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Problem IV

Bank S is currently controlled by M, a Filipino group, and N, a Canadian Bank. To remain


competitive, S needs fresh capital infusion. M, however, would rather sell its shares than put
in more money. N is willing and able to put in all the money needed, but there is the problem
of S becoming a foreign-owned bank. N does not want S converted into an off-shore bank.
Prepare a counselors brief on all the acceptable legal options available to N.

Problem areas:
Bank S is controlled by M (a Filipino group) and N (a Canadian bank).
M would rather sell its shares than put in more money.
If N puts in more money:
-
S might become a foreign-owned bank.

-
S might be converted into an off-shore bank.


Issues:
1. Can Bank N acquire up to 100% of the voting stock of Bank S?
2. What are the legal and regulatory limitations regarding the entities and individuals
that may own a controlling interest in a bank?
3. Are there any restrictions on foreign ownership of banks, as N feared Bank S
would become?
4. What are other available remedies and/or strategies available for Bank N?

Applicable Legal Basis:

R.A. No. 8791, General Banking Law
Section 11. Foreign Stockholdings. Foreign individuals and non-bank
corporations may own or control up to forty percent (40%) of the voting stock of a
domestic bank. This rule shall apply to Filipinos and domestic non-bank corporations.
The percentage of foreign-owned voting stocks in a bank shall be determined by the
citizenship of the individual stockholders in that bank. The citizenship of the
corporation which is a stockholder in a bank shall follow the citizenship of the
controlling stockholders of the corporation, irrespective of the place of incorporation.

Section 72. Transacting Business in the Philippines. The entry of foreign
banks in the Philippines through the establishment of branches shall be governed by
the provisions of the Foreign Banks Liberalization Act. The conduct of offshore
banking business in the Philippines shall be governed by the provisions of the
Presidential Decree No. 1034, otherwise known as the "Offshore Banking System
Decree."





R.A. No. 7721, Act Liberalizing the Entry of Foreign Banks
Section 8. Equal Treatment. x x x Any right, privilege or incentive granted to
foreign banks or their subsidiaries or affiliates under this Act, shall be equally enjoyed
by and extended under the same conditions to Philippine banks. Philippine
corporations whose shares of stocks are listed in the Philippine Stock Exchange or are
of long standing for at least ten (10) years shall have the right to acquire, purchase or
own up to sixty percent (60%) of the voting stock of a domestic bank.

P.D. No. 1034, Offshore Banking System Decree


Discussion:

Can Bank N acquire up to 100% of the voting stock of Bank S?

Yes.
According to Bank Sentral ng Pilipinas Circular No. 256, the aggregate foreign-owned
voting stock in a domestic bank must not exceed 40% of the outstanding voting stock of such bank.
In contrast, there is no aggregate ceiling on the equity ownership in a domestic bank of Filipinos
and non-bank corporations controlled by Filipinos. Put somewhat differently, the 40% ceiling of in
Section 11 is an aggregate limit for foreign individuals and non-bank corporations controlled
foreigners. For Filipinos and nonbank corporations controlled by Filipinos, the 40% ceiling is an
individual (not an aggregate) limit. This means, for instance, that two Filipinos can each own 40%
(or total of 80%) of the voting stock in a domestic bank. This "double standard," however does not
appear to comport with the first paragraph of Section 11, which contemplates equal treatment
between foreigners and citizens. This is evident from the declaration there that the rule applicable to
foreign individuals and non-bank corporations controlled by them "shall apply to Filipinos and
domestic non-bank corporations." However, rather than imposing a 40% aggregate limit on
Filipinos and non-bank corporations controlled by them, the Monetary board may simply render
inapplicable the 40% aggregate limit to foreign individuals and non-bank corporations that they
control, and instead consider that limit as an individual ceiling for both Filipinos and foreigners
alike.

If the foreigners involved are individuals and non-bank corporations, then their aggregate
holding of voting stock in a domestic bank must not exceed 40% of the total. However, under
Section 73 of the General Banking Law, a foreign bank could have acquired up to 100% of the
voting stock of only one already existing bank, within 7 years from June 13, 2000.

Thus, it is possible for a domestic bank to be owned 100% by foreigners, considering that
BSP Circular No. 256 further clarifies that Section 11 of the General Banking Law does not alter


entitlement of a Philippine corporation listed on the Philippine Stock Exchange or in existence for
at least 10 years, under Section 8 of Republic Act No. 7721. Thus Section 4 of that circular
provides:
Section 4. The right of Philippine corporations, however, under Section 8 of Republic Act
7721(Act Liberalizing the Entry of Foreign Banks), to wit:
"x x x Any right, privilege or incentive granted to foreign banks or their
subsidiaries or affiliates under this Act, shall be equally enjoyed by and extended
under the same conditions to Philippine banks. Philippine corporations whose
shares of stocks are listed in the Philippine Stock Exchange or are of long standing
for at least ten (10) years shall have the right to acquire, purchase or own up to
sixty percent (60%) of the voting stock of a domestic bank."
shall continue to be in force and effect.

In this respect, since there is no prohibition against the said "at least ten-year old" Philippine
corporation being owned 100% by foreigners, it is possible for a domestic bank to be wholly owned
by foreigners. Here, 40% of the outstanding capital stock of such domestic bank may be owned say
by foreign individuals, pursuant to Section 11 of the General Banking Law as implemented by BSP
Circular No. 256. The remaining 60% can be owned by an "at least ten-year old" Philippine
corporation wholly owned by foreigners, pursuant to Section 8 of the Act Liberalizing the Entry of
Foreign Banks.

However, the BSP General Counsel is of the view that the ten-year old corporation under
Section 8 of the Act Liberalizing the Entry of Foreign Banks "must be of Philippine nationality
since the thrust of Sec. 8, RA No. 7221 is to give equal treatment to both foreign banks and
Philippine corporations, under the same conditions, upon the former's entry into the Philippine
banking industry".

Be that as it may, N can acquire up to 100% of the voting stock of Bank S. It can then
virtually gain total control of Bank S. As an example, the most significant is the acquisition of
HSBC Bank of a savings bank network, allowing it to leapfrog the tedious process of acquiring a
savings bank license. HSBC is a foreign bank allowed to have a Philippine branch with full banking
authority.


What are the legal and regulatory limitations regarding the entities and individuals
that may own a controlling interest in a bank?

Control is defined as ownership of more than 50% of the voting stock of a bank.
Foreign individuals and non-bank corporations controlled by foreign nationals can
collectively own up to 40% of the voting stock of a universal or commercial bank. However,
Philippine citizens and non-bank corporations controlled by Philippine citizens can
collectively own up to 100% of the voting stock of such bank. However, foreign banks may be


allowed by the Monetary Board to own 100% of the voting stock of a universal or commercial
bank. Up to 60% of the voting stock of a thrift bank may be foreign-owned, but the capital
stock of a rural bank is required to be wholly-owned by Philippine nationals.


Are there any restrictions on foreign ownership of banks, as N feared Bank S would
become?

Foreign banks are not subject to the 40% limitation prescribed under Section 11 of the
General Banking Law. The law prescribes 60% as the maximum foreign bank equity (R.A.
No. 7721). However, Section 73 of the GBL allows the acquisition beyond the 60% limit within
a period of 7 years from the effectivity of the GBL.

Within the 7-year period, with prior authority from the Monetary Board of the Banko
Sentral ng Pilipinas, foreign banks may acquire 100% of the voting stocks of an existing bank
or invest in up to 100% of the voting stocks of a new subsidiary (Sec. 73, GBL).

Moreover, on the issue of S being converted into an offshore bank, one does not simply
convert itself into an offshore bank without complying with the certification requirement
provided by law. Offshore banking in the Philippines is governed by P.D. No. 1034, and the
same law necessitates an application of a certificate of authority to operate an offshore bank.
Therefore, until and unless Bank S seeks from the Monetary Board such certificate, then
Bank N's infusion will not convert S into an offshore bank.



What are other available remedies and/or strategies available?

Option 1: Issue bond securities for Bank N.
The issuance of bond securities acts as a substitute to selling equity for raising
capital to support Bank N. This would provide an alternative way of raising money
when raising equity falls short.

Option 2: Bank S can issue preferred (non-voting) shares.
The Supreme Court in Gamboa vs. Teves
1
held that that non-voting stock does
not count against the mandatory ownership ratio, since preferred shares have no
voting rights on day to day operations nor do they have any say with regard to the
election of directors then they are not considered as part of of the 60:40 ratio.


1
Gamboa vs. Finance Secretary Teves, G.R. No. 176579, June 28, 2011


The 60:40 ratio is only with respect to voting stock (common shares). Preferred
shares (non-voting stock) does not count against such ratio because it is non-voting,
and technically it has no control over corporate affairs.

Thus, Bank S should issue preferred shares to the foreign entity. It will not
affect the ownership structure but will definitely affect how profits are distributed,
thus, infuse funds to the company.

Alternative Options (for S and M):

1. M is free to sell as many shares as it wants to Bank N, so long as it does not
violate the 60:40 rule for a Philippine bank.

2. Bank S could merge with another bank to increase liquidity.

3. Bank S will assume universal bank status by increasing capital requirements
via subordinated bonds that meet the new bank capital guidelines, then sell the
same to generate additional funds.

4. In relation to the 3rd option, split the stocks to increase number of stocks, then
attract new buyers and generate additional funds.

5. Find a "white knight" who is financially able and strike a deal with him.

6. Bank S could apply for a loan from the Central Bank to avoid illiquidity.























Business Organizations II
Atty. Jose Riodil D. Montebon












by:
Precious Edlyn L. Benigay
JD-II


January 29, 2014

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