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JOINT VENTURES

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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. Bolaños, 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.

and a particular partnership may have for its object a specific undertaking. 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. emphasis supplied) Without qualms or equivocation. and as such is to be governed by the laws on partnership.‖ (Article 1771. New Civil Code). with the intention of dividing the profits among themselves. v. 467) . a partnership may be particular or universal. 180 SCRA 130 (1989). . 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. That means that no special form. In Kilosbayan. Commission of Elections. they have entered into a joint venture arrangement which is a form of partnership. since under the Civil Code. the Court observed that a joint venture is akin to a particular partnership. Following-up on the Kilosbayan’s definition of a joint venture. is necessary to give rise to a partnership. terms and conditions. Civil Code). even one seeking to establish a joint venture arrangement. clauses. treated a joint venture arrangement as a partnership. where it held that: . Reiterated in Information Technology Foundation of the Philippines v. or even a representation by them that they have come together in common venture. which may be altered by agreement to share both in profit and losses. (Ibid. considered a ―consortium‖ to be an association of corporations bound in a joint venture arrangement. . the Court ruled – ―When the parties have entered into a Joint Venture Agreement. a joint venture is a form of partnership and should thus be governed by the laws of partnership. thereto. 232 SCRA 110 (1994). 341 SCRA 740 (2000). The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general business with some degree of continuity. property. Board of Investments (BOI). and duty. except where immovable property or real rights are contributed. Commission on Elections . . (Art. Corp. a sharing of risks. Civil Code) It would seem therefore that under Philippine law. 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. 1783. or authority given by the other companies authorizing the declaring company that to represent or bind them in a collective basis.. thus: Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise–generally all contribute assets and share risks. The position that a joint venture is a species of partnerships has been upheld by the Court in Aurbach v. citing Black‘s Law Dictionary. Inc. public order.‖ (at p.‖ then a partnership is created.Since the prevailing contract rule in the Philippines is that parties to a contract may establish such stipulations. no model joint venture agreements have been published by the Securities and Exchange Commission (SEC). v. the Court adopted Black‘s definition of a joint venture. or industry to a common fund. Court of Appeals. Guingona. morals. as they may deem convenient. Inc. b. (At pp. the Court in Information Technology Foundation of the Philippines v. while the joint venture is formed for the execution of a single transaction. Joint Ventures Are a Species of Partnerships The treatment of joint ventures today has come full circle. . Court of Appeals. 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. 493 SCRA 444 (2006). v. which provides that when ―two or more persons bind themselves to contribute money. Sanitary Wares Manufacturing Corp. In Heirs of Tan Eng Kee v. This observation is not entirely accurate in this jurisdiction. 143-44. the acts of working together in a joint project. good customs. In Primelink Properties and Dev. or public policy (Article 1306. and is thus of a temporary nature. provided that they are not contrary to laws. profits and losses. It requires a community of interest in the performance of the subject matter. no evidence was adduced covering a joint venture agreement. in which case a public instrument shall be necessary. the Court in JG Summit Holdings. 419 SCRA 141 (2004). 419 SCRA 141 [2004]) The foregoing definition of a joint venture essentially falls within the statutory definition of what constitutes a partnership. nor any other authority. Lazatin-Magat. 412 SCRA 10 (2003). a right to direct and govern the policy connected therewith.

(Arts. While a corporation. 1803. The basis for such prohibition on corporations is that in entering into a partnership. Bolaños. v. community of interests in the business and sharing of profits and losses. in Philex Mining Corp. the co-venturers acting on behalf of the joint venture are agents of joint venture and of each other. cannot generally enter into a contract of partnership unless authorized by law or its charter. Special Treatments Given to Joint Ventures Jurisprudence. 1830. 1774. Civil Code) (d) Generally. 477 SCRA 576 (2005). Therefore.e. then it would be a joint venture arrangement. although the corporate parties executed the instrument as a ―Power of Attorney‖ and referred to themselves as ―principal‖ and ―manager. the Court held that a joint venture is hardly distinguishable from. Civil Code) and (e) Death. 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. Only recently. has tended to give joint ventures special treatment not accorded to ordinary partnerships. to assume that their directors will conduct the corporate business without sharing that duty and responsibility with others. however. (cf Art. a joint venture as a firm can enter into contracts and own properties in the firm‘s name. i. 1978 Ed. v. retirement. 438-439) (1) Partnership Characteristics of Joint Venture Arrangements Since a joint venture is a species of partnerships.. This is in consonance with the delectus personaeprinciple applicable to partnerships. two or more persons bind themselves to contribute money. 1824 to 1826. Tuason v. and 1839. Litonjua. with the intention of dividing the profits among themselves. 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. like petitioner. 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. there is no doubt that the incidents imposed by the Law on Partnerships on every kind of partnership must befall every joint venture arrangement. (Art. Sr. Under a contract of partnership. (Bautista. (Arts. Jr. Civil Code) In Litonjua. 95 Phil. Commissioner of Internal Revenue. Treatise on Philippine Partnership Law. 1817. and that being a form of partnership. at p. Article 1768. governed by the Law on Partnership. and may be likened to. (Arts. c. civil interdiction or dissolution of a coventurer dissolves the joint venture. a partnership since their elements are similar. The doctrine is grounded on the theory that the stockholders of a corporation are entitled. 1804 and 1813. 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. it would have the following characteristics of a partnership. 551 SCRA 428 (2008). 9) As discussed previously. 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.. (at pp. insolvency. property.With joint venture arrangements being clearly classified as a form of particular partnership. in the absence of any notice to the contrary in the articles of incorporation.‖ the Court held that when the essential elements of a partnership are present.. thus: (a) It constitutes a juridical personality separate and distinct from that of each of the co-venturers. a joint venture is generally governed by the law on partnership. 1818 to 1823. or industry to a common fund. thus An examination of the ―Power of Attorney‖ reveals that a partnership or joint venture was indeed intended by the parties. 1816. Civil Code) (c) Even if a co-venturer transfers his interest to another. 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. 106 (1954). recognized in Philippine jurisdiction the doctrine in Anglo-American . the transferee does not become a co-venturer to the others in the joint venture unless all the other co-venturers consent.

Weston. Sept. the SEC provided for a clear exception to the foregoing ruling. Corp. Ed. 80 A. which is entirely inconsistent with the policy in Corporate Law that the corporation shall be managed by its Board of Directors. allows the board to fully bind the corporation to matters essentially within the boards business appreciation and anticipation. 1082) Although Tuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement. (b) The agreement on the articles of partnership must provide that all the partners shall manage the partnership. and allowed corporations to enter into partnership arrangements.. realizing that the second condition actually prevented a corporation from entering into a limited partnership. it would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers. dated 3 September 1984. 278. the SEC. and the articles of partnership must stipulate that all the partners shall be jointly and severally liable for all the obligations of the partners. XXVIII SEC Quarterly Bulletin 18 [No. Alternative Forms in Structuring a Joint Venture In Aurbach v. 1. 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. when the Board of Directors of a corporation evaluate the risks and responsibilities involved. and the risks involved. since ―there is no existing Philippine law that expressly prohibits a corporation from becoming a limited partner in a partnership. Sec. 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 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. and (c) If it is a foreign corporation.R.quoting from Wyoming-Indiana Oil Gas Co. SEC Opinion.‖ In effect..jurisprudence that ―a corporation has no power to enter into a partnership. documentary stamps of P15. 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. 29 February 1980. 17 August 1995.‖ (Ibid. reconsidered its position and ruled that a corporation may become a limited partner in a limited partnership. citing 6 Fletcher Cyc. 22 December 1966. the SEC dropped the second condition imposed previously. Repl. thus — .citing Fletcher Cyc. (SEC Opinion. 1950. 1994] ) Lately. of Corp. Under Sec. 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. v.‖ Nevertheless.L. XXX SEC Quarterly Bulletin 8 [No. 192 of the National Internal Revenue Code. Perm. it necessarily followed that a partnership of corporations should be organized as a ―general partnership‖. 1043. 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. 23 February 1994. it must obtain a license to transact business in the country in accordance with the Philippine Corporation Code. 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 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.. at p. Tuason ruled that a corporation may validly enter into a joint venture agreement. Later. June 1996]) 3. (SEC Opinion. 3. (SEC Opinion. and would therefore not be held liable (beyond its investment) for debts arising from the acts of the general partners. ―where the nature of that venture is in line with the business authorized by its charter.. 2520). Rev. 180 SCRA 130 (1989). In one opinion. provided the following conditions are met: (SEC Opinion.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. Sanitary Wares Manufacturing Corp. The situation therefore in a joint venture arrangement. SEC FOLIO 1960-1976.

although the business of pursuing to a successful termination may continue for a number of years. the usual rules as regards the construction and operation of contracts generally apply to a contract of joint venture. and much less a new juridical person. nonetheless.. after the Court held that a joint venture is akin to a particular partnership. The foreign group may. should there be an intention . It has ruled that generally. so to speak. Dev. 180 SCRA 130 (1989). in cases of corporations which come together in coventure over a particular project. the courts should extend protection especially in industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens. 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‖. would necessarily give rise to a partnership (Article 1767. To the extent that such subversive actions can be lawfully prevented. property or industry to a common fund (i. The co-venturers therefore intend their relationship to be primarily governed by the contractual terms agreement upon them in the joint venture agreement. 147.citing V. Court of Appeals. Harman. However. no formal registration of the enterprise is made with the appropriate government agencies. (167) 43 NYS 556) Even the SEC itself has recognized such an informal arrangement. use of its brand names. Or the covetousness may come later. However. (b) by partnership arrangement. Thus. 1995]. As the Philippine firm enlarges its operations and becomes profitable. in Heirs of Tan Eng Kee v. Aurbach v. 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.e. no separate books of accounts are kept. 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. there is a always the danger from such arrangements. 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. 142) Parties have varied choices of legal forms in planning a joint venture arrangement. a. 753. CIVIL CODE OF THE PHILIPPINES ANNOTATED 546 [13th ed.. In a joint account. a ―Joint Venture Agreement‖ or a ―Memorandum of Agreement‖ is executed by the co-venturers to provide for the terms of arrangement. 14 App. 341 SCRA 740 (2000). thus: ―Moreover. to the public. the foreign group undermines the local majority ownership and actively tries to completely or predominantly take over the entire company. a joint venture agreement of two corporations need not be registered with the SEC. from the start. but not necessarily a joint adventure is limited to a SINGLE TRANSACTION. Arrangements are formalized where a foreign group becomes a minority owner of a firm in exchange for its manufacturing expertise. and thereby a partnership juridical personality arises ―separate and distinct from that of the partners. the participating merchants can transact business under their own name. (At p. to pursue a business enterprise) with the intention of dividing the profits among themselves. underscoring supplied) In such an instance. has affirmed the principle that joint venture arrangements must primarily be viewed as binding contractual commitments.citing O’Hara v.. New Civil Code). This undermining of joint ventures is not consistent with fair dealing to say the least. a partnership generally relates to a continuing business of various transactions of a certain kind.E. Sanitary Wares Manufacturing Corp. and they can pursue the same through the following formats: (a) informal or contractual joint venture arrangement. but the business enterprise will be pursued in the names of the co-venturers through their duly authorized representatives.‖ (At p. or (c) through a joint venture corporation. No separate company office is set-up. (at p.Quite often. with no firm name and no legal personality. provided it will not result in the formation of a new partnership or corporation. New Civil Code). PARAS. and other such assistance.‖ (Article 1768. (b) Usually. and can be individually liable therefore. 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.

principalagent. 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. 143). property.‖ (Sec. but when controversy arises by which rights and obligations have to be determined. 29 April 1985. purported for PCSO to lease the lottery facilities of the latter in order to operate nationally the on-line lottery system known as ―lotto‖. 232 SCRA 110 (1994). the same requires registration with the SEC in order to have a separate legal personality to obtain a separate TIN. Under a contract of partnership. which contract need not be registered with the SEC. v. 551 SCRA 428 (2008). (SEC Opinion. 3. the Philippine Charity and Sweepstakes Office (PCSO) was prohibited by its charter from holding and conducting lotteries ―in collaboration. 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). Commissioner of Internal Revenue. under a ―contractual joint-venture format. Sept. as amended by B.‖ the co-venturers pursue the joint venture arrangement by a private contract between them. company or entity. or as principal-manager. Jr. 438439) It is clear from the ruling 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. caused the mining companies the obligation to pay unpaid income taxes in the several millions of pesos. 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. 30 March 1995. provided. like petitioner. (SEC Opinion. 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. 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. 42) In order not to be violate such prohibition. This was the sort of arrangement sought to be pursued in Philex Mining Corp. PCSO entered into a ―Contract of Lease‖ with the Philippine Gaming Management Corporation (PGMC). however that the joint venture will not result in the formation of a new partnership or corporation. whether domestic or foreign. While a corporation. 1.to acquire a separate Tax Identification Number (TIN) from the Bureau of Internal Revenue for the business venture. In finding that ―notwithstanding its denomination or designation as aContract of Lease‖ (at p. Rep.. 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. where in the operation of a mining concession between two corporations. thus – An examination of the ―Power of Attorney‖ reveals that a partnership or joint venture was indeed intended by the parties. In Philex Mining. And the hard lesson that was learned was that since a joint venture arrangement is a species of partnership. cannot generally enter into a contract of partnership unless authorized by law or its charter. their rights and liabilities. choosing not to represent to third parties or to the public a separate firm undertaking the project. Ultimately. two or more persons bind themselves to contribute money. or industry to a common fund. Under such an arrangement. Act No. at pp. since by the terms of the arrangement the essential elements of a partnership existed. Guingona. the relationship of the co-venturers. 89) Thus. are governed by the joint venture contract executed among them. The Court refused to consider the relationship between the parties as debtor-creditor. association or joint venture with any person. at p. association. Blng. SEC Annual Opinions 1985. (Ibid.P. with the intention of dividing the profits among themselves. XXIX SEC Quarterly Bulletin 32 [No. Incorporated v. the failed attempt in Philex Mining to veil the arrangement as one as not being a joint venture arrangement. 1169. 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. 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. the purported lease arrangement violated the statutory . A more graphical example of an attempt to hide the joint venture arrangement can be found in Kilosbayan. that the parties to a business venture may choose to treat one another as not being bound by a partnership relationship. In that case.

because of its confessed unwillingness to bear expenses and risks. Under such an arrangement. underscoring supplied). in that it actually covered a joint venture arrangement between PCSO and PGMC. or the articles of partnership. As contrasted from the informal joint venture arrangement discussed above. The evidence presented by petitioners falls short of the quantum of proof required to establish a partnership. it would have it ―at no expense or risks to the government. in its profits. The so-called Contract of Lease is not. above all. and register the same with the SEC. what is purports to be. and management of the On-Line Lottery System. Although the trial court found that there was a joint venture arrangement. . and that although it wished to have the system. The Court observed: All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit. 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. A review of the record persuades us that the Court of Appeals correctly reversed the decision of the trial court. therefore. . and be governed by the legal rules and principles pertaining to. which may also be denominated as a ―Joint Venture Agreement. . Court of Appeals. the only contribution the PCSO would have is its franchise or authority to operate the on-line lottery system. 148-149). In short. 754). 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. and the PCSO the lease. plus the inability of the heirs to indicate by clear evidence the essential elements of a partnership. x x x. and. this lesson can best be shown in the decision in Tan Eng Kee v. but inherent in a joint venture.‖ (at p. (at p. 144-146. 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 PCSO‘s charter. with a separate and distinct juridical personality. The Court held that ―This risk-bearing provision is unusual in a lessor-lessee relationship. and at the same time bearing the risks of loss. particular partnerships. with the rest. 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. The net effect. the co-venturers execute formal Articles of Partnership. (at pp.prohibition. as well as the firm name and structure of the company that they are forming. . in the losses–with the PGMC bearing the greatest burden because of its assumption of expenses and risks. Such a joint venture arrangement would then be operated as. It is outstanding for its careful and meticulous drafting designed to given an immediate impression that it is a contract of lease. They exhibit and demonstrate the parties‘ indivisible community of interest in the conception. conduct. b. operation. Its denomination as such is a crafty device. Apart from the lessons learned from the decisions in Kilosbayanand Philex Mining already discussed above. birth and growth of the on-line lottery. including the risks of the business. no joint venture arrangement can be imputed into the business enterprise. 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. with each having a right in the formulation and implementation of policies related to the business and sharing.‖ embodying their arrangements. 147).‖ x x x. carefully conceived. the best evidence [of a partnership] would have been the contract of partnership itself. being borne by the proponent or bidder. Yet. The acuity or skill of its draftsmen to accomplish that purpose easily manifest itself in the Contract of lease. the Supreme Court affirmed the ruling of the Court of Appeals that in the absence of a contract of partnership. 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. however. 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. (at pp. thus — Undoubtedly. as well. is that we are asked to determine whether a partnership existed based purely on circumstantial evidence. 341 SCRA 740 (2000).

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. 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. (b) In case there are provisions or clauses in the joint venture agreement not found in the charter of the joint venture corporation.. American Standards Inc. 134).‘‖ (at p. such provisions and clauses remain binding contracts among the joint venture parties signatory to the agreement.I. In a situation where a corporate vehicle is formed in pursuance of the joint venture arrangements. either from new issuances of the capital stock of the existing corporation. although the joint venture agreement may contain rules on management and control of the joint venture corporation. the manner of management . (2) Jurisprudential Rulings on the Scheme of JV Corporation The decision in Aurbach v. 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.c. 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. (Government of the P. to override the business management of the corporate affairs of the joint venture corporation by its board of directors. (1) Corporate Principles versus JVA Provisions In equity joint ventures. In short.. a Delaware corporation. Manila Railroad Co. 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. 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. but also implemented by certain provisions of the articles of incorporation and by-laws of the joint venture corporation. (b) between the stockholders and the State. they are bound Corporate Law principles under which the entity must operate. 52 Phil. by having adopted the corporate entity as the medium by which the coventurers have sought to pursue the joint venture enterprise. 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. and (c) between the corporation and its stockholders. the rights and obligations of the parties among themselves are covered not only in a separate joint venture agreement. v. best illustrates the strength and weakness of a joint venture arrangement pursued through the medium of a joint venture corporation. as equity owners. In addition. or sold shares from those already issued in the names of the other co-venturers. 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 Agreement executed between the American group taking 40% equity in the venture. 180 SCRA 130 (1989). (ASI). Sanitary Wares Manufacturing Corp. the provisions of the latter shall prevail. An equity joint venture may also be pursued where a co-venturer is allocated the agreed shares of stock in an existing corporation. Joint Venture Arrangement Pursued Through a Joint Venture Corporation Equity joint ventures are also available in Philippine setting. it does not authorize the co-venturers. 699 [1929]). but do not bind the joint venture corporation or other parties not signatories thereto. Jurisprudence does not support the outright primacy of Corporate Law principles in a joint venture scheme pursued through a joint venture company. provided for the particulars covering the articles of incorporation of the joint venture company to be formed. The articles of incorporation is characterized as a contract between and among three parties: (a) between the State and the corporation. and Filipino group taking 60% equity in the venture.

. The joint venture company was registered. (at p. a result which is clearly contrary to the contractual intent of the parties. not only on their three (3) nominees. and may even be able to get a majority of the board seats. (at p. x x x . which provided for cumulative voting for stock corporations. 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. 128 P. 2nd 751. the Agreement contained the following provision on the Management of the joint venture corporation. 20 Cal. however. As long as AmericanStandard [ASI] shall own at least 30% of the outstanding stock of the 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. The Court was asked to decide the issue on ―the nature of the business established by the parties—whether it was a joint venture or a corporation‖ (at p.R. 2nd 668).citing Terminal Shares. Chicago. According to the Filipino group. including the grant of veto powers over a number of corporate acts and the right to designate certain officers. 65 F. which like any partnership arrangement. 139).‖ (at pp. and Q. since it was the contention of ASI that ―the actual intention of the parties should be viewed strict on the ‗Agreement‘ . . they had a right to cast their votes on all nominees for the Board of Directors. are primarily contractual in character. Management (a) The management of the Corporation shall be vested in a Board of Directors.‖ (at p. when the American group wanted to cast their vote. 140-141). such as a member of the Executive Committee whose vote was required for important corporate transactions. (DC MO). 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. which shall consist of nine [9] individuals. and ―The joint enterprise thus entered into by the Filipino investors and the American corporation [ASI] prospered. . there came a deterioration of the initially harmonious relations between the two groups. Unfortunately. 134-135). Universal Sales Corp. the Court gave the basic doctrine when it comes to joint venture arrangement. 134). v. 139). should not be allowed to interfere in the voting within the Filipino group. Suppl 678. the friction between the two groups came to a head. 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. The Court resolved that – In the instant cases. and the manner by which the two groups would elected the Board of Directors.‖ In resolving the issues. (at pp. . 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. thus: 5. Otherwise. 139. and not just on their allotted three nominees. Inc. as well as ―provisions designed to protect [ASI] as a minority group. Co. ASI would be able to designate more than the three directors it is allowed to designate under the Agreement.. 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. with the business successes. B. 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. wherein it is clearly stated that the parties‘ intention was to form a corporation and not a joint venture‖ (at p. but also on the nominees of the Filipino group on the ground that under Section 24 of the Corporation Code. 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. v. In particular. As aptly stated by the appellate court: x x x ASI.thereof. and the other six [6] shall be designated by the other stockholders of the Corporation. 135). California Press Mfg. three [3] of the nine directors shall be designated by American-Standard [ASI]. Co. In the annual stockholders‘ meeting in 1983.

nonetheless. thus – The Lagdameo Group stated in their appellees‘ brief in the Court of Appeals: ―x x x. Under a close corporation setting. 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. x x x. in said articles of incorporation. Aurbach emphasizes that joint venture arrangements are first and foremost contractual agreements. 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. to the extent that such agreements are not inconsistent with the articles of incorporation. the same principles applicable to formal close corporations. (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. In particular. except those required by this Title [on close corporations] to be embodied.‖ 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. shall be held on record by not more than a specified number of persons. a close corporation is one which provides in its articles of incorporation the following three requisites: (a) all of the corporation‘s issued stock of all classes. shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders. 148). should also apply to equally closely-held corporation. ―Secondly. and the courts ruled that substantial justice lay with those . In essence. (3) JV Company Organized as a Close Corporation Under the Corporation Code. not exceeding twenty (20). even assuming that Saniwares is technically not a close corporation because it has more than 20 stockholders.– 1. Although the Court in Aurbuch did not make a formal ruling on the matter. . such as those organized pursuant to a formal joint venture agreement. 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. Agreements by stockholders. Agreements by and among stockholders executed before the formation and organization of a close corporation. signed by all stockholders. appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation. x x x. Section 100 of the Corporation Code provides that: Sec.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. . 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. 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. exclusive of treasury shares. 100. ―In the United States. Surely. if such be their intent. the undeniable fact is that it is a close-held corporation. (at p. . 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. Corporation Code). irrespective of whether the provisions of such agreements are contained. 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 officers and employees may be elected or appointed directly by the stockholders (Section 97. Corporation Code).

and provided a ―right of first refusal‖ on the equity shares should either of the co-venturer decide to sell. The joint venture between the Philippine Government and KAWASAKI is in the nature of a partnership which. which provides for informal management of its affairs. . exclusion of new parties and non-dilution of equity considerations. 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.‖ (at p. What one notices clearly extant in JG Summit Holdings is that although what was bidded were shares of stock is a duly registered corporation. By the negative list scheme.. 29). 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 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. and the right of first refusal was not found expressed in any provision of the articles of incorporation and by-laws. 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. when it involves foreign investment. binding effect of written agreements among stockholders. was enacted to promote foreign investments. should be deemed to be available to resolve issues pertaining to joint venture corporations. activities. . . (at p.‖ (at pp. etc. It is the basic law that provides the conditions. unlike an ordinary corporation. where the National Investment and Development Corporation (NIDC). Ltd. and (b) new Philseco shares are issued. When later on the government shares in PHILSECO were bidded out. 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). . 412 SCRA 10 (2003). of Kobe. a. The JVA provided for a 60% Filipino-40% Japanese equity. v. 142-144). and limitation of foreign equity. forming the Philippine Shipyard and Engineering Corporation (PHILSECO) to engage in operation and management of shipyard. and procedures where foreign enterprises may invest and do business in the Philippines. the non-selling partner may acquire all these shares and terminate the partnership. It also applies to joint venture arrangements in the Philippines. These areas must involve foreign investments as defined under Republic Act No. 4. a government corporation. is based on delectus personae. Court of Appeals. entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries. No person or corporation can be compelled to remain or to continue the partnership . The Court matter-of-factly recognized the ―partnership‖ arrangement between the original parties in the joint venture company. Japan. 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. ‖FIA ‗91‖. nonetheless. 7042. of restrictions on foreign equity and foreign management and control on certain restricted areas or activities. known as the Foreign Investments Act of 1991. 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. 31). No one can become a member of the partnership association without the consent of all the other associates. The Court further held – . ―x x x.litigants who relied on the joint venture agreement rather than the litigants who relied on the orthodox principles of corporation law. The provisions of the Corporation Code on close corporations. the Act simply established the restricted areas. . tax consequences. and declared all other areas as open to unlimited foreign equity participation. assign or transfer its interest in the joint venture. (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. Should the selling partner decide to dispose all its shares. and prescribes the procedures for registering enterprises doing business in the Philippines.

d. 18. by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. Sec Quarterly Bulletin 44 [No. SEC Opinion. 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. XXVII Sec Quarterly Bulletin 29 [No. 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. Dec. 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) . XXIV Sec Quarterly Bulletin 52 [No. 1993]. the co-ventures would be faced with prospects of ―unlimited liability‖ pervading in such arrangement. In recognizing and applying the grandfather rule. SEC Opinion. Tax Issues In the field of Taxation. 2. Inc. SEC Opinion. 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. 2. and both are subject to corporate income tax. Court of Appeals. 6 November 1989. XXIV Sec Quarterly Bulletin 56 [No. No one can become a member of the partnership association without the consent of all the other associates. B. 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. provided for under the Constitution and other nationalization laws. 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. (1) Application of the Grandfather Rule constitution or other special laws are limited to Filipino citizens only. SEC Opinion. both a partnership and a joint venture are treated as corporate taxpayers. 14 April 1993. March 1994].Essentially. Sept. XXVII Sec Quarterly Bulletin 15 (No. c.‖ (SEC Opinion. . 14 December 1989. the capital or ownership of which under the Whether it be the contractual joint venture arrangement or the partnership arrangement. Under Philippine Partnership Law. 1. Export enterprises may enter all activities not restricted by Lists A and B of the negative list. 1. Therefore. . is computed. 30 May 1990. with foreign equity. may enter all activities not restricted by Lists A. XXVIII Sec Quarterly Bulletin 39 [No. 23 November 1993. SEC Opinion. 29-31 [2003]). 4. v. June 1990]. 6 August 1991. 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. (SEC Opinion. 3. Sept. SEC Opinion. 3. the FIA ‗91 provides for foreign investment negative list which spells out the activities reserved for Philippine national. 3. XXIV Sec Quarterly Bulletin 7 [No. the SEC has adopted the formula of the Secretary of Justice (DOJ Opinion No. XXIV Sec Quarterly Bulletin 7 [No. unlike an ordinary corporation. [because] The joint venture . it is nor qualified to invest in or enter into a joint venture agreement with corporation or partnerships. 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. in cases where corporate shareholders are present in the situation. June 1990]). The SEC was quick to add: ―However. March 1990]). 1990]. and domestic enterprises. It must be stressed however. 23 March 1993. 1991]. 1993). . Exclusions of New Parties. is in the nature of a partnership which. . while a corporation with 60% Filipino and 40% Foreign equity ownership is considered a Philippine national for purposes of investment. 412 SCRA 10. s. . 14 December 1989. that the afore-quoted SEC rule applies for purposes of resolving issues on investments. Sept. is based ondelectus personae. and C of the negative lists.‖ (JG Summit Holdings.

―a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum. (Per amendment to NIRC of 1997 introduced by Rep. . 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. geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. The income tax rate will go down to 30% beginning 01 January 2009. dividends distributed are subject to another tax when received by the stockholders. and the tax on improperly accumulated earnings has likewise been re-imposed (Section 29. Act 9337. however. coal. NIRC of 1997). many of the previous tax laws that tended to make corporate vehicles expensive had been abolished. and those formed to engage in petroleum operations pursuant to an operating agreement under a service contract with the Government (Pres. Except for dividends declared by domestic corporation in favor of foreign corporation (Section 25(a) and (b). 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). as in undertakings that require privacy. NIRC of 1977). since the private arrangements should allow the co-venturers to continue reporting separately their participation in the project in their own tax returns. since formal joint ventures are taxed as corporate taxpayer. and to entice the use of the corporation as the vehicle for such investment. under the reforms embodied in the NIRC of 1997. NIRC of 1977). the corporation has traditionally been subjected to heavier taxation than other forms of business organization.‖ shall not be taxed separately as a corporate taxpayer (Section 22(B). since partnerships are subject to the 35% net income tax for corporations. 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. and also the inability to take advantage of the zero-rate of dividends for corporation. the contractual joint venture lessens the need to have to register the project as a separate corporate taxpayer. as well as inter-corporate dividends between domestic corporations (Section 24. With the trust of Government to encourage both local and foreign investments in the country.except that under the National Internal Revenue Code of 1997. There had also been an abolition of the personal holding companies tax and tax on unreasonably accumulated surplus of corporations (Executive Order No. joint ventures formed for the purpose of undertaking construction projects (Pres. The contractual joint venture has the advantage of limiting the extent of the arrangement between and among the co-venturers. NIRC of 1997). 37 [1986]). when the partnership declares and distributes profits. were subject to zero-rate of income taxation. Decree 1682) are exempt from corporate taxation. Lately. Decree 929 [1976]). The aspect of double taxation looms largely in a partnership joint venture arrangement. NIRC of 1977). dividends received by individuals from corporation (Section 21.) Nevertheless. In the Philippines. 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). In addition. NIRC of 1997).