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Understanding the Anti-Dummy

Law
By Lala Rimando, abs-cbnNEWS.com/Newsbreak

Posted at Jul 09 2009 05038 PM | Updated as of Jul 10 2009 01042


AM

MANILA - Since our Constitution limits public utilities, the exploitation


of natural resources, and the practice of some professions to Filipinos
or Filipino-owned corporations, the classification of a company
engaged in the these businesses is significant.

Thus, the Anti-Dummy Law (or Commonwealth Act No. 108, as


amended) was born to spell out how Filipinos are punished when they
participate in evading the nationalization laws. The Anti-Dummy Las
also prohibits foreigners from intervening in the management,
operation, administration, or control of any nationalized activity.

Filipinos who violate this law commits a criminal act punishable with 5-
to 15-year imprisonment.

The Anti-Dummy Law has been cited in the cases of Piatco-Fraport


partnership (they won the bid to construct and operate Terminal 3 in
Manila airport) and the total ownership of Hong Kong-based First
Pacific Holdings and Japanese firm NTT Docomo in local phone giant
Philippine Long Distance Telephone Co., (PLDT).

Recently, the Anti-Dummy Law was cited as the law violated by the
consortium of 2010 poll automation project winners Total Information

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Management(TIM) and Barbados-based Smartmatic.

Badges of “dummy status”

The Department of Justice Opinion No. 165, Series of 1984, laid down
the following “significant indicators” or badges of “dummy status”

That the foreign investor provides practically all the funds for the
joint investment undertaken by Filipino businessmen and their
foreign partner.
That the foreign investors undertake to provide practically all the
technological support for the joint venture.
That the foreign investors, while being minority stockholders,
manage the company and prepare all economic viability studies.

Control Test vs. Grandfather Rule

Control Test was based on a 1989 opinion of the justice department in


establishing the nationality of corporate stockholders.

It means that if Filipino citizens own at least 60% of the corporationʼs


capital, all the shares of the corporation, including those owned by
foreigners, shall be considered of Philippine nationality.

If the Filipinosʼ stake drops below 60%—say 59%—only the number of


shares that corresponds to that percentage (in the example, 59%) will
be considered of Filipino nationality.

But as long as Filipinos—in their personal capacity or through a


Filipino-owned or -controlled corporation—can prove that they own at
least 60% of the corporationʼs capital stock, no further inquiries shall

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be made on the nationality of the owners of the remaining 40%.

Whenever that company owned at least 60% by a Filipino invests in


another company, say another company covered by the 60-40
ownership rule, its investment shall be treated as one made by a
Filipino company. The foreign-owned portion in the investing
corporation is disregarded.

On the other hand, Grandfather Rule is vastly different from the


Control Test.

Under this rule, if Filipino citizens own 60% of the corporationʼs capital
and foreigners own the remaining 40%, then itʼs a straightforward 60-
40 venture.

Thus, whenever the 60-40 corporation invests in another company


that is also covered by the 60-40 ownership rule, the foreign
component in the cascade company is aggregated.

Simply put, the foreignerʼs 40% in the cascade company is actually


56%.

Once foreignersʼ ownership—either in their personal capacity or as a


proportion of their ownership in a stockholder-corporation—exceeds
40%, then a corporation covered by the 60-40 ownership rule is
considered to have breached the nationality test.

The grandfather rule is stricter in allowing foreign companies to


organize an ownership structure that could mask their effective stake.

Foreign Investment Act

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The Securities and Exchange Commission had stated that the Control
Test rules.

SEC had said that the DoJʼs 1989 opinion has gained legislative
acceptance through the Foreign Investment Act (or Republic Act No.
7042).

The implementing rules of the Foreign Investment Act categorically


said, “the control test shall be applied” when determining certain
financial privileges for the Philippine National.

The SEC explained that, based on the control test, further inquiry on
the ownership of shareholders in “investing and investee corporations
shall be dispensed with once it is clearly established that the
participating corporations are 60% owned by Filipino citizens.”

Goodbye, Grandfather Rule?

The SEC has also pointed out that the “grandfather rule will not apply
in cases where the 60-40 Filipino equity ownership ... is not in doubt.”

Based on the above, the following, thus, applies:

• Control Test is the standard for determining the nationality of


corporations;
• Grandfather Rule applies when there are issues about conforming
with the 60-40 requirement.

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