Opinion No. 18-18 Re: Merger of a Domestic Corporation with a Foreign Corporation Licensed To Do Business in the Philippines.

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEI

16 November 2018

SEC-OGC Opinion No.18-18

BUSINESS IN THE PHILIPPINES CORPORATION WITH A FOREIGN CORPORATION LICENSED TO DO RE: MERGER OF A DOMESTIC

6805 Ayala Avenue,Makati City FORTUN NARVASA SALAZAR 23rd Floor, Multinational Bancorporation Centre

Attention: Atty. Roderick R.C. Salazar III

Atty. Criela D.F. Fragrante

Attorneys:

merely the integration of the domestic corporation and the foreign whether or not a domestic corporation may merge with a foreign corporation doing business in the Philippines, where the intended effect is corporation's Philippine branch. This refers to your letter dated 2 July 2018, requesting an opinion on

Section 132 of the Corporation Code, viz. The request specifically calls for our interpretation of Paragraph I of

Section 132. Merger or consolidation involving a foreign corporation licensed in the Philippines. -- One or more foreign corporations authorized to transact business in the

permitted under Philippine laws and by the requirements on merger or consolidation as law of its incorporation: Provided, That the domestic corporation or corporations if such is provided in this Code are followed. (Emphasis supplied) Philippines may merge or consolidate with any

foreign corporation), which is licensed to do business in the Philippines under the name "Harbour IT Asia" (the Philippine branch). You also stated that "the (the domestic corporation) wishes to merge with Harbour IT Hong Kong (the In your letter, you stated that your client, Converga Asia Incorporated

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plan is just to have Converga merge with Harbour IT Asia," without affecting the status of Harbour IT Hong Kong.

You further stated that in your research, you came across SEC Opinion

where the foreign corporation would be the surviving company. was issued in response to a query involving a foreign corporation licensed to do business in the Philippines proposing to merge with a domestic corporation. dated 23 October 1985 addressed to Mr. F.G. Tagao of SGV & Co., which

permitted under Philippine laws" in Section 132 as a requirement that some between a foreign corporation and a domestic corporation. Citing Fletcher. other statute first needs to be passed, which would expressly allow a merger In that opinion, the Commission interpreted the phrase "if such is

Cyclopedia of Private Corporations, Vol. 15, Sec. 7182, the Opinion also

foreign corporations." stated that "[domestic] corporations have no inherent power to merge with

To put this into context, Fletcher's discussion is quoted here, viz.

XI CORPORATIONS DIFFERENT STATES CONSOLIDATION CREATED OF BY

XXX XXX XXX

s 7182. Statutory or charter authorization.

consolidate or merge either with corporations of each state, or with foreign corporations. Corporations have no inherent power to

domestic and foreign corporation, that is two or The merger or consolidation of a

more corporations organized under the laws of different states, is now authorized under the

this authority, may impose such conditions as it may deem proper. In general, the right of be contained in the charters of the respective corporations, but the sovereign, in conferring statutes of every state. Such authorization may

corporations of one state to combine with those of a sister state is derived from the laws of the respective states. That is to say, the power of a corporation.. to merge _.with a .corporation of another state must be found under the statutes of both states, for neither corporation can have

of the state creating it. Statutes forbidding authority to consolidate except by virtue of a law consolidation, except in case of certain classes of corporations, preclude a consolidation of a

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not of that class.1 (Emphasis supplied) domestic corporation with a foreign corporation

comprise one and the same entity. It is impossible for Harbour IT Asia to Please note that a foreign corporation and its Philippine branch

IT Hong Kong is unwilling to merge with Converga, then the situation falls outside the scope of Section 132 of the Corporation Code. merge independently of Harbour IT Hong Kong. Considering that Harbour

the integration of Converga and (the operations of) Harbour IT Asia. For example, Harbour IT Asia may be spun-off and incorporated in the Philippines. turning this into a merger between two domestic corporations. This is not to discourage you from resorting to other means to achieve

provision in the laws of Hong Kong. do business in the Philippines, may merge with Converga, a domestic Code and other relevant laws. Provided further that it is allowed by a reciprocal corporation, provided that such merger will be governed by the Corporation Alternatively, Harbour IT Hong Kong, a foreign corporation licensed te

corporation with a domestic corporation." On the contrary, Section 132 is that provision in the Corporation Code authorizing the merger of a foreign 23 October 1985 erroneously stated that "there seems to be no express For your guidance only, we wish to highlight that SEC Opinion dated

express provision.

It is elementary in Statutory Construction that the interpretation that would give effect to the law is favored. Recall that Fletcher attests that

under the statutes of each state." A quick survey of state corporate laws in the a merger between a domestic and a foreign corporation is "now authorized

United States reveals a substantial similarity between their authorizing provision and our own Section 132.

Consider a similar provision in the New York Business Corporation Law (NYBCL), viz.

Section 9o7. Merger or consolidation of domestic and foreign corporations. (a) One or more foreign corporations and one or more domestic corporations may be merged or consolidated into a corporation of this state or of another jurisdiction, if such merger.- or consolidation is permitted by the laws of the jurisdiction under which each such foreign corporation is incorporated. xxx

Delaware Code, viz. Consider also a similar provision in the Title 8 (Corporations) of the

1 Fletcher, Cyclopedia of Private Corporations, Vol. 15, Sec. 7182 (rev. 1983) at 370-371.

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domestic and foreign corporations; service of corporation. (a) Any l or more corporations of this State may merge or consolidate with l or Section 252 Merger or consolidation of processupon more foreign corporations, unless the laws of the surviving or resulting

jurisdiction or jurisdictions under which such foreign corporation or corporations are organized prohibit such merger or consolidation. XXX

domestic corporation and the foreign corporation to merge. The authority comes from the_phrase "may merge" and "may be merged." Meanwhile, the In each of these, there is no contingency as to the authority of the

would then be bound to observe the merger provisions of the host state. corporation contains a reciprocal provision. If there is, the foreign corporation contingent terms "if" and "unless" refer to whether the law of the foreign

comply with the merger provisions in the Corporation Code. corporation and the foreign corporation with a license to do business "may merge" but requires a reciprocal provision where it states "if such is permitted under Philippine laws and by the law of its incorporation." If there is a reciprocal provision in the foreign law, the foreign corporation must then Similarly, Paragraph l of Section 132 expressly states that the domestic

to do business in the Philippines, the issuance of which is conditioned upon a merge. Thus, Paragraph 1 of Section 132 of Corporation Code requires a license conditions and delineate which class of foreign corporations will be allowed tc Fletcher clarifies that the laws of the domestic corporation may impose

extends to rules issued by the Commission. commitment by the foreign corporation to abide by our laws. This commitment

it authorizes a foreign corporation licensed to do business in the Philippines to merge with a domestic corporation, provided that the former can prove that governed by the Corporation Code and other relevant laws. there is a similar authorizing law in its home jurisdiction. Such merger will be Therefore, the correct interpretation of Paragraph I of Section 132 is that

It must be emphasized that the phrase "if such is permitted under Philippine laws" should be construed to include our nationality laws. Thus, foreign equity restrictions in the Philippines would prevent a merger between

corporation wilf be engaged in a nationalized industry and foreign control of such surviving corporation will exceed the limits imposed by law. a domestic corporation and licensed foreign corporation if the surviving

No such restrictions would apply here, however, since both Converga (business process outsourcing) and Harbour IT (information technology) are engaged in non-nationalized industries, where 100% foreign ownership is

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allowed. However, the surviving corporation would be a domestic enterprise and it must have a minimum capital of $200,000.

be disclosed that the facts relied"upon are different, this opinion shall be raised therein. It shall not be used in the nature of a standing rule binding or dissimilar circumstances.2 If, upon further inquiry or investigation, it will facts and circumstances disclosed and relevant solely to the particular issues rendered void. upon the Commission in other cases or upon the courts whether of similar It shall be understood, however, that this opinion is based solely on the

Please be guided accordingly.

By authority of the En Banc:

CAMOSMORREA General Counsel

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2 Number 7 of SEC Memorandum Circular I5, Series of 2003.