DOJ Opinion No. 089, s. 1997

DOJ OPINION NO. 089 , s. 1997 December 10, 1997 Associate Commissioner Fe Eloisa C. Gloria Securities and Exchange Commission SEC Bldg. EDSA, Greenhills Mandaluyong City M a d a m : This refers to your request for a definite ruling on the applicability of DOJ Opinion No. 195, s. 1989 to the case of ING Barings Financial Products (IBFP) which intends to invest in securities of Philippine companies through a Trust Agreement with the Development Bank of the Philippines as Trustee similar to that of the Philippine Fund Inc. It appears that the Commission feels that the said ruling refers particularly to the Philippine Fund Inc. and seeks a ruling on whether the said Opinion applies to cases similar to the Philippine Fund Inc., whereby a Trust is set up in the Philippines, and, through the Trustee, the trust may acquire class "A" shares of Philippine companies/corporations. The attached letter of Mr. Simon Clowes, Director and Head of Equity Trading-Asia, IBFP states that IBFP is currently capitalized at US$500 million and is rated Aa by Moody's Investor Service and AA by Standard and Poors; that IBFP is directly owned by ING Bank NV (5%) and ING Baring Holding Company Limited (95%); that the company is incorporated in the United Kingdom and regulated by the Securities and Futures Authority; that the trust has been set up in accordance with the guidelines set out in the Department of Justice opinion for the First Philippine Fund which will enable the trust to buy listed shares in the Philippines; that the trust has been approved internally by IBFP's compliance and trading risk management department, by its legal advisors and by its settlement operations area; and that the activities of the trust will be monitored on several levels by the various internal risk management, compliance, legal and credit control departments in both HongKong and London. aisadc We are informed that the Commission has approved a similar proposal of Morgan Stanley Asia Limited and Capital Group Companies, Inc. However, you seek confirmation of said rulings. DOJ Op. No. 195, s. 1989 which was issued in reply to a query of then Executive Secretary Catalino Macaraig, Jr., Office of the President, concerning the Philippine Fund, Inc., was not meant to exclusively benefit the Philippine Fund Inc. In fact the opinion took pains to state that it "considered all the various legal, social and economic considerations that bear upon the matter", precisely to pave the way for its application by the executive agencies to cases similarly situated. Besides, to confine the effects of the Opinion to the Philippine Fund, Inc. would be to violate the sacred principle of equal protection enshrined in our Constitution. In view whereof, it is the considered view of this Department that Op. No. 195, s. 1989 applies to IBFP and to others similarly situated to the Philippine Fund, Inc. who wish to participate in the Philippine economy through investment in Philippine securities, through a Trustee, acquire class "A" shares of Philippine companies/corporations subject to the following conditions set forth in the aforementioned opinion, viz: "(1) The Trustee must at all times be a Philippine national, i.e., a Philippine citizen or a corporation or association at least 60% of the capital of which is owned by Philippine citizens. (2) The total investment of the Fund (in this case, IBFP), directly or through the Trustee, in any Philippine corporation shall not exceed five (5%) percent of said corporation's outstanding capital stock, inclusive of Class "A" and Class "B" shares. (3) The Trustee will at all times be vested by the Fund with the voting control of shares held by it for the benefit of the Fund. The Fund's Board of Directors will have no right to direct the voting of such securities, and neither the Fund nor the Trustee will act in concert with any other investor for the purpose of exercising control or influencing the management of the Philippine company in which the Fund has investments. (4) The Trustee shall not exercise the right to vote the shares held by it for the benefit of the Fund in the election of the members of the board of directors of the corporations in which such shares are held. For this purpose, the Trustee shall execute a written undertaking to this effect to be furnished each corporation in which the Trustee holds shares for the benefit of the Fund. (5) This ruling applies only to purchases by the Trustee of Class "A" shares listed in the stock exchanges, and should not be construed as authorizing the Fund or the Trustee to freely purchase unlisted Class "A" shares. In the latter case, it would be incumbent upon the Fund or the Trustee to inquire whether such purchase may be lawfully made, having regard to any applicable constitutional or statutory nationality requirements. (6) The investment of the Trustee in Class "A" shares is permitted or is not otherwise prohibited by the articles of incorporation or charter or any other organic documents of the Philippine corporation in which the investment is to be made. (7) That the investment of the Trustee shall be subject to prior approval by the proper government agencies, whenever required by law." Since with this ruling, foreign entities may be encouraged to avail themselves of the same mechanism for investing in Class "A" shares, additional rules and regulations will have to promulgated by the Commission to obviate the diminution of the required equity participation of Filipinos in nationalized and partly nationalized businesses. The reason is that, under the foregoing guidelines, the class "A" shares purchased by trust funds established by foreign entities, cannot be voted in the election of the Board of Directors and while held in trust, are in effect disenfranchised and are virtually non-voting stock. It is therefore conceivable that the total percentage of disenfranchised "A" shares which trust funds may hold in the future, may be such as will vest effective control of the nationalized or partly nationalized businesses in the hands of foreigners holding class "B" shares. Accordingly, this Department suggests that the Securities and Exchange Commission issue reporting and disclosure rules and regulations addressed to the trustees and/or corporate secretaries of the companies concerned in order to ensure that control or management of the said companies do not fall into foreign hands and other conditions or safeguards which as stated in Op. No. 195, s. 1989, "will ensure that the 'situs of control' will remain in the hands of Filipinos". cd Very truly yours, (SGD.) TEOFISTO T. GUINGONA, JR. Secretary