i. Control Test

Control Test

In cases involving properties, business or industries reserved for Filipinos, in addition to the place of incorporation test, the nationality of a corporation is determined by the nationality of the “controlling stockholders”.

[T]here are two cases in determining the nationality of the Investee Corporation. The first case is the ‘liberal rule’, later coined by the SEC as the Control Test in its 30 May 1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules¹ which states, ‘(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality.’ Under the liberal Control Test, there is no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino. (Narra Nickel Mining and Development Corp v. Redmont Consolidated Mines Corp, G.R. No. 195580, 28 January 2015)².

The required percentage of Filipino ownership shall be applied to both:

• The total number of outstanding shares of stock entitled to vote in the election of directors, and
• The total number of outstanding shares of stock, whether or not entitled to vote in the election of directors. (SEC Memorandum Circular No. 8, s. 2013, Sec. 2)³

Mere legal title is not enough. Full beneficial ownership of 60 percent of the outstanding capital stocks, coupled with 60 percent of the voting rights, is constitutionally required for the State's grant of authority to operate a public utility. Thus, voting rights of stocks which have been assigned or transferred to aliens cannot be considered held by Philippine citizens or nationals (cannot give proxies to vote). (Roy III v. Herbosa, et al., G.R. No. 207246, 2016)

The definition of “beneficial owner or beneficial ownership in the SRC-IRR⁴, which is in consonance with the concept of “full beneficial ownership” in the FIA-IRR⁵, is relevant in resolving only the question of who is the beneficial owner or has beneficial ownership of each “specific stock” of the public utility whose stocks are under review. If the Filipino has the voting power of the “specific stock”, i.e., he can vote the stock or direct another to vote for him, or the Filipino has the investment power over the “specific stock”, i.e., he can dispose of that “specific stock” or direct another to vote or dispose it for him, then such Filipino is the “beneficial owner” of that “specific stock.” Being considered Filipino, that “specific stock” is then to be counted as part of the 60% Filipino ownership requirement under the Constitution. The right to the dividends, jus fruendi—a right emanating from ownership of that “specific stock” necessarily accrues to its Filipino “beneficial owner.” (Roy v. Herbosa, G.R. No. 207246, 18 April 2017)⁶

General rule: The Control Test cannot overcome the Place of Incorporation Test.

Exception: A corporation organized abroad and registered as doing business in the Philippines under the Corporation Code⁷, whose capital outstanding stock and entitled to vote is wholly owned by Filipinos is a Philippine National. (SEC Opinion No. 04-14 in reference to the Foreign Investments Act⁸)

Some instances wherein the control test applies:

• Exploration, development, and utilization of natural resources (at least 60% Filipino ownership for participating corporations or associations)
• Sec 2, Art XII, 1987 Constitution⁹ – policy of the State is to ensure that the exploitation of natural resources or the pursuit of the activities deemed to be of public or national interest are in the control of the Filipinos
• The State may directly undertake such activities, or it may enter into coproduction, joint venture, or production sharing agreements with:
• Filipino citizens; or
• Corporations or associations, at least 60% owned by such citizens
• Public utilities (at least 60% Filipino ownership)
• Sec 11, Art XII, 1987 Constitution¹⁰ – A franchise, certificate, or other authorization to operate a public utility may be granted only to Filipino citizens or to corporations or associations organized under Philippine law with at least 60% Filipino-owned capital
• The nationality test for public utilities applies not at the time of the grant of the primary franchise that makes a corporation a juridical person, but at the grant of the secondary franchise that authorizes the corporation to engage in a nationalized industry. (People v. Quasha, G.R. No. L-6055)¹¹
• The Constitution requires a franchise for operating a public utility; however, it does not require a franchise before one can own the facilities needed to operate a public utility so long as it does not operate them to serve the public.(Tatad v. Garcia, G.R. No. 114222, 6 April 1995)¹².
• Mass Media (100%)
• Sec 11, Art XVI, 1987 Constitution¹³ – ownership of mass media shall be limited to the citizens of the Philippines, or to corporations, cooperatives or associations, wholly-owned and managed by such citizens (100% Filipino management of the entity)
• Cable Industry - CATV as “a form of mass media which must, therefore, be owned and managed by Filipino citizens, or corporations, cooperatives or associations, wholly-owned and managed by Filipino citizens pursuant to the mandate of the Constitution.” (DOJ Opinion No. 95, series of 1999)¹⁴.
• Advertising industry (at least 70% Filipino ownership for corporations or associations)
• Sec 11, Art XVI, 1987 Constitution¹⁵ – only Filipino citizens or corporations or associations at least 70% of the capital of which is owned by such citizens shall be allowed to engage in the advertising agency
• NEDA could advise Congress to set limitations of stock ownership in Corporations vested with Public Interests (Sec. 176)¹⁶