Sebastian Liganor Galinato & Tierra

November 9, 1995 Sebastian Liganor Galinato & Tierra Unit 1409 Philippine Stock Exchange Center, Pasig City Attention : Atty . Katz N . Tierra S i r : This refers to your letter dated September 20, 1995 inquiring on what should be the basis of computation of the statutory 60% Filipino ownership requirement for purposes of determining the allowable period of lease contract under P.D. 471 in case the applicant is a non-stock corporation whose membership are divided into several classes of membership with different voting rights . prcd As stated your client, a non-stock, non-profit corporation has the following primary purpose clause: "To establish, maintain and operate a sports field and a clubhouse thereon constructed, with all necessary equipment and other appurtenances, for the promotion of social, athletic and recreational activities of its members, as well as to foster, promote and conduct legitimate athletic exercises, sports, games and entertainments of all kinds; to encourage and foster ethical standards in business and promotion; and to secure the active interest of its member in the civic commercial, moral and social welfare of the community." Some of the members are foreigners while others are Filipino citizens. All members have playing rights. However, the members are divided into: (a) regular members who have the right to vote at all elections of officers and the right to be voted for as a director or officer of the corporation; (b) associate members who have playing rights but cannot vote nor be voted upon as officer/director, (c) honorary members, who may or may not be given voting rights depending on the Board which has the authority to grant voting rights; and (d) restricted members who have no voting rights and may not be voted as officers. Presidential Decree 471 prohibits a corporation from entering into a lease contract for a period of more than 25 years if it does not comply with the 60% Filipino ownership requirement. Your query is, in determining the 60% ownership requirement, is the computation limited only to those who have voting rights , in this case the regular members and sometimes the honorary member, or are the members who have no voting rights , such as the honorary members, the associate members and the restricted members, also be included ? The general rule is, in the case of an ordinary non-stock corporation where there is only one class of members with equal voting rights, the statutory 60-40 ratio requirement is computed on the basis of the number of members . However, this is not always true in cases where the Articles of Incorporation provide for several classes of membership . Usually, non-stock corporations provide for a different voting rights if there are several kinds of members, in which case the general rule of one (1) vote for every member does not apply. The situation allowing different voting rights of members is sanctioned under Section 89 of the Corporation Code which provides: "SECTION 89. Right to vote . The right of the members of any class or classes to vote may be limited broadened or denied to the extent specified in the articles of incorporation or by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote." (Emphasis supplied) LibLex Accordingly, in computing the above required ratio, the extent of voting power of the members should also be taken into consideration, not only the number of members. This is because it is the power to vote that determines control in a corporation. To compute the required merely on the basis of the number of membership without taking into account the voting rights of the members may give rise to a possible situation where although foreign interest is only 40% of the total number, all or majority of the voting powers would be held by them and none or less from the 60% Filipino membership, so that the corporation would in effect be under alien control. Such a situation would merely be a pro-forma compliance with the ratio required, but in essence, the corporation is owned by foreigners since the power to control the corporation would be in the hands of foreigners. Furthermore, to argue that the 60-40 ratio is measured only on the number of members and not on the voting members would be to provide a way for aliens to circumvent the ratio required. On the other hand, to view the ratio requirement as measured in terms of the number of members with voting rights would be to uphold the unequivocal purpose of the Constitution of ensuring Filipino control in the use of land in the Philippines , including the lease thereof. In the light of the foregoing arguments, the Commission En Banc, in its meeting of November 2, 1995, resolved to opine that in "non-stock corporations" where there are several classes of members with different voting rights , the computation of the 60% Filipino equity or ownership requirement, for purposes of determining the allowable "lease" period under P.D. 471, should be based on the number of members who are entitled to vote and be voted for as member of the Board of Directors . This interpretation would render effective the legislative intent giving the Filipinos the preference on the use of lands in the Philippines to ensure effective control of the Philippine economy as embodied in Article 11 Section 19 of the Philippine Constitution * . To be able to give a definite information as to present members of the corporation who are entitled to the above-mentioned rights, much would depend on what is recorded in the membership book of the corporation. The membership book is the best evidence to establish the Filipino membership in a non-stock corporation. Considering therefore that the corporate secretary has the custody thereof and is vested with the function of registering the membership of a corporation, he is in a better position to determine and certify whether the corporation has meet the ratio required under the Law. In relation to the foregoing, please be informed further that the Department of Justice had previously opined, pursuant to Commonwealth Act No. 108, as amended by PD 715, otherwise known as the Anti-Dummy Law, that in cases where there is a constitutional or statutory provision requiring a specific nationality requirement as a requisite for the exercise or enjoyment of a right, franchise or privilege, the election of Filipinos and aliens as members of the board of directors or governing body of the corporation or association shall be proportionate to their actual equity/ownership participation or interest in such entities. Thus, where the law requires a 60% Filipino nationality requirement, Filipino representation in the Board should also be 60% of the required number of directors as fixed in the articles of incorporation. Please be advised, however, that the foregoing opinion does not preclude judicial interpretation and/or application of the law should the issue be raised or litigated in the proper forum. Very truly yours, (SGD.) PERFECTO R. YASAY, JR. Acting Chairman * Copied verbatim from documents obtained directly from the Securities and Exchange Commission .