PAGE 141 OF 320 capital is owned by such citizens. “ [Sec. 11,
Art. XII, Const.]
The term "capital" in Sec. 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock [common and non-voting preferred shares]. Compliance with the required Filipino ownership of a corporation shall be determined on the basis of outstanding capital stock whether fully paid or not, but only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights is essential. Thus, stocks, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals. [Gamboa v. Teves (2011)] The SC, however, reversed its ruling in 2012. The term “capital” is not limited to voting shares since the constitutional requirement of at least 60 % Filipino ownership applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation. It is therefore imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation.
Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific corporate matters under Sec. 6. of the Corporation Code.
Thus, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. [Gamboa v.
Teves, (2012)]
SEC Memorandum Circular No. 8 dated 20 May 2013
Sec. 1. Covered corporations: All corporations
engaged in identified areas of activities or enterprises specifically reserved, wholly or partly, to Philippine Nationals by the Constitution, the FIA and other existing laws, amendments thereto and IRRs of said laws except as may otherwise be provided therein.
Sec. 2. All covered corporations shall, at all
times, observe the constitutional or statutory ownership requirement. For purposes of determining compliance therewith, the required percentage of Filipino ownership shall be applied to both
(1) the total number of outstanding shares of stock entitled to vote in the election of directors; AND
(2) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
C. GRANDFATHER RULE
Method used when a domestic corporation has both domestic and foreign stockholders to determine whether or not said corporation is qualified to engage in a partially nationalized business [Campos].
It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second corporation in the first is multiplied by the latter’s own Filipino equity, and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation.
The Grandfather Rule must be applied to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business. [SEC Opinion re: Silahis Intl Hotel (1987)]
Compliance with the constitutional limitation[s] on engaging in nationalized activities must be determined by ascertaining
PAGE 142 OF 320 if 60% of the investing corporation’s
outstanding capital stock is owned by “Filipino citizens”, or as interpreted, by natural or individual Filipino citizens. If such investing corporation is in turn owned to some extent by another investing corporation, the same process must be observed. One must not stop until the citizenships of the individual or natural stockholders of layer after layer of investing corporations have been established, the very essence of the Grandfather Rule. [Redmont Consolidated
Mines, Corp v. McArthur Mining, Inc., et al.
(2010)]
The Grandfather Rule applies only when the 60-40 Filipino foreign equity ownership is in doubt [i.e. in cases where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino stockholdings (or 59%) invests in another joint venture corporation which is either 60- 40% Filipino alien or 59% less Filipino]. Stated differently, where the 60-40 Filipino foreign equity ownership is not in doubt, the Grandfather Rule will not apply. [Narra Nickel Mining and
Dev. Corp v. Redmont Consolidated Mines Corp. (2014)]
The Control Test can be, as it has been, applied jointly with the Grandfather Rule to determine the observance of foreign ownership restriction in nationalized economic activities. The Control Test and the Grandfather Rule are not, as it were, incompatible ownership-determinant methods that can only be applied alternative to each other. Rather, these methods can, if appropriate, be used cumulatively in the determination of the ownership and control of corporations engaged in fully or partly nationalized activities.
The Grandfather Rule, standing alone, should not be used to determine the Filipino ownership and control in a corporation, as it could result in an otherwise foreign corporation rendered qualified to perform nationalized or partly nationalized activities. Hence, it is only when the Control Test is first complied with that the Grandfather Rule may be applied. Put in another manner, if the subject corporation’s Filipino equity falls
below the threshold 60%, the corporation is immediately considered foreign-owned, in which case, the need to resort to the Grandfather Rule disappears.
On the other hand, a corporation that complies with the 60-40 Filipino to foreign equity requirement can be considered a Filipino corporation if there is no doubt as to who has the “beneficial ownership” and “control” of the corporation. In that instance, there is no need for a dissection or further inquiry on the ownership of the corporate shareholders in both the investing and investee corporation or the application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino to foreign equity ratio is apparently met by the subject or investee corporation, a resort to the Grandfather Rule is necessary if doubt exists as to the locus of the “beneficial ownership” and “control.” In this case (where based on the incorporation papers, the Filipino-Owned corporation subscribed to 60% of the capital while the foreign corporation subscribed to 40% but the subscription of the former is only nominally paid-up and such corporation entered into a financial assistance agreement with the foreign-owned corporation), a further investigation as to the nationality of the personalities with the beneficial ownership and control of the corporate shareholders in both the investing and investee corporations is necessary. [Narra
Nickel Mining and Dev. Corp v. Redmont Consolidated Mines Corp. (2015)]
PAGE 143 OF 320 FULLY/PARTIALLY NATIONALIZED AREAS Nationality Requirement Industry 100% Filipino ownership • Retail Trade • Rural Banks • Mass Media 75% Filipino
ownership • Inter-island shipping industry 70% voting stock
Filipino ownership [but may be reduced to 60%]
• Banks [except Rural Banks]
60% capital stock
Filipino ownership • Public utilities, corporations engaged in exploration, exploitation and utilization of natural resources • Educational institutions