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Techniques to achieve corporate combinations

WHAT ARE THE TECHNIQUES TO ACHIEVE A CORPORATE COMBINATION?


(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
(3) Sale of substantially all corporate assets and purchase thereof by another corporation;
(4) Acquisition of all / substantially all of the stock of one corporation from its SHs in exchange for the
stock of the acquiring corporation
Merger or Consolidation

WHAT IS THE PROCEDURE FOR MERGER OR CONSOLIDATION?


(1)
(2)
(3)
(4)

Board of Directors of the constituent corporations must prepare and approve a plan of merger or
consolidation.
2/3 vote of OCS of the constituent corporations.
Execution of the Articles of Merger/Consolidation, to be signed by the Pres/VP and certified by the
secretary / assistant secretary.
Submission to the SEC for approval.

WHAT ARE THE EFFECTS OF MERGER OR CONSOLIDATION? (Sec. 80)


(1)

The constituent corporation shall become a single corporation:


If merger:

the surviving corporation designated in the plan of


merger

If consolidation: the consolidated corporation designated in the plan of


Consolidation.
(2)

The separate existence of the constituent corporations shall cease, except that of the surviving or
consolidated corporation.

(3)

The surviving or consolidated corporation shall possess all rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under the
Corporation Code.

(4)

The surviving or consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations;

(5)

All property (real or personal) and all receivables due on whatever account (including subscriptions
to shares and other choses in action), and all and every other interest of, or belong to, or due to

each constituent corporation, shall be deemed transferred and vested in such surviving or
consolidated corporation without further act or deed.
(6)

The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending claim,
action or proceeding brought by or against any of such constituent corporations may be prosecuted
by or against the surviving or consolidated corporation. (Note: The merger or consolidation
does not impair the rights of creditors or liens upon the property of any such constituent
corporations.)

WHAT ARE THE RULES GOVERNING MERGER OR CONSOLIDATION INVOLVING A FOREIGN CORPORATION
LICENSED IN THE PHILIPPINES? (Sec. 132)

a foreign corporation authorized to transact business in the Philippines may merge or consolidate
with any domestic corporation if such is permitted under Philippine law and by the law of its
incorporation.

the requirements on merger or consolidation as provided in the Corporation Code must be


complied with.

whenever a foreign corporation authorized to transact business in the Philippines is a party to a


merger or consolidation in its home country or state, such foreign corporation shall file a copy of the
articles or merger or consolidation with the SEC and the appropriate government agencies within 60
days after such merger or consolidation becomes effective. Such copy of the articles must be duly
authenticated by the proper officials of the country or state under the laws of which merger or
consolidation was effected.
If the absorbed corporation in such a merger / consolidation happens to be the foreign
corporation doing business in the Philippines, it shall file a petition for withdrawal of its license in
accordance with Sec. 136.

Sale of substantially all corporate assets

WHEN IS A SALE OR OTHER DISPOSITION DEEMED TO COVER SUBSTANTIALLY ALL THE CORPORATE
PROPERTY AND ASSETS?
If by the sale the corporation would be rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated. (Sec. 40)
WHAT ARE THE REQUIREMENTS? (Sec. 40)
(1)

Majority vote of BOD + 2/3 vote of OCS or members at a meeting duly called for the purpose;

(2)

Compliance with the laws on illegal combinations and monopolies

Note, however, that after such approval by the SHs, the BOD may nevertheless, in its discretion, abandon such sale or
other disposition without further action or approval by the SHs. This, of course, is subject to the rights of third parties under
any contract relating thereto.
WHEN IS SH APPROVAL NOT NECESSARY FOR THE ABOVE DISPOSITION?

(1) If the disposition is necessary in the usual and regular course of business; or
(2) If the proceeds of the disposition be appropriated for the conduct of its remaining business (Sec. 40)
IS THE APPRAISAL RIGHT AVAILABLE TO DISSENTING STOCKHOLDERS?
Yes. However, it must be stressed that this right is generally available only to dissenting stockholders of
the selling corporation, not the purchasing corporation. (It can be argued, though, that in instances wherein the
purchase constitutes an investment in a purpose other than its primary purpose, stockholders' approval of such
investment is necessary, and anyone who objects thereto will have the appraisal right under Sec. 42.)
Exchange of stocks

In this method, all or substantially all the stockholders of the "acquired" corporation are made
stockholders of the acquiring corporation. With the exchange, the acquired corporation becomes a
subsidiary of the acquiring corporation. Although this method does not combine the 2 businesses under a
single corporation as in merger and sale of assets, from the point of view of the acquiring (parent)
corporation, there is hardly any difference between owing the acquired corporation's business directly and
operating it through a controlled subsidiary. In fact, the parent corporation would have the power to buy all
the subsidiary's assets and dissolve it, achieving the same result as in the other methods of combination.
(Campos & Campos)
Definition

Purpose

Distribution of Profits

Non-Stock Corporations
All other private corporations (3)
One where no part of its income is distributable as dividends to its members, trustees or
officers. (87)
May be formed or organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes like trade, industry,
agricultural and like chambers, or any combination thereof. (88)
Whatever incidental profit made is not distributed among its members but is used for
furtherance of its purpose. AOI or by-laws may provide for the distribution of its assets among
its members upon its dissolution. Before then, no profit may be made by members.

Composition
Scope of right to vote

Members
Each member, regardless of class, is entitled to one (1) vote UNLESS such right to vote has
been limited, broadened, or denied in the AOI or by-laws. (Sec. 89)
Voting by proxy
Cannot be denied. (Sec. 58)
Voting by mail
Not possible.
Who exercises Corporate Members of the corporation
Powers 23
Governing Board
Board of Trustees, which may consist of more than 15 trustees unless otherwise provided by
the AOI or by-laws. (Sec, 92)
Term of directors or Board classified in such a way that the term of office of 1/3 of their number shall expire every
trustees
year. Subsequent elections of trustees comprising 1/3 of the board shall be held annually, and
trustees so elected shall have a term of 3 years. (Sec. 92)

Non-Stock Corporations
Election of officers
Officers may directly elected by the members UNLESS the AOI or by-laws provide
otherwise. (Sec. 92)
Place of meetings
Generally, the meetings must be held at the principal office of the corporation, if practicable.
If not, then anyplace in the city or municipality where the principal office of the corporation is
located. (Sec. 51)
Transferability of interest Generally non-transferable since membership and all rights arising therefrom are personal.
or membership
However, the AOI or by-laws can provide otherwise. (Sec. 90)
Distribution of assets in See Sec. 94.
case of dissolution
WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK
CORPORATIONS? (Sec. 94-95)
1. All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or
adequate provision shall be made therefor.
2. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance
with such requirements.
3.

Assets received and held by the corporation subject to limitations


permitting their use only for charitable, religious, benevolent, education
or similar purposes, but not subject to condition (2) above, shall be
transferred or conveyed to one or more corporations, societies or
organization engaged in activities in the Philippines substantially similar
to those of the dissolving corp. according to a plan of distribution
adopted pursuant to Sec. 95 of the Code.

4.

Assets other than those mentioned in preceding paragraphs shall be


distributed in accordance with the AOI or by-laws.

5.

In any other case, assets may be distributed to such persons,


societies, organizations or corporations, whether or not organized for
profit, as may be specified in a plan of distribution adopted pursuant to
Sec. 95.

* The plan of distribution of assets may be adopted by a majority vote of the


Board of trustees and approval of 2/3 of the members having voting rights present
or represented by proxy at the meeting during which said plan is adopted.
It must be noted that the plan of distribution of assets must not be inconsistent with
the provisions of Title XI of the Code

Close Corporations
(Sec. 96-105)
WHAT ARE THE REQUISITES OF A CLOSE CORPORATION? (Sec. 96)
A close corporation, within the meaning of the Corporation Code, is one whose articles of incorporation
provide that:

(1)

All the corporation's issued stock of all classes, exclusive of treasury shares, shall be
held of record by not more than a specified number of persons not exceeding 20;

(2)

All the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by Title XII of the Code; and

(3)

The corporation shall not list in any stock exchange or make any public offering of
any of its stock of any class.

Notes:

A narrow distribution of ownership does not, by itself, make a close corporation. (San Juan
Structural and Steel Fabricators v. CA, 296 SCRA 631)

A corporation shall not be deemed a close corporation when at least 2/3 of its voting stock or
voting rights is owned or controlled by another corporation which is not a close corporation.

CAN A CORPORATION THAT IS NOT A CLOSE CORPORATION BE A STOCKHOLDER IN A CLOSE


CORPORATION?
YES, provided that said corporation owns less than 2/3 of voting stock or voting rights.
WHAT ENTITIES MAY NOT BE ORGANIZED AS CLOSE CORPORATIONS? (Sec. 96)

Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities
Educational Institutions
Corporations declared vested with public interest

DISSOLUTION
Modes of Dissolution

HOW MAY A CORPORATION BE DISSOLVED?


(1) Failure to organize and commence business (Sec. 22);
(2) Cessation of business for 5 years (Continuous inoperation; Sec. 22);
(3) Expiration of original, extended, or shortened term;
(4) Voluntary dissolution (Sec. 118-119);
(a)

Where no creditors are affected (Sec. 118)

This is effected by majority vote of the BOD and a 2/3 vote of the OCS or members. (Note the
special notice requirements.) The copy of the resolution authorizing the dissolution shall be
certified by a majority of the BOD and countersigned by the secretary of the corporation. THE
SEC shall thereupon issue the certificate of dissolution.
(b)

Where creditors are affected (Sec. 119)


(1)

Filing of petition for dissolution with SEC


A petition for dissolution must be filed with the SEC after having been signed by a
majority of the BOD, verified by the president or secretary or one of the directors, and
resolved upon by the affirmative vote of 2/3 of the OCS or members. The petition must set
forth all claims and demands against the corporation, and the fact that the dissolution was
approved by the SHs with the requisite 2/3 vote.

(2)

Fixing of date by SEC for filing of objections to petition


If the petition is sufficient in form and substance, the SEC shall fix a date on or before
which objections thereto may be filed by any person.
Date: not less than 30 days nor more than 60 days after the
entry of the order

(3)

Publication of order
Before the date fixed by the SEC, the SEC order shall be published and posted
accordingly.

(4)

Newspaper:

Once a week for 3 weeks in a newspaper of general circulation


published in the municipality or city where the corporation's principal
office is situated, or there be no such newspaper, in a newspaper of
general circulation in the Philippines

Posting:

For 3 consecutive weeks in 3 public places in the city or municipality


where the corporation's principal office is situated

Hearing of the petition for dissolution


Upon 5 days notice, given after the date on which the right to file objections to
the order has expired, the SEC shall proceed to hear the petition and try any issue
made by the objections filed.
If no objection is sufficient, and the material allegations are true, the SEC shall
render judgment dissolving the corporation and directing such disposition of its assets
as justice requires.
Note: The SEC may appoint a receiver to collect such
assets and pay the debts of the corporation.

(5) Involuntary dissolution (Sec. 121):


(a) Revocation of Certificate of Registration by SEC (Sec. 121)

A corporation may be dissolved by the SEC upon filing of a verified complaint and after
proper notice and hearing on grounds provided by existing laws, rules and regulations.
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66, Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo warranto proceedings involving
corporation. Under the Securities Regulation Code or RA 8799, however, the jurisdiction of the
SEC over all cases enumerated under Sec. 5 of PD 902-A have been transferred to the
Regional Trial Courts.
The grounds for involuntary dissolution of a corporation under quo warranto proceedings are:
(1)
(2)

When the corporation has offended against a provision of an act for its
creation or renewal;
When it has forfeited its privileges and franchises by non-user;

(3)

When it has committed or omitted an act which amounts to a surrender


of its corporate rights, privileges or franchises;

(4)

When it misused a right, privilege or franchise conferred upon it by law,


or when it has exercised a right, privilege or franchise in contravention of
law
(PNB v. CFI, 209 SCRA 294; 1992)

(6) Shortening of corporate term (Sec. 120)


NOTE: The simplest and most expedient way of effecting dissolution
is by shortening the corporate term and waiting for such term
to expire.
Dissolution of close corporations
In close corporations, any stockholder may, by written petition to the SEC, compel the dissolution of such
corporation when:
(1)

Any of the acts of the directors, officers, or those in control


of the corporation is:

(2)

Illegal;
Fraudulent;
Dishonest;
Oppressive or unfairly prejudicial to the corporation
or any other SH;

Corporate assets are being misapplied or wasted. (Sec. 105)

Effects of Dissolution

WHAT ARE THE EFFECTS OF DISSOLUTION?

Corporation ceases to be a juridical person and consequently can no longer continue transacting its
business.
Corporate existence continues for 3 years following dissolution for the ff. purposes only:
(a) winding up of affairs; and
(b) liquidation of corporate assets.

Corporation can no longer continue its business, except for winding up.

Corporation CANNOT even be a de facto corporation.

Corporate existence may be subject to COLLATERAL attack.

NOTE that the subsequent dissolution of a corporation may not remove or impair any right or remedy in favor of
or against, nor any liability incurred by, any corporation, its stockholders, members, directors, trustees or officers.
(Sec. 145)
Loss of juridical personality
NATIONAL ABACA V. PORE (2 SCRA 989; 1961)
Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery of a sum of money advanced to her for
the purchase of hemp. She moved to dismiss the complaint by citing the fact that National Abaca had been abolished by EO 372
dated Nov. 24, 1950. Plaintiff objected to such by saying that it shall nevertheless be continued as a corporate body for a period of
3 years from the effective date of said order for the purpose of prosecuting and defending suits by or against it and to enable the
Board of Liquidators to close its affairs.
Can an action commenced within 3 years after the abolition of plaintiff corporation be continued by the same after the expiration of
said period?
The Corp. Law allows a corporation to continue as a body for 3 years after the time when it would have been dissolved for
the purposes of prosecuting and defending suits by or against it. But at any time during the 3 years, the corporation should convey
all its property to trustees so that the latter may be the ones to continue on with such prosecution, with no time limit on its hands.
Since the case against Pore was strong, the corp.'s amended complaint was admitted and the case was remanded to the lower
court.
CLEMENTE V. CA (242 SCRA 717)
The termination of the life of a juridical entity does not by itself cause the extinction or diminution of the right and liabilities of
such entity nor those of its owners and creditors. If the 3-year extended life has expired without a trustee or receiver having been
expressly designated by the corporation itself within that period, the board of directors or trustees itself may be permitted to so
continue as "trustees" by legal implication to complete the corporate liquidation. In the absence of a board of directors or trustees,
those having any pecuniary interest in the assets, including not only the shareholders but likewise the creditors of the corporation,
acting for and in its behalf, might make proper representations with the SEC, which has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final settlement of the corporate concerns.
Executory contracts
The prevailing view is that executory contracts are not extinguished by dissolution. Sec. 145 of the Code
states that "No right or remedy in favor of or against any corporation.nor any liability incurredshall be
removed or impaired either by the subsequent dissolution of said corp. or by any subsequent amendment or
repeal of this Code or of any part thereof."

Liquidation

WHAT IS LIQUIDATION? (Sec. 122)


Liquidation, or winding up, refers to the collection of all assets of the corporation, payment of all its creditors,
and the distribution of the remaining assets, if any, among the stockholders thereof in accordance with their
contracts, or if there be no special contract, on the basis of their respective interests.
WHAT ARE THE METHODS OF LIQUIDATING A CORPORATION? AND WHO MAY UNDERTAKE THE
LIQUIDATION OF A CORPORATION?
1.

Liquidation by the corporation itself through its board of directors


Although there is no express provision authorizing this method, neither is there any provision in
the Code prohibiting it.

2.

Conveyance of all corporate assets to trustees who will take charge of liquidation.
If this method is used, the 3-year limitation will not apply provided the designation of the
trustees is made within said period. There is no time limit within which the trustee must finish
liquidation, and he may sue and be sued as such even beyond the 3-year period unless the
trusteeship is limited in its duration by the deed of trust. (See Nat'l Abaca Corp. v. Pore, supra)

3.

Liquidation is conducted by the receiver who may be appointed by the SEC upon its decreeing
the dissolution of the corp.
As with the previous method, the three-year rule shall not apply. However, the mere
appointment of a receiver, without anything more, does not result in the dissolution of the
corporation nor bar it from the exercise of its corporation rights.

FOR HOW LONG MAY THE LIQUIDATION OF A CORPORATION BE UNDERTAKEN?


Generally, a corporation may be continued as a body corporate for the purpose of liquidation for 3 years after
the time when it would have so dissolved. (Sec. 122) However, it was held in the case ofClemente v. CA
(supra) that if the 3-year period has expired without a trustee or receiver having been expressly designated by the
corporation itself within that period, the BOD itself may be permitted to so continue as "trustees" by legal
implication to complete the corporate liquidation.
WHAT CAN AND SHOULD BE DONE DURING THE PERIOD OF LIQUIDATION?
(Sec. 122)
(1)
(2)
(3)

Collection of corporate assets and property;


Conveyance of all corporate property to trustees for the benefit of SHs, members, creditors, and
other persons in interest;
Payment of corporation's debts and liabilities;

(4)

Distribution of assets and property

Distribution of assets after payment of debts


GENERAL RULE:
EXCEPTION:

No corporation shall distribute any of its assets or property except upon lawful dissolution
and after payment of all its debts and liabilities. (Sec. 122)
In cases of decrease of capital stock, and as otherwise allowed by the Corporation Code

WHAT HAPPENS IF AN ASSET CANNOT BE DISTRIBUTED TO THE PERSON ENTITLED TO IT?


Any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located. (Sec. 122)
CHINA BANKING V. MICHELIN & CIE. (58 Phil. 261; 1933)
The appointment of a receiver by the court to wind up the affairs of the corporation upon petition of voluntary dissolution
does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. In such cases, the
receiver does not act as a receiver of an insolvent corporation. Since "liquidation" as applied to the settlement of the affairs of a
corporation consists of adjusting the debts and claims, that is, of collecting all that is due the corporation, the settlement and
adjustment of claims against it and the payment of its just debts, all claims must be presented for allowance to the receiver or
trustees or other proper persons during the winding-up proceedings within the 3 years provided by the Corporation Law as the term
for the corporate existence of the corporation, and if a claim is disputed so that the receiver cannot safely allow the same, it should
be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for
payment. The rulings of the receiver on the validity of claims submitted are subject to review by the court appointing such receiver
though no appeal is taken to the latter ruling, and during the winding-up proceedings after dissolution, no creditor will be permitted
by legal process or otherwise to acquire priority, or to enforce his claim against the property held for distribution as against the rights
of other creditors.
Note: Under the Corporation Code, it is the SEC which may
appoint the receiver.
RP V. MARSMAN DEVELOPMENT COMPANY (44 SCRA 418; 1972)
Defendant corp. was a timber license holder with concessions in Camarines Norte. Investigations led to the discovery that
certain taxes were due on it. BIR assessed Marsman 3 times for unpaid taxes. Atty. Moya, in behalf of the corp., received the first 2
assessments. He requested for reinvestigations. As a result, corp. failed to pay within the prescribed period. Numerous BIR
warnings were given. After 3 years of futile notifications, BIR sued the corp.
Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing however bars an action for recovery of
corporate debts against the liquidators. In fact, the 1st assessment was given before dissolution, while the 2nd and 3rd
assessments were given just 6 months after dissolution (within the 3-year rule). Such facts definitely established that the
Government was a creditor of the corp. for whom the liquidator was supposed to hold assets of the corp.
TAN TIONG BIO V. CIR (G.R. No. L-15778; April 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they pass into the hands of the
stockholders. The dissolution of a corp. does not extinguish the debts due or owing to it.

An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by the dissolution of
the corp. The hands of government cannot, of course, collect taxes from a defunct corporation, it loses thereby none of its rights to
assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the
corporation hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such
action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them
from his administrator, who holds the property which the decedent had formerly possessed. Thus, petitioners can be held
personally liable for the corporation's taxes, being successors-in-interest of the defunct corporation.
Distribution of assets of non-stock corporations
WHAT ARE THE RULES FOR DISTRIBUTION OF ASSETS OF NON-STOCK CORPORATIONS? (Sec. 94-95)
(1)

All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or
adequate provision shall be made therefor.

(2)

Assets held by the corporation upon a condition requiring return, transfer or conveyance, and
which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in
accordance with such requirements.

(3)

Assets received and held by the corporation subject to limitations permitting their use only for
charitable, religious, benevolent, education or similar purposes, but not subject to condition (2)
above, shall be transferred or conveyed to one or more corporations, societies or organization
engaged in activities in the Philippines substantially similar to those of the dissolving corp.
according to a plan of distribution adopted pursuant to Sec. 95 of the Code.

(4)

Assets other than those mentioned in preceding paragraphs shall be distributed in accordance
with the AOI or by-laws.

(5)

In any other case, assets may be distributed to such persons, societies, organizations or
corporations, whether or not organized for profit, as may be specified in a plan of distribution
adopted pursuant to Sec. 95.

* The plan of distribution of assets may be adopted by a majority vote of the Board of trustees and
approval of 2/3 of the members having voting rights present or represented by proxy at the meeting
during which said plan is adopted.
It must be noted that the plan of distribution of assets must not be inconsistent with the provisions of Title
XI of the Code.
FOREIGN CORPORATIONS
WHAT IS A FOREIGN CORPORATION? (Sec. 123)
A corporation formed and organized under laws other than those of the Philippines, regardless of the
citizenship of the incorporators and stockholders. Such corporation must have been organized and must
operate in a country which allows Filipino citizens and corporations to do business there.
In times of war:

For purposes of security of the state, the citizenship of the controlling


stockholders determines the corporations nationality.

IN WHAT WAYS CAN A FOREIGN CORPORATION DO BUSINESS IN THE PHILS.?

(1)

Wholly-owned subsidiary; or

(2)

Branch office; or

(3)

Joint venture with a local partner.

Permitted areas of investment

100% EQUITY:

Mass media, except recording


The practice of a profession (law, medicine, etc.)
Operation of rural banks
Cooperatives
Private security agencies
Small-scale mining
Utilization of marine resources
Ownership, operation, and management of cockpits;
Manufacture, repair, stockpiling of nuclear, biological, chemical,
and radiological weapons;

Note: Retail trade is no longer required to be 100% Filipino-owned on account


of the Retail Trade Liberalization Act.
75%-25% EQUITY:

Inter-island shipping (R.A. 1937, Sec. 8)


Private recruitment
Contracts for construction and repair of locally-funded public
works
Except: Public works that would fall under the BuildOperate-Transfer Law, as well as those that are foreign-funded

70%-30% EQUITY:

Advertising

60%-40% EQUITY:

Other industries.

WHAT IS THE SO-CALLED "GRANDFATHER RULE"?


Where a domestic corporation which has both Philippine and foreign stockholders is an investor
in another domestic corporation which has also both Philippine and foreign stockholders, the so-called
"grandfather rule" is used to determine whether or not the latter corporation is qualified to engage in a
partially nationalized business, i.e. by determining the extent of Philippine equity therein.
Under present SEC rules, if the percentage of Filipino ownership in the first corporation is at
least 60%, then said corporation will be considered as a Philippine national and all of its investment in
the second corporation would be treated as Filipino equity. On the other hand, if the Philippine equity in
the first corporation is less than 60%, then only the number of shares corresponding to such percentage
shall be counted as of Philippine nationality. (See SEC Rule promulgated on 28 Feb. 1967, cited in
Opinion # 18, Series of 1989, Department of Justice, dated 19 January 1989.)
NOTE: The reader would be well-advised to cross-reference this
definition of the "grandfather rule" with a trusted commentary.

Legal Requirements Prior to Transaction of Business


Documentary Requirements (Sec. 125)
(1) BOI certificate
The BOI certificate is issued upon a finding of the Board of Investments that the business operations of the
foreign corp. will contribute to the sound and balanced development of the national economy on a selfsustaining basis. (See Omnibus Investments Code, Sec. 48-49)
NOTE: Applications, if not acted upon within 10 days from official acceptance thereof, shall be
considered automatically approved! (Art. 53, Omnibus Investments Code)
(2) SEC license to do business (Sec. 125)

Application under oath setting forth the information specified in Sec. 125;

Additional information as may be necessary or appropriate to enable the SEC to determine


whether the corporation is entitled to a license to transact business in the Philippines, and to
determine and assess the fees payable;

Duly executed certificate under oath by authorized official/s of the jurisdiction of the company's
incorporation, attesting to the fact that the laws of the country of the applicant allow Filipino citizens
and corporations to do business therein, and that the applicant is an existing corporation in good
standing;

Statement under oath of the president or any other person authorized by the corporation showing
that the applicant is solvent and in good financial condition, and setting forth the assets and liabilities
of the corporation within 1 year immediately prior to the application.

(3) Certificate from appropriate government agency


NOTE: Certain sectors such as banking, insurance, etc. require prior approval
from the government agencies concerned. (Sec. 17)
Deposit requirement (Sec. 126)
Within 60 days after the issuance of the license, the licensee shall deposit with the SEC securities with an actual
market value of at least P 100,000.00. These securities are for the benefit of present and future creditors, and shall consist
of any of the following:

Bonds or other evidence of indebtedness of the Government or its instrumentalities, etc.;


Shares of stock in "registered enterprises" as defined in R.A. 5186;
Shares of stock in domestic corporations registered in the stock exchange;
Shares of stock in domestic insurance companies and banks.

Once the licensee ceases to do business in the Philippines, these deposited securities shall be returned, upon the licensee's
application and proof to the satisfaction of the SEC that the licensee has no liability to Philippine residents or the Philippine
government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.

Designation of a resident agent (Sec. 128)


The designation of a resident agent is a condition precedent to the issuance of the license to transact business in the
Philippines.
WHO:
PURPOSE:

A resident of the Philippines.


To be served any summons and other legal processes which may be served in all
actions or other legal proceedings against such corporation. Service upon such
resident shall be admitted and held as valid as if served upon the duly authorized
officers of the foreign corporation at its home office.

Laws applicable to foreign corporations


Foreign corporations lawfully doing business in the Philippines are bound by all laws, rules and regulations applicable to
domestic corporations of the same class.
Exceptions: (1) As regards the creation, formation, organization or dissolution
of the corporation;
(2) As regards the fixing of relations, liabilities, responsibilities, or
duties of stockholders, members, or officers or corporations to each other or
to the corporation (Sec. 129)

Effects of Failure to Secure SEC License

WHAT ARE THE EFFECTS OF FAILURE TO SECURE A LICENSE?


(1) The corporation will not be permitted to maintain agency in the Philippines;
(2) The corporation will be subject to penalties and fines;
(3) The corporation will not be permitted to maintain or intervene in any action before Philippine courts or
administrative agencies; it can be SUED.
Isolated transactions
MARSHALL WELLS V. ELSER (46 Phil. 71; 1924)
Marshall Wells, a corporation organized under the State of Oregon, sued a domestic corp. for the unpaid balance on a bill
of goods. Defendant demurred to the complaint on the ground that it did not show that plaintiff had complied with the law regarding
corp. desiring to do business in the Phil., nor that the plaintiff was authorized to do business in the Phil.
The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute was to subject the foreign corp. doing
business in the Phil. to the jurisdiction of its courts. The object of the statute was not to prevent it from performing single acts but to
prevent it from acquiring a domicile for the purpose without taking the steps necessary to render it amenable to suit in the local
courts. The implication of the law is that it was never the purpose of the Legislature to exclude a foreign corp. which happens to
obtain an isolated order for business from the Phil., from securing redress in Phil. Courts, and thus, in effect to permit persons to
avoid their contract made with such foreign corporation.
ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966)
A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if it is duly licensed. If a foreign corp. is
not engaged in business in the Phil., it can maintain such suit if the transaction sued upon is singular and isolated, in which no
license is required. In either case, the fact of compliance with the requirement of license, or the fact that the suing corp. is exempt
therefrom, as the case may be, cannot be inferred from the mere fact that the party suing is a foreign corp. The qualifying
circumstance, being an essential part of the element of the plaintiffs capacity to sue, must be affirmatively pleaded. In short, facts
showing foreign corporations capacity to sue should be pleaded.
Curing of defect
HOME INSURANCE V. EASTERN SHIPPING (123 SCRA 424; 1983)
A contract entered into by a foreign insurance corp. not licensed to do business in the Phil. is not necessarily void and the
lack of capacity to sue at the time of execution of the contract is cured by its subsequent registration.
Protection of intellectual property rights
GENERAL GARMENTS CORP. V. DIR. OF PATENTS (41 SCRA 50; 1971)
Domestic corporation General Garments registered Puritan trademark for its mens wear. US corporation Puritan
Sportswear petitioned the Phil. Patent Office for cancellation of said trademark, alleging its ownership and prior use in the Phil.

The Supreme Court held that a foreign corp. which does not do business in the Phil. and is unlicensed but is widely known
in the Phil. through the use of its products here has legal right to maintain an action to protect its reputation, corporate name and
goodwill. The right to use the corporate name is a property right which the corp. may assert and protect in any of the courts of the
world.
LE CHEMISE LACOSTE V. FERNANDEZ (129 SCRA 377; 1984)
A foreign corporation not doing business in the Phil. needs no license to sue in the Phil. for trademark violations.
Where a violation of our unfair trade laws which provide a penal sanction is alleged, lack of capacity to sue of injured
foreign corp. becomes immaterial (because a criminal offence is essentially an act against the State).
NOTE: Sec. 160 of R.A. 8293 (Intellectual Property Code) provides that any foreign national or
juridical person who meets the requirements of Sec. 3 of the Act (i.e., is a national or is
domiciled in a country party to any convention, treaty or agreement relating to intellectual
property rights or the repression of unfair competition, to which the Philippines is also a party, or
extends reciprocal rights to Philippine nationals by law) and does not engage in business in the
Philippines may bring a civil or administrative action for opposition, cancellation, infringement,
unfair competition, or false designation of origin and false description, whether or not it is
licensed to do business in the Philippines under existing laws.
What Constitutes Transacting Business

WHAT IS CONSIDERED AS NOT DOING BUSINESS, AND THEREFORE NOT SUBJECT TO THE LICENSING
REQUIREMENT?

Mere investment as a shareholder and the exercise of the rights as such investor;

Having a nominee director or officer represent the foreign investors interests;

Appointing a representative or distributor in the Philippines who transacts business in his own
name and for his own account
Example:

Rustans exclusive distributorship of Lacoste t-shirts

Publication of a general advertisement;


NOTE: Under the Code of Commerce, the publication of an ad is prima
facie evidence (or at least creates a presumption) of doing business in the Philippines.

Maintaining stock of goods for processing by another entity in the Philippines;

Consignment of equipment to be used in processing products for export;

Collecting information in the Philippines;

Performing services incidental to an isolated contract of sale


Example: Installing machinery sold by a foreign corporation to a Philippine buyer

WHAT IS THE TEST OF DOING BUSINESS IN THE PHILIPPINES?


Whether or not there is continuity of transactions which are in pursuance of the normal business of the
corporation. (Metholatum v. Mangaliman)
MENTHOLATUM V. MANGALIMAN (72 Phil. 525; 1941)
The true test as to whether a foreign corporation is doing business in the Philippines seems to be whether the foreign corp.
is continuing the body or substance of the business for which it was organized or whether it has substantially retired from it and
turned it over to another. The term implies a continuity of dealings and arrangements and contemplates performance of acts/works
or the exercise of the functions normally incident to and in progressive prosecution of the purpose and object of its organization.
FACILITIES MANAGEMENT CORP. V. DE LA OSA (89 SCRA 131; 1979)
The Court of Industrial Relations ordered Facilities Management Corporation (FMC) to pay Dela Osa his overtime
compensation, swing shift and graveyard shift premiums. FMC filed a petition for review on certiorari on the issue of whether the
CIR can validly affirm a judgment against persons domiciled outside and not doing business in the Phil. and over whom it did not
acquire jurisdiction.
The Supreme Court held that the petitioner may be considered as doing business in the Philippines within the scope of
Sec. 14, Rule 14 of the Rules of Court:
Sec. 14. Service upon private foreign corp. - If the defendant is a foreign corp., or a non-resident joint
stock corporation or association, doing business in the Phil., service may be made on its resident agent,
on the government official designated by law to the effect, or to an y of its officers or agents within the
Philippines.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment Contracts and receive, on behalf of
the corp., legal services from, and be bound by processes of the Phil. Courts, for as long as he remains an employee of FMS. If a
foreign corp. not engaged in business in the Phil., through an Agent, is not barred from seeking redress from courts in the Phil., that
same corp. cannot claim exemption done against a person or persons in the Phil..
NOTE: Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the term "doing business" has
been replaced with the phrase "has transacted business," thereby allowing suits based on
isolated transactions.
MERRILL LYNCH FUTURES INC. V. CA (211 SCRA 824)
Merrill Lynch Futures, Inc. (MLF) filed a complaint against the spouses Lara for the recovery of a debt. MLF is a nonresident foreign corp. not doing business in the Phil., organized under the laws of Delaware, USA. It is a futures commission
merchant duly licensed to act as such in the futures markets and exchanges in the US, essentially functioning as a broker executing
orders to buy and sell futures contract received from its customers on US futures exchanges. (Futures contract is a contractual
commitment to buy and sell a standardized quantity of a particular item at a specified future settlement date and at a price agreed
upon with the purchase or sale being executed on a regulated futures exchange.)
The spouses refused to pay and moved to dismiss the case alleging that plaintiff had no legal capacity to sue because (1)
MLF is doing business in the country without a license; and (2) the transactions were made with Merrill Lynch Pierce, Fenner and
Smith and not with plaintiff MLF.
Issue: Can MLF sue in Philippine courts to establish and enforce its rights against spouses in light of the undeniable fact that it had
transacted business without a license?

Legal capacity to sue may be understood in two senses: (1) That the plaintiff is prohibited or otherwise incapacitated by
law to institute suit in the Phil. Courts, or (2) although not otherwise incapacitated in the sense just stated, that it is not a real party in
interest.
The Court finds that the Laras were transacting with MLF fully aware of its lack of license to do business in the Phils., and
in relation to those transactions had made payments and the spouses are estopped to impugn MLF's capacity to sue them. The
rule is that a party is estopped to challenge the personality of a corp after having acknowledged the same by entering into a contract
with it. The principle is applied to prevent a person contracting with a foreign corporation from later taking advantage of its
noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract.
PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 7917; April 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a sum of money for
damages suffered by the plaintiff as a consequence of the failure of the defendant to deliver copra which he sold and bound himself
to deliver to the plaintiff. Defendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to transact
business in the Phil and, consequently, it had no personality to file an action.
Has appellant transacted business in the Philippines in contemplation of law?
Contrary to the findings of the trial court, the copra in question was actually sold by the defendant to the plaintiff in the US,
the agreed price to be covered by an irrevocable letter of credit to be opened at the Bank of California, and delivery to be made at
the port of destination. It follows that the appellant corporation has not transacted business in the Phil in contemplation of Sec. 68
and 69 which require any foreign corporation to obtain a license before it could transact business, or before it could have personality
to file a suit in the Phil.. It was never the purpose of the Legislature to exclude a foreign corporation which happens to obtain an
isolated order of business from the Phil., from securing redress in the Phil. Courts, and thus, in effect, to permit persons to avoid
their contracts made with such foreign corp.. The lower court erred in holding that the appellant corporation has no personality to
maintain the present action.
AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA 635; 1977)
Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for the loss of Linen & Cotton piece
goods due to pilferage and damage amounting to US$2,300.00. PSL contends that Aetna has no license to transact insurance
business in the Philippines as gathered from the Insurance Commission and SEC . It also argues that since said company has filed
13 other civil suits, they should be considered as doing business here and not merely having entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held that Aetna is not transacting business
in the Philippines for which it needs to have a license. The contract was entered into in New York and payment was made to the
consignee in the New York branch. Moreover, Aetna was not engaged in the business of insurance in the Philippines but was merely
collecting a claim assigned to it by consignee. Because it was not doing business in the Philippines, it was not subject to Sec. 6869 of the Corporation Law and therefore was not barred from filing the instant case although it had not secured a license to transact
insurance business in the Philippines.
TOPWELD MANUEL VS. ECED (138 SCRA 120; 1985)
Topweld entered into 2 separate contracts with foreign entities: a license and technical assistance agreement with IRTI,
and a distributor agreement with ECED, SA. When Topweld found out that the foreign corporations were looking into replacing
Topweld as licensee and distributor, the latter went to court to ask for a writ of preliminary injunction to restrain the foreign
corporations from negotiating with 3rd parties as violative of RA 5445 (4).
Although IRTI and ECED were doing business in the Philippines, since they had not secured a license from BOI, the
foreign corporations were not bound by the requirement on termination and Topweld could not invoke the same against the former.

Moreover, it was incumbent upon Topweld to know whether or not IRTI and ECED were properly authorized to engage in such
agreements. The Supreme Court held that both parties were guilty of violating RA 5445. Being in pari delicto, Topweld was not
entitled to the relief prayed for.
ANTAM CONSOLIDATED VS. CA (143 SCRA 289; 1986)
Stokely Van Camp Inc. filed a complaint against Banahaw, Antam, Tambunting and Unicorn for the collection of a sum of
money for failure to deliver 500 tons of crude coconut oil. Antam et al asked for dismissal of case on ground that Stokely was a
foreign corporation not licensed to do business in the Philippines and therefore had no personality to maintain the suit.
The SC held that the transactions entered into by Stokely with Antam et al (3 transactions, either as buyer or seller) were
not a series of commercial dealings which signify an intent on the part of the respondent to do business in Philippines but constitute
an isolated transaction. The records show that the 2nd and 3rd transactions were entered into because Antam wanted to recover the
loss it sustained from the failure of the petitioners to deliver the crude oil under the first transaction and in order to give the latter a
chance to make good on their obligation. There was only one agreement between the parties, and that was the delivery of the 500
tons of crude coconut oil.
How Courts Acquire Jurisdiction over Foreign Corporations

As a rule, jurisdiction over a foreign corporation is acquired by the courts through service of summons on its resident agent.
If there is no assigned resident agent, the government official designated by law can receive the summons on their behalf and
transmit the same to them by registered mail within 10 days. This will complete the service of the summons. Summons can also be
served on any of the corporation's officers or agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note
that while Sec. 128 presupposes that the foreign corporation has a license, Rule 14 does not make such an assumption.)
Note that if there is a designated agent, summons served upon the government official is not deemed a valid process.
v

Johnlo Trading case holds that the service on the attorney of an FC who was also charged with the duty of
settling claims against it is valid since no other agent was duly appointed.

Service on Officers or Agents of an foreign corporations domestic subsidiary will only vest jurisdiction if there
is sufficient ground to disregard the separate personalities.

GENERAL CORPORATION OF THE PHILIPPINES VS UNION INSURANCE (87 Phil. 313; 1950)
General Corporation and Mayon investment sued Union Insurance and Firemens Fund Insurance (FFI) for the payment of
12 marine insurance policies. The summons was served on Union which was then acting as FFIs settling agent in the country. At
that time, it was not yet registered and authorized to transact business in the Philippines.
Issue: Did the trial court acquire valid jurisdiction over FFI?
Yes. The service of summons for FFI on its settling agent was legal and gave the court jurisdiction upon FFI. Section 14,
Rule 7 of ROC embraces Union in the phrase, or agents within the Philippines. The law does not make distinctions as to
corporations with or without authority to do business in the Philippines. The test is whether a foreign corporation was actually doing
business here. Otherwise, a foreign corporation doing business illegally because of its refusal or neglect to obtain the
corresponding authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and
thereby impugn the jurisdiction of the courts.

Withdrawal of Foreign Corporation


(Sec. 136)
HOW: By filing a petition for withdrawal of license
REQUISITES FOR ISSUANCE OF CERTIFICATE OF WITHDRAWAL:
(1)

All claims which have accrued in the Philippines have been paid, compromised and 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 3 consecutive weeks in
a newspaper of general circulation in the Philippines.

Revocation and Suspension of License


(Sec. 134)
WHAT ARE THE GROUNDS FOR REVOCATION OR SUSPENSION OF A LICENSE OF A FOREIGN
CORPORATION?
(1)

Failure to file its annual report or pay any fees as required by the Corporation Code;

(2)

Failure to appoint and maintain a resident agent in the Philippines as required;

(3)

Failure, after change of resident agent or of his address, to submit to the SEC a statement of
such change;

(4)

Failure to submit to the SEC an authenticated copy of any amendment to its AOI or by-laws or of
any articles of merger or consolidation within the time prescribed by the Code;

(5)

A misrepresentation of any material matter in any application, report, affidavit or other document
submitted by such corporation pursuant to Title XV;

(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/s for which such corporation is
authorized under its license;

(8)

Transacting business in the Philippine 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.