Re: Election of a Foreign Director and President in a Holding Company; Election of a Foreigner as a Director of a Subsidiary Engaged in Power-Generation Activities

June 28, 2022 SEC-OGC OPINION NO. 22-09 RE: ELECTION OF A FOREIGN DIRECTOR AND PRESIDENT IN A HOLDING COMPANY; ELECTION OF A FOREIGNER AS A DIRECTOR OF A SUBSIDIARY ENGAGED IN POWER-GENERATION ACTIVITIES Prime Infrastructure Capital, Inc. 16th Floor Three E-Com Center, Bayshore Drive corner Ocean Drive Block 21 Mall of Asia Complex, Pasay City 1300 Attention: Attys. Jerry S. Coloma III and Rebecca Anne U. Flores Molo Sia Dy Tuazon and Coloma Law Offices External Legal Counsel Dear Attys. Coloma and Flores : This refers to your letter dated 18 April 2022 1 on behalf of your client, Prime Infrastructure Capital, Inc. (Prime) requesting for opinion on the following matters: a) election of a foreigner as a director and President a holding company; and b) election of a foreigner as a director in the holding company's subsidiaries engaged in a partly-nationalized activity. In your letter, you disclosed the following facts: 1. Prime is a domestic corporation in which all or substantially all of its outstanding capital stock which are entitled to vote are owned by Philippine nationals; 2. New Philippine Corporation (NewCo) is a proposed holding company to be formed by Prime and another domestic corporation which is also a Philippine national; 3. NewCo's paid-in capital will not be less than two hundred thousand US Dollars (US$200,000); 4. NewCo will not own land nor engage in a partly-nationalized activity; 5. NewCo will have subsidiaries to be engaged in the business of generating power from renewable sources, such as solar power and which will own land; and 6. NewCo will not, by itself and for its own account, be engaged in the business of generating power but it will own all the shares in the subsidiaries engaged in such activity. NewCo intends to do the following acts: a) Elect a foreigner as its president and Chief Executive Officer (CEO). Being the president and CEO, the foreigner would also be a director of NewCo. The foreigner would be a nominee of Prime with a qualifying share of the foreigner held in trust for Prime; and b) Nominate a foreigner to the Board of Directors of its subsidiaries that are engaged in the business of power generation and supply of electricity, and which own land. You are now requesting the Commission's opinion on the following matters: a) Whether or not a foreigner may be elected as a director and president of NewCo, a holding company owned and controlled by Philippine nationals; and b) Whether or not NewCo may elect a foreigner as a director of each of its subsidiaries which shall engage in power generation from renewable energy sources ( i.e. , solar) and shall own land. Qualifications of directors and officers Section 46 of the Revised Corporation Code of the Philippines (RCCP) 2 provides for the following are the minimum qualifications to be a member of the board of directors: a) A director must own at least one share of stock in his or her own name; 3 b) He or she must not be disqualified under Section 26 of the RCCP and other laws and regulations; 4 c) He or she must be of legal age; and d) He or she must possess the qualifications as may be prescribed by law and in the by-laws of the corporation. 5 Notably, there is no citizenship requirement for directors in the RCCP. However, this is subject to the allowable participation of foreigners in the board of directors and/or management of a nationalized corporation based on the proportionate share in its capital as provided under the 1987 Constitution, 6 special laws such as the Commonwealth Act (C.A.) No. 108 or the Anti-Dummy Law, 7 and/or special rules implemented by the regulatory authority of the industry. Meanwhile, Section 24 of the RCCP provides that immediately after their election, the directors of a corporation must formally organize and elect: a) A president who shall be a director; b) A treasurer who may or may not be a director but must be a resident; c) A corporate secretary who must be a citizen and resident of the Philippines; d) A compliance officer for corporations vested with public interest; e) Such other officers as may be provided in the by-laws. The same person may hold two offices concurrently, except that no one shall act as president and secretary or as president and treasurer at the same time, unless otherwise allowed in the RCCP. Nature of a holding company; Election of a foreigner as director and president of a holding company A holding company has been defined as "a corporation organized to hold the stock of another or other corporations." 8 Its essential feature is that it holds stock. The term "holding company" is equivalent to a parent corporation, having such an interest in another corporation, or power of control, that it may elect its directors and influence its management. A parent or holding company is one that controls another as a subsidiary or affiliate by the power to elect its management. Affiliates are those concerns that are subject to common control and operated as part of a system. 9 As a general rule, a holding company has a separate corporate existence as is to be treated as a separate entity unless: a) such corporate existence is a mere sham; or b) has been used as an instrument for concealing the truth; or c) where the organization or control is shown to be such that it is but an instrumentality or adjunct of another corporation. 10 A holding company was previously opined as a domestic market enterprise. 11 Micro and small domestic market enterprises with paid-in equity capital of less than the equivalent of two hundred thousand US dollars (US$200,000.00), are reserved to Philippine nationals at sixty percent (60%), the maximum allowable foreign equity being limited to forty percent (40%), 12 provided , that if: (1) they involve advanced technology as determined by the Department of Science and Technology; or (2) they are endorsed as startup or startup enablers by the lead host agencies pursuant to R.A. No. 11337, otherwise known as the Innovative Startup Act ; or (3) a majority of their direct employees are Filipinos, but in no case shall the number of Filipino employees be less than fifteen (15). then a minimum paid-in capital of one hundred thousand US Dollars (US$100,000.00) shall be sufficient to allow ownership by non-Philippine nationals of more than forty percent (40%) equity. 13 Meanwhile, the Commission previously held that foreigners can be elected as directors in proportion to their allowable participation or share in the capital of the corporations engaged in activities that are reserved to Filipinos but are prohibited from being elected as officers of a corporation, such as the President, Vice President, Treasurer and Secretary. 14 Based on the facts that you have presented, NewCo's paid-in capital will not be less than two hundred thousand US Dollars (US$200,000.00). Hence, to answer your first query, a foreigner may be elected as a director and president of the holding company since the nationality restriction on domestic market enterprises does not apply. Election of a foreigner as a director of subsidiaries engaged in partially-nationalized activities Section 2, Article XII of the 1987 Constitution provides: "All lands of the public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy , fisheries, forests or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, or corporations or associations at least 60 per centum of whose capital is owned by such citizens . xxx xxx xxx" Pursuant to the above-quoted Constitutional provision, the Eleventh Foreign Investment Negative List (11th FINL) 15 limits foreign participation in the exploration, development, and utilization of natural resources to a maximum of forty percent (40%) equity. 16 Section 2-A of the Anti-Dummy Law, 17 which applies to corporations engaged in wholly or partially nationalized activity or business undertaking, prohibits the employment of any person, corporation, or association of an alien, who shall intervene in the management, operation, administration or control thereof, whether as officer, employee, or laborer , when the exercise or enjoyment of the property or of the franchise privilege, or business engaged in by such person, corporation or association is expressly reserved by the Constitution or the law to the citizens of the Philippines or corporations or associations at least sixty percent (60%) of the capital of which is owned by such citizens. It, however, allows foreigners to be elected as directors in proportion to their allowable participation in the corporation's capital . 18 Hence, to answer your second query, foreigners may be elected as directors in the subsidiary companies engaged in a partly-nationalized activity, provided that the number of foreign directors shall not exceed the allowable proportion of foreign participation in the corporation's capital ( e.g. , forty percent (40%)). Please note, however, that in determining the representation of foreign stockholders in the board of directors of corporations engaged in partly-nationalized activities, the basis would be the actual share of foreign stockholders in the capital of the corporation, 19 which share should not exceed the foreign equity limitation prescribed by law for that particular corporation or association. 20 It shall be understood that the foregoing opinion is rendered solely on the basis of the facts, circumstances and documents disclosed/submitted, and should be considered relevant solely to the particular issue raised therein. It shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances. 21 If upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void. Please be guided accordingly. Very truly yours, (SGD.) ROMUALD C. PADILLA General Counsel Footnotes 1. Sent through electronic mail on 19 April 2022. 2. Republic Act (R.A.) No. 11232, 23 February 2019. 3. Section 22, RCCP. 4. Section 26, RCCP. A person shall be disqualified from being a director, trustee or officer of any corporation if, within five (5) years prior to the election or appointment as such, the person was: (a) Convicted by final judgment: (1) Of an offense punishable by imprisonment for a period exceeding six (6) years; (2) For violating this Code; and (3) For violating R.A. No. 8799, otherwise known as "The Securities Regulation Code." (b) Found administratively liable for any offense involving fraudulent acts; and (c) By a foreign court or equivalent foreign regulatory authority for acts, violations or misconduct similar to those enumerated in paragraphs (a) and (b) above. The foregoing is without prejudice to qualifications or other disqualifications, which the Commission, the primary regulatory agency, or Philippine Competition Commission may impose in its promotion of good corporate governance or as a sanction in its administrative proceedings. 5. Section 46, RCCP. 6. The 1987 Constitution, 2 February 1987. 7. Commonwealth Act No. (C.A.) 108, An Act to Punish Acts of Evasion of the Laws on the Nationalization of Certain Rights, Franchises or Privileges, also known as the Anti-Dummy Law, as amended by C.A. No. 421, R.A. No. 134, R.A. No. 6084, and Presidential Decree (P.D.) No. 715, October 30, 1936. 8. SEC-OGC Opinion No. 15-11 dated 10 February 2011 addressed to Mr. Rodolfo Ma. A. Ponferrada. 9. Ibid. 10. Ibid. 11. SEC-OGC Opinion No. 15-15 dated 3 November 2015 addressed to Mr. Arsenio A. Alfiler Jr. 12. List B: Foreign Ownership is Limited for Reasons of Security, Defense, Risk to Health and Morals, and Protection of Small and Medium Scale Enterprises, Eleventh Foreign Investment Negative List (11th FINL), Executive Order (E.O.) No. 65, 29 October 2018. 13. Section 8, R.A. No. 11647, An Act Promoting Foreign Investments, Amending Thereby R.A. No. 7042, also known as the "Foreign Investments Act of 1991," as Amended, and for Other Purposes, 2 March 2022. 14. See SEC-OGC Opinion No. 19-14 dated 15 July 2014 addressed to Mr. Isagani A. Zulueta; SEC-OGC Opinion No. 21-08 addressed to Prime Infrastructure Holdings, Inc. dated 17 May 2021 citing applicable provisions of the C.A. No. 108 or the Anti-Dummy Law. 15. 11th FINL, supra . 16. SEC-OGC Opinion No. 16-29 addressed to Atty. Russel S. Alabado dated 25 November 2016. 17. C.A. No. 108, as amended, supra . 18. SEC-OGC Opinion No. 19-14, supra ; SEC-OGC Opinion No. 21-08, supra . 19. Department of Justice (DOJ) Opinion No. 161, Series of 1994, 16 November 1994. 20. SEC-OGC Opinion No. 21-08, supra . 21. Section 7, SEC Memorandum Circular 2003-15, 16 December 2003.