Issuing Preference Shares to Foreign Energy Investors: Retaining Board Control While Raising Capital (Philippines)
Introduction: why preference shares matter for energy startups raising foreign capital
Philippine energy startups often need offshore capital to fund development, equipment, or scaling. At the same time, certain energy-related activities may be subject to Filipino ownership and control requirements, and founders typically want to keep board control even when bringing in foreign investors.
A common approach is to issue preferred (often non-voting) shares to foreign investors while keeping voting common shares primarily with Filipinos. This article explains how that structure works under Philippine corporate law and nationality rules, and the legal limits you must respect.
Governing rules and why “board control” is not just a business issue
The structure must comply with (1) the corporation’s power to classify and issue shares under the Revised Corporation Code, and (2) constitutional and regulatory nationality requirements that may apply to certain energy activities.
Under the Revised Corporation Code, corporations may classify shares and create preferred shares with defined preferences and restrictions, subject to the Code and SEC filings. Preferred shares must have a par value and their terms must be properly set and documented. (R.A. No. 11232, Revised Corporation Code)
Where a business is in a partially nationalized activity (for example, where Philippine law requires a minimum Filipino equity/control level), the Supreme Court’s guidance in Gamboa v. Teves and related SEC opinions becomes relevant to share design and cap table planning. (Gamboa, et al. v. Teves, et al., G.R. No. 176579, October 9, 2012; SEC Opinion No. 11-44, 2011; SEC-OGC Opinion No. 19-24, 2019)
Step 1: confirm whether your energy activity has Filipino ownership/control requirements
Before drafting any term sheet, identify whether your particular energy line of business is subject to statutory or constitutional limits on foreign equity and/or control. In many deals, founders assume “energy” automatically means restricted, but the restriction depends on the exact activity and license category.
If there is a Filipino ownership requirement, the share structure must be designed so that Filipino ownership and control are preserved under the applicable test used by regulators.
Step 2: understand how “capital” and “control” are assessed in restricted activities
In Gamboa v. Teves, the Supreme Court explained that the constitutional term “capital” in a nationality restriction context refers to shares entitled to vote in the election of directors, and emphasized that compliance must reflect beneficial ownership, not only nominal title. (Gamboa, et al. v. Teves, et al., G.R. No. 176579, October 9, 2012)
The same decision further clarified a critical point for preferred share structures: the nationality requirement should be applied separately to each class of shares, including preferred non-voting shares, to ensure that foreigners do not end up dominating shareholder votes on matters where even non-voting shares may vote. (Gamboa, et al. v. Teves, et al., G.R. No. 176579, October 9, 2012)
SEC opinions likewise emphasize that nationality compliance looks at voting rights for director elections and also checks legal and beneficial ownership. (SEC Opinion No. 11-44, 2011)
Step 3: design share classes that raise capital while keeping Filipino board control
A typical founder-friendly structure is:
(A) Voting common shares mostly held by Filipinos to preserve the vote for directors.
(B) Preferred shares for foreign investors with dividend preference, liquidation preference, redemption features, and limited governance rights, while restricting voting for director elections.
What the Revised Corporation Code allows (and requires) for preferred shares
Under R.A. No. 11232, preferred shares may be given preferences in dividends and liquidation, and preferred shares may be issued only with a stated par value. If the board is authorized in the Articles of Incorporation to fix the terms and conditions of preferred shares (or a series), those terms become effective upon filing of the required certificate with the SEC. (R.A. No. 11232, Revised Corporation Code)
This means the “non-voting preferred share” concept must be supported by:
1) the Articles of Incorporation (share classifications and authority),
2) the board-approved terms (if the Articles authorize the board to fix series terms), and
3) the SEC filing of the certificate of the terms and conditions.
Important limit: non-voting preferred shares may still vote on certain major matters
Even where preferred shares are described as “non-voting,” the Supreme Court recognized that preferred shares may still have voting rights on specific fundamental corporate acts. This is why Gamboa warned that nationality compliance should apply per share class, including preferred non-voting shares, to keep effective Filipino control. (Gamboa, et al. v. Teves, et al., G.R. No. 176579, October 9, 2012)
For startups, the implication is straightforward: you cannot assume that issuing “non-voting” preferred shares to foreigners eliminates nationality issues. If your activity is restricted, you should review what matters those shares may vote on and ensure the foreign percentage does not defeat the required Filipino control outcome.
Step 4: plan the cap table using the control test and (when relevant) the two-tiered test
In nationality-sensitive structures, regulators commonly evaluate compliance using tests recognized in SEC guidance.
SEC-OGC Opinion No. 19-24 (2019) explains that the two-tiered test under SEC Memorandum Circular No. 8, Series of 2013 is used for 60-40 compliance analysis, and the grandfather rule is applied only when there is doubt as to beneficial ownership and control. (SEC-OGC Opinion No. 19-24, 2019)
Separately, SEC Opinion No. 11-44 (2011) emphasizes the importance of evaluating shares entitled to vote in the election of directors and checking that board election mechanics do not undermine proportional Filipino control, consistent with the Anti-Dummy Law policy. (SEC Opinion No. 11-44, 2011)
Typical structures used in energy startup financings (and what to watch for)
1) Common (Filipino) + preferred (foreign), with strict director-election voting only in common
Use case: early-stage funding where founders want clean board control.
Watch-outs: if the business is in a restricted activity, ensure the required Filipino percentage is met in each class as needed under Gamboa, and confirm beneficial ownership. (Gamboa, et al. v. Teves, et al., G.R. No. 176579, October 9, 2012)
2) Preferred shares with economic rights plus protective provisions
Use case: foreign investors want downside protection without day-to-day control.
Common terms: dividend preference, liquidation preference, anti-dilution, redemption features, information rights, and consent rights on limited “reserved matters.”
Watch-outs: excessive consent rights can resemble control in substance. SEC guidance stresses that nationality compliance must reflect actual control and beneficial ownership, not form alone. (SEC Opinion No. 11-44, 2011; SEC-OGC Opinion No. 19-24, 2019)
3) Redeemable shares as an exit tool
If foreign investors want a defined exit, redeemable shares may be considered if the Articles expressly allow them. Under the Revised Corporation Code, redeemable shares may be purchased by the corporation upon a fixed period and under terms stated in the Articles and stock certificate, subject to SEC rules. (R.A. No. 11232, Revised Corporation Code)
Watch-outs: redemption terms must be carefully aligned with cash flow and corporate finance limitations, and must not create arrangements that regulators could interpret as evading nationality rules.
Summary table: how to raise capital while protecting Filipino board control
| Structuring goal | Common approach | Main legal constraint |
|---|---|---|
| Keep board control with Filipinos | Filipinos hold majority of voting common shares | “Capital” for director elections focuses on voting shares; beneficial ownership matters (Gamboa) |
| Give foreigners strong economic upside | Preferred shares with dividend/liquidation preference | Preferred shares must have par value; terms must be properly authorized and filed (R.A. No. 11232) |
| Limit foreign influence on governance | Non-voting preferred + narrow reserved matters | Non-voting shares may still vote on certain fundamental acts; nationality compliance may apply per class (Gamboa) |
| Reduce nationality-risk in layered holdings | Confirm compliance under SEC tests | Two-tiered test applies; grandfather rule only if there is doubt (SEC-OGC Opinion No. 19-24, 2019) |
Common examples and scenarios
Scenario A: Seed round for a renewable energy software startup. If the startup is not operating a restricted activity, founders may still prefer preferred shares for valuation and investor protection. Even then, clean documentation under R.A. No. 11232 prevents future disputes on voting, dividends, and exit.
Scenario B: Venture funding for a company holding or seeking licenses in a restricted segment. The cap table should be designed so that Filipino ownership requirements remain satisfied under the principles in Gamboa, including per-class considerations and beneficial ownership checks. (Gamboa, et al. v. Teves, et al., G.R. No. 176579, October 9, 2012)
Scenario C: Offshore investor requests “negative control” via extensive veto rights. Keep reserved matters limited and clearly tied to extraordinary actions. Overbroad veto rights may be viewed as shifting actual control, which SEC opinions caution against when assessing nationality and control. (SEC Opinion No. 11-44, 2011)
Action-oriented guidance for founders and counsel
1) Identify the regulated activity first (license type and nationality restriction, if any) before negotiating economics.
2) Separate economics from control: use preferred shares for financial preferences; keep director-election voting concentrated where legally required.
3) Draft share terms with SEC compliance in mind: preferred shares need par value, clear terms, and proper corporate approvals and SEC filings under R.A. No. 11232.
4) Check per-class nationality exposure if the activity is restricted, consistent with Gamboa’s guidance on applying the Filipino ownership requirement to each class of shares. (Gamboa, et al. v. Teves, et al., G.R. No. 176579, October 9, 2012)
5) Confirm beneficial ownership and control using SEC guidance (two-tiered test, and apply the grandfather rule only when there is doubt). (SEC-OGC Opinion No. 19-24, 2019)
Conclusion: raise foreign capital without losing compliant Filipino control
Issuing preferred (often non-voting) shares to foreign energy investors can be lawful and effective, but it must be built on correct share classification under the Revised Corporation Code and careful nationality analysis where restrictions apply. The guiding ideas from Gamboa v. Teves and SEC opinions are that compliance focuses on voting power for director elections, requires real beneficial ownership, and may require per-class compliance to preserve genuine Filipino control.
Well-documented share terms, disciplined reserved matters, and early regulatory analysis usually prevent the most common structuring problems during due diligence and licensing.
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