Attys. Ray C. Espinosa

August 17, 1995 Attys. Ray C. Espinosa and J.M.G. Hofilea Sycip Salazar Hernandez and Gatmaitan 105 Paseo de Roxas, 1200 Makati, Metro Manila S i r : This refers to your letter of August 4, 1995, requesting opinion on the issue of whether or not a corporation or other non-natural persons may become a limited partner in a Philippine limited partnership. As stated in your Memorandum dated August 4, 1995, attached to your letter, foreign investors have proposed to construct and operate in the Municipality of Mauban, Province of Quezon, a 440 MW coal-fired thermal power plant and related structures (power project). The power project is expected to yield significant economic and social benefits to the Philippines. Under a Power Purchase Agreement negotiated with and approved by the Manila Electric Company ("Meralco"), electricity from the Power project would be sold to Meralco for 25 years. The Department of Energy has already accredited the power project as a Private Sector Generating Facility, and the Board of Investments has already issued a Certificate of Registration entitling the power project to investment incentives under the Omnibus Investments Code. The foreign investors in the proposed power project have determined that their business goals would best be achieved with the use of a limited partnership .The limited partnership to be formed would involve certain corporate partners acting as general partners, who would be in charge of the management of the enterprise, and certain corporate partners acting as limited partners who would act as passive investors with limited liability. However, you noted that under existing policy of the Commission, a corporation, as a general rule, cannot enter into a contract of partnership with an individual or another corporation on the premise that if a corporation enters into a partnership agreement, it would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers, which is entirely inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively. ( SEC Opinion dated Dec. 22, 1966, addressed to Messr. Juan G. Collas, Jr. and Luis Ma. Guerrero ,citing 13 Am. Jur. S. 823, (1938) and 6 Fletcher Cyclopedia Corporations, S 2520 (perm. ed. rev. repl. 1950).The Commission only allows, as an exemption, to the application of the above rule, if the following conditions are complied with: 1. The authority to enter into a partnership relation is expressly conferred by the charter of the articles of incorporation of the corporation, and the nature of the business venture to be under-taken by the partnership is in line with the business authorized by the charter or articles of incorporation of the corporation involved. ( SEC letter to Mr. Antonio E. Librea dated Feb. 29, 1980 ). 2. The agreement on the articles of partnership must provide that all the partners shall manage the partnership ,and the articles of partnership must stipulate that all the partners shall be jointly and severally liable for all the obligations of the partnership ;(ibid) 3. If it is a foreign corporation, it must obtain a license to transact business in the country in accordance with the Corporation Code of the Philippines. ( Ltr. to Mr. Romeo P. Orsolino, dtd. Sept. 3, 1984 ). On several instances, the Commission reiterated the above rulings and in a letter opinion dated February 23, 1994, addressed to Messrs. Jose T. Tale & Jose Luis G. de Dios of Romulo, Mabanta, Buenaventura, Sayoc & delos Angeles, it was opined that since the partners in a partnership of corporations are required to stipulate that all of them shall manage the partnership and that they shall be jointly and severally liable for all the obligations of the partnership, it necessarily follows that a partnership of corporations should be organized as a " general partnership " wherein all the partners are general partners so that all corporate partners shall take part in the management and thus be jointly and severally liable with the other partners . However, it is your contention that a corporation can be a limited partner in a partnership submitting the following summarized arguments: 1. Just as a corporate investor has the power to make passive investments in other corporations by purchasing stock, corporate investor should also be allowed to make passive investments in partnerships as a limited partner. By being a limited partner, the corporation would not be bound beyond the amount of its investment by the acts of the other partners who are not its duly appointed and authorized agents and officers. Hence, the very reason why as a general rule, a corporation cannot enter into a contract of partnership, as stated in the 1966 SEC opinion, would no longer be present, as the corporation, which is merely a limited partner, will now be protected from the unlimited liability of the other partners who are not agents or officers of the corporation. LibLex 2. Section 42 of the Corporation Code which permits a corporation to invest its funds in another corporation or business, does not require that the investing corporation be involved in the management of the investee corporation with a view to protect its investment therein. Under said provision, the management of the other entity is not a pre-condition to the validity of such investment. By entering into a contract of limited partnership, a corporation would continue to manage its own corporate affairs while validly abstaining from participation in the management of the entity in which it has invested. Accordingly, as there is generally no threat that a corporate limited partner would be solidarily liable with the partnership, there would be no reason for requiring a corporate partner to actually manage the partnership, if it makes the business decision not to do so and opts to become a limited partner. 3. The SEC policy that a corporation cannot enter into a limited partnership, is an offshoot of the outdated view in the U.S.,that, as a general rule, corporations could not form a partnership; that corporations cannot become limited partners, is based on an assumption which is no longer current. Jurisprudence and common commercial practice in the U.S.,indicate that corporations are not barred from acting as limited partners. Current American laws support the position that a corporation can enter into a contract of limited partnership. For example, the Revised Uniform Limited Partnership Act of 1976 (as amended in 1985),specifically confirms, that corporations may act as limited partners. Almost all states in the U.S. have adopted limited partnership laws which provide, in the same manner as the Revised Uniform Limited Partnership Act, that corporations may act as limited partners. This indicates that many other jurisdictions simply follow the broad language of the Revised Model Business Corporations Act which suggests that corporations may act as limited partners and in no event prohibits that activity. These statutes reaffirm what is indicated by the commercial practice in the U.S.,that corporations can act as limited partners. The proliferation of statutes reversing the doctrine forbidding corporations to become partners is proof of the unsoundness of and dissatisfaction with such doctrine. In the light of the foregoing, you submit that foreign corporations may become a limited partner in a Philippine limited partnership. Please be advised that inasmuch as there is no existing Philippine law that expressly prohibits a corporation from becoming a limited partner in a partnership, the Commission is inclined to adopt your view on the matter, provided, that the two other conditions above-mentioned are complied with. We agree with your statement that a reconsideration of the present policy of the Commission on the matter is timely in order to permit the Philippine commercial environment to maintain its pace in terms of legal infrastructure with similar developments in the international arena with a view to encouraging and facilitating greater domestic and foreign investments in Philippine business enterprise. LexLib (SGD.) ROSARIO N. LOPEZ Chairman