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Point of Law

Francisco Ed. Lim

Welcome news for the investing public

Francisco Ed. Lim

May 25, 2017

The Supreme Court affirmed with finality its decision dated Nov. 22, 2016 in “Roy v. Herbosa, et. al.” which declared SEC Memorandum Circular No. 8 or the “Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities,” valid and consistent with its decision and resolution in “Gamboa v. Teves.”

This decision laid to rest the saga of the conflicting interpretations of the term “capital” under Sec. 11, Article XII of the 1987 Constitution, and definitively ruled that the same referred only to shares of stock entitled to vote in the election of directors. This also refuted the restrictive interpretation of the term “capital” by my friend, Judd Roy, who claimed that the percentage of Filipino ownership must be applied to each class of shares, regardless of privileges and restrictions.

This is welcome news not only to the legal community but also to the stock market and the investing public who invested their money in corporations engaged in nationalized and partly nationalized activities, which the Supreme Court considered indispensable parties since they were to be directly affected by the resolution of this case.

I find it noteworthy that the Supreme Court, instead of adopting a purely legalistic approach, considered the practical implications of the issue. The high court considered that applying the “restrictive interpretation” to corporations engaged in nationalized and partly nationalized activities will result in massive involuntary divestment of foreign stockholdings in affected corporations which will have tremendous impact on the stock market, and to the Philippine economy as a whole.

The Supreme Court gave credence to the position of the Philippine Stock Exchange (PSE) that if the “effective control test” were to be applied, the value of the shares that would be deemed in excess of the foreign-ownership limits based on stock prices at that time (30 April 2014) was about P160 billion, which had to be absorbed by the Filipino shareholders. As a consequence thereof, this may have resulted in dire financial difficulties for the affected companies, or worse, their shutdown.

The high court also gave credence to the undisputed submission of the Shareholders Association of the Philippines (Sharephil) that in five corporations alone, more than P158 billion worth of shares must be divested by foreign shareholders if petitioner’s restrictive interpretation were to be adopted.

These numbers are evident of how great the impact would have been to the stock market and the economy had the restrictive interpretation of the term “capital” been upheld. These divestments of stockholding affect the stability of the concerned corporations which in turn relates to issues of employment, market or commodity prices which are the concerns of every Filipino. Thus, we have all the reasons to be happy that the legal justifications in this case properly coincide with the practical consequences of this constitutional question.

As a final note, I quote Justice Caguioa, the ponente of the decision, who poignantly put an end to this issue by stating that “the key to nationalism is in the individual… If the safeguards, which are already stringent, fail, then that is not the fault or failure of the Constitution. It is the breakdown of nationalism in each of the Filipino shareholders, Filipino directors and Filipino officers of the corporation. No Constitution, no decision of the Court, no legislation, no matter how ultra-nationalistic they are, can guarantee nationalism.”