Anti-Dummy Law in the Philippines

There are various laws and regulations restricting the maximum amount of foreign equity in corporations engaged in nationalized or partially nationalized economic activities in the Philippines. The sources of these restrictions are the 1987 Constitution, the Foreign Investments Act of 1991, and the Foreign Investment Negative Lists.

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The Anti-Dummy Law (Commonwealth Act No. 108) seeks to penalize persons and corporations which circumvent these foreign equity restrictions. The offender can be: (i) any citizen of the Philippines, or (ii) any citizen of any other specific country. The proscribed offense includes the act of using the “name” or “citizenship” of a Filipino citizen to be used for the purpose of evading the foreign ownership limitations.

One example of a violation of the Anti-Dummy Law is the designation of a foreigner as a beneficial owner and of a Filipino citizen as a legal owner in an enterprise engaged in nationalized or partially nationalized economic activities. Under this nominee shareholder structure, the Filipino acts as a nominee shareholder while the foreigner acts as the real or actual owner hiding behind the former’s name. Corporate votes in stockholder resolutions and board meetings are exercised by the Filipino nominee shareholder, but the votes are in fact dictated by the foreign beneficial owner. Dividends are issued in the name of the Filipino nominee shareholder, but are subsequently transferred to the foreign beneficial owner.

The same Law also provides that “the exercise, possession or control by a Filipino citizen having a common-law relationship with an alien of a right, privilege, property or business, the exercise or enjoyment of which is expressly reserved by the Constitution or the laws to citizens of the Philippines, shall constitute a prima facie evidence of violation[.]” Under a common-law relationship, a man and a woman live exclusively as husband and wife without the benefit of marriage.

Section 2-A of the Law prohibits the election or appointment of foreigners in management positions. The exception is a foreigner serving as “technical personnel whose employment may be specifically authorized by the Secretary of Justice[.]” SEC Opinion No. 12-01 dated 31 January 2012 states that this prohibition is applicable to corporations engaged in partially nationalized economic activities, such as public utility corporations. The Supreme Court in King v. Hernaez (G.R. No. L-14859, 31 March 1962) articulated the rationale for such prohibition, as follows:

When the law says that you cannot employ an alien in any position pertaining to management, operation, administration and control, "whether as an officer, employee, or laborer therein", it only means one thing: the employment of a person who is not a Filipino citizen even in a minor or clerical or non-control position is prohibited. The reason is obvious: to plug any loophole or close any avenue that an unscrupulous alien may resort to flout the law or defeat its purpose, for no one can deny that while one may be employed in a non-control position who apparently is harmless he may later turn out to be a mere tool to further the evil designs of the employer. It is imperative that the law be interpreted in a manner that would stave off any attempt at circumvention of this legislative purpose.

Violation of the Anti-Dummy Law is meted out the following penalty: (i)   imprisonment for not less than five (5) nor more than fifteen (15) years, and (ii) by a fine of not less than the value of the right, franchise or privilege, which is enjoyed or acquired in violation of the provisions of the Law, but in no case less than PHP 5,000. Public officers who are participants in the violation shall be dismissed. Corporations which are involved in the offense shall be dissolved.

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