Applicability of "Control Test" and "Grandfather Rule" in Determining a Corporation's Nationality

DOJ OPINION NO. 025 , s. 2008 April 17, 2008 Mr. Henry J. Schumacher Executive Vice-President European Chamber of Commerce of the Philippines 19/F Philippine AXA Life Centre Sen. Gil Puyat Ave. cor. Tindalo St. Makati City Sir : This refers to your request for clarificatory opinion on the issues raised therein relating to the applicability of the "control test" and "grandfather rule" vis-a-vis the determination of the nationality of a corporation as well as the provisions of the Anti-Dummy Law (Commonwealth Act No. 108) as passed upon by this Department in our letter dated September 3, 2007. The request, it appears, is raised in connection with the purported Resolution of this Department in the case of NBI-AFFCD vs. Cheng Yong, et al. , docketed as I.S. No. 2006-817, wherein, resolving the motion for reconsideration, it ruled the nationality of the corporation subject therein, without using the control test, constitutes 71.44% foreign investments thereby violating the Anti-Dummy Law. We take it that you want to be clarified on our statement, quoting from this Department's Opinion No. 20, s. 2005, to wit: . . . (W)here the 60-40 Filipino-alien equity ownership (in a particular natural resource corporation) is not in doubt, the Grandfather Rule will not apply. Specifically, you inquire 1. whether the "doubt" mentioned may be deemed to be evident only in cases where such operational control is sought by an investor and, otherwise, the "control test" has indeed superseded the previously applicable "grandfather rule"; and cIETHa 2. whether it is the government or a party that has an interest in the same undertaking that can raise the "doubt". At the outset, it must be stressed that since the transaction in issue had already taken place, there is a question that arises: whether the Anti-Dummy Law has indeed been violated. The resolution thereof, however, pertains to the prosecuting officer after a determination of whether or not, based on the established facts of the case, the elements of the crime alleged to have been committed are present. Thus, any opinion that may be rendered on your request would, at most, be hypothetical, speculative and anticipatory. Pursuant to settled precedents, the Secretary of Justice does not pass upon issues that, as in this case, are not only factual but also hypothetical or speculative in nature (Sec. of Justice Op. Nos. 100 & 82, s. 2000). Besides, such opinion would not serve any useful purpose. The rationale is because, if we say that there would be no violation of the Anti-Dummy Law, the same would neither be conclusive nor binding upon the prosecuting officers upon whom, under the law, devolve the duty of deciding whether or not to file a complaint/information for violation of said law after an investigation into the facts of the case and according to whether the evidence are sufficient to warrant prosecution (Rule 110, Revised Rules of Court; Sec. 8, Chap. 2, Title III, Book IV, E.O. No. 292; Maddela vs. Aquino , 104 Phil. 433, 435-436; Gonzales vs. CFI of Bulacan, 63 Phil. 846). While the Secretary of Justice is given the power to review, revise or reverse said findings of the prosecuting officers (see also, Sec. 12, DOJ Circular No. 70, s. 2000 [2000 NPS Rule on Appeal]), the latter are given the widest leeway in the exercise of the discretion, which discretion must be "free from pressure and other irrelevant considerations" (Sec. of Justice Op. No. 67, s. 1984, citing People vs. Santos, 30 SCRA 100, 104). EDHTAI Moreover, the resolution of the issues herein raised would inevitably require an interpretation of the pertinent provisions of the Foreign Investments Act of 1991 (Rep. Act No. 7042), as amended. However, under Section 13 of the Act, the power "to issue the rules and regulation to implement the Act" hence, the power to interpret the same belongs to the "NEDA (National Economic Development Authority), in consultation with BOI (Board of Investments), SEC (Securities and Exchange Commission) and other government * concerned," over which actions this Department exercises no revisory authority. As a matter of established policy, this Department does not pass upon issues falling within the primary jurisdiction of another office (Sec. of Justice Op. No. 53, current series; No. 75, s. 2006). Nonetheless, for your information and guidance only, Section 3 of R.A. No. 7042, as amended by R.A. No. 8179, pertinently reads: Sec. 3. Definitions . As used in this Act: a) the term Philippine national shall mean a citizen of the Philippines; or a domestic partnership or association wholly owned by citizens of the Philippines; or 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 ; or a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to vote is wholly owned by Filipinos; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals: Provided, that, where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC)-registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of each of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60%) of the members of the Board of Directors of each of both corporations must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national. (stress supplied). Likewise, in this Department's Opinion No. 18, s. 1989, we quoted Paragraph 7 of the 1967 Rules of the Securities and Exchange Commission, to wit: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Explaining the provision quoted, we said: Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of said shares shall be recorded as owned by Filipinos. But if less than 60%, or, say, only 50% of the capital stock or capital belong to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens. CcAITa Very truly yours, (SGD.) RAUL M. GONZALEZ Secretary