Opinion No. 22-05 Re: Citizenship of a Trust; Grandfather Rule

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEL

13 April 2022

Re: Citizenship of a Trust; SEC-0GC Opinion No.22-05 Grandfather Rule

9th floorCebu Holdings Center Cebu Business Park Cebu City Alvarez Nuez Galang Espina & Lopez and Espina Law Firm Atty.Joselito T.Lopez

Dear Atty. Lopez

the contemplated ownership structure of the Proposed Corporation that Philippines will be compliant with nationality laws. will engage in the acquisition and development of real estate in the This refers to your letter requesting an opinion on whether or not

follows: Per your letter, the proposed incorporators/stockholders are as

Incorporator Individual Individual Individual (Minor C) Corporation X Individual Individual Individual Chinese Chinese Citizenship Chinese Filipino (with Chinese trustee) 100% foreign-owned BVI Filipino Filipino Percentage of Ownership 1% 1 Share 1 Share 3 % 10% 1 Share 50%

You request an opinion on the following queries:

1: Whether or not the Chinese Father of Minor C can validly be

3.Will this not violate the "Grandfather Rule"? 2. Can the Chinese trustee qualify as nominee/representative of appointed/designated as trustee for his daughter's shares in the Proposed Corporation? the Filipino minor incorporator in the Board of Directors?

1 Dated 21 March 2018

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nationality of the trustee will impact the nationality of the Proposed Corporation and the legality of the latter's pursuit of its real estate business. Relative to the first query, the issue actually posed is how the

be registered in the name of one person but the beneficial owner may belong to another.? Shares may be issued in trust for another person. The shares may

nationals.5 In order for a trustee of a trust fund for retirement benefits of be satisfied, namely:(1 the trustee is a Philippine national and (2) at Pilipinas on trust fund invested in banks provides that if the trustee is foreign, the equity investment shall be considered foreign regardless of citizenship of shares being held in trust, both the nationality of the trustee Foreign Investment Act includes in its definition of "Philippine national a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60% of the fund will accrue to the benefit of Philippine employees to be considered a Philippine national, two requirements must least sixty percent (60% of the fund will accrue to the benefit of the Philippine nationals.6 Further, the rules of the Bangko Sentral ng the citizenship of the beneficiaries.8 and of the beneficiary should be considered. It was pointed out that the In a previous opinion3we opined that in the determination of the

looking at the stockholder's ability to vote in the election of directors and in relation to Roy vs. Herbosaio that control should be determined by other important corporate affairs. The foregoing are consistent with the ruling in Gamboa vs. Teves

acquisition and development of real estate which is a partially In this case, the Proposed Corporation will be engaged in the

Manuals of Regulations of the Bangko Sentral ng Pilipinas,07-11-19751975 cited in SEC 3SEC Opinion No.12-13 dated 09 August 2012 addressed to Atty.Loreto j.DaponJr Republic Act No. 7042 Foreign Investments Act of 1991 s This definition is a reproduction of that contained in the Omnibus Investment Code as well as the SupraNote 2,citing SEC-OGC Opinion No.01-A-09 dated 08 December 2009 addressed Mr. 7SupraNote 2,citing the Manual of Regulations ofthe Bangko Sentral ng Pilipinas,07-11-1975 Opinion No.12-13 dated 09 August 2012 10 Roy IIIv. Herbosa,G.R.No.207246,22 November 2016,800 PHIL 459-617 2 Guy v.Court of Appeals. G.R. Nos.165849,170185,170186,171066& 176650,10 December Demosthenes B.Donato of Donato Zarate & Rodriguez Gamboa v.Teves.G.R.No.176579,28 June 2011,668 PHIL 1-118 2000 Investment Incentives Act

Page 3 of 5 nationalized11 activity; thus,the Proposed Corporation must comply with the 40% foreign ownership threshold.1z

incorporator will be held in trust by her Chinese father,with authority to minor (with a Filipino mother. However,the shares of stock of the minor represent the minor in all stockholders'meeting of the corporation, while she is still a minor. She will have full control over the shares only upon attaining the age of majority. 50% of which,by virtue of a Deed of Donationis owned by a Filipino The proposed structure is that 61% will be owned by Filipinos

are embraced in the administration of property.However, he/she does not have the power to dispose or encumber the property of the minors,as such power is only granted by law to a judicial guardian of the wards property,and even then only with the court's prior approval secured in accordance with the proceedings set forth by the Rules of Court. is should be issued in the name of the father or in his absence,in the name of the mother, in trust for the minors. He/She may represent and vote for the minor children in the stockholders' meetings inasmuch as said acts 32614 of the Civil Code that the stock certificates owned by the minors The Commission previously opined,based on Articles 32013 and

and 326 of the Civil Code by, among others,providing the joint legal guardianship over the property of the unemancipated child,to wit: The following provisions of the Family Code amended Articles 320

children or wards the following rights and duties: authority shall have with the respect to their unemancipated "Article 220. The parents and those exercising parental

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interests; (5 To represent them in all matters affecting their

unemancipated common child without the necessity of a exercise legal guardianship over the property of the Article 225. The father and the mother shall jointly

13 Civil Code of the Philippines,Republic Act No.386,18 June 1949.Article 320. The father,or in his absence the mother, is the legal administrator of the property pertaining to the child under 14 Ibid.Article 326.When the property of the child is worth more than two thousand pesos, the father or mother shall be considered a guardian of the child's property, subject to the duties and 1 Eleventh Regular Foreign Investment Negative List (FINLSection 7, Article XII of the 1987 conveyed except to individuals,corporations or associations qualified to acquire or hold lands of shall give a bond subject to the approval of the Court of First Instance. obligations of guardians under the Rules of Court." 1SSEC Opinion dated 30 June 1982,TGN Realty Corporation Constitution. Section 7. Save in cases of hereditary successionno private lands shall be transferred or the public domain." 12 SEC Opinion No.14-05 dated 25 April 2014 parental authority. If the property is worth more than two thousand pesos, the father or mother

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decision shall prevail, unless there is a judicial order to the court appointment In case of disagreement, the father's contrary.

performance of the obligations prescribed for general income of the child exceeds P50,000,the parent concerned shall be required to furnish a bond in such amount as the court may determine, but not less than ten per centum (10%) of the value of the property or annual income, to guarantee the guardians. Where the market value of the property or the annual

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parental authority over their children. The father or the mother, should by force of law and without need of judicial appointment, administer the child's property.16 However,under the proposed structure, the 50% shareholding of Minor C will be under the control of her Chinese father. Since foreign control over the Proposed Corporation will exceed 40%,it will not comply with the Constitution and nationality laws. Thus, the Proposed Corporation cannot engage in real estate business under this structure Based on the foregoing, the general rule is that parents exercise

qualification. As to your second query, we answer in the affirmative with a

appears as owner on the books of the company who is the stockholder stock has been transferred for the purpose of qualifying him as a director ownership in order to be eligible as director. For the purpose of stock not necessary and that a person who holds the legal title to stock on the books of the corporation is qualified, although the beneficial ownership may be in another. In other words, it is sufficient that the title to the stock, as it appears on the books of the corporation, is in the director since the legal title is what counts and it is the person whose name and eligible as director For instance, a director may hold his stock as trustee and yet be legally qualified. So a person to whom one share of ownership qualification, the general rule is that beneficial ownership is is eligible17 Section 22 of the Revised Corporation Code (RCC) requires stock

the above prohibition and the fact that the Chinese father represents the minor in such incorporation, the legal title to the stocks issued shall be in RCC requires that a natural incorporator must be of legal age. Considering incorporator of the Proposed Corporation. However, Section 10 of the In your letter, you represented that Minor C will be an

17 SEC Opinion dated 11uly 1989 addressed to Mr.Rolando Rosales 16 Paras,Civil Code of the Philippines,Vol.1,1984 ed.p.742

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qualify as a director subject to the allowable proportion under the the name of the Chinese father. As such, the trustee Chinese father may Anti-Dummy Law,18

or "grandfathering the shares of an investing corporate stockholder(s. which can directly be determined without applying the Grandfather Rule. nationality of an investee corporation and such is determined by tracing Here,the nationality of the corporate stockholder,Corporation X,is not in doubt. What we are analyzing is the 50% share ownership of Minor C, case. As to your third query,the Grandfather Rule does not apply in this The Grandfather Rule applies when there is a doubt on the

standing rule binding upon the Commission in other cases or upon the investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void. disclosed/submitted, and should be considered relevant solely to the particular issue raised therein. It shall not be used in the nature of a courts whether of similar or dissimilar circumstances.19 If upon on the basisof the facts,circumstancesanddocuments It shall be understood that the foregoing opinion is rendered solely

CormwhLtaom ROMUALDC.PADILLA General Counsel

18 Section 2-A of Commonwealth Act No. 108, as amended by P.D.715 19 SEC Memorandum Circular 2003-15, No. 7