DOJ Opinion No. 046, s. 1985

DOJ OPINION NO. 046, s. 1985 April 2, 1985 The General Manager National Development Company NDC Bldg., 377 Buendia Ave. Ext., Makati, Metro Manila Sir : This refers to your request for opinion "on whether or not NDC-Guthrie Estates, Inc. (NGEI) is a private corporation for purposes of determining whether its assets all outside the scope of the negative pledge provisions under foreign loan agreements of the Republic of the Philippines (ROP)". You state that NGEI is a joint venture corporation between National Development Company (NDC) and Kumpulan Guthrie Sendirian Berhad (KGSB) of Malaysia, with NDC owing 60% of its equity and KGSB, 40%; that NGEI is engaged in the development and cultivation of an oil palm plantation in the province of Agusan del Sur; that in order to finance its plantation development activities, it seeks to obtain a US $10-Million loan from International Finance Corporation (IFC), the investment arm affiliate of the Work Bank; that IFC, however, requires that a mortgage be created in its favor on NGEI's assets; that a question has been raised as to the legal feasibility of such mortgage in the light of the negative pledge provisions under the foreign loan agreements of the Republic of the Philippines prohibiting the creation of liens on "public assets". which "include assets of government-owned or controlled corporations", without the prior consent of the creditors concerned. Hence, the present query. In connection with the foregoing, you mention that an agreement has been reached between NDC and IFC for the purchase by IFC of 20% of NDC's share in NGEI. This purchase would reduce NDC's equity ownership in NGEI to only 40%. In several opinions of this Ministry, the criterion that has consistently been applied in determining whether a corporation is government-owned or controlled or not is the extent of the government's interest therein. Thus, a corporation is deemed owned by the government if all or a majority of its stocks are owned by the government and it deemed controlled by the government if the majority of its voting stocks are owned by the government. (Ops. No. 128, s. 1983; No. 94, s. 1981; No. 312, s. 1954; Nos. 206 and 208, s. 1953). prcd Applying this criterion to NGEI, which, as you state, is owned by NDC and KGSB on a 60%-40% equity sharing ratio, NGEI would clearly be a government-owned or controlled corporation and therefore covered by the negative pledge provision in ROP's loan agreements prohibiting the creation of liens on public assets, e.q. assets of government-owned or controlled corporations. On the other hand, upon the assumption that IFC has, by this time, already acquired 20% of NDC's share in NGEI hereby reducing NDC's equity therein to 40%, NGEI would not be deemed a government-owned or controlled corporation for purposes of the negative pledge clause in loan agreements of the Republic of the Philippines for the following reasons: 1. The "negative pledge" clause of the ROP in its commercial loan agreements is, as a rule, limited only to itself. Since NGEI is not part of the Republic of the Philippines, its assets are not those of the ROP and any encumbrance on its assets will not violate the ROP's negative pledge. In the few instances that the said clause is defined in the agreements to include corporations owned or controlled by the ROP, the meaning of ownership and control is not defined, but taken in their ordinary acceptation, i.e. ownership and control would require possession of more than 50% of the capital stock, in which case, NGEI will not be considered as a government corporation because the government's interest therein, through NDC, would only constitute 40% of its stocks. 2. The "negative pledge" clause in recent ROP loan agreements with IBRD uses the term "public assets", which inter alia includes assets "of any entity owned or controlled by, or operating for the account or benefit of the Borrower". While the definition of "public assets" is comprehensive enough so as to include assets of corporations owned or considered as a government corporation because the government's interest therein, through NDC, would only constitute 40% of its stocks. 2. The "negative pledge" clause in recent ROP loan agreements with IBRD uses the term "public assets", which inter alia includes assets "of any entity owned or controlled by, or operating for the account or benefit of the Borrower". While the definition of "public assets" is comprehensive enough so as to include assets of corporations owned or controlled by the government, nonetheless, it may not be deemed to extend to assets of corporations in which the government has only a minority interest, such as in the case of NGEI. prcd In the case of Asian Development Bank loans, the assets of the Republic of the Philippines include those "of any agency of the Guarantor", i.e., of the Republic. The term "agency" cannot include NGEI, which is not owned or controlled by the government. Please be guided accordingly. Very truly yours, (SGD.) ESTELITO P. MENDOZA Minister of Justice