DOJ Opinion No. 130, s. 1985

DOJ OPINION NO. 130 , s. 1985 October 7, 1985 Gov. Lilia Bautista Board of Investments Industry and Investments Building 385 Gil J. Puyat Avenue Makati, Metro Manila Madam : This has reference to your request for opinion regarding the legality of a stock swap transaction between a Filipino stockholder and a Japanese corporation, both stockholders in the Yazaki-Torres Manufacturing, Inc. ("YTMI"), which owns real properties in the Philippines, in the light of Section 9, Article XIV of the Constitution. You state that YTMI is engaged in the manufacture of PV electrical tapes, gauges and instruments, ignition high tension and wiring harness and owns 13 hectares of land in Laguna; that is authorized capital stock of P8,750,000 is divided into 43,750 common (voting) shares and 43,750 preferred (non-voting) shares, which are subscribed by Filipino and Japanese investors in this manner: prcd Common Per cent Preferred Per Cent Filipino 26,250 60% 26,250 60% Japanese 15,500 40 17,500 40 You state further that last April 26, 1985, a Filipino stockholder, F. Torres, executed a deed of exchange, with Yazaki corporation, a foreign corporation, whereby the former's 6,750 common shares were exchanged for the latter's 8,750 preferred shares. The Deed of Exchange was approved by the Board subject to whatever opinion this Ministry of Justice may render in connection with the ownership of the land belonging to the corporation. As a result of the swap transaction, the Filipino/Japanese stockholdings in YTMI is now as follows: Common Per Cent Preferred Per Cent Percentage on Common and Preferred Shares Total Filipino 17,500 40% 35,000 80% 60% Japanese 26,250 60% 8,750 20 40 Thus, the Filipino group still owns sixty (60%) of the entire subscribed capital stock (common and preferred) while the Japanese investors control sixty per cent (60%) of the common (voting) shares. It is your position that despite the re-structured stock ownership in YTMI, the corporation may still retain ownership of its landholdings since Section 9, Article XIV of the Constitution uses the word "capital", which is construed "to include both preferred and common shares" and "that where the law does not distinguish, the courts shall not distinguish". However, doubt is entertained as to whether the scheme would amount to a circumvention of the constitutional provision. prcd The following issues have been presented for opinion: 1. Whether YTMI may retain ownership of its landholdings, despite the restructuring of its capital ownership as described above? 2. If so, whether the election of alien directors in the YTMI board should be in proportion to their participation, both common and preferred, in the capital stock of the corporation pursuant to Sec. 2.a of CA No. 108, as amended by P.D. No. 715? Sections 2 and 14, Article XIV of the Constitution read respectively as follows: "SEC. 9. The disposition, exploration development, exploitation, or utilization of any of the natural resources of the Philippines shall be limited to citizens of the Philippines, or to corporations or associations at least sixty per centum of the capital of which is owned by such citizens. . ." "SEC. 14. Save in cases of hereditary succession, no private land shall be transferred or conveyed except to individuals, corporations, or association qualified to acquire or hold lands of the public domain." The constitutional ban on the acquisition of public and private land by aliens or by corporations with less than 60% Philippine equity is a provision carried over from the 1935 Constitution that is intended to ensure, among other purposes, the conservation for Filipino posterity of land and indigenous natural resources, which constitute the exclusive heritage of the Filipino nation (Vol. X, Constitutional Convention Records Journal Nos. 131-139, pp. 144 et seq., Sinco, Political Law, 1962 Ed. p. 445). This Ministry has had occasion to state in several opinions, that it is implicit in this provision, even if it refers merely to ownership of stock in the corporation holding the land or natural resource concession, that the nationality requirement is not satisfied unless it satisfies the criterion of beneficial ownership, i.e., Filipinos are the principal beneficiaries in the exploitation of natural resources (Op. No. 144, s. 1977; Roman Catholic Apostolic Adm. of Davao, Inc., vs. Land. Reg. Com. 102 Phil. 596[1957]) and that in applying the same "the primordial consideration is situs of control, whether in a stock or non-stock corporation" (Op. No. 178, s. 1974). The framers of the constitution, in limiting the disposition, exploration, development, exploitation or utilization of the natural resources of Philippines to citizens or to corporations or associations at least 60% of the capital of which is owned by such citizens, could not have intended "any interest less than full and absolute ownership by Philippine citizens of the 60% capital", and any other interpretation would do violence to the policy and intent behind these and related constitutional provisions of insuring the conservation of the natural resources of the Philippines for its citizens (Op. No. 171, s. 1974). As stated in Register of Deeds vs. Ung Sui Si Temple (97 Phil. 58), the purpose of the sixty per centum requirement is obviously to ensure that corporations and associations allowed to acquire agricultural land or to exploit natural resources " shall be controlled by Filipinos ". In line with these pronouncements, then Minister of Justice Vicente Abad Santos repeatedly opined that it was constitutionally impermissible, as a post-parity arrangement, for a realty company in which 40% of the capital stock is owned by an alien corporation, while the remaining 60% is to be owned by a pension plan/fund established for the benefit of the corporation's Philippine employees, to own land in the Philippines, where by the terms of the Pension Plan and the Trust Agreements, control of the pension fund remain with the American company and the possession, control and disposal of the Fund do not belong to the Filipino employees as beneficiaries (Op. Nos. 171, 172, 173, 178 and 179, s. 1974). In light of the foregoing jurisprudence, it is my opinion that the stock-swap transaction in question may not be constitutionally upheld. While it may be ordinary corporate practice to classify corporate shares into common voting shares and preferred non-voting shares (Salonga, Corporation Law, 1968 Ed. p. 431), any arrangement which attempts to defeat the constitutional purpose should be eschewed. Thus, the resultant equity arrangement which would place ownership of 80% of the common (voting) shares in the Japanese group, while retaining 60% of the total percentage of common and preferred shares in Filipino hands would amount to circumvention of the principle of control by Philippine stockholders that is implicit in the 60% Philippine nationality requirement in the Constitution. prcd The first question is accordingly answered in the negative. This conclusion renders unnecessary resolution of the second query. Very truly yours, (SGD.) ESTELITO P. MENDOZA Minister of Justice