Opinion No. 14-01 RE: Doing Business; Foreign Corporation Investing in a Consortium

SEC Building, EDSA, Greenhills, Mandaluyong City Securities and Exchange Commission Republic of the Philippines Department of Finance

Office of the General Counsel

February 21, 2014

Investing in a Consortium SEC OGC Opinion No. 14-01 Doing Business; Foreign Corporation

26th Street corner 3rd Avenue Cresent Park West Bonifacio Global City 12th Floor, Net One Center Taguig City QUISUMBING TORRES

Attention: Atty. Dennis A. Quintero

Gentlemen:

position that a foreign corporation' is not required to obtain a license to'transact business in the Philippines, if such member of the consortium is not the operator thereof, and such foreign corporation will hold a minority and non-controlling interest in the consortium. We received your letter, dated January 31, 2013, requesting for our confirmation on your

consortium will contribute to the joint venture for exploration, drilling and production costs. Such percentage interest is also the share that the consortium member would be participating in structure. Instead of shares of stock, a member of a petroleum consortium would hold a participating percentage interest, which pertains to the percentage that a member of the profits from petroleum production. You also stated in your letter that said consortium has an unincorporated joint venture

Agreement and cited this Commission's Opinion dated August 6, 1998. In support of your position, you enumerated the relevant provisions of the Consortium

agree with your position. It is our opinion that the subject foreign corporation still needs to We wish to inform you that, based on the facts stated in your letter-request, we cannot

1 a member of a consortium that enters into a petroleum Service Contract with the Philippine Government under Presidential Decree No. 87, otherwise known as."The Oil Exploration and Development Act of 1972" (PD 87),

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obtain a license to do business in the Philippines under the Foreign Investment Act of 19912 (FIA) notwithstanding the fact that it holds a minority and non-controlling interest in the consortium.

invest in a consortium or joint venture, which, as you stated and to which we agree, is a form of business in the Philippines. partnership in this jurisdiction and should be governed by our laws on partnerships. The question now is whether your client's act"of investing in said joint venture constitutes doing At the outset, it must be stressed that the subject foreign corporation, your client, will

participating in the management, supervision or control of any domestic business, firm, entity or corporation, thus: Section 3(d) of the FIA describes the phrase "doing business" as, among others,

Philippines or who in any calendar year stay in the country for a period or periods totaling one hundred eighty [180] days or more; participating_in the management. arrangements and contemplate to that extent the performance -of acts.or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of commercial gain or of the purpose and object of the business organization: xxx." supervision or control of any domestic business, firm, entity or corporation in_ the Philippines; and any other act or acts that imply a continuity of commercial dealings or "liaison" offices or branches; appointing representatives or distributors domiciled in the "include soliciting orders, service contracts, opening offices, whether called

Philippines, it must prove that it merely invested as a shareholder in a domestic corporation. Indeed, paragraph 2, Section 1(f), Rule I, of the Rules and Regulations to Implement the FIA (FIA-IRR) enumerated the acts which shall not be deemed as "doing business" in the Philippines, to wit: For a foreign corporation to be exempted from obtaining a license to do business in the

"1. Mere investment as a shareholder by a foreign entity in domestic corporation duly 2 Having a nominee director or officer to represent its interest in such corporation; registered to do business, and/or the exercise of rights as such investor:

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exemption to the.term "doing business" to include an investment of a foreign corporation as a of an investment of a foreign stockholder in a Philippine domestic. corporation. However, said circumstances therein are present. In short, not every investment in a partnership is akin to an "limited partner" in a Philippine Limited Partnership because such investment is similar to that Opinion should be strictly construed and should be applied only when the exact attendant It is true that the Commission, in its Opinion? dated August 6, 1998, interpreted the

2 Republic Act No. 7042. 4 Addressed to Attys. Rolando V. Medalla & Angel M. Salita, Jr. 3 Emphasis supplied.

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investment in a domestic corporation so as to make it an exemption from the definition of "doing business".

invoking the exemption?: Considering that the exemption from the doing business rule pertains only to investment in a corporation, investment in any other business organization, firm or entity (e.g. partnership) would not automatically constitute an exemption. In this connection, corporation in the Philippines" is considered doing business. Consequently, following the strict interpretation rule, the only automatically exempt "management, supervision or control" is that "participating in the management, supervision or control of any domestic business, firm, entity or of a corporation (i.e.. "having a nominee director or office to represent its interests in such corporation") and not of any other entity, such as a partnership. It is settled. that exemptions from the general rule are strictly construed against those

based on a substantial distinction between the said two forms of organization. In a corporate setting, the stockholders, save in specified rare instances when their concurrence is necessary, do management of the business, each of them being considered as agent who could bind the partnership7, except when the manner of management has been set in the Articies of Partnership or in the case of a limited partnership. Thus, investment in a partnership does not necessarily mean exemption from doing business since being a partner generally entails management, supervision, or control of the partnership. not manage the affairs of the corporation, a function which belongs to the Board of Directors/Trusteest. The differing treatment of investment in a corporation and investment in a partnership is In contrast, all the partners in a partnership have an equal right in the

should in no case take part in the management and control of the business operation of the partnership, thus: Accordingly, the. Commission's Opinion categorically declares that the limited partner

limited partnership, is required to obtain a license to transact business in the not a "foreign corporation", which. will invest as a "limited partner" in a Philippine Philippines. "This refers to your letter dated July 21; 1998 requesting opinion on whether or

Philippines as it will not take part in the management of the partnership. You also hence, does not need to obtain a license to do business in the Philippines. believe that its investment in the partnership is similar to that 'of an investment of a foreign stockholder in a Philippine domestic corporation, which under the Foreign Investment Act of 1991 shall not be' deemed "doing business" in the Philippines, and It is your position that such foreign investor will not be doing business in the

subject however to the following conditions: Please be advised that we are_inclined to. adopt your opinion on the matter.

5The Commission on Internal Revenue vs: The Court of Appeals, et al., G.R. No. 107135 February 23, 1999 7 Article 1803 and 1810(3), New Civil Code " Section 23, Corporation Code.

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(2) In no case shall it take part in the management and control of the business "(1)The entry of the foreign corporation in the partnership is merely for (3) The investment is allowed by, and complies with the Foreign Investment Act of 1991." operation of the partnership; and investment purposes:

operation of the limited partnership. Such opinion is consistent with Article 1848 of the Civil corporation that is exempt from the doing business rule only when the foreign corporation is exclusively a limited partner and takes no part in the management and control of the business Code which provides: In other words, investment in a partnership will only be akin to an investment in a

unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business." "ART. 1848. A limited partner shall not become liable as _a_general partner

The word "control" in Article 1848 has been explained, thus:

advice to general partners as to specific matters which the latter may follow or not Being also interested in the success of the partnership business, a limited partner does not management of the partnership business and does not comprehend the mere giving of thereby forfeit his'right to.make suggestions or express opinions as to the advisability of certain transactions. (Silvola vs. Reulett, 272 P.d. 287.) "It would seem that such control contemplates active participation in the

generally for the firm's obligations where: The limited_partner takes part in_the management of the business and is liable

(1) The business of the partnership is in fact carried on by a board of directors (2) By the terms of the contract between the parties. an appointee of the limited partner becomes the directing manager of the firm; xxx." chosen by the limited partners;

This is because the right of a limited partner is restricted only to the following:

"Art. 1851. A limited partner shall have the same rights as a general partner to:

partnership, and at a reasonable hour to inspect and copy any of them; (1) Have the partnership books kept at the principal place of business of the

8 Emphasis supplied. 9 Page 309, Comments and Cases Copyright. .on Partnership, Agency and Trust by Hector S. De Leon, Fifth Edition, 1999

ECOG

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(2) Have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances (3) Have dissolution and winding up by decree of court. render it just and reasonable; and

A limited partner shall have the right to receive a share of the profits or other compensation by way of income, and to the return of his contribution as provided in Articles 1856.and 1857."

Consortium Agreement which you cited in your letter-request: Having stated the foregoing, we now refer you to the following stipulations in the

"The Operator

1. The members of the consortium would choose one of them to be the.operator with the right and duties set out below (Operator).

2. The rights and duties of the Operator would be as follows:

a. The right and _obligation to conduct operations (for exploration, drilling and production) by itself, its affiliates, its agents or its contractors under the overall supervision and control of an Operating Comimittee. xxx

b Subject to the overall supervision of the Operating Committee, the responsibilities of the Operator, shall include, but not limited to:

(i) The preparation of programs and budgets for expenditures: (ii The "implementation of such programs and budgets as approved by the Operating Committee;

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(x) The conduct of such other activities as the Operating Committee shall decide as appropriate for the proper and efficient carrying out of the operations.

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d. Unless 'otherwise directed by the Operating Committee, the DOE or any other governmental authorities in respect of matters solely relating to its own Percentage Interest; Operator shall represent the consortium members regarding any matters or dealings with the DOE and other governmental authorities or third parties insofar as the same relate to Operations, provided that there is reserved to each Party the unfettered right to deal with the

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XXX XXX- XXX the Operator shall:

(i) provide each consortium member with daily drilling reports and additional reports as such party may reasonably request; and such other reports as the Operating Committee may decide monthly activity reports and monthly production reports and and, at the sole cost of the party requesting the same, such

8. The operator shall consult with the parties and keep them informed of non-routine matters concerning the operation; xxx

(i) inform each Party of all logging, coring, testing and such other (ii) Provide each party with copies of all well logs and core analyses operations as the Operating Committee may decide with such each party may have one or more representatives present on location during the conduct of such operations; and information relating to operations as the Operating Committee reasonably request. advance notice as is practicable in the circumstances, so that and such engineering, geological, technical and other date and may decide and, at the sole'cost of the party requesting same, such additional data and information as such party may

The Operating Committee

each consortium member shall act solely on its own behalf in the _capacity of an individual party and not on behalf of the consortium members, collectively. matters pertaining to the operations. In the exercise of such supervision and control. The Operating Committee shall exercise overall supervision and control of all

Powers and Duties

The powers and duties of the Operating Committee shall include:

1 The consideration and determination of all matters relating to

3 general .policies,procedures.. and.methods of operation The consideration, revision and approval or disapproyal, of all proposed programs, budgets_and_expenditures prepared and The determination of the timing, location and depth of.all wells hereunder; submitted to it;

The consideration and, if so required, the determination of any drilled under operations and any change in the use or status'of a well; other matter relating to the operations which may be referred to it by the parties or any of them.

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Operator submitted shall be subject to consideration, revision and approval or rejection by the Operating Committee. The proposed development programme e and budget that the

Representations in the Operating Committee

the consortium members provided always that more than one of the consortium members may appoint the same representative who shall represent them separately. The representative of a Party or, in the absence of the representative, his alternate, shall be deemed authorized to represent and bind such Party with respect to any matters which is within the powers of the Operating Committee. The Operating Committee shall consist of one representative appointed by each of

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Voting Procedure

member shall have a voting interest equal to its Percentage Interest. Unless otherwise _provided in _ the consortium agreement, each consortium

part or all of a permit shall require the unanimous approval of all the consortium members. Operating Committee shall be made by the affirmative vote of at least two consortium members having 'in aggregate a Percentage Interest of not less than seventy percent (70%). Unless otherwise provided in the consortium agreement, all decisions of the All decisions of the Operating Committee relating to the relinquishment of any

matters shall be at least two Parties having in aggregate a Percentage Interest of not less than seventy per cent (70%): The quorum required for any meeting of the Operating Committee to decide

Committee duly made in accordance. with the provisions of the consortium agreement.".io All the consortium 'members shall be bound by each decision of the Operating

capital contributions." On the other hand, a general partner-is personally liable for contractual obligations of the partnership.12 In the instant case, the subject foreign corporation appears to be that the foreign corporation cannot definitely be considered as a limited partner in the Consortium. A limited partner is not personally liable for partnership obligations beyond his a general partner of the Consortium as the Service Agreement clearly provides that the first party (Government's Petroleum Board) shall have the right to require performance of any and all of the obligations under the contract from the second parties(consortium members), thus: We also noticed from the provisions of the Service Agreement forwarded to this Office

12 Article 1816, Civil Code of the Philippines. 1o Emphasis supplied. 11 Articles 1848, 1853 and 1856, Civil Code of the Philippines.

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"SECTION I SCOPE

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1:2 Contractor shall be responsible to the Petroleum Board for the execution of such appointed and constituted the exclusive party to conduct the Petroleum Operations. obligations under this Contract against any or all of the second parties. xxx" Operations in accordance with the provisions -of this Contract, and is hereby The Petroleum Board shall have the right to require performance of any or all

Operating Committee, takes active part in the management and control of the business operation of the partnership. Indeed, the Consortium Agreement positively stipulates that the Operating operations, and has the specific power to determine all matters relating to general policies. the Government's Petroleum Board can require the subject foreign corporation to perform any or Committee shall exercise overall supervision and control of all matters pertaining to the procedures and methods of operation of the business. Finally, the Service Agreement shows that all obligations of the partnership under the Contract. From the foregoing, it is clear that the subject foreign corporation; being a member of the

provided in Section 3(d) of the FIA and hence, it must secure a license to do business in the Philippines. Accordingly, the subject foreign corporation is doing business in the Philippines as

relevant solely to the particular issues raised therein and shall not be used in the nature of a circumstances.13 If, upon investigation, it is disclosed that the facts relied upon are different, this opinion shall be rendered void. standing rule binding upon the Courts or upon the Commission whether of similar or dissimilar The foregoing opinion is rendered based solely on the facts disclosed in the query and

Very truly yours,

CAMILO S./GORREA General Counsel

13 SEC Memorandum Circular No. 15, Series of 2003