The recent ruling of the Supreme Court in the case of “Wilson Gamboa vs Finance Secretary Teves et al.” has blurred the distinction between “legal ownership” and “beneficial ownership” as far as stocks in partially nationalized industries are concerned.
Using the capital structure of PLDT as reference point, the tribunal stated that “the 60-40 ownership requirement in favor of Filipino citizens in the Constitution to engage in certain economic activities applies not only to voting control of the corporation, but also to the beneficial ownership of the corporation. The legal and beneficial ownership of 60 percent of the outstanding capital stock must rest in the hands of Filipino nationals in accordance with the constitutional mandate.”
Legal ownership or title over shares of stock belongs to the person or entity whose name appears on the face of the stock certificate or, if no such document is issued, in the registry book of the broker-dealer concerned or transfer agent of the company. Beneficial ownership, on the other hand, refers to the person or entity that has the right to enjoy the dividends or profits that the stocks are entitled to under the by-laws of the corporation.
For security or tax purposes, a stockholder can have his shares registered in the name of another person (the legal owner) but the right to receive the dividends that may be issued from them stays with him.
Responsibility
In the face of the tribunal’s order requiring capital in partially nationalized industries to be owned in truth (not merely on paper) by Filipinos to the extent of at least 60 percent, corporate secretaries are now obliged to go beyond the face of the stock certificates to determine their real ownership.
If the stocks are in a person’s name, ascertaining their legal or beneficial ownership, including the owner’s nationality, does not pose a problem. There are credible government- or privately issued documents that can be relied upon to verify these information.
But the story is different if the stocks are registered in a corporation’s name. If we follow the spirit of the tribunal’s ruling, the nationality of the stockholders of that corporation has to be examined to make sure the nationality requirement is scrupulously observed.
Every single stock of that stockholder-corporation, regardless of its description or nomenclature, must undergo this test. In case the stockholder-corporation has, in turn, one or more subscribing corporations, the same scrutiny is required in the latter corporations to ensure that the combined foreign ownership in them, if any, does not breach the 40 percent ownership cutoff.
Bottom line, corporate secretaries have to go beyond the stockholders’ ownership declarations and do two things: first, ascertain whether their ownership is both legal and beneficial; second, check if their nationalities conform to the ownership parameters laid down by the Constitution.
Guidelines
Let us assume a review of the capital stock structure of the affected companies shows that their foreign ownership exceeds 60 percent of the authorized capital stock.
The tribunal said that PLDT (and for that matter any company in a partially nationalized industry affected by the ruling) may be imposed sanctions by the Securities and Exchange Commission “if it finds after due hearing, that, at the start of the administrative case or investigation, there is an existing violation” of the Constitution.
With this directive, the companies concerned have to cure whatever deficiencies they have or make the appropriate adjustments in their ownership structure to conform to the tribunal’s ruling ahead of any investigation that the SEC may conduct for this purpose. The SEC has yet to issue the guidelines on the enforcement of the subject ruling. It will conduct public consultations with the affected parties on November 9 to address their concerns.
Ahead of those guidelines, in fact, shortly after the tribunal rendered its ruling on June 28, 2011, PLDT and the affected companies have already mapped out contingency plans to cope with its adverse consequences in the event it is not overturned.
Divestment
The proposed remedial actions include, among others, the creation of preferred voting shares, reclassification of voting rights and spinning off of companies engaged in partially nationalized businesses. Considering the magnitude of foreign investments in these companies, some of these measures may fall short of the objective to make their capital structure compliant with the nationality requirement.
Thus, the affected foreign stockholders may be forced to divest or sell their stocks to Filipinos or Philippine corporations under pain of administrative penalties or, worse, the noncompliant stocks forfeited in favor of the government. Selling out is easier said than done. True, the Philippines is enjoying some level of economic boom but it is doubtful if there are enough Filipino businessmen or corporations that have the financial resources to acquire the foreign stockholdings that may have to be let go to comply with the tribunal’s ruling.
It would be grossly unfair (if not oppressive) to the foreign investors who bought in good faith to be ordered to do a fire sale on their stocks or sell at a loss to comply with the unexpected shift in the interpretation of the rules on investment in partially nationalized industries.
The period within which the affected companies shall be allowed to remedy whatever deficiencies they may have in regard to their capital structure must reflect the reality on the ground and not be based on some sudden surge of nationalistic fervor. Justice Roberto Abad was right when he said in his dissenting opinion that Congress, not the tribunal, should flesh out the intent of the Constitution on ownership of capital in nationalized industries.
It is scary when unelected justices perform certain roles they have no right to in the guise of judicial interpretation.
For comments, send your e-mail to rpalabrica@inquirer.com.ph.