According to the World Bank, the Philippines, anchored on more robust domestic activities, is poised to grow 5.6 percent on average in 2023 – 2024 amidst intensifying global uncertainties. Just recently, “The World Bank’s Board of Executive Directors approved financing to support the Philippine government’s efforts to boost the resiliency and sustainability of its financial sector and strengthen economic recovery from the COVID-19 pandemic.” Accordingly, “The US$600-million Philippines Second Financial Sector Reform Development Policy Financing provides continuing support to three policy reform areas including strengthening financial sector stability, integrity, and resilience; expanding financial inclusion for individuals and firms, especially micro, small, and medium enterprises (MSMEs); [x x x].” (The World Bank, World Bank Approves Funding to Support Financial Sector Resiliency and Strengthen Recovery in the Philippines, 31 January 2023)
Certainly, the government’s actions toward strengthening the country’s economic recovery could pave the way for more foreign investments here in the Philippines. On the other hand, foreign investors would want several options when it comes to choosing what investment opportunities to venture into. Investments in the Philippine’s Financial Institutions Strategic Transfer Corporations (FISTCs) could be one of the many options available.
To be discussed herewith are the relevant features of FISTCs, and how a foreign investor/corporation can invest therein.
Background
In January 2003, Rep. Act No. 9182, also known as the Special Purpose Vehicle (SPV) Law was signed into law primarily to address the non-performing asset (NPA) problems of the financial sector, by encouraging the private sectors—through the provision of tax exemptions and fee privileges—to invest in these NPAs. Note that the law applies to assets that have become non-performing as of June 30, 2002. Accordingly, the end goal is to help improve the liquidity of the financial institutions and “restore their capability to perform their role as mobilizers of savings and investments for the country's growth and development.” (SPV Explanatory Note, Senate Bill No. 1830)
With this in mind, the government set up a separate and distinct entity called an SPV—a stock corporation organized under the Corporation Code of the Philippines—which is specially given the power to invest in, or acquire NPAs of financial institutions (FIs). Furthermore, an SPV may likewise engage third parties to manage, operate, collect and dispose of NPAs acquired from an FI.
Effects of the Repeal of the Special Purpose Vehicle Law Brought About by the Enactment of R.A. No. 11523 (FIST Law)
Stock corporations, formerly known as SPVs, are now called Financial Institutions Strategic Transfer Corporations (FISTCs) under the FIST Law, which took effect on 18 February 2021. A FISTC is a stock corporation organized in accordance with the Revised Corporation Code (RCC) of the Philippines, but with a limitation that it cannot be organized as a One Person Corporation. Also, if a FISTC wants to acquire land here in the Philippines, the law requires that at least sixty percent (60%) of its outstanding capital must be owned by Philippine nationals, as defined under the Foreign Investments Act, as amended.
It is worthy to note that the 12th Foreign Investment Negative List—which covers investment areas or activities that are open to foreign investors and/or reserved to Filipino nationals—likewise applies to a FISTC.
For instance, under List A, which limits foreign ownership by the mandate of the Constitution and specific laws, a FISTC must be wholly-owned by Filipino citizens if it undertakes activities involving mass media, except recording and internet business, or practice of a profession, except in cases specifically allowed by law, or retail trade enterprises with paid-up capital of less than PHP 25 million, among others. Meanwhile, up to 25% foreign equity is allowed in case a FISTC engages in private recruitment or enters into contracts for the construction of defense-related structures, whereas, up to 30% foreign equity is allowed in case a FISTC undertakes an advertising business. Lastly, up to 40% foreign equity is allowed in case a FISTC acquires private lands, or condominium units, or operates public utilities, or educational institutions other than those established by religious groups and mission boards, or private radio communications networks, among others.
The Permitted Investors
The FIST law, same with the SPV law, provides for those who are qualified to invest in FISTCs. Unlike in other private corporations, not everyone can invest in FISTCs—only those who are permitted under the law, otherwise known as the “permitted investors,” thus:
Any qualified buyer, as defined in Section 10.1(l) of Republic Act No. 8799, otherwise known as "The Securities Regulation Code", may acquire or hold [Investment Unit Instruments] IUIs in a FISTC in the minimum amount of Ten million pesos (P10,000,000.00): Provided, That a FISTC shall not be authorized to acquire the IUIs of another FISTC: Provided further, That the parent, subsidiaries, affiliates or stockholders, directors, officers or any related interest of the selling FI or the parent's subsidiaries, affiliates or stockholders, directors, officers or any related interest shall not acquire or hold, directly or indirectly, the IUIs of the FISTC that acquired the NPAs of the FI.
Section 10.1 of Rep. Act No. 8799 provides:
The requirement of registration under Subsection 8.1 shall not apply to the sale of any security in any of the following transactions:
[x x x]
(l) The sale of securities to any number of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of the Philippines or any political subdivision thereof or manage by a bank or other persons authorized by the Bangko Sentral to engage in trust functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine as qualified buyers, on the basis of such factors as financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of assets under management.
An IUI refers to a participation certificate, debt instrument, or similar instrument issued by the FISTC and subscribed by Permitted Investors as provided in Section 11 of the Act, pursuant to an Approved Plan: Provided, That these shall not include the instruments to be issued by the FISTC to the selling FIs as full or partial settlement of the NPAs transferred to the said FISTC: Provided, further, That such issuances of the FISTC shall not be considered as deposit substitutes: Provided, finally, That these shall not form part of the capital stock of the FISTC. In this regard, loans, advances, or other credit accommodations obtained by the FISTC from any FI (other than the selling FI), or from its shareholders, shall not be considered an IUI under the FIST Act Implementing Rules.
As a prerequisite to the issuance of an IUI, a FISTC Plan must first be submitted to the Securities and Exchange Commission (SEC) for its approval. Once approved, the SEC will then issue a Certificate of Permit to Sell or Offer Sale Securities in favor of the FISTC, thereby authorizing the sale and distribution of IUIs pursuant to the provisions of the Act.
Investments in FISTCs
To reiterate, a FISTC is a stock corporation organized under the RCC. Thus, for an investor wanting to invest in a FISTC, the purchase of FISTC shares is usually one way to do it.
Filipino corporations are primarily governed by the Revised Corporation Code (RCC) of the Philippines. Thus, a corporation’s shares of stocks may not be issued for a consideration less than the par or issued price thereof. This is commonly known as the issuance of watered stocks, which is prohibited in order to prevent fraud on creditors.
Aside from cash, the RCC further enumerates those non-cash considerations which may be received by a corporation in exchange for the issuance of its shares, such as tangible or intangible properties, and previously incurred debts of the corporation, among others. The SEC requires evidence to support the payment of shares of stock and the accreditation of appraisal companies which are required to attest to the value of non-cash considerations. Furthermore, no shares of stocks may be issued in exchange for promissory notes or future service.
Acquisition of Shares
A person may become a stockholder in a corporation by voluntary acquisition, which may either be through the purchase of shares or through a subscription.
An individual and/or entity wanting to acquire unissued shares of a corporation, whether existing or yet to be formed, may enter into a subscription agreement with the corporation, which agreement is embodied in a document called, subscription contract—notwithstanding the fact that the parties refer to it as a purchase or some other contract. The subscription contract contains essentially the description of the subject shares, and the terms and conditions for their payment.
Transfer of Unpaid Shares of Stocks
A subscriber who has not yet fully paid the price of the shares per the subscription contract, generally, may not be able to transfer its shares to a third party. The RCC clearly provides that no shares of stocks against which the corporation holds any unpaid claim shall be transferable in the books of the corporation. Nonetheless, a stockholder may, in a limited capacity, still transfer such shares or the subscription agreement itself, to a third party. Such a transfer may be binding between them, but not with respect to the corporation. Thus, notwithstanding said transfer, it is still the original stockholder who may exercise the rights and privileges vested in it by the RCC and other pertinent laws, rules, and regulations (such as the right to inspect corporate books and to receive dividends) and not the third-party transferee.
Since the transfer of subscription agreement in such case is not recognized by the corporation, the parties (stockholder and third party) must come up with an internal agreement establishing the terms and conditions surrounding said transfer. For instance, a share sale agreement or document of assignment of shares, may be executed by the parties.
In some cases, an unpaid stockholder may likewise transfer its shares to the corporation itself. Whether to transfer the shares to a third-party or to the corporation itself, it is imperative that such a transfer should not breach constitutional or other legal requirements.
In exceptional circumstances, assignment of the subscribed shares which are not yet fully paid may still bind the corporation when the latter, through its board consents. There is novation in this case. Specifically, there is a change of debtor (subscriber) needing the consent of the creditor (corporation).
Issuance of Certificate of Stocks and Its Subsequent Transfers
A certificate of stock, which is a tangible representation of ownership of company shares, may only be issued until the stockholder has fully paid its subscription and other necessary fees, as may be required under the law, this is otherwise known as the principle of indivisibility of subscription.
Upon full payment of the subscription contract and other pertinent fees in accordance with law, the stockholder has a legal right to compel the corporation to issue in its (stockholder’s) favor a certificate of stock. A certificate of stock is considered a property right of the stockholder which the latter may transfer as it deems fit.
In Teng v. Securities and Exchange Commission, G.R. No. 184332 (2016), the Court explained that for there to be a valid transfer of certificate of shares, the following requisites must concur:
- There must be delivery of the certificate (to the third-party transferee);
- The share certificate must be indorsed by the owner or his agent; and
- To be valid vis-a-vis the corporation and third parties, the transfer must be recorded in the books of the corporation (also called the Stock and Transfer Book).
Modes of Acquiring Shares of Stocks
To reiterate, a share may be issued in exchange of cash or other non-cash assets, as permitted under the law.
Acquisition of Shares Upon Payment through Cash, Check, or Bank Wire Transfer
Investment in stocks which are listed and traded in stock exchange, in general, requires a broker who will facilitate the purchase of shares. Such an investor must open an account with a broker and fund the same. The fees that may be charged are for securities clearing, and broker’s commission, which are approximately 0.01% and 0.25% of the gross amount, respectively, and a VAT of 12% of the broker’s commission. These fees, however, may not be applicable for the purchase of shares which are not listed or traded in the stock exchange. In this instance, a share sale and purchase agreement, or deed of assignment of shares, may be executed by the parties. Such agreement may contain precise terms and conditions which may include the manner of payment of the purchase of shares, such as through cash, check, or payment through bank wire transfer.
Acquisition of Shares in Exchange of Other Non-cash Assets
As mentioned earlier, the RCC allows non-cash assets as consideration for the issuance of shares of stocks, with the exception of promissory notes and future service. The SEC requires evidence to support payment of shares of stock (SEC Memorandum Circular (M.C.) No. 6-2012 (2012), as amended by SEC M.C. No. 11-2016 (2016)), and the accreditation of appraisal companies which are required to attest to the value of non-cash considerations [SEC M.C. No. 02-2014 (2014)], in order to ensure that no shares of stocks are issued for overvalued properties, i.e., valued in excess of their fair value.
Other Regulatory Requirements for the Transfer of Shares
The documentary stamp tax and the applicable capital gains tax should be paid before the transfer of shares is registered and before the issuance of a new certificate. The corporate secretary must require the submission of the Certificate of Authority to Register issued by the Bureau of Internal Revenue before the transfer in the books of the corporation is made.
For any legal assistance you may need, you may send your inquiries and other legal concerns to info@gqlaw.com.ph.