Tragedy avoided

In a recent column, I wrote about the decision of the Supreme Court in Roy vs. Herbosa (G.R. No. 207246, November 22, 2016) where it settled, with finality, that the term “capital” under Section 11 Article XII of the 1987 Constitution only “refers to the voting stock or controlling interest of a corporation”—no more, no less.

The Roy case stemmed from a statement in its predecessor case, Gamboa vs. Teves (G.R. No. 176579, October 9, 2012), which read that the “constitutional requirement of at least 60 percent Filipino ownership applies not only to voting control of the corporation but also to the beneficial ownership of the corporation.”

The majority opinion rejected the minority view that the “Filipinos who own 60 percent of the controlling interest, must also own 60 percent of the economic interest in a public utility” (meaning, Filipinos must also own 60 percent of the investment returns) and therefore, to avoid the situation where the economic interest is skewed in favor of foreigners, the 60-40 ratio should be applied separately to all classes of shares.

The high court clarified that the phrase “beneficial ownership” in Gamboa more pertinently refers to the ownership of the subject shares. In other words, beneficial ownership is a question of who, in fact, is the beneficial owner of the individual shares for the purpose of classifying it as either Filipino-owned or non-Filipino owned (beneficial ownership test). It does not refer to economic interests.

The restrictive economic provisions of our Constitution have been making it very difficult for the country to attract much-needed foreign direct investments.

Based on 2015 data, net foreign direct investments in the 10 Asean members amounted to a total of $120.8 billion. The Philippines cornered only $5.7 billion, or 4.7 percent, of this inflow. Singapore, with a very small population and scarce natural resources, accounted for 50.8 percent. Even Asean latecomer Vietnam had double the Philippine share at $11.8 billion, or 9.8 percent.

Attracting foreign investments would have even been harder for the country had the SC ruled that the nationality requirement should reflect a 60 percent economic interest in the corporation as well. Obviously, we cannot expect foreigners to invest in the Philippines if we limit their return to only 40 percent of their investments.

Common sense dictates that when a person deposits P1.00 in his bank, he expects that the interest that will be paid by the bank will be for his one-peso deposit and not P0.40, which was what the petitioner and minority opinion would have wanted.

The Roy decision is most satisfactory for now amid the economic restrictions entrenched in our current Constitution. Under section 6 of the Corporation Code, a corporation may “classify its shares for the purpose of insuring compliance with constitutional or legal requirements.” Had the minority opinion been adopted, it would certainly have practical repercussions in the way covered corporations structure their capitalization requirement.

For example, it would have outlawed high par shares normally issued to foreigners willing to invest more money than their Filipino counterparts. It would have also outlawed depository receipts, which are not only issued onshore by Philippine companies but also offshore by foreign companies to attract investments into their markets. It would have caused an exodus of foreign investments from our stock market.

The Roy decision is also a welcome news to the Duterte administration. The President has been hard at work going overseas to attract much needed foreign investments, especially for his “Build. Build. Build” program, which was envisioned to usher in the Philippine’s golden age of infrastructure. What a dilemma it would have been for our country if suddenly, the already restrictive economic provisions of the Constitution were interpreted more restrictively by the SC.

The last thing we needed was a shock wave that would have rocked our sound macroeconomic fundamentals to the core. We can now breathe a sigh of relief that the high court had saved the country from a tragedy of immense proportions.