Recent Developments

In a recent decision, Roy III v. Chairperson Teresita Herbosa, et. al. (Roy Case)[1], the Supreme Court affirmed that the guidelines issued by the Philippine Securities and Exchange Commission (SEC) (SEC Guidelines) on determining compliance with foreign equity restrictions of corporations engaged in nationalized activities are valid. The pronouncements of the Supreme Court in the Roy Case should serve as a definite direction on how affected corporations should structure its equity.

Implications for corporations engaged in activities subject to foreign equity restrictions

The SEC Guidelines[2] require corporations engaged in activities subject to foreign equity restrictions to, at all times, observe the constitutional or statutory ownership requirements. For purposes of determining such compliance, the required percentage of Filipino equity should 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. The Roy Case has affirmed that such method of determining compliance with the required Filipino equity is in accordance with the pronouncements of the Supreme Court in an earlier case which prompted the drafting of the SEC Guidelines.

What the Roy Case says

The SEC Guidelines were issued as a result of the Supreme Court's directive to the SEC to apply the Supreme Court's interpretation of "capital" in the case of Gamboa v. Teves ("Gamboa Case")[3]. In the Gamboa Case, the Supreme Court ruled that "capital," as used in the Constitution imposing a 60% minimum Filipino capital requirement on public utilities, should refer to shares entitled to vote in the election of the directors. In a resolution denying the motions for reconsideration filed in connection with the Gamboa Case ("Resolution")[4], the Supreme Court noted that in addition to applying the required percentage of Filipino ownership on shares entitled to vote in the election of directors, such Filipino ownership requirement must also apply separately to each class of shares in the public utility.

The Roy Case has clarified that the pronouncement of the Supreme Court on requiring the minimum percentage of Filipino ownership to separately apply to each class of shares in the Resolution is a mere obiter dictum, and should not be binding.

Aside from confirming that the SEC Guidelines reflect the proper application of the required Filipino ownership imposed in the Constitution on public utilities, the Roy Case is notable on the following points, in relation to foreign equity restrictions on such operators:

  • It clarified that for shares to be deemed owned and held by Philippine citizens or Philippine nationals, both egal title and beneficial ownership must rest in the hands of Filipinos. "Beneficial ownership"[5] was defined as having the voting power or the investment power (power to dispose of the stock or direct another to dispose the stock), or both, over a 'specific stock'. Based on such definition, the Supreme Court ruled that, "if a 'specific stock' is owned by a Filipino in the books of the corporation, but such stock's voting power or disposing power belongs to a foreigner, then that 'specific stock' will not be deemed as 'beneficially owned' by a Filipino."
  • It explained that "the 'beneficial owner or beneficial ownership' definition, as above, is understood only in determining the respective nationalities of the outstanding capital stock of a public utility corporation in order to determine its compliance with the percentage of Filipino ownership required by the Constitution."
  • It provided an example on how to determine the compliance of the required Filipino equity based on the number of shares of the entity.
  • It recognized the flexibility granted to corporations to create shares of different classes, with varying features to attract and generate capital (funds) from both local and foreign capital markets.

Actions to Consider

The Supreme Court’s ruling in the Roy Case on the validity of the SEC Guidelines and clarifying the requirement to satisfy both the voting test and beneficial ownership test may bring about significant changes to the equity structures of corporations engaged in nationalized activities. To ensure compliance with the Roy Case, the SEC Guidelines, and other applicable jurisprudence, corporations with foreign equity and engaged in nationalized industries may wish to review its equity structures, and take steps to ensure that these structures comply with the foregoing.

Philippine procedural rules allow a party to file a motion for reconsideration of a judgment or final resolution of the Supreme Court within fifteen days from notice thereof. Should such motion relative to the Roy Case be filed before the Supreme Court, affected corporations should also be watchful of any clarifications or pronouncements of the Supreme Court in the potential resolution deciding such motion.


[1] G.R. No. 207246, 22 November 2016.
[2] SEC Memorandum Circular No. 8 series of 2013, entitled, "Guidelines on Compliance with the Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized or Partly Nationalized Activities."
[3] G.R. No. 176579, 28 June 2011.
[4] G.R. No. 176579, 9 October 2012.
[5] The Supreme Court adopted the definition of "beneficial owner" under the 2015 Implementing Rules and Regulations of the Securities Regulation Code.


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