Last meeting, we discussed about the Tests.
(1) The ownership and
1. Incorporation test – Determined by the state of
incorporation, regardless of the nationality of the
stockholders.
2. Domiciliary test – Determined by the principal
place of business of the corporation.
3. Control test – Determined by the nationality of
the controlling stockholders or members. This
test is applied in times of war.
4. Grandfather rule – Nationality is attributed to
the percentage of equity in the corporation used
in nationalized or partly nationalized area.
It is basic in corporate law that the nationality of a
corporation serves as a legal basis for subjecting
an enterprise or its activities to the laws, the
economic and fiscal powers, and the various
social and financial policies of the state to which
it is supposed to belong. In Philippine jurisdiction,
there are several tests employed to determine the
nationality of corporations: The Place of
Incorporation Test, The Control Test, War Time
Test and the Investment Test or the so-called
"Grandfather Rule."
Now let’s go to the Constitutional provision.
Article XVI, Section 11 of the 1987
Constitution provides:
Section 11.
management of mass media shall be limited
to citizens of the Philippines, or to
corporations, cooperatives or associations,
wholly-owned and managed by such citizens.
The Congress shall regulate or prohibit
monopolies in commercial mass media when
the public interest so requires. No
combinations in restraint of trade or unfair
competition therein shall be allowed.
(2) The advertising industry is impressed with
public interest, and shall be regulated by law
for the protection of consumers and the
promotion of the general welfare.
Only Filipino citizens or corporations or
associations at least seventy per centum of
the capital of which is owned by such citizens
shall be allowed to engage in the advertising
industry.
The participation of foreign investors in the
governing body of entities in such industry shall
be limited to their proportionate share in the
capital thereof, and all the executive and
managing officers of such entities must be
citizens of the Philippines.
This provision is for the protection of consumers.
Take note of the 70% requirement.
Davis Winship vs Philippine Trust Company
Facts: Prior to December, 1941, the Eastern
Isles Import Corporation organized under and
existing by virtue of the laws of the Philippines,
all of the capital stock of which was and has
been owned by American citizens, except one
share with a par value of P100 in the name of
Antonia Sevilla and one share with a par value
of P100 in the name of Edmund A.
Schwesinger, had a current account deposit
with the Philippine Trust Company, and as of
December 29, 1941, the balance in favor of
said depositor was P51,410.91. Prior to
December, 1941, the Eastern Isles, Inc., a
corporation organized under and existing by
virtue of the laws of the Philippines, all of the
capital stock of which was and has been
owned by American citizens, except one share
with a par value of P100 in the name of F.
Capistrano, had a current account deposit with
the Philippine Trust Company, and as of
December 29, 1941, the balance in favor of
said depositor was P34,827.74. The Eastern
Isles, Incorporated made a withdrawal of
P204.37 which was debited to said account on
June 10, 1942.
On October 4,1943, the Japanese Military
Administration in the Philippines issued an
order requiring all deposit accounts of hostile
people (including corporations) to be
transferred to the Bank of Taiwan, as the
depository of the Bureau of Enemy Property
Custody of the Japanese Military.
Administration, which order the Philippine
Trust Company was specifically directed to
comply with. On September 29, 1944, in
compliance with said order, the Philippine
Trust Company transferred and paid the credit
balances of the current account deposits of the
Eastern Isles Import Corporation and of the
Eastern Isles, Inc. to the Bank of Taiwan.
The pre-war current deposit accounts of the
Eastern Isles Import Corporation and of the
Eastern Isles, Inc. were subsequently
transferred to S. Davis Winship who, on Aug.
12, 1947, presented to the Philippine Trust
Company checks Nos. A-79212 and H-579401
covering the aforesaid deposits. The
Philippine Trust Company, however, refused to
pay said checks, whereupon, on September 6,
1947, S. Davis Winship instituted the present
action against the Philippine Trust Company in
the Court of First Instance of Manila, to recover
upon the first cause of action the sum of
P51,410.91 and under the second cause of
action the sum of P34,827.74.
Issue: How is the Nationality of a Private
Corporation determined
Holding: In the case of Filipinas Compañia de
Seguros vs. Christern Huenefeld & Co., Inc.,
89 Phil., 54, it was held that the nationality of
a private corporation is determined by the
character or citizenship of its controlling
stockholders; and this pronouncement is of
course decisive as to the hostile character of
the Eastern Isles Import Corporation and the
Eastern Isles, Inc., as far as the Japanese
Military Administration was concerned, it being
conceded that the controlling stockholders of
said corporations were American citizens.
Comment: This case discusses the nationality of
a corporation. How is it done? Citizenship of
majority controlling stockholders or the War Time
Test. Now, how do we determine the phrase
“controlling” stockholders? By simple majority.
How is it different from 60-40 test? During war
time, the phrase “controlling stockholders” means
it is only a simple majority.
Next is a landmark case. This case explains the
Grandfather Test.
NARRA NICKEL MINING AND
DEVELOPMENT CORP., TESORO MINING
AND DEVELOPMENT, INC., AND
MCARTHUR MINING,
INC., Petitioners, v. REDMONT
CONSOLIDATED MINES
CORP., Respondent.
Facts: Very simply, the challenged Decision
sustained the appellate court’s ruling that
petitioners, being foreign corporations,are not
entitled to Mineral Production Sharing
Agreements (MPSAs). In reaching its
conclusion, this Court upheld with approval the
appellate court’s finding that there was doubt
as to petitioners’ nationality since a 100%
Canadian-owned firm, MBMI Resources, Inc.
(MBMI), effectively owns60% of the common
stocks of the petitioners by owning equity
interest of petitioners’ other majority corporate
shareholders.
Issue: W/N the application of the Grandfather
Rule is justified by the circumstances of the
case to determine the nationality of petitioners.
Holding: The application of the Grandfather
Rule in the
present case does not eschew the Control
Test.
Nowhere in that disposition did the Court
foreclose the application of the Control Test in
determining which corporations may be
considered as Philippine nationals. Instead, to
borrow Justice Leonen’s term, the Court used
the Grandfather Rule as a “supplement” to the
Control Test so that the intent underlying the
averted Sec.2, Art. XII of the Constitution be
given effect. The following excerpts of the April
21, 2014 Decision cannot be clearer:
In ending, the “control test” is still the
prevailing mode of determining whether or
not a corporation is a Filipino corporation,
 within the ambit of Sec. 2, Art. XII of the 1987
Constitution, entitled to undertake the
exploration, development and utilization of the
natural resources of the Philippines. When in
the mind of the Court, there is doubt, based
on the attendant facts and circumstances
of the case, in the 60-40 Filipino equity
ownership in the corporation, then it may
apply the “grandfather rule.”(emphasis
supplied)
As further defined by Dean Cesar Villanueva,
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,
by attributing the nationality of the second
or even subsequent tier of ownership to
determine the nationality of the corporate
shareholder.”4 Thus, to arrive at the actual
Filipino ownership and control in a corporation,
both the direct and indirect shareholdings in
the corporation are determined.
The method employed in the Grandfather Rule
of attributing the shareholdings of a given
corporate shareholder to the second or even
the subsequent tier of ownership hews with the
rule that the “beneficial ownership” of
corporations engaged in nationalized activities
must reside in the hands of Filipino citizens.
Thus, even if the 60-40 Filipino equity
requirement appears to have been satisfied,
the Department of Justice (DOJ), in its Opinion
No. 144, S. of 1977, stated that an agreement
that may distort the actual economic or
beneficial ownership of a mining corporation
may be struck down as violative of the
constitutional requirement.
Comment with illustration:
Olympic 33-31%
MBMI
Sara MBMI
60% 40%
Tesoro Grandfather
Here, there is doubt as to the composition of
Sara, that is why we use the Grandfather Test to
trace the origin of MBMI and Olympic- the
grandchildren. In determining compliance with
the minimum Filipino equity requirement, there
are two acknowledged tests. One is the control
test or the liberal rule. The other is the
Grandfather Rule, which is known to be the
stricter and more stringent test. In applying these
tests, there had been confusion as to whether
one method excludes the use of the other.
The control test provides that shares belonging to
corporations or partnerships at least 60% of the
capital of which is owned by Filipino citizens shall
be considered of Philippine nationality. This test
is straightforward and does not scrutinize further
the ownership of the Filipino shareholdings. On
the other hand, the Grandfather Rule determines
the actual Filipino ownership and control in a
corporation by tracing both the direct and indirect
shareholdings in the corporation.
According to the January 2015 Resolution of the
Supreme Court in the case of Narra Nickel Mining
and Development Corp. vs. Redmont
Consolidated Mines Corp. (G.R. No. 195580),
“the Grandfather test was originally intended to
look into the citizenship of the individuals who
ultimately own and control the shares of stock of
a corporation for purposes of determining
compliance with the constitutional requirement of
Filipino ownership”.
The shareholdings should ideally be traced (i.e.
grandfathered) to the point where natural persons
hold the shares. However, this may be impractical
and a limit must be set when tracing through the
corporate layers to attribute nationality. Citing a
memorandum from the Securities and Exchange
Commission (SEC), the Supreme Court noted the
suggestion of the SEC to apply the Grandfather
Rule on two levels of corporate relations for
publicly-held corporations or where shares are
traded in the stock exchange, and to three levels
for closely held ones or those which are not
traded in any stock exchange. Clearly, the limits
should not go beyond the level of what is
reasonable.
The Supreme Court clarified the role of these
tests in determining compliance with the required
 Filipino equity threshold. The Court explained that
the use of the Grandfather Rule is a supplement
to the Control Test in implementing the wisdom of
the “Filipinization” provisions of the Constitution.
Remember: the Grand Father Test is suppletory
applicable to Control Test. Bakit? May mga
companies na tinatago yung citizenship ng
stockholders kaya mayt doubt. They circumvent
the proscription by adding layers. Kaya may
Grand Father Test to cure the doubt when it
comes to 60-40.
In Gamboa case the issue here is what is the
basis of control of 60-40? Is it the capital or is it
just the voting share?
Now, who determines the doubt to apply the
Grandfather’s test? The prosecutor in a
criminal offense (Anti-Dummy).
Who can raise the doubt? Interested party
Wilson P. Gamboa v. Finance Secretary
Margarito Teves, et al.,
G.R. No. 176579, June 28, 2011
CARPIO, J.:
II. ISSUE
. Facts:
This is a petition to nullify the sale of
shares of stock of Philippine
Telecommunications Investment Corporation
(PTIC) by the government of the Republic of
the Philippines, acting through the Inter-
Agency Privatization Council (IPC), to Metro
Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First
Pacific), a Hong Kong-based investment
management and holding company and a
shareholder of the Philippine Long Distance
Telephone Company (PLDT).
The petitioner questioned the sale on
the ground that it also involved an indirect sale
of 12 million shares (or about 6.3 percent of the
outstanding common shares) of PLDT owned
by PTIC to First Pacific. With the this sale, First
Pacific’s common shareholdings in PLDT
increased from 30.7 percent to 37 percent,
thereby increasing the total common
shareholdings of foreigners in PLDT to about
81.47%. This, according to the petitioner,
violates Section 11, Article XII of the 1987
Philippine Constitution which limits foreign
ownership of the capital of a public utility to not
more than 40%, thus:
Section 11. No franchise, certificate,
or any other form of authorization for the
operation of a public utility shall be granted
except to citizens of the Philippines or to
corporations or associations organized
under the laws of the Philippines, at least
sixty per centum of whose capital is owned
by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in
character or for a longer period than fifty years.
Neither shall any such franchise or right be
granted except under the condition that it shall
be subject to amendment, alteration, or repeal
by the Congress when the common good so
requires. The State shall encourage equity
participation in public utilities by the general
public. The participation of foreign investors in
the governing body of any public utility
enterprise shall be limited to their proportionate
share in its capital, and all the executive and
managing officers of such corporation or
association must be citizens of the Philippines.
(Emphasis supplied)
Does the term “capital” in Section 11, Article XII
of the Constitution refer to the total common
shares only, or to the total outstanding capital
stock (combined total of common and non-
voting preferred shares) of PLDT, a public
utility?
Holding: The Constitution expressly declares
as State policy the development of an
economy "effectively controlled" by Filipinos.
Consistent with such State policy, the
Constitution explicitly reserves the ownership
and operation of public utilities to Philippine
nationals, who are defined in the Foreign
Investments Act of 1991 as Filipino citizens, or
corporations or associations at least 60
percent of whose capital with voting
rights belongs to Filipinos. The FIA’s
implementing rules explain that "[f]or stocks to
be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title
is not enough to meet the required Filipino
equity. Full beneficial ownership of the
stocks, coupled with appropriate voting
rights is essential." In effect, the FIA clarifies,
reiterates and confirms the interpretation that
the term "capital" in Section 11, Article XII of
the 1987 Constitution refers to shares with
voting rights, as well as with full beneficial
ownership. This is precisely because the right
to vote in the election of directors, coupled with
full beneficial ownership of stocks, translates to
effective control of a corporation.
Any other construction of the term "capital" in
Section 11, Article XII of the Constitution
contravenes the letter and intent of the
Constitution. Any other meaning of the term
"capital" openly invites alien domination of
economic activities reserved exclusively to
Philippine nationals. Therefore, respondents’
interpretation will ultimately result in handing
over effective control of our national economy
to foreigners in patent violation of the
Constitution, making Filipinos second-class
citizens in their own country.
Gamboa Resolution:
The 28 June 2011 Decision declares that the
60 percent Filipino ownership required by the
Constitution to engage in certain economic
activities applies not only to voting control of
the corporation, but also to the beneficial
ownership of the corporation. To repeat, we
held:
Mere legal title is insufficient to meet the 60
percent Filipino-owned "capital" required
in the Constitution. Full beneficial
ownership of 60 percent of the outstanding
capital stock, coupled with 60 percent of
the voting rights, is required. The legal and
beneficial ownership of 60 percent of the
outstanding capital stock must rest in the
hands of Filipino nationals in accordance with
the constitutional mandate. Otherwise, the
corporation is "considered as non-Philippine
national[s]." (Emphasis supplied)
This is consistent with Section 3 of the FIA
which provides that where 100% of the capital
stock is held by "a trustee of funds for pension
or other employee retirement or separation
benefits," the trustee is a Philippine national if
"at least sixty percent (60%) of the fund will
accrue to the benefit of Philippine nationals."
Likewise, Section 1(b) of the Implementing
Rules of the FIA provides that "for stocks to be
deemed owned and held by Philippine citizens
or Philippine nationals, mere legal title is not
enough to meet the required Filipino
equity. Full beneficial ownership of the
stocks, coupled with appropriate voting
rights, is essential."
Since the constitutional requirement of at least
60 percent Filipino ownership applies not only
to voting control of the corporation but also to
the beneficial ownership of the corporation, it
is therefore imperative that such requirement
apply uniformly and across the board to all
classes of shares, regardless of nomenclature
and category, comprising the capital of a
corporation. Under the Corporation Code,
capital stock35 consists of all classes of shares
issued to stockholders, that is, common shares
as well as preferred shares, which may have
different rights, privileges or restrictions as
stated in the articles of incorporation.
The Corporation Code allows denial of the right
to vote to preferred and redeemable shares,
but disallows denial of the right to vote in
specific corporate matters. Thus, common
shares have the right to vote in the election of
directors, while preferred shares may be
denied such right. Nonetheless, preferred
shares, even if denied the right to vote in the
election of directors, are entitled to vote on the
following corporate matters: (1) amendment of
articles of incorporation; (2) increase and
decrease of capital stock; (3) incurring,
creating or increasing bonded indebtedness;
(4) sale, lease, mortgage or other disposition
of substantially all corporate assets; (5)
investment of funds in another business or
corporation or for a purpose other than the
primary purpose for which the corporation was
organized; (6) adoption, amendment and
repeal of by-laws; (7) merger and
consolidation; and (8) dissolution of
corporation.
Comment with excerpt from the FT:
Since a specific class of shares may have rights
and privileges or restrictions different from the
rest of the shares in a corporation, the 60-40
ownership requirement in favor of Filipino citizens
in Section 11, Article XII of the Constitution must
apply not only to shares with voting rights but also
to shares without voting rights. Preferred shares,
denied the right to vote in the election of directors,
are anyway still entitled to vote on the eight
specific corporate matters mentioned  Major
above. Thus, if a corporation, engaged in a decisions
partially nationalized industry, issues a
mixture of common and preferred non-voting
shares, at least 60 percent of the common
shares and at least 60 percent of the preferred
non-voting shares must be owned by
Filipinos. Of course, if a corporation issues only
a single class of shares, at least 60 percent of
such shares must necessarily be owned by
Filipinos.

In short, the 60-40 ownership requirement in

favor of Filipino citizens must apply Each class must pass the 60-40 test. Such 60-40
separately to each class of shares, whether must apply separately as to common shares and
common, preferred non-voting, preferred preferred shares.
voting or any other class of shares. This
The Court issued the Gamboa Decision,... that
uniform application of the 60-40 ownership
the term "capital" in Section 11, Article XII of the
requirement in favor of Filipino citizens clearly
1987 Constitution refers only to shares of stock
breathes life to the constitutional command that
entitled to vote in the election of directors, and
the ownership and operation of public utilities
thus in the present case only to common shares,
shall be reserved exclusively to corporations at
and not to the total outstanding capital stock
least 60 percent of whose capital is Filipino-
(common and non-voting preferred shares). The
owned. Applying uniformly the 60-40 ownership
case would give light to the doubt as to the issued
requirement in favor of Filipino citizens to each
Memorandum Circular of SEC and the doctrine
class of shares, regardless of differences in
laid down in Gamboa. This is a 2016 case.
voting rights, privileges and restrictions,
guarantees effective Filipino control of public Roy III vs Herbosa
utilities, as mandated by the Constitution.
DOCTRINE: Section 11, Article XII of the
Constitution, which provides: "No franchise,
Moreover, such uniform application to each class certificate, or any other form of authorization
of shares insures that the "controlling interest" in for the operation of a public utility shall be
public utilities always lies in the hands of Filipino granted except to citizens of the Philippines or
citizens. to corporations or associations organized
under the laws of the Philippines at least sixty
per centum of whose capital is owned by such
Common Shares Preferred Shares
citizens.”
 Normally  Non-voting
have voting rights
FACTS:
rights  Has voting
 Day-to-day rights but
Petitioner Jose M. Roy III sought the reversal
decisions withheld
and setting aside of the Decision dated
 Under
November 22, 2016, which denied his petition,
Corporation
and declared that the Securities and Exchange
Code, they
Commission (SEC) did not commit grave
still have
abuse of discretion in issuing Memorandum
voting rights:
Circular No. 8, Series of 2013 (SEC-MC No. 8)
amendments
as the same was in compliance with, and in
of articles of
fealty to, the decision of the Court in Gamboa
incorporation,
v. Finance Secretary Teves and the
merger,
resolution denying the Motion for
consolidation
Reconsideration therein. The grounds raised
by movant are: He has the requisite standing
because this case is one of transcendental
importance; The Court has the constitutional
duty to exercise judicial review over any grave
abuse of discretion by any instrumentality of
government; (3) He did not rely on an obiter
dictum; and The Court should have treated the
petition as the appropriate device to explain
the Gamboa Decision.
The heart of the controversy is the
interpretation of Section 11, Article XII of the
Constitution, which provides: "No franchise,
certificate, or any other form of authorization
for the operation of a public utility shall be
granted except to citizens of the Philippines or
to corporations or associations organized
under the laws of the Philippines at least sixty
per centum of whose capital is owned by such
citizens xxx."
ISSUE:
Should SEC-MC No. 8 be invalidated 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.
HOLDING:
No. The Court ruled that petitioners (movant
and petitioners-in-intervention) failed to
sufficiently allege and establish the existence
of a case or controversy and locus standi on
their part to warrant the Court's exercise of
judicial review; the rule on the hierarchy of
courts was violated; and petitioners failed to
implead indispensable parties such as the
Philippine Stock Exchange, Inc. and
Shareholders' Association of the Philippines,
Inc. Other than PLDT, the petitions failed to join
or implead other public utility corporations
subject to the same restriction imposed by
Section 11, Article XII of the Constitution. They
should be afforded due notice and opportunity
to be heard, lest they be deprived of their
property without due process.
The Court disposed of the issue on whether the
SEC gravely abused its discretion in ruling that
respondent PLDT is compliant with the
limitation on foreign ownership under the
Constitution and other relevant laws as without
merit. The Court reasoned that what the
Constitution requires is "[f]ull [and legal]
beneficial ownership of 60 percent of the
outstanding capital stock, coupled with 60
percent of the voting rights xxx must rest in the
hands of Filipino nationals xxx."And, precisely
that is what SEC-MC No. 8 provides, viz.: "xxx
For purposes of determining compliance [with
the constitutional or statutory ownership], 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 xxx."
In construing "full beneficial ownership, the
Implementing Rules and Regulations of the
Foreign Investments Act of 1991 (FIA-IRR)
provides: For stocks to be deemed owned and
held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet
the required Filipino equity. Full beneficial
ownership of the stocks, coupled with
appropriate voting rights is essential. It bears
repeating here that the Court in
the Gamboa Decision adopted the foregoing
definition of the term "capital" in Section 11,
Article XII of the 1987 Constitution in express
recognition of the sensitive and vital position of
public utilities both in the national economy
and for national security, so that the evident
purpose of the citizenship requirement is to
prevent aliens from assuming control of public
utilities, which may be inimical to the national
interest.
So long as Filipinos have controlling interest of
a public utility corporation, their decision to
declare more dividends for a particular stock
over other kinds of stock is their sole
prerogative - an act of ownership that would
presumably be for the benefit of the public
utility corporation itself. Thus, as explained in
the Decision:
In this regard, it would be apropos to state that
since Filipinos own at least 60% of the
outstanding shares of stock entitled to vote
directors, which is what the Constitution
precisely requires, then the Filipino
stockholders control the corporation, i.e., they
dictate corporate actions and decisions, and
they have all the rights of ownership including,
but not limited to, offering certain preferred
shares that may have greater economic
interest to foreign investors as the need for
capital for corporate pursuits (such as
expansion), may be good for the corporation
that they own. Surely, these "true owners" will
 not allow any dilution of their ownership and
control if such move will not be beneficial to
them.
Comment:
Section 2 of SEC-MC No. 8 clearly incorporates
the Voting Control Test or the controlling interest
requirement. In fact, Section 2 goes beyond
requiring a 60-40 ratio in favor of Filipino
nationals in the voting stocks; it moreover
requires the 60-40 percentage ownership in the
total number of outstanding shares of stock,
whether voting or not. The SEC formulated SEC-
MC No. 8 to adhere to the Court's unambiguous
pronouncement that "full beneficial ownership of
60 percent of the outstanding capital stock,
coupled with 60 percent of the voting rights is
required." Clearly, SEC-MC No. 8 cannot be said
to have been issued with grave abuse of
discretion
While SEC-MC No. 8 does not expressly mention
the Beneficial Ownership Test or full beneficial
ownership of stocks requirement in the FIA, this
will not, as it does not, render it invalid meaning,
it does not follow that the SEC will not apply this
test in determining whether the shares claimed to
be owned by Philippine nationals are Filipino, i.e.,
are held by them by mere title or in full beneficial
ownership. To be sure, the SEC takes its guiding
lights also from the FIA and its implementing
rules, the Securities Regulation Code.
Illustration:
100 Common shares
100 Class A Preferred
with Voting Rights
100 Class B Preferred
WITHOUT voting
rights
120/300 = 0.60 or 60%
What constitutes doing business?
"Foreign Investments Act of 1991". RA 7042
Section 2. Declaration of Policy. - It is the
policy of the State to attract, promote and
welcome productive investments from foreign
individuals, partnerships, corporations, and
governments, including their political
subdivisions, in activities which significantly
contribute to national industrialization and
socioeconomic development to the extent that
foreign investment is allowed in such activity by
the Constitution and relevant laws. Foreign
investments shall be encouraged in
enterprises that significantly expand livelihood
and employment opportunities for Filipinos;
enhance economic value of farm products;
promote the welfare of Filipino consumers;
expand the scope, quality and volume of
exports and their access to foreign markets;
and/or transfer relevant technologies in
agriculture, industry and support services.
Foreign investments shall be welcome as a
supplement to Filipino capital and technology
in those enterprises serving mainly the
domestic market.
Section 3. Definitions
d) The praise "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 totalling 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 (take note of this), 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:
(take note of the exception)
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;
Comment: The distributor should be
independent, or in other words not dependent to
such corporation. Why is it important to know the
term doing business? Because if it is doing
business in the Philippines, then it has to secure
a license. The Corporation Code of the
Philippines (the “Corporation Code”) requires any
foreign corporation doing business in the
Philippines to obtain a license to do business
from the Philippine Securities and Exchange
Commission (“SEC”). A foreign corporation doing
business in the Philippines without the required
license will not be permitted to maintain or
intervene in any judicial or administrative action
in the Philippines; however, such foreign
corporation may be sued or proceeded against
before Philippine courts or administrative
tribunals on any valid cause of action recognized
under Philippine law.
(From UST Golden Notes)
Q: Why do foreign corporations need license to
transact business in the Philippines?
A: Foreign corporations need license to:
1. Place them under the jurisdiction of the court;
2. Place them in the same footing as domestic
corporation;
3. Protect the public in dealing with the said
corporation.
NECESSITY OF A LICENSE TO DO BUSINESS
Q: Why is there a necessity to require a foreign
corporation to acquire a license before engaging
in business in the Philippines?
A: The purpose of the law in requiring that a
foreign corporation doing business in the
Philippines be licensed to do so is to subject such
corporation to the jurisdiction of the courts. The
object is not to prevent foreign corporation from
performing single acts but to prevent it from
acquiring a domicile for the purpose of business
without taking steps necessary
Q: What are the considered as “doing or
transacting business” in the Philippines for
foreign corporations?
A: 1. Soliciting orders, service contracts, and
opening offices
2. Appointing representatives, distributors
domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more
3. Participating in the management, supervision
or control of any domestic business, firm, entity,
or corporation in the Philippines
4. Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of
acts or works or the exercise of some functions
normally incident to and in progressive
prosecution of, the purpose and object of its
organization.
Q: What are the jurisprudential rules related to the
consequences of not obtaining license by a
foreign corporation?
A: 1. Doctrine of isolated transactions – foreign
corporations, even unlicensed ones can sue or be
sued on a transaction or series of transactions set
apart from their common business in the sense
that there is no intention to engage in a
progressive pursuit of the purpose and object of
business transaction (Eriks Pte. Ltd. v. CA, G.R.
No. 118843, Feb. 6, 1997)
2. In pari delicto rule – in the case of Top‐ Weld
manufacturing vs. ECED S.A. (G.R. No. L‐44944,
Aug. 9, 1985), the court denied the relief prayed
for by petitioner when it ruled that the very
purpose of the law was circumvented and evaded
when the petitioner entered into the said
agreements despite the prohibition contained in
the questioned law. The parties were considered
as being in pari delicto because they equally
violated R.A. No. 5455.
3. Doctrine of Estoppel – the party is estopped
from questioning the capacity of a foreign
corporation to institute an action in our courts
where it had obtained benefits from its dealings
with such foreign corporations and thereafter
omitted a breach or sought to renege its
obligations (Merrill Lynch v. CA, G.R. No.
978160, July 24, 1992)
Under the Foreign Investment Act, the following
are not considered doing business:
1. Mere investment as a shareholder by a foreign
entity in a foreign corporation duly registered to
do business.
2. The exercise of rights as a stock investor and
3. Having a nominee director or officer to
represent its interest in such corporation
4. Appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own account.
5. Publication of general advertisement through
any print or broadcast media
6. Maintaining a stock of goods in the Philippines
solely for the purpose of having the same
processed by another entity in the Philippines.
7. Consignment by a foreign entity of equipment
with a local company to be used in the processing
of products for export and
8. Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis, such as installing in the
Philippines machinery it has manufactured or
exported to the Philippines, servicing the same,
training domestic workers to operate it and similar
incidental services.
Provisions with amendments.
Italics: Omitted under the new law
Bold: Under the amended law
Section 125. Application for a license. –
Note: Section 125 is amended to delete
“Securities and Exchange” from
“Securities and Exchange Commission” in
each instance. Further, Sections 123, 124
and 125 of the Code are renumbered as
Sections 142, 143 and 144, respectively.
A foreign corporation applying for a license to
transact business in the Philippines shall
submit to the Securities and Exchange
Commission a copy of its articles of
incorporation and by-laws, certified in
accordance with law, and their translation to an
official language of the Philippines, if
necessary. The application shall be under oath
and, unless already stated in its articles of
incorporation, shall specifically set forth the
following:
1. The date and term of incorporation;
2. The address, including the street number, of
the principal office of the corporation in the
country or state of incorporation;
3. The name and address of its resident
agent authorized to accept summons and
process in all legal proceedings and,
pending the establishment of a local office,
all notices affecting the corporation;
4. The place in the Philippines where the
corporation intends to operate;
5. The specific purpose or purposes which the
corporation intends to pursue in the transaction
of its business in the Philippines: Provided,
That said purpose or purposes are those
specifically stated in the certificate of authority
issued by the appropriate government agency;
6. The names and addresses of the present
directors and officers of the corporation;
7. A statement of its authorized capital stock
and the aggregate number of shares which the
corporation has authority to issue, itemized by
classes, par value of shares, shares without
par value, and series, if any;
8. A statement of its outstanding capital stock
and the aggregate number of shares which the
corporation has issued, itemized by classes,
par value of shares, shares without par value,
and series, if any;
9. A statement of the amount actually paid in;
and
10. Such additional information as may be
necessary or appropriate in order to enable the
Securities and Exchange Commission to
determine whether such corporation is entitled
to a license to transact business in the
Philippines, and to determine and assess the
fees payable.
(Reciprocity requirement)
Attached to the application for license shall
be a duly executed certificate under oath by
the authorized official or officials of the
jurisdiction of its incorporation, attesting to
the fact that the laws of the country or state
of the applicant allow Filipino citizens and
corporations to do business therein, and
that the applicant is an existing corporation in
good standing. If such certificate is in a foreign
language, a translation thereof in English
under oath of the translator shall be attached
thereto.
The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of the
president or any other person authorized by
the corporation, showing to the satisfaction of
the Securities and Exchange Commission and
other governmental agency in the proper
cases that the applicant is solvent and in sound
financial condition, and setting forth the assets
and liabilities of the corporation as of the date
not exceeding one (1) year immediately prior
to the filing of the application.
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case of
all other foreign corporations, no application for
license to transact business in the Philippines
shall be accepted by the Securities and
Exchange Commission without previous
authority from the appropriate government
agency, whenever required by law. (68a)
Section (126) 145. Issuance of a license. – If
the Securities and Exchange Commission is
satisfied that the applicant has complied with
all the requirements of this Code and other
special laws, rules and regulations, the
Commission shall issue a license to the
applicant to transact business in the
Philippines for the purpose or purposes
specified in such license. Upon issuance of the
license, such foreign corporation may
commence to transact business in the
Philippines and continue to do so for as long
as it retains its authority to act as a corporation
under the laws of the country or state of its
incorporation, unless such license is sooner
surrendered, revoked, suspended or annulled
in accordance with this Code or other special
laws. Within sixty (60) days after the issuance
of the license to transact business in the
Philippines, the license, except foreign banking
or insurance corporation, shall deposit with the
Securities and Exchange Commission for the
benefit of present and future creditors of the
licensee in the Philippines, securities
satisfactory to the Securities and Exchange
Commission, consisting of bonds or other
evidence of indebtedness of the Government
of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or
controlled corporations and entities, shares of
stock OR DEBT SECURITIES THAT ARE
REGISTERED UNDER THE SECURITIES
REGULATION CODE in “registered
enterprises” as this term is defined in Republic
Act No. 5186, shares of stock in domestic
corporations registered LISTED in the stock
exchange, or shares of stock in domestic
insurance companies and banks, OR ANY
FINANCIAL INSTRUMENT DETERMINED
SUITABLE BY THE COMMISSION, or any
combination THEREOF of these kinds of
securities, with an actual market value of at
least one FIVE hundred thousand (P100,000.)
(P500,000.) pesos OR SUCH OTHER
AMOUNT THAT MAY BE SET BY THE
COMMISSION; Provided, however, That
within six (6) months after each fiscal year of
the licensee, the Securities and Exchange
Commission shall require the licensee to
deposit additional securities equivalent in
actual market value to two (2%) percent of the
amount by which the licensee’s gross income
for that fiscal year exceeds five TEN million
(P5,000,000.00) (P10,000,000.) pesos. The
Securities and Exchange Commission shall
also require THE deposit of additional
securities OR FINANCIAL INSTRUMENTS if
the actual market value of the securities OR
FINANCIAL INSTRUMENTS on deposit has
decreased by at least ten (10%) percent of
their actual market value at the time they were
deposited. The Securities and Exchange
Commission may at its discretion release part
of the additional securities deposited with it if
the gross income of the licensee has
decreased, or if the actual market value of the
total securities on deposit has increased, by
more than ten (10%) percent of theIr actual
market value of the securities at the time they
were deposited. The Securities and Exchange
Commission may, from time to time, allow the
licensee to MAKE substitute DEPOSITS other
securities for those already on deposit as long
as the licensee is solvent. Such licensee shall
be entitled to collect the interest or dividends
on the SUCH securities depositSed. In the
event the licensee ceases to do business in the
Philippines, ITS the securities depositSed as
aforesaid shall be returned, upon the
licensee’s application therefor and upon proof
to the satisfaction of the Securities and
Exchange Commission that the licensee has
no liability to Philippine residents, including the
Government of the Republic of the Philippines.
FOR PURPOSES OF COMPUTING THE
SECURITIES DEPOSIT, THE COMPOSITION
OF GROSS INCOME AND ALLOWABLE
DEDUCTIONS THEREFROM SHALL BE IN
ACCORDANCE WITH THE RULES OF THE
COMMISSION
Note* -revised the initial amount of the
securities deposit from Php100k to
Php500k - revised the based amount of
gross income for the additional securities
deposit from Php5M to 10M - included a
reference to the guidelines on securities
deposit issued by the SEC
Important Amendments: Sections 128, 130,
131, 132, 134, 135, and 136 of the Code are
amended to delete “Securities and Exchange”
from “Securities and Exchange Commission”
in each instance. Further, Sections 127 to 136
are hereby renumbered as Sections 146 to
155 accordingly.
Section 127. Who may be a resident agent. –
A resident agent may be either an individual
residing in the Philippines or a domestic
corporation lawfully transacting business in the
Philippines: Provided, That in the case of an
individual, he must be of good moral character
and of sound financial standing.
Section 128. Resident agent; service of
process. – The Securities and Exchange
Commission shall require as a condition
precedent to the issuance of the license to
transact business in the Philippines by any
foreign corporation that such corporation file
with the Securities and Exchange Commission
a written power of attorney designating some
person who must be a resident of the
Philippines, on whom any summons and other
legal processes may be served in all actions or
other legal proceedings against such
corporation, and consenting that service upon
such resident agent shall be admitted and held
as valid as if served upon the duly authorized
officers of the foreign corporation at its home
office. Any such foreign corporation shall
likewise execute and file with the Securities
and Exchange Commission an agreement or
stipulation, executed by the proper authorities
of said corporation, in form and substance as
follows:
"The (name of foreign corporation) does
hereby stipulate and agree, in consideration of
its being granted by the Securities and
Exchange Commission a license to transact
business in the Philippines, that if at any time
said corporation shall cease to transact
business in the Philippines, or shall be without
any resident agent in the Philippines on whom
any summons or other legal processes may be
served, then in any action or proceeding
arising out of any business or transaction
which occurred in the Philippines, service of
any summons or other legal process may be
made upon the Securities and Exchange
Commission and that such service shall have
the same force and effect as if made upon the
duly-authorized officers of the corporation at its
home office."
Whenever such service of summons or other
process shall be made upon the Securities and
Exchange Commission, the Commission shall,
within ten (10) days thereafter, transmit by mail
a copy of such summons or other legal process
to the corporation at its home or principal
office. The sending of such copy by the
Commission shall be necessary part of and
shall complete such service. All expenses
incurred by the Commission for such service
shall be paid in advance by the party at whose
instance the service is made.
In case of a change of address of the resident
agent, it shall be his or its duty to immediately
notify in writing the Securities and Exchange
Commission of the new address. (72a; and n)
Section 129. Law applicable. – Any foreign
corporation lawfully doing business in the
Philippines shall be bound by all laws, rules
and regulations applicable to domestic
corporations of the same class, except such
only as provide for the creation, formation,
organization or dissolution of corporations or
those which fix the relations, liabilities,
responsibilities, or duties of stockholders,
members, or officers of corporations to each
other or to the corporation. (73a)
*Doctrine of Incorporation
Section 130. Amendments to articles of
incorporation or by-laws of foreign
corporations. – Whenever the articles of
incorporation or by-laws of a foreign
corporation authorized to transact business in
the Philippines are amended, such foreign
corporation shall, within sixty (60) days after
the amendment becomes effective, file with the
Securities and Exchange Commission, and in
the proper cases with the appropriate
government agency, a duly authenticated copy
of the articles of incorporation or by-laws, as
amended, indicating clearly in capital letters or
by underscoring the change or changes made,
duly certified by the authorized official or
officials of the country or state of incorporation.
The filing thereof shall not of itself enlarge or
alter the purpose or purposes for which such
corporation is authorized to transact business
in the Philippines. (n)
Section 131. Amended license. – A foreign
corporation authorized to transact business in
the Philippines shall obtain an amended
license in the event it changes its corporate
name, or desires to pursue in the Philippines
other or additional purposes, by submitting an
application therefor to the Securities and
Exchange Commission, favorably endorsed by
the appropriate government agency in the
proper cases. (n)
Section 132. Merger or consolidation involving
a foreign corporation licensed in the
Philippines. – One or more foreign
corporations authorized to transact business in
the Philippines may merge or consolidate with
any domestic corporation or corporations if
such is permitted under Philippine laws and by
the law of its incorporation: Provided, That the
requirements on merger or consolidation as
provided in this Code are followed.
Whenever a foreign corporation authorized to
transact business in the Philippines shall be a
party to a merger or consolidation in its home
country or state as permitted by the law of its
incorporation, such foreign corporation shall,
within sixty (60) days after such merger or
consolidation becomes effective, file with the
Securities and Exchange Commission, and in
proper cases with the appropriate government
agency, a copy of the articles of merger or
consolidation duly authenticated by the proper
official or officials of the country or state under
the laws of which merger or consolidation was
effected: Provided, however, That if the
absorbed corporation is the foreign corporation
doing business in the Philippines, the latter
shall at the same time file a petition for
withdrawal of its license in accordance with this
Title. (n)
Section 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. (69a)
Section 134. Revocation of license. – Without
prejudice to other grounds provided by special
laws, the license of a foreign corporation to
transact business in the Philippines may be
revoked or suspended by the Securities and
Exchange Commission upon any of the
following grounds:
1. Failure to file its annual report or pay any
fees as required by this Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
3. Failure, after change of its resident agent or
of his address, to submit to the Securities and
Exchange Commission a statement of such
change as required by this Title;
4. Failure to submit to the Securities and
Exchange Commission an authenticated copy
of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due
to the Philippine Government or any of its
agencies or political subdivisions;
7. Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its
license;
 8. Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed
to do business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (n)

*If licensed, foreign corporations will now be

taxed in the Philippines
*Permanent establishment of foreign
corporations will now be taxed in the
Philippines

Section 136. Withdrawal of foreign

corporations. – Subject to existing laws and
regulations, a foreign corporation licensed to
transact business in the Philippines may be
allowed to withdraw from the Philippines by
filing a petition for withdrawal of license. No
certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless
all the following requirements are met;
1. All claims which have accrued in the
Philippines have been paid, compromised or
settled;
2. All taxes, imposts, assessments, and
penalties, if any, lawfully due to the Philippine
Government or any of its agencies or political
subdivisions have been paid; and
3. The petition for withdrawal of license has
been published once a week for three (3)
consecutive weeks in a newspaper of general
circulation in the Philippines.

Comment:

Can a foreign corporation sue even without

license? Yes, by Doctrine of Estoppel. Gained
benefit from foreign corporation.

The Court’s ruling in Communication Materials

and Design, Inc. v. Court of Appeals where it was
written:

A foreign corporation doing business in

the Philippines may sue in Philippine Courts
although not authorized to do business here
against a Philippine citizen or entity who had
contracted with and benefited by said
corporation. To put it in another way, a party
is estopped to challenge the personality of a
corporation after having acknowledged the
same by entering into a contract with it.