December 20, 2018

SEC-OGC OPINION NO. 24-18

RE: NATIONALITY REQUIREMENT OF THIRD TELCO

Romulo Mabanta Buenaventura

Sayoc & De Los Angeles
21st Floor, Philamlife Tower
8767 Paseo de Roxas
Makati City, 1226, Philippines

Attention: Atty. Ronaldo Modesto J. Ventura

Dear Atty. Ventura :

This pertains to your letter dated 29 November 2018 requesting from the Commission its Opinion on
whether the terms of the binding Bidding Agreement dated 06 November 2018 entered into by
Udenna Corporation (Udenna), Chelsea Logistics Holdings Corp. (Chelsea), China
Telecommunications Corporation (CT) and Mindanao Islamic Telephone Company, Inc. (Mislatel)
(Bidding Agreement) comply with the relevant rules on foreign ownership applicable to the
telecommunications business. HTcADC

This is in connection with the requirement under Section 10.1 (b) of NTC Memorandum Circular 09-
09-2018 or the Rules and Regulations on the Selection Process for a New Major Player (NMP) in the
Philippine Telecommunications Market (NTC Bidding Rules) which states:

"SEC. 10. ISSUANCE OF CERTIFICATE OF PUBLIC CONVENIENCE AND NECESSITY

(CPCN) AND TERM

xxx xxx xxx

b. Compliance by NMP of Paid Capital of at least P10B and implementation of the relevant
provisions of the Bidding Agreement, if applicable to a Participant which has been selected as NMP,
accompanied by an SEC clearance that the terms of the Bidding Agreement comply with the relevant
rules on the limitation of foreign equity ownership." 1 (Emphasis and underscoring supplied).

It was further disclosed that Mislatel was recently declared and confirmed by the National
Telecommunications Commission (NTC) as the NMP of the Philippine Telecommunications Market.
CAIHTE

I. BACKGROUND

Under the Bidding Agreement, Mislatel shall be the sole entity to be declared as the NMP and the
recipient of the CPCN and related permits and licenses. On the other hand, Udenna, Chelsea and CT
agree to invest the necessary capital to Mislatel for the purpose of raising its paid-up capital to enable
the latter to comply with the capitalization requirements of an NMP, which was set at Ten Billion
Pesos (Php10,000,000,000.00). 2

Based on the disclosures and Mislatel's 2018 General Information Sheet (GIS), Mislatel currently has
an authorized capital stock amounting to Php200,000,000.00 divided into 200,000,000 common
shares with a par value of Php1.00 per share. Out of the 200,000,000 common shares, only
50,003,000 common shares have been subscribed and only Php32,503,000.00 are paid-up as
follows:
 Shareholder's Name No. of shares Total Par Value Paid-Up Amount Percentage
subscribed of Shares (Php) (%) of
Subscribed (Php) Ownership
Marte L. Lascano 3,750,000 3,750,000.00 3,750,000.00 7.50%
(Filipino)
Romeo V. Sabillo 3,750,000 3,750,000.00 3,750,000.00 7.50%
(Filipino)
Howard U. Evangelista 3,000,000 3,000,000.00 3,000,000.00 6.00%
(Filipino)
Winsberg L. Austria 3,000,000 3,000,000.00 3,000,000.00 6.00%
(Filipino)
Mariano Pamintuan, 1,500,000 1,500,000.00 1,500,000.00 3.00%
Jr. (Filipino)
Nicanor L. Escalante 5,834,334 5,834,334.00 2,917,667.00 11.67%
(Filipino)
Danilo M. Cortez 5,834,333 5,834,333.00 2,917,666.50 11.67%
(Filipino)
Levitico C. Toquero 5,834,333 5,834,333.00 2,917,666.50 11.67%
(Filipino)
CTE Vector Holdings, 17,499,999 17,499,999.00 8,749,999.00 34.99%
Inc. (Filipino)
Mabelle Grace A. 1 1.00 1.00 0.00%
Palay (Filipino)
Total 50,003,000 50,003,000.00 32,503,000.00 100%

In this connection, pursuant to the Bidding Agreement, Mislatel will apply for an increase in authorized
capital stock with the Commission. As stated in the letter, the planned increase will only consist of
common shares with full voting rights. Accordingly, Udenna, Chelsea, and CT will subscribe to
common shares of Mislatel, all of which will be entitled to vote. It was clarified that no preferred shares
or other class of shares will be created pursuant to the increase.

As stated in the Bidding Agreement:

1. Description of Financial Investment and Financial Plan.

a. The investment to be financed consists of equity investment in MISLATEL for the purpose of
raising its paid-up capital to enable MISLATEL to comply with the capitalization requirements of an
NMP, which is currently set at PESOS: TEN BILLION (Php10,000,000,000.00).

For the avoidance of doubt, the obligations of the Parties as provided in this Section would only arise
upon the issuance by the NTC En Banc of the Confirmation Order in favor of MISLATEL as the
selected NMP.

b. Within the period required in the TOR, MISLATEL shall: (i) cause the increase of its existing
capitalization to:

No. of Shares Amount (Php)

Authorized Capital Stock 10,200,000,000 Php10,200,000,000
Subscribed Capital Stock 10,050,003,000 Php10,050,003,000
Paid-up Capital Stock 10,032,503,000 Php10,032,503,000

xxx xxx xxx

c. From MISLATEL's increase in authorized capital stock, the Parties agree as follows:

i. Udenna shall invest the amount of PESOS: THREE BILLION FIVE HUNDRED MILLION
(Php3,500,000,000.00), in MISLATEL, by subscribing and paying for in full in Pesos, at the
subscription share price of PESOS: THREE BILLION FIVE HUNDRED MILLION
(Php3,500,000,000.00) for PESOS: ONE (Php1.00) per share, representing THREE BILLION FIVE
HUNDRED MILLION SHARES (Php3,500,000,000) with par value of ONE Peso only (Php1.00) each.
(Emphasis ours.)

ii. Chelsea shall invest the amount of PESOS: TWO BILLION FIVE HUNDRED MILLION
(Php2,500,000,000.00), in MISLATEL, by subscribing and paying for in full in Pesos, at the
subscription share price of PESOS: TWO BILLION FIVE HUNDRED MILLION (Php2,500,000,000.00)
for PESOS: ONE (Php1.00) per share, representing TWO BILLION FIVE HUNDRED MILLION shares
(2,500,000,000) with par value of ONE Peso only (Php1.00) each. (Emphasis ours.)

iii. CT shall invest the amount of PESOS: FOUR BILLION (Php4,000,000,000.00), in MISLATEL,
by subscribing and paying for in full in Pesos, at the subscription share price of PESOS: FOUR
BILLION (Php4,000,000,000.00) for PESOS: ONE (Php1.00) per share, representing FOUR BILLION
shares (4,000,000,000) with par value of ONE Peso only (Php1.00) each.

d. Upon the increase in MISLATEL'S capitalization, the shareholding structure of MISLATEL

shall be as follows:

SHAREHOLDERS SUBSCRIBED
Udenna No. of Shares Amount
Chelsea 3,500,000,000 Php3,500,000,000.00
CT 2,500,000,000 Php2,500,000,000.00
Other Shareholders 4,000,000,000 Php4,000,000,000.00

In this regard, the Opinion of the Commission is now being sought on whether the proposed
ownership structure in the Bidding Agreement is compliant with the foreign ownership limitation on the
NMP pursuant to the Constitution and prevailing laws as required by Section 10.1 (b) of NTC Bidding
Rules.

II. RULES ON CORPORATE

NATIONALITY

Section 11, Article XII of the 1987 Philippine Constitution mandates that a franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted only to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines, at least
sixty percent of whose capital is owned by such citizens, to wit:

"SECTION 11. No franchise, certificate, or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum of whose capital is owned by
such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a
longer period than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public utilities by the
general public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive and
managing officers of such corporation or association must be citizens of the Philippines." (Emphasis
and underscoring supplied).
Under the Public Service Act, entities engaged in telecommunications are deemed operators of public
utility, to wit:

"Section 13. x x x (b) The term "public service" includes every person that now or hereafter may
own, operate, manage, or control in the Philippines, for hire or compensation, with general or limited
clientele, whether permanent, occasional or accidental, and done for general business purposes, any
common carrier, railroad, x x x wire or wireless communications system, wire or wireless broadcasting
stations and other similar public services. x x x" 3 (Emphasis and underscoring supplied).

Thus, entities engaged in telecommunications are covered by the Constitutional restriction on foreign
equity.

Public utilities were placed under List A, Item 18 of the 11th Foreign Investment Negative List (FINL),
4 wherein only up to 40% foreign equity is allowed. As mandated in R.A. No. 7042 or the Foreign
Investments Act of 1991 (FIA), the FINL shall compile and identify all investment areas or activities
which are fully or partially open to foreign investors and/or reserved to Filipino nationals according to
foreign equity restrictions imposed by the Constitution and laws.

With respect to corporations, the FIA deems one to be a "Philippine national" if it is organized under
the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is
owned and held by citizens or the Philippines. Further, FIA provides that where a corporation and its
non-Filipino stockholders own stocks in a SEC registered enterprise, at least 60% of the capital stocks
outstanding and entitled to vote of both corporations must be owned and held by Filipino citizens and
at least 60% of the members of the Board of Directors of both corporations must be Filipino citizens,
in order that the corporations shall be considered Philippine nationals. 5

A. Base of the 60%-40% Filipino/Foreign Ownership under Jurisprudence and SEC

Memorandum Circular No. 8, Series of 2013

In the case of Gamboa vs. Teves, 6 the Supreme Court ruled that the "term 'capital' in Section 11,
Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding capital
stock (common and non-voting preferred shares)." 7

Pursuant to this, the Commission issued SEC Memorandum Circular No. 8, series of 2013 (SEC-MC
No. 8) which uses the two-tiered test in determining compliance with the required percentage of
Filipino ownership (two-tiered test). Under the two-tiered test, the 60% required Filipino ownership
shall be applied to BOTH: (a) the total number of outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled
to vote in the election of directors.

In Roy v. Herbosa, 8 the Supreme Court affirmed SEC-MC No. 8 and ruled that it adheres to the
Gamboa v. Teves 2011 Decision and 2012 Resolution, 9 to wit:

"Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond requiring a 60-40 ratio in favour of Filipino nationals in the
voting stocks; it moreover requires the 60-40 percentage ownership in the total number of outstanding
shares of stock, whether voting or not. The SEC formulated SEC-MC No. 8 to adhere to the Court's
unambiguous pronouncement that "full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights is required."

B. Control Test vs. Grandfather Rule

In the Philippines, there are two acknowledged tests in determining the nationality of a corporation
which has corporate stockholders: (i) the Control Test and (ii) the Grandfather Rule.
The Control Test states that shares belonging to corporations at least sixty percent (60%) of the
capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. Under
this test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of
an investing corporation since a corporation which is at least 60% Filipino-owned is already
considered as Filipino. 10

On the other hand, the Grandfather Rule is "the method by which the percentage of Filipino equity in a
corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under
the Constitution and other nationalization laws, is computed, in cases where corporate shareholders
are present, by attributing the nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder." 11 Under this Rule, the Filipino ownership of
the investing corporation and the investee corporation are combined to determine the percentage of
Filipino ownership.

Please note that the Grandfather Rule is only applicable when the 60-40 Filipino-foreign equity
ownership is in "doubt." For instance when the investing corporation has less than 60% Filipino
stockholdings and the investee corporation has either 60-40% Filipino-foreign ownership ratio or has
59% or less Filipino shareholdings. 12 "Doubt", however, is not limited to these circumstances.

The Supreme Court, in its Resolution in Narra Nickel Mining and Development Corporation v.
Redmont Consolidated Mines, Corp., et al., 13 explained that even if the 60-40 Filipino to Foreign
equity ratio is apparently met by the investing or investee corporation, a resort to the Grandfather Rule
is necessary if doubt exists as to the locus of the "beneficial ownership" and "control." The "doubt"
refers to, "various indicia that the 'beneficial ownership' and 'control' of the corporation do not in fact
reside in Filipino shareholders but in foreign stakeholders." 14

III. DISCUSSION: USING

THE TWO-TIERED TEST

OF SEC-MC NO. 8

AND/OR THE CONTROL

TEST OR

GRANDFATHER RULE

To illustrate, the proposed structure of Mislatel shall be as follows:

In order to determine whether the proposed ownership structure of Mislatel in the Bidding Agreement
conforms to the foreign ownership rules, the nationality of the above-mentioned stockholders (i.e.,
Udenna, Chelsea, CT and "Other Shareholders") must first be determined.
A. Nationality of Udenna

As disclosed, the authorized capital stock of Udenna amounts to Php2,000,000,000.00 divided into
2,000,000,000 common shares with a par value of Php1.00 per share. 15

In this regard, since all shares are common shares (i.e., shares with voting rights), which therefore
comprise the totality of the Outstanding Capital Stock, it is sufficient to base the 60-40% requirement
on the same to determine the nationality.

As disclosed, all stockholders of Udenna are natural persons and are declared to be Filipino citizens.
16

Since the voting shares are 100% owned by individual Filipino citizens, Udenna is a Philippine
National. Consequently, its 34.83% direct shareholding in Mislatel is entirely Filipino.

B. Nationality of Chelsea

With respect to Chelsea, it was disclosed that its authorized capital stock is Php2,000,000,000.00
divided into two classes of shares: (1) 1,990,000,000 common shares with a total par value of
Php1,990,000,000.00 and (2) 10,000,000 preferred shares with a total par value of
Php10,000,000.00. It was further disclosed that only the common shares of Chelsea are presently
subscribed.

Chelsea is a company listed in the Philippine Stock Exchange where a minimum 10% public float is
required. 17 Public float represents the percentage of shares of a listed corporation that were bought
and owned by public investors (local and foreign).

Hence, the following is the corporate structure of Chelsea: 18

Since only the voting shares of Chelsea are subscribed, it is sufficient to base the computation of the
60-40 requirement on the same, to determine compliance with SEC MC No. 8.

To reiterate, Udenna is already established as a Philippine National. Hence, its 70% interest in
Chelsea is considered Filipino. Since more than 60% or 70% to be exact, of Chelsea is held by the
Filipino investing corporation Udenna, then, at the onset, there is no "doubt". Further, based on your
letters, Udenna has fully paid its subscribed shares in Chelsea and plans to do the same in Mislatel;
thus, the "indicia" of doubt laid out in Narra Nickel is absent in this case, considering that majority of
the funds in Chelsea and Mislatel came from Udenna. Absent any other "indicia of doubt," the Control
Test, not the Grandfather Rule, will be applied. Using the Control Test, Chelsea is a Philippine
national, hence, its 24.88% shareholding in Mislatel should be considered Filipino.
C. Nationality of Other Shareholders

The "Other Shareholders" mentioned in the proposed ownership structure of Mislatel refers to the
current stockholders of Mislatel, to wit:

Shareholder's Name/Nationality No. of shares Total Par Value Paid-Up Amount

subscribed of Shares (Php)
Subscribed (Php)
Marte L. Lascano (Filipino) 3,750,000 3,750,000.00 3,750,000.00
Romeo V. Sabillo (Filipino) 3,750,000 3,750,000.00 3,750,000.00
Howard U. Evangelista (Filipino) 3,000,000 3,000,000.00 3,000,000.00
Winsberg L. Austria (Filipino) 3,000,000 3,000,000.00 3,000,000.00
Mariano Pamintuan, Jr. (Filipino) 1,500,000 1,500,000.00 1,500,000.00
Nicanor L. Escalante (Filipino) 5,834,334 5,834,334.00 2,917,667.00
Danilo M. Cortez (Filipino) 5,834,333 5,834,333.00 2,917,666.50
Levitico C. Toquero (Filipino) 5,834,333 5,834,333.00 2,917,666.50
CTE Vector Holdings, Inc. (Filipino) 17,499,999 17,499,999.00 8,749,999.00
Mabelle Grace A. Palay (Filipino) 1 1.00 1.00

Based on the table, apart from CTE Vector Holdings, Inc. (CTE Vector), all other shareholders are
natural persons and declared to be Filipinos.

With respect to CTE Vector, as disclosed all its shareholders are all natural persons who are Filipinos.
19 Though the letter is silent on the classes of shares, based on the Articles of Incorporation filed with
the Commission, the entire outstanding shares of stock of CTE Vector is composed of common
shares. 20 Since all the voting shares of CTE Vector are 100% owned by Filipino citizens, CTE Vector
in turn is a Philippine National.

Collectively, therefore, the "Other Shareholders" are 100% Filipinos.

D. Nationality of Mislatel under the Bidding Agreement

It can be recalled that the following shall be the proposed ownership structure of Mislatel under the
Bidding Agreement: 21

Similar to Udenna, since all shares of Mislatel are common shares (i.e., shares with voting rights),
which comprise the totality of its Outstanding Capital Stock, it is sufficient to base the 60-40%
requirement on the same to determine the nationality. Applying the Control Test and the SEC-MC No.
8, therefore, the foreign equity and Filipino equity in Mislatel shall be computed as follows:
Foreign Equity (voting shares)

CT = 39.80%

Filipino Equity (voting shares)

Udenna 34.83%

Chelsea 24.88%

Marte L. Lascano 0.037%

Romeo V. Sabillo 0.037%

Howard U. Evangelista 0.030%

Winsberg L. Austria 0.030%

Mariano Pamintuan, Jr. 0.010%

Nicanor L. Escalante 0.060%

Danilo M. Cortez 0.060%

Levitico C. Toquero 0.060%

Mabelle Grace A. Palay 0.000%

CTE Vector Holdings, Inc. 00.170%

–––––––––

TOTAL = 60.204%

========

Assuming, for the sake of argument, that "doubt" warranting the use of the Grandfather Rule exists,
the Filipino and Foreign ownership of Mislatel shall be computed as follows:
Using the Grandfather Rule, the computation shall be as follows:

A. Shares which Filipinos will Directly and Indirect Hold

Udenna (100% Filipino)

Shares Udenna will directly hold = 34.83%

Shares Udenna will indirectly hold

(24.88% x 70%) = 17.42%

TOTAL shares Udenna will directly and indirectly hold = 52.3%

PCD Nominee Corporation (Filipino)

Shares it will indirectly hold

(24.88% x 29.12%) = 7.24%

Individual Shareholders of Chelsea (Filipino)

Shares they will indirectly hold

(24.88% x 0.06%) = 0.01%

"Other Shareholders" of Mislatel

Shares they will directly hold = 0.49%

––––––

TOTAL FILIPINO SHARES = 60%

=====

B. Shares Non-Filipinos will Directly and Indirectly Hold

PCD Nominee Corporation (Non-Filipino)

Shares it will indirectly hold

(24.88% x 0.8%) 23 = 0.20%

CT (Non-Filipino)

Shares it will directly hold = 39.80%

––––––

TOTAL NON-FILIPINO SHARES = 40%

=====

Using the Grandfather Rule, 60% of Mislatel shares will be directly and indirectly held by Filipinos
while 40% will be directly and indirectly held by Non-Filipinos. Under the Grandfather Rule, the
proposed ownership structure in the Bidding Agreement is still compliant with the foreign ownership
limitation for NMP.

In closing, please be mindful of the requirement of dispersal of ownership under Section 16 of the
R.A. No. 8627 or the Act Granting Mislatel its Legislative Franchise:

"Section 16. Dispersal of Ownership. — In accordance with the constitutional provisions to

encourage public participation in the public utilities, the grantee shall offer at least thirty percentum
(30%) of its outstanding capital stock or a higher percentage that may hereafter be provided by law in
any securities exchange in the Philippines within five (5) years from the commencement of its
operations. Noncompliance therewith shall render the franchise ipso facto revoked."

Based on the foregoing, Mislatel shall offer at least 30% of its outstanding capital stock in any
securities exchange. Please note, however, that per SEC's records, Mislatel is not yet a publicly listed
corporation 24 and cannot, therefore, offer and sell to the public a portion of their outstanding capital
stock in any securities exchange. It should be noted, however, that should Mislatel sell its shares to
the public, or list in an exchange in compliance with R.A. No. 8627, it must conform to the
requirements of the Securities Regulation Code ("SRC") and SEC rules. Most importantly, any
transfer of ownership pursuant to such dispersal of ownership requirement should not exceed the
foreign ownership limitation.

Also, please take note of the limitation in the Board composition under the Anti-Dummy Law, 25 which
confines the number of foreign directors in proportion to their allowable participation or share in the
capital.

Lastly, it shall be understood, that the foregoing opinion is rendered based solely on the facts and
circumstances disclosed and relevant solely to the particular issue raised therein. It shall not be used
in the nature of a standing rule binding upon the Commission in other cases or upon the courts
whether of similar or dissimilar circumstances. 26 If, upon further inquiry or investigation, it will be
disclosed that the facts relied upon are different, this opinion shall be rendered void.

Please be guided accordingly.

By authority of the Commission En Banc:

(SGD.) CAMILO S. CORREA

General Counsel
ANNEX A

Udenna's Ownership Structure

As disclosed, the current authorized capital stock of Udenna amounts to Php2,000,000,000.00,

divided into 2,000,000,000 common shares with a par value of Php1.00 per share. The shares of
Udenna are subscribed to by the following shareholders:

ANNEX B

Chelsea's Ownership Structure

As disclosed that the authorized capital stock of Chelsea is Php2,000,000,000.00 and divided into two
classes of shares: (1) 1,990,000,000 common shares with a total par value of Php1,990,000,000.00
and (2) 10,000,000 preferred shares with a total par value of Php10,000,000.00. It was further
disclosed and consistent with its 2018 GIS that only the common shares of Chelsea are presently
subscribed.
ANNEX C

CTE Vector

As disclosed, the following are the shareholders of CTE Vector:

ANNEX D

Detailed List of Proposed Stockholders and Their Percentage of Ownership under the Bidding
Agreement

Based on the Bidding Agreement, below are the detailed list of the stockholders with their calculated
percentage of ownership: