Director Angeles T. Wong

April 14, 1993 Director Angeles T. Wong Philippines Overseas Employment Administration POEA Bldg.,Ortigas Avenue cor. EDSA, Mandaluyong, Metro Manila S i r : This refers to your letter of April 5, 1993 requesting comments on the following: 1. Company A is a Filipino corporation with 75% Filipino and 25% foreign equity. It is licensed by POEA to engage in overseas recruitment. Its authorized capital is P15,000,000.00 with paid up capital of P4,500,000.00. 2. Company B is a holding company with 60% Filipino and 40% foreign equity. It has agreed to purchase about 29% of Company A's capital stock. 3. Company C, likewise is a holding company with 60% Filipino and 40% foreign equity, also agreed to purchase 35% of Company A's paid up capital stock. cdll Questions: 1. Will the transfer/sale of Company A's capital stocks affect the equity proportion (75/25) of Company A? 2. What will now be the equity sharing in these cases? In determining the nationality of corporations with foreign equity, the Commission En Banc, on the basis of the opinion of the Department of Justice No. 18, s. 1989, dated January 19, 1989, voted and decided to do away with the strict application/computation of the so-called "grandfather rule" (Re: Far Southeast Gold Resources, Inc. FSEGRI), and instead applied the so-called "control test" method of determining corporate nationality. The method as applied in the said case states as follows: " Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality ,but if the percentage of Filipino ownership in the corporation or partnership, is less than 60%,only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital respectively, of which belong to Filipino citizens, all of said shares shall be recorded as owned by Filipinos. But if less than 60%,or say only 50% of the capital stock or capital of the corporation or partnership, respectively belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens".(Emphasis supplied, Justice Opinion, dated January 19, 1989) Applying the above ruling to the instant case, companies B and C which are 60% Filipino owned are considered as of Philippine nationality. Consequently, companies B and C may be allowed to invest in Company A, provided that the voting and Board membership requirements under Section 3 of R.A. 7042, otherwise known as the Foreign Investment Act of 1991, quoted hereunder, are complied with. "a) the term Philippine National " shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines; or a corporation organized under [the] laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines; or a trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefit of Philippine nationals; Provided ,That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprises ,at least sixty percent (60%) of the capital stocks outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty percent (60)% of the members of the Board of Directors of both corporations must be citizens of the Philippines in order that the corporation shall be considered a Philippine national ;" (Emphasis supplied) Likewise, the above transaction is subject to Section 42 of the Corporation Code which provides: "SECTION 42. Power to invest corporate funds in another corporation or business or for any other purpose . Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the members in the case of non-stock corporations, at a stockholders' or members' meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, that where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary." Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman