CONTROL TEST VS GRANDFATHER RULE TEST (CommL law )

Last week, the Supreme Court issued an entry of judgment on its ruling in June 2011
on the issue of foreign ownership in PLDT where it held that the 60-40 (percent)
nationality requirement in public utility corporations, in favor of Filipinos, refers to
common shares entitled to vote in the election of directors, not to the totality of the
companys capital stock.
With the denial of the motions for reconsideration, that decision, per the entry of
judgment, became final and executory as of Oct. 18, 2012.
Unlike previous entries of judgment (which simply state the case number and
names of the parties), the instant entry bore the note that the 40 percent foreign
ownership cap relates only to common shares and not to total outstanding capital
stock (common and non-voting preferred shares).
The special mention, in effect, sets aside the tribunals statement in its denial of the
motions for reconsideration that the 60-40 ownership requirement in favor of
Filipinos must apply separately to each class of shares, whether common, preferred
non-voting, preferred voting or any other class of shares.
This statement drew strong reaction from the business community. It said the
inclusion of stocks, other than common, in determining compliance with the
ownership rule would discourage foreign investments.
The clarification in the entry of judgment was a welcome relief to the business
community.
Application
With this development, the SEC has gained more flexibility in crafting the rules and
regulations that will govern the ownership of corporations engaged in nationalized
businesses.
In this effort, it has to find a middle ground between complying with the tribunals
instructions on the enforcement of the nationality rules and the need to make the
countrys investment climate more attractive to foreign investors.
For one, the SEC has to take a close look at its approach in determining the
nationality of corporations for purposes of verifying compliance with the ownership
benchmark.
At present, it uses two methods in addressing this issue: the control test and
grandfather rule.
Under the control test, if, on the basis of the documents submitted, it can be seen
that at least 60 percent of a corporations capital is owned by Filipinos, the
corporation will be considered of Philippine nationality.

Once the 60 percent Filipino ownership is established, no further inquiries will be

made on the citizenship of the rest of the stockholders.
The grandfather rule, on the other hand, provides that the nationality of the
stockholders is material or critical in determining the nationality of a corporation or
its compliance with our laws on permissible foreign investments.
Criteria
Under this rule, the stocks owned by or registered in the name of foreigners are
sorted out and added to determine if they meet the allowable maximum percentage
of foreign ownership in nationalized businesses, e.g., 30 percent for advertising
companies, 25 percent for recruitment agencies and 60 percent for financing
companies.
The past rulings of the SEC show that it applies the control test in determining a
corporations nationality, unless there are questions about the true character of
such ownership.
If there are, the corporation is grandfathered, meaning, the nationality of the
owners of the stocks under question is examined to determine if it meets the
nationality requirements.
With the PLDT ruling already in force, the SEC may have to set aside the control test
and apply the grandfather rule to corporations engaged in nationalized businesses.
For this purpose, it can require the key officials of the affected companies to submit
sworn statements of their compliance with the minimum requirement on ownership
of common shares by Filipino citizens.
But the problem is it is difficult to take affidavits at their face value. It is common
knowledge that most Filipinos have little regard for written statements even if made
under oath and notary publics will notarize any document for the right price.
Examination
If caught lying in a sworn statement (which is a big if), the person concerned can
raise any of the following defenses: lack of knowledge of the significance of his
statement, that he signed upon a lawyers advice, and that he acted in good faith in
claiming compliance with the law.
The more worrisome part of the problem is, the record of conviction in our country
for perjury or false affirmation in sworn statements is dismal. Hardly anybody goes
to prison for that crime.
Unless the SEC wants to take a chance on the credibility of sworn statements, it has
no recourse but apply the grandfather rule to all covered corporations.

Its tough, but it has no choice. Otherwise, it runs the risk of being dressed down by
the tribunal for not performing its duty to monitor compliance by corporations with
the nationality rules.
If the examination involves only natural persons, the task is easy. The birth
certificates or passports of the people will be the best proof of their nationality.
Unfortunately, its not going to be a walk in the park for corporations that are
stockholders of corporations covered by the nationality rules.
When the corporations under review consist of two or more corporations with
different areas of registration which, in turn, consist of corporations as stockholders,
will the examination be limited to the first layer of stockholder-corporations or would
also cover the second or third layer, if any?
Layering of corporations (or using corporations as stockholders of other
corporations in different stages of organization) is a common practice in the
business community. Unless used for unlawful purposes, its perfectly legal.
The SEC has to make sure that, in applying the grandfather rule in its monitoring
activities, the business of business is not unduly hampered.

Read more: http://business.inquirer.net/103175/control-test-vs-grandfatherrule#ixzz3OCu1z66w

Follow us: @inquirerdotnet on Twitter | inquirerdotnet on Facebook