Republic of the Philippines Department of Finance Securities and Exchange Commission SEC Building, EDSA, Greenhills, Mandaluyong City OFFICE OF THE GENERAL COUNSEL 01 June 2016 SEC-OGC Opinion No. 16-15 RE: Nationality of — Non-Stock Corporation; Acquisition of Land by a Non-Stock Corporation ATTY. GENESES R. ABOT 389 Quezon Ave. corner West 6" St. West Triangle, Quezon City Dear Atty. Abot: This refers to your letter dated 24 August 2015 requesting opinion regarding the nationality of your client Foundation for purposes of acquiring real property, particularly land, in the Philippines. You stated that your client, a non-stock, non-profit, foreign corporation (hereinafter referred to as the “Foundation”), established here in the Philippines since 1991, is organized solely to conduct charitable ac s. You also disclosed that about ninety (90%) percent of the total initial capital, or Thirty Seven ‘Thousand Pesos (Php 37,000.00), is contributed by foreign nationals. Out of five (5) incorporators, only two (2) are Filipinos, contributing less than (10%) percent of the total initial capital, or Three Thousand Pesos (Php 3,000.00). At present, the Foundation has seven (7) board members with four (4) foreigners and three (3) Filipinos. Your client seeks to expand the coverage of its activities, which would, however, require it to acquire land in the Philippines. In view thereof, you raised the following queries 1. Given the facts above, is the Foundation regarded as a foreign corporation? If so, can the Foundation acquire real properties, particularly a land? 2. If the Foundation is disqualified to acquire lands, how can the Foundation change its nationality? 3. Consequently, is the Foundation allowed to hold on to such real property while undergoing change of nationality? andPage 2 of 6 4, Can the Foundation transfer its assets to a foreign-based NGO, its main donor, should its existence cease in the Philippines? Relative to your first query, Section 7, Article XII of the 1987 Constitution restricts the ability of a corporation to acquire land in the Philippines, to wit: “Sec. 7. Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of public domain.” The determination of whether a corporation may acquire real estate is laid down in Sections 22 and 23 of Commonwealth Act No. 141, which provide: "See. 22. Any citizen of lawful age of the Philippines, and any such citizen not of lawful age who is a head of a family, and any corporation or association of which at least sixty per centum of the capital stock or of any interest in said capital stock belongs wholly to citizens of the Philippines, and which is organized and constituted under the laws of Philippines, and corporate bodies organized in the Philippines authorized under their charters to do so; may purchase any tract of public agricultural land disposable under this Act, not to exceed ‘one hundred and forty-four hectares in the case of an individual and one thousand and twenty-four hectares in that of a corporation or association, by proceeding as prescribed in this chapter: xxx Sec. 23. No person, corporation, association, or partnership other than those mentioned in the last preceding section may acquire or own agricultural public land or land of any other denomination or classification, which is at the time or was originally, really or presumptively, of the public domain, or any permanent improvement thereon, or any real right on such land and improvement. ..." For the determination of the nationality of a corporation, a previous Opinion of the Commission is instructive: Primarily, it is the incorporation test which should be applied in determining the nationality of a corporation. Thus: "Under Philippine jurisdiction, the primary test is always the Place of Incorporation Test since we adhere to the doctrine that a corporation is a creature of the State whose laws it has been created. A. corporation organized under the laws of a foreign country, irrespective of the nationality of the persons who control it is necessarily @ foreign corporation. The control test and the principal place of business test (siege social), are merely adjunct tests, when the place of incorporation test indicates that the subject corporation is organized under Philippine laws.’Page 3 of 6 However, based _upon the foregoing, while the incorporation test serves as the primary test under Philippine jurisdiction, other tests such as the control test must be used for purposes of compliance with the provisions of the Constitution and of other laws on nationality requirements, Even if the corporation is a creature of the State, there is a need to further safeguard/regulate certain areas of inyestment_and_activities_for_the protection of the interests of Filipinos. For instance, the control test is used to determine the eligibility of a corporation, which has foreign equity participation in its_ownership structure, to engage in nationalized or _partly nationalized activities, The nationality of non-stock corporation, in relation to the constitutional provision on land acquisition, is computed on the basis of the nationality of its members and not premised on the membership contribution.” In computing the above required ratio, the extent of voting power of the members should also be taken into consideration, not only the number of members. This is because it is the power to vote that determines control in a corporation. To compute the required ratio merely on the basis of the number of members without taking into account the voting rights of the members may give rise to a possible situation where although foreign interest is only 40% of the total number, all or majority of the voting powers would be held by them and none or less from the 60% Filipino members, so that the corporation would in effect be under alien control.’ In this connection, Section 89 of the Code* provides: “TION 89. Right to vote. — The right of the members of any class or classes to vote may be limited broadened or denied to the extent specified in the articles of incorporation or by-laws. Unless so limited, broadened or denied, each member, regardless of class, shall be entitled to one vote." Thus, in a non-stock corporation, the general rule is that each member shall be entitled to one vote, regardless of the amount of contribution. The exception is when the right of members of any class to vote is limited, broadened, or denied to the extent specified in the articles of incorporation or the by-laws.> " SEC Opinion dated 12 October 2011 addressed to James Yee ? Decasa, Lucilla, Handbook on Private Corporations (Domestic and Foreign), p.527 eiting SEC Opinion dated28 February 2002 addressed to Atty. Victoria A. Timbacaya > SEC Opinion dated 09 November 1995 addressed to Sebastian Liganor Galinato Tierra + Corporation Code of the Philippines (BP 68). SEC Opinion dated 21 July 2015 addressed to COMMO Eduardo T. Domingo AFP (RET), citing Tan v. Sycip & Lim, G.R. No. 153468, August 17, 2006; SEC Opinion dated 17 August 1998, addressed to Atty. Edilberto S, Gaddi; SEC Opinion dated 3 July 1992 addressed to Myma Yao & Patricia M, AlvarezPage 4 of 6 From the foregoing, let us assume for example, that a non-stock corporation has 100 members, 90 of the members are Filipinos, while only ten (10) members are foreigners. But under the Articles of Incorporation and By-laws of the said corporation, only the ten (10) foreign members are entitled to vote. If the 60/40 requirement is based only on the number of the entire membership, then the corporation is deemed compliant with the foreign equity limitation. However, the obvious absurdity is that the control of the corporation rests not with the Filipino, but with the foreigners. Further, assuming that all the members of the non-stock corporation are entitled to vote, but the voting rights of the ten (10) foreigners are broadened, Pursuant to Sec. 89 of the Code, to the extent that the foreigners were given ten (10) votes each, still the control of the corporation is still with the foreigners. Hence the extent of the voting rights should also be considered. Unfortunately, the facts are insufficient to make a categorical o whether your client can own land. Assuming that it is so qualified, pursuant to Section 2-A of the Anti-Dummy Law’, foreigners should not constitute more than 40% of the members of the Board of Trustees.” In relation to your second query, the Code expressly grants a non-stock corporation the power and the capacity to admit members.* Assuming, therefore, that the Foundation does not meet the 60% Filipino membership requirement, the Commission is of the opinion that the Foundation may resort to increasing the Filipino membership of the Foundation until the 60% requirement is met, subject also to the 60% voting rights to Filipinos. With respect to your third query, if the Foundation failed to comply with the above statutory conditions, the Foundation cannot be considered a Philippine national, and therefore, is not qualified to own lands in the Philippines. However, while aliens cannot own lands under the Philippine Constitution, they may, however, be granted temporary rights such as lease contracts of lands, this being considered not forbidden by the Constitution. Presidential Decree No. 471 has fixed the maximum period for leases of private lands to such aliens or alien-owned corporations, associations, or entities not qualified to acquire private lands in the Philippines to twenty-five years, © Commonwealth Act No. 108 7 SEC Opinion dated 12 February 2016 addressed to Atty Peter Anthony V. Rafanan, * SECTION 36. Corporate powers and capacity. — Every corporation incorporated under this Code has the power and capacity: 6 In case of stock corporations, to issue or sell stocks to subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to admit members to the corporation be it a non-stock corporation; ..."Page 5 of 6 renewable for another period of twenty-five years upon mutual agreement of both lessor and lessee.” The Foundation may also be a possessor in the concept of holder who is such by virtue of a juridical title, such as a usufructuary, or hold such lands in trust for the equitable-title holder/s, With regard to your fourth query, please be informed that, in case of dissolution of a non-stock corporation, corporate assets shall be applied and distributed in accordance with certain specific rules laid down under Section 94'° of the Code, or as may be specified in a plan of distribution adopted by the corporation in accordance with Section 95'' of the Code.'? ° SEC Opinion dated 4 September 1990 addressed to Don Mandell, citing Krivenko vs. Register of Deeds of Manila, G.R. No. L-630, November 15, 1947 "® Section 94.Rules for distribution. — In case of dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1 All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore: 2. Assets held by the corporation upon a condition requiring rotum, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such requirements; 3. Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational or similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation pursuant to a plan of distribution adopted as provided in this Chapter; 4. Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws, to the extent that the articles of incorporation or the by-laws determine the distributive rights of members, or any class or classes of members or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution as provided in this Chapter. (Emphasis supplied) " See. 95. Plan of distribution of assets. ~ A plan providing for the distribution of assets, not inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed plan of distribution or a summary thereof and the date, time and place of such meeting shall be given to cach member entitled to vote, within the time and in the manner provided in this Code forthe giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of at least two- thirds 2/3) ofthe members having voting rights present or represented by proxy at such meeting ” SEC Opinion dated 27 August 2015 addressed to Letceia M. CoronelPage 6 of 6 Distribution or liquidation of assets of a dissolved corporation is a matter of internal concern to the corporation and falls within the power of the directors and stockholders or duly appointed liquidation trustee.'? Should there be substantial issues, the same may be brought to court, pursuant to the case of Consuelo Metal Corporation v. Planters Development Bank.'* It shall be understood that the foregoing opinion is rendered based solely on the facts disclosed in the query and relevant solely to the particular issues raised therein and shall not be used in the nature of a standing rule binding upon the courts, or upon the Commission in other cases of similar or dissimilar circumstances.'* If upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void. Please be guided accordingly. datlidrcentRea General Counsel atchjbg ? Id, citing SEC Opinion dated 8 August 2014 addressed to Manuel T, Hing '* GR. No. 152580, June 26, 2008, In this case, the Supreme Court ruled: However, the SEC's jurisdiction does not extend to the liquidation of a corporation. While the SEC has jurisdiction to Corder the dissolution of a corporation, jurisdiction over the liquidation of the corporation now pertains tothe appropriate regional trial court. * SEC Memorandum Circular 2003-15, No. 7