The irony of corporate ownership

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Emeterio Sd. Perez

Emeterio Sd. Perez

If Z, a stock corporation, has two stockholders, such as X with 60 percent and Y with 40 percent, what is its nationality?

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The answer depends on the ownership of the two stockholders. If X is 60-percent Filipino and 40 percent foreign, and Y is 100 percent foreign, then Z is a Filipino company.

The big puzzle is on the issue of control. Filipinos may control the numbers but foreigners, who may own fewer shares in a company engaged in a partially nationalized activity, may be getting more in “economic benefits.”

This has happened, and continues to happen, unless the 60-40 ownership ratio in favor of Filipinos is redefined and the layers and layers of ownerships to circumvent the law are reviewed to protect Filipinos’ stake in various businesses.

Let’s look again at the ownership composition of Z. Although X is 60-percent Filipino, making Z’s nationality Filipino, the 40-percent foreign ownership in it puts foreigners in control of the economic benefits.

To illustrate by computation: Y, which is 100 percent foreign, owns 40 percent of Z, making it a minority stockholder. But X also has 40 percent foreign ownership. While the ownership ratio in Z remains 60-40 in favor of Filipinos, the example shows that 40 percent of X is foreigner-owned.

While in compliance with the 60-40 ownership requirement, it is easy to deduce from this equity profile that foreigners, in fact, are the controlling stockholders of Z. Thus, if Z has 1 million outstanding shares, X would control 600,000 shares, or 60 percent, and Y would control 400,000 shares, or 40 percent.

The computations get more complicated if you “divide” X’s 60-percent ownership in Z between Filipinos and foreigners: 60 percent of 600,000 Z shares equals 360,000 shares, while 40 percent equals 240,000. Since foreigners own 40 percent in Z, then they directly own 400,000 shares.

Thus, by adding 240,000 Z shares, the equivalent in shares of a 40-percent foreign ownership in X, and 400,000 Z shares which Y, the foreign company, directly owns, you get 640,000 shares.

In short, by a series of computations, one finds that foreigners end up controlling 640,000 Z shares, or 64 percent, of a supposedly Filipino-owned company. Filipinos’ original control of 60 percent is reduced to a minority stake of 360,000 shares, or 36 percent, because they lose 24 percent to foreigners.

Due Diligencer is presenting these computations so that our policy makers can make some adjustments to the rules. Reviewing the rules will not be enough to prevent corporate lawyers from taking advantage of the loopholes in the law to favor their foreign clients. It is, of course, not their fault but that of the system.

Imagine defining a 60-40 company as 100-percent Filipino when it is a stockholder in a stock corporation engaged in, say, the exploration of natural resources in partnership with an entity wholly owned by foreigners. The result of the computations shows how easy it is for Filipinos to lose control of the companies they are invested in.

Is there a solution to the discrepancy in ownership in companies engaged in ventures that should be controlled by Filipinos?

Only the Securities and Exchange Commission can provide the answer. Yet, it may not be able to do anything about the corporate ownership system that proves to be more advantageous to foreigners. The best that the five-man SEC body could do is to review the rules on the allowable ratio of equity profile of stock corporations. They cannot overhaul these rules by themselves because in going over the laws that govern business, they have to be guided by the decisions of the Supreme Court in a number of cases, the latest of which was the issue of foreign ownership in Philippine Long Distance Telephone Co.

Yes, the issuance by PLDT of voting preferred shares may have corrected the ownership issue of the telecommunications conglomerate. But this is a correction that is only a temporary because, come to think of it, preferred shares, whether they be voting or not, are, strictly speaking, liabilities that to call the interest earnings due them as “dividend” is a misnomer.

Who knows? The public investors, who trade in shares listed on the Philippine Stock Exchange, may realize that the retained earnings are declarable as dividend only for holders of common shares. Preferred shareholders should not partake in a company’s surplus because interest paid on preferred shares should be redefined by auditors as interest expense.

esdperez@gmail.com

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