You are on page 1of 13

JOINT VENTURES

________________________________________________

venture arrangements. Under the National Internal Revenue Code of 1997 (NIRC), joint ventures formed for the purpose of engaging in petroleum, coal, geothermal, and other energy operations under an operating or service contract with the Government, or those formed for the purpose of undertaking construction projects, are exempt from corporate income tax. Joint venture arrangements have particularly been the more popular medium when foreign participation is involved in local projects, since the contractual nature of the arrangement allows the parties flexibility in adopting special rules and procedures covering their situations, which would otherwise not be applicable in a purely corporate vehicle arrangement because of the restrictive rules of the Corporation Code and jurisprudence on Philippine Corporate Law.

1. Introduction
It is fitting that a course in Philippine Partnership Law should end with the section on joint ventures, for it is in this field where Supreme Court decisions have become truly transcendent when it comes to protection of national interests or upholding the sanctity of contractual commitments, and consequently where the essence of partnership principles has become more lucent. Discussions on joint ventures first appeared as a sort-of esoteric medium of doing business in Philippine jurisprudence, with an original impression that they were a commercial association different from partnerships. The tendency has therefore been to ascribe to joint venture arrangements certain legal allowances that would never been accepted in the case of strict partnership arrangements. This partiality for joint venture arrangements, which still has remnants in sprinkling statutory provisions, may be attributed to the perception that the joint venture is a more project-oriented medium when compared to the partnership which tends to be branded with the attributes of primarily being contractual relationship bounded by the doctrine of delectus personae, and thereby being more party-oriented, person-oriented or even personalityoriented. Although it may not be readily apparent, but joint venture arrangements have become fairly common medium for doing business or undertaking projects in the Philippines, both covering local transactions, when it comes to large infra-structure undertakings involving the resources of big corporations; or structuring partnership arrangements between foreign investors and their local partners in the pursuit of local projects in the Philippines. The Philippine Government encourages the pursuit of construction projects and petroleum, coal, geothermal, and other energy operations under joint

2. Nature of Joint Venture in Philippine Setting


a. Joint Venture Arrangements Partnership Law Principles Primarily Governed by

There was a time when joint ventures were treated separately from partnerships. Take the 1954 decision of Tuason v. Bolaos, 95 Phil. 106 (1954), where the Supreme Court upheld as applicable the old adage in American Corporate Law that though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter. (at p. 109, quoting from Wyoming-Indiana Oil Gas Co., v. Weston, 80 A.L.R., 1043, citing 2 Fletcher Cyc. of Corp., 1082). Tuason does not explain why there was a difference in treatment of corporate involvement in partnerships as compared to that when it come to joint ventures. If we pursue the position that joint ventures must be treated differently from partnerships then it can be said that apart from specific reference in the National Internal Revenue Code, there is no statutory provision that formally governs directly joint ventures, although they have been recognized in jurisprudence and commonplace in commercial ventures. Consequently, joint venture agreements fall generally within the realm of Contract Law.

Since the prevailing contract rule in the Philippines is that parties to a contract may establish such stipulations, clauses, terms and conditions, as they may deem convenient, provided that they are not contrary to laws, morals, good customs, public order, or public policy (Article 1306, New Civil Code), no model joint venture agreements have been published by the Securities and Exchange Commission (SEC), Board of Investments (BOI), nor any other authority. b. Joint Ventures Are a Species of Partnerships The treatment of joint ventures today has come full circle, in that the prevailing school of thought in the Philippines is that joint ventures are a species of the partnerships falling within the definition under Article 1767 of the New Civil Code, which provides that when two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves, then a partnership is created. In Kilosbayan, Inc. v. Guingona, 232 SCRA 110 (1994), the Court adopted Blacks definition of a joint venture, thus: Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprisegenerally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy connected therewith, and duty, which may be altered by agreement to share both in profit and losses; the acts of working together in a joint project. (At pp. 143-44, citing Blacks Law Dictionary. Reiterated in Information Technology Foundation of the Philippines v. Commission on Elections , 419 SCRA 141 [2004]) The foregoing definition of a joint venture essentially falls within the statutory definition of what constitutes a partnership. Other reasons as to why a joint venture must be considered a species of partnerships is that the Law on Partnerships provides that A partnership may be constituted in any form, except where immovable property or real rights are contributed, thereto, in which case a public instrument shall be necessary. (Article 1771, Civil Code). That means that no special form, even one seeking to establish a joint venture arrangement, is necessary to give rise to a partnership.

Following-up on the Kilosbayans definition of a joint venture, the Court in Information Technology Foundation of the Philippines v. Commission of Elections, 419 SCRA 141 (2004), considered a consortium to be an association of corporations bound in a joint venture arrangement, and held that the involvement of several companies in a large project would not constitute them into a consortium nor a joint venture when nothing shows a community of interest, a sharing of risks, profits and losses, or even a representation by them that they have come together in common venture. The Court found in that case that apart from a short and unsupported statement by one of the companies that it was representing a consortium, no evidence was adduced covering a joint venture agreement, or authority given by the other companies authorizing the declaring company that to represent or bind them in a collective basis. The position that a joint venture is a species of partnerships has been upheld by the Court in Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), where it held that: . . . The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. . . This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code) It would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of partnership. (Ibid; emphasis supplied) Without qualms or equivocation, the Court in JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003), treated a joint venture arrangement as a partnership. In Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), the Court observed that a joint venture is akin to a particular partnership. In Primelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006), the Court ruled When the parties have entered into a Joint Venture Agreement, they have entered into a joint venture arrangement which is a form of partnership, and as such is to be governed by the laws on partnership. (at p. 467)

With joint venture arrangements being clearly classified as a form of particular partnership, there is no doubt that the incidents imposed by the Law on Partnerships on every kind of partnership must befall every joint venture arrangement. Only recently, in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), although the corporate parties executed the instrument as a Power of Attorney and referred to themselves as principal and manager, the Court held that when the essential elements of a partnership are present, then it would be a joint venture arrangement, governed by the Law on Partnership, thus An examination of the Power of Attorney reveals that a partnership or joint venture was indeed intended by the parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. While a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership relationship: x x x Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine. (at pp. 438-439) (1) Partnership Characteristics of Joint Venture Arrangements Since a joint venture is a species of partnerships, it would have the following characteristics of a partnership, thus: (a) It constitutes a juridical personality separate and distinct from that of each of the co-venturers. Article 1768, of the New Civil Code provides specifically that the partnership has a juridical personality seprate and distinct from that of each of the partners even in case of failure to comply with the registration requirements of law. Therefore, a joint venture as a firm can enter into contracts and own properties in the firms name; (cf Art. 1774, Civil Code) (b) Each of the co-venturers would be liable with their private property to the creditors of the joint venture beyond their contributions to the joint venture; (Arts. 1816, 1817, 1824 to 1826, and 1839, Civil Code)

(c) Even if a co-venturer transfers his interest to another, the transferee does not become a co-venturer to the others in the joint venture unless all the other co-venturers consent. This is in consonance with the delectus personaeprinciple applicable to partnerships; (Arts. 1804 and 1813, Civil Code) (d) Generally, the co-venturers acting on behalf of the joint venture are agents of joint venture and of each other; (Arts. 1803, 1818 to 1823, Civil Code) and (e) Death, retirement, insolvency, civil interdiction or dissolution of a coventurer dissolves the joint venture. (Art. 1830, Civil Code) In Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005), the Court held that a joint venture is hardly distinguishable from, and may be likened to, a partnership since their elements are similar, i.e., community of interests in the business and sharing of profits and losses; and that being a form of partnership, a joint venture is generally governed by the law on partnership. c. Special Treatments Given to Joint Ventures Jurisprudence, however, has tended to give joint ventures special treatment not accorded to ordinary partnerships. Philippine jurisprudence had adopted the prevailing rule in the United States that a corporation cannot ordinarily enter into partnerships with other corporations or with individuals. The basis for such prohibition on corporations is that in entering into a partnership, the identity of the corporation is lost or merged with that of another and the direction of the affairs is placed in other hands than those provided by law of its creation. The doctrine is grounded on the theory that the stockholders of a corporation are entitled, in the absence of any notice to the contrary in the articles of incorporation, to assume that their directors will conduct the corporate business without sharing that duty and responsibility with others. (Bautista, Treatise on Philippine Partnership Law, 1978 Ed., at p. 9) As discussed previously, Tuason v. Bolaos, 95 Phil. 106 (1954), recognized in Philippine jurisdiction the doctrine in Anglo-American

jurisprudence that a corporation has no power to enter into a partnership. Nevertheless, Tuason ruled that a corporation may validly enter into a joint venture agreement, where the nature of that venture is in line with the business authorized by its charter. (Ibid,quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043,citing Fletcher Cyc. of Corp., 1082) Although Tuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement, it would seem that the policy behind the prohibition on why a corporation cannot be made a partner does not apply in a joint venture arrangement. Being only a particular project or undertaking, when the Board of Directors of a corporation evaluate the risks and responsibilities involved, they can more or less exercise their own business judgment is determining the extent by which the corporation would be involved in the project and the likely liabilities to be incurred. The situation therefore in a joint venture arrangement, unlike in an ordinarily partnership arrangement which may expose the corporation to any and various liabilities and risks which cannot be evaluated and anticipated by the board, allows the board to fully bind the corporation to matters essentially within the boards business appreciation and anticipation. The previous ruling of the SEC on the matter is that a corporation cannot enter into a contract of partnership with an individual or another corporation on the premise that if a corporation enters into a partnership agreement, it would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers, which is entirely inconsistent with the policy in Corporate Law that the corporation shall be managed by its Board of Directors. (SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl. 1950, Sec. 2520). Later, the SEC provided for a clear exception to the foregoing ruling, and allowed corporations to enter into partnership arrangements, provided the following conditions are met: (SEC Opinion, 29 February 1980; SEC Opinion, dated 3 September 1984. Under Sec. 192 of the National Internal Revenue Code, documentary stamps of P15.00 must be affixed on each proxy) (a) The authority to enter into a partnership relation is expressly conferred by the charter or the articles of incorporation of the corporation, and the

nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or articles of incorporation; (b) The agreement on the articles of partnership must provide that all the partners shall manage the partnership, and the articles of partnership must stipulate that all the partners shall be jointly and severally liable for all the obligations of the partners; and (c) If it is a foreign corporation, it must obtain a license to transact business in the country in accordance with the Philippine Corporation Code. In one opinion, the SEC clarified that the conditions imposed meant that since the partners in a partnership of corporations are required to stipulate that all of them shall manage the partnership and they shall be jointly and severally liable for all the obligations of the partnership, it necessarily followed that a partnership of corporations should be organized as a general partnership. (SEC Opinion, 23 February 1994, XXVIII SEC Quarterly Bulletin 18 [No. 3, Sept. 1994] ) Lately, the SEC, realizing that the second condition actually prevented a corporation from entering into a limited partnership, which it allowed to do so would then be more congruent with the policy that the corporation would then not be held liable for its venture beyond the investments made and determined by its Board of Directors, and would therefore not be held liable (beyond its investment) for debts arising from the acts of the general partners, reconsidered its position and ruled that a corporation may become a limited partner in a limited partnership, since there is no existing Philippine law that expressly prohibits a corporation from becoming a limited partner in a partnership. In effect, the SEC dropped the second condition imposed previously. (SEC Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8 [No. 1, June 1996])

3. Alternative Forms in Structuring a Joint Venture


In Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), the Supreme Court discussed background of the use of joint ventures when it comes to Filipino investors inviting foreign participation in a local project, and the risks involved, thus

Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a local firm are constrained to seek the technology and marketing assistance of huge multinational corporations of the developed world. Arrangements are formalized where a foreign group becomes a minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other such assistance. However, there is a always the danger from such arrangements. The foreign group may, from the start, intend to establish its own sole or monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine firm enlarges its operations and becomes profitable, the foreign group undermines the local majority ownership and actively tries to completely or predominantly take over the entire company. This undermining of joint ventures is not consistent with fair dealing to say the least. To the extent that such subversive actions can be lawfully prevented, the courts should extend protection especially in industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens. (at p. 142) Parties have varied choices of legal forms in planning a joint venture arrangement, and they can pursue the same through the following formats: (a) informal or contractual joint venture arrangement; (b) by partnership arrangement; or (c) through a joint venture corporation. a. Informal or Contractual Joint Venture Arrangement In spite of the peremptory provisions under the Law of Partnerships that any agreement by which two or more persons bind themselves to contribute money, property or industry to a common fund (i.e., to pursue a business enterprise) with the intention of dividing the profits among themselves, would necessarily give rise to a partnership (Article 1767, New Civil Code), and thereby a partnership juridical personality arises separate and distinct from that of the partners, (Article 1768, New Civil Code), nonetheless, in cases of corporations which come together in coventure over a particular project, there has been in implicit recognition that such a venture can be pursued merely as a private enterprise with no

intention to present a new or separate firm or company, and much less a new juridical person, to the public. Thus, in Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), after the Court held that a joint venture is akin to a particular partnership, it distinguished one from the other as follows: (a) A joint adventure (an American concept similar to ourjoint accounts) is a sort of informal partnership, with no firm name and no legal personality. In a joint account, the participating merchants can transact business under their own name, and can be individually liable therefore. (b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing to a successful termination may continue for a number of years; a partnership generally relates to a continuing business of various transactions of a certain kind. (At p. 753,citing V.E. PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED 546 [13th ed., 1995]; underscoring supplied) In such an instance, a Joint Venture Agreement or a Memorandum of Agreement is executed by the co-venturers to provide for the terms of arrangement, but the business enterprise will be pursued in the names of the co-venturers through their duly authorized representatives. No separate company office is set-up, no separate books of accounts are kept, no formal registration of the enterprise is made with the appropriate government agencies. The co-venturers therefore intend their relationship to be primarily governed by the contractual terms agreement upon them in the joint venture agreement. Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), has affirmed the principle that joint venture arrangements must primarily be viewed as binding contractual commitments, thus: Moreover, the usual rules as regards the construction and operation of contracts generally apply to a contract of joint venture. (At p. 147,citing OHara v. Harman, 14 App. Dev. (167) 43 NYS 556) Even the SEC itself has recognized such an informal arrangement. It has ruled that generally, a joint venture agreement of two corporations need not be registered with the SEC, provided it will not result in the formation of a new partnership or corporation. However, should there be an intention

to acquire a separate Tax Identification Number (TIN) from the Bureau of Internal Revenue for the business venture; the same requires registration with the SEC in order to have a separate legal personality to obtain a separate TIN. (SEC Opinion, 30 March 1995, XXIX SEC Quarterly Bulletin 32 [No. 3, Sept. 1995]) The SEC has also ruled that two or more corporations may enter into a joint venture through a contract or agreement (contractual joint venture) if the nature of the venture is authorized by their charters, which contract need not be registered with the SEC; provided, however that the joint venture will not result in the formation of a new partnership or corporation. (SEC Opinion, 29 April 1985, SEC Annual Opinions 1985, at p. 89) Thus, under a contractual joint-venture format, the co-venturers pursue the joint venture arrangement by a private contract between them, choosing not to represent to third parties or to the public a separate firm undertaking the project. Under such an arrangement, the relationship of the co-venturers, their rights and liabilities, are governed by the joint venture contract executed among them. This was the sort of arrangement sought to be pursued in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), where in the operation of a mining concession between two corporations, they executed merely a Power of Attorney and designated one another principal (the owner of the concession) and manager (the entity that would directly manage development and operations). The Court refused to consider the relationship between the parties as debtor-creditor, principalagent, or as principal-manager, since by the terms of the arrangement the essential elements of a partnership existed, thus An examination of the Power of Attorney reveals that a partnership or joint venture was indeed intended by the parties. Under a contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. While a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership relationship: x x x Perusal of the agreement denominated as the Power of Attorney indicates that the parties had intended to create a partnership and establish a common fund

for the purpose. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine. (Ibid, at pp. 438439) It is clear from the ruling in Philex Mining, that the parties to a business venture may choose to treat one another as not being bound by a partnership relationship, but when controversy arises by which rights and obligations have to be determined, the courts would have no choice by to impute the legal relationship of a partnership or joint venture arrangement when the essential elements of a partnership are present. In Philex Mining, the Court refused to allow the parties to treat the advances made to the venture as loans or advances to one another, holding that advances made by a co-venturer in the joint venture business which cannot be recovered cannot be treated as bad debts and deducted for income tax purposes; the relationship between co-venturers in a joint venture arrangement cannot be considered a creditor-debtor relationship with respect to their advances and contributions to the business enterprise. Ultimately, the failed attempt in Philex Mining to veil the arrangement as one as not being a joint venture arrangement, caused the mining companies the obligation to pay unpaid income taxes in the several millions of pesos. And the hard lesson that was learned was that since a joint venture arrangement is a species of partnership, then the peremptory provisions and principles under the Law on Partnerships will be the once employed by the courts to smoke out whether the underlying agreement was a joint venture arrangement. A more graphical example of an attempt to hide the joint venture arrangement can be found in Kilosbayan, Incorporated v. Guingona, Jr., 232 SCRA 110 (1994). In that case, the Philippine Charity and Sweepstakes Office (PCSO) was prohibited by its charter from holding and conducting lotteries in collaboration, association or joint venture with any person, association, company or entity, whether domestic or foreign. (Sec. 1, Rep. Act No. 1169, as amended by B.P. Blng. 42) In order not to be violate such prohibition, PCSO entered into a Contract of Lease with the Philippine Gaming Management Corporation (PGMC), purported for PCSO to lease the lottery facilities of the latter in order to operate nationally the on-line lottery system known as lotto. In finding that notwithstanding its denomination or designation as aContract of Lease (at p. 143), the purported lease arrangement violated the statutory

prohibition, in that it actually covered a joint venture arrangement between PCSO and PGMC, the Court held The contemporaneous acts of the PCSO and the PGMC reveal that the POCSO had neither funds of its own nor the expertise to operate and manage an on-line lottery system, and that although it wished to have the system, it would have it at no expense or risks to the government. x x x. In short, the only contribution the PCSO would have is its franchise or authority to operate the on-line lottery system; with the rest, including the risks of the business, being borne by the proponent or bidder. x x x. The so-called Contract of Lease is not, therefore, what is purports to be. Its denomination as such is a crafty device, carefully conceived, to provide a built-in defense in the event that the agreement is questioned as violate of the exception in Section 1(b) of the PCSOs charter. The acuity or skill of its draftsmen to accomplish that purpose easily manifest itself in the Contract of lease. It is outstanding for its careful and meticulous drafting designed to given an immediate impression that it is a contract of lease. Yet, woven therein are provisions which negate its title and betray the true intention of the parties to be in or to have a joint venture for a period of eight years in the operation and maintenance of the on-line lottery system. (at pp. 144-146; underscoring supplied). The joint venture arrangement was found to exists under the Contract of Lease with finding by the Court of the essential element of participating in the profits of the on-line lottery system, and at the same time bearing the risks of loss. The Court held that This risk-bearing provision is unusual in a lessor-lessee relationship, but inherent in a joint venture. (at p. 147). The Court observed: All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit, operation, conduct, and management of the On-Line Lottery System. They exhibit and demonstrate the parties indivisible community of interest in the conception, birth and growth of the on-line lottery, and, above all, in its profits, with each having a right in the formulation and implementation of policies related to the business and sharing, as well, in the losseswith the PGMC bearing the greatest burden because of its assumption of expenses and risks, and the PCSO the lease,

because of its confessed unwillingness to bear expenses and risks. (at pp. 148-149). b. Joint Venture Pursued under Formal Partnership Arrangements A second type of joint venture arrangement is to formally operate the joint venture set-up as a partnership, with a separate and distinct juridical personality. Under such an arrangement, the co-venturers execute formal Articles of Partnership, which may also be denominated as a Joint Venture Agreement, embodying their arrangements, as well as the firm name and structure of the company that they are forming, and register the same with the SEC. Such a joint venture arrangement would then be operated as, and be governed by the legal rules and principles pertaining to, particular partnerships. As contrasted from the informal joint venture arrangement discussed above, a formal joint venture pursued under formal partnership arrangements provides better protection for the parties in the sense that they have a set of laws by which they can base their rights and claims. Apart from the lessons learned from the decisions in Kilosbayanand Philex Mining already discussed above, this lesson can best be shown in the decision in Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), where the heirs of the purported co-venturer in a lumber and construction supply business sought to recover the decedents share in the enterprise and accumulated profits. Although the trial court found that there was a joint venture arrangement, the Supreme Court affirmed the ruling of the Court of Appeals that in the absence of a contract of partnership, plus the inability of the heirs to indicate by clear evidence the essential elements of a partnership, no joint venture arrangement can be imputed into the business enterprise, thus Undoubtedly, the best evidence [of a partnership] would have been the contract of partnership itself, or the articles of partnership. . . . The net effect, however, is that we are asked to determine whether a partnership existed based purely on circumstantial evidence. A review of the record persuades us that the Court of Appeals correctly reversed the decision of the trial court. The evidence presented by petitioners falls short of the quantum of proof required to establish a partnership. (at p. 754).

c. Joint Venture Arrangement Pursued Through a Joint Venture Corporation Equity joint ventures are also available in Philippine setting, which may cover the formation of a new joint venture company, with each coventurer being allocated proportionate shareholdings in the outstanding capital stock of the joint venture corporation. An equity joint venture may also be pursued where a co-venturer is allocated the agreed shares of stock in an existing corporation, either from new issuances of the capital stock of the existing corporation, or sold shares from those already issued in the names of the other co-venturers. (1) Corporate Principles versus JVA Provisions In equity joint ventures, the rights and obligations of the parties among themselves are covered not only in a separate joint venture agreement, but also implemented by certain provisions of the articles of incorporation and by-laws of the joint venture corporation. In a situation where a corporate vehicle is formed in pursuance of the joint venture arrangements, ideally the joint ventures should be able to fit into the various terms and clauses of the articles of incorporation and by-laws (known as the charter) of the joint venture company the salient features of their joint venture agreements. Considering that the co-venturers have chosen the corporate vehicle by which to pursue their business enterprise, then it would be posited that in situations where joint venture agreements contain provisions not covered by the charter of the joint venture corporation or vice-versa, the resolutions of issues arising therefrom ought to be as follows: (a) In case of conflicts between the provisions of the joint venture agreement and the charter of the joint venture corporation, the provisions of the latter shall prevail; (b) In case there are provisions or clauses in the joint venture agreement not found in the charter of the joint venture corporation, such provisions and clauses remain binding contracts among the joint venture parties signatory to the agreement, but do not bind the joint venture corporation or other parties not signatories thereto.

The foregoing rules of resolution are based on the well-established doctrine under Philippine Corporate Law that the articles of incorporation form a basic contract document defining the charter of the corporation. The articles of incorporation is characterized as a contract between and among three parties: (a) between the State and the corporation; (b) between the stockholders and the State; and (c) between the corporation and its stockholders. (Government of the P.I. v. Manila Railroad Co., 52 Phil. 699 [1929]). In addition, although the joint venture agreement may contain rules on management and control of the joint venture corporation, it does not authorize the co-venturers, as equity owners, to override the business management of the corporate affairs of the joint venture corporation by its board of directors. Any stipulation therefore in the joint venture agreement that seeks to arrogate unto the stockholders thereof the management prerogatives of its board of directors would be null and void. In short, by having adopted the corporate entity as the medium by which the coventurers have sought to pursue the joint venture enterprise, they are bound Corporate Law principles under which the entity must operate. Jurisprudence does not support the outright primacy of Corporate Law principles in a joint venture scheme pursued through a joint venture company. (2) Jurisprudential Rulings on the Scheme of JV Corporation The decision in Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), best illustrates the strength and weakness of a joint venture arrangement pursued through the medium of a joint venture corporation. American Standards Inc. (ASI), a Delaware corporation, entered into an Agreement with Filipino group to participate in the ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling abroad vitreous china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the corporation shall initially be Sanitary Wares Manufacturing Corporation. (at p. 134). The Agreement executed between the American group taking 40% equity in the venture, and Filipino group taking 60% equity in the venture, provided for the particulars covering the articles of incorporation of the joint venture company to be formed, the manner of management

thereof, as well as provisions designed to protect [ASI] as a minority group, including the grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a member of the Executive Committee whose vote was required for important corporate transactions. (at pp. 134-135). In particular, the Agreement contained the following provision on the Management of the joint venture corporation, and the manner by which the two groups would elected the Board of Directors, thus: 5. Management (a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine [9] individuals. As long as AmericanStandard [ASI] shall own at least 30% of the outstanding stock of the Corporation, three [3] of the nine directors shall be designated by American-Standard [ASI], and the other six [6] shall be designated by the other stockholders of the Corporation. (at p. 134). The joint venture company was registered, and The joint enterprise thus entered into by the Filipino investors and the American corporation [ASI] prospered. Unfortunately, with the business successes, there came a deterioration of the initially harmonious relations between the two groups. According to the Filipino group, a basic disagreement was due to their desire to expand the export operations of the company to which ASI objected as it apparently had other subsidiaries of joint venture groups in the countries where Philippine exports were contemplated. (at p. 135). In the annual stockholders meeting in 1983, the friction between the two groups came to a head, when the American group wanted to cast their vote, not only on their three (3) nominees, but also on the nominees of the Filipino group on the ground that under Section 24 of the Corporation Code, which provided for cumulative voting for stock corporations, they had a right to cast their votes on all nominees for the Board of Directors, and not just on their allotted three nominees. The Court was asked to decide the issue on the nature of the business established by the partieswhether it was a joint venture or a corporation (at p. 139), since it was the contention of ASI that the actual intention of the parties should be viewed strict on the Agreement . . . wherein it is clearly stated that the parties intention was to form a corporation and not a joint venture (at p. 139), since a particular

provision in the Agreement provided that nothing herein contained shall be construed to constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder. In resolving the issues, the Court gave the basic doctrine when it comes to joint venture arrangement, which like any partnership arrangement, are primarily contractual in character, thus: The rule is that whether the parties to a particular contract have thereby established among themselves a joint venture or some other relation depends upon the actual intention which is determined in accordance with the rules governing the interpretation and construction of contracts. (at p. 139,citing Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO), 65 F. Suppl 678; Universal Sales Corp. v. California Press Mfg., Co., 20 Cal. 2nd 751, 128 P. 2nd 668). The Court resolved that In the instant cases, our examination of important provisions of the Agreement as well as the testimonial evidence presented by the [witnesses] shows that the parties agreed to establish a joint venture and not a corporation. The history of the organization of Saniwares and the unusual arrangements which govern its policy making body are all consistent with a joint venture and not with an ordinary corporation. (at pp. 140-141). The Court resolved to apply the mandatory provisions of the Corporation Code within the contractual intentions of the parties provided in the joint venture Agreement, and affirmed the formula adopted by the Court of Appeals that the American group can cumulate their votes only within the nominees allotted to them, and held: To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be beholden to them would obliterate their minority status as agreed upon by the parties. As aptly stated by the appellate court: x x x ASI, however, should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be able to designate more than the three directors it is allowed to designate under the Agreement, and may even be able to get a majority of the board seats, a result which is clearly contrary to the contractual intent of the parties. x x x .

Equally important as the consideration of the contractual intent of the parties is the consideration as regards the possible domination by the foreign investors of the enterprise in violation of the nationalization requirements enshrined in the Constitution and circumvention of the AntiDummy Act. x x x. (at p. 148). In essence, Aurbach emphasizes that joint venture arrangements are first and foremost contractual agreements, and as much as possible the contractual intent of the co-venturers should be given realization within the corporate medium by which they pursued the business enterprise. Aurbach recognized that such a principle is not alien to Corporate Law when it quoted arguments that Section 100 of the Corporation Code expressly makes binding written agreements between the stockholders in a close corporation. (3) JV Company Organized as a Close Corporation Under the Corporation Code, a close corporation is one which provides in its articles of incorporation the following three requisites: (a) all of the corporations issued stock of all classes, exclusive of treasury shares, shall be held on record by not more than a specified number of persons, not exceeding twenty (20); (b) all of the issued stock of all classes shall be subject to one or more specified restrictions on transfer in the nature of a right of first refusal; and (c) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any class (Section 96, Corporation Code). Under a close corporation setting, it may be provided in the articles of incorporation that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors, and the officers and employees may be elected or appointed directly by the stockholders (Section 97, Corporation Code). In particular, Section 100 of the Corporation Code provides that: Sec. 100. Agreements by stockholders.

1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation, irrespective of whether the provisions of such agreements are contained, except those required by this Title [on close corporations] to be embodied, in said articles of incorporation. x x x. Although the Court in Aurbuch did not make a formal ruling on the matter, it seems to have given its imprimatur to the proposition that even when a corporation does not comply with the definition of a close corporation under the Corporation Code because the three requisites are not expressly provided for in its articles of incorporation, nonetheless, the same principles applicable to formal close corporations, should also apply to equally closely-held corporation, such as those organized pursuant to a formal joint venture agreement, thus The Lagdameo Group stated in their appellees brief in the Court of Appeals: x x x. Secondly, even assuming that Saniwares is technically not a close corporation because it has more than 20 stockholders, the undeniable fact is that it is a close-held corporation. Surely, appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation. In the United States, many courts have taken a realistic approach to joint venture corporations and have not rigidly applied principles of corporation law designed primarily for public issue corporation. Theses courts have indicated that express arrangements between corporate joint ventures should be construed with less emphasis on the ordinary rules of law usually applied to corporate entities and with more consideration given to the nature of the agreement between the joint venturers. . . . These American cases dealt with legal questions as to the extent to which the requirements arising from the corporate form of joint venture corporations should control, and the courts ruled that substantial justice lay with those

litigants who relied on the joint venture agreement rather than the litigants who relied on the orthodox principles of corporation law. x x x. (at pp. 142-144). The provisions of the Corporation Code on close corporations, which provides for informal management of its affairs, binding effect of written agreements among stockholders, etc., should be deemed to be available to resolve issues pertaining to joint venture corporations. (4) Right of First Refusal as a Delectus Personae Feature in JV Company Scheme Another reported case of a joint venture company arrangement would be in JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003), where the National Investment and Development Corporation (NIDC), a government corporation, entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan, forming the Philippine Shipyard and Engineering Corporation (PHILSECO) to engage in operation and management of shipyard. The JVA provided for a 60% Filipino-40% Japanese equity, and provided a right of first refusal on the equity shares should either of the co-venturer decide to sell, assign or transfer its interest in the joint venture. When later on the government shares in PHILSECO were bidded out, one of the issues that had to be resolved was the validity of the right of first refusal clause found in the JVA. The Court matter-of-factly recognized the partnership arrangement between the original parties in the joint venture company, and characterized the right of first refusal clause in the JVA as a protective mechanisms to preserve their respective interests in the partnership in the event that (a) one party decides to sell its shares to third parties; and (b) new Philseco shares are issued. (at p. 29). The Court further held . . . The right of first refusal is meant to protect the original or remaining joint venturer(s) or shareholder(s) from the entry of third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s). The joint venture between the Philippine Government and KAWASAKI is in the nature of a partnership which, unlike an ordinary corporation, is based on delectus personae. No one can become a member of the partnership association without the consent of all the other associates. The right of

first refusal thus ensures that the parties are given control over who may become a new partner in substitution of or in addition to the original partners. Should the selling partner decide to dispose all its shares, the non-selling partner may acquire all these shares and terminate the partnership. No person or corporation can be compelled to remain or to continue the partnership . . . (at p. 31). What one notices clearly extant in JG Summit Holdings is that although what was bidded were shares of stock is a duly registered corporation, and the right of first refusal was not found expressed in any provision of the articles of incorporation and by-laws, nonetheless, the Court applied its enforceability to a third party bidder who was not privy to the terms of the private JVA between the Government and the foreign investor.

4. Aspects which Influence Choice of JV Scheme The important aspects in choosing the format or scheme by which to pursue the joint venture arrangement would be the issues relating to limited liability considerations, exclusion of new parties and non-dilution of equity considerations, tax consequences, and limitation of foreign equity. a. Defining Joint Ventures Scope of Business Activity The principal consideration in defining the scope of business to be undertaken by joint venture in the Philippines basically revolves around the issue, when it involves foreign investment, of restrictions on foreign equity and foreign management and control on certain restricted areas or activities. These areas must involve foreign investments as defined under Republic Act No. 7042, known as the Foreign Investments Act of 1991. FIA 91, was enacted to promote foreign investments, and prescribes the procedures for registering enterprises doing business in the Philippines. It is the basic law that provides the conditions, activities, and procedures where foreign enterprises may invest and do business in the Philippines. It also applies to joint venture arrangements in the Philippines. By the negative list scheme, the Act simply established the restricted areas, and declared all other areas as open to unlimited foreign equity participation.

Essentially, the FIA 91 provides for foreign investment negative list which spells out the activities reserved for Philippine national. Export enterprises may enter all activities not restricted by Lists A and B of the negative list, and domestic enterprises, with foreign equity, may enter all activities not restricted by Lists A, B, and C of the negative lists. (1) Application of the Grandfather Rule

constitution or other special laws are limited to Filipino citizens only. (SEC Opinion, 14 December 1989, XXIV Sec Quarterly Bulletin 7 [No. 2, June 1990]). A joint venture arrangement would mean that such corporation has become a partner and is deemed then to be acting or involving itself in the operations of a nationalized activity by the acts of the local partners by virtue of the principle of mutual agency b. Limited Liability Feature

The grandfather rule is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases where corporate shareholders are present in the situation, by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. In recognizing and applying the grandfather rule, the SEC has adopted the formula of the Secretary of Justice (DOJ Opinion No. 18, s. 1989) to the effect that: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than 60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. (SEC Opinion, 23 November 1993, XXVIII Sec Quarterly Bulletin 39 [No. 1, March 1994]; SEC Opinion, 14 April 1993, XXVII Sec Quarterly Bulletin 29 [No. 3, Sept. 1993]; SEC Opinion, 23 March 1993, XXVII Sec Quarterly Bulletin 15 (No. 3, Sept. 1993); SEC Opinion, 6 August 1991, Sec Quarterly Bulletin 44 [No. 4, Dec. 1991]; SEC Opinion, 30 May 1990, XXIV Sec Quarterly Bulletin 52 [No. 3, Sept. 1990]; SEC Opinion, 14 December 1989, XXIV Sec Quarterly Bulletin 7 [No. 2, June 1990]; SEC Opinion, 6 November 1989, XXIV Sec Quarterly Bulletin 56 [No. 1, March 1990]). It must be stressed however, that the afore-quoted SEC rule applies for purposes of resolving issues on investments. The SEC was quick to add: However, while a corporation with 60% Filipino and 40% Foreign equity ownership is considered a Philippine national for purposes of investment, it is nor qualified to invest in or enter into a joint venture agreement with corporation or partnerships, the capital or ownership of which under the

Whether it be the contractual joint venture arrangement or the partnership arrangement, the co-ventures would be faced with prospects of unlimited liability pervading in such arrangement. Under Philippine Partnership Law, partners (except limited partner in formally registered limited partnership) and con-venturers are liable for partnership debts beyond their contributions to the parternship or joint venture arrangements. Therefore, the use of the joint venture company as the format to pursue the joint venture arrangement allows the co-venturers to take full advantage of the limited liability features of the corporate vehicle especially in projects and undertakings which embody certain risks. c. Exclusions of New Parties; Non-Dilution of Equity The ability of the co-venturers to present the venture among the original parties through a right of first refusal clause has been recognized as valid by the Supreme Court as a means to protect the original or remaining joint venturer(s) or shareholder(s) from the entry of third persons who are not acceptable to it as co-venturer(s) or coshareholder(s) . . . [because] The joint venture . . . is in the nature of a partnership which, unlike an ordinary corporation, is based ondelectus personae. No one can become a member of the partnership association without the consent of all the other associates. The right of first refusal thus ensures that the parties are given control over who may become a new partner in substitution of or in addition to the original partners. (JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10, 29-31 [2003]). d. Tax Issues In the field of Taxation, both a partnership and a joint venture are treated as corporate taxpayers, and both are subject to corporate income tax,

except that under the National Internal Revenue Code of 1997, a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government, shall not be taxed separately as a corporate taxpayer (Section 22(B), NIRC of 1997). The contractual joint venture has the advantage of limiting the extent of the arrangement between and among the co-venturers, as in undertakings that require privacy. In addition, since formal joint ventures are taxed as corporate taxpayer, the contractual joint venture lessens the need to have to register the project as a separate corporate taxpayer, since the private arrangements should allow the co-venturers to continue reporting separately their participation in the project in their own tax returns. The corporate entity route also allows the co-venturers to take advantage of zero rate taxability of dividends declared by corporations in instances provided under the National Internal Revenue Code. In the Philippines, the corporation has traditionally been subjected to heavier taxation than other forms of business organization; dividends distributed are subject to another tax when received by the stockholders. With the trust of Government to encourage both local and foreign investments in the country, and to entice the use of the corporation as the vehicle for such investment, many of the previous tax laws that tended to make corporate vehicles expensive had been abolished. Except for dividends declared by domestic corporation in favor of foreign corporation (Section 25(a) and (b), NIRC of 1977), dividends received by individuals from corporation (Section 21, NIRC of 1977), as well as inter-corporate dividends between domestic corporations (Section 24, NIRC of 1977), were subject to zero-rate of income taxation. There had also been an abolition of the personal holding companies tax and tax on unreasonably accumulated surplus of corporations (Executive Order No. 37 [1986]). Lately, however, under the reforms embodied in the NIRC of 1997, a final tax of 10% has been re-imposed on dividends received by residents and citizens declared from corporate earnings after 1 January 1998 (Section 24(B)(2), NIRC of 1997); a final tax of 20% on dividends received by a nonresident alien individual has been re-imposed from corporate earnings after 1 January 1998 (Section 25(A)(1), NIRC of 1997); and the tax on

improperly accumulated earnings has likewise been re-imposed (Section 29, NIRC of 1997). The pursuit of joint venture arrangements under a formal partnership arrangement has the disadvantage of inviting into the arrangement the features of unlimited liability for partnership debts to the co-venturers, and also the inability to take advantage of the zero-rate of dividends for corporation, when the partnership declares and distributes profits. The aspect of double taxation looms largely in a partnership joint venture arrangement, since partnerships are subject to the 35% net income tax for corporations. (Per amendment to NIRC of 1997 introduced by Rep. Act 9337. The income tax rate will go down to 30% beginning 01 January 2009.) Nevertheless, joint ventures formed for the purpose of undertaking construction projects (Pres. Decree 929 [1976]), and those formed to engage in petroleum operations pursuant to an operating agreement under a service contract with the Government (Pres. Decree 1682) are exempt from corporate taxation.