A practical legal article for structuring share transfers, capital raises, and reorganizations in the Philippines

1) Why ownership changes are legally sensitive in the Philippines

In many Philippine industries, the law limits how much of a company may be foreign-owned. These limits don’t just apply at incorporation—they apply continuously. A single share transfer, capital increase, conversion of preferred shares, merger, or exercise of options can unintentionally push a company over the line and trigger consequences: loss of licenses, inability to bid, SEC issues, contract invalidity risks, regulatory sanctions, or criminal exposure under the Anti-Dummy Law.

This article focuses on the “moving parts”: how ownership percentages change, how the limits are measured, and how to structure transactions that stay compliant.

2) The core legal framework (what sets the limits)

Foreign ownership restrictions come from four main sources:

A. The Constitution (the “hard” limits)

Some activities are restricted by constitutional policy, commonly encountered in:

Mass media (generally reserved to Filipinos)
Advertising (typically requires greater Filipino ownership than 60%)
Educational institutions (commonly 60% Filipino)
Exploitation of natural resources (commonly 60% Filipino, subject to specific modes like FTAA)
Public utilities (historically 60% Filipino; scope depends on statutory definitions and regulatory treatment)
Land ownership (corporations must be at least 60% Filipino-owned to own land)

B. The Foreign Investments Act (FIA) and the Negative List approach

Outside constitutional areas, the Philippines generally follows a “Negative List” approach: foreign investment is allowed unless an activity is reserved/limited by:

the Constitution,
a specific statute, or
the regularly issued Foreign Investment Negative List (FINL) concept (a catalog of restricted activities).

C. Special industry laws and regulators

Many sectors have their own caps, licensing rules, and nationality requirements (e.g., certain transportation activities, banking/financial institutions, cooperatives, regulated professions, and other licensed sectors).

D. The Anti-Dummy Law (enforcement overlay)

Even if ownership percentages look compliant on paper, using Filipinos as “dummies” to mask foreign control can create criminal liability, plus licensing and contract risks.

3) What does “foreign ownership percentage” actually mean?

Ownership limits can be tested through multiple lenses, depending on the activity and regulator:

A. Voting/control perspective

Many restrictions focus on control, so regulators often look at:

Voting shares (who elects directors / controls corporate decisions)
Board composition and officer nationality requirements
Shareholder agreements and veto rights that may effectively transfer control

B. Economic/beneficial ownership perspective

Authorities may also evaluate who really benefits:

who enjoys dividends and liquidation proceeds,
who bears risk and enjoys upside,
who has the power to dispose of shares,
layered ownership (ownership through other corporations).

C. Direct vs indirect ownership (layering)

If your shareholder is another corporation, you often must test whether that corporate shareholder is itself sufficiently Filipino-owned. In nationalized/restricted activities, regulators may require tracing through layers to determine the effective Filipino/foreign split (often called “grandfathering” in practice).

D. Record owner vs beneficial owner

The SEC, regulators, and banks conducting compliance checks may look beyond the stock and transfer book to:

declarations and disclosures,
ultimate beneficial ownership representations,
control arrangements (e.g., voting trusts),
side letters or nominee arrangements.

4) The biggest practical rule: changing percentages is easy to do accidentally

Your percentages change not only through obvious transfers but also through “silent” mechanics:

A. Secondary transfers (sale/donation of existing shares)

A Filipino sells shares to a foreigner → foreign % increases immediately upon recognition/registration (depending on corporate formalities and regulator practice).

B. Primary issuance (capital increase or new subscriptions)

If foreigners subscribe to new shares and Filipinos do not participate pro-rata, foreign % rises through dilution.

C. Conversion/exercise features

Conversion of preferred shares into common
Exercise of warrants/options
Equity-settled debt instruments These can “spring” foreign ownership above the cap at the moment of conversion/exercise.

D. Mergers, share swaps, property-for-shares, reorganizations

These can change ownership composition at closing—even if no cash changes hands.

Deal discipline tip: In restricted industries, treat every instrument as if it will be “fully looked through” and model fully diluted outcomes.

5) Common Philippine caps you’ll encounter (and why you must verify the exact activity)

Rather than relying on labels (e.g., “utilities,” “telecom,” “education”), compliance starts with the precise licensed activity and the regulator’s current interpretation. In practice:

Some activities are fully closed to foreign ownership (effectively 0% foreign).
Many are 60/40 (at least 60% Filipino).
Some allow higher foreign participation but require special approvals or have “reciprocity” or national security conditions.
Some are generally open (100% foreign) but may trigger minimum capital, reporting, or other conditions.

Because the applicable cap depends on the exact business activity, the safest approach in transaction documents is:

identify the regulated activity precisely (licenses, CPCN/CPC, franchise, permits),
identify the controlling law and regulator rule, and
apply the most conservative test unless you have a confirmed, written regulatory basis to do otherwise.

6) How to compute ownership under 60/40 structures (the mechanics)

A. Start with the simplest: direct ownership in a single corporation

If a company has 100 shares outstanding:

Filipinos hold 60 shares → 60% Filipino
Foreigners hold 40 shares → 40% foreign That’s the basic cap.

B. Voting vs non-voting shares: why preferred shares aren’t a free pass

A frequent idea is: “Let foreigners buy non-voting preferred shares so Filipinos keep voting control.” This may work only if the applicable rule focuses strictly on voting control and the regulator accepts it.

In many restricted contexts, regulators evaluate both:

control (voting) and
beneficial ownership/economic interest, and may require that Filipinos own at least 60% of the entire equity structure, not just voting shares.

Practical takeaway: Treat “non-voting preferred to foreigners” as a tool that can work in some contexts—but never assume it solves nationality compliance by itself.

C. Layered ownership and “grandfathering” risk

If Company A (restricted activity) is owned by Company B (a holding company), you may need to compute the Filipino/foreign composition of Company B and “attribute” that to Company A.

A common regulatory posture is:

If Company B is 100% Filipino, its investment in A is Filipino.
If Company B is partly foreign, you may need to trace beneficial ownership down to individuals/entities and compute effective percentages.

Example (simplified):

HoldCo B owns 60% of OpCo A.
B is 70% Filipino / 30% foreign.
Effective Filipino interest in A through B = 60% × 70% = 42% Filipino.
Effective foreign interest in A through B = 60% × 30% = 18% foreign. Then add the direct owners of A to get totals.

Because the details depend on regulator rules and structure, this is an area where transaction counsel typically builds a “nationality worksheet” showing each layer and computed effective ownership.

7) Deal structures to change ownership while staying within caps

Below are common, lawful structures used in the Philippines—each with its own limits.

A. Straight share sale with a cap “guardrail”

Use when: foreigner wants entry but must stay at/under cap. How it works: seller transfers only up to the allowable percentage and includes:

closing conditions (cap compliance),
representations on nationality,
covenants restricting further transfers without compliance review,
remedies if cap is breached (mandatory re-transfer, redemption if permitted, etc.).

B. Rights offering / pro-rata protections in capital raises

Problem: new issuance dilutes Filipinos and raises foreign %. Fix: structure capital increase so Filipinos can maintain their proportion:

enforce pro-rata subscription rights,
arrange Filipino “backstop” subscriptions,
stage subscriptions (Filipinos first, foreigners only up to remaining headroom).

C. Dual-class or preferred structures (carefully)

Use when: capital needed but control must remain Filipino. Tools include:

preferred shares with economic rights,
limited voting rights consistent with law and regulator rules,
governance provisions that keep board/management Filipino where required.

Caution: Overly strong veto rights for foreign investors can be attacked as “negative control,” which may be treated as de facto control in sensitive sectors.

D. Debt and quasi-equity as alternatives

If foreign equity headroom is tight, capital can be structured as:

loans, bonds, convertible instruments with conversion blocked unless compliant,
redeemable preferred with strict compliance triggers,
revenue-sharing arrangements (ensuring they don’t become disguised equity/control).

E. Use of Filipino holding companies (but real, not dummies)

A compliant structure may involve a Filipino-owned holding company investing in the restricted operating company. But: the holding company must have genuine Filipino beneficial ownership and control, not a nominee façade.

8) Nationality-related clauses that matter in shareholder agreements

In restricted industries, “paper compliance” can be undone by control arrangements. Watch for:

Board composition: who appoints directors; reserved board seats for foreigners may be limited.
Reserved matters and veto rights: too broad can shift control.
Quorum rules: if foreign consent is required for ordinary corporate acts, regulators may treat that as control.
Voting trusts / proxies: can affect control and must be scrutinized.
Call/put options: can create future noncompliance if exercised without safeguards.
Anti-dilution: may force future issuances that push over caps.
Transfer restrictions: must ensure the company can block transfers that would breach caps.

Best practice: Include a “Nationality Compliance” article:

representations on citizenship/foreign status,
ongoing disclosure obligations,
automatic suspension of transfer rights if a transfer breaches caps,
mandatory sale/redemption mechanisms where legally possible,
compliance committee or corporate secretary certification before registering transfers.

9) Corporate approvals and SEC mechanics when changing ownership

The legal mechanics depend on whether the change is a transfer or an issuance.

A. For share transfers (secondary sale)

Typical steps include:

Board/secretary processes required by bylaws and agreements (e.g., ROFR).
Execution of deed of sale/transfer documents.
Endorsement and surrender of stock certificate (if certificated).
Payment of applicable taxes (and securing evidence of payment where required).
Registration in the Stock and Transfer Book and issuance of new certificate.
Update disclosures (e.g., GIS and beneficial ownership disclosures where applicable).

In practice, many companies refuse to register a transfer unless nationality compliance is demonstrated.

B. For new issuances / capital increases (primary issuance)

Common requirements:

Board approval and, if required, stockholder approval
Amendment of Articles (if increasing authorized capital stock or changing share classes)
SEC filing/approval for amendments
Subscription agreements, proof of payment, issuance of shares
Tax and documentary compliance
Updated corporate records and disclosures

C. For mergers/reorganizations

Plan of merger, board and stockholder approvals
SEC filings, notices, possible regulator clearances
Closing mechanics that ensure post-merger ownership remains compliant

10) Taxes that typically arise when changing ownership

Foreign ownership compliance planning often ignores tax until late; don’t.

A. Share sale taxes

Depending on whether shares are listed/traded or closely held, taxes may include:

capital gains tax regime for unlisted shares (net gains concept),
stock transaction tax for listed trades,
documentary stamp tax (DST) on transfer.

B. Issuance taxes

Issuing shares can trigger DST on original issuance.

C. Cross-border considerations

tax treaty positions,
withholding tax issues for dividends/interest,
BOI/PEZA or incentive-registration conditions (if applicable).

Because tax rates and implementing rules can change, treat this as an area to confirm against current BIR guidance for the specific transaction type.

11) The Anti-Dummy Law: where deals get dangerous

Even if your cap math works, liability can arise if foreigners effectively run a nationalized business through nominees.

Common red flags:

Filipino shareholders funded by foreigners with side agreements requiring them to vote as directed
undisclosed beneficial ownership arrangements
foreigners acting as de facto officers/managers where nationality is required
management contracts that transfer control in substance
blank endorsement arrangements held by foreigners

Penalties can include criminal sanctions and regulatory consequences, and the business risk (licenses and contracts) is often worse than the criminal risk.

12) Due diligence checklist for changing ownership in restricted sectors

Before signing (and again before closing), diligence should cover:

Corporate and equity

Articles/bylaws, share classes, voting rights
cap table, fully diluted cap table (options/warrants/convertibles)
stock and transfer book integrity
shareholder agreements (veto/negative control)
nominee risks and beneficial ownership disclosures

Regulatory

exact licensed activities and scope
nationality rules from the regulator (licenses, franchises, CPCN/CPC, permits)
board/officer nationality requirements
reporting and approval requirements for ownership changes

Transaction mechanics

conditions precedent tied to nationality compliance
“cap breach” remedies and automatic protective provisions
staged closings or escrow to manage compliance risks

Tax

applicable CGT/STT/DST
required filings and proof for corporate registration of transfers/issuance

13) Drafting “compliance-by-design” protections (practical clauses)

In restricted industries, sophisticated documentation typically includes:

Nationality representation (citizenship/foreign status; look-through for entities)
Covenant to maintain compliance (including cooperation to provide documents)
Transfer blocking (company may refuse to register transfers breaching caps)
Automatic disposition mechanism (forced sale/redemption if legally permitted)
Compliance certificate at closing (corporate secretary + counsel sign-off)
Fully diluted safeguards (no conversions/exercises if they breach caps)

14) Practical examples of lawful ownership-change scenarios

Example 1: Foreign investor wants more economic exposure but cap is tight

Keep foreign equity within cap
Provide upside through preferred shares with dividends and liquidation preference, only if this does not violate the applicable beneficial ownership test
Add convertible features that are expressly blocked unless post-conversion ownership remains compliant

Example 2: Company needs new money; Filipino shareholders can’t fund pro-rata

Structure a capital raise with:
- Filipino backstop investor(s), or
- staged subscriptions, or
- mix of debt + limited equity so the foreign subscription does not dilute Filipinos below the threshold.

Example 3: Foreign buyer wants acquisition but the business is nationalized

Buyer can acquire the foreign-allowable stake directly
Control and remaining equity must stay with qualified Filipino owners
Governance documents must not transfer negative control in a way regulators could treat as foreign control.

15) Key takeaways

In the Philippines, foreign ownership limits are activity-specific and often enforced through both control and beneficial ownership concepts.
Ownership changes happen through more than sales—issuances, conversions, options, and reorganizations can all breach caps.
Layered structures require careful effective-ownership computations and may require “look-through” tracing.
The Anti-Dummy Law makes “nominee compliance” high risk; real beneficial ownership and control matter.
The safest deals are built with cap-table modeling, fully diluted testing, and contractual guardrails that block noncompliant future events.

General information notice

This article is for general informational purposes and does not constitute legal advice. For a specific transaction, the correct cap and the correct ownership test depend on the company’s exact licensed activities, regulator rules, and deal structure.