Ownership Requirements

November 28, 2007 SEC-OGC OPINION NO. 19-07 ( Ownership Requirements ) Atty. Peter D. A. Barot PICAZO BUYCO TAN FIDER & SANTOS 18th, 19th and 17th Floors, Liberty Center 104 H.V. Dela Costa Street Salcedo Village, Makati City RE : Request for SEC Opinion on Compliance with the Ownership Requirement for a Public Utility Gentlemen : Having reviewed your submissions we are of the opinion that your proposed consortium, composed of Monte Oro Grid Resources Corporation (MOGRC), the Calaca High Power Corporation (CHPC), and the State Grid Corporation of China (SGCC) complies with the ownership requirements for operating a public utility under Section 11, Article XII of the 1987 Constitution. The relevant facts disclosed in your letter dated November 16, 2007 are as follows: (1) MOCK is a Philippine corporation currently owned 100% by Monte Oro Resources & Energy, Inc. ("MORE"), also a Philippine corporation. (A foreign corporation holds an option to subscribe up to 16% of the resulting capital stock of MOGRC; the option has not been exercised. In any case, Philippine nationals will own at least 60% of the outstanding and voting capital stock of MOGRC.) EcDSTI The primary purpose of MOGRC is "to invest and hold interest in shares of stock of companies engaged or proposing to engage in infrastructure projects, whether public or private, as well as in government privatization or similar projects, whether as proponent, equity investor or financial or technical advisor." Currently, MORE is 99.86%-owned by Filipinos. The top stockholders of MORE are as follows: Stockholder No. of Shares Citizenship % Ownership Wealth Securities, Inc. 163,954,750 Filipino 32.15 + Nominee Director A. Brown Co., Inc. 94,208,300 Filipino 18.47 + Nominee Director Campos, Lanuza & Co., Inc. 77,023,300 Filipino Lakeland Village Holdings, Inc. 25,065,100 Filipino 4.91 + Nominee Director Evergrow Industries, Inc. 25,065,100 Filipino 4.91 + Nominee Directors Devoncourt Estates, Inc. 25,065,100 Filipino 4.91 Sureste Properties, Inc. 25,065,100 Filipino 4.91 Victor Chan 15,039,100 Filipino 2.95 Jacinto C. Ng, Jr. 14,131,200 Filipino 2.77 Ramon Y. Sy 13,458,300 Filipino 2.64 Biosphere Group Holdings, Inc. 11,156,250 Filipino 2.19 Ruddy C. Tan 10,026,100 Filipino 1.97 Ruben C. Tan 10,026,100 Filipino 1.97 Sub total 509,283,800 Filipino 99.86 Gerardo Lanuza, Jr. 716,200 Spanish 0.14 GRAND TOTAL 510,000,000 100.00 (2) CHPC is also a Philippine corporation with the primary purpose of carrying on the general business of operating, managing, maintaining, and rehabilitating energy systems and services, including the acquisition of franchises from government entities for such purpose. TcEaDS CHPC is 100% owned by Filipinos as follows: Stockholder No. of Shares Citizenship % Ownership Robert Coyiuto, Jr. 9,600 Filipino 96.00 Elmer G. Pedregosa 100 Filipino 1.00 Noel Antonio A. Geotina 100 Filipino 1.00 Cris Dominador Marquez 100 Filipino 1.00 Merlina W. Viernes 100 Filipino 1.00 GRAND TOTAL 10,000 100.00 (3) SGCC is a state-owned enterprise in the People's Republic of China. It is the principal transmission and distribution utility in China and is one of the largest utilities in the world. (4) The Concessionaire will be a corporation organized under Philippine law. Initially, it will be owned by the consortium members as follows: Consortium Member Equity Ownership in the Concessionaire Monte Oro Grid Resources Corp. 30% + 1 share Calaca High Power Corp. 30% - 1 share State Grid Corporation of China 40% As allowed by the transaction documents on the privatization of Transco, MOGRC and SGCC may divest part of their holdings in the Concessionaire. However, stockholders who are Philippine nationals including MOGRC and CHPC will always hold 60% of the voting shares of the Concessionaire. TSacCH The Commission currently employs two methods for determining the nationality of a corporation, depending on the business in which the corporation was formed to engage the grandfather rule, and the control test. The grandfather rule is a method of determining the nationality of a corporation which in turn is owned in part by another corporation by breaking down the equity structure of the shareholder corporation. It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second corporation in the first is Multiplied by the latter's own Filipino equity, 1 and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation. This can be useful when the economic activity in question is one of those strictly limited by law to Filipino citizens, such as certain types of retail trading, 2 and mass media. 3 In such instances the Commission has opined that corporations with sixty percent (60%) Filipino and forty percent (40%) foreign equity are not considered Filipino corporations and are not qualified to engage in such activity, and so the grandfather rule may be used to clarify the actual Filipino ownership of corporations looking to engage in such activities by looking into the equity ratios of their stockholder corporations. In some instances, the Commission has held that corporations looking to engage in such activity must be wholly Filipino-owned. 4 The control test, on the other hand is much more liberal in its application. Under this method, a corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60%, and where the 60-40 alien Filipino-alien equity ownership is not in doubt. 5 Therefore its shareholdings in another corporation shall be considered to be of Filipino nationality when computing the percentage of Filipino equity of that second corporation. 6 The control test is applied for corporations intending to engage in economic activity where such a 60/40 Filipino/foreign equity ratio is allowed by law. aDcHIS Based on your disclosures, we are of the opinion that based on the proposed structure in paragraph four (4) of your letter-request, the proposed consortium satisfies the requirements of the control test. The Articles of Incorporation and General Information Sheet of MOGRC show that it is Filipino-owned because less than one percent (1%) of its shares belongs to a foreign national. The Articles of Incorporation of CPHC show that it is wholly-Filipino owned. Considering, that under the Constitution, only a 60/40 ratio of Filipino/foreign equity is required by the law for the operation of a public utility, the proposed consortium may be considered a Philippine national, and therefore may be deemed to have complied with the ownership requirements for grantees of a public utility franchise. It shall be understood that the foregoing opinion is rendered based solely on the facts and circumstances disclosed in the query and is relevant solely to the particular issues raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases whether of similar or dissimilar circumstances. If upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void. HAIDcE Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. SEC Opinion re: Silahis International Hotel, May 4, 1987. 2. Section 5, Republic Act No. 8762, Category "A." 3. Section 11 (1), Article XVI, 1987 Constitution. 4. SEC Opinion, December 14, 1989; SEC Opinion, December 3, 1976. 5. SEC Opinion for the Philippine Overseas Employment Administration, April 14, 1993; SEC Opinion, November 6, 1989; Department of Justice Opinion No. 18, s. 1989. 6. SEC Opinion for Messrs. Dominador Almeda and Renato S. Calma of Bito, Lozada, Ortega and Castillo, November 23, 1993, SEC Opinion for Mr. Francis How, March 23, 1993; SEC Opinion for Boston Bank, August 6, 1991; SEC Opinion for Gold Fields Philippines Corporation, May 30, 1990; SEC Opinion for Atty. Eduardo Hernandez, January 2, 1990.