Attys. Alex Erlito S. Fider

November 13, 2002 SEC OPINION NO. 11-02 Attys. Alex Erlito S. Fider Estrelita G. Gacutan Picazo Buyco Tan Fider & Santos Law Offices 18th, 19th, & 17th Floors, Liberty Center 104 H.V. De la Costa Street Salcedo Village, Makati City Gentlemen : This refers to your letter requesting confirmation of your opinion that the proposed sale and distribution by your client of mobile cellular phone units, telephone accessories and other related communications equipment to the public is within its corporate powers as stated in its articles of incorporation, its congressional franchise and under the Corporation Code, and that the proposed activities are necessary and incidental to and form an integral component of providing telecommunication services. Smart Communications, Inc. ("SMART") is a telecommunications company, which was granted a legislative franchise to operate as a telecommunications system in the Philippines in accordance with the authority under the franchise. It is a wholly-owned subsidiary of Philippine Long Distance Telephone Company ("PLDT"),a public utility at least 60% of the capital stock of which is owned by Philippine nationals. As part of its expansion programs, SMART intends to sell mobile cellular phone units and accessories to the public. The proposed sale and distribution by SMART of cellular phone units and accessories to the public is within its corporate powers, more specifically, under paragraphs 1 and 8 of its Secondary Purposes under the Second Article of its Amended Articles of Incorporation which provide: "1. To purchase, acquire, own, lease, sell and convey, real properties such as lands, buildings, factories and warehouses and machineries, equipment and other personal properties as may be necessary or incidental to the conduct of the corporate business ... xxx xxx xxx 8. To conduct and transact any and all lawful, business, and to do or cause to be done any one or more of the acts and things herein set forth as its purposes, within or without the Philippines, and in any and all foreign countries, and to do everything necessary, desirable or incidental to the accomplishment of the purposes or the exercise of any one or more of the powers herein enumerated, or which shall at any time appear conducive to or expedient for the protection or benefit of this corporation." (Emphasis ours) In a similar instance involving Globe Telecommunications Company, the Commission has previously opined that such activity "may be treated as reasonable and necessary activities to be engaged in by a telecommunications operator considering that by providing the necessary equipment to transmit the same, the conveyance of communication is thus assured and the availment by the subscribers or clients of the communication services offered by the firm is thus enhanced." ( SEC Opinion dtd. May 31, 2001, Attys. Nisce and Guinto ) "It is a familiar doctrine that every express grant of power to a corporation carries with it all the powers that may be implied from or which are incidental or necessary, or expedient to those expressly conferred, and the corporation may do whatever is necessary or expedient to their exercise." ( Fletcher Cyclopedia Corporations Vol. 6 Sec. 2486 ) SMART's proposed sale and distribution of cellular phone units and related devices or accessories to the public may likewise be considered as within the exercise of its implied powers. The exercise by corporations of implied powers is expressly recognized under pars. 7 and 11 of Section 36 of the Corporation Code, as follows: HaTSDA "Sec. 36. Corporate powers and capacity . Every corporation incorporated under this Code has the power and capacity: xxx xxx xxx 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may be reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution. xxx xxx xxx 11. To exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation." The term implied power of the corporation has been defined as one which the law will regard as existing by implication; such power must be one in a sense necessary; that is needful; suitable and proper to accomplish the object of the grant one that is directly and immediately appropriate for the execution of the specific powers; and not one that has slight, indirect or remote relation to the specific purpose granted." 1 The test to be applied is whether the act in question is in direct and immediate furtherance of the corporation's business fairly incident to the express powers and reasonably necessary to their existence. 2 The sale by SMART of cellular phone units and accessories to the public may be treated as reasonable and necessary to its primary business considering that by providing the cellular phone units and related devices or accessories, the provision of telecommunications services is actually carried out and the availment by the subscribing public of such telecommunications services is actually realized. On the basis of the foregoing reasoning of the Commission, it is clear that the sale by SMART of cellular phone units and related devices or accessories is necessary, suitable and proper to accomplish its object, that is, to provide telecommunications services. It is likewise directly and immediately appropriate for the execution of its primary purpose of providing telecommunications services. On the question as to whether the sale would constitute "retail trade",the Commission has already ruled that engaging in the selling of merchandise as an incident to the primary purpose of a corporation does not constitute retail trade. In an opinion issued by the Commission, it was ruled that "since a hospital, by its very nature, cannot operate without a pharmacy to cater to its patients, it is believed that the putting up by a hospital of its own pharmacy does not constitute a "retail trade" within the purview of the Retail Trade Nationalization Law." The same was based on the exception granted under R.A. No. 1180 or the Retail Trade Nationalization Law excluding from the term "retail business" the operation of a restaurant by a hotel-owner or keeper since the same does not constitute the act or habitually selling direct to the general public merchandise, commodities or goods for consumption. On the basis of the above opinion, it may be said that the selling to the public of cellular phone units and related devices or accessories by a telecommunications operator, such as SMART, does not constitute retail trade. This is because the sale of cellular phone units and related devices or accessories is merely incidental to the primary purpose of a telecommunications operator and is not by itself progressively pursued by the telecommunications operator as an independent business. Assuming, however, that the sale and distribution to the public of cellular phone units and related devices or accessories by a telecommunications operator constitutes retail trade, it is submitted that under the liberalized policy of the SEC, SMART may still engage in retail trade notwithstanding that a portion of the outstanding capital stock of its parent company, PLDT, is owned by foreign nationals. PLDT is a public utility and as of to date, approximately 12.72% of its outstanding capital stock is owned by foreigners. On the other hand, SMART is a wholly-owned subsidiary of PLDT. Thus, notwithstanding that a portion of the capital stock of its parent company is owned by non-Filipinos, SMART is deemed qualified to engage in retail trade under the Retail Trade Liberalization Act of 2000 as it meets the capitalization requirement for enterprise with foreign ownership that may engage in retail trade business in the Philippines. On the basis of the General Information Sheet submitted by the corporation, the paid-up capital of SMART has reached Php3,494,433,919.00 ,as of December 31, 2001. Very truly yours, (SGD.) VERNETTE UMALI-PACO General Counsel Footnotes 1. Rosario N. Lopez, The Corporation C od e of the Philippines, Vol. I, pp. 518-519, citing Ballantine Law Dictionary, p. 614; also cited in SEC Opinion dated May 31, 2001 addressed to Attys. Rosanno P. Nisce and Bob L. Guinto. 2. supra , SEC Opinion dated May 31, 2001 citing Montelibano vs. Bacolod Murcia Milling Co., Inc .,G.R. No. L-15092 dated May 18, 1962.