Opinion No. 24-28 Re: Foreigner in the Board off-shore Collective Investment Schemes

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Exchange Securities and Commission

BACONG PILIPINAS

OFFICE OF THE GENERAL COUNSEL

09 October 2024 SEC 0GC Opinion No. 24-28 Re: Foreigner in the Board of Off-shore Collective Investment Schemes

17F Robinsons Equitable Tower Ortigas Center, Pasig City 1605 BELLO VALDEZ & FERNANDEZ 4 ADB Ave., cor. P. Poveda Drive

Attention Atty. Emilio Sebastian M. Caedo

esmcaedo@jglaw.com.ph Re Request for opinion Dear Atty. Caedo:

on the "setting-up of foreign-owned venture capital, private equity and hedge funds (collectively referred to as "the funds") in the Philippines." This refers to your letter dated 28 April 2023 requesting, on behalf of your clients, for an opinior

In your letter, you provided the definition of the different kinds of funds in this wise: investors. Hedge funds typically raise capital from wealthy individuals, institutional investors, and pension funds, and use the funds to invest in a wide range of securities, including stocks, bonds, commodities, A 'venture capital fund' is a type of investment fund that provides capital to early-stage or startup companies with high growth potential, in exchange for an ownership stake in the company. A "private equity in public companies with the goal of generating high return on investment. A 'hedge fund' is a type of investment fund that uses various investment strategies to generate high returns on investment for its fund' is a type of investment fund that invests in privately held companies or takes private ownership stakes currencies, and derivatives.1

exclusively offered offshore (i.e. outside of the Philippine territory)." 2 representation in the boards of directors of such funds, considering that: (i) such funds will be wholly- or partially-owned by foreign stockholders, and (ii) the units of participation in those funds will be You are now asking for an opinion on whether or not "foreign nationals will be allowed to have

Nature of Investment Companies

"investment companies" as follows: Section 4 of Republic Act (R.A.) No. 2926 or the Investment Companies Act (ICA) defines

SECTION 4. Definition of investment company. (a) when used in this Act "investment company" means any issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities:

companies as follows: Rule 1(19) of the Implementing Rules and Regulations (IRR) of the ICA 3 defines investment

2 Emphasis supplied. 1 Lifted from Pages 1 and 2 of your letter-request. 3 Rule 1(19), Implementing Rules and Regulations of Republic Act (R.A.) No. 2629 or the Investment Companies Act (ICA-IRR), 19 December 2017.

14/F The SEC Headquarters, 7907 Makati Avenue (+63 2) 8818 5348 /(+63 2) 8818 5418 Salcedo Village, Bel-air. Makati City. TiVRhe. A Ohe

www.sec.gov.ph j imessagemo@sec.gov.ph

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engaged primarily, or proposes to engage, in the business of investing, reinvesting and trading in securities. 19. Investment Company -- shall refer to a stock corporation primarily engaged or holds itself out as being

Section 15 of the ICA provides a specific rule for board composition, viz.: SECTION 15. Board of directors; election; term vacancies; and salaries. -- No person shall serve as a director of a registered investment company unless he is a Filipino citizen and elected to that office by the holders of the holders' of the outstanding voting securities of the company at such an annual or special meeting. In the event that at of electing directors to fili any existing vacancies in the board of directors unless the Commission shall by order extend Such period. The foregoing provisions shall not apply to members of an advisory board. outstanding voting securities of such company, at an annual or a special meeting duly called for the purpose; except that vacancies occurring between such meeting may be filled in any otherwise legal manner if immediately after filling any time less than a majority of the directors of such company holding office at that time were so elected by the holders of the outstanding voting securities, the board of directors or proper officer of such company shall forthwith cause to be held as promptly as possible and in any event within sixty days cancy at least two-thirds of the directors then holding office shall have been elected to such office by the 's a meeting of such holders for the purpose

In relation thereto, Rule 3.4 of the ICA-IRR4 provides the following minimum requirements:

3.4. Minimum Requirements. An Investment Company applying for incorporation with this Commission shall comply with the following requirements:

XXXX

through an investment company. In fact, your claim that the three types of funds described "may fall under this definition of investment companies."5 Nevertheless, assuming that your proposed activities and business model fall under the definition of investment companies, we provide the following discussion. Notably, the letter does not conclusively show that the management of the funds will be e. All members of the Board of Directors shall be Filipino citizens:

Foreign Equity Restrictions

provide a foreign equity limitation in investment companies" such that "foreign nationals may set-up these (E.0.) No. 175, Series of 2022 or the Twelfth (12th) Foreign Investments Negative List (FINL) "does not types of funds in the Philippines without ownership restrictions."" To support your position that Section 15 of the ICA was repealed, you claim that Executive Order

"Section 2-A of the Anti-Dummy Law supersedes Section 15 of the ICA, since the former was passed after the latter."? You also cited the doctrine of lex posteriori derogate legipriori to support your position that

foreign ownership is limited for reasons of security, defense, risk to health and morals and protection of small and medium scale enterprises (List B). It is updated from time to time by the National Economic and foreigners are allowed to invest in up to 100% of the equity of a domestic enterprise unless otherwise restricted by the Constitution and other pertinent laws. foreign ownership is limited by mandate of the Constitution and specified laws (List A), and those in which Development Authority (NEDA).9 As to the FINL, under R.A. No. 7042, also known as the Foreign Investments Act of 1991 (FIA), The 12th Regular FINL provides a specific list of activities, businesses, and enterprise in which As such, we must examine the nature of the FINL and the Anti-Dummy Law.

by citizens of the Philippines or of any other specific country, it shall be unlawful to falsely simulate the existence of It is clear that for the Anti-Dummy Law to apply, the corporation must be engaged in a nationalized or partly. the 12th [FINL]. Only the investment areas and/or activities listed in the i2th FINL shall be reserved for As to the Anti-Dummy Law, SEC-OGC Opinion No. 24-1810 is instructive, viz.: may exercise or enjoy a right, franchise or privilege, not less than a certain per centum of its capital must be owned In all cases in which a constitutional or legal provision requires that, in order that a corporation or association such minimum of stock or capital as owned by such citizens, for the purpose of evading said provision nationalized activity. A list of activities which are deemed "nationalized" or "partly-nationalized" is provided under

8 SEC-OGC Opinion No. 24-19 addressed to Siguion Reyna Montecillo & Ongsiako dated 02 July 2024. 5 Lifted from Page 2 of your letter-request. Emphasis and underscoring supplied 6 As stated in page 2 of your letter. 7 As stated in page 5 of your letter. % SEC-OGC Opinion No. 24-01 addressed to Estrada & Aquino dated 02 January 2024. 4 Rule 3.4, supra Note 3. 10 SEC-OGC Opinion No. 24-18 addressed to Community'Economic Ventures (A Microfinance NGO) Inc. dated 25 June 2024

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Philippine Nationals, subject to the exceptions and conditions indicated therein. (Emphasis and underscoring supplied)

of engaging in a certain industry/activity is a nationalized or partly-nationalized corporation. The Anti- Dummy Law does not prescribe foreign equity restrictions, what it does is to prescribe the effects of having one. Under the Anti-Dummy Law, a corporation with foreign equity restriction of 40% or less as a result

corporation under Section 2-A of the Anti-Dummy Law is that "the election of aliens as members of the participation or share in the capital of [the corporation]."11 board of directors or governing body of [such corporation] shall be allowed in proportion to their allowable One effect of having a foreign equity restriction or being a nationalized or partly-nationalized

providing the consequences thereof. nationalized or partly-nationalized corporations, the Anti-Dummy Law complements the same by Considering the foregoing, it is established that while the FINL provides the enumeration of

No Repeal of ICA

there was an implied repeal of ICA. As early as Antonio Mecano vs. Commission on Audit, 1 the Court laid down the rule on implied repeal: It is worthy to note that there is no express repeal of the ICA. The question then is whether or not

as the two acts are the same from the time of the first enactment. Repeal by implication proceeds on the premise that where a statute of later date clearly reveals an intention on the can be a repeal, there must be a clear showing on the part of the lawmaker that the intent in enacting the new Iaw was to abrogate the old one. The intention to repeal must be clear and manifest; otherwise, at least, as a general rule, the later act is to be construed as a continuation of, and not a substitute for, the first act and will continue so far There are two categories of repeal by implication. The first is where provisions in the two acts on the same subject matter are in an irreconcilable conflict, the later act to the extent of the conflict constitutes an implied repeal of the earlier one. The second is if the later act covers the whole subject of the earlier one and is clearly intended as a part of the legislature to abrogate a prior act on the subject, that intention must be given effect. Hence, before there substitute, it will operate to repeal the earlier law

and both cannot be given effect, that is. that one law cannot he enforced without nullifving the other. Implied repeal by irreconcilable inconsistency takes place when the two statutes cover the same subject matter: they are so clearly inconsistent and incompatible with each other that they cannot be reconciled or harmonized:

XXX The fact that a later enactment may relate to the same subject matter as that of an earlier statute is not of itself sufficient to cause an implied repeal of the prior act, since the new statute may merely be cumulative or a continuation of the old one. What is necessary is a manifest indication of legislative purpose to repeal. (Emphasis and underscoring supplied, citations omittedy

enacted by the legislature with full knowledge of "existing laws on the subject and not to have enacted conflicting statutes," to wit: Further, repeals by implication are frowned upon. This is based on the presumption that a law was

the existing laws on the subject and not to have enacted conflicting statutes. Hence, all doubts must be resolved their congruent application. The two laws must be absolutely incompatible, and a clear finding thereof must surface, legibus est optimus interpretendi, i.e., every statute must be so interpreted and brought into accord with other laws as to form a uniform syste against any implied repeal, and all efforts should be exerted in order to harmonize and give effect to all laws on the Well settled is the rule that before the inference of implied repeal may be drawn. The rule is expressed in the maxim, interpretare et concordare subject. 13 m of jurisprudence. The fundament is that the legislature should be presumed to have known peals of laws by implication are not favored, and that courts must generally assume

and the newer law; or (2) the later law covers the whole subject of the earlier one and is clearly intended as a substitute. This is because of the well-established rule of statutory construction that endeavor should foreign equity restrictions or those which impose a limit on a corporation's capital structure itself. be made to harmonize the provisions of a law or two laws so that each shall be effective. It is clear that implied repeal only applies if (1) there is irreconcilable conflict between the older We now examine whether or not there was an implied repeal of the ICA. As to the FINL, it is worthy to emphasize that it is not a law but merely an issuance that deals with

13 Department of Public Works and Highways (DPWH) vs. Philippine Institute of Civil Engineers Inc. and Leo Gamolo, G.R. No. 200015, 11 Section 2-A, Commonwealth Act No. 108 or the Anti-Dummy Law, as amended, 30 October 1936. 12 Antonio Mecano vs. Commission on Audit (COA), G.R. No. 103982, 11 December 1992. [Per J. Campos Jr., En Banc] 15 March 2023. [Per J. Leonen, Second Division]

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on the composition of the board itself. Section 15 of the ICA is different as the restriction imposed is not on equity or capital structure but

between the FINL and Section 15 of the ICA, nor is there a showing that the former was intended as a substitute for the latter as the former is not even a law and does not even cover the same subject-matter. Considering that these are two different subject-matters, there is neither an irreconcilable conflict

of the ICA. The former applies as a restriction on the board composition of all corporations which are made on board representation. The latter, on the other hand, applies to all investment companies, regardless of the presence or absence of foreign equity restriction, as the board composition is specifically provided restrictions but which do not prescribe a specific rule on board composition. This is how, to reiterate, the Anti-Dummy Law complements these laws and the FINL, by providing the effects of such equity restriction nationalized or partly-nationalized by the Constitution or by laws which prescribe foreign equity As to the Anti-Dummy Law, Section 2-A thereof can be reconciled or harmonized with Section 15

which provides that, in general, educational institutions are limited to 40% foreign equity but the board composition is required to be 100% composed of Filipinos. Article XIV, Section 4(2) of the Constitution14 provides the following: and/or dependent on the equity structure of the corporation. An example is no less than the Constitution Indeed, the law can prescribe a specific board composition that is not necessarily correlated to

Educational institutions, other than those established by religious groups and mission boards, shall be owned solely institutions. The control and administration of educational institutions shali be vested in citizens of the Philippines. (Emphasis supplied) by citizens of the Philippi owned by such citizens. The Congress may, however. or corporations or associations gt least sixty per centum of the capital of which is require increased Filipino equity participation in all educational

of a specific type of corporation that is, unlike the rule under the Anti-Dummy Law, not correlated to and/or dependent on the equity structure Section 15 of the ICA is another example of a law prescribing a specific rule on board composition

aliens as members of the board of directors or governing body of corporations or associations engaging in in the capital of such entities), the exception being when the specific law provides for a different specific partially nationalized activities shall be allowed in proportion to their allowable participation or share requirement on board composition. To sum, the Anti-Dummy Law provides for the general rule on board composition, (i.e. election of

intended as a substitute of the later since the former does not cover the whole subject of the latter. It follows on the composition of the Board of Directors, neither is there a showing that the former was clearly then that there is no implied repeal and that the requirement on the composition of the Board of Directors Under the ICA still stands. As such, there is no irreconcilable difference between the Anti-Dummy Law and the ICA provision

Effect of off-shore offer and sale of securities

foreigners, it is not necessary to have an all-Filipino board. Sections 8 and 10 thereof, and that since the units of participation of the Funds to be established will be offered purely offshore, the provisions of the SRC are inapplicable. As such, the investors being purely You assert that R.A. No. 8799 or the Securities Regulation Code (SRC) is territorial in scope, citing

a) Registration Requirement under the SRC

under Section 8 of the SRC was discussed in SEC-OGC Opinion No. 24-04,15 to wit: Thus, for the registration requirement to bind the issuer, the following elements must be present: The materiality of the situs of the offer and sale of securities vis-a-vis the registration requirement C the sale or offer to sell/distribute securities must be within the Philippines. the subject matter must be securities: the tic es must either be sold or offered for sale or distribution; and

However, as to the establishment and operation of investment companies, the ICA and its IRR prevail. Hence, notwithstanding the intention to offer units of participation purely offshore, a corporation seeking That said, it is worthy to stress that Section 8 governs the requirements of securities registration

15 SEC-OGC Opinion No. 24-04 addressed to Puyat Jacinto & Santos dated 26 March 2024 Article XIV, Section 4(2), 1987 Constitution, 02 February 1987

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to obtain and maintain a license as an investment company must comply with the ICA, including Section 15 thereof.

b) ASEAN CIS Framework

the ASEAN Collective Investment Scheme (CIS) Framework. The Commission issued SEC Memorandum Circular (MC) No. 09, Series of 202116 to operationalize

like the ICA and the SRC and their respective IRRs. In fact, Article IV of the same MC provides the following guidelines: The Philippine's adoption of the ASEAN CIS Framework does not dispense with domestic laws

IV. Additional Requirements for Investment Companies offering cross-border

An investment company that seeks to offer its shares under the Framework must demonstrate compliance differ on a particular provision, the stricter requirement/s would govern and such fact must be with both domestic regulations and Standards of Qualifving CIS, but where the two sets ofrequirements highlighted in the Prospectus of the Fund. (Emphasis and underscoring supplied)

outstanding voting securities of such company17 and pursuant thereto, all members of the board must be under Philippine laws must satisfy the requirements under the domestic laws, i.e. the director of a registered investment company should be a Filipino citizen and elected to that office by the holders of the Filipino citizens, notwithstanding the intention to offer units of participation purely offshore.1: Thus, a company seeking to obtain a license to undertake activities of an investment company

Directors of funds constituted as investment companies notwithstanding the representation that (i) such funds will be exclusively offered offshore (i.e. outside of the Philippine territory). funds will be wholly-or partially-owned by foreign stockholders, and (ii) the units of participation in those Accordingly, foreign nationals will not be allowed to have representation in the Board of

regardless of its perceived harshness. Dura lex sed lex. The proper remedy is not a request for an opinion but an express amendment or repeal of the law -- matters which are within the office of the Legislature and Indeed, it is doctrinal that when the law is clear, there is no other recourse but to apply it

not with this Commission.

circumstances and documents disclosed/submitted 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 it will be disclosed that the facts relied upon are different, this opinion shall be rendered void. upon the courts whether of similar or dissimilar circumstances.19 If, upon further inquiry or investigation, It shall be understood that the foregoing opinion is rendered based solely on the facts,

Please be guided accordingly.

Yours most respectfully. 2

ROMUALO C. PADILI A, LLM, CESO II Wetat m. General Counsel

18 Section 3.4, ICA-IRR, supra Note 3. 16 Article IV, SEC Memorandum Circular (MC) No. 09, Series of 2021, 16 August 2021. 19 Section 7, SEC MC No. 15, Series of 2003, 16 December 2003. 17 Section 15, R.A. No. 2926, Investment Companies Act (ICA), 18 June 1960.