SEC-OGC Opinion No. 22-05: Citizenship of a Trust; Grandfather Rule

The Securities and Exchange Commission (“SEC”) in its SEC-OGC Opinion dated 13 April 2022 addressed the issue of whether the nationality of the trustee will impact the nationality of the Proposed Corporation. 

The proposed incorporators/ stockholders are laid down as follows:

The SEC cited its previous opinion, where it stated that in determining the citizenship of shares being held in trust, both the nationality of the trustee and of the beneficiary should be considered. This is in line with the rules of the Bangko Sentral ng Pilipinas which provides that if the trustee is foreign, the equity investment shall be considered foreign regardless of the citizenship of the beneficiaries. The foregoing is also consistent with the ruling in Gamboa vs. Teves in relation to Roy vs. Herbosa where the Court held that the control should be determined by looking at the stockholder’s ability to vote in the election of directors and other important corporate affairs.

In this case, the SEC discussed that 40% foreign ownership threshold must be complied with since the Proposed Corporation will engage in the acquisition and development of real estate which is a partially nationalized activity. It was also explained that under the proposed structure, 61% will be owned by Filipinos, where 50% of which is owned by a Filipino minor (with a Filipino mother) by virtue of a Deed of Donation. However, the shares of stock of the minor incorporator will be held in trust by her Chinese father, with authority to represent the minor in all stockholders’ meeting of the corporation, while she is still a minor.

Pursuant to the Civil Code and the Family Code, the general rule is that parents exercise parental authority over their children. The father or the mother should, by force of law and without need of judicial appointment, administer the child’s property. However, under the proposed structure, the 50% shareholding of Minor C will be under the control of her Chinese father. Since foreign control over the Proposed Corporation will exceed 40%, it will not comply with the Constitution and nationality laws. 

The SEC also opined that the trustee Chinese father may qualify as a director subject to the allowable portion under the Anti-Dummy Law. The SEC said that for the purpose of stock ownership qualification, the general rule is that beneficial ownership is not necessary. Else stated, it is sufficient that the title to the stock, as it appears on the books of the corporation, is in the director, since the legal title is what counts, and it is the person whose name appears as owner on the books of the company is the stockholder and eligible as director.

Lastly, the SEC opined that the Grandfather Rule does not apply in the case as it can only be applied where there is a doubt on the nationality of an investee corporation. Here, the nationality of the corporate stockholder, Corporation X is not in doubt.