Atty. Abbas M. Basman

September 10, 1980 Atty. Abbas M. Basman Suites 5 & 6 Legaspi Towers 300 Pres. Roxas Boulevard Manila Dear Atty. Basman: This has reference to your letter dated June 14, 1980 requesting opinion on the query posed therein. It appears from your letter that the Guimba Industrial Development and Construction Corporation (Guideco, in short) was registered in 1963 and since that time up to the present has organized eight (8) more corporations as its subsidiaries engaged in different purposes or goals. You wish to know how Guideco can qualify as a holding company as well as its resulting obligations as such; and that you be furnished with the necessary information and/or guidelines relative thereto. Ballantine defines a holding or parent company as "one which controls another as a subsidiary or affiliate by the power to elect its management. Affiliates are those concerns which are subject to common control and operated as part of a system" (Ballantine Law on Corporation, p. 208). In other words, a holding company is one which holds stocks in other companies for purposes of control rather than for mere investment. If a corporation owns a majority of stock in another with no idea of exercising control, but simply for the return which the investment will bring, it is not an actual holding company, though it may be regarded potentially as such. Consequently, if Guideco possesses the power of control either directly or indirectly through the eight (8) corporations it has organized, then it may be deemed a parent or holding company in relation to the series of corporations it has established. If the eight (8) corporations are related to each other by common control of voting stock and operated as parts of a system or enterprise, they may be deemed affiliated companies. Parent-subsidiary relationships have been clarified to a large extent by a series of American decisions and/or jurisprudence. Thus, if properly used to perform legitimate functions, each subsidiary and affiliate may maintain its separate juridical personality distinct from its controlling corporations or stockholders and the liabilities of each corporation will be confined to those. Otherwise, the parent company is liable for the torts and contracts of the subsidiary, arising from its separate business to wit: 1. The "instrumentality rule" holds that a parent company will be liable for debts of a subsidiary where it can be shown that the parent uses the subsidiary as a mere "instrumentality", "agency" or "adjunct", so that one is the "alter ego" of the other. 2. If a corporation is controlled by another and is manipulated by the parent for its own purposes and in its own interest to the prejudice of innocent third parties or the public welfare, it may be necessary to hold the controlling party responsible (ibid p. 313) cdll 3. If the parent corporation provides the subsidiary with inadequate capital or deals with the property of the subsidiary as if it were its own; if it gives direct orders to the employees of the subsidiary and treats it as a mere department of its business; if it divert its funds by the unlawful declaration of dividends or otherwise abuses its control, it ceases to enjoy the privilege of separate capacity. (Ibid p. 319) 4. If the parent or holding company undertakes to assume complete control of the operation of the subsidiary's business, employs a manager to operate its properties and authorizes him to hire employees on its behalf and discharges them, and to purchase labor, materials and supplies, subject to the supervision of the directors of the holding company, it may be held that the separate corporate existence or capacity by the subsidiaries has been so far disregarded as an independent organization. (Ibid p. 320) The parent company has innumerable obligations in relation to its subsidiaries. The SEC however, has not promulgated guidelines on the same considering that we fall back on American precedents and jurisprudence applicable to the circumstances of each case. It is informed, however, that the Bureau of Internal Revenue has its own definition of a "holding company" under its rules and regulations. cdlex Please be guided accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Director Corporate and Legal Department