Published 16 November 2020, The Daily Tribune

Sometime last year, the Securities and Exchange Commission (SEC) issued Memorandum Circular 15, Series of 2019, directing all SEC-registered domestic corporations to disclose their beneficial owners in their General Information Sheet (GIS). Last 13 October 2020, the SEC issued a Memorandum Circular anew, this time requiring foreign corporations registered with the SEC to likewise declare their beneficial ownership.

Declaration of beneficial ownership is essentially reporting the identity of those who ultimately own or control or exercise ultimate effective control over the corporation. This covers the natural person who actually owns or controls the corporation as distinguished from the legal owners. Hence, it seems the measure aims to address the practice of intricate corporate layering involving which may sometimes obscure nationality restrictions involving industries reserved for Filipinos only, or those which involve a limit to the extent of foreign participation allowed.

Prior to the rule requiring declaration of beneficial ownership, the courts had to rely on the Grandfather Rule to accurately determine the actual participation, both direct and indirect, of foreigners in a corporation engaged in a nationalized activity or business. The Grandfather Rule is consistent with the rule that the “beneficial ownership” of corporations engaged in nationalized activities must reside in the hands of Filipino citizens.

In the case of Narra Nickel Mining and Development Corp. vs McArthur Mining Inc., (GR 195580, 28 January 2015), it was alleged that the elaborate corporate layering resorted to by petitioners so as to make it appear that there is compliance with the minimum Filipino ownership in the Constitution, allowing only Filipino citizens and corporations 60 percent-owned by Filipino citizens to explore, develop and use the country’s natural resources. The avowed purpose of the Constitution is to place in the hands of Filipinos the exploitation of our natural resources. Necessarily, therefore, the rule interpreting the constitutional provision should not diminish that right through the legal fiction of corporate ownership and control.

With the requirement of declaration of beneficial ownership, the SEC is no longer tied to resorting to a manual tracing of the shareholdings or relying on existing or available documents to identify beneficial ownership. Getting to the bottom line of beneficial ownership of the shares is now easier and more transparent.

Under the recent issuance, the SEC now requires registered foreign corporations’ resident agent, country or regional/area head to exercise the due diligence required in obtaining, keeping, reporting and updating information on its beneficial ownership. It directs the timely report of all relevant changes in the submitted beneficial ownership information as they arise. Any change must be submitted through an update in the Notification Update Form and submitted to the SEC within 30 days after such change occurred or became effective.

As provided in the updated GIS Form, beneficial ownership may be determined on the basis of the following natural persons: owning, directly or directly, through a chain of ownership, at least 25 percent of the voting rights, voting shares or capital of the reporting corporation; who ultimately has controlling ownership interest in the corporation, whether alone or with others, through any contract, understanding, relationship, intermediary or tiered entity; having the ability to elect a majority of the board of directors/trustees; having the ability to exert a dominant influence over the management or policies of the corporation; whose directions, instructions or wishes in the conducting the affairs of the corporation are carried out; acting as stewards of the properties of corporations; who actually own or control the corporation through nominee shareholders or directors, and ultimately owning or controlling ultimate effective control through other means.

In the exceptional circumstance that no natural person is identifiable who ultimately owns or exerts control over the corporation despite having exhausted all reasonable means of identification, and provided there are no grounds for suspicion, the beneficial owners will be deemed as those exercising control through positions held within a corporation, such as members of the board of directors.

Hence, as with the rules governing the declaration of ownership for local corporations, beneficial owners are identified to determine who ultimately exercises ownership and control in the corporation — allowing the SEC to get the bottom line of the corporation’s ownership and control structure.

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