Corporate Restructuring: From 100% Filipino-Owned to 99-1 Foreign-Owned

Below is a comprehensive discussion of the key considerations, legal framework, and procedural steps involved in restructuring a Philippine corporation from being 100% Filipino-owned to 99% foreign-owned. This overview focuses on Philippine law and prevailing regulations, including references to relevant statutes, constitutional provisions, administrative issuances, and practical considerations.

I. Overview of Foreign Ownership in the Philippines

  1. Constitutional Limits
    The 1987 Philippine Constitution imposes strict foreign equity limitations in certain sectors, most notably in:

    • Public utilities (traditionally subject to a 60% Filipino ownership requirement, although recent legislative reforms—particularly amendments to the Public Service Act—have relaxed some of these constraints for certain industries classified as “public services” rather than “public utilities”).
    • Mass media (100% Filipino-owned, subject to very limited exceptions).
    • Land ownership (restricted to Filipino citizens or entities at least 60% Filipino-owned, although foreign entities may hold long-term leases).
    • Educational institutions (at least 60% Filipino-owned).
    • Other areas listed in the Foreign Investment Negative List (FINL), such as small-scale mining, cooperatives, etc.

    If a corporation is engaging in an activity included in these constitutionally or statutorily restricted sectors, it generally cannot move to a 99% foreign-owned structure. Instead, the Filipino equity requirement must remain at levels mandated by the Constitution or other special laws.

  2. Foreign Investment Act and FINL

    • Foreign Investments Act of 1991 (R.A. 7042, as amended): Governs the entry of foreign investments in the Philippines. It provides the legal framework for foreign equity in activities not covered by the Constitution’s stricter limitations.
    • The Foreign Investment Negative List (FINL): Enumerates which areas of investment are either entirely closed or partially restricted to foreign participation.
    • If your corporation’s activity is not in the Negative List (or is partially restricted at below 99%), then moving to 99% foreign ownership may be permissible.

  3. Recent Reforms

    • Revised Corporation Code (R.A. 11232): Modernized corporate governance and introduced the One Person Corporation (OPC) and other flexible corporate forms. While this law does not directly alter foreign ownership limits, it affects the incorporation and structuring process.
    • Retail Trade Liberalization Act amendments: Lowered the minimum paid-up capital requirements for foreign retailers, making it easier for foreign-owned enterprises to do business in retail, subject to certain investment thresholds.
    • Public Service Act amendments: Reclassified which enterprises are “public services” versus “public utilities,” affecting foreign equity caps for certain services such as telecommunications, transport, and others.

II. Determining Whether 99% Foreign Ownership Is Allowed

Before initiating any restructuring, the corporation must ascertain whether its primary business activity is subject to a foreign equity cap. The key steps include:

  1. Review the FINL and Constitutional Restrictions

    • Identify if the business is completely closed to foreign equity, if it allows only up to 40% foreign equity, or if it allows up to 100% foreign equity.
    • If the activity is completely open, a 99% foreign-owned structure is feasible.

  2. Check Specific Sectoral or Agency Rules

    • Some sectors (e.g., banking, insurance, utilities) have separate charters or special rules issued by regulatory agencies like the Bangko Sentral ng Pilipinas (BSP), Insurance Commission, Energy Regulatory Commission (ERC), or the National Telecommunications Commission (NTC).
    • If a corporation falls under any special regulatory regime, compliance with these specialized rules on foreign equity is required.

  3. Confirm Board and Management Composition Requirements

    • Certain industries may require that a majority of the board of directors or certain principal officers be Philippine nationals.
    • The Anti-Dummy Law (Commonwealth Act No. 108, as amended) penalizes circumvention of nationality restrictions. Thus, corporations must ensure that control and management are not merely nominally Filipino if the law requires genuine Filipino control.

III. Methods of Restructuring Ownership

1. Direct Sale or Transfer of Existing Shares

If the corporation already has outstanding shares held by Filipino stockholders, those stockholders may sell some or most of their shares to foreign investors, provided that the total foreign-held shares do not exceed permissible limits. Key considerations:

  1. Share Purchase Agreement (SPA)

    • Outlines the terms of purchase (price, schedule, warranties, conditions precedent, etc.).
    • Should specify that the foreign purchaser’s acquisition is contingent on compliance with legal ownership thresholds and, if applicable, any regulatory approvals.

  2. Board and Shareholders’ Approval

    • Typically, corporations do not need to amend their Articles of Incorporation just to reflect a change in ownership. However, the by-laws or a shareholders’ agreement may require consent if there is a right of first refusal or other restrictions on share transfers.
    • Approval at the corporate level is required if the transfer triggers changes in management, board composition, or major policy decisions.

  3. Tax and Documentary Requirements

    • Capital Gains Tax (for domestic share transactions): Typically 15% on net gains for unlisted shares; or a stock transaction tax if the shares are listed in the Philippine Stock Exchange.
    • Documentary Stamp Tax on share transfers.
    • Submission of Notice of Transfer of Shares to the Bureau of Internal Revenue (BIR) for the issuance of Certificate Authorizing Registration (CAR) or Tax Clearance.

  4. Notification to the SEC

    • Submit required notices or filings reflecting changes in shareholding structure, along with any proof of tax compliance.
    • Update the General Information Sheet (GIS) to reflect the new equity distribution.

2. Issuance of New Shares (Subscription)

A corporation can also alter its ownership structure by issuing new shares to foreign investors, subject to the authorized capital stock limitations:

  1. Increase in Authorized Capital Stock (If Needed)

    • If the current authorized capital is insufficient for new foreign subscriptions, the corporation must amend its Articles of Incorporation to increase the authorized capital stock.
    • This requires a 2/3 vote of outstanding capital stock and approval by the Securities and Exchange Commission (SEC).

  2. Pre-emptive Rights

    • Under the Revised Corporation Code, existing stockholders generally have pre-emptive rights to subscribe to new issuances unless the Articles of Incorporation or a shareholders’ agreement waive such rights.
    • If Filipinos do not exercise their pre-emptive rights, the foreign investor can subscribe to the shares—resulting in a higher foreign equity proportion.

  3. Payment of Subscription

    • The subscription price must typically be at least par value. Additional paid-in capital can be recognized as premium.
    • For foreign investment, ensure compliance with inward remittance rules through the banking system to secure a Bangko Sentral ng Pilipinas (BSP) registration (if desired for future repatriation of capital and dividends).

  4. Filing Requirements

    • SEC approval of the amended Articles of Incorporation (if the authorized capital is increased).
    • Updated GIS reflecting the new shareholding structure.

IV. Corporate Governance and Regulatory Compliance

  1. Board of Directors Composition

    • For wholly or majority foreign-owned corporations not covered by special laws that require Filipino control, there are no general nationality requirements for directors under the Revised Corporation Code.
    • However, certain industries (e.g., insurance, banking) mandate a specific number or percentage of Filipino directors.

  2. Officers and Key Management

    • Generally, there is no explicit nationality requirement for corporate officers (President, Treasurer, Corporate Secretary) in a fully or majority foreign-owned enterprise.
    • Exception: The Corporate Secretary (and in some cases, the Treasurer) must be a resident of the Philippines, and some special laws require such officer to be a Filipino citizen.

  3. Anti-Dummy Law Compliance

    • Even if the corporation is allowed to have up to 99% foreign equity, it must comply with laws designed to prevent circumvention of nationality requirements, especially if the nature of the business touches upon partially restricted sectors.
    • Ensure that Filipinos acting as nominal stockholders or nominal officers do not effectively “dummy” for foreign beneficial owners, which is penalized under the law.

  4. Reporting and Disclosure

    • The SEC requires all corporations to submit an annual General Information Sheet (GIS) disclosing shareholder information.
    • For large enterprises or those subject to special regulations (e.g., listed companies, those under the supervision of other government agencies), additional disclosures and compliance reports may be required.

  5. Tax and Other Regulatory Registrations

    • After restructuring, the corporation must update registrations with the BIR, local government units (LGUs), and other relevant agencies to reflect changes in equity or management structure.
    • Additional registrations or licenses may be required if the corporation plans to expand operations or change its business scope.

V. Practical Considerations

  1. Sector-Specific Requirements

    • Certain licenses (e.g., from the Philippine Economic Zone Authority, Board of Investments, or specialized regulatory agencies) may stipulate additional conditions regarding ownership. These must be reviewed carefully before changing the ownership structure.
    • For example, if the corporation enjoys incentives under a BOI registration, there may be rules about minimum Filipino ownership if it availed of incentives under a pioneer or non-pioneer status.

  2. Land Ownership and Real Property

    • A 99% foreign-owned corporation cannot own land in the Philippines because the Constitution restricts land ownership to Philippine nationals or corporations at least 60% Filipino-owned.
    • If the corporation owns real property, it must restructure these assets (often through a long-term lease or a compliant property-holding company that meets the 60-40 requirement) before allowing foreign ownership to exceed 40%.

  3. Corporate Control and Governance Agreements

    • Where foreign investors hold 99% of the shares, they hold almost all economic rights. However, they must be mindful of any statutory or by-law provisions requiring at least one Filipino director or officer.
    • Shareholders’ agreements, voting trusts, or other governance structures should be put in place to define decision-making processes and protect minority interests (if any).

  4. Exit Strategy and Repatriation of Profits

    • Foreign investors should ensure that their equity investments are registered with the BSP if they plan on repatriating capital or remitting dividends in foreign currency later.
    • Proper documentation of inward remittances is crucial for any future capital repatriation.

  5. Timing and Regulatory Delays

    • SEC approval of amendments to the Articles of Incorporation (if increasing authorized capital stock) can take several weeks to months, depending on the completeness of documents and complexity of the transaction.
    • Be prepared for potential back-and-forth with the SEC if clarifications are requested.

VI. Step-by-Step Summary

  1. Confirm the Business is Not Restricted

    • Check constitutional, statutory, and FINL restrictions.
    • If unrestricted or partially restricted above 40% but up to 100% allowed, 99% foreign ownership is possible.

  2. Decide on the Restructuring Path

    • Sale of existing shares vs. Issuance of new shares (subscription).
    • Determine if an increase in authorized capital is necessary.

  3. Execute the Transaction

    • For share sales, draft and finalize Share Purchase Agreements.
    • For new issuances, comply with pre-emptive rights rules and subscription agreements.

  4. Secure Approvals

    • Board resolution and shareholders’ approval, as required by corporate governance documents.
    • Amend the Articles of Incorporation if increasing authorized capital (2/3 vote + SEC filing).

  5. Comply with Tax Obligations

    • Pay Capital Gains Tax (if applicable), Documentary Stamp Tax, and obtain the BIR Certificate Authorizing Registration.

  6. Update SEC Records

    • File updated GIS reflecting the new ownership structure.
    • Submit supporting documents, including proof of share transfer taxes paid and subscription contracts (if new shares were issued).

  7. Ensure Ongoing Compliance

    • Check any other licenses or approvals needed, especially in regulated industries.
    • Comply with annual reportorial requirements (GIS, Audited Financial Statements, etc.).
    • Adhere to Anti-Dummy Law provisions and avoid nominal arrangements.

  8. Establish New Corporate Governance Framework

    • Reflect changes in directorship, officers, and signatories if needed.
    • Align shareholder agreements and internal policies with the new ownership structure.

VII. Conclusion

Restructuring a Philippine corporation from 100% Filipino-owned to 99% foreign-owned is legally feasible in many sectors not subject to stringent constitutional or statutory foreign equity restrictions. The key lies in conducting thorough due diligence on the applicable regulatory framework (e.g., Constitution, FINL, sector-specific laws), securing the necessary corporate and governmental approvals, and maintaining strict compliance with Philippine rules on share ownership, management composition, and anti-dummy provisions.

By following the correct procedures—whether through direct share transfers or issuance of new shares—foreign investors can validly acquire substantial control of a Philippine corporation, while the enterprise itself maintains good standing and continued regulatory compliance. Proper planning, legal advice, and close coordination with both the SEC and the BIR are essential to ensure a smooth transition from a purely Filipino-owned entity to one with 99% foreign equity.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

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