Filipino ownership of a company is counted twice, on voting shares and on total shares

The 60 percent is applied to both the outstanding shares entitled to vote and the total outstanding shares. Beneficial ownership is required, not bare title. Where there is doubt that Filipinos truly control the company, the grandfather rule looks through corporate shareholders to their own ownership.

The definition, and the proviso underneath it

A cap on foreign equity is the same statement as a floor on Filipino ownership, so every percentage in the Negative List resolves into one question: is this company a Philippine national?

The Foreign Investments Act defines the term. It covers a Filipino citizen, a domestic partnership or association wholly owned by citizens, and “a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines”.¹

The proviso that follows reaches layered structures. Where a corporation and its non-Filipino stockholders own stock in a company registered with the Commission, then 60 percent of the voting stock of both corporations must be Filipino-held, and 60 percent of the directors of both must be Filipino citizens, before the company counts as a Philippine national.² A holding company in the chain does not change the nationality of what sits above it.

Title is not enough

The implementing rules of the 2022 amending Act put the substance of ownership beyond argument: “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.” The same provision adds that “stock, the voting rights of which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or Philippine nationals.”³

Those two sentences dispose of most nominee arrangements.

What the shares are counted on

Two texts speak to which shares are counted.

The implementing rules provide that “[c]ompliance 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.”⁴

The Commission’s circular approaches it differently. Its fourth recital records that the Supreme Court in Gamboa “ruled that the term ‘capital’ in Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors”.⁵ Section 2 then provides:⁵

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 (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

Section 2 continues that “[c]orporations covered by special laws which provide specific citizenship requirements shall comply with the provisions of said law”, and the circular’s own footnote gives as examples the Lending Company Regulation Act of 2007, the Financing Company Act of 1998, and the Investment Houses Law.⁵

Anyone testing a cap table should have both texts in front of them and should take advice on which applies to their company, because the answer decides whether non-voting preferred shares count.

The circular was signed on 20 May 2013, took effect two days later on publication, and was upheld against a constitutional challenge in the Supreme Court in 2017. Confirm its current text with the Commission before a cap table is built on it, because an issuance can be amended without the notice an amending statute attracts.

The circular’s scope is wider than the case that produced it. It applies to 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”.⁶ It is not confined to public utilities.

The circular also places a duty on the corporate secretary, who carries the compliance function personally and “cannot delegate the responsibility of complying with the provisions of this Circular without the express authority from the Board of Directors or Trustees, as the case may be”.⁷ Failure to comply exposes the company, any person, and the responsible corporate officers to the sanctions in section 14 of the Foreign Investments Act.⁷

The each-class formulation is obiter dictum

The Supreme Court’s 2012 resolution in Gamboa states that the 60-40 requirement “must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares.”⁸

That sentence is not the operative holding. The Court, En Banc, said so in Roy III v. Herbosa in 2016, in a passage its 2017 resolution on reconsideration reproduces: “the definiteness and clarity of the fallo of the Gamboa Decision must control over the obiter dictum in the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign ownership requirement to ‘each class of shares, regardless of differences in voting rights, privileges and restrictions.’”⁹

A structure tested against the each-class formulation is being tested against a passage the Court has identified as dictum.

The control test, and when the grandfather rule joins it

Two methods exist for looking at a company’s ownership, and the Court settled in Narra Nickel v. Redmont in 2015 that they are used together and not as alternatives: “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”.¹⁰

The order is fixed, and it runs control test first:¹⁰

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.

If 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.”¹⁰ The grandfather rule is for companies that pass the first test, not for companies that fail it.

What “doubt” means

The grandfather rule is triggered by doubt, and the Court has been specific about what doubt means. It “does not refer to the fact that the apparent Filipino ownership of the corporation’s equity falls below the 60% threshold. Rather, ‘doubt’ refers to various indicia that the ‘beneficial ownership’ and ‘control’ of the corporation do not in fact reside in Filipino shareholders but in foreign stakeholders.”¹¹

The Court adopted three such indicia: that the foreign investors provide practically all the funds for the joint investment, that they undertake to provide practically all the technological support, and that they manage the company and prepare all economic viability studies while being minority stockholders.¹²

A structure that is Filipino on the register and foreign in its funding, technology, and management is the structure the rule exists to find.

Two separate questions

Which cap applies to a business is a question about the activity, and it is the subject of its own article. Whether the company meets that cap is a question about beneficial ownership, voting rights, board composition, and who actually funds and runs the enterprise, and it is not answered by the shareholder register alone.

This is corporate work, and the documents matter, because the test is applied “at all times” and not only at registration, and the party asserting compliance has to be able to show it.