ASEAN 2015: BENEFITS AND IMPLICATIONS TO

PHILIPPINE BUSINESSES
By Christian A. Abellonar

Atty. Mary Ann Reyes

There is simultaneous happiness and unease over the ASEAN Free Trade Agreement (AFTA) or
its more recent transformation into ASEAN Trade in Goods Agreement (ATIGA) and ASEAN
Framework Agreement on Services (AFAS). These are the heart of the ASEAN Economic
Community for which a mindset change of stakeholders is needed to face the end- 2015
economic integration deadline; these include politicians who have to implement agreements
committed and signed by the government, business leaders who ask for protection and
preferential treatment instead of proactively addressing long-term problems, and the general
public who must wage a continuous battle against corruption and inefficiency.
Fears over changing comparative advantages, bad environments of doing business, more
complex and chaotic global conditions, etc. must be balanced by careful exploitation of
opportunities. The Philippines has its own strengths going into AEC 2015 ,e.g., governance
improvements that led to stronger economic fundamentals and investment upgrades, and network
of overseas Filipinos who bring information on markets, financing options, transferable
technologies on top of continued foreign exchange remittances. It could overcome its
weaknesses by pushing for more reforms in investment/ trade promotion and facilitation by

Automating business procedures in national government agencies; streamlining

procedures across various offices, and making them more transparent and consistent;
Unifying various investment promotion bodies and adopting PEZA operation practices,
harmonizing their incentives, reviewing the Constitutional 60-40 rule on foreign equity
participation and other limitations; and
Instituting a national single window and linking its databases with the Bureau of Customs
to improve risk management ; instituting e-government with sufficient physical and
human infrastructure.
The Philippines should also pay attention to its much neglected physical ports facilities through
PPP, remove conflict-of-interest in regulatory agencies that own certain infrastructure, review its
cabotage policy, and improve the efficiency of regulatory agencies and trade-related offices.
The ASEAN Political-Security Community and the ASEAN Socio-Cultural Community do not
receive as much attention but serve as foundations for the economic pillar of the integration
exercise in Southeast Asia. Issues such as drug trafficking, labor migration, a peacekeeping force,
strong mechanism for enforcing human rights, and border issues among member states and with
China on maritime waters do affect the progress of the ASEAN Economic Community. Local
and foreign direct investments, as well as government expenditures, are swayed in certain
locations and industries according to perceptions on these matters.
Prof. Federico M. Macaranas, Ph.D
6th General Membership Meeting
Philippine Association of National Advertisers (PANA)
Makati Shangri-La Hotel, Makati City, Philippines
June 24, 2014

Determination of the Constitutional requirements of 60:40 Equity on the term

Capital.
By Christian A. Abellonar

Atty. Mary Ann Reyes

As to the term capital for the determination of 60% equity for Filipino and maximum of 40%
foreign equity investment of foreigner, the Court have ruled in Heirs of Gamboa vs. Teves that
the term capital, pertains to ownership of shares of stock entitled to vote, i.e., common shares,
considering that it is through voting that control is being exercised. Indisputably, one of the
rights of a stockholder is the right to participate in the control or management of the corporation.
This is exercised through his vote in the election of directors because it is the board of directors
that controls or manages the corporation.
In determining compliance with the minimum Filipino equity requirement, there are two
acknowledged tests. One is the control test or the liberal rule. The other is the Grandfather Rule,
which is known to be the stricter and more stringent test. In applying these tests, there had been
confusion as to whether one method excludes the use of the other. The control test provides that
shares belonging to corporations or partnerships at least 60% of the capital of which is owned
by Filipino citizens shall be considered of Philippine nationality. On the other hand, the
Grandfather Rule determines the actual Filipino ownership and control in a corporation by
tracing both the direct and indirect shareholdings in the corporation. According to the January
2015 Resolution of the Supreme Court in the case of Narra Nickel Mining and Development
Corp. vs. Redmont Consolidated Mines Corp. (G.R. No. 195580), the Grandfather test was
originally intended to look into the citizenship of the individuals who ultimately own and
control the shares of stock of a corporation for purposes of determining compliance with the
constitutional requirement of Filipino ownership.
The shareholdings should ideally be traced (i.e. grandfathered) to the point where natural
persons hold the shares. However, this may be impractical and a limit must be set when tracing
through the corporate layers to attribute nationality. Citing a memorandum from the Securities
and Exchange Commission (SEC), the Supreme Court noted the suggestion of the SEC to apply
the Grandfather Rule on two levels of corporate relations for publicly-held corporations or
where shares are traded in the stock exchange, and to three levels for closely held ones or those
which are not traded in any stock exchange. Clearly, the limits should not go beyond the level of
what is reasonable.The Supreme Court clarified the role of these tests in determining
compliance with the required Filipino equity threshold. The Court explained that the use of the
Grandfather Rule is a supplement to the Control Test in implementing the wisdom of the
Filipinization provisions of the Constitution.
The Supreme Court recognized the intention of the framers of the Constitution to apply the
Grandfather Rule in cases where there is corporate layering. It likewise noted that corporate

layering, while admittedly allowed by the Foreign Investment Act, becomes illegal if used to
circumvent the Constitution and other applicable laws.
. Heirs of Gamboa vs. Teves

. G.R. No. 195580