Foreign businessmen caution govt against implementing SC ownership ruling

MANILA – Foreign businessmen operating in the Philippines warned the government against implementing a Supreme Court decision that redefined limits to foreign ownership of companies, saying this ruling is a “step backward” as the country scrambles to catch up with Asean neighbors in attracting investments.

“The [Joint Foreign Chambers] submits that requiring foreign equity percentages to apply not just to the total outstanding capital of a corporation but to each class of shares of such capital is a step backward, and may have a negative impact on the investment climate of the Philippines, which is already struggling to keep pace with neighboring countries that are working to relax their FDI restrictions to encourage entry of more foreign investment,” the group said in a November 13 letter addressed to Securities and Exchange Commission chairperson Teresita J. Herbosa.

The letter listed the group’s concerns on the draft rules on foreign ownership that the SEC released early this month in light of the High Court ruling affirming a previous decision defining Filipino ownership of public utilities to mean no less than 60 percent of the voting rights of such firms.

The group expressed concern over the criteria to be used in determining compliance with foreign capital restrictions as stated in Section 4 of the draft guidelines: “All covered corporations shall at all times observe the constitutional or statutory ownership restrictions for each class of shares, provided that if any class of shares is divided into series of shares and a particular series of shares has different rights, privileges and limitations, the covered corporation must observe the same ownership restrictions for said series of shares.”

The group also raised a red flag on the coverage of the draft rules, which encompass “all corporations engaged in identified areas of activities or enterprises specifically reserved, wholly or partly, to Philippine nationals by the Constitution, the [Foreign Investments Act] and other existing laws.”

“The draft guidelines covers not just public utility companies in Section 11, Article XII of the 1987 Constitution (which was the subject of the Gamboa case), but all wholly or partially nationalized corporations under the Constitution, the Foreign Investments Act, and other existing laws,” the group said.

“Under the Constitution, the restrictive criteria for complying with equity requirements would then apply to areas such as the ownership and management of mass media and the utilization of marine resources (both wholly nationalized); the 40-percent foreign capital cap imposed on the operation of public utilities, land ownership, exploration, development and utilization of natural resources, and ownership, establishment and administration of education institutions; and the 30-percent foreign capital cap imposed on advertising. Add to that investment areas listed in the Foreign Investment Negative List, existing law, and perhaps even future legislation, and the possibility of an investment backslide becomes more disturbing,” the letter read.

The group cited a recent United Nations Conference on Trade and Development report, which showed that the Philippines cornered a measly $900-million worth of foreign direct investments during the first half of this year, whereas Singapore attracted $27.4-billion worth and Indonesia got $8.2 billion.

“The Philippines has a long way to go in an increasingly competitive world economy, and such drastic changes in the fundamental principles of doing business is a serious setback that undermines investor confidence in the stability of the Philippine legal and business environment,” the group said.

It also recommended that a sentence – “The control test shall be applied for this purpose” – similar to what is contained in the implementing rules and regulations of the FIA – be added at the end of Section 3(r) of the draft guidelines defining a “Philippine national since confusion invariably arises as to whether the Control Test or the Grandfather Rule applies in determining nationality.”

The Control Test and Grandfather Rule are tests used in determining the nationality of corporations, according to www.batasnatin.com.

Under the Control Test, the nationality of a corporation is “determined by the nationality of the controlling stockholders or members.” Meanwhile, the Grandfather Rule provides that the “nationality is attributed to the percentage of equity in the corporation used in nationalized or partly nationalized area.” –Ben Arnold O. De Vera, InterAksyon.com