Mr. Mariano Sarmiento II

May 17, 1990 Mr. Mariano Sarmiento II Acting Deputy Executive Secretary Office of the President Malacaang, Manila S i r : This refers to your letter, dated February 20, 1990, requesting comments/recommendations on House Bill No. 28915 entitled: "An act Rationalizing and Regulating the Lease of Shares of Stocks in Corporations and Interests in Partnerships, Establishing The Procedure For The Documentation and Registration of the Lease, and For Other Purposes". prcd Shares of stock are property, having the same characteristics as any other property, and may be bought, sold, mortgaged or pledged, taxed, made the subject of a gift or a trust agreement, be impressed with a constructive trust, or a resulting trust, and bequeathed and distributed as any other property may be. (11 Fletcher, Cyc. Corp. Sec. 5096, 1986 Revised Volume).It is well-settled that the owner, as in the case of other personal property, has an absolute and inherent right, as an incident of his ownership, to sell and transfer the same at will, except insofar as the right may be restricted by the charter of the corporation, or the general law, or by a valid by-laws, or by a valid agreement between him and the corporation, provided the transfer is in good faith, and to a person capable of assuming the obligations of a stockholder. (12 Fletcher's Cyc. of Corps.,Sec. 5452). The Civil Code of the Philippines provide thus: "ARTICLE 417. The following are also considered as personal property: xxx xxx xxx (2) Shares of stock of agricultural, commercial and industrial entitles, although they may have real estate." (emphasis supplied). Likewise, the Corporation Code provides: "SECTION 63. Certificates of Stock and transfer of shares . ...Shares of stock so issued are personal property and may be transferred. ..." (emphasis supplied). In the light of the foregoing, shares of stock, just like any other property, may be disposed of, transferred, alienated or even "leased". However, attention is invited to the provisions of the following declared state policy mandated in the Philippine Constitution: "The state shall develop a self-reliant and independent national economy effectively controlled by Filipinos ." (Section 19, Article II, Philippine Constitution). It is a basic political creed that our economy must be independent of foreign control and domination. It must be effectively controlled by Filipinos .(Nolledo, The Constitution of the Philippines, 1987 ed. p. 12). While our economy is based on private enterprise system, giving a great impetus to the role of private initiative and the need for local and foreign investments, the latter, however, are under certain regulating restrains and subject to the fundamental principle that Philippine economy must be effectively controlled by Filipino citizens .(Ibid) While under the Corporation Code, there is no general requirement of Philippine citizenship, there are some areas of business and industry where ownership is reserved, wholly or partially, in favor of Filipino citizens by virtue of the Constitution and various special laws. Even if the constitutional or statutory provisions refer merely to ownership of stock in the corporation, the nationality requirement is not satisfied unless it meets the criteria of beneficial ownership and power control over corporations intended solely for Filipinos. To construe the equity requirement as merely limiting ownership in the capital without limiting the controlling interest may give rise to a dangerous situation where although the ownership in capital belongs to Filipinos, the management/control of the company would be absolutely under alien control. Such a situation would only be a pro-forma compliance with the equity rule and does not serve the very purpose of the Constitutional and statutory mandates giving the Filipinos the power to control certain areas of business activities. Any scheme or arrangement which attempts to defeat the Constitutional and statutory mandates on equity participation, should not be allowed. Furthermore, to allow the stockholders to lease the stocks to foreigners without any limitation would pave the way for indirect circumvention of the Anti-Dummy Law, (CA No. 108, as amended) which punishes the intervention of aliens in the management, operation, administration or control of nationalized or partly nationalized enterprises or activity. Likewise, attention is invited to the provisions of the Corporation Code allowing the formation of a "close corporation". It is a well-recognized fact that a person has the right to choose his business associates. Thus, the formation of a "close corporation" is given a special recognition under the Corporation Code, taking into consideration that close corporations have special legitimate needs different from those widely held corporations, and treats them under a separate title (Title XII), relaxing in their favor some of the general rules and requirements applicable to all business corporations. Where business associates belong to a small, closely-knit group, like a family, they usually prefer to keep the organization exclusive and would not welcome strangers. Since it is through their efforts and managerial skills that they expect the business to grow and prosper, it is quite understandable that they would not trust outsiders to come in and interfere with their management thereof, and much less share whatever fortune, big or small that the business may bring. (Comments, Notes and Selected Cases, Corporation Code, Campos & Lopez-Campos). LexLib Recognizing the unique quality and legitimate needs of "close corporations", the Corporation Code allows investors to form "close corporations" limiting the shareholders to members of the family or close business associates with whom they have trust and confidence. Thus, where the corporation is organized as a close corporation, the stockholders thereof cannot transfer or dispose the shares to third persons if there is a restriction in the articles of incorporation. Certain restrictions on the transfer of shares, if within proper limits, may be imposed by charter provisions. Charter restrictions on the transfer of shares are binding on all who become shareholders, as they become parties to the charter contract and take their shares subject to it. (12 Fletcher, Cyc. Corp., Sec. 5461.4, 1 Revised Volume). Restrictive stock agreement is one of the devices evolved for assuring the succession in interest of persons most likely to act harmoniously with the other shareholders. (Ibid, Sec. 5461.6). Thus, while we interpose no objection on the above-mentioned bill which recognizes lease of interest in juridical entities, nevertheless, we take exception to lease of shares of stocks or interest in "nationalized or partly-nationalized" business activities and "close corporations". LibLex Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman