Opinion No. 19-24 Re: Foreign ownership requirement of partly nationalized activity.

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEL

24 June 2019

SEC-OGC Opinion No. 19-24

requirement of partly nationalized activity Re: Foreign ownership

Atty. Dennis R. Quiokeles Corporate Secretary Green Earth Enersource Corporation

Mandaue City, Cebu 6014 G. Lopez Jaena, AP Cortes St., Tipolo 4/F Northside Business Hub,

Dear Atty. Quiokeles:

We write in response to your letter dated 27 March 2019 requesting an opinion on whether Green Earth Enersource Corporation (GEEC) complied with the ownership requirement under Section 2, Article XII of the 1987 Constitution.

Provisional Authority to Operate (PAO) into a Certificate of Compliance for You disclosed that GEEC is applying for the conversion of its

its Buluan Biomass Power Plant as a FIT-eligible plant with rated capacity of 3.33 MW located in Brgy. Poblacion, Buluan, Maguindanao. The Energy.

under the Constitution and the Renewable Energy Act of 20081 (REA), Regulatory Commission (ERC), during its deliberation on the issue of GEEC's compliance with the 60%-40% Filipino-foreign ownership requirement

directed GEEC to secure a formal Securities and Exchange Commission (SEC) opinion regarding its compliance. Hence, this request.

1 Republic Act (RA) No. 9513

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L RULES ON CORPORATE NATIONALITY

exploration, development, and utilization of natural resources shall be under Section 2, Article XII of the 1987 Constitution provides that "thel

the full control and supervision of the State. The State may directly undertake

associations at least sixty per centum (60%) of whose capital is owned by production-sharing agreements with Filipino citizens, or corporations or such citizens." such activities, or it may enter into co-production, joint venture, or

This is implemented by the REA which provides that Foreign

government, subject to Article XII, Section 2 of the Philippine Constitution.2 Renewable Energy (RE) Developers may also be allowed to undertake RE development through an RE Service/Operating Contract with the

utilization and development of natural resources were placed under List A. Pursuant to this Constitutional foreign equity restriction, exploration,

Item 16 of the 11th Foreign Investment Negative List (FINL)3, wherein only up to 40% foreign equity is allowed.

laws of the Philippines of which at least 60% of the capital stock outstanding 19914 deems one to be a "Philippine national" if it is organized under the and entitled to vote is owned and held by citizens of the Philippines.5 With respect to corporations, the Foreign Investment Act (FIA) of

RULE 6 Regulatory Framework for the Renewable Energy Industry SECTION 19. Renewable Energy Service/Operating Contract. A. State Ownership of All Forces of Potential Energy

not be alienated. These include potentiat energy sources such as kinetic energy from water, marine All forces of potential energy and other natural resources are owned by the State and shall

current and wind; thermal energy from solar, ocean, geothermal and biomass. B. Parties to a Service/Operating Contract

the full control and supervision of the State The exploration, development, production, and utilization of natural resources shall be under

f or co-production sharing agreements with Filipino citizens or corporations or associations at The State may directly undertake such activities, or it may enter into co-production, joint

Subject to Article XII, Section 2 of the Philippine Constitution. allowed to undertake RE development through an RE Service/Operating Contract with the government, least sixty percent (60%) of whose capital is owned by Filipinos. Foreign RE Developers may also be

3 Executive Order No. 65, Promulgating the Eleventh Regular Foreign Investment Negative List. 4 R.A. No. 7042 5 Section 3, Republic Act No. 7042, Foreign Investments Act. Approved on 13 June 1991.

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A Base of 60%-40%UnderJurisprudence and SEC

Memorandum Circular No. 8, Series of 2013

In the case of Gamboa vs. Teves, 6 the Supreme Court ruled that the "term 'capital' in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock (common and non-voting preferred shares)."

Pursuant to this, the Commission issued SEc Memorandum Circular No. 8, Series of 2013 (SEC-MC No. 8) which was upheld by the Supreme Court in Roy v. Herbosa.7 SEC-MC No. 8 uses the two-tiered test in determining compliance with the required percentage of Filipino ownership. Under the two-tiered test, the 60% required Filipino ownership shall be applied to BOTH: (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

B. Control Test vs. Grandfather Rule

stockholders: (i) the Control Test and (ii) the Grandfather Rule. determining the nationality of a corporation which has corporate In the Philippines, there are two acknowledged tests in

The Control Test states that shares belonging to corporations at least sixty percent (60%) of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. Under this test. there is no need to further trace the ownership of the 60% (or more)

corporation _which is at least 60% Filipino-owned is already Filipino stockholdings of an investing corporation since a

considered as Filipino.8

On the other hand, the Grandfather Rule is "the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where corporate shareholders are present, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality

7 Jose M. Roy III v. Chairperson Teresita Herbosa, G.R. No. 207246, 22 November 2016. 8 Narra Nickel Mining and Development Corporation, et. al. v. Redmont Consolidated Mines Corporation, G.R. No. 195580, 21 April 2014, citing DOJ Opinion No. 020, series of 2005. 6 Heirs of Gamboa v. Teves, G.R. No. 176579, 28 June 2011.

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of the corporate shareholder."9 Under this Rule, the Filipino ownership of the investing corporation and the investee corporation are combined to determine the percentage of Filipino ownership.

the 60-40 Filipino-foreign equity ownership is in "doubt." For Please note that the Grandfather Rule is only applicable when

instance when the investing corporation has less than 60% Filipino

foreign ownership ratio or is less than 60% Filipino. "Doubt", however, stockholdings and the investee corporation has either 60-40% Filipino- is not limited to these circumstances.

Development Corporation v. Redmont Consolidated Mines, Corp., et al.,.1o apparently met by the investing or investee corporation, a resort to the explained that even if the 60-40 Filipino to foreign equity ratio is Grandfather Rule is necessary if doubt exists as to the locus of the The Supreme Court, in its Resolution in Narra Nickel Mining and

"beneficial ownership" and "control." The "doubt" refers to, "various

not in fact reside in Filipino shareholders but in foreign stakeholders."11 indicia that the 'beneficial ownership' and 'control' of the corporation do

II. DISCUSSION: USING THE TWO-TIERED TEST OF SEC-MC NO. 8

Based on the latest General Information Sheet (GIS) of GEEC which you attached to your letter, the ownership structure of the corporation is illustrated below:

Stockholders {(Malaysian) Individual 40% Stockholders Individual (Filipino) 60%

Agumil Philippines. Inc. (Agumil) (Foreign) 40 Ventures, Inc. (SEVi) Specialized Equity (Filipino) 18% Stockholders Individual (Filipino) 4 2%

GEEC

11 Id., at Note 9. 9 Ibid, citing Narra Nickel Mining 10 (bid.

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To determine whether the ownership structure of GEEC conforms with the foreign ownership restriction, the nationality of the above-mentioned stockholders (i.e. Agumil, SEVI, and "Individual Shareholders") must first be determined.

A. Nationality of SEVI

The latest GIS and Articles of Incorporation of SEVI on file with the Commission show an authorized capital stock of Php 1,000,000.00 divided into 1,000,000 common shares with a par value of Php 1.00 per share.

which thus comprise the totality of the Outstanding Capital Stock (OCS), it is Since all shares are common shares (i.e. shares with voting rights)

sufficient to base the 60-40% requirement on the same to determine the nationality in compliance with SEC MC No. 8.

SEVI are natural persons, as follows: Based on its latest GIS on file with the Commission, all stockholders of

Name Nationality Number of Shares Subscribed Amount Ownership Percent of

Lim Chan Lok Malaysian Subscribed 400.000 400.000.00 40.00% Apolinar Y. Saso Filipino 200,000 200.000.00 20.00% Jonathan Furog Filipino 200,000 200,000.00 20.00% Gideon M. Sequino Filipino 100,000 100.000.00 10.00% Yumiko U. Bajade Filipino 100,000 100,000.00 10.00%

tests are used to determine the nationality of a corporation (in this case, turn, has corporate stockholders. As SEVI's shares are 60% owned by individual Filipino citizens, SEVI is considered a Philippine National. necessary to use either the Control Test or the Grandfather Rule as these GEEC) only when it has an investing corporation (in this case, SEVI) that, in Consequently, its 18% direct shareholding in GEEC is Filipino. Since the shareholders of SEVI are all natural persons, it is no longer

B. Nationality of Agumil

Commission show an authorized capital stock of Php 650,000,000.00 divided into 6,500,000 common shares with a par value of Php 100.00 per share The latest GIS and Articles of Incorporation of Agumil on file with the

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Since all shares are common shares (i.e. shares with voting rights) which thus comprise the totality of the OCS, it is sufficient to base the 601 40% requirement on the same to determine the nationality in compliance with SEC MC No. 8.

Based on the latest GIS on file with the Commission, Agumil is 100% owned by Agusan Plantations, Inc. which is 100% foreign-owned. Thus, Agumil's 40% direct shareholding in GEEC is foreign-owned.

C. Nationality of Individual Shareholders

natural persons, owning 42% of GEEC. The GIS of GEEC attached to your Apart from Agumil and SEVI, all other shareholders of GEEC are

letter shows the following individual stockholders:

Name Nationality Number of Amount Percent of

Subscribed Shares Subscribed Ownership

Reynold Siy Harry Ong Mangudadatu Lim Chan Lok Ibrahim Gaguil Malaysian Filipino Filipino Filipino 63,224,998 17,542,821 8,545,171 1 8,545,171.00 1.00 63,224,998.00 17,542,821.00 8.00% 4.00% 0.00% 30.00%

DJ Parok D. Mangudadatu Filipino 1 1.00 0.00%

their 42% direct shareholding in GEEC is Filipino-owned. Collectively, the "Individual Shareholders" are 100% Filipinos. Thus,

D. Nationality of GEEC

The Articles of Incorporation of GEEC on file with the Commission shows an authorized capital stock of Php 400,000,000.00 divided into 400,000,000 common shares with a par value of Php 1.00 per share.

Similar to SEVI and Agumil, since all shares of GEEC are common shares (i.e. shares with voting rights), which thus comprise the totality of the OCS, it is sufficient to base the 60-40% requirement on the same to determine the nationality in compliance with SEC MC No. 8.

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hence, GEEC complied with the ownership requirement under Section 2, Article XII of the 1987 Constitution. From the foregoing, 60% of GEEC is held by Filipinos, as shown below;

Name Nationality Number of Shares Subscribed Amount Ownership Percent of

Subscribed

Individual Shareholders Specialized Equity Ventures, Inc. Filipino Filipino 63.224.998 37,137,007 63,224,998.00 37,137,077.00 42.00% 18.00%

Total Filipino Equity 60.00%

investigation, it will be disclosed that the facts relied upon are different, this Commission in other cases of similar or dissimilar circumstances.12 If upon the nature of a standing rule binding upon the courts, or upon the opinion shall be rendered null and void. solely on the facts disclosed in the query as well as documents filed with the Commission by the requestor as part of its regular reportorial compliance. relevant solely to the particular issues raised therein and shall not be used in It shall be understood that the foregoing opinion is rendered based

LCKMAO'S. CORREA General Counsel

12 SEC Memorandum Circular 2003-15, No. 7.