DOJ OPINION NO. 020, s.

2005

May 5, 2005

Secretary Cesar Purisima

Department of Finance

Roxas Boulevard cor. Pablo Ocampo, Sr. St.

Manila 1004

Sir:

Reference is made to the request of the National Home Mortgage Finance Corporation ("NHMFC") to
your Department to recommend to the Office of the President the creation of subsidiary and joint
venture corporations 1 in relation to the sale by NHMFC of about 55,000 of its non-performing loans
with a book value of about Php 45 Billion (the "NPLs") to a special purpose vehicle that NHMFC will co-
own with DB Real Estate Global Opportunities IB ("DBGO"), a real estate investment fund managed by
an affiliate of Deutsche Bank AG. ITESAc

You state that based on NHFMC's request, NHMFC and DBGO will have to create four (4) corporations as
follows:

1. Balikatan Housing, Inc. (the "Financing Company")

2. Balikatan Housing Property, Inc. (the "Real Estate Company")

3. BHPC, Inc. ("JV Corporation 2")

4. BHPC Holdings, Inc. ("JV Corporation 1")

You also state that while the "Financing Company" was incorporated already on 28 December 2004,
your Department, however, has deferred its recommendation with respect to the Real Estate Company,
JV Corporation 2 and JV Corporation 1 until it receives an opinion from this Department resolving the
issue of whether the Real Estate Company (as structured by NHMFC below) can qualify as a corporation
qualified to acquire or hold private lands according to the 1987 Philippine Constitution. cd1updoj05

As stated in your letter-request, the following are the factual antecedents:

1. The NHMFC is a corporation created by virtue of Presidential Decree No. 1267 (1977) with the
following objectives: (a) develop and provide a secondary market for home mortgages granted by public
and/or private home financing institutions (PD 1267); (b) act as the major government home mortgage
institution (Executive Order No. 90 [1986]); (c) operate a viable home mortgage market using long term
funds principally provided by the Social Security System (SSS), Government Service Insurance System
(GSIS), and the Home Development Mutual Fund (HDMF) to purchase mortgages originated by private
and public institutions (EO 90, supra.); (d) provide mortgage financing program to assist legally
organized associations of underprivileged and homeless citizens to purchase and develop a tract of land
under the concept of community ownership pursuant to the Community Mortgage Program (CMP)
under the Urban Development And Housing Act of 1992 (Republic Act No. 7279 [1992]); (e) assist
organized community associations to acquire tenure ownership of the land they are occupying (Republic
Act 7835 [1994]); and (f) develop and provide a secondary mortgage market to finance, mortgage, take,
and fast track the disposition of existing mortgages (Executive Order No. 195 [1999]); EaScHT

2. In line with these objectives, NHFMC provided financing for various low-cost housing projects
and took over the various loan mortgages accounts of the buyers of houses and lots. However, over the
years, many of these loan mortgage accounts defaulted and NHFMC began to accumulate a portfolio of
non-performing loans. Thus, NHFMC decided to liquefy about 55,000 of its non-performing loans (NPLs)
with a book value of about Php 45 Billion by passing then on to the Financing Company that the NHFMC
will co-own with DBGO. DBGO would be responsible for acquiring a controlling interest in the NPLs is
and providing infrastructure and expertise required to service and resolve NPLs;

3. Since the Financing Company will not be considered a Philippine national as it is owned 51% by
DBGO, a foreign entity, the Real Estate Company will have to be organized as a Philippine national in
order that it may be qualified to bid at foreclosure for, and own the foreclosed assets, as well as hold
dationed assets;

4. Pursuant to and consistent with the Rules and Regulations of the Securities and Exchange
Commission (SEC) dated 28 February 1967, the SEC Rulings 2 and DOJ Opinions, 3 the following
structure was formulated for the Real Estate Company:

5. Based on the above structure, the Filipino interest in the Real Estate Company (based on the
stock ownership of NHMFC) is computed as follows:

Financing Company

78% x 49% 38.22%

JV Corporation 1

(Considered 100% Filipino-owned) 22.00%

Total Filipino Ownership in

Real Estate Company 60.22%

Based on the foregoing, you now request that this Department confirm that the ownership structure of
the Real Estate Company is legal and valid and does not violate the nationality restrictions prescribed by
the Philippine Constitution and applicable laws so that the Department of Finance may recommend the
creation of these corporations. AcISTE

In giving our opinion on the subject, we assume that the percentages of Filipino and foreign equity as
presented in the diagram above are correct.

We now base our opinion on the following discussions below.

As previously stated, one of the legal bases in arriving at the proposed structure for the Financing
Company as described above is the 1967 SEC Rules 4 to implement the requirement of the Constitution
and other laws that the controlling interests in enterprises engaged in the exploitation of natural
resources shall be owned by Filipino citizens.

Paragraph 7 of the said Rules pertinently provides, to wit:

Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60%, only the number of shares corresponding
to such percentage shall be counted as of Philippine nationality.

The above-quoted SEC Rules provide for the manner of calculating the Filipino interest in a corporation
for purposes, among others, of determining compliance with nationality requirements (the "Investee
Corporation"). Such manner of computation is necessary since the shares of the Investee Corporation
may be owned both by individual stockholders ("Investing Individuals") and by corporations and
partnerships ("Investing Corporation"). The said rules thus provide for the determination of nationality
depending on the ownership of the Investee Corporation and, in certain instances, the Investing
Corporation. SHECcD

Under the above-quoted SEC Rules, there are two cases in determining the nationality of the Investee
Corporation. The first case is the "liberal rule", later coined by the SEC as the Control Test in its 30 May
1990 Opinion, and pertains to the portion in said Paragraph 7 of the 1967 SEC Rules which states,
"(s)hares belonging to corporations or partnerships at least 60% of the capital of which is owned by
Filipino citizens shall be considered as of Philippine nationality." Under the liberal Control Test, there is
no need to further trace the ownership of the 60% (or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least 60% Filipino-owned is considered as Filipino.

The second case is the Strict Rule or the Grandfather Rule Proper and pertains to the portion in said
Paragraph 7 of the 1967 SEC Rules which states, "but if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality." Under the Strict Rule or Grandfather Rule
Proper, the combined totals in the Investing Corporation and the Investee Corporation must be traced
(i.e., "grandfathered") to determine the total percentage of Filipino ownership.

Moreover, the ultimate Filipino ownership of the shares must first be traced to the level of the Investing
Corporation and added to the shares directly owned in the Investee Corporation. This was done, as
alleged, in the case of the "Real Estate Company" as structured by the NHMFC.

The "Grandfather Rule" is a method by which the percentage of Filipino equity in corporations engaged
in nationalized and/or partly nationalized areas of activities provided for under the Constitution and
other national laws is accurately computed, and the diminution of said equity prevented. 5 It is applied
specifically in cases where the corporation has corporate stockholders with alien stockholdings,
otherwise, if the rule is not applied, the presence of such corporate stockholders could diminish the
effective control of Filipinos. ITECSH

This Department has had the occasion to rule on the applicability of the "Grandfather Rule." Citing our
Opinion No. 018, s. 1989 dated January 19, 1989, we stated in this wise:
. . .. It is quite clear . . . that the "Grandfather Rule", which was evolved and applied by the SEC in several
cases, will not apply in cases where the 60-40 Filipino-alien equity ownership in a particular natural
resource corporation is not in doubt.

Illustrating paragraph 7 of the 1967 SEC Rule, this Department went further, to wit:

Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the
capital stock or capital respectively, of which belong to Filipino citizens, all of the said shares shall be
recorded as owned by Filipinos. But if less than 60%, or say, only 50% of the capital stock or capital of
the corporation or partnership, respectively belongs to Filipino citizens, only 50,000 shares shall be
counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens.

In other words, based on the said SEC Rule and DOJ Opinion, the Grandfather Rule or the second part of
the SEC Rule applies only when the 60-40 Filipino-foreign equity ownership is in doubt (i.e. in cases
where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in another joint venture corporation which is either 60-40% Filipino-alien
or 59% less Filipino. Stated differently, where the 60-40 Filipino-foreign equity ownership is not in
doubt, the Grandfather Rule will not apply.

In applying, therefore, the "Grandfather Rule," given the aforementioned structure formulated for the
"Real Estate Company," it is apparent that the Filipino interest in the Real Estate Company (based on the
stock ownership of NHMFC) is 60.22%. This 60.22% is well within the total percentage of Filipino
ownership required under the so-called "Grandfather Rule" promulgated by SEC in 1967. AHCTEa

Finally, the foregoing manner of computation was in fact used by the SEC in various opinions (SEC
Opinions dated 4 May 1987, dated 27 November 2003, etc.) which upheld the continuing applicability of
the "Grandfather Rule."

This being the case, and consistent with the above-opinions of this Department and the SEC, we find no
reason to contradict the view of your Department that the ownership structure of the Real Estate
Company as structured by the NHMFC is legal and valid under the "Grandfather Rule", and does not
violate the nationality restrictions prescribed by the Philippine Constitution and applicable laws.
Therefore, the Real Estate Company (as structured by NHMFC) is a corporation qualified to acquire or
hold private lands according to the 1987 Philippine Constitution. DIcSHE

Very truly yours,

(SGD.) RAUL M. GONZALEZ

Secretary

Footnotes

1. Pursuant to Administrative Order No. 24, series of 2001 and Memorandum Order No. 266, series
of 1989, the creation of subsidiaries and joint venture corporations shall be approved by the President
upon recommendation by the Department of Finance (DOF).

2. Dated 14 December 1989, 2 January 1990, 30 May 1990, 23 March 1993, 14 April 1993, and 23
November 1993
3. Opinion Nos. 84, s. of 1988; and No. 18, s. 1989

4. Dated February 28, 1967

5. SEC Memo, s. 1976.