SEC-OGC Opinion No. 24-36, Re: Additional Paid-In Capital; Foreign Equity Ownership Requirement for Corporations engaged in Land or Real Estate Business

On 19 November 2024, the Securities and Exchange Commission-Office of the General Counsel (“SEC-OGC”) issued SEC-OGC Opinion No. 24-36 (“the Opinion”), which clarified that the creation of Additional Paid-In Capital (“APIC”) does not affect a corporation’s nationality.

Seniorproperties Corporation (“SPC”), a real estate development company, intends to raise funds for the acquisition of real property by allowing foreign investors to subscribe to eight (80) preferred shares at a steep premium. SPC sought guidance on whether this would affect its compliance with foreign equity limitations. Specifically, if the premium would be classified as APIC and whether it would be considered equity for determining the corporation’s nationality.

The Opinion explained that share premiums, similar to APIC, represent amounts paid over the par value of shares. Since no law or regulation restricts the premium amount, corporations are generally free to set it at any level. Once paid, the premium becomes part of the corporation’s funds and may be used for business operations, such as acquiring land.

Under the Public Land Act, corporations must be at least sixty percent (60%) Filipino-owned to qualify for acquiring or holding land. This requirement, when aligned with the Supreme Court’s ruling in Gamboa v. Teves and SEC Memorandum Circular No. 8, Series of 2013, require compliance with the Two-Tier Test. The first tier requires that at least sixty percent (60%) of voting shares be Filipino-owned, while the second tier requires at least 60% Filipino ownership of all outstanding capital stock, which includes both voting and non-voting shares.

Since APIC arises from payments exceeding the par value of shares and does not involve the issuance of additional shares, it does not alter the proportion of Filipino-to-foreign ownership. The determination of nationality is based solely on the shares subscribed: voting shares for the first tier and all outstanding capital stock for the second tier.

Assuming SPC has five thousand (5,000) voting common shares all owned by Filipinos and 80 non-voting preferred shares subscribed by a foreign entity, the subscription by the foreign investor does not breach the foreign equity limitation under the Constitution. Applying the Two-Tier Test, one hundred (100%) of the voting shares are Filipino-owned, and ninety-eight and forty-three hundredths percent (98.43%) of the outstanding capital stock is Filipino-owned.