chapter 18 foreign corporations

7/21/2019 Chapter 18 Foreign Corporations

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Chapter XVIII – Foreign Corporations

Definition, status

— Sec 123: a foreign corporation is one formed, organized, or existing under any

laws other than those of the Phils and whose laws allow Filipino citizens and

corporations to do business in its own country or state

Not doing business no need for license

to sue and be sued

Doing business need license

Jack: doing business is extending the business of the foreign entity to the RP, on a

continuing and permanent basis, in order to make profits! That’s all it is!

Call cases (except Merrill Lynch and TopWeld, are exceptions to doing business!

Compare with Agilent. Compare Wells and Mentholatum.

Set aside cases of foreign corporation enforcing IPRs from the other cases (Le

Chemise, Gelhaar, Columbia, Puritan)

Methods of investment

Permitted areas of investment

1. partially nationalized areas

2. preferred areas; incentives for investment

3. non-preferred areas of investment

Legal Requirements prior to transaction of business

1. BOI Certificate

2. SEC license to do business

3. Certificate from appropriate government agency

Effect of failure to secure SEC license

Marshall Wells v Elser. F: Marshall Wells Co. (foreign) sued Henry Elser Co

(local) for the unpaid balance on the sale of goods. Elser Co files a demurrer,

contending that Marshall has no legal capacity to sue, not having complied with

the laws required of foreign corporations doing business in the RP and not

authorized to do business in RP. TC sustains demurrer.I: W/n the obtaining of the license to do business is a condition precedent to

maintaining any kind of action in RP courts.

H: The object of the statute was to subject the foreign corporation doing

businesss in the Philippines to the jurisdiction of its courts. Its object was not to

prevent the foreign corporation from performing single acts, but to prevent it

from acquiring a domicile for the purpose of business without taking the steps

necessary to render it amenable to suit in the local courts. The effect of the

statute preventing foreign corporations from doing business and bringing action

in the courts except on compliance with elaborate requirements must not be

unduly extended or improperly applied.

Thus confronted with the option of construing the law to mean that any

corporation in the US, which might ant to sell to a person in the Phils must sent

some representative here before the sale and go through the complicated

formulae provided by the corporation law with regard to obtaining of the license,

before the sale was made in order to avoid being swindled by Filipinos, there

can be no other construction. The law simply means that no foreign corporation

shall be permitted to transact business in the Phils unless it shall have the

license required by law, and until it complies with the law, shall not be permitted

to maintain any suit in the local courts.

The non-compliance of a foreign corporation with the requirements of thestatute may be pleaded as an affirmative defense. Thereafter it must appear

from the evidence, first—that the plaintiff is a foreign corporation, and second—

that it is doing business in the Phils, and third—that it has not obtained the

proper license.

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— To subject foreign corporations doing business in the RP to the jurisdiction of

the courts; and to prevent it from acquiring domicile without taking steps to

make it amenable to suits

— Requirement to obtain license applies only to foreign corporations doing

business in RP

Marshall Wells + Metholatum = isolated txns NOT doing business

Columbia Pictures v CA. F: Columbia Pictures et al lodged a formal complaint

with the NBI for violation of PD No. 49, as amended, and sought its assistance in

their anti-film piracy drive. Agents of the NBI and private researchers made

discreet surveillance on various video establishments in Metro Manila including

Sunshine Home Video Inc. NBI Senior Agent Lauro C. Reyes applied for a search

warrant with the courta quo against Sunshine seeking the seizure, among others,

of pirated video tapes of copyrighted films all of which were enumerated in a list

attached to the application; and, television sets, video cassettes and/or laser disc

recordings equipment and other machines and paraphernalia used or intended to

be used in the unlawful exhibition, showing, reproduction, sale, lease or dispositionof videograms tapes in the premises above described.TC granted and issued the

SW. The search warrant was served to Sunshine and/or their representatives. In

the course of the search of the premises indicated in the search warrant, the NBI

Agents found and seized various video tapes of duly copyrighted motion

pictures/films owned or exclusively distributed by private complainants, and

machines, equipment, television sets, paraphernalia, materials, accessories all of

which were included in the receipt for properties accomplished by the raiding

team.Sunshine filed a motion to lift warrant but was denied by the TC. Sunshine

contended that being foreign corporations, Columbia Pictures et al should have

such license to be able to maintain an action in Philippine courts. In so

challenging petitioners’ personality to sue, Sunshine pointed to the fact thatpetitioners are the copyright owners or owners of exclusive rights of distribution in

the Philippines of copyrighted motion pictures or films, and also to the appointment

of Atty. Rico V. Domingo as their attorney-in-fact, as being constitutive of “doing

business in the Philippines” under BOI Rules. As foreign corporations doing

business in the Philippines, Section 133 of the Corporation Code denies them the

right to maintain a suit in Philippine courts in the absence of a license to do

business, and thus have no right to ask for the issuance of a search warrant.

Upon MR, the TC granted the same, holding that the master tapes of the

copyrighted films from which the pirated films were allegedly copies, were never

presented in the proceedings for the issuance of the search warrants in

question. The orders of the Court granting the search warrants and denying

the urgent motion to lift order of search warrants were, therefore, issued in error

and was set aside. Petitioners appealed.H: The obtainment of a license prescribed by Section 125 of the Corporation

Code is not a condition precedent to the maintenance of any kind of action in

Philippine courts by a foreign corporation. However, under the aforequoted

provision, no foreign corporation shall be permitted to transact business in the

Philippines, as this phrase is understood under the Corporation Code, unless it

shall have the license required by law, and until it complies with the law in

transacting business here, it shall not be permitted to maintain any suit in local

courts. As thus interpreted, any foreign corporation not doing business in the

Philippines may maintain an action in our courts upon any cause of action,

provided that the subject matter and the defendant are within the jurisdiction of

the court. It is not the absence of the prescribed license but “doing business” inthe Philippines without such license which debars the foreign corporation from

access to our courts. In other words, although a foreign corporation is without

license to transact business in the Philippines, it does not follow that it has no

capacity to bring an action. Such license is not necessary if it is not engaged in

business in the Philippines. it is recognized that a foreign corporation is “doing,”

“transacting,” “engaging in,” or “carrying on” business in the State when, and

ordinarily only when, it has entered the State by its agents and is there engaged

in carrying on and transacting through them some substantial part of its

ordinary or customary business, usually continuous in the sense that it may be

distinguished from merely casual, sporadic, or occasional transactions and

isolated acts. Jurisprudence has, however, held that the term implies acontinuity of commercial dealings and arrangements, and contemplates, to that

extent, the performance of acts or works or the exercise of some of the

functions normally incident to or in progressive prosecution of the purpose and

subject of its organization.

Based on Article 133 of the Corporation Code and gauged by such statutory

standards, petitioners are not barred from maintaining the present action.

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There is no showing that, under our statutory or case law, petitioners are doing,

transacting, engaging in or carrying on business in the Philippines as would require

obtention of a license before they can seek redress from our courts. No evidence

has been offered to show that petitioners have performed any of the enumerated

acts or any other specific act indicative of an intention to conduct or transact

business in the Philippines.

Accordingly, the certification issued by the SEC stating that its records do not show

the registration of petitioner film companies either as corporations or partnerships

or that they have been licensed to transact business in the Philippines, while

undeniably true, is of no consequence to petitioners’ right to bring action in the

Philippines. Verily, no record of such registration by petitioners can be expected to

be found for, as aforestated, said foreign film corporations do not transact or do

business in the Philippines and, therefore, do not need to be licensed in order to

take recourse to our courts. As a general rule, a foreign corporation will not be

regarded as doing business in the State simply because it enters into contracts

with residents of the State, where such contracts are consummated outside the

State. In fact, a view is taken that a foreign corporation is not doing business in the

state merely because sales of its product are made there or other business

furthering its interests is transacted there by an alleged agent, whether a

corporation or a natural person, where such activities are not under the direction

and control of the foreign corporation but are engaged in by the alleged agent as

an independent business.

In accordance with the rule that “doing business” imports only acts in furtherance

of the purposes for which a foreign corporation was organized, it is held that the

mere institution and prosecution or defense of a suit, particularly if the transaction

which is the basis of the suit took place out of the State, do not amount to the

doing of business in the State. The institution of a suit or the removal thereof is

neither the making of a contract nor the doing of business within a constitutional

provision placing foreign corporations licensed to do business in the State under

the same regulations, limitations and liabilities with respect to such acts as

domestic corporations. Merely engaging in litigation has been considered as not a

sufficient minimum contact to warrant the exercise of jurisdiction over a foreign

corporation.

As to Sunshine’s contention that petitioners have no legal personality to sue,

among the grounds for a motion to dismiss under the Rules of Court are lack of

legal capacity to sue and that the complaint states no cause of action. Lack of

legal capacity to sue means that the plaintiff is not in the exercise of his civil

rights, or does not have the necessary qualification to appear in the case, or

does not have the character or representation he claims. On the other hand, a

case is dismissible for lack of personality to sue upon proof that the plaintiff isnot the real party-in-interest, hence grounded on failure to state a cause of

action. The term “lack of capacity to sue” should not be confused with the term

“lack of personality to sue.” While the former refers to a plaintiff’s general

disability to sue, such as on account of minority, insanity, incompetence, lack of

juridical personality or any other general disqualifications of a party, the latter

refers to the fact that the plaintiff is not the real party- in-interest.

Correspondingly, the first can be a ground for a motion to dismiss based on the

ground of lack of legal capacity to sue; whereas the second can be used as a

ground for a motion to dismiss based on the fact that the complaint, on the face

thereof, evidently states no cause of action.

Applying the above discussion to the instant petition, the ground available for

barring recourse to our courts by an unlicensed foreign corporation doing or

transacting business in the Philippines should properly be “lack of capacity to

sue,” not “lack of personality to sue.” Certainly, a corporation whose legal rights

have been violated is undeniably such, if not the only, real party-in-interest to

bring suit thereon although, for failure to comply with the licensing requirement,

it is not capacitated to maintain any suit before our courts.

— Columbia: ownership of copyright or distribution rights and enforcement of

IPR≠ doing business

— Entering into contracts with residents in the RP≠ doing business

General Garments Corp v Director of Patents. F: General Garments Corp is

the owner of the trademark “Puritan” for assorted men’s wear and underwear.

The Puritan Sportswear Corporation of Pennsylvania, filed a petition for

cancellation of the trademark registered in the name of General Garments

Corporation, alleging ownership and prior use of the name. General Garments

contends that Puritan being a foreign corporation which is not licensed to do

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and is not doing business in the RP, is not considered a person under RP laws and

consequently not comprehended within the term “any person” under the Trademark

Law then in force. MTD was denied by the Director of Patents.

I: W/N Puritan Sportswear Corp, not licensed to do business and not doing

business in the RP, has legal capacity to maintain a suit in the Phil. Patent Office.

H: The fact that it may not transact business in the Phils unless it obtains a license

or maintains a suit does not make the respondent any less a juridical person. Anexception to the license requirement is where a foreign corporation sues on an

isolated transaction. It cites the Marshall Wells case (supra)

It should be pointed out that Puritan is not suing in the courts to recover a debt

claim or demand—which would require a license—but filed a petition to cancel the

trademark registered by General Garments. A foreign corporation which has never

done business in the Phils and which is unlicensed and unregistered to do so, but

is widely and favorable known in the Phils through the use therein of its products

bearing its corporate name has a legal right to maintain an action. The purpose of

such a suit is to protect its reputation, corporate name, and goodwill, which has

been established through the natural development of its trade, in the doing ofwhich it does not seek to enforce any legal or contract rights arising from, or

growing out of any business transacted in the Phils.

The lawful entry into the Phils of goods bearing the trademark since 1949 should

entitle the owner to the right to use the same to the exclusion of others. The law is

not only for the protection of the owner of the trademark but also for the protection

of purchasers from confusion or deception.

General Garments invokes the Mentholatum ruling in support of his case, but the

SC held that Congress, in seeking to purposely counteract the effects of the case,

enacted RP 638 and inserted Sec 21-A in the Trademark Law, to allow foreigncorporations to bring an action in RP courts for infringement of a mark or trade

name, or unfair competition, or false designation of origin and false description,

whether or not it has been licensed to do business in the RP.

Le Chemise Lacoste v Fernandez. F: La Chemise Lacoste is a French

corporation and not doing business in the RP, and is also the actual owner of the

trademarks Lacoste and Crocodile Device. Hemandas & Co secured a

registration of the trademarks in its name from the Phil Patent Office of the

trademarks owned by Le Chemise. Hemandas then assigned all its rights title

and interest in the trademark to Gobindram Hemandas. Le Chemise filed its

own application for registration of the trademarks Crocodile Device and

Lacoste, and the Patent Office approved the former was but rejected the latter.

Le Chemise then filed a letter-complaint with the NBI alleging acts of unfaircompetition committed by Hemandas and requesting their apprehension and

prosecution. The NBI secured search warrants, but Hemandas files a MTQ the

warrant alleging that his trademarks is different from Le Chemise. Search

warrants were recalled and items seized returned to Hemandas. Le Chemise

questions the quashal.

I: W/n petitioner has no legal capacity to sue because it is not doing business in

the Philippines and is not licensed to do so, and that it failed to allege certain

facts in its petition relative to its capacity to sue.

H: In Leviton case, which is relied on by Hemandas, it was ruled that it is not

enough for a foreign corporation to merely allege that it is a foreign corporation.Compliance with the requirements under the law or statute from which it seeks

relief and upon which the grounds of the illegal act are alleged, is necessary. It

is therefore necessary for the foreign corporation to comply with these

requirements or aver why it should be exempted from them. The foreign

corporation may have the right to sue before RP courts, but our rules on

pleadings require that the qualifying circumstances necessary for the assertion

of that right be affirmatively pleaded. Since the present case involves a criminal

offense, the Leviton case is inapplicable. Le Chemise may still sue even if it

failed to allege material facts. A foreign corporation not doing business needs

no license to sue before RP courts for infringement of trademark and unfair

competition. A foreign corporation favorable known in the Phils through the useof its products bearing its corporate name has a legal right to maintain action in

the Philippines to restrain the formation in BF of a corporation bearing the same

name as the foreign corporation; the sole purpose of its suit is to protect its

reputation, corporate name, goodwill whenever the same has established

themselves. A corporate and trade name are property rights, rights in rem,

which the owner may assert and protect against the whole world, in any courts

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of the world—even in jurisdictions where it does not transact business. Since it is

the trademark and not the mark that is to be protected, a trademark acknowledges

no territorial boundaries or municipalities or states or nations, but extends to every

market where the trader’s goods have become known and identified.

The letter-complaint that preceded the petition was filed with the NBI. If prosecution

would follow after the PI then the information shall be in the name of the People ofthe RP and no longer the petitioner which is only an aggrieved party, since a

criminal act is an act against the State. Le Chemise capacity to sue, would then be

of no significance.

The Mentholatum case relied upon by Hemandas is also not on all fours with the

present case. The foreign corporation in Mentholatum is in fact doing business in

the RP but without the requisite license. In the present case, Le Chemise is a

foreign corporation not doing business in the RP. It has an exclusive distributor,

Rustans Commercial, which is an independent entity which buys and sells the

products of Le Chemise, and is in other words not a mere agent or conduit of Le

Chemise. BOI rules also support a finding that Le Chemise is not doing business.Rustans is a middleman acting and transacting business in its own name and

account.

In upholding the rights of Le Chemise, SC held that we are recognizing our duties

and rights of foreign states to which the Philippines and France are parties. We are

simply interpreting and enforcing a solemn international commitment of the

Philippines embodied in a multilateral treaty, the Paris Convention for the

Protection of Industrial Property to which we are a party. The convention has

extraterritorial application, and is essentially a compact between the member

countries to accord to member-countries’ citizens the same rights comparable to

those accorded their own citizens by domestic law. The underlying principle is thatforeign nationals should be given the same treatment in each of the member-

countries as that country makes available to its own citizens. It is not premised

upon the idea that the trademark and related laws shall be given extra-territorial

application, but on exactly the converse that each nation’s law shall have only

territorial application. A treaty or convention is not a mere moral obligation to be

enforced but creates a legally binding obligation on the parties founded on the

generally accepted principles of international law of pacta sunt servanda, which

has been adopted as the law of the law.

— Foreign corporation not doing business has personality to commence

criminal proceedings for violation of RPC

— Mentholatum does not apply! Le Chemise’s exclusive distributor buys and

then sells it shirts for its own account and for its own profit and is not anagent or conduit of Le Chemise

— Not every sale to an exclusive agent in RP constitutes doing business! The

agent must sell or transact in the foreign corporation’s name and for the

foreign entity’s own account to constitute doing business

— Villanueva: but buying the products to be resold in the RP from foreign

entities involve the foreign entity as direct parties!

What constitutes doing business

— Isolated transaction: set apart from common business; no intention to

engage in a progressive pursuit of the business or corporate purpose

Litton Mills v CA. F: Petitioner Litton Mills, Inc. (Litton) entered into an

agreement with Empire Sales Philippines Corporation (Empire), as local agent

of Gelhaar Uniform Company (Gelhaar), an American corporation, whereby

Litton agreed to supply Gelhaar 7,770 dozens of soccer jerseys. The

agreement stipulated that before it could collect from the bank on the letter of

credit, Litton must present an inspection certificate issued by Gelhaar’s agent in

the Philippines, Empire Sales, that the goods were in satisfactory condition.

Litton then sent four shipments totaling 4,770 dozens of the soccer jerseys. A

fifth shipment of 2,110 dozens of the jerseys, was inspected by Empire, but

Empire refused to issue the required certificate of inspection. Alleging that

Empire’s refusal to issue a certificate was without valid reason, Litton filed a

complaint for specific performance to compel Empire to issue the inspection

certificate covering the 2,110 dozen jerseys plus damages. The trial court

issued the writ and the next day, Empire issued the inspection certificate, so

that the cargo was shipped on time. The law firm of Sycip, Salazar, Feliciano

and Hernandez entered a special appearance for the purpose of objecting to

the jurisdiction of the court over Gelhaar, and moved to dismiss the case and to

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quash the summons on the ground that Gelhaar was a foreign corporation not

doing business in the Philippines, and as such, was beyond the reach of the local

courts. It contended that Litton failed to allege and prove that Gelhaar was doing

business in the Philippines.

H: We sustain petitioner’s contention based on the first ground, namely, that the

trial court acquired jurisdiction over Gelhaar by service of summons upon its agent

as required by of Rule 14, § 14. But, it should be noted, in order that service may

be effected in the manner above stated,said section also requires that the foreign

corporation be one which is doing business in the Philippines.This is asine qua

nonrequirement.This fact must first be established in order that summons can be

made and jurisdiction acquired. The fact of doing business must then, in the first

place, beestablishedbyappropriate allegations in the complaint. Hence, a court

need not go beyond the allegations in the complaint to determine whether or not a

defendant foreign corporation is doing business for the purpose of Rule 14, § 14. In

the case at bar, the allegation that Empire, for and in behalf of Gelhaar, ordered

7,770 dozens of soccer jerseys from Litton and for this purpose Gelhaar caused

the opening of an irrevocable letter of credit in favor of Litton is a sufficient

allegation that Gelhaar was doing business in the Philippines.

Gelhaar contends that the contract with Litton was a single, isolated transaction

and that it did not constitute “doing business.” where a single act or transaction of a

foreign corporation is not merely incidental or casual but is of such character as

distinctly to indicate a purpose on the part of the foreign corporation to do other

business in the state, such act will be considered as constituting doing business.

This Court referred to acts which were in the ordinary course of business of the

foreign corporation.

In the case at bar, the trial court was certainly correct in holding that Gelhaar’s act

in purchasing soccer jerseys to be within the ordinary course of business of thecompany considering that it was engaged in the manufacture of uniforms. The acts

noted above are of such a character as to indicate a purpose to do business.

In accordance with Rule 14, § 14, service upon Gelhaar could be made in three

ways: (1) by serving upon the agent designated in accordance with law to accept

service of summons; (2) if there is no resident agent, by service on the government

official designated by law to that effect; and (3) by serving on any officer or agent of

said corporation within the Philippines.6 Here, service was made through

Gelhaar’s agent, the Empire Sales Philippines Corp. There was, therefore, a

valid service of summons on Gelhaar, sufficient to confer on the trial court

jurisdiction over the person of Gelhaar.

— Single transaction most not simply be casual or incidental to constitute

doing business… it must be in the ordinary course of the business of the

foreign corporation

Mentholatum v Mangaliman. F: MEntholatum Co Inc, a Kansas corporation

which manfactures “Mentholatum” (a medicament and salve adapted for the

treatment of colds, nasal irritations etc) and its distributing agent Philam Drug

Co filed an action against Mangaliman et al for infringement of trademark and

unfair competition. They allege that the Mangaliman et al prepared a

medicament and salve named “Mentoliman” which they sold in a container of

the same size, color, shape as “Mentholatum,” and allege damages and

diminutions of sales and loss of goodwill and reputation. TC ruled ifo

Mentholatum Co. CA reverses, holding that the activities of Mentholatum were

business transactions in the Philippines through its agent PhilAm Drug, and that

under the Corpo Law they cannot maintain their suit. Mentholatum claims that

they have not personally sold any of their products in the RP and that the

Philam Drug Co was merely an importer of the products, their sales not being

for the account of Mentholatum but for their own. Mangaliman countered that

PhilAm Drug is the exclusive distributor of Mentholatum and that because of

this arrangement, the acts of the former became acts of the latter, and thus

Mentholatum is engaged in doing business in the RP and would require a

license before it can sue.

I: W/N Mentholatum is doing business in the RP; W/N Mentholatum Inc could

prosecute their action without having secured the license; W/N the PhilAm Drug

co could by itself maintain the suit.

H: There is no general rule regarding what constitutes doing business in the

Phils. The true test is whether the foreign corporation is continuing the body or

substance of the business or enterprise for which it was organized or whether it

has substantially retired from it and turned it over to another, thus implying a

continuity of dealings and arrangements, and contemplates the performance of

acts and exercise of functions normally incident to the purpose and object of its

6

http://www.supremecourt.gov.ph/jurisprudence/1996/may1996/94980.htm#_ftn6

http://www.supremecourt.gov.ph/jurisprudence/1996/may1996/94980.htm#_ftn6



organization. In this case, as stipulated in their respective pleadings, whatever

transactions of PhilAm Drug had executed in view of the law, the Mentholatum Co.

being a foreign corporation doing business without the license, may not prosecute

the action. Neither may the PhilAm Drug maintain the action for the reason that the

distinguishing features of the agent being his representative character and

derivative authority, it cannot, to the advantage of its principal, claim an

independent standing in court.

— Sale of products of a foreign entity through a local distributor is equivalent to

doing business; isolated transaction is not doing business

— Mentholatum tests:

(1)substance test: continuing the substance of the business and purpose for

which it was organized

(2)continuity test: continuity of dealings and arrangements, or acts normally

incidental to the purpose and object

Agilent Technologies Singapore v. Integrated Silicon Technology Phils. F:

Petitioner Agilent Technologies Singapore (Pte.), Ltd. (“Agilent”) is a foreigncorporation, which, by its own admission, is not licensed to do business in the

Philippines. Respondent Integrated Silicon Technology Philippines Corporation

(“Integrated Silicon”) is a private domestic corporation, 100% foreign owned, which

is engaged in the business of manufacturing and assembling electronics

components. A 5-year Value Added Assembly Services Agreement (“VAASA”), was

entered into on April 2, 1996 between Integrated Silicon and the Hewlett-Packard

Singapore (Pte.) Ltd., Singapore Components Operation (“HP-Singapore”). Under

the terms of the VAASA, Integrated Silicon was to locally manufacture and

assemble fiber optics for export to HP-Singapore. HP-Singapore, for its part, was

to consign raw materials to Integrated Silicon; transport machinery to the plant of

Integrated Silicon; and pay Integrated Silicon the purchase price of the finishedproducts. HP-Singapore assigned all its rights and obligations in the VAASA to

Agilent. Integrated Silicon sues Agilent and its officers for specific performance,

alleging that Agilent breached the parties’ oral agreement to extend the VAASA.

Integrated Silicon thus prayed that defendant be ordered to execute a written

extension of the VAASA for a period of five years as earlier assured and promised.

Agilent then filed a separate complaint for specific performance against Integrated

Silicon, Teoh Kang Seng, Teoh Kiang Gong, Anthony Choo, Joanne Kate M.

dela Cruz, Jean Kay M. dela Cruz and Rolando T. Nacilla, and prayed for the

immediate return and delivery to plaintiff its equipment, machineries and the

materials to be used for fiber-optic components which were left in the plant of

Integrated Silicon.TC denied MTD of Silicon. CA reverses. Integrated Silicon et

al argue that since Agilent is an unlicensed foreign corporation doing business

in the Philippines, it lacks the legal capacity to file suit, assailing various acts of

Agilent, purportedly in the nature of “doing business” in the Philippines.

H: A foreign corporation without a license is notipso facto incapacitated from

bringing an action in Philippine courts. A license is necessary only if a foreign

corporation is “transacting” or “doing business” in the country. The Corporation

Code provides:

Sec. 133. Doing business without a license. — 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 oradministrative agency of the Philippines; but such corporation may

be sued or proceeded against before Philippine courts or

administrative tribunals on any valid cause of action recognized

under Philippine laws.

The aforementioned provision prevents an unlicensed foreign corporation

“doing business” in the Philippines from accessing our courts. In a number of

cases, however, we have held that an unlicensed foreign corporation doing

business in the Philippines may bring suit in Philippine courts against a

Philippine citizen or entity who had contracted with and benefited from said

corporation. Such a suit is premised on the doctrine of estoppel. A party is

estopped from challenging the personality of a corporation after having

acknowledged the same by entering into a contract with it. This doctrine of

estoppel to deny corporate existence and capacity applies to foreign as well as

domestic corporations. The application of this principle prevents a person

contracting with a foreign corporation from later taking advantage of its

noncompliance with the statutes chiefly in cases where such person has

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received the benefits of the contract.

The principles regarding the right of a foreign corporation to bring suit in Philippine

courts may thus be condensed in four statements:

(1) if a foreign corporation does business in the Philippines without a license, it

cannot sue before the Philippine courts;

(2) if a foreign corporation is not doing business in the Philippines, it needs nolicense to sue before Philippine courts on an isolated transaction or on a cause of

action entirely independent of any business transaction;

(3) if a foreign corporation does business in the Philippines without a license, a

Philippine citizen or entity which has contracted with said corporation may be

estopped from challenging the foreign corporation’s corporate personality in a suit

brought before Philippine courts; and

(4) if a foreign corporation does business in the Philippines with the required

license, it can sue before Philippine courts on any transaction.

InMentholatum, the Court discoursed on the two general tests to determine

whether or not a foreign corporation can be considered as “doing business” in thePhilippines. The first of these is the substance test, thus: The true test [for doing

business], however, seems to be whether the foreign corporation is continuing the

body of the business or enterprise for which it was organized or whether it has

substantially retired from it and turned it over to another.

The second test is the continuity test, expressed thus: The term [doing business]

implies a continuity of commercial dealings and arrangements, and contemplates,

to that extent, the performance of acts or works or the exercise of some of the

functions normally incident to, and in the progressive prosecution of, the purpose

and object of its organization.

Although each case must be judged in light of its attendant circumstances, jurisprudence has evolved several guiding principles for the application of these

tests. For instance, considering that it transacted with its Philippine counterpart for

seven years, engaging in futures contracts, this Court concluded that the foreign

corporation inMerrill Lynch Futures, Inc. v. Court of Appeals and Spouses Lara,

was doing business in the Philippines. InTop-Weld Manufacturing v. ECED, IRTI,

et al. both involved the License and Technical Agreement and Distributor

Agreement of foreign corporations with their respective local counterparts that

were the primary bases for the Court’s ruling that the foreign corporations were

doing business in the Philippines. In particular, the Court cited the highly

restrictive nature of certain provisions in the agreements involved, such that…

the Philippine entity is reduced to a mere extension or instrument of the foreign

corporation.

The case law definition has evolved into a statutory definition, having been

adopted with some qualifications in various pieces of legislation. The Foreign

Investments Act of 1991 (the “FIA”; Republic Act No. 7042, as amended), Sec 3

(d) defines “doing business” as those which “include soliciting orders, service

contracts, opening offices, whether called “liaison” offices or branches;

appointing representatives or distributors domiciled in the Philippines or who in

any calendar year stay in the country for a period or periods totaling 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 that imply a continuity of commercial

dealings or arrangements, and contemplate to that extent the performance ofacts or works, or the exercise of some of the functions normally incident to, and

in the progressive prosecution of, commercial gain or of the purpose and object

of the business organization.” An analysis of the relevant case law, in

conjunction with Section 1 of the Implementing Rules and Regulations of the

FIA (as amended by Republic Act No. 8179), would demonstrate that the acts

enumerated in the VAASA do not constitute “doing business” in the Philippines.

The IRR of the FIA (as amended by Republic Act No. 8179) provides that the

following shall not be deemed “doing business”:

a. Mere investment as a shareholder by a foreign entity in domesticcorporations duly registered to do business, and/or the exercise

of rights as such investor;

b. Having a nominee director or officer to represent its interest in

such corporation;

c. Appointing a representative or distributor domiciled in the

Philippines which transacts business in the representative’s or

8



distributor’s own name and account;

d. The publication of a general advertisement through any print or

broadcast media;

e. Maintaining a stock of goods in the Philippines solely for the

purpose of having the same processed by another entity in the

Philippines;

f. Consignment by a foreign entity of equipment with a local company

to be used in the processing of products for export;

g. Collecting information in the Philippines; and

h. Performing services auxiliary to an existing isolated contract of sale

which are not on a continuing basis, such as installing in the

Philippines machinery it has manufactured or exported to the

Philippines, servicing the same, training domestic workers to

operate it, and similar incidental services.

By and large, to constitute “doing business”, the activity to be undertaken in the

Philippines is one that is for profit-making. By the clear terms of the VAASA,

Agilent’s activities in the Philippines were confined to (1) maintaining a stock ofgoods in the Philippines solely for the purpose of having the same processed by

Integrated Silicon; and (2) consignment of equipment with Integrated Silicon to be

used in the processing of products for export. As such, we hold that, based on the

evidence presented thus far, Agilent cannot be deemed to be “doing business” in

the Philippines. Respondents’ contention that Agilent lacks the legal capacity to

file suit is therefore devoid of merit. As a foreign corporation not doing business in

the Philippines, it needed no license before it can sue before our courts.

— Jqck: Agilent sums up everything; it’s the controlling doctrine now

Merrill Lynch Futures v CA. F: Merrill Lynch Futures, Inc. a non-resident foreigncorporation not doing business in the Philippines, sued the Spouses Pedro M. Lara

and Elisa G. Lara for the recovery of a debt and interest thereon. Merrill Lynch is a

"futures commission merchant" duly licensed to act as such in the futures markets

and exchanges in the United States, and essentially functioning as a broker…

(executing) orders to buy and sell futures contracts received from its customers on

U.S. futures exchanges.

It also defined a "futures contract" as a "contractual commitment to buy and sell

a standardized quantity of a particular item at a specified future settlement date

and at a price agreed upon, with the purchase or sale being executed on a

regulated futures exchange." It entered into a Futures Customer Agreement

with the defendant spouses, in virtue of which it agreed to act as the latter's

broker for the purchase and sale of futures contracts in the U.S. and that

pursuant to the contract, orders to buy and sell futures contracts were

transmitted to ML FUTURES by the Lara Spouses "through the facilities of

Merrill Lynch Philippines, Inc., a Philippine corporation and a company servicing

plaintiffs customers. Later, the Laras would reaffirm their lack of awareness that

Merrill Lynch Philippines, Inc.(formerly registered as Merrill Lynch, Pierce,

Fenner & Smith Philippines, Inc. ) did not have a license, claiming that they

learned of this only from inquiries with the Securities and Exchange

Commission which elicited the information that it had denied said corporation's

application to operate as a commodity futures trading advisor. Lara Spouses

actively traded in futures contracts, including "stock index futures" for four years

or so,i.e., from 1983 to October, 1987. A loss amounting to US$160,749.69

was incurred in respect of three (3) transactions involving "index futures," andafter setting this off against an amount of US$75,913.42 then owing by ML

FUTURES to the Lara Spouses, said spouses became indebted to ML

FUTURES for the ensuing balance of US$84,836.27. Lara Spouses however

refused to pay this balance, "alleging that the transactions were null and void

because Merrill Lynch Philippines, Inc., the Philippine company servicing

accounts of plaintiff… had no license to operate as a 'commodity and/or

financial futures broker. Lara files a MTD, and TC sustains the motion. CA

affirms, holding that the Trial Court had seen "through the charade in the

representation of MLPI and the plaintiff that MLPI is only a trading advisor and

in fact it is a conduit in the plaintiff's business transactions in the Philippines,”

citing the ruling in Mentholatum v Mangaliman.

I: W/n (a) ML FUTURES is prohibited from suing in Philippine Courts because

doing business in the country without a license, and that (b) it is not a real party

in interest since the Lara Spouses had not been doing business with it, but with

another corporation, Merrill Lynch, Pierce, Fenner & Smith, Inc.

9



H: The ground that the plaintiff has no legal capacity to sue — may be understood

in two senses: one, that the plaintiff is prohibited or otherwise incapacitated by law

to institute suit in Philippine Courts; or two, although not otherwise incapacitated in

the sense just stated, that it is not a real party in interest. Now, the Lara Spouses

contend that ML Futures has no capacity to sue them because the transactions

subject of the complaint were had by them, not with the plaintiff ML FUTURES, but

withMerrill Lynch Pierce Fenner & Smith,Inc.

The facts on record adequately establish that ML FUTURES, operating in the

United States, had indeed done business with the Lara Spouses in the Philippines

over several years, had done so at all times through Merrill Lynch Philippines, Inc.

(MLPI), a corporation organized in this country, and had executed all these

transactions without ML FUTURES being licensed to so transact business here,

and without MLPI being authorized to operate as a commodity futures trading

advisor. The Laras did transact business with ML FUTURES through its agent

corporation organized in the Philippines, it being unnecessary to determine

whether this domestic firm was MLPI (Merrill Lynch Philippines, Inc.) or Merrill

Lynch Pierce Fenner & Smith (MLPI's alleged predecessor). The fact is that MLFUTURES did deal with futures contracts in exchanges in the United States in

behalf and for the account of the Lara Spouses, and that on several occasions the

latter received account documents and money in connection with those

transactions.

I: W/N ML FUTURES may sue in Philippine Courts to establish and enforce its

rights against said spouses, in light of the undeniable fact that it had transacted

business in this country without being licensed to do so. W/N the Lara Spouses are

now estopped to impugn ML FUTURES' capacity to sue them in the courts of the

forum.

H: The rule is that a party is estopped to challenge the personality of a corporation

after having acknowledged the same by entering into a contract with it. And the

"doctrine of estoppel” to deny corporate existence applies to 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, chiefly in cases

where such person has received the benefits of the contract where such person

has acted as agent for the corporation and has violated his fiduciary obligations

as such, and where the statute does not provide that the contract shall be void,

but merely fixes a special penalty for violation of the statute… "

There would seem to be no question that the Laras received benefits generated

by their business relations with ML FUTURES. Those business relations,

according to the Laras themselves, spanned a period of seven (7) years; and

they evidently found those relations to be of such profitability as warranted their

maintaining them for that not insignificant period of time; otherwise, it is

reasonably certain that they would have terminated their dealings with ML

FUTURES much, much earlier. In fact, even as regards their last transaction, in

which the Laras allegedly suffered a loss in the sum of US$160,749.69, the

Laras nonetheless still received some monetary advantage, for ML FUTURES

credited them with the amount of US$75,913.42 then due to them, thus

reducing their debt to US$84,836.27. Given these facts, and assuming that the

Lara Spouses were aware from the outset that ML FUTURES had no license to

do business in this country and MLPI, no authority to act as broker for it, it

would appear quite inequitable for the Laras to evade payment of an otherwise

legitimate indebtedness due and owing to ML FUTURES upon the plea that it

should not have done business in this country in the first place, or that its agent

in this country, MLPI, had no license either to operate as a "commodity and/or

financial futures broker."

— Estoppel doctrine: if local parties knew that the foreign entity does not have

a license, yet it is doing business, and they still transacted with them—

estopped from invoking lack of license!

— Villanueva: Merrill Lynch lacks an element of estoppel—

action/representation by the local which induces the foreign to believe thathe would be entitled to relief… the simple act of entering into a contract

with a foreign entity does not of itself give rise to estoppel.

Topweld Manufacturing v ECED. F: TopWeld, a domestic corporation

engaged in manufacturing and selling welding supplies and equipment, entered

into separate contracts with 2 different foreign entities. The first contract is a

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License and Technical Assistance Agreement with the IRTI, a Swiss corporation,

which constituted TopWeld a licensee of IRTI to manufacture welding products

under certain specifications with raw materials to be purchased by TopWeld from

suppliers designated by IRTI. The second contract is a Distributor Agreement with

the ECED SA, a Panamanian corporation, which designated TopWeld as ECED’s

distributor in the RP of its welding products and equipment. Upon learning that the

two foreign corporations were negotiating with another group to replace TopWeld,

the latter sued IRTI, ECED and an American corporation, EUTECTIC, and also

Victor Gaerlan, the alleged representative of the three corporations. TopWeld

sought to restrain the corporations from negotiating with third parties and from

terminating its contract. TC grants petition and issues TRO. IRTI and ECED writes

TopWeld to inform it of their intent to sever their agreement. TopWeld amended its

complaint to ask the court to compel the ECED to deliver items covered by the

agreement and to prohibit them from importing into the RP any EUTECTIC

products. TC granted the amended prayer. CA reverses, holding that IRTI and

ECED, by entering into licensing and distributing agreements with TopWeld, were

doing business in the RP and thus should have required a certificate from the BOI.

It held that having not obtained the requisite certificate, the provisions of RA 5455prohibiting alien firms from terminating their franchise or licensing agreements with

domestic firms without payment of compensation and reimbursement of expenses

cannot be applied to them. They are not bound by the requirement on termination

and thus TopWeld cannot invoke the same. To impose a requirement would

perpetuate or condone an unlawful business operation. The CA finally held that

TopWeld ought to know whether or not IRTI and ECED were properly authorized to

engage in business in the RP. TopWeld appeals to SC.

I: W/n IRTI and ECED can be considered as doing business and thus subject to

the requirements of RA 5455.

H: IRTI and ECED are foreign corporations not licensed to do business in the Phils.SC reverted to the lack of a general rule as to what exactly constitutes doing or

engaging in business in the RP, and acknowledged that each case must be judged

in light of its peculiar circumstances. Acts of corporations should be distinguished

from single or isolate business transactions or occasional, incidental, or casual

transactions. Where a single act or transaction is not merely incidental or casual

but indicates the foreign corporation’s intention to do other business in the

Phils, said single act constitutes doing or engaging in business in the RP.

The SC concurs with the CA that the IRTI and ECED were doing business in

the RP. When they entered into the dispute contracts with TopWeld, they were

carrying out the purposes for which they were created—to manufacture and

market welding products and equipment. The terms and conditions of the

contracts indicate that they established within the RP, a continuous business,

and not merely one of a temporary character. This is buttressed by the

admission that they were negotiating with another domestic company. Their

acts enable them to enter into the mainstream of our economic life in

competition with local business interests, bringing them under the provisions of

RA 5455. IRTI and ECED contends exemption from RA 5455 because TopWeld

maintained an independent status during the existence of the contracts. But a

perusal of the agreements shows that they are highly restrictive, and in

assuming TopWeld to have an independent status, in essence it merely extends

to the Islands the business of IRTI and ECED.

As between the parties, RA 5455 does not declare void or invalid the contracts

entered without the license being secured. What is created is an illegal

situation between the parties having entered into agreements without the

license or certificate. In this case, TopWeld had actual knowledge of the

applicability of RA 5455 at the time of execution of the contract. It was

incumbent upon TopWeld to know whether or not IRTI and ECED were properly

authorized to engage in the RP. The very purpose of the law was circumvented

when they etered into the licensing and distributorship agreements, and the

parties being equally guilty and are in pari delicto, it follows that TopWeld is not

entitled to the relief prayed for.

— TopWeld: “pari delicto rule”—local company knew that the law it alleges to

have been violated by the foreign corporation is in force at the time of the

questioned contracts were consummated; while foreign corporation is doing

business without a license!

— The contracts cannot be voided!

11



— Highly restrictive agreements which has the effect of reducing the local

corporation to mere conduits or extensions of the foreign corporation

Antam Consolidated v CA. F: Stokely (parent) and Capital City (subsidiary)

companies are foreign corporations not engaged and not licensed to do business

in the RP. Capital City and Comphil acting through broker Rothschild entered into a

contract wherein Comphil undertook to sell and deliver and Capital City agreed to

buy 500 long tons of crude coconut oil. Comphil failed to deliver the coconut oil so

that Capital decided to cover its oil needs in the open market, resulting in a loss of

$103,600. The parties entered into a second contract—designated as a “wash out”

of the first contract—wherein Comphil undertook to buy back the 500 long tons of

coconut oil at a higher price, the difference in price offsetting the loss sustained in

the first contract. Comphil failed to pay. A third contract was entered into, wherein

Comphil was to sell the same quantity of coconut oil at a discounted price from the

market value thereof, again offsetting the loss of $103,600 sustained by Capital

City. Again Comphil failed to deliver, and despite repeated demands Comphil

refused to settle its obligations to Capital City under the agreements. The

Tambuntings, former directors of Comphil, left the company and were replaced by5 employees of their pawnshop business, and caused the name of Comphil to be

changed to Banahaw Milling. The new directors also authorized Tambunting to sell

the oil mill of Comphil/Banahaw, which is the only substantial asset of Banahaw

and would thus leave it with no assets to satisfy claims of creditors. Unicom also

took over the assets and capital stock of Banahaw. Capital City alleged that all

petitioners evaded their obligation thereto through the devious scheme of using

Tambunting employees to replace the Tambuntings in the management of

Banahaw and disposing part of the assets and entire interests in

Comphil/Banahaw to Unicom. TC ordered the writ of attachment. Petitioners Antam

et al file MTD on the ground that petitioners are foreign corporations no licensed to

do business in the RP and has no personality to maintain the instant suit. TCdenies MTD, and Antam et al appeals. Antam claims Stokely and Capital city are

doing business in the RP, because it entered into three transactions/contracts with

them either as seller or buyer, and which are in the pursuit of the purpose and

object for which they are organized. They are thus required to obtain a license first

before maintaining any legal action against them.

H: the transactions are not a series of commercial dealings which signify an

intent on the part of Stokely and Capital City to do business in the RP, but

constitute an isolated one which does not fall under the category of “doing

business.” The records show that the only reason why the second and third

contracts were entered into was to recover the loss sustained from the failure of

Antam et al to deliver the crude coconut oil under the first contract. Instead of

outright demand, the foreign company even tried to push through with the

transaction to recover the amount lost. And again petitioners failed to make

good. It can be deduced therefore, that in reality there was only one agreement

—to deliver 500 long tons of coconut oil—and the 3 different transactions were

entered into in an effort to fulfill the basic agreement and in no way indicate an

intent to engage in a continuity of transactions with the petitioners which would

categorize it as a foreign corporation doing business in the RP.

It is a common ploy of defaulting companies sued by unlicensed foreign

companies not engaged in business in the RP to invoke lack of capacity to sue.

The doctrine of lack of capacity to sue based on failure to acquire a local

license is based on considerations of sound public policy. It was never intendedto favor domestic corporations who enter into solitary obligations simply

because the latter are not licensed to do business in the country.

— Antam: “auxiliary rule”—performance of services auxiliary to an existing

contract is not doing business!

How courts acquire jurisdiction over foreign corporations

Laws governing licensed foreign corporations

Merger of licensed foreign corporation

Withdrawal of foreign corporation

Revocation and suspension of license

Existing Licensed Foreign Corporations

12

chapter 18 foreign corporations

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