Opinion No. 19-42 Re: Nationality Requirement for Transport Network Company

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEL

September 19, 2019

SEC-0GC Opinion No. 19-42 Re: Nationality Requirement for Transport Network Company

4 ADB Avenue, Ortigas Center, Pasig City TIONGCO SIAO BELLO LAW OFFICES Units 2104 to 2105, Robinson's Equitable Tower

Attention: ATTY. NIKKA M. BACCAY ATTY. JOYCE G. JUCUTAN

Attorneys:

Velox Technology Philippines, Inc. (Velox Philippines) is compliant with the foreign equity limits under Section 11, Article XII of the 1987 Constitution. This refers to your letter dated 26 April 2019 requesting an opinion on whether

Velox Philippines undertook ownership restructuring. Transport Network Company (TNC) with the Land Transportation Franchising and dated 11 June 2018 classifying TNCs as public utilities. To comply with the mandate of the said D0 and in accordance with Section 11, Article XII of the 1987 Constitution, Regulatory Board (LTFRB). After submission and pending approval of the application, the Department of Transportation (D0Tr) issued Department Order (D0) No. 2018-12 Based on your letter, Velox Philippines is an applicant for accreditation as a

SEA), a foreign Singaporean corporation and a stockholder of Velox Philippines, sold stock of Velox Philippines. After the said purchase and subscription, and based on the Amended 2018 General Information Sheet (GIS) of Velox Philippines, which you Velox Philippines. Meanwhile, Velox SEA's common shares were reduced to 799,999,995 or 39.99% ownership in Velox Philippines, as follows: 955,000,000 common shares from the unsubscribed portion of the authorized capital attached, PCVC now has a total of 1,200,000,000 common shares or 60% ownership in 245,000,000 of its common shares in the latter to Pace Crimson Ventures Corporation (PCVC), a wholly-owned Filipino corporation. After the sale, PCVC also subscribed to Pursuant to such restructuring, Velox South-East Asia Holdings Pte. Ltd. (Velox

Stockholders Stockholder 5 Individual Velox SEA PCVC Total Shares Subscribed 1,200,000,000 2,000,000,000 799,999,995 5 Php 12,000,000.00 Php 20,000,000.00 Amount Subscribed 7,999,999.95 0.05 Percent of Ownership 39.99% 0.01% 100% 60%

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Hence, your query.

I RULES ON CORPORATE NATIONALITY

Section 11, Article XII of the 1987 Constitution provides:

association must be citizens of the Philippines." (Emphasis ours) limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or it shall be subject to amendment, alteration or repeal by the Congress when the common good so requires. The State shall governing body of any public utility enterprise shall be of authorization for the operation of a public utility shall the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such encourage equity participation in public utilities by the general public. The participation of foreign investors in the "SECTION 11. No franchise, certificate, or any other form be_granted except to citizens of the Philippines or to corporations or associations organized under the laws of franchise or right be granted except under the condition that

the 11th Foreign Investment Negative List (FINL)1, wherein only up to 40% foreign equity is allowed. In this regard, the operation of public utilities was placed under List A, Item 18 of

least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines3. a "Philippine National" if it is organized under the laws of the Philippines of which at Under the Foreign Investment Act (FIA) of 19912, a corporation is deemed to be

A. Base of 60%-40% under Jurisprudence and SEc Memorandum Circular

No. 8. Series of 2013

entitled to vote in the election of directors, and thus, in that case, only to common shares, and not to the total outstanding capital stock (which in that case comprised of common and non-voting preferred shares). 'capital' in Section 11, Article XII of the 1987 Constitution refers only to shares of stock In the 2011 case of Gamboa vs. Teves, 4 the Supreme Court ruled that the term

Subsequently, the Commission issued SEc Memorandum Circular No. 08,

3 Section 3, R.A. No. 7042 ' Executive Order No. 65, Promulgating the Eleventh Regular Foreign Investment Negative List 2 Republic Act (R.A.) No. 7042 approved on 13 June 1991 4 Heirs of Gamboa v. Teves, G.R. No. 176579, 28 June 2011

SEC-OGC Opinion No Re:Nationality Company Requirement 19-42 Transport Network Page 3 of 5

AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. number of outstanding shares of stock entitled to vote in the election of directors; Series of 2013 (SEC-MC No. 8), which was upheld by the Supreme Court in the 2016 case of Roy vs. Herbosa5. SEC-MC No. 8 uses the two-tiered test in determining compliance with the required percentage of Filipino ownership. Under the two-tiered test, the 60% required Filipino ownership shall be applied to BOTH: (a) the total

B.Control Test (Prevailing mode of determining Filipino ownership)

nationality of a corporation which has corporate stockholders: (i) the Control Test and (ii) the Grandfather Rule. In the Philippines, there are two acknowledged tests in determining the

Filipino.6 at least sixty percent (60%) of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. Under this test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of an investing corporation since a corporation which is at least 60% Filipino-owned is already considered as The Control Test or the "liberal rule" states that shares belonging to corporations

shareholders but in the foreign shareholders.8 of Filipino equity in a corporation is computed by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the beneficial ownership and control, as when these do not in fact reside in the Filipino corporate shareholder."7 This rule is only used when doubt exists as to the locus of the On the other hand, the Grandfather Rule is the method by which the percentage

I DISCUSSION: USING THE TWO-TIERED TEST UNDER SEC-MC NO. 08

your letter, the ownership structure of Velox Philippines is illustrated below: Based on the Amended 2018 GIS of Velox Philippines, which you attached to

Stockholders 5 Individual 100% Stockholders 5 Individual 0.01%

PCVC 60% Velox SEA 39.99%

Philippines Velox

Narra Nickel Mining and Development Corporation, et. al. vs Redmont Consolidated Mines Corporation, G.R. No. 5 Jose M. Roy IIlvs Chairperson Teresita Herbosa, G.R. No. 207246, 22 November 2016 8 Ibid. 1 Ibid. 195580, 21 April 2014, citing DOJ Opinion No. 020, series of 2005.

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with the foreign ownership limits, the nationality of the abovementioned stockholders (i.e. PCVC, Velox SEA, and the 5 Individual Stockholders) must first be determined. To determine whether the ownership structure of Velox Philippines complies

A. Nationality of Velox Philippines' Stockholders

a) Nationality of PCVC

authorized capital stock amounting to PhP 5,000,000.00 divided into 50,000 common shares with a par value of PhP 100.00 per share. Out of this, PhP 1,250,000 representing Articles of Incorporation, which is on file with the Commission, the corporation has an 12,500 common shares have been subscribed, as follows: Based on the 2016 GIS of PCVC, which you attached to your letter, and its latest

Shirley B. Enobal Lourdes E. Campos Paulo Crispin Ll. Campos, III Cecilia Ll. Campos Paulo E. Campos, Jr Name Nationality Filipino Filipino Filipino Filipino Filipino Subscribed Shares 4,375 3,750 3,750 500 125 Php 437,500.00 Subscribed Amount 375,000.00 375,000.00 12,500.00 50,000.00 Ownership Percent of 30% 30% 35% 4% 1%

constitute the totality of the Outstanding Capital Stock (OCS), the two-tiered test is complied with by basing the 60%-40% requirement on the outstanding 12,500 common shares. Here, all of the 12,500 common shares are owned by Filipino citizens. Hence, PCVC is a 100% Philippine national. Since all shares are common shares (i.e. shares with voting rights), which thus

b) Nationality of Velox SEA

direct shareholding with Velox Philippines10 is foreign-owned. laws of Singapore.9 Velox SEA is a corporation duly organized and existing under and by virtue of the Based on the above information, Velox SEA is foreign-owned. Thus, its 39.99%

c) Nationality of Individual Stockholders

Velox Philippines are all natural persons and declared as Filipinos. The five (5) individual stockholders mentioned in the Amended 2018 GIS of

9 Consistent with the Deed of Absolute Sale of Shares of Stock between Velox SEA and PCVC dated 18 1 Amended 2018 GIS of Velox Philippines January 2019

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B. Nationality of Velox Philippines

shares. These common shares are owned as follows: rights), which thus comprise the totality of the OCS, the two-tiered test is complied with by basing the 60%-40% requirement on the outstanding 2,000,000,000 common Since all shares of Velox Philippines are common shares (i.e. shares with voting

5 Individual Stockholders (Filipino) Velox SEA (Foreign) PCVC (Filipino) Stockholder Total 2,000,000,000 Php 20,000,000.00 1,200,000,000 799,999.995 Subscribed Shares 5 Php 12,000,000.00 Subscribed Amount 7,999,999.95 0.05 Ownership Percent of 39.99% 0.01% 100% 60%

nationals. Velox Philippines is thus 60.01% owned by Philippine nationals, and thus compliant with the foreign ownership limits under Section II, Article XII of the 1987 nationals. Hence, PCVC's and the 5 Individual Stockholders' 60% and 0.01% shareholdings in Velox Philippines, respectively, are investments of Philippine Constitution. As discussed previously, PCVC and the 5 Individual Stockholders are Philippine

nationality of a corporation (Velox Philippines) with an investor corporation (PCVC) which has corporate stockholders. the Grandfather Rule are not applicable as these tests are used to determine the Further, since PCVC's shareholders are all natural persons, the Control Test and

facts relied upon are different, this opinion shall be rendered void. therein. It shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances.11 If, upon further inquiry or investigation, it will be disclosed that the facts and circumstances disclosed and relevant solely to the particular issue raised It shall be understood that the foregoing opinion is rendered based solely on the

CAMLOS.CORRER General Counsel

11 SEC Memorandum Circular 2003-15, No.7