SEC-OGC Opinion 21-08: Appointment of a Foreign Director in a Corporation Engaged in a Partly Nationalized Activity

In SEC-OGC Opinion No. 21-08, the Securities and Exchange Commission (the “Commission”) explained whether a foreigner can be elected as a director in a corporation engaged in a partly nationalized activity. 

The opinion was issued in response to a query from a corporation which has acquired 51% voting shares of a company engaged in the business of operating a public utility. The said corporation intends to nominate an American national as a member of the Board of Directors of the acquired company. 

The Commission opined that while the Revised Corporation Code (“RCC”) does not impose a restriction on the nationality of the members of the board of directors, the same shall be subject to the following:

1. Additional qualifications of a director according to the corporation’s by-laws; and
2. Requirements under the 1987 Constitution, special laws (e.g. Anti-Dummy Law), and/or special rules implemented by the regulatory authority of the industry (i.e. Department of Energy and Natural Resources and/or National Water Resources Board).

Section 11, Article XII of the 1987 Constitution provides for the nationality requirements for corporations engaged in the operation of a public utility, to wit:

“SECTION 11. No franchise, certificate, or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens, nor shall such franchise, certificate, or authorization be exclusive in character or for a longer period than fifty years. Neither shall any such franchise or right be granted except under the condition that it shall be subject to amendment, alteration, or repeal by the Congress when the common good so requires. The State shall encourage equity participation in public utilities by the general public. The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines.”

Meanwhile, Section 2-A of the Anti-Dummy Law, as amended, states: 

“SEC. 2-A. xxx xxx xxx Provided, finally, That the election of aliens as members of the board of directors or governing body of corporations or associations engaging in partially nationalized activities shall be allowed in proportion to their allowable participation or share in the capital of such entities.

In this regard, the Commission has held in its previous opinions that foreigners can be elected as directors in proportion to their allowable participation or share in the capital of corporations engaged in activities that are reserved to Filipinos but are prohibited from being elected as officers of a corporation, such as the President, Vice President, Treasurer and Secretary. However, in determining the representation of alien stockholders in the board of directors of corporations engaged in partially nationalized activities, the basis should be the actual share of the alien stockholders in the capital of the corporation which share should not exceed the foreign equity ceiling prescribed by law for a particular corporation or association.