The Philippine Securities and Exchange Commission (SEC) recently issued Memorandum Circular No. 8, entitled Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities ("Guidelines").
The Guidelines provide a regulatory framework for the implementation of the decision of the Philippine Supreme Court in Wilson P. Gamboa v. Finance Secretary Margarito Teves, et. al.1 ("Gamboa Case") which defined "capital" in Section 11, Article XII of the 1987 Constitution as shares of stock entitled to vote in the election of directors.
The Guidelines are a significant departure from the initial proposed regulation of the SEC dated 8 November 2012, to implement the Gamboa Case ("Draft Circular"). Under the Draft Circular, a corporation engaged in nationalized or partially nationalized activity must "at all times, observe the constitutional or statutory ownership restrictions for each class of shares…if any class of shares is divided into series of shares and a particular series of shares has different rights, privileges, and limitations, the [corporation] must observe the same ownership restriction for said series of shares."2 This means that under the Draft Circular, the foreign equity limitation must be separately applied for each class of shares whether common, preferred non-voting, preferred voting, or any other class of shares.
The Guidelines removed the separate application of the foreign equity limitation for each class of shares. Instead, the Guidelines applied the foreign equity restriction to the voting stock or shares of stock entitled to vote in the election of directors, and the total outstanding capital stock composed of both voting and non-voting shares.
Implications for Covered Corporations
The Guidelines apply to all corporations engaged in activities specifically reserved, wholly or partly, to Philippine Nationals by the 1987 Constitution, the Foreign Investments Act of 1991, and other existing laws ("Covered Corporations").3
The salient provisions of the Guidelines follow:
- The Constitutional or statutory foreign equity restriction shall be imposed on two levels: (1) the voting stock or shares of stock entitled to vote in the election of directors, and (2) the total outstanding capital stock composed of both voting and non-voting shares.4
- Corporations covered by special laws which provide specific citizenship requirements are enjoined to comply with the provisions of such special laws.5
- The corporate secretaries of all Covered Corporations are mandated to ensure compliance with the new rules laid down by the Guidelines.6
- The Guidelines took effect on 22 May 2013. However, all Covered Corporations which are unable to comply with the new rules provided by the Guidelines are given until 22 May 2014 within which to reorganize their capital structures.
Actions to Consider
Covered Corporations must review their capital structures to ensure that they are compliant with the Guidelines.
Covered Corporations which are not compliant with the Guidelines must implement the necessary changes to their capital structures on or before 22 May 2014.