Opinion No. 19-14 Re: Creation of APIC using value of an aircraft; Non-Scheduled Domestic Air Transport as Nationalized Business Activity.

Republic of the Philippines Department of Finance Securities and Exchange Commission

OFFICE OF THE GENERAL COUNSEL

28 March 2019

SEC-OGC Opinion No. 19-14 RE: CREATION OF APIC USING VALUE OF AN AIRCRAFT; NON-SCHEDULED DOMESTIC AIR TRANSPORT AS NATIONALIZED BUSINESS ACTIVITY

2/F Xerografix World Plus Building Lot Space 3, Manila Ave. cor. Canal Rd CBD. Subic Bay Freeport Zone Reyes Diano Tumanda & Co. CPAs

Attention: Peter R. Tumanda, Managing Partner

Gentlemen:

This refers to your letter dated 19 November 2018, requesting an opinion

domestic air transport" is a nationalized activity (i.e. public utility). on (1) whether or not the value of an aircraft may be used to create additional paid-in capital (APIC), and (2) whether or not "non-scheduled

If domestic air transport is a nationalized activity, you further inquire as to (a) whether or not a foreign shareholder may infuse the APIC, and (b) whether or not APIC infused by a foreign shareholder should be included in the computation of foreign ownership.

1. Creation of APIC using the value of an aircraft

The creation of APIC is a matter within the business judgment of the corporation.' It does not require the prior approval of the Commission.

However, since the consideration here is property, in the form of an aircraft, it is subject to the Commission's confirmation of valuation, as mandated by Section 61 of the Revised Corporation Code,2 viz.

1 SEC Opinions 18-03 (dated 19 March 2018) and 10-34 (dated 22 December 2010), citing SEC Resolution No. 94, Series of 2006 which grants corporations the "option," but not the obligation, to apply for creation of APIC with the Commission. 2 Reenactment of Section 62 of the 1980 Corporation Code (B.P. 68)

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Section 61. Consideration for Stocks. xxx

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Where the consideration is other than actual cash. or consists of intangible property such as patents or copyrights, the valuation thereof shall initially be determined by the stockholders or the board of directors, subject to the approval of the Commission. (Emphasis supplied)

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of an appraiser,3 and then file an application for confirmation. The Commission The corporation has to prepare its valuation of the aircraft with the aid

has to confirm the valuation of consideration other than cash, including aircraft. to prevent watering of stock.4

We recommend filing an Application for Confirmation of Valuation of aircraft for the creation of APIC with the Financial Analysis and Audit

Department (CRMD). The application should be accompanied by a favorable Division (FAAD) of the Commission's Company Registration and Monitoring

endorsement of airworthiness from the Civil Aeronautics Board.

Ownership Registration as Paid-Up Capital dated 15 November 1994 (as The SEC Guidelines Covering the Use of Properties that Require

proof of transfer of ownership within ninety (90) days from approval of the amended by Memorandum Circular No. 14, Series of 2013) also require

application,5 viz.

In the interest of investors and creditors in stock corporations, the following guidelines are hereby registration, such as motor vehicles, sea vessels. adopted by the Commission, in connection with land, and other properties requiring ownership

aircraft, firearms, and shares of stock, which are used as paid-up capital of stock corporations xxx

value of an aircraft cannot be used to create APIC. Absent such confirmation of valuation and proof of transfer, the

is other than real property, the appraiser or valuer issuing the report shall show proof, upon request by the Commission, of [its] technical expertise on conducting such valuation." 5 See new Paragraph l.b ("property other than land") under SEC Memorandum Circular No. 14, 6 SEC Guidelines Covering the Use of Properties that Require Ownership Registration as Paid- 3 See Item II-2 of SEC Memorandum Circular No. 2, Series of 2014 (Guidelines on Asset Valuations), viz. "For corporations that are not public companies xxx.[if] the subject valuation Series of 2013 Up Capital dated 15 November 1994. 4 Lucila M. Decasa, Handbook on Private Corporations (2009) at 382

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Non-scheduled Domestic Air Transport as a Nationalized Business Activity (i.e. Public Utility)

To determine if the use of the aircraft falls within the nationality restrictions on public utilities, the Commission shall consider whether or not the air transport services are being offered to the general public. If so, the air transport services would constitute a public utility where 60% equity is reserved to Filipinos.

(CAB) as Non-scheduled Domestic Air Transport, for which the CAB will grant you a Certificate of Public Convenience and Necessity (CPCN), you are representing that you will offer the air transport services to the general public. Since you have a pending application with the Civil Aeronautics Board

Likewise, the CAB itself considers this kind of business activity as a public utility, because a CPCN is only required of and issued to public utilities.

for a corporation engaged in the "operation of public utilities."8 equity is reserved to Filipinos, pursuant to the 11th Regular Foreign Investment Negative List which provides that up to 40% foreign ownership is allowed Thus, the air transport here constitutes a public utility, of which 60%

"party-nationalized activities" (e.g. 60:40 Equity in Public Utilities). reserved to Filipinos, we must refer to the provisions of SEC Memorandum Circular No. 8, Series of 2013, which applies to nationalized(100%) and For purposes of computing the required percentage of ownership

which is determined on the basis of (1) the total number of outstanding shares The primary consideration is full beneficial ownership of shares.

entitled to vote, and (2) the total number of all outstanding shares. As applied to the 60:40 Ratio, this means 60% of outstanding voting shares must be Filipino-owned, and 60% of all outstanding shares must also be Filipino-owned.

foreign ownership would be same before and after the creation of APIC. balance sheet) is increased but there is no further issuance of shares, the creation of APIC will not affect Filipino ownership. The ratio of Filipino-to- price of shares," wherein the amount paid for the shares (as recorded on the However, since APIC is considered "a premium paid over and above the

shareholder. The infusion/contribution of the aircraft's value will not cause a It is also of no consequence that the APIC was infused by a foreign

new issuance of shares, i.e. the shareholders will be the same.

plant, and equipment) of the corporation, while the creation of APIC will Essentially, the value of the aircraft will increase the assets (i.e. property.

increase owners' equity (net worth).

7 Executive Order No. 65 dated 29 October 2018 8 List A, Number 18 ("Operation of Public Utilities")

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since no additional shares will be issued to the foreign shareholder. However, there will be no corresponding increase in foreign ownership.

We further caution that the Commission considers not only share

foreigner who is not already a shareholder seeks to gain control of the ownership but also other contracts and arrangements which grant control to foreigners.' Based on the facts, however, no control is being granted to the foreign shareholder in consideration of the aircraft. If, on the other hand, a

laws even without actually owning any shares. corporation through a donation, there might be a violation of foreign ownership

raised therein. It shall not be used in the nature of a standing rule binding rendered void. be disclosed that the facts relied upon are different, this opinion shall be facts and circumstances disclosed and relevant solely to the particular issues upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances.1 If, upon further inquiry or investigation, it will It shall be understood, however, that this opinion is based solely on the

Please be guided accordingly.

By authority of the En Banc:

CAML S.CORREA General Counsel

9 Rule 3.1.8.2 of the 2015 Implementing Rules of the Securities Regulation Code 10 Number 7 of SEC Memorandum Circular No. 15, Series of 2003