THE FOREIGN investor is concerned not so much about economic protectionism but about government changing the rules mid-stream. This I learned at a forum on Tuesday this week, sponsored by the Action for Economic Reform, a group of economists and lawyers, who sat down with the foreign chambers of commerce to discuss the laws regulating foreign investments in the country.
Investors play the market. Investors know that they have to take risks. Investors also have choices, whether to invest in the Philippines, or Thailand, or increasingly, Indonesia and Vietnam (to mention Southeast Asia alone). What drives them up the wall is our penchant for trifling with investment-backed expectations and treating rules like they were mere short-term, ad hoc arrangements that can casually override agreements sealed in solemn contracts.
The next day, I opened the newspapers to read about a Supreme Court decision that was released, as it were, just when the AER roundtable was being held. In Gamboa v. Finance Secretary, the Court, through the sharp pen of Justice Antonio Carpio, reinterpreted the protectionist rule that certain areas of the economy are reserved solely for Filipino nationals, including “corporations at least 60 percent of whose capital is owned by [Filipino] citizens.” The term “capital” should henceforth mean only “shares of stock that can vote in the election of directors.” Whereas before, all shares of stock constituting the capital of a corporation were counted, under this new ruling, only the voting shares will be counted, and non-voting “preferred” shares will be excluded.
This aims to advance the framer’s original intent, namely, to create “a self-reliant and independent national economy effectively controlled by Filipinos.” Since only the voting shares can exercise control over a corporation, only such shares should count.
I had initially thought that this decision would in fact sit well with foreign investors. After all, reading about it fresh from a forum with these investors, I thought that, although this was yet another of those dreaded surprises, it would in fact open the field to foreign investors for as long as they limited themselves to non-voting stocks.
But apparently its immediate application would actually prejudice foreign players who have already invested in voting stocks on the basis of the old, settled formula. Already the local markets have reacted adversely, and it has begun to show in the numbers coming from the stock exchange. Former Philippine Stock Exchange president Francis Lim yesterday lamented the decision, saying: “The decision does not bode well for our stock market. More than that, it puts another stumbling block to the administration’s program to attract more foreign direct investments and will further push out the Philippines from the radar screen of the foreign investment community.”
Apparently, in the Philippines, non-voting stocks are typically held by Filipinos, while foreign investors prefer voting stocks that enable them to elect seats in the board of directors. Thus the SC decision offers the hypothetical that a corporation with 100 common shares owned by foreigners and 1 million non-voting preferred shares owned by Filipinos will be considered a Filipino corporation, even if only the foreigners have voting rights to elect the directors.
We must look at this recent decision at several levels. At the purely legal level, the text of the Constitution does not make the distinction between voting and non-voting shares but refers merely to “capital.” Assuming that there is room for interpretation here, we then turn to the drafting history of the Constitution. Reading the Carpio majority and the dissenting opinions, there seems to be enough ammunition either way. Indeed the original draft prepared by the UP Law Center actually contained the words “voting stock or controlling interest,” which was eventually rejected in favor of the more neutral term “capital.”
Next, if one were to read the law according to its purpose, the SC majority is correct in saying that the 60-40 rule must be read consistently with the protectionist purposes of the 1987 Constitution. But even that heuristic approach will not result in the SC’s favored interpretation. Just look at the Corporation Code. It grants voting rights even to so-called non-voting shares on what the dissenting opinion of Justice Presbitero Velasco calls “certain key fundamental corporate matters.” If the purpose of the 60-40 rule is to place management and control in the hands of Filipinos, then all those investors entitled to vote in one way or another should be counted.
Finally, in the long-term, the SC’s nationalist ruling opens the door to a rather bizarre possibility. A foreign investor can own as many non-voting shares as possible because the new formula is totally oblivious to the ownership of shares for as long as they have no voice in management, while retaining the option to maximize his 40 percent stake in voting shares to ensure a voice in the governing board. In other words, the foreign investor gets to eat his cake while talking in the board meeting too.
Having risked my neck in street battles against the Metrocom during martial law, I have seen how the term “nationalism” has evolved over the decades. I think it’s time to chuck the old-fashioned notion that Filipino citizenship is the controlling test for love of country. Creating new jobs for the Filipino workingman should be the new nationalism, and whoever will help us do that while respecting our rights and our narrow patch of the earth should be enlisted, whatever flag they carry.