FOREIGN DIRECTORS IN NATIONALIZED CORPORATIONS
By Ellaine Anne Bernardino on August 5, 2021
Corporations engaged in business activities reserved for Philippine nationals where foreign equity shall be limited to that prescribed by the Constitution and other existing laws are also known as wholly or partially nationalized corporations. Accordingly, the election of foreigners into the Board of Directors of these corporations is subject to strict limitations.
In the case of Gamboa vs Teves (Gamboa case) (GR 176579, June 28, 2011), the Supreme Court held that the term “capital” appearing in Section 11, Article XII of the 1987 Philippine Constitution refers only to common shares or shares of stock entitled to vote in the election of the members of the board of directors, and not to the total outstanding capital stock. Pursuant to the Gamboa case, the Securities and Exchange Commission (SEC) issued SEC Memorandum Circular 8, Series of 2013, which provides for the guidelines for the compliance with the Filipino-foreign ownership requirements prescribed in the Constitution and other existing laws by corporations engaged in nationalized and partly nationalized activities. Under SEC Memorandum Circular 8-13, for purposes of determining compliance with nationalization laws, the required percentage of Filipino ownership shall be applied to BOTH: the total number of outstanding shares of stock entitled to vote in the election of directors; AND the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
Section 2-A of the Commonwealth Act No. 108, otherwise known as the “Anti-Dummy Law,” as amended, provides that the election of aliens as members of the board of directors or governing body of corporations or associations engaging in wholly or partially nationalized activities shall be allowed in proportion to their allowable participation or share in the capital of such entities.
In Dental Management Center Corp. vs Company Registration Monitoring Department (SEC EB Case 06-14-335, Jan. 6, 2020), the SEC opined that pursuant to Section 2-A of the Anti-Dummy Law, foreigners are allowed representation in the Board of Directors or governing body of partially nationalized business activities in proportion to their shareholdings. Moreover, in SEC-OGC Opinion 14-05, the SEC clarified that in determining the representation of alien stockholders in the board of directors of corporations engaged in partially nationalized activities, the basis should be the actual share of the alien stockholders in the capital of the corporation which share, however, should not exceed the foreign equity ceiling prescribed by law for a particular corporation or association.
In relation to this, the Department of Justice (DOJ) explained, in DOJ Opinion 161, Series of 1994, the interpretation of Section 2 of the Anti-Dummy Law. As an example, a mining firm where the allowable participation of aliens under the law is up to 40 percent of the capital stock and two alien investors own 40 percent of the shareholdings of the corporation, then both alien investors can sit in the Board of five directors because 40 percent of five is two.
In determining the allowable seats for foreign directors, it is also important to note the rule on rounding off numbers, wherein the decimal figures to the right of a specified number of places are dropped after increasing the final remaining figure by one if the first digit dropped is five or greater (SEC Opinion dated Nov. 7, 1989). Hence, in an SEC Opinion dated Sept. 11, 2002, wherein the percentage of board seats allowable to foreign nationals is 40 percent, then three foreign nationals may be elected as directors in a board composed of seven members. By mathematical computation, 40 percent of seven is 2.8, thus, three directors constitute 40 percent of the total board membership of seven.
However, foreign directors of wholly or partially nationalized companies may not be elected as officers of the corporation. The Anti-Dummy Law provides that foreigners are not allowed to intervene in the management, operation, administration or control of a nationalized corporation, whether as an officer, employee or laborer therein with or without remuneration except technical personnel whose employment may be specifically authorized by the Secretary of Justice.
Hence, since the Anti-Dummy Law provides for the prohibition on the appointment of foreigners in management positions in corporations in the Philippines engaged in nationalized activities, the SEC opined that aliens are banned from being appointed as officers of the corporation, such as president, vice-president, treasurer, auditor, among others, of the companies engaged in wholly or partially nationalized activities, although they can be elected as directors therein in accordance with the Anti-Dummy Law as to prevent the circumvention of the nationalization laws (SEC-OGC Opinion 14-05).
Therefore, in view of the foregoing, foreigners may be elected as directors of corporations engaged in activities that are reserved to Filipinos in proportion to their allowable participation or share in the capital, but are prohibited from being elected as officers of a corporation pursuant to the Anti-Dummy Law. However, in determining the seats allowed for foreigners in the Board, the basis should be the actual share of the alien stockholders in the capital of the corporation, which should not exceed the foreign equity ceiling prescribed by law.