DOJ OPINION NO. 165, s.

1984

November 2, 1984

Minister Jaime C. Laya

Ministry of Education, Culture

and Sports

Palacio del Gobernador

Intramuros, Manila

Sir :

This refers to your request for comment on your draft decision regarding the sale of stocks of the
University of the East (UE) in favor of the Maharishi Educational Foundation (MEF) and the Age of
Enlightenment Foundation of the Philippines, Inc. (AEFPI). Your draft decision denies the petition for
approval of the said transaction on legal grounds and the finding that the proposed sale is "not
conducive to national unity and consciousness."

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

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 universities, schools, colleges and
other places of instruction throughout the world. Its primary goal is to propagate the teachings and
programs of Maharishi Mahesh Yogi specifically the Science of Creative Intelligence/Transcendental
Meditation.

2. AEFPI is a non-stock, SEC-registered corporation whose primary purposes are to teach and
propagate the Science of Creative Intelligence, the Transcendental Meditation Program, the TM-Shidhi
Program and similar programs of Maharishi Mahesh Yogi and to train teachers, governors and ministers
for this purpose. LexLib

3. UE is a stock corporation with 226,224 outstanding shares, 983 of which are founders shares
and the rest are common shares. The founders shares enjoy the privilege to vote and be voted for in the
UE Board of Trustees.

4. On September 21, 1984, Messrs. Jovino S. Lorenzo and Cornelio T. Peralta, in their behalf and in
behalf of other Stockholders of the UE entered into a Memorandum of Agreement with MEF and AEFPI
whereby the former agreed to sell to the latter 922 founders shares and 47,547 common shares of the
UE at P270.00 per share or a total of P13,086,630.00.

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 in
place of Messrs. Lorenzo, Peralta, Candio and Bocaling who agreed to resign as trustees to give way for
the election 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
America, shall be released in favor of the sellers upon 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 return the amount
deposited to the buyers.

7. The 922 founders shares covered by 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. LexLib

8. On September 28, 1984, UE and AEFPI entered into a Loan Agreement whereby the former
borrowed from the latter P5,000.00 against real estate security for the purpose of paying salaries and
wages of UE personnel. The Loan Agreement provides that upon release of the loan proceeds, the
lender shall be entitled 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, seminars, lectures and conferences on the lender's Maharishi
Technology of the Unified Field. The Agreement also provides that the lender shall have the option to
convert into equity out of the authorized but unissued shares of the borrower, the full amount of the
loan and such other amounts accruing thereon, or a portion thereof, and to nominate the comptroller of
the UE.

II

Comments and Observation

A. Constitutional Implications 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 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 Maharishi group constitutes less than 40% of
the aggregate outstanding shares of UE, the sale merely covering 922 founders shares and 47,547
common shares of the university, or 22% of the outstanding capital stock. Thus, the Maharishi group's
acquisition of the UE shares in the instant case does not violate the equity requirement for corporate
educational institutions that at least 60% of its capital stock should be owned by Philippine citizens.
LexLib

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 8[7], 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 members of which
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 evidently a corporate control device which enables
such minority to gain ascendancy and dominate management 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 board is a violation of the Constitution. Since the Maharishi group, as a
consequence of the proposed sale, would control and absolute majority of the voting shares in UE, it is
expected that their nominees to the board of trustees 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 Filipino citizens as
trustees of the university in pursuance of the specific legal requirement to this effect and, accordingly,
there is ostensible assurance that no alien will be directly involved in the control and management of
the school as a trustee, the fact remains that the Maharishi shareholders i.e. the AEFPI and the MEF
acting in unity of purpose with each other, could control the governing board and elect a majority, if not
all, of the trustees. LexLib

In concluding that the MEF 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 XVI Sec. 5, Constn.) aliens
may not intervene in the management of corporations or entities engaged in partially nationalized
activities. However, aliens may be elected to the governing board of such corporations in proportion to
their allowable participation of share in the capital of such entities (P.D. 715), although such alien
directors may not occupy management positions in such entities. (Op. No. 37, s. 1976) In the case of
educational institutions, the Constitution prescribes, in addition to the 60% Filipino minimum ownership
of capital, that control and management shall be vested in Philippine citizens, clearly subjecting to the
citizenship requirement control and management positions in said institutions. Accordingly, in the UE
corporate structure, an alien entity should not be allowed to buy founders shares which carry exclusive
voting rights to the governing board.

B. Violation of the Anti-Dummy Law

The draft decision points to a possible violation of the Anti-Dummy Law. It is stated that while it is true
that under the Memorandum of Agreement, AEFPI, which is an all-Filipino corporation, gets 622
founders shares and MEF, which is wholly alien-owned, only gets 300 founders shares, however, in view
of their common goals and objectives and their joint commitment to teach and propagate the teachings
and programs of Maharishi Mahesh Yogi, they could combine their votes to elect nominees of their
choice who, pursuant to AEFPI's by-laws, must be AEFPI members. Under this arrangement, MEF and
AEFPI could control the Board of Trustees and effectively allow foreign intervention in the management
and control of the educational institution. It is also stated that since, by its admission, AEFPI has no
funds of its own but that all its funds came from MEF in the form of donations, AEFPI is virtually a
"dummy" of MEF in the latter's enjoyment of the privilege to control and administer UE. Their joint
efforts to buy almost all of UE's founders shares and some UE common shares are designed to have a
venue for the propagation of the teachings and programs of Maharishi Mahesh Yogi. LexLib

We are not aware of the forms of the donation of funds by MEF to AEFPI. However, the existence of
dummy relationship between the MEF and the AEFPI may be indicated by the fact that all the funds for
the purchase of UE stock, including the amount of P5 million loaned by AEFPI to UE, admittedly came
from MEF.

The Anti-Dummy Law is designed to prevent foreign intervention or participation in areas traditionally
reserved for citizens of the Philippines or to corporations or associations at least 60% of the capital stock
of which is owned by citizens of the Philippines. It specifically prohibits any qualified citizen or
corporation which has "in its name or under its control, a right, franchise, privilege, property of business,
the exercise or enjoyment of which is expressly reserved by the constitution or the laws to citizens of
the Philippines or . . . to corporations or associations at least sixty per centum of the capital of which is
owned by such citizens", from allowing a non-qualified person or corporation from intervening "in the
management, operation, administration or control" of such right, franchise, privilege property or
business. (Sec. 2-A, C.A. No. 108, as amended).

In 1974, a Presidential directive had set forth "significant indicators of the dummy status" in view of
reports "that some Filipino investors or businessmen are being utilized or allowing themselves to be
used as dummies by foreign investors." While the directive was primarily directed to joint ventures for
national resource exploitation, the indicators are relevant to any anti-dummy situation. Thus, are: LexLib

"1. That the foreign investors provide practically all the funds for the joint investment undertaken
by these Filipino businessmen and their foreign partner;"

"2. That the foreign investors undertake to provide practically all the technological support for the
joint venture;

"3. That the foreign investors, while being minority stockholders, manage the company and prepare
all economic viability studies."

A close examination of the circumstances attendant in the UE transaction shows that the above-stated
indicators may be present in this case.

A. Funding

It is admitted that AEFPI has no funds of its own. The P5,000,000 loan extended by AEFPI to UE on
September 28, 1984 came from MEF by way of donation and the funds to be expended for the
acquisition by AEFPI of UE shares also came from the same source. There is no evidence to show that
the donations are covered by duly executed deeds of donation, much less that the donations are
unconditional. This arrangement tends to show that ownership is vested in an alien corporation.

B. Technological support
AEFPI claims that is pursues the same goals and objectives as the MEF. Both are committed to the
propagation of the Maharishi Technology of the Unified Field. However, in teaching the technology,
AEFPI appears to be dependent upon the expertise of MEF consultants. It was disclosed during the
public hearing conducted by MECS that the arrival in the country of some 1,200 MEF members was upon
the invitation of AEFPI and their objective is to look for Filipino volunteers who shall be trained in the
practice of the technology. These foreigners do not intend to stay long in the country but will leave as
soon as the Filipinos can handle the effective propagation of the technology themselves. (Public Hearing
held on October 15, 1984). LexLib

C. Control and management

The community or purpose and objective of AEFPI and MEF is what impelled AEFPI to seek a controlling
interest in UE. It believes that it can achieve its goals only if it has control and management of UE,
otherwise, it is not interested if it will assume only a minority role. (Public Hearing, October 15, 1984).

Considering the close relationship between AEFPI and MEF, bound together as they are, by their
common goals and plans, and the obvious dependence of AEFPI on MEF for logistical and other support,
it may be logical to assume that although MEF is merely a minority stockholder, it is in a position to
intervene in the control and management of the university not only through acquisition of founders
shares, but through its local affiliate, the AEFPI, in violation of the Anti-Dummy Law.

In view of the foregoing, it is believed that the transfer of ownership management and control of the UE
in favor of the AEFPI and MEF is violative of the Constitution, and possibly, the Anti-Dummy Law.

Very truly yours,

(SGD.) ESTELITO P. MENDOZA

Minister of Justice