Sycip Salazar Hernandez & Gatmaitan Law Offices

June 1, 1987 Sycip Salazar Hernandez & Gatmaitan Law Offices 105 Paseo de Roxas, Makati Metro Manila Gentlemen: This relates to your letter, dated May 14, 1987, requesting for a ruling on certain legal consequences relative to the proposed establishment of an office in the Philippines of your client, First Philippine Capital Fund L.P. ("the Partnership"). LibLex The facts as presented in your letter are as follows: The partnership is a limited partnership proposed to be formed under the laws of the State of Delaware, United States of America. It will be an investment vehicle designed to enable banking institution to pool their holdings of certain foreign debt obligations of the Central Bank of the Philippines in order to facilitate the conversion of those obligations into equity investments in Philippine enterprises under the Philippine Program for the Conversion of Philippine External Debt into Equity Investments, governed by Central Bank Circular No. 1111. The partnership will have a general partner and limited partners. The general partner will be Shearson Lehman International Investments, Inc., while the limited partner will be the International Finance Corporation (I.F.C.), foreign banks, bank affiliates or banks with offshore banking units or foreign currency deposit units in the Philippines. Limited partners will exchange "Qualified Debt" which they hold for units of limited partner interest in the partnership. The partnership will invest substantially all of the Qualified Debt in common stock and preferred stock of Philippine enterprises under the Conversion Program. It might also invest in debt securities issued by such enterprises, including debt securities convertible into equity, upon approval by the Central Bank, pursuant to the Conversion Program. The partnership will be capitalized at a minimum of U.S. $125M and maximum of U.S. $250M. As manifested in your basic letter, "the Partnership" desires to establish an office in the Philippines that will have the following functions in relation to the company's investment activity, to wit: 1) Identifying and seeking out suitable investments, 2) negotiating the terms of, and concluding contracts for the acquisition of investments, 3) monitoring the investments, including representing the Partnership to the extent allowed by law on the board of directors of the corporation in which the investment is made, as well as giving advice to the corporation concerned without remuneration, 4) Liaising with governmental and other institutions with respect to such investments and Qualified Debt, and 5) Disposing of the investments in the Philippines (a) in privately negotiated sales, transactions, (b) in public offering conducted through brokers/dealers to whom compensation negotiated at arm's length is paid, or most likely, (c) in secondary offerings conducted through brokers/dealers made in conjunction with primary offerings made by the Philippine company, or (d) outside the Philippines. ISSUE : If "the Partnership" pursues the establishment of an office in the Philippines that will perform the functions enumerated above, will it be considered as being involved in investment activity only, i.e., it will not be deemed doing business in the Philippines, and need not therefore obtain a license required under Section 123 of Batas Pambansa Blg. 68, otherwise known as the Corporation Code? DISCUSSION : Article 65 of P.D. 1789, otherwise known as the Omnibus Investments Code, reads thus: "ARTICLE 65. Definition of Terms . As used in this Book, the term 'investment' shall mean equity participation in any enterprise formed, organized or existing under the laws of the Philippines; and the phrase 'doing business' shall include soliciting orders, purchases, service contracts, opening offices, whether called 'liaison' offices or branches ; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines 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 which imply a continuity of commercial dealings or arrangements and contemplate to that extent that 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 . " (Emphasis supplied). The term "doing business" involves a continuity of act and purpose such as might be evidenced by investment of capital in the state, with the maintenance of an office for the transaction of its affairs, and such incidental circumstances as might indicate the aim of the corporation to avail itself of the privilege of carrying on business in this jurisdiction. (17 Fletcher, Cyc. Corp., sec. 8466, p. 508). The Court ruled thus: " If the corporation is engaged in a more or less continuous effort, not merely casual, sporadic or isolated, to conduct and carry on within the state some part of the business in which it is usually and generally engaged, it may be said with due and becoming propriety to be doing business within such state . (Knapp v. Bullock Tractor Co., 242 F 543. Emphasis Ours) The purpose for which a particular corporation is organized must be taken into consideration in determining whether it is doing business in another state. It has been ruled that the mere fact that a foreign corporation acquires or holds stock of a domestic corporation does not of itself constitute the doing of business in the state, even though such ownership gives the corporation the controlling interest in the stock of the domestic corporation. Nevertheless, the converse of this rule is pointed out by Mr. Fletcher as follows: " If however the purchase and ownership of stock in other corporation is one of the objects for which the corporation was organized, it would be doing business in the state when it purchases and holds stock of a corporation domiciled in the state ." (17 Fletcher Cyc. Corp., sec. 8490). Another factor to be considered is the presence or absence of an office which imports certain significance in determining whether a foreign corporation is transacting business within the meaning of a state's qualification statute. (Fletcher, sec. 8473, citing Allenberg Cotton Co., Inc. v. Pittman, 419 US 20, 42L Ed. 2d 195, 95 S. Ct., 260). Standing alone and in the absence of a further showing, it can hardly be said to be controlling. The character and purpose of the office and the use to which it is put must be considered. (Fletcher, Supra.). In this connection, however, the Courts have agreed thus: "Where a foreign corporation transacts in a state a portion of its ordinary business, it will be regarded as doing business in such state within the meaning of the statutes, although it may not have its principal office therein or may not have any office as place of business therein. (Lamb v. Lamb, 6 Biss 420, Fed. Case No. 8,018; Ginn v. New England Mortg. Security Co., 92 Ala. 135, 8 So 388; and others, cited in Fletcher, sec. 8473). Judicial thought and utterances have clarified the real test in determining whether a corporation is doing business in the state within the meaning of the qualifying statute as follows: is the corporation engaged in the transaction of the business, or any part thereof, for which it was created and organized to transact? If it be, it does business within the meaning of the statute. If it be not, if the act it is doing, or has done is not within its general powers and franchises, it is not the business to which statutory requirement is directed. (Sullivan v. Sullivan Timber Co., 103 Ala. 371, 15 So. 941, cited in Fletcher Cyc. Corps., Vol. 17, sec. 8466, p. 510). Your basic letter shows that "the Partnership" will engage in investment activity of buying and selling debt and equity securities. Considering the various acts which the representative office would admittedly do in this forum state, particularly the purchase and sale of securities of domestic companies in the course of a number of repeated transactions of like nature, there is a clear indication that the representative office would engage in some part of the regular business of "the Partnership". The Board of Investments, in its letter to you of May 20, 1987 confirmed the opinion that the activities to be performed by the office of "the Partnership" in this state forum are economic activities, of a representative office, and thus "the Partnership" should first secure a Certificate of Authority from the Board of Investments pursuant to the provisions of Article 69 of P.D. 1789, as amended, otherwise known as the Omnibus Investments Code, before it may open an office in the Philippines. Article 70 of P.D. 1789, as amended, in relation to Article 69 thereof imposes certain requirements upon the granting of B.O.I. Certificate of Authority on foreign forms of organizations affecting SEC jurisdiction, particularly paragraph (8) thereof impliedly conferring upon the Commission its duty of protecting the resident creditors and others dealing with the foreign firms' representative or branch offices. Corollary to this, Section 3 of P.D. 902-A, as amended, provides that "The Commission shall have absolute jurisdiction, supervision and control over all corporations, partnerships or associations, who are grantees of primary franchises and/or a license or permit issued by the government to operate in the Philippines , . . . ". (Emphasis supplied). In view of the foregoing, the Commission opines that the activities of the proposed office of the First Philippine Capital Fund L.P. ("the Partnership") constitutes economic activities of a representative office. Hence, a license or permit to operate should be secured from this Commission, not pursuant to Section 123 of the Corporation Code, but under Title IX of the New Civil Code (Partnership). Please be guided accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner