40% Foreign Ownership Rule and Its Implications

SUPREME COURT’S RULING ON THE 60-40% OWNERSHIP RULE

Regarding the Supreme Court’s Ruling on the 60-40% ownership, I would like to know the answers on these questions:

How the 40% foreign ownership limit is computed, based on total outstanding shares or authorized capital stock or shares issued?

Computation is based on total outstanding stock. According to the SC ruling, the 40% foreign ownership limit shall be applied for each class of stock whether it is common or preferred.

Will the voting preferred shares be included as part of the 40% limit?

This is what the SEC is trying to sort out with the stakeholders.SEC recently released a draft and it was attended by the bigwigs of the Philippine industries. There is no final rule yet on this.

Below is the news I got from the Supreme Court’s website. Supreme Court News

The Supreme Court, voting 10-3, has denied with finality the motions for reconsideration of its June 28, 2011 decision that directed the Securities and Exchange Commission (SEC) to investigate the Philippine Long Distance Telephone Co. (PLDT) for possible violation of the constitutional limit on foreign ownership in utilities.

In a 51-page resolution penned by Senior Justice Antonio T. Carpio, the Court En Banc declared that it “no further pleadings shall be entertained” in the case.

Joining Senior Justice Carpio in his ponencia were Chief Justice Maria Lourdes P. A. Sereno and Justices Teresita J. Leonardo-De Castro, Arturo D. Brion, Diosdado M. Peralta, Lucas P. Bersamin, Mariano C. Del Castillo, Martin S. Villarama, Jr., Jose Portugal Perez, and Jose Catral Mendoza.

Justices Presbitero J. Velasco, Jr. wrote a dissenting opinion and was joined by Justice Bienvenido L. Reyes.  Justice Roberto A. Abad wrote a separate dissenting opinion.

Justice Estela M. Perlas-Bernabe did not take part due to prior participation in a related case.

The Court clarified that it did not decide, and in fact refrained from ruling on the question of whether PLDT violated the 60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of the 1987 Constitution as such question indisputably calls for a presentation and determination of evidence through a hearing, which is generally outside the province of its jurisdiction, but well within the SEC’s statutory powers. The Court thus limited its decision on the purely legal and threshold issue on the definition of the term ‘capital’ in Section 11, Article XII of the Constitution and directed the SEC to apply such definition in determining the exact percentage of foreign ownership in PLDT.

The Court found that from the deliberations of the Constitutional Commission, it was clear that the term “capital” refers to controlling interest of a corporation. The Court held: “As we held in our 28 June 2011 Decision, to construe broadly the term ‘capital’ as the total outstanding capital stock, treated as a single class regardless of the actual classification of shares, grossly contravenes the intent and letter of the Constitution that the ‘State shall develop a self-reliant and independent national economy effectively controlled by Filipinos.’”

The Court further held that the PLDT is only an indispensable party insofar as other issues, particularly factual questions are concerned.

It also held that SEC was properly impleaded in this case. It noted that SEC has expressly manifested that it will abide by the Court’s decision and defer to the Court’s definition of the term “capital” in Section II, Article XII of the Constitution. Further, the SEC entered its special appearances in this case and argued during the Oral Arguments, indicating its submission to the Court’s jurisdiction. It Thus the Court found that there exists no legal impediment against the proper and immediate implementation of its directive to the SEC. “For its part, PLDT must be impleaded, and must necessarily be heard, in the proceedings before the SEC where the factual issues will be thoroughly threshed out and resolved,” added the Court.

“Thus, there is no dispute that it is only after the SEC has determined PLDT’s violation, if any exists at the time of the commencement of the administrative case or investigation, that the SEC may impose the statutory sanctions against PLDT. In other words, once the 28 June 2011 Decision becomes final, the SEC shall impose the appropriate sanctions only if it finds after due hearing that, at the start of the administrative case or investigation, there is an existing violation of Section 11, Article XII of the Constitution. Under prevailing jurisprudence, public utilities that fail to comply with the nationality requirement under Section 11. Article XII and RA 7042, the Foreign Investments Act of 1991 (FIA) can cure their deficiencies prior to the start of the administrative case or investigation,” the Court ruled.

The Court noted that the 1935, 1973, and 1987 Constitutions have the same 60 percent Filipino ownership and control requirement for public utilities like PLDT. It ruled that any deviation from this requirement necessitates an amendment to the Constitution as exemplified by the Parity Amendment.

The Court held that the 1987 Constitution reserves the ownership and operation of public utilities exclusively to (1) Filipino citizens, or (2) corporations, or associations at least 60 percent of whose ‘capital’ is owned by Filipino citizens. “In other words, under Section 11, Article XII of the 1987 Constitution, to own and operate a public utility a corporation’s capital must at least be 60 percent owned by Philippine nationals,” held the Court.

RA 7042, like all its predecessor statutes, clearly defines a “Philippine national” as a Philippine citizen, or a domestic corporation at least “60% of the capital stock outstanding and entitled to vote” is owned by Philippine citizens, noted the Court.

The Court explained that the right to elect directors, coupled with beneficial ownership, translates to effective control. The Court stressed that its assailed decision “declares that the 60 percent Filipino ownership required by 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.” It further held that it was “imperative that such requirement apply uniformly and across the board to all classes of shares, regardless of nomenclature and category, comprising the capital of a corporation. Under the Corporation Code, capital stock consists of all classes of shares issued to stockholders, that is, common shares as well as preferred shares, which may have different rights, privileges or restriction as stated in the articles of incorporation.”

The Court further explained that if a corporation, engaged in a partially nationalized industry, issues a mixture of common and preferred non-voting shares, at least 60 percent of the common shares and at least 60 percent of the preferred non-voting shares must be owned by Filipinos. In short, the 60-40 ownership requirement in favor of Filipino citizens must apply separately to each class of shares, whether common, preferred non-voting, preferred voting or any other class of shares. 

In its June 28, 2011 decision, the Court ruled that the term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock entitled to vote in the election of directors, and, in the present case, only to common shares and not to the total outstanding capital stock comprising both common and non-voting preferred shares.

The SEC was thus directed to apply the Court’s definition of the term “capital” in determining the extent of allowable foreign ownership in PLDT and to impose the appropriate sanctions under the law if there is any violation of sec. 11, Art. XII of the Constitution.

Justice Velasco in his dissenting opinion opined that PLDT should be given time to undertake the necessary measures to make its capital structure compliant, and the SEC should formulate appropriate guidelines and supervise the process. He added that SEC should also adopt rules and regulations to implement the prospective compliance by all affected companies with the new ruling on the interpretation of Sec. 11, Art. XII of the Constitution.

For his part, Justice Abad opined that Sec. 11, Art. XII already provides limitations on foreign participation in public utilities, hence, the Court need not add more by further restricting the meaning of the term “capital” when none was intended by the framers of the 1987 Constitution. He wrote that the authority to define “capital” in the said provision belongs to Congress as part of its policy making power. Granting otherwise, he opined that “capital” encompasses the entirety of a corporation’s outstanding capital stock and that the Court can simply adopt such interpretation of Constitution Commission by Fr. Joaquin Bernas and Dr. Bernardo M. Villegas. (GR No. 176579, Gamboa v. Sec. Teves, October 9, 2012)

LIST OF STOCKS WITH MORE THAN 40% FOREIGN OWNERSHIP

I extracted the data MANUALLY (copy+paste) and as such I feel that while transferring the data from PSE’s website to the excel sheet, clerical errors may occur.  Nevertheless, I have executed and did the work with utmost care to have an  accurate display of information. It is not a joke to manually consolidate below data. It takes days to complete.

**Note: Foreign Ownership were taken from disclosure to PSE as per Public Ownership Report  as of Sep 30,2012. The market activity that happened between October 1, 2012 until today were not yet taken into account. Thus, foreign ownership as of today may have a significant change already depending on the volume of transactions that happened during the period.

NAME	SYMBOL	*Foreign Ownership
		%	# of Shares
MAYBANK ATR KE	MAKE	99.14	1,059,154,235
BERJAYA	BCOR	88.38	770,424,141
GRAND PLAZA	GPH	87.04	50,094,204
PEPSI-COLA	PIP	86.26	3,186,421,157
BOGO MEDELLIN	BMM	85.61	5,136,715
PANASONIC	PMPC	79.96	337,994,588
PAXYS	PAX	75.74	869,883,852
KEPPEL PROP	KEP	65.53	192,558,326
7-11	SEVN	65.00	223,774,020
SAN MIGUEL	SMB	48.40	7,457,961,180
MABUHAY VINYL	MVC	46.04	304,445,689
ISM COMM.	ISM	42.42	812,871,425

The above mentioned stocks pertain to common shares only.

With the list I have mentioned above, MAKE and SMB also failed on the required minimum public ownership of 10%. It is a double whammy. I speculate these two companies will delist from the PSE before the end of the year. According to the disclosures made to PSE, MAKE and SMB are evaluating various options and alternatives to comply with the 10% minimum public float. Given that they made the 10% minimum public ownership, they also have another problem with the foreign ownership rule. Will they issue common shares that will dilute their stock or will they follow the actions made by PLDT and Ayala Companies by issuing Voting Preferred Shares?

There is no disclosure yet as to what action the rest in the list will take. I think everybody is waiting for the SEC ruling in order to explore further alternatives later.

LIST OF STOCKS WITH MORE THAN 40% FOREIGN OWNERSHIP IF VOTING PREFERRED SHARES EXCLUDED

		As per Sep 30 Report			Pure Common Shares
NAME	SYMBOL	*Foreign Ownership			*Foreign Ownership
		%	# of Shares		%	# of Shares
INTEGRATED MICRO	IMI	39.09	1,049,436,978		73.18	1,434,078,088
INTL CONTAINER	ICT	32.91	869,594,801		44.77	1,942,372,860
ANCHOR LAND	ALHI	30.15	313,592,898		45.23	693,334,000
GLOBE TELECOM	GLO	29.71	86,427,800		65.28	132,399,720
PLDT	TEL	24.45	126,173,271		58.40	216,055,775
AYALA LAND	ALI	23.07	5,576,317,276		40.55	13,751,209,776
MANILA WATER	MWC	17.78	1,073,230,046		53.33	2,012,475,848

**Note: ICT's foreign ownership doesn't identify which one is Common and Voting Preferred but upon checking the nature of the Preferred, it is issued for Filipino nationals only.

ALHI's Pref Shares subscribers came from the stockholders of common shares as of Sep 12, 2011. I did not find any record on the foreign investors to common shares.

NAME	SYMBOL	Remarks
INTEGRATED MICRO	IMI	Includes Voting Pref Shares of 1,300,000,000  in the computation
INTL CONTAINER	ICT	Includes Voting Pref B Shares of 700,000,000 in the computation
ANCHOR LAND	ALHI	Includes Voting Pref Shares of 346,667,000 in the computation
GLOBE TELECOM	GLO	Includes Voting Pref Shares of 158,515,021 in the computation
PLDT	TEL	Includes Voting Pref Shares of 300,000,000 in the computation
AYALA LAND	ALI	Includes Voting Pref Shares of 13,066,494,759 in the computation
MANILA WATER	MWC	Includes Voting Pref Shares of 4,000,000,000 in the computation

As per the Sep 30, 2012 Public Ownership Report, the computation of the percentage of foreign ownership of the stocks listed above is calculated by adding the common shares and voting preferred shares. However, if you will compute the foreign ownership based on common shares only, the result is that most of the stocks in the list are above the 40% rule. Ayala Land though is just a notch above the 40% limit and as such can rectify the problem easier than the rest of the stocks if voting preferred shares are excluded in the foreign ownership limit.

IMI as per the above table is just a stone throw away from the 40% limit even if voting preferred shares are included in the computation. In fact as per the October 31, 2012 Public Ownership Report, IMI has 43.24% foreign ownership. It is already above the 40% limit.

FEARS OF STOCK SELLDOWN

Philippine Stock Exchange together with other players in the capital market called the recent Supreme Court ruling that redefined limits to foreign ownership of companies a “game-changer” that will hurt the bull run in the stock market, damage confidence in the economy and risk the country’s chances of snatching the sought after investment grade status. Interaksyon

SEC’S STANCE ON THE 60%-40% FOREIGN OWNERSHIP

With the recent dialogue between SEC and stakeholders, I was about to check the current stance of SEC on the issue. I browsed for articles that will share the position and sentiment of SEC and stakeholders regarding the issue. I found the article below from BusinessMirror and I think it represents the views and opinions of the stakeholders. I am posting it in full because I think it captures major points of what we had to know regarding the 60-40% rule.

Source: Businessmirror

Private-sector stakeholders led by the Philippine Stock Exchange (PSE) that trooped to the Securities and Exchange Commission (SEC) headquarters in an apparent show of force on Friday morning did not come out disappointed.

At the very least, the effort earned them reasonable hopes of a compromise over “game-changing” foreign- ownership restrictions, which would hurt the capital markets and the broader Philippine economy, participants said at the sidelines of a “public dialogue” hosted by the SEC.

The SEC held the rare dialogue at its Mandaluyong City building to open for comment its recently issued draft implementing rules on the 60-40 percent ownership rule in favor of Filipinos covering so-called nationalized and partly nationalized sectors.

Its proposed rules are meant to implement the October 9, 2012, Supreme Court decision, affirming the court’s June 28, 2011 ruling, on the foreign ownership of Philippine Long Distance Telephone Co. (PLDT).

But the SEC also drew criticism for fully adopting in its draft the most contentious portion of the High Court’s decision, which said the calculation for the 60-40 rule should apply to each class of shares instead of just voting shares as indicated in the “dispositive” portion of the June 28 ruling. The draft rules indicated a five-year period for firms to
comply.

Because the tribunal’s interpretation is very different from what the SEC has been following for decades, fund managers expressed worries that this could trigger a wave of foreign selling of   a number of PSE index heavyweights, which will suddenly be in violation of the 60-40 rule.

Concerns were also raised over curtailing of foreign money needed for a wide range of businesses from large-cap firms to smaller companies involved in the capital-intensive public-utility and mining sectors.

SEC open to changing rules

PSE President Hans Sicat, leading industry groups and ranking officials and lawyers from large corporations affected by the rules such as PLDT, Ayala Corp. subsidiaries and the Lopez Group echoed those concerns in the packed multipurpose hall of the SEC on Friday morning.

The exercise started out with dire warnings on effects of the SEC’s draft rules. Sicat said about 13 percent of over 250 listed firms would be affected, while unprecedented economic gains under the current administration could be undone, noted PLDT Regulatory and Policy Affairs head Ray Espinosa.

But the meeting ended in a positive note. “It sounded like they [the SEC] are open to listening,” Sicat said.

BDO Capital and Investment Corp. President Eduardo Francisco, who said strict implementation of the High Court’s 60-40 interpretation could trigger an estimated P200 billion in foreign equity selling while discouraging certain types of investment instruments, was also optimistic.

“It’s good that the SEC is willing to entertain changes. From my understanding, they recognize the fact that their rules [at present] might be a deterrent to capital-market growth,” Francisco added.

Twofold test

SEC Chairman Teresita Herbosa said in a press conference held immediately after the dialogue that the corporate regulator is indeed open to revising its draft rules, namely, the “meat of the matter” or Section 4, which outlines the parameters for computing the 60-40 rule.

One of the suggestions during the dialogue that caught the commission’s attention is a “twofold” approach, which Herbosa said could meet the requirements under the Constitution and the recent ruling by the Supreme Court.

Under this approach, the SEC applies the 60-40 rule both on voting shares, as well as on total outstanding capital.

To recall, the use of the 60-40 test on outstanding capital was the definition that the SEC has been using for decades before the High Tribunal came out with its own definition of capital.

“We heard this morning that a lot of people are quite happy with the existing 60-40 based on outstanding capital. So the twofold suggestion is worth considering,” Herbosa said.

She added that the decision to strictly comply with the Supreme Court’s application of the 60-40 rule per class of share in its draft was a “maximum position” taken by the SEC.

“We have to make sure that whatever rules we are going to come up with are proactive and will not set back our capital markets many years behind,” Herbosa said.

During the dialogue, Espinosa reiterated that that 60-40 rule applying to each class of share, whether common or non-voting preferred, is an “obiter dictum” or a remark said “by the way” and thus, is not legally binding.

The Supreme Court’s ruling on PLDT  stemmed from an earlier case filed by the human-rights lawyer Wilson Gamboa, who sought to annul the sale of the government’s stake in PLDT to Hong Kong-based First Pacific Co. Ltd. Gamboa has since passed away.

Final rules still due next year

Herbosa said the next step is to gather comments that are expected to be submitted in the coming weeks. The SEC is eyeing a November 30 deadline for comments and hopes to release a final set of rules after six months.

The private-sector participants said they will work with the SEC in crafting suggestions and solutions to help promote the Philippines as a viable investment destination while complying with the court’s ruling.

“We will work with the commission in trying to come up with a rule that allows us to deal with the legal realities of Gamboa but, at the same time, promote, as I said, vibrant and robust capital market formation,” Espinosa said.

Ayala Land Chief Finance Officer Jaime Ysmael said the company will collaborate with other private-sector groups in filing its comments even as it moves to appease jittery fund managers.

“We assured them [fund managers] that we will be in dialogue with the government,” he added. Ayala Land and PLDT have announced issuance of voting preferred shares to comply with the 60-40 rule under the June 28 decision.

But with the recent October 9 decision, both companies would be in breach of the foreign-ownership cap, with Ayala Land at 40.5-percent foreign ownership and PLDT at 58.3 percent.

“I don’t know what will happen. Foreigners will probably have to unload some of their [shares]. It will happen as a natural course but hopefully it does not happen at all,” Ysmael said.

Two other Ayala companies are said to be in breach of the 60-40 rule when using the per class of shares interpretation of the Supreme Court. These are Globe Telecom at 65.2 percent and Manila Water Co. Inc. at 53.3 percent.

In a statement last week, Ayala Corp. Corporate Secretary Solomon Hermosura clarified that Manila Water is “not required by law to have 60-percent Filipino ownership. But it is at present, based on ownership of both voting stock and economic interest, compliant with 60-percent Filipino ownership.”

“Our group abides with law, and will always comply with applicable laws and rules. We trust SEC to enforce the laws in the best interest of our country according to its discretion,” Hermosura said.

PLDT and Ayala Land shares have declined 1.13 percent and 2.76 percent, respectively, week-on-week while Globe Telecom is up 0.26 percent. The benchmark PSE index added 0.86 percent during the period.

POSSIBLE OPTIONS TO OVERCOME THE 40% FOREIGN OWNERSHIP

If strict implementation of foreign ownership (re: each class of stock must not be more than 40% foreigners owned), then the companies affected may force the foreign investors to sell their shares to local investors. Doing this option will negatively affect the stock price of the stock. If I am a foreign investor and the regulatory body is asking me to dump my shares because it is now illegal, I will make some tough choices and decisions on my investments in that country. In the first place, when I bought the shares, there is nothing wrong with it and now it is deemed illegal. What other legal impediments that can increase the risk of investing in that country? I believe that forcing foreigners to sell their shares will negatively impact our stock market and economy as well. The optimism generated by the current administration from the foreign investors could be wiped away. Also, foreign investors cannot buy additional shares anymore.

The amount involved if the foreign investors are forced to sell down their shares is a staggering P170B! Since this amount will be absorbed by the locals, the liquidity in the current market will be affected. I included PIP and SEVN because they are actively traded as well and the amount involved is material.

As per Sep 30 Report				If Strict 40% Ownership		Shares and Amount To Sell
NAME	SYMBOL	%		%		Price	# of Shares	TOTAL
INTEGRATED MICRO	IMI	39.09		73%		4.16	475,805,743	1,979,351,890
INTL CONTAINER	ICT	32.91		45%		69.60	92,645,657	6,448,137,727
ANCHOR LAND	ALHI	30.15		45%		17.00	36,259,298	616,408,066
GLOBE TELECOM	GLO	29.71		65%		1,128.00	33,467,912	37,751,804,736
PLDT	TEL	24.45		58%		2,502.00	39,750,961	99,456,904,422
AYALA LAND	ALI	23.07		41%		22.35	75,833,366	1,694,875,721
MANILA WATER	MWC	17.78		53%		30.95	268,239,707	8,302,018,925
PEPSI-COLA	PIP	86.26		86%		5.30	1,708,912,245	9,057,234,901
7-11	SEVN	65.00		56%		87.00	64,318,256	5,595,688,237
								170,902,424,626

Forcing foreigners to sell down their shares means each foreign investor will sell a percentage of their shares to the locals.

The second option is to issue additional shares to Filipinos. However doing this will dilute the percentage ownership of the current stockholders. When your ownership percentage decreases, your hold on the earnings also decreases. For example if PLDT declares P10B dividends and you own 5% of the company, you will get P500M. If PLDT issued 99M additional shares, then your ownership percentage will decrease to 1.6%!  At 1.6% ownership, you will only get P160M dividends.

One of the reasons why I bought PLDT is because of its dividends. Surely with the issuance of additional shares it will greatly affect the amount of dividends I will receive from it.

If the companies below will follow the strict 40% ownership and have chosen to issue new shares, the amount involved is a massive P430B! This amount will affect the liquidity of the market.

As per Sep 30 Report				If Strict 40% Ownership		New Shares to Be Issued to Local
NAME	SYMBOL	%		%		Price	# of Shares	TOTAL
INTEGRATED MICRO	IMI	39.09		73%		4.16	1,189,514,357	4,948,379,725
INTL CONTAINER	ICT	32.91		45%		69.60	231,614,143	16,120,344,318
ANCHOR LAND	ALHI	30.15		45%		17.00	90,648,245	1,541,020,165
GLOBE TELECOM	GLO	29.71		65%		1,128.00	83,669,780	94,379,511,840
PLDT	TEL	24.45		58%		2,502.00	99,377,403	248,642,261,055
AYALA LAND	ALI	23.07		41%		22.35	189,583,414	4,237,189,303
MANILA WATER	MWC	17.78		53%		30.95	670,599,267	20,755,047,314
PEPSI-COLA	PIP	86.26		86%		5.30	4,272,280,614	22,643,087,252
7-11	SEVN	65.00		56%		87.00	160,795,639	13,989,220,593
								427,256,061,564

LASTLY

The 60-40% foreign ownership is creating fears and jitters among the investors. Who wouldn’t be? The reforms being made by the current administration could be undone by the strict implementation of the 60-40% foreign owenrship rule. It will cripple the capital formation of the companies looking for resources outside of Manila.

Theoretically, a stock owned by the foreigners near the 40% llimit doesn’t have that much room for foreign buyers to enter the stock. It does have the probability of going down if the foreign investors exit the stock. It will be the locals then who will push the price upwards unless additional common shares are issued by the company for which foreign investors can subscribed again.Stocks that have near zero percent of foreign investors means that the stock still has room for foreign buyers. That is if the foreigners are interested in the stock. The mere fact that the stock doesn’t have that much foreign investors at his portfolio means that foreigners are not interested in this stock.

The strict implementation of the rule may forced foreign investors  to look upon other stocks who still have space within the 40% limit (maybe). Investors will buy stocks they deemed is worth their money. If Ayala Land is a favorite among foreign investors, then so be it. You should not force them to sell their holdings or restrict them to stop buying because of their penchant to Ayala Land. This does not remove the fact that  the beneficial owner of the company must still be a Filipino. It should be and will always be. It is now the responsibility of SEC to make sure that the capital inflows stay intact and at the same time the benefical owner is a Filipino.

By the way, foreign investors keen on investing in Philippines who doesn’t want to engage in this foreign ownership can establish their own companies at PEZA locations. PEZAs are scattered all over the country from which there is no foreign ownership restriction.