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Foreign Investment Act

Steelcase v Design International Selections

Facts: Steelcase is a foreign corporation existing under the laws of Michigan, United States of America,
and engaged in the manufacture of office furniture with dealers worldwide. Respondent Design
International Selections, Inc. is a corporation existing under Philippine Laws and engaged in the furniture
business, including the distribution of furniture.

Sometime in 1986 or 1987, Steelcase and DISI orally entered into a dealership agreement whereby
Steelcase granted DISI the right to market, sell, distribute, install, and service its products to end-user
customers within the Philippines. The business relationship continued smoothly until it was terminated
sometime in January 1999 after the agreement was breached with neither party admitting any fault.

Steelcase filed a complaint for sum of money against DISI for the said unpaid account of $600k. DISI alleged
that the complaint failed to state a cause of action and to contain the required allegations on Steelcase’s
capacity to sue in the Philippines despite the fact that it (Steelcase) was doing business in the Philippines
without the required license to do so. Consequently, it posited that the complaint should be dismissed
because of Steelcase’s lack of legal capacity to sue in Philippine courts.

RTC: The RTC stated that in requiring DISI to meet the Dealer Performance Expectation and in terminating
the dealership agreement with DISI based on its failure to improve its performance in the areas of business
planning, organizational structure, operational effectiveness, and efficiency, Steelcase unwittingly
revealed that it participated in the operations of DISI. It then concluded that Steelcase was “doing
business” in the Philippines, as contemplated by Republic Act (R.A.) No. 7042 (The Foreign Investments
Act of 1991), and since it did not have the license to do business in the country, it was barred from seeking
redress from our courts until it obtained the requisite license to do so. Its determination was further
bolstered by the appointment by Steelcase of a representative in the Philippines. Finally, despite a
showing that DISI transacted with the local customers in its own name and for its own account, it was of
the opinion that any doubt in the factual environment should be resolved in favor of a pronouncement
that a foreign corporation was doing business in the Philippines, considering the twelve-year period that
DISI had been distributing Steelcase products in the Philippines.

CA: Affirmed the decision of SC. Steelcase was a foreign corporation doing or transacting business in the
Phil without a license.

ISSUE: WON CA committed error?

Ruing: Yes. CA decision reversed and set aside.

The rule that an unlicensed foreign corporations doing business in the Philippine do not have the capacity
to sue before the local courts is well-established. Section 133 of the Corporation Code of the Philippines
explicitly states: Sec. 133. Doing business without a license.—No foreign corporation transacting business
in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any
valid cause of action recognized under Philippine laws. The phrase “doing business” is clearly defined in
Section 3(d) of R.A. No. 7042 (Foreign Investments Act of 1991), to wit: d) The phrase “doing business”
shall include soliciting orders, service contracts, opening offices, whether called “liaison” offices or
branches; appointing representatives or distributors domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods totaling one hundred eighty (180) days or more;
participating in the management, supervision or control of any domestic business, firm, entity or
corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some
of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose
and object of the business organization: Provided, however, That the phrase “doing business” shall not
be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly
registered to do business, and/or the exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a representative or distributor
domiciled in the Philippines which transacts business in its own name and for its own account.

Cargill Inc. v. Intra Strata Assurance Corp.

Cargill (foreign)is a corporation organized and existing under the laws of the State of Delaware.
Cargill executed a contract with Northern Mindanao Corporation (NMC)(domestic), whereby NMC agreed
to sell to petitioner 20,000 to 24,000 metric tons of molasses to be delivered from Jan 1 to 30 1990 for
$44 per metric ton. The contract provided that CARGILL was to open a Letter of Credit with the BPI. NMC
was permitted to draw up 500,000 representing the minimum price of the contract. The contract was
amended 3 times (in relation to the amount and the price).But the third amendment required NMC to put
up a performance bond which was intended to guarantee NMC’s performance to deliver the molasses
during the prescribed shipment periods. In compliance, INTRA STRATA issued a performance bond to
guarantee NMC’s delivery. NMC was only able to deliver 219551 metric tons out of the agreed
10,500.Thus CARGILL sent demand letters to INTRA claiming payment under the performance.

Issue: Whether petitioner, an unlicensed foreign corporation, has legal capacity to sue before Philippine
courts

Ruling: Yes.

Under Article 123 of the Corporation Code, a foreign corporation must first obtain a license and a
certificate from the appropriate government agency before it can transact business in the Philippines.
Where a foreign corporation does business in the Philippines without the proper license, it cannot
maintain any action or proceeding before Philippine courts as provided under Section 133 of the
Corporation Code.

The determination of whether a foreign corporation is doing business in the Philippines must be based on
the facts of each case. In the case of Antam Consolidated, Inc. v. CA, 143 SCRA 288 (1986), in which a
foreign corporation filed an action for collection of sum of money against petitioners therein for damages
and loss sustained for the latter’s failure to deliver coconut crude o il, the Court emphasized the
importance of the element of continuity of commercial activities to constitute doing business in the
Philippines.
There is no showing that the transactions between petitioner and Northern Mindanao Corporation (NMC)
signify the intent of petitioner to establish a continuous business or extend its operations in the
Philippines. Activities with Philippine jurisdiction that do not constitute doing business in the Philippines.

To constitute “doing business,” the activity undertaken in the Philippines should involve profitmaking;
“Soliciting purchases” has been deleted from the enumeration of acts or activities which constitute “doing
business.” A foreign company that merely imports goods from a Philippines exporter, without opening an
office or appointing an agent in the Philippines is not doing business in the Philippines.

Roy v Herbosa

Facts: On June 28, 2011, the Court issued the Gamboa Decision,... that the term "capital" in Section 11,
Article XII of the 1987 Constitution refers only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares, and not to the total outstanding capital
stock (common and non-voting preferred shares).

The Gamboa Decision attained finality on October 18, 2012, and Entry of Judgment was thereafter issued
on December 11, 2012

On May 20, 2013, the SEC, through respondent Chairperson Teresita J. Herbosa, issued SEC-MC No. 8

Section 2. All covered corporations shall, at all times, observe the constitutional or statutory ownership
requirement. For purposes of determining compliance therewith, the required percentage of Filipino
ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote
in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.

On June 10, 2013, petitioner Roy, as a lawyer and taxpayer, filed the Petition,[15] assailing the validity of
SEC-MC No. 8 for not conforming to the letter and spirit of the Gamboa Decision and Resolution and for
having been issued by the SEC with grave abuse of discretion.

Issue: whether the SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of the Gamboa
Decision and Gamboa Resolution

Ruling:

As defined in the SRC-IRR, “[b]eneficial owner or beneficial ownership means any person who, directly or
indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares
voting power (which includes the power to vote or direct the voting of such security) and/or investment
returns or power (which includes the power to dispose of, or direct the disposition of such security).” The
term “full beneficial ownership” found in the Foreign Investment Act-Implementing Rules and Regulations
(FIA-IRR) is to be understood in the context of the entire paragraph defining the term “Philippine
national.” Mere legal title is not enough to meet the required Filipino equity, which means that it is not
sufficient that a share is registered in the name of a Filipino citizen or national, i.e., he should also have
full beneficial ownership of the share.

If a “specific stock” is owned by a Filipino in the books of the corporation, but the stock’s voting power or
disposing power belongs to a foreigner, then that “specific stock” will not be deemed as “beneficially
owned” by a Filipino. If the Filipino has the “specific stock’s” voting power, or the Filipino has the
investment power over the “specific stock,” or he has both, then such Filipino is the “beneficial owner” of
that “specific stock” and that “specific stock” is considered as part of the sixty percent (60%) Filipino
ownership of the corporation.

The “beneficial owner or beneficial ownership” definition in the Implementing Rules and Regulations of
the Securities Regulation Code (SRC-IRR) is understood only in determining the respective nationalities of
the outstanding capital stock of a public utility corporation in order to determine its compliance with the
percentage of Filipino ownership required by the Constitution. The application of the sixty-forty (60-40)
Filipino-foreign ownership requirement separately to each class of shares, whether common, preferred
nonvoting, preferred voting or any other class of shares fails to understand and appreciate the nature and
features of stocks as financial instruments. That stock corporations are allowed to create shares of
different classes with varying features is a flexibility that is granted, among others, for the corporation to
attract and generate capital (funds) from both local and foreign capital markets.

As mandated by Section 11, Article XII of the Constitution, all the executive and managing officers of a
public utility company must be Filipinos. Thus, the all-Filipino management team must first be convinced
that any of the eight (8) corporate actions in Section 6 of the Corporation Code will be to the best interest
of the company. Allowing stockholders holding preferred shares without voting rights to vote in the eight
(8) corporate matters enumerated in Section 6 of the Corporation Code is an acknowledgment of their
right of ownership. A too restrictive definition of “capital” will surely have a dampening effect on the
business milieu by eroding the flexibility inherent in the issuance of preferred shares with varying terms
and conditions.

Cemco Holdings

Facts

Union Cement Corporation (UCC), a publicly-listed company, has two principal stockholders - UCHC, a
non-listed company, with shares amounting to 60.51%, and petitioner Cemco with 17.03%. Majority of
UCHC's stocks were owned by BCI with 21.31% and ACC with 29.69%. Cemco, on the... other hand, owned
9% of UCHC stocks.

BCI informed the Philippine Stock Exchange (PSE) that it and its subsidiary ACC had passed resolutions to
sell to Cemco BCI's stocks in UCHC equivalent to 21.31% and ACC's stocks in UCHC equivalent to 29.69%.

Issues

Whether or not the SEC has jurisdiction over respondent's complaint and to require Cemco to make a
tender offer for respondent's UCC shares.

Whether or not the rule on mandatory tender offer applies to the indirect acquisition of shares in a listed
company, in this case, the indirect acquisition by Cemco of 36% of UCC, a publicly-listed company, through
its purchase of the shares in UCHC, a non-listed... company.

Whether or not the questioned ruling of the SEC can be applied retroactively to Cemco's transaction which
was consummated under the authority of the SEC's prior resolution.

Ruling:
Petitioner's stance fails to persuade.The foregoing provision bestows upon the SEC the general
adjudicative power which is implied from the express powers of the Commission or which is incidental to,
or reasonably necessary to carry out, the performance of the administrative duties entrusted to it.as the
incidental power to conduct hearings and render decisions. SEC has the competence to render the
particular decision it made in this case.

SEC has the authority to promulgate rules and regulations, subject to the limitation that the same are
consistent with the declared policy of the Code.The power conferred upon the SEC to promulgate rules
and regulations is a legislative recognition of the complexity and the constantly-fluctuating nature of the
market and the impossibility of foreseeing all the possible contingencies that cannot be addressed in
advance.

Petitioner is barred from questioning the jurisdiction of the SEC. It must be pointed out that petitioner
had participated in all the proceedings before the SEC and had prayed for affirmative relief.Petitioner did
not question the jurisdiction of the SEC when it rendered an opinion favorable to it.

It was only when the case was before the

Court of Appeals and after the SEC rendered an unfavorable judgment against it that petitioner challenged
the SEC's competence.

Tender offer is a publicly announced intention by a person acting alone or in concert with other persons
to acquire equity securities of a public company. A public company is defined as a corporation which is
listed on an... exchange, or a corporation with assets exceeding P50,000,000.00 and with 200 or more
stockholders, at least 200 of them holding not less than 100 shares of such company. Stated differently, a
tender offer is an offer by the acquiring person to... stockholders of a public company for them to tender
their shares therein on the terms specified in the offer.[14] Tender offer is in place to protect minority
shareholders against any scheme that dilutes the share value of their investments. It gives the... minority
shareholders the chance to exit the company under reasonable terms, giving them the opportunity to sell
their shares at the same price as those of the majority shareholders.

The rule in this jurisdiction is that the construction given to a statute by an administrative agency charged
with the interpretation and application of that statute is entitled to great weight by the courts, unless
such construction is clearly shown to be in sharp contrast with... the governing law or statute.[18] The
rationale for this rule relates not only to the emergence of the multifarious needs of a modern or
modernizing society and the establishment of diverse administrative agencies for addressing and
satisfying those needs;... it also relates to accumulation of experience and growth of specialized
capabilities by the administrative agency charged with implementing a particular statute.[19]

Gabionza v CA

Facts

Betty Go Gabionza (Gabionza) and Isabelita Tan (Tan) filed their respective Complaints-affidavit1 charging
private respondents Luke Roxas (Roxas) and Evelyn Nolasco (Nolasco) with several criminal acts. Roxas
was the president of ASB Holdings, Inc. (ASBHI) while Nolasco was the senior vice president and treasurer
of the same corporation.
The complaints were for estafa under Article 315(2)(a) and (2)(d) of the Revised Penal Code, estafa under
Presidential Decree No. 1689, violation of the Revised Securities Act and violation of the General Banking
Act. A special task force, the Task Force on Financial Fraud (Task Force), was created by the Department
of Justice (DOJ) to investigate the several complaints that were lodged in relation to ASBHI. The Task Force,
dismissed the complaint on 19 October 2000, and the dismissal was concurred in by the assistant chief
state prosecutor and approved by the chief state prosecutor.

Issue: WON the charges against the corporation can also be pinned against Roxas and Nolasco likewise.

Ruling: Yes.

In estafa under Article 315(2)(a), it is essential that such false statement or false representation constitute
the very cause or the only motive which induces the complainant to part with the thing. It is unfair to
expect a person to procure every available public record concerning an applicant for credit to satisfy
himself of the latter’s financial standing—at least, that is not the way an average person takes care of his
concerns. To be clear, it is possible to hold the borrower in a money market placement liable for estafa if
the creditor was induced to extend a loan upon the false or fraudulent misrepresentations of the
borrower. It is one thing for a corporation to issue checks to satisfy isolated individual obligations, and
another for a corporation to execute an elaborate scheme where it would comport itself to the public as
a pseudo investment house and issue postdated checks instead of stocks or traditional securities to
evidence the investments of its patrons.

It bears pointing out that the definition of “securities” set forth in Section 2 of the Revised Securities Act
includes “commercial papers evidencing indebtedness of any person, financial or non-financial entity,
irrespective of maturity, issued, endorsed, sold, transferred or in any manner conveyed to another”; A
check is a commercial paper evidencing indebtedness of any person, financial or non-financial entity, and
where checks were generally rolled over to augment the creditor’s existing investment with a corporation,
they most definitely took on the attributes of traditional stocks. The enactment of the new Code in lieu of
the Revised Securities Act could have extinguished all criminal acts committed under the old law; An
exception to the rule that the absolute repeal of a penal law deprives the court of authority to punish a
person charged with violating the old law prior to its repeal is “where the repealing act reenacts the
former statute and punishes the act previously penalized under the old law.”

SEC v Prosperity

To make a profit, PCI devised a scheme in which, for the price of US$234.00 (subsequently increased to
US$294), a buyer could acquire from it an internet website of a 15-Mega Byte (MB) capacity. At the same
time, by referring to PCI his own down-line buyers, a first-time buyer could earn commissions, interest in
real estate in the Philippines and in the United States, and insurance coverage worth P50,000.00.

To benefit from this scheme, a PCI buyer must enlist and sponsor at least two other buyers as his own
down-lines. These second tier of buyers could in turn build up their own down-lines. For each pair of
down-lines, the buyer-sponsor received a US$92.00 commission. But referrals in a day by the buyer-
sponsor should not exceed 16 since the commissions due from excess referrals inure to PCI, not to the
buyer-sponsor.

Apparently, PCI patterned its scheme from that of Golconda Ventures, Inc. (GVI), which company stopped
operations after the Securities and Exchange Commission (SEC) issued a cease and desist order (CDO)
against it. As it later on turned out, the same persons who ran the affairs of GVI directed PCIs actual
operations.In 2001, disgruntled elements of GVI filed a complaint with the SEC against PCI, alleging that
the latter had taken over GVIs operations. After hearing, the SEC, through its Compliance and Enforcement
unit, issued a CDO against PCI. The SEC ruled that PCIs scheme constitutes an Investment contract and,
following the Securities Regulations Code, it should have first registered such contract or securities with
the SEC. The CA ruled that, following the Howey test, PCIs scheme did not constitute an investment
contract that needs registration pursuant to R.A. 8799, hence, this petition.

Issue: WON PCIs scheme constitutes an investment contract that requires registration under R.A. 8799.

Ruling: NO.

The Securities Regulation Code treats investment contracts as securities that have to be registered with
the SEC before they can be distributed and sold. An investment contract is a contract, transaction, or
scheme where a person invests his money in a common enterprise and is led to expect profits primarily
from the efforts of others. The United States Supreme Court held in Securities and Exchange Commission
v. W.J. Howey Co. that, for an investment contract to exist, the following elements, referred to as the
Howey test must concur:

(1) a contract, transaction, or scheme;

(2) an investment of money;

(3) investment is made in a common enterprise;

(4) expectation of profits; and

(5) profits arising primarily from the efforts of others.

Thus, to sustain the SEC position in this case, PCIs scheme or contract with its buyers must have all these
elements. An example that comes to mind would be the long-term commercial papers that large
companies, like San Miguel Corporation (SMC), offer to the public for raising funds that it needs for
expansion. When an investor buys these papers or securities, he invests his money, together with others,
in SMC with an expectation of profits arising from the efforts of those who manage and operate that
company. SMC has to register these commercial papers with the SEC before offering them to investors.

Here, PCIs clients do not make such investments. They buy a product of some value to them: an Internet
website of a 15-MB capacity. The client can use this website to enable people to have internet access to
what he has to offer to them, say, some skin cream.

The buyers of the website do not invest money in PCI that it could use for running some business that
would generate profits for the investors. The price of US$234.00 is what the buyer pays for the use of the
website, a tangible asset that PCI creates, using its computer facilities and technical skills.

Actually, PCI appears to be engaged in network marketing, a scheme adopted by companies for getting
people to buy their products outside the usual retail system where products are bought from the stores
shelf.

Under this scheme, adopted by most health product distributors, the buyer can become a down-line
seller. The latter earns commissions from purchases made by new buyers whom he refers to the person
who sold the product to him. The network goes down the line where the orders to buy come. The
commissions, interest in real estate, and insurance coverage worth P50,000.00 are incentives to downline
sellers to bring in other customers.

These can hardly be regarded as profits from investment of money under the Howey test. The CA is right
in ruling that the last requisite in the Howey test is lacking in the marketing scheme that PCI has adopted.
Evidently, it is PCI that expects profit from the network marketing of its products. PCI is correct in saying
that the US$234 it gets from its clients is merely a consideration for the sale of the websites that it
provides.

SEC v Santos

Sometime in 2007, yet another investment scam was exposed with the disappearance of its primary
perpetrator, Michael H.K. Liew (Liew), a self–styled financial guru and Chairman of the Board of Directors
of Performance Investment Products Corporation (PIPC–BVI), a foreign corporation registered in the
British Virgin Islands. To do business in the Philippines, PIPC–BVI incorporated herein as Philippine
International Planning Center Corporation (PIPC Corporation). Because the head of PIPC Corporation had
gone missing and with it the monies and investment of a significant number of investors, the SEC was
flooded with complaints from thirty–one (31) individuals against PIPC Corporation, its directors, officers,
employees, agents and brokers for alleged violation of certain provisions of the Securities Regulation
Code, including Section 28 thereof. Santos was charged in the complaints in her capacity as investment
consultant of PIPC Corporation, who supposedly induced private complainants Luisa Mercedes P. Lorenzo
(Lorenzo) and Ricky Albino P. Sy (Sy), to invest their monies in PIPC Corporation.

Issue: WON Santos can be prosecuted for Section 28 of the Securities Regulation Code.

Ruling: YES.

Generally, at the preliminary investigation proper, the investigating prosecutor, and ultimately, the
Secretary of the DOJ, is afforded wide latitude of discretion in the exercise of its power to determine
probable cause to warrant criminal prosecution. The determination of probable cause is an executive
function where the prosecutor determines merely that a crime has been committed and that the accused
has committed the same. The rules do not require that a prosecutor has moral certainty of the guilt of a
person simply for preliminary investigation purposes.

The authority of the prosecutor and the Department of Justice (DOJ) is not absolute; it cannot be exercised
arbitrarily or capriciously. The transaction initiated by Santos with Sy and Lorenzo, respectively, is an
investment contract or participation in a profit sharing agreement that falls within the definition of the
law. When the investor is relatively uninformed and turns over his money to others, essentially depending
upon their representations and their honesty and skill in managing it, the transaction generally is
considered to be an investment contract. The touchstone is the presence of an investment in a common
venture premised on a reasonable expectation of profits to be derived from the entrepreneurial or
managerial efforts of others.