SEC Adm. Case No. 07-10-205 In the Matter of the Petition for the Revocation of the Certificate of Registration of Linearworks Realty Development Corporation

Republic of the Philippines

Securities and Exchange Commission SEC Bidg. EDSA, Greenhills, Mandaluyong City Department of Trade Industry

COMMISSION EN BANC *

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In the Matter of the Petition for the Revocation of the Certificate of Registration of Linearworks Realty Development Corporation, SEC En Banc Case No. 07-10-205 (EPD Reference No. 2010-177-CID)

Seven Oaks Properties, Inc. Petitioner. A

DECISION

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This refers to the Appeal to the Commission En Banc, filed by} petitioner Seven Oaks Properties, Inc., from the Enforcement and Prosecution Department's C'EPD," for brevity) 24 June 2010 Order that dismissed. the Petition for the Revocation of the Certificate of Registration of Linearworks Realty Development Corporation.

Linearworks Realty Development Corporation is registered ( with the

Its primary purpose is: "To own, use, improve, develop, subdivide, sell,fexchange, Commission under Company Registration No. CS200712611 since 21 August 2007 lease, and hold for investment or otherwise, real estate of all kinds, including buildings, houses, apartments and other structures."

Its authorized capitai stock is eighteen million pesos (Php 18,000,000.00) divided into 5,000 Class A shares with par value at ten pesos (Php 10.00) each, and

Its shares are subscribed as follows:3 1,795 Class B shares with par value of ten thousand pesos (Php 10,000,00) each.2

3 Articles of Incorporation, Articie Vi!I: Articles of Incorporation, Article VI; Articies of Incorporation, Article I; I: t 1

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Shareholder Nationality Share Class Of Par Value Subscribed Number of Shares Amount ] Subscribed (subscribed shares X par

Lomarda Agnes Daniel A Filipino Filipino A A Php 10.00 Php 10.00 2,000 2,000 value} Php 20,000.00 Php 20,000.00 Lomarda Gonzales Shozo Noboru Soma Sugaya Linearworks Corporation Johnathan Filipino Japanese Japanese Japanese A B B B Php Php 10.00 10,000.00 Php 10,000.00 Php 10,000.00 1,000 1,793 . 1 1 17,930,000.00 Php 10,000.00 Php 10,000.00 Php 10,000.00 Php 1

Total 6,7 5 18,000,000.00 Php

Certificate of Registration of Linearworks Realty Development Corporation on 16 Seven Oaks Properties, Inc. filed a Petition for the Revocation of the

February 2010 with the EPD. The petitioner alleged that Linearworks Realty Development Corporation's equity structure was designed to circumvent the constitutional and statutory limitations on foreign ownership of private iands in our country.

Article XII, Section 7 of the 1987 Constitution, in relation to Sections 22 and 23 of Commonwealth Act No. 141, provides that, in order for a corporation to own land, at least sixty per centum (60%) of its capital stock must belong wholly to Philippine citizens. Conversely, the participation of foreign nationals in a corporation owning (and is limited to a maximum of up to forty per centum (40%) of the equity only.

In furtherance of such constitutional and statutory restrictions on foreign ownership, Section 2 of Commonwealth Act No. 1084 punishes any simulation of the ownership of the capital stock by Philippine citizens that are made for the' purpose of evading the said restrictions. And, Section 3 of the same Act mandates that any corporation that commits such a violation must be dissolved.

As amended by Republic Act 421, Republic Act 134, Republic Act 6084, and Presidentiai Decree 715.

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Since Linearworks Realty Development Corporation is engaged in real estate activities, including the ownership of land, the said restrictions necessarily apply to it. And thus, at least sixty per centum (60%) of its capital stock must belong wholly to Philippine citizens, and foreign ownership is permitted only up to forty per centum (40%) of the total equity.

Petitioner argued that the per centum of participatioh by foreign nationals in Linearworks Realty Development Corporation exceeds the restrictions, and actually amounts to 99.72% of the total equity since the total amount subscribed by the Japanese nationals is Php 17,950,000.00 out of the total Php 18,000,000.00 authorized capital stock.

However, the EPD rejected the petitioner's arguments. The EPD maintained that the basis for determining the level of foreign participation is the number of shares subscribed, regardless of the par value. Applying such an interpretation, the EPD ruled that the foreign equity participation in Linearworks Realty Development Corporation amounts to 26.41% of the corporation's capital stock since the amount of shares subscribed by foreign nationals is 1,795 only out of the 6,795 total shares. Thus, the subject corporation is compliant with the 40% limit on foreign equity participation. Accordingly, the EPD dismissed the complaint, and did not'pursue any investigation against the subject corporation.

Unsatisfied with the EPD's stance, the petitioner filed the present appeal to on 13 July 2010.

The main legal issue submitted by the petitioner for resolution is whether the determination of foreign equity participation ought to be based on the number of shares only, or whether it should be based on the actual equity investment or amount subscribed, i.e., number of shares multiplied by the par value. In other words, the issue is whether or not the par value of shares should be considered in determining the level of foreign equity participation in a corporation.

constitutional and statutory limitations on foreign equity of corporations owning In order to resolve this issue, we look at the intent and purpose of the

Iand.

In this regard, the D0J's Opinion No. 130, series of 1985, is instructive. Then Minister of Justice Estelito P. Mendoza, addressing the Board of Investments, discussed, in part, that:

by aliens or by corporations with less than 60% Philippine equity is a provision carried over from the 1935 Constitution that is intended to ensure, indigenous natural resources, which constitute the exclusive heritage of the Filipino nation (Vol. X, Constitutional Convention Records Joumal Nos. 131- among other purposes, the conservation for Filipino posterity of land and "The constitutionai ban on the acquisition of public and private land

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139, pp. 144 et seq., Sinco, Politicai Law, 1962 Ed. p. 445). This Ministry has had occasion to state in several opinions, that it is implicit in this provision, even if it refers merely to ownership of stock in the corporation holding the iand or natural resource concession, that the nationality requirement is not satisfied unless it satisfies the criterion 'of beneficial ownership, i.e., Filipinos are the principal beneficiaries'in the exploitation of natural resources (Op. No. 144, 's. 1977; Roman Catholic Apostolic Adm. of Davao, Inc., vs. Land. Reg. Com. i02 Phit. 596[1957]) and that in applying the same "the primordial consideration is situs of controi, whether in a stock or non-stock corporation" (Op. No. 178, s. 1974). The framers of the constitution, in limiting the disposition, exploration, development, exploitation or utilizationi of the natural resources of Philippines to citizens or to corporations} or associations at least 60% of the capital of which is owned by such citizens could not have intended "any interest less than full. and absolute ownership by Philippine citizens of the 60% capital", and any other interpretation would do violence to the policy and intent behind these and related constitutional provisions of insuring the conservation of the natural resources of the Philippines for its citizens (Op. No. 171, s.:1974). As stated in Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), -the purpose ofithe sixty per centum requirement is obviously to ensure that.corporations and associations allowed to acquire agricultural land or to exploit natural resources 'shall be controlled by Filipinos'." In short, the constitutional and statutory restrictions were enacted in order to conserve lands and other natural resources for the benefit and control of Philippine citizens.

In fact, in line with the said purpose, the Foreign Investments Act of 19915 and its implementing rules and regulations provide the basis for determining whether a corporation may be treated as a Philippine national in accordance with the constitutional and statutory restrictions on foreign equity. Section 1 of the Implementing Rules and Regulations of the Foreign Investments Act of 1991, provides that:

"b. Philippine national shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by the citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty peroent (60%) of the capital stock outstanding and entitled to vote is owned and held by registered as doing business in the Philippines under the Corporatioh citizens of the Philippines; or a corporation organized abroad and

Code of which 100% of the capital stock outstanding and entitied to vote is wholly owned by Filipinos or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty peroent (60%) of the fund Provided, that where a corporation and its non-Filipino stockholders will accrue to the benefits of the Philippine nationals;

5 Republic Act 7042. as amended.

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own stocks in Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent" (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in Order that the corporation shall be considered a Philippine nationai. The control test shall be applied for this purpose.

Compliance with the required Filipino ownership of a corporation shali be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitied to vote are considered.

For stocks to be deemed owned and heid by Philippine citizens or Philippine nationals, mere legal title is:not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are considered as non-Philippine nationals."

With these considerations in mind, it is clear that, the important criteria for determining compliance with the foreign equity restrictions are: (1) control and (2) beneficial ownership. We must ensure that a corporation, engaged in activities reserved to Philippine citizens, is: first, under the effective control of; Philippine citizens; and second, the Philippine citizens are the main beneficiaries of the business activity.

And, in order to determine the state of such criteria, we need to look into the total number of shares subscribed by Philippine citizens out of the total outstanding capital stock, and crucially, the rights, privileges or restrictioris conferredjupon such shares.

Now, a share's par value is "simply an amount fixed as the nominal value of the interest so specified, which amount likewise indicates the sum of money or value of property or services which a subscriber is represented as having contributed to the corporation in exchange for such share in its ownership.1 The par value of the share does not determine the rights, privileges or restrictions of the share. This means that the par value of the subscribed shares is,actually irrelevant in determining compliance with the constitutional and statutoryi restrictions' on foreign equity.

13 American Jurisprudence S 176.

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What we need to look at is the corporation's articles of incorporation since except as otherwise provided in the articies of incorporation and stated in the certificate of stock, each share shall be equal in all respects to' every other share.7 In other words, the articles of incorporation provide the rights, privileges or restrictions E conferred upon the shares. Any other document, or agreements purporting to classify shares, and conferring respective rights, privileges or,restrictions upon each type of shares is ineffective with respect to the corporation.

In the present case, an examination of Linearworks Realty Deyelopment Corporation's articles of incorporation reveal that while the shares may be' classified to two types having different par value, there is no provision conferring different rights, privileges or restrictions on each type. Thus, the shares, although they have different par values, are equal in every rights, privileges or restrictions. In particular, every share, regardless of par value, is entitled to the same voting rights, the exact same value of dividends, and at the time of liquidation, each share is entitled to same rights and interests over the remaining assets for distribution - which may include land.

Considering that all the shares in the subject corporation have equal rights. control, and economic rights over the corporation and its assets is solely dependent upon the number of shares subscribed, irrespective of par value. It is now simply a matter of determining the number of shares subscribed by Philippine citizens out of the total outstanding capitai stock in order to determine compliance with the forty percent (40%) foreign equity restriction.

Thus, in this respect we find no error in the assailed o'rder made by the EPD. The EPD did not err when it did not take into account the 'par value of shares in determining compliance with the constitutional and statutory restrictions on foreign equity.

However, we are aware that some unscrupulous individuals employ certain schemes to circumvent the constitutionai and statutory restrictions [on foreign equity. In the present case, the fact that the shares of the Japanese natiorials have a greater par value but only have similar rights to those held by Philippine citizens having much lower par value, is highly suspicious. This is because atreasonable investor would expect to have greater control and economic rights fthan other investors who invested less capital than him. Thus, it is reasonable to Suspect that there may be secret arrangements between the corporation and the stockholders wherein the Japanese nationals who subscribe to the shares with greater par value actually have greater control and economic rights contrary to the equality of shares based on the articles of incorporation.

Corporation Code, Section 6. 1

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With this in mind, we find it proper for the EPD to investigate the subject corporation. The EPD is advised to avail of the Commission's subpoena powers in order to gather sufficient evidence, and file the necessary complaint.

Incidentally, a perusal of the subject corporation's 2010 General Information Sheet on file with the Commission's records, reveals that Noboru Soma, a Japanese national, is the corporate treasurer.

We note that that pursuant to the provisions of the Anti-Dummy Law, aliens are banned from being elected or appointed to management positions as president, vice-president, treasurer, auditor, etc. in firms engaged in wholly or partially nationalized business, although they can be elected directors in proportion to their allowable participation or share in the capital of such companies.3

WHEREFORE, premises considered, the Appeal is hereby DISMISSED for lack of merit. The Enforcement Prosecution Department (EPD) is hereby ORDERED to investigate the subject corporation, its officers and stockholders for possible violations, and to recommend the imposition of administrative sanctions if,warranted under the circumstances.

Further, the EPD is hereby DIRECTED to report the subject corpOration and Noboru Soma to the Department of Justice, the Bureau of Immigration, and other related agencies for viofation of the Anti-Dummy Law.

SO ORDERED.

Mandaluyong City, 25 November 2010.

HE B: BARIN N Chairperson

MA. JANITA E. CU RAUL J. PALABRICA

Commissioner Commissioner

Commonwealth Act No. 108. Section 2-A, as amended by P.D. 715.

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Linearworks Reatty Developrfi- .. Corp oration SEC En Banc Case No. 07-10-205 {EPD Reference No. 2010-177-CID} 25 November 20} 0 Decision Page 8 of 8

MAnuel HUBertO B. GAItE Commissioner EUADIO M JALA MM Commi$sione?