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ReggbIicof the~hilippines
SECURIT:l¥Sic{\~D EXCHANGE COMMISSION
SEC BUilding;;;E);?,S4;Greenhills, City of Mandaluyong

27 September 2007

Mr. Reynaldo G. David SEC Opinion No. 07-:-17

President & Chief Executive Officer Control Test Rule
Development Bank of the Philippines
Makati City

Sir:

This refers to your letter dated 19 September 2007 requesting confirmation that in
determining the nationality of the proposed corporate bidder or buyer of PNOC -EDC
shares, the "control test" is applicable.

It is alleged that Philippine National Oil Company ("PNOC") and PNOC EDC
Retirement Fund ("PNOC-EDC RF") own 46.67% (consisting of 6,000,000,000 common
shares and 4,500,000,000 preferred shares) and 13.33% (consisting of 3,000,000,000
preferred shares), respectively, of PNOC -Energy Development Corporation (PNOC-
EDC).

The total combined shareholdings of PNOC and PNOC- EDC RF represent 60%
of the entire outstanding capital stock of PNOC-EDC. The remaining 40% shares is held
by the public of which 37.8% is foreign owned while 2.2% thereof is owned by
Philippine nationals. PNOC-EDC's common shares are listed in the Philippine Stock
Exchange ("PSE") while the preferred shares are not listed. Both common shares and
preferred shares are voting.

It is further alleged that PNOC-EDC, a corporation duly organized under

Philippine laws, owns land and is engaged in the business of exploring, developing and
operating geothermal energy projects.

PNOC and PNOC-EDC RF intend to divest their shareholdings in PNOC-EDC

through public bidding. In its bidding rlies and regulations, the corporation proposes
to incorporate as one of the qualifications for the potential bidder the hereunder quoted
proviso: /
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IJ Xx :Xthe bidder must be a Filipino citizen, or a

paIinership with at least sixty percent (60%) of its total
capital contIibution and controlling interest held by
Philippine Nationals, or a corporation or association at
least sixty percent (60%)of whose issued and outstanding
shares of stock is owned legally and beneficially by
Philippine Nationals.'

xxx xxx xxx

'Philippine National' is defined as ' a citizen of the

Philippines; or domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at
least sixty percent (60%) of the capital stock outstanding
and entitled to vote is owned and held by citizens of the
Philippines; or a corporation organized abroad and
registered as doing business in the Philippines under the
Corporation Code of which one hundred percent (100%) of
the capital stock outstanding and entitled to vote is wholly
owned by Filipinos; or a tmstee of funds for pension or
other employee retirement or separation benefits, where
the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accme to the benefit of
Philippine nationals: Provided, That where a corporation
and its non-Filipino stockholders own stocks in a SEC-
registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of
the Philippines and at least sixty percent (60%) of the
n.1embers of the Board of Directors of each of both
corporations must be citizens of the Philippines in order
that the corporation shall be considered a Philippine
National."

In reply, please be informed that while the 1987 Constitution of the Philippines 1
imposes a mandatory restriction that 60% of the outstanding capital stock of PNOC-

ISection 2. Article XU. All lands of the public domain, waters, minerals, coal, petroleum, and other
mineral oils, all forces of potential energy, fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are ovmed by the State. With the exception of agricultural lands, all other natural
resources shall not be alienated. The exploration, development, and,utilization of natural resources shall be
under the full control and supervision of the State. The State may directly undcriake such activities, or it '
may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens or
cOl})orations or associations at least sixty per centum of whose capital is owned by such citizens, Such
agreements may be tor a period not exceeding twenty-five years, renewable for not more than twcrlty-five
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EDC must be held by Philippine nationals since it owns real estate in this jmisdiction
and is engaged in a partly nationalized activity, nonetheless, the law squarely applicable
in the presented factual scenalio is RA. 7042, otherwise known as the Foreign
Investment Act (PIA) as amended by RA. 8179, and its Amended Implementing Rules \
and Regulations.

Section 3 of RA. 7042, as amended, reads thus:

a) the term Philippine national shall mean a citizen

II

of the Philippines; or a domestic paltnership or association

wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines
under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and
entitled to vote is wholly owned by Filipinos or a trustee of
funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine
national and at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals: Provided, That
where a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of each of
both corporations must be owned and held by citizens of
the Philippines and at least sixty percent (60%) of the
members of the Board of Directors of each of both
corporations must be citizens of the Philippines, in order

years, and under such tenns and conditions as may be provided by law. In cases of water rights for
uTigation, water supply, fisheries or industrial uses other than development of water power, beneficial use
may be the measure and limit of the grant.

xxx xxx xxx

Section 11. No ii-anchise, certificate, or any other fonn of authorization for the operation of a public utility
shall be granted except to citizens of the Philippules or to corporations or association organized under the
laws ofthe Philippines, at least sixty per centum of whose capital is owned by such citizens, nor shall such
1:l-Imchise,certificate, or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such Ji'anchise or right be granted except under the condition that it shall be subject to
amendment, alteration, or repeal by Congress when common good requu-es. The State shall encomage
equity participation in public utilities by the general public. The participation offoreign illvestors ill the
goveming body of any public utility enterprise shall be limited to their proportionate share in its capital,
and the executive and managing officers of such corporation or association must be citizens of the
Philippines. (Article XII, 1987 Constitution of the Philippines).
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that the corporation shall be considered a Philippine

national."

In the same vein, Section 1(b) of the Amendments to the Implementing Rules
and Regulations of R.A. 7042 (Foreign hlVestments Act of 1991) as amended by R.A.
8179 provides:

(b) Philippine National shall mean a citizen of the

Philippines or a domestic partnership or association
wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned and held by
citizens of the Philippines; or a corporation organized
abroad and registered as doing business in the Philippines
under the Corporation Code of which 100% of the capital
stock outstanding and entitled to vote is wholly owned by
Filipinos; or a trustee of funds for pension or other
employee retiJ:ement or separation benefits, where the
trustee is a Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefits of Philippine
nationals; Provided, that where a corporation and its non-
Filipino stockholders own stocks in SecUlities and
Exchange Conunission (SEC)registered enterprise, at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote of each of both corporations must be
owned and held by citizens of the Philippines and at least
sixty percent (60%) of the members of the Board of
Directors of each of both corporations must be citizens of
tl1e Philippines, in order that the corporation shall be
considered a Philippine national. The control test shall be
applied for this purpose. (Underlining supplied)

The foregoing adopts the well-entrenched ruling in the Far Southeast Gold
Resources case2 which laid down the "control test" rule stating:

It further appears that on February 28, 1967, the

SEC promulgated rules and regulations on the
implementation of the constitutional and statutory
requirements that the controlling interests of enterprises
engaged in the exploitation of the natural resources should
be held by citizens of the Philippines or by corporations or
by associations at least 60% of the capital of which is
owned by such citizens, and which provide for the

2 DOJ Opinion No. 18 s.1989, dated January 19, 1989.

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following lUle in the determination of citizenship of

corporations with alien equity/ to wit:

'Shares belonging to corporations or partnerships at least

60% of the capital of which is owned by Filipino citizens
shall be considered as of Philippine nationality, but if the
percentage of Filipino ownership in the corporation or
partnership is less than 60%, only the number of shares
corresponding to such percentage shall be counted as of
Philippine nationality. Thus, if 100,000 shares are registered
in the name of the corporation or partnership at least 60% of
the capital stock. or capital respectively, of which belong to
Filipino citizens, all of the said shares shall be recorded as
owned by Filipinos. But if less than 60%, or, say, only 50%
of the capital stock. or capital of the corporation or
partnership, respectively belongs to Filipino citizens/ only
50,000 shares shall be counted as owned by Filipinos and the
other 50/000 shares shall be recorded as belonging to aliens.'

Said rule was substantially reiterated on September 7, 1972

and approved by the SecretalY of Commerce and Industry
on September 12, 1972; and this rule has been followed up to
the time as basis for determining the nationality of corporate
stockholders.

With due respect, it is believed that the said query should

be resolved by that Office by applying its aforecited rule.

Opinion No. 84, s. 1988 cited in your query is not meant to

ovenule the aforesaid SEC lUle. There is nothing in said
Opinion that precludes the application of the said SEC rule
in appropriate cases. It is quite clear from said SEC rule that
the JGrandfather Rule~( which evolved and applied by the
SEC in several cases, will not apply in cases where the 60-:40
Filipino alien equity ownership in a particular natural
resource corporation is not in doubt.

Verily, the PNOC-EDC proposed equity stlUcture reflects that the 60-40% rule
shall be adhered to by the adoption of the suggested provision in the Bidding Rules and
Regulations. In the process, the "conb"ol test" lUle as enunciated in the Far Southeast
Gold case and not the" grandfather mle" shall be applicable.

Under the control test lUle mandated by the aforequoted Amendments to the
lRR of PIA dissection or fmiher inquiry on the ownership of the shareholders both in the
investing and investee corporation shall be dispensed with once it is clearly established
that the participating corporations are 60% owned by Filipino citizens. In the absence of
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any doubt that the bidding corporation is 60% Filipino owned, the entity shall be deemed
as "Philippine national" and may thus be allowed to bid or invest in legally permissible
areas of investment as in the instant case.

It should be emphasized, however, the PNOC-EDC should always maintain its

60% Filipino equity ownership or holdings at all times in order not to contravene the
mandatory restriction of the fundamental law.

Very truly yours,

VERNETTE G. UMAU-PACO
General Counsel

Copy furnished: Chairperson Fe B.Barin

Dir. Justina F. Callangan, CFD

Opinions 07 pnoe ede per.

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