Opinion No. 19-52 Re: Allowable Foreign Equity in Cargo and Freight Forwarding Activities

Securities and Exchange Commission OFFiCE oF THE GENERAL COUNSEL Republic of the Philippines Department of Finance

18 November 2019

SEC-0GC Opinion No. 19-52 Re: Allowable Foreign Equity in Cargo and Freight Forwarding Activities

PROCY FERNANDEZ Blk 16 L9, Diamond Village Salawag, Dasmarinas, Cavite

Dear Ms. Fernandez:

This refers to your letter dated 10 September 2019, raising the following inquiries/concerns:

3. Are there restrictions of the SEC for Cargo/Freight forwarding companies; and 2. May a foreign corporation or entity, which is not registered with the Securities 4. What are the possible penalties that may be imposed for companies operating 1. What is the allowable percentage of foreign equity in cargo and freight forwarding activities? Are there constitutional provisions or existing laws which allows foreign equity on said activities? In the event that the allowable may be imposed? and Exchange Commission (SEC), subscribe to a domestic corporation's shares and what are the requirements of the same? Communication and Technology and local government licenses? foreign equity has exceeded, what are the possible penalties or actions that without the necessary permits from the Department of Information and

public with some commodity or service of public consequence such as electricity, gas, utility, which is defined as a "business or service engaged in regularly supplying the water, transportation, telephone or telegraph service."1 As to your first query, a freight forwarder is considered an operator of a publid

forty percent (4o%) foreign ownership is allowed in corporations or associations operating a public utility, to wit: In this connection, Article XII of the 1987 Constitution provides that only up to

the operation of a public utility shall be granted except to citizens of the citizens; nor shall such franchise, certificate, or authorization be exclusive in Philippinesor to corporations or associations organized under the laws of the Philippines,at least sixty per centum of whose capital is owned by such "Section 11. No franchise certificate.or any other form of authorization for

1 Albano vs Reyes, G.R. No. 83551, 11 July 1989.

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character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to

amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines." (Emphasis supplied)

The said constitutional prohibition has been carried over in List A, Item 15 of

Executive Order No. 65, Series of 2018, otherwise known as the "11th Regular Foreign Investment Negative List" (11th FINL) to emphasize the forty percent (40%) foreign equity

restriction over public utilities.

In previous Opinions2, the SEC has consistently opined that "utility firms such as

international freight forwarders engaged exclusively in international commerce are beyond the Constitutional prohibition limiting foreign ownership to 40% of the capital of

a corporation."

Thus, corporations engaged in purely international cargo and freight forwarding

activities may be wholly-owned (100%) by foreigners. With respect to corporations

engaged in purely local or mixed local and international cargo and freight forwarding activities, the forty percent (40%) foreign ownership restriction under the 1987 Constitution shall apply.

Should the foreign equity restrictions as discussed above be violated by the corporation, the Commission may, after proper notice and hearing, suspend or revoke the

certificate of registration of the corporation pursuant to Section 6(i) of Presidential

Decree No. 902-A3, otherwise known as the "SEC Reorganization Act".

2 SEC-0GC Opinion No. 17-14, dated 17 November 2017 and addressed to Valdecantos & Valencia Law Office, SEC-0GC Opinion No. 16-08, dated 20 April 2016 and addressed to Takuma Yamaguchi; SEC-OGC Opinion 08-21, dated 29 October 2008 and addressed to Atty. Agerico T. Paras; SEC-OGC Opinion No. 10- 30, dated 15 November 2010 and addressed to Mr. Arvin D. Delima. 3Section 6 of PD 902-A which reads:

"Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the following powers: XXXXX

(i) To suspend,or revoke, after proper notice and hearing. the franchise_or certificate of registration of corporations partnerships or associations, upon any of the grounds provided by law, inciuding the following: [1] Fraud in procuring its certificate of registration; [2] Serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public; [3] Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise: [4] Continuous inoperation for a period of at least five (5] years; [5] Failure to file by-Iaws within the required period;

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As to your second query, foreign corporations and entities not registered with the

Commission may subscribe to domestic corporation's shares. However, in case said

subscription shall cause the investee-domestic corporation's total foreign equity to

exceed 40%, Sections 5 and 6 of Republic Act No. 7042 (RA 7042), otherwise known as

the "Foreign Investments Act of 1991" (FIA) shall apply, to wit:

"Section 5.Registration of Investments of Non-Philippine Nationals.- Without need of prior approval, a non-Philippine national4 as that term is defined in Section 3 (a), and not otherwise disqualified by law may upon registration with the Securities and Exchange Commission (SEC), or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of the Department of Trade and Industry in the case of single proprietorships, do business as defined in Section 3 (d) of this Act or invest in a domestic enterprise up to one hundred percent (100%) of its capital unless participation of non Philippine nationals in the enterprise is prohibited or limited to a smaller percentage by existing law and/or limited to a smaller percentage by existing law and/or under the provisions of this Act.xxxxx"

Section 6. Foreign Investments in Export Enterprises. - Foreign investment in export enterprises whose products and services do not fall within Lists A and B of the Foreign Investment Negative List provided under Section 8 hereof is allowed up to one hundred percent (100%) ownership. xxxxx" (Emphasis supplied)

By virtue of said provisions, it shall be the obligation of the investee corporation to

register said investment of non-Philippine nationals with the Commission

As toyour third query, Section 2-A of Commonwealth Act No. 108, otherwise known

as the "Anti-Dummy Law", provides that:

"Sec. 2-A. Any person, corporation, or association, which, having in its name or under its control, a right, franchise, privilege, property or business, the exercise or enjoyment of which is expressly reserved by the Constitution or the laws to citizens of the Philippines or of any other specific country, or to corporations or

[6] Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period;" (Emphasis supplied)

4 "Non-Philippine nationals" are those falling outside the definition of a Philippine National under Section 3(a) of RA 7042, which reads:

"The term "Philippine national" shall mean a citizen of the Philippines or a domestic

organized under the laws of the Philippines of which at least partnership or ass ciation wholly owned by citizens of the Philippines; or a corporation sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at ieast sixty (60%) of the fund will accrue to the benefit of the Philippine nationals..xxxxx".

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citizens, permits or allows the use, exploitation or enjoyment thereof by a the Constitution or the laws of the Philippines; or leases, or in any other way. associations at least sixty per centum of the capital of which is owned by such transfers or conveys said right, franchise, privilege, property or business to a Constitution, or the provisions of the existing laws; or in any manner permits or Constitution, or existing laws to acquire, use, exploit or enjoy a right, franchise, privilege, property or business, the exercise and enjoyment of which are expressly reserved by the Constitution or existing laws to citizens of the employee or laborer therein with or without remuneration except technical personnel whose employment may.be specifically authorized by the Secretary of Justice, and any person who knowingly aids, assists, or abets person, corporation or association not possessing the requisites prescribed by allows any person, not possessing the Philippines or of any other specific country, to intervene in the management. in the planning, consummation or perpetration of any of the acts herein above person, operatic corporation or association not otherwise qualified under the administration or control thereof. whether_as an officer. qualifications required by the

enumerated shall be punished by imprisonment for not less than five nor more privilege enjoyed or acquired in violation of the provisions hereof but in no case or persons in violating the provisions of this section shall be criminally liable in lieu thereof: Provided, further, That any person, corporation or association shall, and the property provisions of this Act; and Provided, finally, That the election of aliens as members of the board of directors_or governing_body of than fifteen years and by a fine of not less than the value of the right, franchise or less than five thousand pesos: Provided, however, that the president, managers in addition to the penalty imposed herein, forfeit such right, franchise, privilege corporations or associations engaging in partially nationalized activities shall be allowed in proportion to their allowable participation or share in the capital of such entities." (Emphasis supplied)

trustees in proportion to their allowable participation or share in the capital. appointed as corporate officers in corporations with foreign ownership restrictions or those engaged in wholly and partly-nationalized activities (for example: corporations activities), except for technical personnel authorized by the Department of Justice! engaged in purely local or mixed local and international cargo and freight forwarding Further, foreigners may only be appointed as members of the board of directors or By virtue of the above-stated provision, foreigners are restricted from being

SEC Memorandum Circular No. 15, Series of 2003 (MC 15-2003), the Commission shall the promulgating agencies which are competent to undertake such construction by refrain from rendering an opinion on queries involving interpretation of the administrative rules and issuances of other government agencies considering that it is As to your final query, please be advised that as a matter of policy and pursuant to

reason of their knowledge of the specific intent and extent of application of the subject issuances.5

5 SEC Memorandum Circular 2003-15, No.5.6

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Considering that your query involves the possible penalties which may be imposed by the Department of Information and Communication Technology, as well as the local government units, this Commission cannot answer the same.

It shall be understood that the foregoing opinion is rendered based solely on the facts and circumstances disclosed and relevant solely to the particular issue raised therein. It shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances.6 If, upon further inquiry or investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered void.

Please be guided accordingly.

ROMUALD C. PADILLA Officer-in-Charge

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