By: Atty. Nica Gasapo on February 4,2021.

The 1987 Philippine Constitution has set forth requirements a corporation must meet before involving itself in certain activities. Depending on its nationality, a corporation may or may not undertake specific business ventures or invest in certain areas. Indeed, the 1987 Constitution was crafted to protect the rights of Filipinos to utilize natural resources, operate public utilities, and engage in fully or partly nationalized activities.

Under the Foreign Investments Act of 1991, a corporation is a “Philippine National” if it is organized under the laws of the Philippines and at least 60 percent of its capital stock outstanding and entitled to vote are owned and held by Filipino citizens. This definition echoes the ownership requirements provided by the 1987 Constitution.

In 2012, the Supreme Court (SC), in Gamboa v. Teves (G.R. 176579), had the occasion to define the term “capital” used in the 1987 Constitution. To recall, the main issue in that case was whether that term in Section 11 of Article 12 of the 1987 Constitution refers to the total common shares only or to the total outstanding capital stock (of a public utility).

The SC said capital, as used in that section, “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 comprising both common and non voting preferred shares.” The SC also held that capital referred to “shares with voting rights, as well as with full beneficial ownership” as the “right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates to effective control of a corporation.

In 2016, the SC, in Roy v. Herbosa (G.R. 207246), upheld the constitutionality of the Securities and Exchange Commission (SEC) Memorandum Circular 08, series of 2013, which required compliance with both the 60-40 ratio in voting stocks and in ownership of the total number of outstanding shares, whether such shares are entitled to vote or not.

In our jurisdiction, there are two recognized tests in determining the nationality of a corporation: “Control Test,” or the liberal rule; and the stricter test, the “Grandfather Rule.”

The control test, as embodied in the definition of “Philippine National,” provides that “(s)hares belonging to corporations or partnerships at least 60 percent of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality” (Narra Nickel Mining and Development Corp. et. al. v. Redmont Consolidated Mines Corp. [G.R. 195580, April 21, 2014]). Under the control test, there is no need to further determine the ownership of 60 percent of the investing company, because a corporation that is at least 60-percent owned by Filipinos is considered Filipino. This test remains the prevailing one in gauging the nationality of corporations.

On the other hand, the grandfather rule, which finds basis in the 1967 SEC Rules, applies when there is “doubt” over the 60-40 Filipino-foreign equity ownership. This rule states that if the percentage of Filipino ownership in the corporation is less than 60 percent, only the number of shares corresponding to this percentage shall be declared as Filipino. Pursuant to this rule, the combined total in the investing and investee corporations must be traced or “grandfathered” to determine the total percentage of Filipino ownership.

The doubt triggering the rule’s application is not limited to instances where the Filipino ownership does not reach the required threshold. The doubt may also refer to various signs, such as the fact the “beneficial ownership” or “control” of the corporation is held by foreign investors.

The determination of a corporation’s nationality is crucial because it spells out the nature of business and area of investment a corporation may engage and invest in. Furthermore, compliance with the limits on foreign ownership protects Filipinos and their economic interests as required by the 1987 Constitution.

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