The Department of Justice (DOJ) has affirmed the position of the Securities and Exchange Commission (SEC) on the number of seats allowed for foreigners in corporations.
The SEC said the number of seats allowed for foreigners in a partially nationalized corporation or in any corporation not considered public utilities should be based on its allowable share in the capital of such entities.
In a legal opinion issued last September 20, Justice Secretary Jesus Crispin Remulla said that only those corporations that are considered public utilities under Republic Act (RA) 11659, an Act amending Commonwealth Act No. 146, otherwise known as The Public Service Act, are covered by the constitutional limitation in the participation of foreign investors in the board of directors.
“For all other corporations with foreign capitalization requirements and ownership of stock, or those corporations engaged in regular activity, the participation of foreigners is limited by their allowable participation or share in the capital of such entities, as provided for in Section 2-A of the Anti-Dummy Law,” Remulla said.
Remulla issued the opinion in response to the letter dated March 13, 2023 of SEC General Counsel Romualdo Padilla seeking the justice department’s confirmation that consistent with the objective of the Anti-Dummy Law, the determination of the number of seats allowed for foreigners in a partially nationalized corporation is based on its allowable participation or share in the capital of such entities.
Padilla, in his letter, told the DOJ that it has been the position of the SEC that foreigners can be elected as directors in proportion to their allowable participation or share in the capital of corporations engaged in activities that are reserved to Filipinos.
The SEC’s position is based on DOJ Opinion Nos. 37, series of 1976 and 11, series of 1981.
However, the SEC noted that in its subsequent query on the number of board seats, which may be given to alien investors in partially nationalized activity, the DOJ through its Opinion 161, series of 1994 seemingly altered its position.
In the said opinion, according to SEC, the DOJ stated that “it is the actual investment of the foreigner that will form the basis for its representation in the board of directors, which may be less than the allowable participation of aliens therein.”
The DOJ, in its latest opinion on the matter, cited Section 11, Article XII of the 1987 Constitution which states: “No franchise, certificate or any other form or authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the law of the Philippines at least sixty percentum of whose capital is owned by such citizens…”
It added that “the participation of foreign investors in the governing body of any public utility enterprise shall be limited to the proportionate share in its capital…”
Remulla explained that the said provision under Section 11, Article XII of the 1987 Constitution formed the basis for Opinion No. 161, series of 1994, where participation of foreign investors in the governing body of any public utility or enterprise was limited to their proportionate share in its capital.
The purpose of the said provision, according to the DOJ secretary, is to prevent foreigners from controlling the operations of public utilities in the country, which is imbued with public interest.
Considered as public utilities under RA 11659 are those engaged in the distribution of electricity, transmission of electricity, petroleum and petroleum products pipeline transmission systems, water pipeline distribution systems, seaports, and public utility vehicles.
For the purposes of determining the number of seats allowed for foreigners in regular corporations in consonance with the objectives of the Anti-Dummy Law, the DOJ said the allowable participation or share in the capital of such corporations will be taken into account.
“This is consistent with the strict limitation set forth by the Constitution for businesses considered as public utilities,” Remulla said.
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