Opinion No. 24-18 Re: Anti-Dummy Law

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Exchange Securities and Commission

BAGONG PILIPINAS

OFFICE OF THE GENERAL COUNSEL

25 June 2024

SEC OGC Opinion No. 24-18 Re:Anti-Dummy Law COMMUNITY ECONOMIC VENTURES (A MICROFINANCE NGO) INC. 3rd Floor, CKU Building Llorente Street,Cebu City 6000 CebuPhilippines

Attention: nickie.bolos@gmail.com ATTY. MARIE NICKIE H. BOLOS

Dear Atty.Bolos

Ventures (A Microfinance NGO) Inc.CEVI),for an opinion on the application of Commonwealth Act (C.A. No. 108, as amended, or the Anti-Dummy Law. This refers to your letter dated 16 October 2018, requesting, on behalf of Community Economic

In your letter, you disclosed the following matters: a)"[CEVI] is a non-stock and non-profit microfinance non-government organization [NGO] b) CEVI has the following purposes in its articles of incorporation (AOI) which was attached registered with the Securities and Exchange Commission (SEC to your letter: To facilitate technical and financial support to small entrepreneurs to enhance their businesses through microfinance operations, pursuant to Republic Act (R.A.) No. 8425 of the Social Reform To develop income-generating projects that will assist individuals/families in need and Poverty Alleviation Act

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cCEVI has one (1 alien member in its nine [9]-seat Board of Trustees and four (4 aliens d)"[A]t present, no alien is sitting as an officer of CEVI"; and e CEVI does not own land in the Philippines. as members in its general assembly C 6 L M To exercise any and all lawful powers in promoting the interest of the association or to enhance its goals and objectivesand To acquire,hold, lease, purchase, exchange, borrow, mortgage, or otherwise deal in real and To promote knowledge of Christian values and precepts the value of the properties and to perform everything necessary and proper for attainment of To promote personal properties and to build, construct, acquire, lease, purchase,mortgage buildings and from any source,public and private,and to invest funds and utilize properties in such activities offices as may be necessary and useful to solicit and receive contributions,grants,donations as may be necessary and useful to carry out the objectives of such association programs that will sustain development activities in the communities

You are now asking for an opinion on whether or not CEVI is covered by the Anti-Dummy Law. Application of the Anti-dummy Law

association may exercise or enjoy a right, franchise or privilege, not less than a certain per centum of its falsely simulate the existence of such minimum of stock or capital as owned by such citizens, for the purpose of evading said provision. capital must be owned by citizens of the Philippines or of any other specific country,it shall be unlawful to In all cases in which a constitutional or legal provision requires that, in order that a corporation or

1Section 2-A, Commonwealth Act (C.A.)No.108, Anti-Dummy Law,30 October 1936

The SEC Headquarters,7907 Makati Avenue +63 25322 7696 www.sec.gov.ph |imessagemo@sec.gov.ph Salcedo VillageBel-air,Makatl City IN PEOPLE INVESTORS We invest in neont ww. D B aVL

nationalized or partly-nationalized activity.2 A list of activities which are deemed "nationalized" or "partly-nationalized" is provided under the 12th Foreign Investment Negative List (FINL).3 Only the investment areas'and/or activities listed in the 12th FINL shall be reserved for Philippine Nationals, subject to the exceptions and conditions indicated therein.4 It is clear that for the Anti-Dummy Law to apply, the corporation must be engaged in a

Appointment of alien officer

discussed in a previous opinion particularly,SEC-0GC Opinion No.14-05s,viz The appointment of an alien officer in a corporation engaged in partly-nationalized activities was

In previous opinions, the Commission held that foreigners can be elected as directors in proportion to their participation or share in the capital of corporations engaged in activities that are reserved to Filipinos, hut are prohibitedfrom being elected as officers ofa corporation such as thePresident,Vice-President,Treasurer and Secretary, viz. On the citizenship requirement of corporate officers. Sec.2-A of [C.A.]No.108,as amended,bans foreigners from being elected or appointed to management positions as president,vice-president treasurer,secretaryetc.in business activities where there is a constitutional or statutory provision imposing a specific nationality requirement as a requisite for the exercise or enjoyment of a right, franchise or privilege.

This is censistent with the previous rulings of the Department of Justice,stating that in firms engaged in wholly or the president,vice-presidenttreasurerauditor,etc.of said companies,although they can be elected directors in partially nationalized activities, aliens are banned from being appointed as officers of the corporation, such as proportion to their allowable participation or share in the capital of such activities in accordance with the Anti Dummy Law. However while in nationalizedbusiness activities foreigners are prohibited from being elected determining the representation of alien stockholders in the board of directors of corporations engaged in partially nationalized activities, the basis should be the actual share of the alien or appointed as corporate officers, they can be elected as directors in proportion to their participation or share in the capital of such business entities pursuant to [Presidential Decree (P.D.] 715 which amends [C.A. No.] 108.Thus, the Department of Justice had opined that "in stockholders in the capital of the corporation which share,however,should not exceed the foreign equity ceiling prescribed by law for a particular corporation or association. XXXXXX

or the charter or its by-laws are considered as officers of a corporationand if a corporation is covered by the Anti- Dummy Law, any corporate function which is specifically and/or specilly spelled out and intended under its by In this connection,please take note that only those who are given such character either by the Corporation Code laws to be belonging to such officers of the corporation cannot be delegated to a foreigner because the same would be tantamount to a circumvention of the said law, viz.

Code, specifically by Sections 24 and 25 thereof, or the charter or by-laws; the rest can be Code [now Section 24 of the Republic Act R.A)No.11232RCCP].Citations omitted,emphasis and underscoring supplied) The only officers of a corporation are those who are given that character either by the Corporation considered merely as employees or subordinate officials. The president,vice president, treasurer and secretary are commonly regarded as the principal or executive officers of the corporation. by the laws; this is the import of the term "officers in the phrase and such other officers as may be provided for in the by-laws"contained in paragraph one (1) of Section 25 of the Corporation Additional offices may, however,be created as long as the same are so enumerated and authorized

Nature of Microfinance NGOs

with the primary purpose of implementing a microenterprise development strategy and providing the application of the Anti-Dummy Law,as it is not expressly reserved by the law or by the 12th FINL as one microfinance programs, products, and services, such as microcredit and microsavings, for the poor and low-income clients.6 of the activities with foreign equity restrictions. Microfinance is neither a nationalized nor a partly nationalized industry which would warrant Microfinance NGOs are defined as nonstock, nonprofit organizations duly registered with the SEC,

Republic Act (R.A. No. 10693 or the Microfinance NGOs Act, 03 November 2015. 3 Executive Order (E.O.) No. 175, Twelfth 12)Foreign Investment Negative List.27 June 2022. 5 SEC-OGC Opinion No.14-05 addressed to Atty.Rester John Nonato dated 25 April 2014 2SEC-OGC Opinion No.19-57 addressed to Atty.Gener Sansaet dated 26 November 2019. Section 1, ibid.

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properties without the exclusion of land, to wit: Corporate Powers: Ownership of Land We note, however, that one of the purposes of CEVI in its AOI involves the ownership of real

6. To acquire, hold. lease purchase, exchange, borrow. mortgage, or otherwise deal in real and personal properties and to build, construct, acquire, lease,purchase,mortgage buildings and offices as my he necessary and useful to solicit and receive contributions, grants, donations from any source,public and private, and to invest funds and utilize properties in such activities as may be necessary and useful to carry out the objectives of such association.7(Emphasis and underscoring supplied)

XII of the Constitution provides that save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.8 The List A of the 12th FINL provides the following: Ownership of land is one of the activities reserved by law to Philippine nationals. Section 7, Article

and the character of a corporation is usually determined by the objects of its formation and the nature of clause must be examined because it confers, as well as limits, the powers which a corporation may exercise its business. The primary purpose of the corporation, as stated in its AOI, is the first business to be primary purpose, the secondary purposes might determine a corporation's classification on the condition that the corporation is actually engaged in the business stated therein. undertaken by the corporation. Hence, the primary purpose determines its classification. Outside of the Code of the Philippines (RCCP) provides that every corporation has the power and capacity to purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful by law and the Constitution.io business of the corporation may reasonably and necessarily require,subject to the limitations prescribed To determine if a corporation is nationalized or partly-nationalized, the corporation's purpose In connection with this,Section 35g) of Republic Act (R.A.) No. 11232 or the Revised Corporation Up to forty percent (40%) foreign equity 17.Ownership of private lands (Section 7,Article XII of the Constitution;Section 22 of CA No.141;Section 4 of RA to enter into a contract under Philippine laws (Section 10 of RA No.7042, as amended by Section 5 of RA No. No. 9182),except a natural born citizen who has lost his Philippine citizenship and who has the legal capacity 17

Section 35(g) of the RCCP]. Hence, it simply affirms the general power of every corporation allowed under the law.l Notably, this is a substantial reproduction of the then Section 36 of the Corporation Code [now

under Section 35 of the RCCP,viz. Therefore, item 1 under the secondary purpose clauses of West Spring's Articles may not be strictly construed as As to your third query, it should be noted that item 1 in West Spring's secondary purpose clause is substantially declaration of Section 36 of the Code. Section 36 contains an enumeration of powers expressly given to every general power ofevery corporation allowed under Section 36 (7). It would be different if the qualifying phrase in item 1 of West Spring's secondary clause as may be necessary or Similar to Section 36 (7) of the Corporation Code[now Section 35(g) of the RCCP]...In this regard, we have 7 of the Corporation Code. Therefore, whether or not such power is included in what the corporation could do and perform under its [Ol],it is nevertheless,deemed to be within the scope ofits corporate powers by express not any such powers are stated in the [AOI] or by-laws. Thus, even if West Spring's Articles does not so provide, it can still purchase and convey real property, as the transaction of the lawful bi reasonably and necessarily requirebecause it is expressly allowed under Section 36 7 of the Corporation Code. a secondary purpose independent or distinct from its primary purpose of general construction because it is a incidental to the conduct of the corporate business"were not present, because the buying and selling of real estate, In this relation, SEC-0GC Opinion No. 11-3312 discussed the nature of a corporation's powers previously opined that: "Fletcher has regarded the power to acquire and convey property as an incident to every corporation created under the general incorporation law. They may be exercised by the corporation whether or corporation although such power is expressly conferred to corporations incorporated in accordance with Section 36 ess of the corporation may

SEC-OGC Opinion No. 11-33 addressed to Mr. Jesus B. Lapuz dated 29 July 2011. 11 SEC-OGC Opinion No.19-26 addressed to Atty.Irineo J.Marasigan dated 22 July 2019 12SEC-OGC Opinion No.11-33,supra Note 9.See also SEC-OGC Opinion No.19-22addressed to Mr.Juan MiguelMacapagal Arroyo 7 Lifted from your letter-request. o Section 35g.RA.No.11232 or the Revised Corporation Code of the Philippines (RCCP).23February 2019 dated 14 June 2019. Section 7,Article XI1, the 1987 Constitution.02 February 1987.

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The right of a corporation to take and hold real property may be treated by the purpose to which said property was acquired and the ever-present intention of devoting it to a proper and necessary corporate use. Consideration should be given, in determining the right to the object of acquisition, to the intention with which the property is held, and the use to which it may be and is designated to be put, and the power of the corporation is to be limited to such real property as is reasonably necessary to such corporate purposes and uses. (Citations omitted, emphasis supplied) done in the ordinary course of business, would then be considered as a business in itself, distinct and separate from the primary purpose.

necessary and useful"which means that its ownership of land is not in its ordinary course of business and is only incidental or in furtherance of its main business. of a corporation reaffirming this power, and the nationality requirement, SEC-OGC Opinion No. 16-1214 is instructive, to wit: Similar to SEC-OGC Opinion No.11-3313,CEVI's purpose clause is limited by the clause,as may be To harmonize the corporate power to own land under Section 35 of the RCCP, the purpose clause Thus,considering that PFI,based on its [AOI], is not engaged in any nationalized or partly nationalized business or industry, it may have an alien trustee in its board, and a foreigner as its President/Chairman.

the event that PFl owns land. it shall already be considered to have engaged in a partly nationalized activity. As such, foreigners should not comprise more than 40% of its membership. 1 Consequently,PFI can elect foreign trustees in proportion to their allowable participation in the membership of the corporation. Otherwise stated,not more than However,the purpose clause PFI's [AOI] allows,or does not exclude,ownership of land by the corporation. Hence,in 40% of the trustees should be foreigners. However, it cannot have a foreigner as President/Chairman of the board Conclusion

From the foregoing, the following can be gleaned:

nationalized or partly-nationalized activity.However,in the event that it owns land,the Anti-Dummy Law rule binding upon the Commission in other cases whether of similar or dissimilar circumstances.is Philippines, the Anti-Dummy Law does not apply to CEVI as it is a Microfinance NGO which is not a would now apply to it, i.e. aliens cannot be appointed or elected as corporate officers. and relevant solely to the particular issues raised therein and shall not be used in the nature of a standing c Being a partly-nationalized corporation, the Anti-Dummy Law applies, i.e. foreigners can be Applying the foregoing and relying on your representation that "CEVI does not own land in the It shall be understood that the opinion rendered is based solely on the facts disclosed in the query b However,while a corporation is not outrightly banned from owning land based on a mere Please be guided accordingly. a A corporation's purpose clause which contains substantial reproduction of the general powers This means that the primary purpose in the ordinary course of business (in this case, as a elected as directors in proportion to their participation or share in the capital but they are of a corporation granted under Section 35 of the RCCP should be taken merely as a re- affirmation of the latter and may not be strictly construed as a primary or secondary purpose. Microfinance NGO) should still be examined to determine if the corporation is nationalized or partly-nationalized; a partly-nationalized corporation where aliens may own only up to forty percent (40%) prohibited from being elected or appointed as corporate officers. reproduction of Section 35(g) of the RCCP in its AOI,in the event that it owns land,it becomes foreign equity; and

Very truly yours Ca mmat bom ROMUALD C.PADILLA General Counsel

1+SEC-OGC Opinion No.16-12 addressed to Atty.John Rester Nonato dated 24 May 2016; See also SEC-OGC Opinion No.14-05 13 SEC-OGC Opinion No. 11-33, supra Note 9 addressed to Atty. Rester John L. Nonato dated 25 April 2014. is Section 7,SEC Memorandum Circular No.15,Series of 2003.16 December 2003.

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