Republika ng Pi!ipinas \11NfSTHI NC KATARUNGAN

.Wini str)' uf fustice

Minister Jaime C. Laya Ministry of Education, 011 ture

and Sports Palacio del Gobernador Intramuros, Manila

S i r :

I 6.)-- S-19--­OPINION NO. __ , . ..!t No vember 2, 1984

This refers to vour reque st for comment on your draft deci s ion regar~ing the sale of stocks of the University of the Eas t (UE ) in favor of the Maharishi Educational Foundation (MEF) and the Age of Enlightenment Foundation of the Philipp i nes, Inc. (i\EFPI). Your draft decision denies the petit i on for approval of the said transaction on legal grounds and the finding that the proposed sale is "no t conducive to national unity and consciousness."

Our comments are confined to the legal implications of the transaction in t he light of the Constitution and the Anti-Dummy Law.

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Antecedent Facts

Culled from the within papers the antecedent facts, briefly stated, are -

1. MEF is a foreign foundation based in Channel Islands. One of its aims and objectives is to establish and maintain a trust for education and to found and support uni ve'rs i ti es, s choo1 s , colleges and other places of instruction throughout th e world. Its primary goal is to propagate the teachings and programs of Maharishi Mahesh Yogi specificaily the Science of Creative Intelligence/Transcende ntal Meditation.

2. AEFPI is a non-stock, SEC-registered corporation whose primary purposes are to teach and propagate the Science of Creative Intc ll1gcnce, the Transcendental Meditation Program, the TM-Shidhi Program and similar programs of Maharishi Mahesh Yogi and to train teachers, governors and ministers f or th i s purpose.

3. UE is a stock corporation with 226,224 outstanding shares, 983 of whi c h are f ounders shares and the rest are common~shares . The founders shares enjoy the privilege to vote and be voted for i n the UE Board of Trustees.

4. On September 21, 1984, Messrs. Jovino S. Lorenzo and Cornelio T. Peralta, in their be}ialf and in behalf of other stockholders of the UR entered into a Memorandum of Agreement with MEF and ;\EFPI whereby the former agreed to sell to the latter 922 founders shares and 47,547 common shares of the UE a t P270. 00 per share or a total of Pl3,086,630.00.

5. Pending compliance with the stipulated require­ments, the sellers immediately assigned one founders share to each of the buyer's nominees to qualify them for election to· the Board of Trustees i n place of Messrs. Lorenzo, Peralta, Canc io and Bocaling who agreed to resign as trustees to give way for the ele c tion of the buyer's nominees.

6. On September 27, 1984, the sellers and buyers entered into an Addendum to Agreement dated 21 September, 1984 which stipulates that the purchase price, which is deposited with the Bank of Ameri ca, shall be released in favor of the sellers upon th e approval by the Ministry of Education, Culture and Sports (MECS) of the Memorandum of Agreement dated September 21, 1984. In the event such approval is not obtained on or before October 31, 1984, the depository bank shall r eturn the amount deposited to the buyers. ·

7. The 9 22 founders s h a res covered bv the Memorandum of Agreement shall be apportioned as follows: AEFPI - 622, and MEF - 300. The cost of acquiring the shares came from an inward remittance of $717, 705.00 from MEF. AEFPI admitted that its fund to acquire the UE shares came from funds donated allegedly without condition to AEFPI by MEF. ·

8. On September 28~ 1984, UE and AEFPI entered into a Loan Agreement whereby the former borrowed from the latter PS,000,000.00 against real estate security for the purpose of paying salaries and wages of UE personnel. The Loan Agreement provide s that upon release of the loan proceeds, the lender s hall he ent:i tled to . representation in the board by two representatives who shall sit-in at all Board meetings. The lender shall also be allowed to offer to the borrower's students , faculty and employees, during their usual hours , semin ars, lectures and conferences on the lender's Maharish i Te chno logy of the lh1ified Field. The Agreement also provi des that the lend.er shall have the option to convert into equi ty out of the authorized but unissued shares of the bor rowe r , the full amount of the loan and such other umounts accruing thereon, or a portion thereof, and to nominate the comptroller of the UE.

OPINION NO.

II

Comments and Observation

A. Constitutional Impli~a~ions of the Sale

1. The draft resolution states that it is legally permissible, under the Constitution, for foreigners to invest up to 40% of the capital stock of educational institutions. However, the finding that the buyers are not charitable organizations and do not, therefore, fall under one of the exceptions in Section 8(7) of Article XV of the Constitution, conveys the impression that it is not qualified to make the purchase. The more accurate state­ment should be that the aforecited section of the charter and of Section 1 of P.D. 176, partially nationalizing ownership of educational institutions, are not violated by the purchase since it appears that the total number of shares acquired by the Mah~rishi group constitutes less than 40t of the aggregate outstanding shares of UE, the sale merely convering 922 foundcr.<0 shares and 47 ,547 common shares of the university, or 22% of the outstanding capital stock. Thus, the Maharishi grGup's acquisition of the UE shares in the instar..t czEc dues not violate the equity requirement for corporate educational institutions that at least 60\ of its capital stock should be owned by Philippine citizens.

2. We concur with the finding that the sale in question constitutes a violation of the constitutional and legal injunction that "the control and administration of educational institutions should be vested in citizens of the Philippines''. (Section 8L77, Philippine Constitution; Sec. 2, P.D. 176) As the draft resolution observes, the control and administration of UE is vested in its board of trustees, the member;; of whLch are elected only by the owners of the 983 founders shares, of which 922 were covered by the subject sale. The capital structure of UE in which a small minority of its outstanding shareholders (983 out of 226 ,224) are conferred exclusive voting rights is evidentlv a cornorate contro1 device which enables such minority to' gain a~cendancy and dominate managemeht of the

·corporation. (See Campos, Corporation Law, 1969 Ed., p. 372) The acquisition by an alien entity of founders shares, which carries with them control of the management of the corporation because only these shareholders can vote and be elected to the governing bo.ard is a violation of the Constitution. Since the :tvkharish i group, as a consequence of the proposed sale, would control an absolute majority of the voting shares in UE, it is expected that their nominees to the board of truste~~s will win most' 'if not all, of the seats in such board.

Even assuming that the Maharishi owners of the founders shares would elect only Pilipi.no citizens as trustees of the

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OPINION NO. __ , S.19 - 4 -

university in purs uance of cht! specific legal requirement to this effect and, accordingly , there is ostensible assurance that no alien will bt; directly involved in the control and management of t he school as a trustee, the fact remains that the Maharishi shareholders i.e. the AEFPI and the MEF act i ng in unity of purpose with each other,could control the roverning board and elect a majority, if not all, of the trustees.

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In concluding that the ME F cannot acquire founders shares without infringing the constitutional provision that the control and management of educational institutions shall be vested in citizens of the Philippines, we are guided by the fact that this constitutional requirement is a special provision peculiar to educational institutions.

It is to be noted that under the Anti-Dummy Law (C.A. 108; see also Article XIV Sec. 5, Constn.) aliens may not intervene in th e management of corporations or entities engaged in partially na tionalized activities. However, aliens may be elected to the governing board of such corporations i n propcrtj~n to their allowable participa­tion or share in the ~ apit a l of such entities (P,D. 715)• although such alien directors may not occupy management positions in such ent i ti es. ( Op. No. 37, s . 1976) · In the case of educat ional ins t i tutions, the Constitution prescribes, in addition to t he 60% Filipino minimum owner­ship of capital, thaL cont r ol and management shall be vested in Philippine :..: i r, .lzens , cJearly subjecting to the citizenship requireme ~t cont r ol and management positions in said ins t:i. tut ions. Ac cc-!'..:.ir;.gl y , in the UE corporate structure, an aiien en t i t y s.ho1.t ld not be allowed to buy founders share:- which carry exclu ::.o i ve voting rights to the governing boa rd.

B. Violation of the An t i Durnmv Law ----'-'-=---...;._-~. ~.....;;... __ ,..__ -

The draft decis ion points to a possib le violation of the Anti-Dummy Law. It is stated that while it is true th.at

·under the Memorandum of Agreement, AEFPI, which is an all "'. Filipino corporat i on, gets 622 f ounders shares and MEF, which is wholly alien-owned, only gets 300 founders shares, however,, in view of th.e i r common goals and objectives and their joint commitment to t each and propagate the teachings and programs of Maharishi M'ahesh Yogi , they could combine their votes t o elect nominees o:f th ei r choice who, pursu11nt to AEFPI's by-Jaws, must be AEFPI members. Unde 1· this arrangement, MEF and AEFPI coul ·~ control the Board of Trustees and effectively a llmv foreign intervention in the management and cont ro l of t he educational institution. It is also stated t hat since, b y i ts admission, AEFPI h as no funds of its own but t ha t aJ1 :its f unds came from MEF in the form of donations, AFFP I is virtually a "dummy" of .MEF in the latter's en j oyment of th e privilege to control and

I .

QPINIO~l NO. - s ·•

administer UTL ThPtr jo : n~. efforts to buy almost all of UE 1 s founders shares and sum·:~ JF common shares are designed to have a venue for the prnpagati.on of the teachings and programs of M::il:arishi ;,tihesh ):'og" . .

We are not ava.re of tlh~ tc:rms of the donation of funds bv MF.F to AEFPI. Howev,,:r, t h e existence of dummy re.iat.icnsh1.1; 00.-weer< the MB P and the AEFPI may be indicated by the fact that all the funds for the purchase of UE stock, including the amount of PS million loaned by AEFPI to UE, admittedly came from MIF.

The J\nti-Dummy Lav :l.s designed to prevent foreign intervention or participation ~n areas tradition·ally reserved fo r citizens of the Philippines or to corporations or associations 'at least 60 ~. of the capital stock of which is ownerl by citizens of the Philippines. It specifically prohibits any quelified citize~ or corµoration which has "in its name or under its cont:c-ol, a right, franchise, privilege, property or busin~s:; 1 the exercise or enjoyment of which is exnresslv :rcse ved ln t.h.e constitution or the ,. ' , laws to citi,ens of the Ph:i.J. i ·,Jpines or .• to corporations or assoc i atior-s at leas t sixty pe:r centum of the capital of which is own·~~d Ly such rj_tizcns 11

, from allowing a non­qualified person or corpo-ra ti0'1 from intervening "in. the manage1uent$ operation, l dmir•istra -:: ion or control" of such right, fra11.c.h;;_se, p1·i v .i.le ge,, y :~uperty or business. (Sec. 2-A, C.A. No. 108, dS aue ~o~d) .

In 19/ti , a : 1resid<'' '·. i ai d irec ti~ie i.rn.(:, s e t forth "sig­nificant HHl.icators of 1-:-·ds dum,Tv status" in view of repo·-'·5 11 ·:J- c ·c. ''""'" ,~· 1 :r, . ..... 'n.,·,~ ·'· · 11 · ..:: ".,,. b· Sl. IlCSSJfi"'Il are 1 ... ~ .. '· ' ' l ·-"·· .L.. ; .I.. .• " !::' - L • l. ·- \t v -, L ,_, • , .. .• ... u . ... being ut~li.::: c1 or 2.Llowing th:-n~:cl ves to be used as dummies by foreign ir;,vestors". W.i1i.:Le tL ;,;; (hrective was primarily directed to joint ventures for na t ional resource exploita­t~on, the ind.lea tors a r e r e J. cva;1 c to any :inti-dummy s itua­tion .- Tl1c-

"l. That the fo.re ign i nves tl"l!' S provide prac­tically all the funds for the joint in­vestment tmde~t a.ken by these Filipino bus incssm~n and t.h ei r f oreign partner; 11

"2. That the foreign. imre sto-:cs undertake to provide practically all the techno­logical supp0rt for the joint venture;

"3. Th r- t the foreign investors , while being minority stockholders , manage the company and prepa re all economic vi ability s tud:Les. 11

A close exa.mi :ia tion of the circrnns tances a.t tendant in the UE transaction show!~ that the above-stated indicators may be present in thi s case .

OPINION NO. - 6 -

A. Funding

It is admitted that AEFPI has no funds of its own. The PS,000,000 l oan exte nded by AEF~I to UE on September 28, 1984 came from MEF by way of donation and th ~ funds to be e xpended f or th.e acquisition by AEFPI of UE shares als o c ame f rom the same source. There is no evidence to show that the donations are covered by duly executed deeds of donation, much less that the ronations a re u nccndi t ional. This arrangement tends to show that ownership i s vested in an alien corporation.

B. Technological support

AEFPI claims that it pursues the $me goals and. objectives as the MEF. Both are commit t ed to the pro­pagation of the Maharishi. Technology of the Unified Field. Howeve r , i n t t>aching the technology, AEFPI appears to be depende n t upon the expertise of MEF consul tan ts. It was d:i s c losc d during the public hearings conducte<l by t he };iECS that the arrival in the country of some 1, 200 MEF members was upon the invitation of AEFPI an<l th9 l r objective is to look for Filipino vo l unteers wh 'J sh a ll be t r ained in the practice of the tech1i o l l;gy, Thes e fo reigners do not intend t o stay Jo n g i :i. th.~ country but will leave as soon as the Filipino s c an handle t he effective propaga­tion of the te chno l o gy the mse l v es. (Public Hearing held on October 15t 19 84 ) .

C. Control and man agement

The community of purpos0 and obj ective of AEFPI and ME F is wha t impelle d AEFPI t o · seek~ a t6rittolling inte~est in UE. It be lieves t hlt it can achieve its

. goals only if i t h as contro l and manag~ment of UE, otherwise, it i s not i ntereste d if it will assume only a minority role. (Public Hearing, October 15, 1984).

Considering the close relationship between AEFPI and MEF, bound to gether as they are, py their common goals and plans, and the obvious dependence of AEFPI on MEF for logis tic a l and other s upport, i t may be logical t o assume t hat although MEF is merely a minority stockholde r , it i s in a position to intervene in the control and management of t he university not only through acquisition of founders shares, but through . i ts l ocal affili ate , the AE FPI, i n violation of the Anti-Dummy Lah' .

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OPilUONNO .

. In ~iew of the foregoing, it i s believed that the transfer of ownership i management and control of the UE

· in favor of the AEFPI and the MEF is violative of the Constitution, and possibly, the Anti-Dummy Law.

Very truly yours,

\AA.la._ ~. ""-t/ ESTELITO P. MENDOZA Minister of Justice