Opinion No. 17-03 Re: Foreign Corporation; Doing business; Online Gaming.

Securities and Exchange Commission Republic of the Philippines Department of Finance

OFFICE OF THE GENERAL COUNSEL

04 April 2017

business; Online Gaming Re: Foreign Corporation; Doing SEC-OGC Opinion No.17-03

SYCIP,SALAZAR,HERNANDEZ & GATMAITAN Metro Manila, Philippines SycipLaw Center 105 Paseo de Roxas Makati City 1226

Attention: Attys. Franco Noel A. Manaig, Vida M. Panganiban-Alindogan, Jenifer Jill I. Lim and

Maria Christina C. Ortua

Dear Mesdames and Messieurs:

whether or not Sony Computer Entertainment Hong Kong (SCEH) will be required to obtain a license to do business in the Philippines. This pertains to your Letter-request for opinion dated 25 July 2012 to confirm

By way of a background, you stated that SCEH is a company organized and

online platform that offers various content and services such as an online community existing under the laws of Hong Kong and operates Sony Entertainment Network (SEN) in Singapore, Indonesia, Taiwan, Malaysia, Thailand and Hong Kong. SEN is an and an online gaming system, which requires a SEN account in order to participate

Philippines. A SEN account holder can buy content and services from SEN only by using funds from an associated SEN online wallet, which can be funded by using a Since SEN is an internet-based system, persons in the Philippines can create a SEN account to participate in the online community and to purchase content from and/or use SEN's services even if the SCEH does not have a physical presence in the credit or debit card or a prepaid card where available.

based in the United States. Finally, SEN employees are located in Hong Kong while SEN's servers are

Philippines and will not be required to obtain a license for the following activities: SCEH is seeking confirmation that it is not engaged in doing business in the

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1) Offer and sale of SEN services on the internet without restricting

2) Assuming that Maintenance, by itself, is not considered doing 3) Marketing or advertising the SEN in the Philippines through (a) SEN in any currency, including Philippine currency; business in the Philippines, accepting online payments for using commercials, which is based on the enumerated acts constituting not "doing business" provided in Section 1(f) of the Implementing Rules and Regulations (IRR) of the Foreign Investment Act of 1991 online and printed publications, and (b) television and radio persons located in the Philippines from availing of these services (Maintenance); FIA);1 and 4) Further, as a form of expansion, hiring Independent Contractors for

cards in relation to its online gaming services. marketing or advertising of its products and the selling of prepaid

Thereafter, Sony Philippines submitted a Letter dated 17 January 2017

Philippines without obtaining a license to do business as a foreign corporation. PlayStation VR is Sony's latest gaming technology which offers a variety of games lacked confirmation from the Commission whether SCEH can operate in the addressed to the President of the Philippines, which was in turn referred to the that can enhance learning skills. However, Filipinos cannot avail of such service online because PlayStation Network is not yet available in the Philippines, since it Commission by the Office of the Executive Secretary. The letter mentioned that

The basic question to be resolved is whether or not the above-enumerated activities of SCEH would be considered as "doing business" in the Philippines so as to require SCEH to obtain a license to do business from the Commission pursuant to Section 133 of the Corporation Code.2

business, the facts are considered on a case to case basis.3 In determining whether or not a foreign corporation is considered doing

to persons in the Philippines; (ii) the SEN allows access to portions of its PlayStation The facts, as deduced from your representations, are: (i) the SEN is available

games (and other digital content) to those with a SEN account or who create an

holder can buy content and services from SEN by using funds from the associated offered by SEN provided they have or create a SEN user account; (iv) a SEN account SEN online wallet; (v) to put funds in the SEN online wallet, the user has to "top up" existing account/ID; (iii) users in the Philippines may access the content and services

or load money into his/her SEN online wallet via credit or debit card or prepaid card

2 Batas Pambansa Blg. 68 (1980). 3 Cargill, Inc. vs. Inter-Strata Assurance Corporation, Inc., G.R. No. 168266, March 15, 2010. 1 Republic Act No.7042 (1991).

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where available; (vi) SCEH does not have a physical office, physical properties (including its servers), nor domiciled employees in the Philippines; (vii SCEH accepts online payments for using SEN in any currency, including Philippine currency; and (viii) SCEH may opt to market or advertise the SEN in the Philippines and sell pre-paid cards to fund the SEN online wallet.

landmark case of Mentholatum Co., Inc. vs. Mangiliman,4 a foreign corporation is considered "doing business" in the Philippines when: Under the twin characterization test laid out by the Supreme Court in the

a) The foreign corporation is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another; and

b) The foreign corporation is engaged in activities which implies a continuity of commercial dealings and arrangements, and

the exercise of some of the functions normally incident to, and in contemplates, to that extent, the performance of acts or works or

progressive prosecution of, the purpose and object of its organization.

known as the "Foreign Investment Act of 1991," defines "doing business" as follows: definition, having been adopted with some qualifications in various pieces of legislation in our jurisdiction.5 For instance, Republic Act No. 7042, otherwise The traditional case law definition has metamorphosed into a statutory

one hundred eight(y) (180) days or more; participating in the management, commercial gain or of the purpose and object of the business be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor, nor having a nominee director or officer to represent its interests in such corporation, nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account." (Emphasis supplied) appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling 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 the performance of acts or works; or the exercise of some of the functions normally incident to, and in progressive prosecution of. organization; Provided, however, That the phrase 'doing business' shall not "d) The phrase 'doing business' shall include soliciting orders, service contracts, opening offices, whether called liaison' offices or branches; commercial dealings or arrangements, and contemplate to that extent

4 72 Phil 524, 1941. 5 MR Holdings, Ltd. v. Bajar, et al., G.R. No. 138104, 11 April 2002

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Likewise, Section 1 of Republic Act No. 5455,6 provides that:

called liaison' offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totaling one hundred eighty days or more; participating in the management, supervision or control of any domestic business firm, entity or commercial dealings or arrangements, and contemplate to that extent the shall include soliciting orders, purchases, service contracts, opening offices, whether corporation in the Philippines; and any other act or acts that imply a continuity of purpose and object of the business organization." 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 "SECTION. 1. Definition and scope of this Act. - (1) x x x the phrase 'doing business'

as those above-quoted, and as may be observed, one common denominator among them all is the concept of "continuity."8 There are other statutes? defining the term "doing business" in the same tenor

The above-mentioned twin-characterization test (i.e. transactions must be for the pursuit of the main business, and with intent to continue the same for

considered."1o "Moreover, what is determinative of 'doing business' is not really the number or the quantity of the transactions, but more importantly, the intention of Philippines."9 "The fact that it derives income from its activities should also be sometime) have since become the hallmark of what constitutes doing business in the an entity to continue the body of its business in the country. The number and quantity are merely evidence of such intention."11 Each case must be judged in the

6 An Act to Require that the Making of Investments and the Doing of Business Within the Philippines

MR Holdings, Ltd. v. Bajar, et al. 11 Id., 989, citing: Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567 (1997). 7 Article 65 of Presidential Decree No. 1789 ("A Decree to Revise, Amend, and Codify the 10 See: Cargill, supra, note 3. 9 C. Villanueva, Philippine Corporate Law (2010 ed.), 986. imply a continuity of commercial dealings or arrangements and contemplate to that purpose and object of the business organization. Contribute to the Sound and Balanced Development of the National Economy on a Self-Sustaining Basis, and for Other Purposes, Enacted Without executive approval, September 30, 1968 (65 0.G. Investment, Agricultural and Export Incentives Acts to be Known as the Omnibus Investment Code"), which took effect on January 16, 1981, defines "doing business" to include soliciting branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totaling one hundred eighty (180) days or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines, and any other act or acts that extent the performance of acts or works, or the exercise of some of the functions by Foreigners or Business Organizations Owned in Whole or in Part by Foreigners Should No.29,p.7410). orders, purchases, service contracts, opening offices, whether called "liaison" offices or normally incident to, and in progressive prosecution of , commercial gain or of the

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considered on a case to case basis.13 light of its own environmental circumstances,12 and, as above stated, the facts are

Philippines, considering that its employees are in Hong Kong, that its property is business in the Philippines since the activities of SCEH are carried outside of the outside the Philippines, and that the SEN servers are in the United States. You stated that there is no reason to consider that SCEH will be doing

SEN services; (iii) accepting online payments for using SEN in any currency, including Philippine currency; (iv) marketing or advertising; and (v) hiring considered as "doing business" in the Philippines since the twin characterization test is satisfied in this case. First, the following activities indicate that SCEH will be continuing the body or substance of the business of SCEH for which it was organized Independent Contractors for marketing or advertising of its products and the selling of prepaid cards in relation to its online gaming services. in the Philippines, to wit: (i) funding of the SEN online wallet; (ii) offering and selling However, we opine that the activities SCEH proposes to undertake shall be

find themselves in the Philippines: consummated within the Philippines although they are done in a virtual plane. The following salient points of the online commercial transactions, or e-commerce, will Second, the above-mentioned enumerated activities are transactions

(i The creation of a new SEN account will take place in the Philippines

in order to participate in SEN;

(ii) The offering for sale and sale of online content and services of SEN

will be made to the SEN account holder who is located in the Philippines;

(iii) The funding of the SEN online wallet will take place in the Philippines as will be further discussed below;

(iv) The payment of the sale of online content and services of SEN will

be made from the Philippines by the SEN account holder; and

(v) The delivery of the online content and services of SEN will be made in the Philippines.

through a device (e.g. PlayStation 4, computer, HDTV or mobile device) used by the The salient points above-mentioned are evidenced by the use of an IP address

12 Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567 (1997) 13 See: Cargill, supra, note 3.

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SEN account holder. IP address is short for Internet Protocol (IP) address.14 The IP is the method or protocol by which data is sent from one computer to another on the Internet. Each computer (known as a host) on the Internet has at least one IP address that uniquely identifies it from all other computers on the Internet.15 An IP address consists of four numbers, each of which contains one to three digits, with a single dot (.) separating each number or set of digits (e.g., 78.125.0.209). Moreover, an IP address may reveal such information as the continent, country, region, and city in which a computer is located; the ISP (Internet Service Provider) that services that particular computer; and such technical information as the precise latitude and longitude of the country, as well as the locale, of the computer.16 The location of an IP address can be traced through the use of an IP geolocation service.17

device, he may view the content or service which is offered to him for sale that is sent Here, once the SEN account holder enters the SEN online store through his

transaction(s) will be consummated in the Philippines. to his device in the Philippines. Thereafter, the SEN account holder may accept the offer of the content or service from the Philippines by clicking "Confirm Purchase". Once it is purchased, the acceptance of the offer is transmitted from his IP Address through his device in the Philippines to the virtual plane, and the content or service is through his device through his IP address located in the Philippines.18 Clearly, such delivered through said virtual plane to the account of the SEN account holder who is in the Philippines. The SEN account holder will then download the content or service

Furthermore, it must be remembered that the offering for sale and the sale of content and services, and the funding of the SEN online wallet, are intricately connected since the sale of the SEN content and services cannot be consummated

the Philippines. funded by credit cards and debit cards, it, thus, logically and reasonably means that without the funding of said SEN online wallet. Since the SEN online wallet may be SCEH will likewise have arrangements with the credit card/debit card issuers here in

of the SEN online wallet also clearly indicates that there is intent to continue the main business for a period of time. Once the SEN account holder puts funds in the The permission to use and buy from the SEN online store through the funding

them up at one time. SEN online wallet, he can resume transactions on the SEN while his account is still active (subject of course, to the SEN's rules on membership in the network), thereby intermittent and infrequent and even if the SEN user only purchases credit and uses maintaining a business relationship with the SCEH even if the transactions are

17 http://en.wikipedia.org/wiki/Geolocation#cite_note-2, last accessed on 2 November 2016. 18 http://www.sonyentertainmentnetwork.com/home/, last accessed on 2 November 2016. 14 http://www.webopedia.com/TERM/I/IP_address.html, last accessed on 2 November 2016. 1s http://searchunifiedcommunications.techtarget.com/definition/Internet-Protocol, last accessed on 16 http://whatismyipaddress.com/ip-address, last accessed on 2 November 2016. 2 November 2016.

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Philippines, there is an intent to make available in the Philippines the online gaming services provided by the PlayStation VR. In fact, pursuant to the second element of Furthermore, as stated in the Letter dated 17 January 2017 of Sony

imply the continuity of commercial dealings and arrangements, and contemplates the performance of acts incident to, and in the progressive prosecution of, the purpose of but for a long period of time in the Philippines. SCEH. Clearly, it appears that the SEN services will not be provided intermittently the twin characterization test, the previously enumerated activities that you stated

issue and no relevant case law has considered the question of whether owning or operating a website or online platform constitutes "doing business".19 Numerous court opinions, however, address a similar issue: whether a corporation's internet In the United States, there is currently no statutory law which addresses this

notions of fair play and substance."22 the issue of "jurisdiction" with regard to websites can be useful when trying to foreign state, such that its ability to be sued there "does not offend the traditional activities in a foreign state constitutes "doing business" sufficient to justify the court of that state in exercising "personal jurisdiction"2 over the corporation. Exploring determine a corporation's need to "qualify [or obtain a license] to do business"21 based on its website or online activities. One prerequisite for the court to obtain "personal jurisdiction" is that the corporation has "minimum contacts" with the

that an entity conducts over the internet." At one end of the scale are "passive" to internet activities to determine the level or types of activities that will constitute "minimum contacts" for jurisdictional purposes.23 This Sliding Scale Test is based on the premise that "the likelihood that personal jurisdiction' can be constitutionally exercised is directly proportionate to the nature and quantity of commercial activity websites, which alone generally do not generate sufficient contacts with a foreign state to establish personal jurisdiction since they are only used to post information Currently, most courts in the United States apply a Sliding Scale Test tailored

21 "Qualification" or registration is compliance with a statute requiring obtainment of a certificate of 2o Personal Jurisdiction is a complex legal principle that refers to a court's authority to resolve a legal 23 Id., citing Zippo Mfg. Co. v. Zippo Dot Com, Inc., 952 F. Supp. 1119, 1124 (W.D. Pa. 1997). 19 https://www.cscglobal.com/pdfs/50-State-Qualification-Handbook.pdf, last accessed on 2 November 22 See note 19, citing International Shoe Co. v. Washington, 326 U.S. 310, 316 (1945). authority from a state officer to do business within its jurisdiction. (Robert V. Okulski, Foreign Corporations: What Constitutes Doing Business Under New York's Qualification Statute?, 44 Fordham L. dispute and to render an (https://www.cscglobal.com/pdfs/50-State-Qualification-Handbook.pdf, last accessed on 2 November 2016) Rev. 1042 (1976) notify.net/download/223003/http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=2215&context=flr, 2016. (http://passthrough.fw- last accessed on 7 December 2016). enforceabledecision to . the specific.parties involved

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therein.24 At the other end of the scale are "active" websites, which generate sufficient business over the internet to establish personal jurisdiction.25 "Interactive" websites fall in the center of the scale since they are hybrid sites that contain elements of both passive and active websites, and courts determine whether to

basis.26 exercise personal jurisdiction over the interactive website owner on a case-by-case

considering that there will be sufficient contacts with the SEN account users in the Philippines and such platform is not used to merely post information. In which case, the SEN online platform should be considered as an "active website" which, as above- Philippines. The SEN online platform cannot be considered as a "passive website" stated, generates sufficient contacts and business over the internet since it offers for Applying the Sliding Scale Test, the SCEH has "minimum contacts" with the

sale and is engaged in the selling of the SEN content and services to SEN account

exists in this case sufficient "minimum contacts" between the foreign corporation holders in the Philippines, and, in the process, allows the funding of the SEN online wallet by the SEN account holder who is located in the Philippines. Clearly, there SCEH and the Philippines.

SCEH would be considered as doing business in the Philippines. From the foregoing, we opine that the previously enumerated activities of

the Corporation Code, to wit: corporation which is doing business in the Philippines, as provided in Section 133 of Note that there are adverse consequences to an unregistered foreign

"Section 133. Doing business without a license. - No foreign corporation transacting business in the Philippines without a license, or its 1

before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws." (Emphasis ours) successors or assigns, shall be permitted to maintain or intervene in any Philippines; but such corporation may be sued or proceeded against action, suit or proceeding in any court or administrative agency of the

25 An active website serves as a gateway for conducting business over the Internet 26 An interactive websites allow users to exchange information with the website creator, order 24 A passive website does not actively solicit orders for goods or services or support other Nutrition Physiology Corp. v. Enviros Ltd., 87 F. Supp. 2d 648 [N.D. Tex. 2000]) (holding that commercial activities. Many courts have held that the fact that the site exists and can be viewed all website owner to jurisdiction in every state in which viewers can access the website. (See, e.g., website owner and residents of a particular state. Courts will exercise personal jurisdiction over a corporate website owner that knowingly and repeatedly transmits computer files over the internet to residents of a foreign state or repeatedly sells any products or services to residents of a specific State state via its website. (See Zippo Mfg Co., 952 F. Supp. 1119, at 1124 [citing Compuserve, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996)]). products, make reservations and conduct other business, often with a credit card. websites that do not allow viewers to order products online are passive). over the world does not,by itself,amount to the"minimum contacts" sufficient to subject the - between the

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Software, B.V.,27 the court stated that a corporation has a legal status only within the state or territory in which it was organized. For this reason, a corporation organized in another country has no personality to file suits in the Philippines. In order to In the Supreme Court case entitled Global Business Holdings, Inc. v. Surecomp

service of process. Without such license, it cannot institute a suit in the Philippines. courts, it must acquire a license from the Commission and appoint an agent for subject a foreign corporation doing business in the country to the jurisdiction of our

Systems, et al.,28 stated that "the purpose of the rule requiring foreign corporations to need them later for its own protection. While foreign investors are always prepared as an indispensable condition to respect and be bound by Philippine law in secure a license to do business in the Philippines is to enable us to exercise jurisdiction over them for the regulation of their activities in this country. If a foreign corporation operates in the Philippines without submitting to our laws) it is only just that it not be allowed to invoke them in our courts when it should welcome in this land to collaborate with us for our mutual benefit, they must be proper cases, as in the one at bar." The Supreme Court, in another case entitled Granger Associates v. Microwave

foreign corporation may be sued or proceeded against before the Philippine courts or administrative tribunals on any valid cause of action under Philippine laws. to obtain a license to do business from the Commission, it shall not be permitted to maintain a suit or action in any court or administrative agency. However, such As can be seen, if a foreign corporation doing business in the Philippines fails

or burdensome process. Should SCEH desire to register its business in the Registration of Foreign Investment; (vi) Resident Agent's Acceptance of following: (i) filling up the Cover Sheet, Name Verification Slip and Application Form29; (ii) submitting an authenticated copy of the Board Resolution authorizing served in behalf of the foreign corporation; (iii) submitting an authenticated copy of the Articles of Incorporation / Partnership / Establishment; (iv) submitting Financial Statements;30 (v) submitting Notarized Proof of Inward Remittance - For BSP Philippines, the requirements to obtain a license from the Commission essentially involve the submission of documents and payment of fees. The requirements are the the establishment of the Branch/Representative Office in the Philippines and designating the Resident Agent to whom summons and other legal processes may be Appointment. Lastly, the registration of a corporation in the Philippines is not an elaborate

29 F-103 for Stock Branch Office, F-104 for Stock Representative Office, F-108 for Non-Stock Branch 28 G.R. No. 79986, 14 September 1990. 27 G.R. No. 173463, 13 October 2010 30 Per SEC MC No. 11, series of 2013. and Representative Office

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condition,31 and will be required to pay the filing fees/charges.32 Lastly, SCEH must thereafter submit its annual reports to the Commission such as the General Information Sheet and Annual Financial Statement. Further, SCEH will be required to show that it is solvent and in sound financial

issues raised therein and shall not be used in the nature of a standing rule binding contemplated business activity is covered by any foreign ownership limitation as this was not posed as a query, nor were there sufficient facts presented in order to draw a facts relied upon are different, this opinion shall be rendered void. solely on the facts and circumstances disclosed and relevant solely to the particular upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances.33 There was no discussion on whether or not the conclusion. If, upon further inquiry and investigation, it will be disclosed that the It shall be understood, however, that the foregoing opinion is rendered based

Please be guided accordingly.

Very truly yours,

CAMYLUS.CORREA General Counsel

/crm/csc/bjgv/elba

32 Pursuant to SEC MC No. 5, 2004 33 Paragraph 7, SEC Memorandum Circular No. 15, Series of 2003. 31 Section 125 of the Corporation Code.