Situation 1 COMPANY A (INVESTEE)

(GRANDFATHER)
Filipino Citizen 35%
Foreign Citizen 30%
Company B 35%

COMPANY

Filipino Citizen 60%

Foreign Citizen 20%
Company C 20%

Considering that Company B is 60% owned by Filipino, there is no need to compute for grandfather companys ownership,
Company B is considered as 100% Filipino owned

Company As ownership
+

Filipino Citizen
35%
Company B
35% (0.35 x 1)
Filipino Ownership 70%

Situation 2 COMPANY A (INVESTEE)

(GRANDFATHER)
Filipino Citizen 35%
Foreign Citizen 30%
Company B 35%

COMPANY B (INVESTOR)

COMPANY B (INVESTOR)
Filipino Citizen 40%
Foreign Citizen 40%
Company C 20%

COMPANY

Filipino Citizen 60%

Foreign Citizen 40%

Considering that Company Bs Filipino ownership is below 60%, only the those shares actually owned by Filipinos will be
considered Filipino

Company Bs ownership
+

Filipino Citizen
40%
Company C
12% (0.20 x 0.60)
Filipino Ownership 52%

Company As ownership
+

Filipino Citizen
35%
Company B
18.20% (0.35 x 0.52)
Filipino Ownership 53.20%

Note: Grandfathering is only done when the investor is also a corporation.

GIVEN: AUTHORIZED CAPITAL STOCK

160,000

FILIPINO

COMMON SHARE
PREFERRED, NON-VOTING
PREFERRED, VOTING

60,000
37,500
37,500

FOREIGN

PREFERRED, NON-VOTING
PREFERRED, VOTING

12,500
12,500

QUESTION: If Manny owns entire Common Shares and plans to sell 50% of such shares to Prince Harry, will such sale be
constitutional considering that the subject corporation is engaged in telecommunications business?
GAMBOA VS. TEVES, DECISION (2011)
The term capital in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election
of directors, and thus in the present case only to common shares, and not to the total outstanding capital stock comprising
both common and non-voting preferred shares.
Considering that common shares have voting rights which translate to control, as opposed to preferred shares which
usually have no voting rights, the term capital in Section 11, Article XII of the Constitution refers only to common shares.
However, if the preferred shares also have the right to vote in the election of directors, then the term capital shall include
such preferred shares because the right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of directors.
In addition, both the Voting Control Test and the Beneficial Ownership Test must be applied to determine whether a
corporation is a Philippine national.
Thus:
BEFORE THE SALE
COMMON SHARE
ADD: PREFERRED, VOTING
TOTAL NO. OF FILIPINO SHARES
WITH VOTING RIGHTS
NOTE:

60,000
37,500
97,500

T. FILIPINO SHARES W/ VOTING RIGHTS

TOTAL SHARES W/ VOTING RIGHTS
=
97,500
110,000

= 0.886363 or 88.64%- OK

OUTSTANDING CAPITAL STOCK = TOTAL SUBSCRIBED AND ISSUED CAPITAL STOCK TREASURY SHARES

AFTER THE SALE

COMMON SHARE
ADD: PREFERRED, VOTING
RIGHTS
TOTAL NO. OF FILIPINO SHARES
WITH VOTING RIGHTS

30,000

% OF FIL.OWNERSHIP =

37,500

T. FILIPINO SHARES W/ VOTING RIGHTS

TOTAL SHARES W/ VOTING

67,500
=
67,500
110,000

= 0.613636 or 61.36% - OK

GAMBOA VS. TEVES, MOTION FOR RECONSIDERATION (2012)

Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares
as well as preferred shares, which may have different rights, privileges or restrictions as stated in the articles of
incorporation. The Corporation Code allows denial of the right to vote to preferred and redeemable shares, but disallows
denial of the right to vote in specific corporate matters. Thus, common shares have the right to vote in the election of
directors, while preferred shares may be denied such right. Nonetheless, preferred shares, even if denied the right to vote
in the election of directors, are entitled to vote on the following corporate matters: (1) amendment of articles of
incorporation; (2) increase and decrease of capital stock; (3) incurring, creating or increasing bonded indebtedness; (4)
sale, lease, mortgage or other disposition of substantially all corporate assets; (5) investment of funds in another business
or corporation or for a purpose other than the primary purpose for which the corporation was organized; (6) adoption,
amendment and repeal of by-laws; (7) merger and consolidation; and (8) dissolution of corporation.
Since a specific class of shares may have rights and privileges or restrictions different from the rest of the shares in a
corporation, the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting rights but also to shares without voting rights.
Preferred shares, denied the right to vote in the election of directors, are anyway still entitled to vote on the eight specific
corporate matters mentioned above. Thus, if a corporation, engaged in a partially nationalized industry, issues a mixture of
common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the
preferred non-voting shares must be owned by Filipinos. Of course, if a corporation issues only a single class of shares, at
least 60 percent of such shares must necessarily be owned by Filipinos. In short, the 60-40 ownership requirement in favor
of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting
or any other class of shares.
The intent of the framers of the Constitution is to reserve exclusively to Philippine nationals the controlling interest in
public utilities.
The Constitution expressly declares as State policy the development of an economy effectively controlled by Filipinos.
Consistent with such State policy, the Constitution explicitly reserves the ownership and operation of public utilities to
Philippine nationals, who are defined in the Foreign Investments Act of 1991 as Filipino citizens, or corporations or

associations at least 60 percent of whose capital with voting rights belongs to Filipinos. The FIAs implementing rules
explain that [f]or stocks to be deemed owned and held by Philippine citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial ownership of the stocks, coupled with appropriate voting rights
is essential. In effect, the FIA clarifies, reiterates and confirms the interpretation that the term capital in Section 11,
Article XII of the 1987 Constitution refers to shares with voting rights, as well as with full beneficial ownership. This is
precisely because the right to vote in the election of directors, coupled with full beneficial ownership of stocks, translates
to effective control of a corporation
Thus:
Computation in 2011 must be OK, in addition:
BEFORE THE SALE
COMMON SHARE
or 50% - NG

100% FILIPINO

- OK

PREFERRED, NV , FILIPINO
PREFERRED NV, TOTAL
PREFERRED, V , FILIPINO =
PREFERRED V, TOTAL

37,500 =

0.50

75,000
37,500 = 0.50 or 50% - NG
75,000

AFTER THE SALE

COMMON, FILIPINO=

30,000 =

0.50 or 50% - NG

PREFERRED, NV, FILIPINO =

37,500 =

0.50 or 50%

- NG
COMMON, TOTAL

60,000

PREFERRED, NV, TOTAL

PREFERRED, V , FILIPINO =
PREFERRED V, TOTAL

75,000
37,500 = 0.50 or 50% - NG
75,000

NOTE:
The opinions of the SEC en banc, as well as of the DOJ, interpreting the law are neither conclusive nor controlling and
thus, do not bind the Court. It is hornbook doctrine that any interpretation of the law that administrative or quasi-judicial agencies
make is only preliminary, never conclusive on the Court. The power to make a final interpretation of the law, in this case the term
capital in Section 11, Article XII of the 1987 Constitution, lies with this Court, not with any other government entity.
The FIA is the basic statute regulating foreign investments in the Philippines. Government agencies tasked with regulating or
monitoring foreign investments, as well as counsels of foreign investors, should start with the FIA in determining to what extent a
particular foreign investment is allowed in the Philippines. Foreign investors and their counsels who ignore the FIA do so at their
own peril. Foreign investors and their counsels who rely on opinions of SEC legal officers that obviously contradict the FIA do so
also at their own peril.

SEC Memo No. 8, series of 2013

All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement. For purposes of
determining compliance therewith, the required percentage of Filipino ownership shall be applied to BOTH:

(A) THE TOTAL NUMBER OF OUTSTANDING SHARES OF STOCK ENTITLED TO VOTE IN THE ELECTION OF DIRECTORS
BEFORE THE SALE
COMMON SHARE
ADD: PREFERRED, VOTING
TOTAL NO. OF FILIPINO SHARES
WITH VOTING RIGHTS

60,000
37,500
97,500

T. FILIPINO SHARES W/ VOTING RIGHTS

TOTAL SHARES W/VOTING RIGHTS
=
97,500
110,000

= 0.886363 or 88.64%- OK

AFTER THE SALE

COMMON SHARE
ADD: PREFERRED, VOTING
TOTAL NO. OF FILIPINO SHARES
WITH VOTING RIGHTS

30,000
37,500
67,500

T. FILIPINO SHARES W/ VOTING RIGHTS

TOTAL SHARES W/VOTING RIGHTS
=
67,500
110,000

= 0.613636 or 61.36% - OK

(B) THE TOTAL NUMBER OF OUTSTANDING SHARES OF STOCK, WHETHER OR NOT ENTITLED TO VOTE IN THE
ELECTION OF DIRECTORS.
BEFORE THE SALE
COMMON SHARE
ADD: PREFERRED, VOTING
PREFERRED, NON-VOTING
TOTAL NO. OF FILIPINO SHARES

60,000
37,500
37,500
135,000

T. FILIPINO SHARES =
135,000
OCS
= 0.84375 or 84.38% - OK

160,000

30,000
37,500
37,500
105,000

T. FILIPINO SHARES =
105,000
OCS
= 0.65625 or 65.63% - OK

160,000

AFTER THE SALE

COMMON SHARE
ADD: PREFERRED, VOTING
PREFERRED, NON-VOTING
TOTAL NO. OF FILIPINO SHARES