Corporate & Commercial
Manila
Client Alert
SEC issues guidelines on corporations engaged
in nationalized or partly nationalized activities
Recent Developments
June 2013
For further information, please contact:
Pearl T. Liu
Partner and Head
Corporate & Commercial Practice Group
Head, Energy, Mining & Infrastructure
Industry Group
(T): +63 2 819 4905
(T): +63 2 577 6206
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pearl.liu@bakermckenzie.com
Alain Charles J. Veloso
Senior Associate, Corporate &
Commercial Practice Group
(T): +63 2 819 4954
(T): +63 2 577 8351
(M): +63 917 819 4954
charles.veloso@bakermckenzie.com
Juan Fidel F. Nograles
Associate, Corporate & Commercial
Practice Group
(T): +63 2 819 4919
(T): +63 2 623 4342
(M): +63 917 846 4919
juanfidel.nograles@bakermckenzie.com
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
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Secretary Margarito Teves, et. al. ("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
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same ownership restriction for said series of shares." 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
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Corporations").
1
Heirs of Wilson P. Gamboa v. Finance Secretary Margarito Teves, et al, G.R. No. 176579, 9
October 2012 and 28 June 2011.
2
Section 4 of the Draft Circular
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Section 1 of the Guidelines
The salient provisions of the Guidelines follow:
1. 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
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both voting and non-voting shares.
2. Corporations covered by special laws which provide specific citizenship
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requirements are enjoined to comply with the provisions of such special laws.
3. The corporate secretaries of all Covered Corporations are mandated to
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ensure compliance with the new rules laid down by the Guidelines.
4. 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.
4
Section 2 of the Guidelines
Id.
6
Section 3 of the Guidelines
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SEC issues guidelines on corporations engaged in nationalized or partly nationalized activities  June 2013