7 Foreign Corporation

Obtaining a License: Its Substance to Foreign Corporations doing Business in

the Philippines1

Patrick Mabbagu2

Prologue

Corporations, both domestic and foreign have been considered partners of the State in its economic progression and stability. In our jurisdiction, a number of Supreme Court decisions support the view that business corporations are not organized solely as profit-making enterprises but also as economic and social institutions corresponding public responsibility to aid in the betterment of economic and social conditions in the community in which such corporations are doing business.

Recognizing their economic and social import, the State in the exercise of its police powers, has enacted legislations which regulate and promote the establishment of corporate institutions and the means and manner by which these corporations perform, use or exercise their corporate powers.

With the growing trends of economic globalization and trade liberalization, which former Chief Justice Artemio V. Panganiban considers “the millennium buzz words3”, the existence of foreign corporations doing business here in our archipelago are hence inevitable.

Definition and Nature of Foreign Corporations

Under the Corporation Code of the Philippines,4 a foreign corporation is done, formed, organized or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state. It shall have the right to transact business in the Philippines after it shall have obtained a license to transact business in this country in accordance with the provisions of the Corporation Code and a certificate of authority from the appropriate government agency.

1 Attributed to the discussions of and cases assigned by Judge Dante Vittorio D. Dalman in the subject Private Corporation

2 Bachelor of Arts in Political Science, Andres Bonifacio College; College Instructor; Freelance columnist-The Mindanao Observer; Former Governor-Supreme Law Council; Former President-Lex Deo (Debate and Oratorical) Club; Editor in Chief and Chairman of the Editorial Board-Bonifacio Law Journal

3 Tañada vs. Angara, G.R. No. 118295, May 2, 19974 Section 123, Batas Pambansa Bilang 68; took effect on the date of its approval

on May 1, 1980; supplants Act No. 1459 as amended

With respect to a particular state, a foreign corporation is a corporation created by or under the laws of another State or country. This is the traditional definition of the term. In the incorporating State, it is a domestic corporation. Thus:

“X corporation organized under the laws of the Philippines is a domestic corporation with respect to the Philippines and a foreign corporation with reference to any other State; if organized under the laws of Y country, it is domestic with reference to Y and a foreign corporation under the Corporation Code.”5

In the 1997 case of Avon Insurance PLC vs. Court of Appeals,6 the Supreme Court described a foreign corporation as one which owes its existence to the laws of another state and generally, has no legal existence within the state in which it is foreign.

As a rule, a foreign corporation can have no legal existence or status beyond the bounds of the State or sovereignty by which it is created or incorporated and organized. It exists only in contemplation of law and by force of the law and where the law ceases to operate, the corporation can have no existence.

Nationality of Foreign Corporations

As cited by de Leon7, there are two rules for determining the corporate nationality of a corporation. Under the incorporation test, the nationality of a corporation is that of the state of incorporation regardless of the nationality of its stockholders. Under the control test, it depends on the nationality of the stockholders who owns the controlling interest. The application of either test depends however on the particular situation.

During wartime, for reasons of national security, the control test and not the incorporation test shall determine the nationality of a corporation, that is, a domestic corporation controlled by enemy aliens shall be deemed a foreign corporation with a nationality identical with that of its controlling stockholders8.

5 De Leon, H. The Corporation Code of the Philippines Annotated. Ninth Edition. Manila: Rex Bookstore Inc. 2006.

6 278 SCRA 3127 De Leon, ibid.8 Filipinas Cia de Suguros vs. Christern Huenefeld and Company, 89 Phil 53

(1951)

| Obtaining License: Its Substance to Foreign

Corporations doing business in the Philippines

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The Department of Justice in an opinion9 applying the control test, has laid down the rule adopted by the Securities and Exchange Commission10 and now expressly embodied in the Forein Investments Act11 in the determination of the nationality of corporations formed or organized under Philippine law with alien equity as follows:

“Shares belonging to corporations or partnerships at least 60% of the capital of which are owned by Filipino citizens shall be considered as of Philippine nationality but if the percentage of Filipino ownership in the corporation or partnership is less than 60%, only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of corporation or partnership at least 60% of the capital stock or capital, respectively, of which belong to Filipino citizens, all of said shares shall be recorded as owned by Filipinos. But if less than 60% or say only 50% of the capital stock or capital belong to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens.

Under existing laws, the basis for the computation is the total outstanding capital stock or number of shares, irrespective of the amount of the par value of the shares.

Requirements to be Complied before Foreign Corporations Can Transact Business

As provided under Section 123, foreign corporations shall not be permitted to transact or do business in the Philippines until they have secured a license for the purpose from the Securities and Exhange Commission and a certificate of authority from the appropriate government agency. SEC does not have rules and regulations governing the activities of foreign corporations in the Philippines before they are granted a license, the reason being that until they have obtained a license, they cannot transact business in the country.

9 Opinion No. 18, January 19, 198910 SEC opinion, December 7, 199311 Republic Act No. 7042



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The objectives of the statutory provisions prescribing conditions under which foreign corporations are permitted to do business in a State other than that of their creation have been stated as follows12:

1.) to place them on an equality with domestic corporations;2.) to subject them to inspection so that their condition may

be known; and3.) to protect the residents of the State doing business with

them by subjecting them to the courts of the state.

The license requirement does not prevent the foreign corporation from performing single or isolated acts, but instead, it seeks to bar foreign corporations from acquiring domicile for the purpose of business without taking steps necessary to render it amenable to suit in the local courts13. In other words, what the law seeks to prevent is a foreign corporation doing business in the Philippines without a license from gaining access to Philippine courts14.

The requirement enables our government to exercise jurisdiction over foreign corporations doing business in the Philippines for the regulation of their activities in the country. By securing license, a foreign corporation gives assurance that it will abide by the decisions of our courts even if adverse to it.15

In Avon Insurance PLC case,16 the Supreme Court ratiocinated as follows:

“The purpose of the law requiring that foreign corporations doing business in the country be licensed to do so is to subject the foreign corporations doing business in the Philippines to the jurisdiction of the courts, otherwise, a foreign corporation illegally doing business here because of its refusal or neglect to obtain the required license and 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 local courts”.

For licensing purposes, Section 123 also requires reciprocity. Under the Corporation Code, the existence of a foreign law allowing Filipino citizens and corporations to do business in the country of the

12 De Leon, ibid.13 De Leon, ibid., citing Marshall-Wells Co. Vs. Elser & Co., 46 Phil 71 (1924)14 Ibid., citing Hang Lung Bank, Ltd. Vs. Saulog, 201 SCRA 137 (199115 Ibid, citing Eriks Pte., Ltd. vs. CA 79 SCAD 70, 267 SCRA 567 (1997)16 Ibid.



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foreign corporation is prescribed as a condition for securing a license to transact business in the Philippines. It is to be noted however that it is not an essential element of being a foreign corporation.

Requisites for the Grant of License

Since securing a license is imperative before foreign corporations can engage in business in the Philippines, we shall now examine what are the requisites for the grant of such license.

Section 125 of the Corporation Code clearly provides that a foreign corporation applying for a license to transact business in the Philippines shall submit to the Securities and Exchange Commission a copy of its articles of incorporation and by-laws, certified in accordance with law, and their translation to an official language of the Philippines, if necessary. The application shall be under oath and, unless already stated in its articles of incorporation, shall specifically set forth the following:

“1. The date and term of incorporation;2. The address, including the street number, of the principal office of the corporation in the country or state of incorporation;3. The name and address of its resident agent authorized to accept summons and process in all legal proceedings and, pending the establishment of a local office, all notices affecting the corporation;4. The place in the Philippines where the corporation intends to operate;5. The specific purpose or purposes which the corporation intends to pursue in the transaction of its business in the Philippines: Provided, That said purpose or purposes are those specifically stated in the certificate of authority issued by the appropriate government agency;6. The names and addresses of the present directors and officers of the corporation;7. A statement of its authorized capital stock and the aggregate number of shares which the corporation has authority to issue, itemized by classes, par value of shares, shares without par value, and series, if any;8. A statement of its outstanding capital stock and the aggregate number of shares which the corporation has issued, itemized by classes, par value of shares, shares without par value, and series, if any;9. A statement of the amount actually paid in; and



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http://www.sec.gov.ph/

10. Such additional information as may be necessary or appropriate in order to enable the Securities and Exchange Commission to determine whether such corporation is entitled to a license to transact business in the Philippines, and to determine and assess the fees payable.”

Attached to the application for license shall be a duly executed certificate under oath by the authorized official or officials of the jurisdiction of its incorporation, attesting to the fact that the laws of the country or state of the applicant allow Filipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing. If such certificate is in a foreign language, a translation thereof in English under oath of the translator shall be attached thereto.

The application for a license to transact business in the Philippines shall likewise be accompanied by a statement under oath of the president or any other person authorized by the corporation, showing to the satisfaction of the Securities and Exchange Commission and other governmental agency in the proper cases that the applicant is solvent and in sound financial condition, and setting forth the assets and liabilities of the corporation as of the date not exceeding one (1) year immediately prior to the filing of the application.

Foreign banking, financial and insurance corporations shall, in addition to the above requirements, comply with the provisions of existing laws applicable to them. In the case of all other foreign corporations, no application for license to transact business in the Philippines shall be accepted by the Securities and Exchange Commission without previous authority from the appropriate government agency, whenever required by law.

In summary, Cesar Villanueva17 enumerated the following conditions which must be met before SEC will issue a license to the foreign corporation to do business in the Philippines:

“a.) appointment of a resident agent:i. either a Filipino or domestic corporation;ii. power of attorney for SEC to receive process

b.) must prove that the foreign corporation’s country grants reciprocal rights to Filipinos and Philippine corporation;

17 Dean, Ateneo de Manila School of Law; Chairman-Commercial Law Department, Philippine Judicial Academy; Member-MCLE Governing Board; BSC-Holy Angel University; LlB-Ateneo de Manila; LlM-Harvard University; DJS-San Beda Graduate School of Law; Author: Commercial Law Reviewer



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c.) must establish an office in the Philippines;d.) must bring in its assets;e.) in the event of insolvency, an undertaking that Filipino

creditors will be preferred;f.) notice in six months should there be a desire to

terminate operations;g.) franchise and patents must remain belonging to the

Philippines if this is possible;h.) must file a bond of Php 100,000.00, which may be in the

following form:i. surety bond;ii. government securities;iii. securities of political subdivisions;iv. shares of stock of registered enterprises with SEC;v. shares of stock of any corporation being sold at the stock exchange.

That within six months after each fiscal year, SEC shall require the deposit of additional securities equivalent to 2% of the amount in excess of Php 5,000,000.00 of the gross.”18

Necessity of a Resident Agent

It is also important to note that a resident agent is also required by the Corporation Code19 before license could be issued.

18 Villanueva, Commercial Law Review, 2009 Edition, p. 76619 Section 128. Resident agent; service of process. - The Securities and

Exchange Commission shall require as a condition precedent to the issuance of the license to transact business in the Philippines by any foreign corporation that such corporation file with the Securities and Exchange Commission a written power of attorney designating some person who must be a resident of the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against such corporation, and consenting that service upon such resident agent shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office. Any such foreign corporation shall likewise execute and file with the Securities and Exchange Commission an agreement or stipulation, executed by the proper authorities of said corporation, in form and substance as follows:

“The (name of foreign corporation) does hereby stipulate and agree, in consideration of its being granted by the Securities and Exchange Commission a license to transact business in the Philippines, that if at any time said corporation shall cease to transact business in the Philippines, or shall be without any resident agent in the Philippines on whom any summons or other legal processes may be served, then in any action or proceeding arising out of any business or transaction which occurred in the Philippines, service of any summons or other legal process may be made upon the Securities and Exchange Commission and that such service shall have the same force and effect as if made upon the duly-authorized officers



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A resident agent could be an individual, who must be of good moral character and of sound financial standing, residing in the Philippines or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines.

The sole function of a resident agent is to receive in behalf of the corporation notices, summons and other legal processes in connection with actions against such corporation. It is to be noted however that in the case of Expert Travel and Tours Inc. vs. CA,20 the Supreme Court ruled that a resident agent cannot sign the certificate of non-forum shopping that is a requirement for the filing of an initiatory pleading in court because while a resident agent maybe aware of the actions filed against the principal, he may not be aware of the actions initiated by the principal.

When License Issued

Under Section 126, it provides that if the Securities and Exchange Commission is satisfied that the applicant has complied with all the requirements of the Corporation Code and other special laws, rules and regulations, the Commission shall issue a license to the applicant to transact business in the Philippines for the purpose or purposes specified in such license. Upon issuance of the license, such foreign corporation may commence to transact business in the Philippines and continue to do so for as long as it retains its authority to act as a corporation under the laws of the country or state of its incorporation, unless such license is sooner surrendered, revoked, suspended or annulled in accordance with the Corporation Code or other special laws.(Emphases supplied.)

What Constitutes Doing Business

of the corporation at its home office.”Whenever such service of summons or other process shall be made upon the

Securities and Exchange Commission, the Commission shall, within ten (10) days thereafter, transmit by mail a copy of such summons or other legal process to the corporation at its home or principal office. The sending of such copy by the Commission shall be necessary part of and shall complete such service. All expenses incurred by the Commission for such service shall be paid in advance by the party at whose instance the service is made.

In case of a change of address of the resident agent, it shall be his or its duty to immediately notify in writing the Securities and Exchange Commission of the new address.

20 G.R. No. 152392, May 26, 2005



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Upon the grant of license, the law provides that the foreign corporation may then start engaging business in the Philippines. However, it is precisely on the conduct of doing business that foreign corporations become involve in court litigations and proceedings. It is to be noted that the Corporation Code is silent on what constitutes “transacting business”. In the case of Agilent Technologies Singapore (PTE) Ltd. Vs. Integrated Silicon Technology Phil. Corp. 21, the Supreme Court stressed, viz:

“There is no definitive rule on what constitutes doing business in the Philippines as this Court observed in the case of Mentholathum v. Mangaliman. The Corporation Code itself is silent as to what acts constitute doing or transacting business in the Philippines”.

Despite such silence, there have been recognized jurisprudential and statutory tests which would determine as to what activities amount to “doing business”.

Jurisprudential Tests

First we have the so called Twin Characterization Test which is comprised of the Substance Test and the Continuity Test components. The substance test component involves the determination of whether the foreign corporation is maintaining or continuing in the Philippines the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over another. If the substance of the business has been maintained and continued, then that is a positive indication that the corporation is doing business.

The continuity test component on the other hand seeks to identify whether there is continuity of commercial dealings and arrangements contemplating to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of the purpose and objectives of its organization. If such continuity is seen, then this writer holds that the activities done constitute business.

In the case of B. Van Zuiden Bros., Ltd. vs. GTVL Manufacturing Industries, Inc.,22 the Supreme Court enunciated the so called Contract Test. The said test involves the determination of whether

21 427 SCRA 593 (2004)22 G.R. 147905, May 28, 2007



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the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines.

To be “doing or transacting business in the Philippine” for purposes of Section 13323 of the Corporation Code, the foreign corporation must actually transact business in the Philippines, that is, perform specific business transactions within the Philippine territory on a continuing basis on its own name and for its own account. Actual transaction of business within the Philippine territory is an essential requisite for the Philippines to acquire jurisdiction over a foreign corporation and thus requires the foreign corporation to secure a Philippine business license.

Statutory Tests

As already mentioned by this writer, the Corporation Code does not offer a provision enumerating what constitutes doing business. Special laws however tend to fill in the blanks. Under Section 3,(d) of the Foreign Investments Act of 1991,24 doing business in the Philippines is deemed to include the following acts:

a.) Soliciting orders, service contracts, opening offices, whether liaison offices or branches;

b.) Appointing representatives or distributors operating under full control of foreign corporation who:

i. are domiciled in the Philippines; orii. in any calendar year stay in the country for a

period or periods totalling 180 days or more;c.)Participating in management, supervision or control of any

domestic business, firm, entity or corporation in Philippines; and

d.) Any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to the extent the 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 or object of the business organization.

Under the implementing rules of Republic Act 7042, the following are NOT considered acts constituting “doing business”:

23 See succeeding paragraphs24 Republic Act 7042, as amended by Republic Act 8179



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a.) Mere investment as a shareholder in a domestic corporation and/or the exercise of rights as such investor;

b.) Appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account;

c.)Publication of a general advertisement through any print or broadcast media;

d.) Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines;

e.) Consignment by the foreign corporation of equipment with a local company to be used in the processing of products for export;

f.) Collecting information in the Philippines; andg.) Performing services auxiliary to an existing isolated

contract of sale which are not on a continuing basis.

In Agilent Technologies Singapore (PTE) Ltd. Vs. Integrated Silicon Technology Phil. Corp.,25 it was held that by and large, to constitute ‘doing business’, the activity to be undertaken in the Philippines is one that is for profit-making.

In the case of MR Holdings, Ltd. vs. Bajar26, the Supreme Court however noted that the question of whether or not a foreign corporation is doing business is dependent principally upon the facts and circumstances of each particular case, considered in the light of the purposes and language of the pertinent statute or statutes involved and of the general principles governing the jurisdictional authority of the state over such corporations.

Effect of Lack of License to the Capacity of Foreign Corporations to Sue

As cited above, compliance of the license requirement is necessary. But the most important reason perhaps to this compliance lies on the fact that license has bearing on the corporation’s capacity to sue. Section 133 of the Corporation Code provides:

No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded

25 Supra.26 380 SCRA 617 (2002)



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against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.

Basing on this section, the lack of license produces the following effects as pointed by De Leon,27

a.transacting business without a license or its successors or assigns shall not be permitted, subject to certain exceptions to maintain or intervene in any action, suit, or proceeding in any court or administrative agency in the Philippines. If a foreign corporation operates in the Philippines without submitting to its laws, it is only just that it be not allowed to invoke them in our courts when it should need them later for its protection. 28

b.however, be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws under the doctrine of quasi-estoppel by acceptance of benefits. It shall not be allowed under any circumstances, to invoke its lack of license to impugn their jurisdiction.29 It is against justice and equity for an unlicensed foreign corporation to execute contracts with domestic firms and then repudiate their obligations thereunder or plead immunity to Philippine jurisdiction just because it has not obtained license in the Philippines30.

It should be stressed however that it is not the lack of the prescribed license (to transact business in the Philippines) but doing business WITHOUT such license which bars a foreign corporation from access to our courts as held in MR Holdings, Ltd vs. Bajar31 and in Universal Shipping Lines, Inc. vs. Intermediate Appellate Court32.

Villanueva summarizes the effect in the following wise, which this writer will present in a tabular form:

27 De Leon, H. The Corporation Code of the Philippines Annotated. Ninth Edition. Manila: Rex Bookstore Inc. 2006.

28 De Leon, ibid., citing Granger Associates vs. Microwave Systems Inc., 189 SCRA 63 (1990)

29 Marubeni Nedeland B.V. vs. Tensuan, 190 SCRA 105 (1990)30 SEC Opinion, January 10, 199531 Supra.32 188 SCRA 178 (1990)



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EFFECTS OF LICENSE TO THE CAPACITY TO SUEA. Doing business in the

Philippines WITH LICENSE

a.) May sue and can be sued in the Philippines

B. Doing business in the Philippines

WITHOUT LICENSE

b.) Cannot sue but may be sued in the Philippines

C. NOT doing business in the Philippines On ISOLATED TRANSACTIONS

c.1) May sue c.2) Maybe sued

In Avon Isurance PLC vs. CA33 case, the Supreme Court explained that a foreign corporation NOT doing business in the Philippines is not required to obtain a license since the same dangers do not pertain to them as in the case of foreign corporations actually engaged in business in the Philippines. Indeed, if a foreign corporation does not do business here, there would be no reason for it to be subjected to State’s regulation. As observed, in so far as the State is concerned, such foreign corporation has no legal existence. Therefore, to subject such foreign corporation to the court’s jurisdiction would violate the essence of sovereignty.

Effect of Lack of License to Contracts Entered by Foreign Corporations

If the Corporation Code is silent on what constitutes doing business, the same silence is felt with regards to the validity of contracts entered by unlicensed corporations.

Some legal scholars including the SEC34 submit the view that since Article 5 of the Civil Code provides that “acts executed against the provisions of mandatory or prohibitory laws shall be void except when the law itself authorizes their validity”, the contracts are void and therefore, subsequent compliance with legal requirement will not cure the defect of the contract.

In the antique case of Bough vs. Cantiveros,35it was held that such contracts shall prejudice only the guilty corporation and not the innocent parties who may have dealt with said corporation in good faith for it is unjust that the non-complying foreign corporation and persons standing in its shoes should escape liability on contracts had by it by setting up its non-compliance.

33 Supra.34 SEC Opinion, March 12, 197535 Bough vs. Cantiveros, 40 Phil. 209 (1919)



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However, in the case of Home Insurance Co. vs. Eastern Shipping Lines36, the High Court ruled that the contracts are unenforceable at first but can be cured by subsequent compliance with the law, thus:

“The better reason, the wiser and fairer policy and the greater weight lie with those decisions which hold that where (as in our Corporation Code, Section 144) there is a prohibition with a penalty, with no express or implied declaration respecting the validity or enforceability of contracts made by qualified foreign corporations, the contracts xxx are enforceable upon compliance with the law”

“The failure to obtain a license by a foreign corporation doing business in the Philippines does not affect the validity of contracts entered into by such foreign corporation, but merely removes its legal standing to sue in local tribunals. However the defect may even be cured by subsequent registration by the foreign corporation to obtain the necessary license to do business in the Philippines.”

The Court continued that it is not necessary to declare the contract null and void as against the erring foreign corporation. The penal sanction for the violation and the denial of access to our courts and administrative bodies are sufficient from the viewpoint of legislative policy. The lack of capacity at the time of the execution of the contract is cured by the subsequent registration of the unlicensed foreign corporation.

This writer however opines that the ruling which states that contracts entered into by foreign corporations without the requisite license are uneforceable (but however curable) does not apply if the contract or agreement is contrary to law, morals, good customs, public order and public policy. This is consonant to Article 1409 of the Civil Code which provides:

“The following contracts are inexistent and void from the beginning:

1. Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy;

2. Those which are absolutely simulated or fictitious;

36 123 SCRA 424 (1983)



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3. Those whose cause or object did not exist at the time of the transaction;

4. Those whose object is outside the commerce of men;5. Those which contemplate an impossible service;6. Those where the intention of the parties relative to

the principal object of the contract cannot be ascertained;

7. Those expressly prohibited or declared void by law.

These contracts cannot be ratified. Neither can the right to set up the defense of illegality be waived.”

Penal Sanction for Failure to Obtain License

Apart from the effects of having no license to the capacity to sue and to the contracts entered into by foreign corporations, failure to comply with the said license requirement subjects the corporation under the pain of punishment. The Corporation Code37 so provides:

“Section 144. Violations of the Code. - Violations of any of the provisions of this Code or its amendments not otherwise specifically penalized therein shall be punished by a fine of not less than one thousand (P1,000.00) pesos but not more than ten thousand (P10,000.00) pesos or by imprisonment for not less than thirty (30) days but not more than five (5) years, or both, in the discretion of the court. If the violation is committed by a corporation, the same may, after notice and hearing, be dissolved in appropriate proceedings before the Securities and Exchange Commission: Provided, That such dissolution shall not preclude the institution of appropriate action against the director, trustee or officer of the corporation responsible for said violation: Provided, further, That nothing in this section shall be construed to repeal the other causes for dissolution of a corporation provided in this Code.”

When Contracts Valid and when Suits allowed despite absence of license

As already pointed out, no foreign corporation transacting business in the Philippines without a license shall be permitted to maintain or intervene in any action, suit or proceeding in any court or administrative agency of the Philippines. The contracts entered into by

37 See Section 144



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them on the other hand are deemed unenforceable. However, there are recognized exceptions to such rule.

Doctrine of Isolated Transaction

In the case of Eriks Pte. Ltd. vs. Court of Appeals,38 the Supreme Court enunciated the doctrine of isolated transaction. Under the said doctrine, foreign corporations can sue or be sued on a transaction or series of transactions set apart from their common business in the sense that there is no intention to engage in a progressive pursuit of the purpose and object of business transaction.

Single or isolated acts, contracts or transactions of foreign corporations are not regarded as a doing or carrying on of business. Typical examples of these are the making of a single contract, sale, sale with the taking of a note and a mortgage of real estate to secure payment thereof, purchase or note or the mere commission of a tort. In these instances, there is no purpose to do any other business within the country.39 The law does not prohibit foreign corporations from performing single acts of business. A foreign corporation needs no license to sue before Philippine courts on isolated transactions. Even a series of transactions which are occasional, incidental and casual—not of a character to indicate a purpose to engage in business—do not constitute the doing or engaging in business as contemplated by law.40

Suit is also possible even if license is wanting if the same is stipulated in a contract. In the 1983 case of Linger and Fisher GMBH vs. Intermediate Appellate Court,41 the Supreme Court held that when a contract between a local and a foreign corporation stipulates the venue to be within the proper courts in the Philippines, such stipulation shall be considered to be consent to being sued in the Philippines even when the foreign corporation does no business in the Philippines.

The Supreme Court also in one case reiterated that if a foreign corporation, not engaged in business in the Philippines, is not barred from seeking redress from courts in the Philippines a fortiori, that same corporation cannot claim exemption from being sued in Philippine courts for acts done against a person or persons in the Philippines42.

38 G.R. No. 118843, February 6, 199739 Villanueva, citing MR Holdings, Ltd. vs. Bajar, 380 SCRA 617 (2002)40 Villanueva, citing Lorenzo Shipping vs. Chubb and Sons, Inc. 431 SCRA 266

(2004)41 125 SCRA 52242 Villanueva, citing Facilities Management Corporation vs. De la Osa, 89 SCRA

131 (1979). The ruling making foreign corporations not doing business in the Philippines subject to suits in local courts has been reiterated in FBA Aircraft, S.A



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In Signestics Corp. vs. Court of Appeals,43 it was held that “even when a foreign corporation is not engaged in business in the Philippines, since it may still look upon local courts for relief, reciprocally, such corporation may likewise be sued in Philippine courts for aacts done against a person or persons in the Philippines. Provided that in the latter case, it would not be impossible for court processes to reach the foreign corporation—a matter that can later be consequential in the proper execution of judgment. Verily, a State may not exercise jurisdiction in the absence of some good basis (and not offensive to traditional notions of fair play and substantial justice) for effectively exercising it whether the proceedings are in rem, quasi in rem or in personam.”

In Pari Delicto Rule

Another recognized exception is the so-called in pari delicto rule which was articulated by the Supreme Court in Top Weld Manufacturing vs. ECED, S.A.44. In that case, it was ruled that “a contract entered into by a Philippine corporation with a foreign corporation for manufacture and marketing of the latter’s product is illegal if the same was not previously licensed with the BOI under Republic Act 5455. For being in pari delicto, the Philippine corporation cannot ask our courts to prohibit the foreign corporation from terminating their contract and givng the license to produce and market its products to another.”

The High Court reiterated that the “parties are charged with knowledge of the existing law at the time they enter into the contract and at the time it is to become operative. Morevoer, a person is presumed to be more knowledgeable about his own state law than his alien or foreign contemporary. xxxx The parties in this case being equally guilty of violating R.A. 5455, they are in pari delicto in which case it follows as a consequence that petitioner is not entitle to the relief prayed for in this case.

Estoppel Doctrine

vs. Zosa 110 SCRA 1 (1981); Wang Laboratories, Inc. vs. Mendoza, 156 SCRA 44 (1987); and Royal Crown Internationale vs. NLRC, 178 SCRA 569 (1989).

4342225 SCRA 737 (1993)44 G.R. No. L-44944, August 9, 1985



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Also an interesting exception is the estoppel doctrine which was applied in Merill Lynch Futures Inc. vs. Court of Appeals.45 The Supreme Court sustained the idea that a party is estopped from questioning the capacity of the foreign corporation to institute an action in our courts where it had obtained benefits from its dealings with such foreign corporations and thereafter committed a breach or sought to renege on its obligations:

“Although foreign corporation has engaged in business in the Philippines WITHOUT license, the dismissal of the suit would not be proper on the ground that if the local investors knew that the foreign corporation had no license to do business in the Philippines, then they are estopped from using the lack of license to avoid their obligations”

A foreign corporation doing business in the Philippines may sue in Philippine courts although not authorized to do business here against a Philippine citizen or entity who had contracted with and benefited by the said corporation. To put it another way, a party is estopped to challenge the personality of the corporation after having acknowledged the same by entering into a contract with it. And the doctrine of estoppel to deny corporate existence applies to a foreign as well as to domestic corporations. One who has dealt with a corporation of foreign origin as a corporate entity is estopped to deny its corporate existence and capacity. The principle will be applied to prevent a person contracting with a foreign corporation from later taking advantage of its noncompliance with the statutes chiefy in cases where such persons has received the benefits of the contract46.

The rule relating to estoppel is deeply rooted in the axiom of commodum ex injuria sua non habere debet – no person ought to derive any advantage from his own wrong.47 After contracting with a foreign corporation, a domestic corporation can no longer deny the former’s capacity to sue48.

Protection of Corporate Names, Tradenames and marks

45 G.R. No. 978160, July 24, 1992; 211 SCRA 824 (1992)46 Communication Materials and Design Inc. vs. Court of Appeals, 260 SCRA 673

(1996)47 European Resources and Technologies Inc. vs. Ingenieuburo Birkhanh+ Nolte,

435 SCRA 246 (2004)48 Rimbunan Hijau Group of Companies vs. Oriental Wood Processing Corp., 470

SCRA 650 (2005)



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A foreign corporation although not doing business in the Philippines has personality to sue to oppose the registration of trademark when it is shown that its products using such trademark are being imported and sold in the Philippines, pursuant to the terms of Section 21-A of R.A. 166.49

In Converse Rubber vs. Universal Rubber Products,50 the Supreme Court ruled that a foreign corporation has a right to maintain an action in Philippine courts even if it is not licensed to do business and is not actually doing business on its own therein to protect its corporate and tradenames since it is a property right in rem which it may assert to protect against all the world, in any of the courts of the world—even in jurisdictions where it does not transact business—just the same as it may protect its tangible property real or personal, against tresspass or conversion.

This is in consonance with the Convention of the Union of Paris for the Protection of Industrial Property to which the Philippines became a party on September 1965. Article 8 thereof provides that “a trade name shall be protected in all the countries of the Union without the obligation of filing or registration whether or not it forms part of the trademark”. The mandate of the Convention finds its implementation in Section 37 of Republic Act 166, otherwise known as the Trademark Law.

Revocation or suspension of license

Having examined the importance of a license to foreign corporations, this writer also includes the grounds by which license maybe revoked or suspended by the Securities and Exchange Commission. Section 134 of the Corporation Code enumerates the grounds without prejudice to other grounds that maybe provided by special laws:

1. Failure to file its annual report or pay any fees as required by this Code;

2. Failure to appoint and maintain a resident agent in the Philippines as required by [Sections 125-128];

3. Failure, after change of its resident agent or of his address, to submit to the Securities and Exchange Commission a statement of such change as required by [Section 128];

49 General Garments vs. Director of Patents, 41 SCRA 50 (1997)50 147 SCRA 153 (1987)



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4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by [the Corporation Code];

5. A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to [Section 125];

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 or purposes for which such corporation is authorized under its license;

8. Transacting business in the Philippines 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.

Upon the revocation of any such license to transact business in the Philippines, the Securities and Exchange Commission shall issue a corresponding certificate of revocation, furnishing a copy thereof to the appropriate government agency in the proper cases. The Securities and Exchange Commission shall also mail to the corporation at its registered office in the Philippines a notice of such revocation accompanied by a copy of the certificate of revocation51.

The revocation of the license of a foreign corporation cannot affect the validity of contracts entered into by it BEFORE the revocation nor its right to maintain an action to enforce them.52 But contracts entered into by it AFTER revocation are invalid and uneforceable. As to contracts, the effect is the same as if a license had never been granted to the foreign corporation.53

Withdrawal of a foreign corporation

51 Section 135, Corporation Code of the Philippines52 De Leon, citing Billmeyer Lumber Co. vs. Merchants’ Coal Co, 69 S.E. 107353 Ibid.



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Section 13654 of the Corporation Code also allows foreign corporations to withdraw doing business in the Philippines. The withdrawal can be effected by filing a petition for withdrawal of the license complying the following requisites:

1. All claims which have accrued in the Philippines have been paid, compromised or 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 three (3) consecutive weeks in a newspaper of general circulation in the Philippines.

To ascertain that the foreign corporation has no outstanding liabilities to residents in the Philippines, the Securities and Exchange Commission shall have to make an examination and inspection of its books and records. If the Commission is aware of pending cases against the foreign corporation, it may not declare that such corporation has no outstanding liabilities in the Philippines.55 The courts may review the action of the Commission approving the withdrawal of a foreign corporation, for the law shall not be interpreted as to permit the foreign corporation to escape the results of pending action against it by withdrawing from the Philippines with all the securities it has deposited, provided it gets the sanction of the SEC.56

When the right to do business of a foreign corporation duly licensed to do so in another State is revoked or such foreign corporation subsequently withdraws its business from that State, the cessation of its business works a quasi-dissolution of the foreign corporation. Consequently, the corporation is placed in the same situation in that

54 Section 136. Withdrawal of foreign corporations. - Subject to existing laws and regulations, a foreign corporation licensed to transact business in the Philippines may be allowed to withdraw from the Philippines by filing a petition for withdrawal of license. No certificate of withdrawal shall be issued by the Securities and Exchange Commission unless all the following requirements are met;

1. All claims which have accrued in the Philippines have been paid, compromised or 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 three (3) consecutive weeks in a newspaper of general circulation in the Philippines.

55 De Leon, citing Scottish Union and National Insurance Co. vs. Macadaeg, 91 Phil. 89 (1952)

56 Ibid.



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State as if its charter had expired or terminated.57 It is subject to the rules of law governing expired foreign corporations in respect to action against it58.

Accordingly, the provisions of Section 122 on corporate dissolution applies to a branch of a foreign corporation withdrawing from doing business in the Philippines, insofar as suits by or against it are concerned, in connection with its business transactions done in the Philippines59.

Epilogue

Foreign corporations are vital to our economy. They complement our domestic enterprises in order strenghten the socio-economic fibers of the Philippines. Undeniably, they can contribute much in our country’s desire to accelerate economic growth. But important as they are, there is still a need to subject them to State regulation. As discussed, a license is imperative and necessary before foreign corporations can engage and transact business in our country.

The corporate license clearly is a factor that cannot be discounted with respect to the enforceability of contracts entered into by foreign corporations and with respect to such corporations’ right to maintain a suit or to intervene in any action or proceeding in Philippine courts or administrative tribunals. We learned that generally, contracts are unenforceable and that foreign corporations are dispossessed of the capacity to sue, if the license required by law has not been complied.

However, we are taught at the same time that laws must not always be given an unduly harsh interpretation. In our jurisdiction, doctrines and rulings have been pronounced to give a liberal and open-minded view of the situation. Reason and economic interdependence dictate us that rigid application of laws may only hamper the development of trade relations to the prejudice of our image as a member of the economic global village.

We hold on to the idea that the provisions of the Corporation Code must be enforced and upheld to regulate the conduct of foreigners who desire to do business in our country. But as we stick to that line of thinking, we are reminded also that there will always be another side of the fence. To sum up, the unenforceability of contracts is curable and foreign corporations can invoke the protection of our courts

57 De Leon, citing SEC Opinion, March 5, 196358 De Leon, citing Frazier vs. Steel and Tube (W. Va.) 132 S.E. 723, 45 ALR 144259 De Leon, comments on the Corporation Code of the Philippines, pp. 807



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whether or not they are licensed to do business in the Philippines under any of the following grounds:

First, to seek redress for an isolated business transaction;

Second, to protect its corporate reputation, name and goodwill;

Third, to enforce a right not arising out of business transaction as in cases of torts that occured in the Philippines and of recovery of misdelivered properties;

Fourth, when the parties have contractually stipulated that Philippines is the venue of the actions; and

Fifth, when the party sued is barred by principle of estoppel and/or principle of unjust enrichment from questioning the capacity of the foreign corporation.

If we lean on the option of giving our corporation laws harsh and callous interpretation, it would only disastrously embarass trade. But if we would consider the challenges of rapidly changing global economy and if we would incline to give a reasonable mindset through accepted doctrinal rules over the possession of a corporate license, such mindset would markedly help in the development of trade and the stimulation and expansion of foreign investment and economic viability.



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Documents

7 Foreign Corporation