Horizon Freight International, Inc.

February 19, 1988 Horizon Freight International, Inc. 4th Flr., J & T Building R. Magsaysay Blvd., Sta. Mesa Manila Gentlemen : This refers to your letter, dated February 12, 1988, requesting the opinion of this Commission on the query posed therein. It appears therein that Horizon Freight International, Inc., is a domestic corporation engaged in customs brokerage/cargo forwarding, whose equity is owned 60% by Filipinos and 40% by foreigners. Your query is: Is there any impediment for Horizon Freight International, Inc. to acquire the majority of the Class A shares of a Filipino mining corporation? Section 2, Article XII of the Constitution of the Philippines reads thus: ". . . 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 sixty per centum of whose capital is owned by such citizens . . .." The above provision is in consonance with the following declared state policy: "The state shall develop a self-reliant and independent national economy effectively controlled by Filipinos." (Section 19, Article 11, Philippine Constitution) * . It is a basic political creed that our national economy must be independent of foreign control and domination. It must be effectively controlled by Filipinos. (Nolledo, The Constitution of the Phil., 1987 ed., p. 12). The Commission issued the so-called "Grandfather Rule", which is a method by which the percentage of Filipino equity in corporation engaged in nationalized and/or partly nationalized areas of activities provided for under the constitution and other nationalization laws, is accurately computed, and the diminution of said equity prevented. The presence of corporate stockholders with alien stockholdings would as a result diminish effective control of Filipinos, if this rule is not applied. As ruled by the Secretary of Justice Vicente Abad Santos (Opinion No. 144, s. 1977), "The sixty percent Philippine equity requirement in mineral resource exploitation, which is carried over from the old constitution, is intended to insure, among other purposes, the conservation of indigenous natural resources, for Filipino posterity. (Vol. X, Const'l. Records Journal, Nos. 131-139 (1966), pp. 114 et. seq.). I think it is implicit in this provision, even if it refers merely to ownership of stock in the corporation holding the mining concession, that beneficial ownership of the right to dispose, exploit, utilize, and develop natural resources shall pertain to Filipino citizens, and that the nationality requirement is not satisfied unless Filipinos are the principal beneficiaries in the exploitation of the country's natural resources." The Secretary of Justice, defining the term "qualified person" as used in Section 2 ( Mining Lease Rights ), of P.D. 463 ( Mineral Resources Development Decree of 1974 ), declared that a "Filipino citizen, of legal age and with capacity to contract, or a corporation or partnership registered with the Securities and Exchange Commission at least 60% of the capital of which is owned by Filipino citizens would exclude a foreign company ." (Opinion No. 144, s. 1977, emphasis supplied) Thus, the Commission in its letter to the Board of Investments, dated May 4, 1987 ruled that the "Grandfather Rule" may be applied to determine the percentage of effective Filipino stock ownership in corporations engaged in real estate business. ( In re : Hotel Properties, Inc .) In view of the foregoing, we answer your query in the affirmative. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman * Copied verbatim from documents obtained directly from the Securities and Exchange Commission .