Opinion No. 14-32 RE: Foreign Ownership restrictions

SEC Building, EDSA, Greenhills, Mandaluyong City. Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEL

10 November 2014

SEC-OGC Opinion No. 14-32 Foreign Ownership restrictions

5th Floor SGV Building 6758 Ayala Avenue HERRERA TEEHANKEE AND CABRERA 1200 Makati City

Str:

concerning your client, STI Education Systems Holdings Incorporated ("STI- ESH"), regarding the applicability of foreign ownership restrictions by reason of its controlling ownership of STI Education Services Group Inc. ("STI-ESG"), an educational institution, and its primary purpose of owning land. This refers to your letters dated November 13 and December 10, 2012

domestic corporation, a holding company registered under SEC Registration No. institution offering vocational and tertiary courses through its network of 65 schools throughout the Philippines, registered with the Commission under SEC Registration 0000001746. STI-ESH is the substantial owner of shares of STI-ESG, an educational No. 0000113156. You disclosed that STI-ESH (formerly JTH Davies Holdings Inc.) is a

issued and outstanding capital stock of STI-ESG, mainly through share-swapping transactions and agreements with several stockholders of STI-ESG. You likewise attached the following documents: (l) Amended Articles of Incorporation of STI- ESG; ($) The Amended Articles of Incorporation of STI-ESH; and (2) the latest General Information Sheet of STI-ESH, which indicates that that as of the date of its filing, September 27, 2012, STI-ESH is 99.90% Filipino-owned. You further informed that STI-ESH, as of December 2, 2012, owns 98% of the

Incorporation reads as follows: The primary purpose of STI-ESH as indicated in its Amended Articles of

use, sell, assign, transfer, lease, mortgage, pledge. exchange, or otherwise dispose of real properties as well as personal and movable property of any kind and "To invest in, purchase or otherwise acquire or own, hold.

ownership, including all voting powers of any stock so notes,.. evidence of indebtedness and other securities or description, including shares of stock, bonds, debentures, obligations of any corporation or corporations, association or associations, domestic or foreign and to possess and exercise in respect thereof all the rights, powers and privileges of owned; but not to act as dealer in securities and to invest in and manage any company or institution." (Emphasis and underscoring supplied)

forty. per cent (40%) foreign ownership restriction with respect to educational long as the corporation and its subsidiaries own land. institutions, since it owns substantially all of the outstanding capital stock of STI- ESG; and (2) whether or not STI-ESH is likewise subject to foreign ownership restrictions to a maximum of 40% of its issued and outstanding capital stock, for as Thus, you would like to confirm (1) whether or not STI-ESH is subject to the

nationality restrictions for educational institutions: Article XIV, Section 4 (2), of the 1987 Constitution specifically provides

"Section 4. xxx

"(2) Educational institutions, other than those established by associations at least sixty per centum of the capital of religious groups and mission boards, shall be owned solely by citizens of the Philippines or corporations which is owned by such citizens. The Congress may however, require increased Filipino equity participation in all educational institutions. 4

institutions shall be vested in citizens of the Philippines. "The controlandadministration of educational

temporary residents." "No educational institution shall be established exclusively for aliens and no group of aliens shall comprise more than one-third of the enrolment in any school. The provisions of foreign diplomatic personnel and their dependents and, this subsection shall not apply to schools established for unless otherwise provided by law, for other foreign

(Emphasis and underscoring supplied)

176, Section 1 of which states as follows: This provision of the Constitution is implemented by Presidential Decree No.

CONSTITUTION", to implement Article XV Sec. 8(7) of the 1973 Constitution. The said law now implements Article XIV, Section 4 (2), of the 1987 Constitution. (SEC Opinions dated November 7, 1991 and November 10, 1992) The Decree is entitled "IMPLEMENTING SECTION 8 (7), ARTICLE XV,OF THE NEW

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"1. Ownership. All educational institutions, other than those which are already established or which may hereafter be established by religious orders, mission boards and charitable organizations, shall be owned solely by citizens of the per centum (60%) of the capital of which is owned by Philippines or corporations or associations at least sixty Such citizens. xxx" "2. Control and Administration. The control and established or hereafter to be established in the Philippines in the governing bodies or boards of such educational institutions shall be limited to citizens of the Philippines. Appointments and designations to, and employment in, positions involving the exercise of administrative discretion in the management of such educational institutions shall Likewise be limited to citizens of the Philippines. xxx administration of all educational institutions already shall be vested in citizens of the Philippines. Membership

(Emphasis and underscoring supplied)

above prohibition/restriction against foreigners applies to all persons who are not established by religious orders and mission boards, and those established for foreign diplomatic personnel and their dependents, and for other foreign temporary residents, is subject to 40% foreign ownership limitation.2 Likewise, foreigners are not allowed any control and administration of educational institutions, thus are barred from becoming members of the Board of Directors/Trustees of educational institutions. The citizens of the Philippines, including natural-born citizens of the Philippines who have lost theif Philippine citizenship by acquiring naturalized citizenship. Pursuant to the foregoing, all educational institutions, other than those

an educational institution under its Articles of Incorporation. However, the foreign ownership restriction on educational institutions is inapplicable to STI-ESH. Indeed, STI-ESG must comply with the foreign ownership requirement, being

requirements of its own, despite being the controlling shareholder thereof. Thus: separate corporate existence, is to be treated as a separate entity with peculiar As was previously opined by the Commission, a holding company, having a

corporations." Its essential feature is that it holds stock. The corporation organized to hold the stock of another or other "A holding company xxx has been aptly defined as "a

limited to information technology services, nursing, education, care giving, etc." (Emphasis and establish and operate educational institutions providing pre-elementary, elementary, secondary and tertiary as well as post-graduate courses, post-secondary, lower tertiary non-degree programs and other technical-vocational programs and in connection therewith develop, adopt and/or acquire, entirely or in part, suchcurricula or academic services as may be necessary in the pursuance thereof, relating but not underscoring supplied) 2 SEC-OGC Opinion No.09-08, March 27, 2009, addressed to Picazo Buyco Tan Fider and Santos. 3 SEC-OGC Opinion No. 14-20, August 5, 2014, addressed to Nonato Nonato and Nonato Law Offices, Citing SEC Opinion dated November 10, 1992, addressed to Mr. Eleno L. dela Cruz. Said primary purpose of STI-ESG in its Articles of Incorporation reads as follows: "To maintain.

term "holding company" is equivalent to a parent corporation, having such an corporation, or power of control, that it may elect its directors and influence its management. A parent or holding company is one that controls another as a subsidiary or affiliate by the power to elect its management. Affiliates operated as part of a system. are those concerns that are subject to common control and interest in another

XXX XXX "As a general rule, a "holding company" or company" has a separate corporate existence, and is to be treated as a separate entity, unless such corporate existence is a mere sham, or has been used as an instrument for concealing the truth, or where the organization or control is holding company is also subject to the same. xxx5 shown to be such as that it is but an instrumentality or adjunct of another corporation. So a holding company is generally held not to be doing or transacting business through its subsidiary where the corporate separate entities are maintained. Thus, if properly used to perform legitimate functions, the subsidiary and affiliate such as distinct from its controlling corporation or stockholder, ISM. Therefore, the fact that EPTI is the grantee of the legisiative franchise to operate a public utility (the operation of telecommunications), that is subject to the foreign ownership restriction under Article XII, Section 11 of the Constitution, it does NOT follow that ISM, the ETPI may maintain its separate juridical personality "parent

(Emphasis and underscoring supplied)

Article XII of the 1987 Constitution provides: the Philippines is regulated by the Constitution and the Public Land Act. Section 7, As to ownership of land, the legal capacity of a corporation to acquire land in

"Save -in cases of hereditary succession, no private lands shall be transferred except to individuals, corporations or associations qualified to acquire or hold lands in public domain."

qualified to acquire land in the Philippines: This is in relation to Sections 22 and 23 of the Public Land Act, as to who are

"SECTION 22. Any citizen of lawful age of the Philippines and any such citizen not of lawful age who is a head of a family, and any corporation or association of which at least citizens of the Philippines, and which is organized and sixty per centum of the capital stock belongs wholly to

5 SEC-O$C Opinion No: 11-15, February 10, 2011, addressed to Mr. Rodolfo Ma. A. Ponferrada. 6 SEC-OGC Opinion No. 12-03, February 6, 2012, addressed to Atty. Joan A. Giduquio-Baron. Citations omitted

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agricultural land disposable under this Act . . .. constituted under the laws of the Philippines, authorized under their charter, to do so, may purchase any tract of public

"SEC'TION 23. No person, corporation, association, or partnership other than those mentioned in the last preceding section, may acquire or own agricultural public land or at the: time or was originally really or presumptively of the public domain, or any permanent improvement thereon, or land of any other denomination or classification, which is any.real right on such land and improvement .. (Emphasis and underscoring supplied)

provides a primary purpose that includes ownership of lands, it must comply with the 40% foreign equity threshold. Verily, considering that STI-ESH's Amended Articles of Incorporation

List B pf the Ninth Regular Foreign Investment List ("FINL"),& provide that a participation is limited only up to forty percent (40%) for foreigners. As previously STI-ESH, being a holding company, will be subject to the aforesaid provisions of the FIA and the FINL if its paid-in equity capital is less than the equivalent of domestic market enterprise with paid-in equity capital of less than the equivalent of US$200[000.00 is partially reserved to Philippine nationals, i.e. foreign equity opined by the Commission, a holding company is deemed a domestic market enterpri$e subject to the minimum capitalization as required under the FIA.' Hence, US$200|000.00. Additionally, Section 8 of the Foreign Investments Act ("FIA") and Item 6,

or upon the Commission in other cases of similar or dissimilar circumstances.i0 If the facts disclosed in the query and relevant solely to the particular issues raised therein and shall not be used in the nature of a standing rule binding upon the courts. opinion shall be rendered null and void. upon investigation, it will be disclosed that the facts relied upon are different, this It shall be understood that the foregoing opinion is rendered based solely on

CAM General Counsel CO S. CORREA

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ExecutiJe Order No. 98, series of 2012, dated October 29, 2012. 9 SEC-OGC Opinion No. 09-30, November 23, 2009, addressed to Gonzales Batiller David Leabres 10 sEC Memorandum Circular 2003-15. 7 Republig Act No. 7042, as amended by Republic Act No. 8179. and Reyes