Professional Documents
Culture Documents
JOINT VENTURES1
Introduction
Formation Agreement: Nature of Joint Ventures in Philippine Setting
Alternative Legal Forms in Structuring a Joint Venture
Aspects which Influence Choice of Legal Form
Governing Laws and Language
Freedom to Contract, In General
Formal or Extrinsic Validity of Agreements
Capacity of Contract Parties
Intrinsic Validity
Language of Joint Venture Agreements
Defining Joint Ventures Scope of Business Activity
Foreign Investment Act of 1991
Establishing a Corporate Vehicle
Procedure in Establishing a Corporate Vehicle
Doing Business in the Philippines
Governing Law
What Constitutes Doing Business
Qualifications to Do Business in the Philippines
Registration under FIA 91
SEC Registration
Additional Requirements
Effects of Non-Compliance with FIA 91 Requirements
SEC License for Foreign Corporations Doing Business
SEC Requirements
Issuance of License
Requirements Upon Issuance of SEC License
Effects of Failure to Secure SEC License to Do Business by Foreign Corporation
Incentives Available to Foreign Joint Venture Partners
Preferred Areas of Investments (BOI Registered and with Incentives)
Non-Preferred Area Investor(Investment Without Incentives)
Incentives of Export Processing Zone Enterprises
Restrictions on Activities of Foreign Joint Venture Partners
Financing Joint Ventures
Schemes Recognized under the Act
Equity Limitations for Operators of Public Franchises
Reasonable Rate of Return on Investments and Operating and Maintenance Cost
Period Covered
Financing Allowed
Priority Projects
Preference to Filipino Contractors
Repayment Schemes
Land Reclamation or Industrial Estates
1The original paper was submitted by the author to the CENTER FOR INTERNATIONAL LEGAL
STUDIES based in Salzburg, Austria, as part of its international publication.
2
INTRODUCTION
Joint venture arrangements are fairly common media of doing business or
undertaking projects in the Philippines, both covering local transactions, such a
large infra-structure undertakings involving the resources of big corporations, or
structuring partnership arrangements between foreign investors and their local
partners in the pursuit of local projects in the Philippines.
In particular, the Government encourages the pursuit of construction
projects and petroleum operations under joint venture arrangements. Under the
National Internal Revenue Code of 1997 of the Philippines (NIRC), joint ventures
formed for the purpose of engaging in petroleum operations pursuant to
operating agreements under a service contract with the Government, or those
formed for the purpose of undertaking construction projects, are exempt from
corporate income tax.
Joint venture arrangements have particularly been the more popular
medium when foreign participation is involved in local projects since the
contractual nature of the arrangement allows the parties flexibility to adopt
special rules and procedures covering their situation, which would otherwise be
inapplicable in a straight corporate vehicle because of the restrictive rules of the
Philippine Corporation Code and jurisprudence on Philippine Corporate Law.
3
FORMATION AGREEMENT:
NATURE OF JOINT VENTURES IN PHILIPPINE SETTING
There is no statutory provision that recognizes or governs directly joint
ventures, although they have been recognized in jurisprudence and
commonplace in commercial ventures. Consequently, joint venture arrangements
fall generally within the realm of the Law on Contracts, and particularly within the
applicable provisions of the Law on Partnership, both of which are governed
under the Civil Code of the Philippines.
Since the prevailing contract rule in the Philippines is that parties to a
contract may establish such stipulations, clauses, terms and conditions, as they
may deem convenient, provided they are not contrary to laws, morals, good
customs, public order, or public policy,1 no model joint venture agreements have
been published by the Securities and Exchange Commission (SEC), Board of
Investments (BOI), or any other authority.
The prevailing school of thought in the Philippines is that a joint venture is
a species of partnership. By specific statutory provision when "two or more
persons bind themselves to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves," then a
partnership is created by definition of law.2 The main distinction between an
ordinary partnership and a joint venture is that the ordinary partnership is
organized for general business venture and does not have a definite term of
existence; whereas a joint venture is organized for a specific project or
undertaking.
The Philippine Supreme Court has adopted Black's definition of a joint
venture, thus: "Joint venture is defined as an association of persons or
companies jointly undertaking some commercial enterprisegenerally all
contribute assets and share risks. It requires a community of interest in the
performance of the subject matter, a right to direct and govern the policy
connected therewith, and duty, which may be altered by agreement to share both
in profit and losses."3
The foregoing definition of a joint venture essentially falls within the
statutory definition of what constitutes a partnership. Other reasons on why a
joint venture must be considered a species of partnership is that the Law on
Partnership provides that "A partnership may be constituted in any form, except
where immovable property or real rights are contributed, thereto, in which case a
public instrument shall be necessary." 4 That means that no special form, even
one seeking to establish a joint venture arrangement, is necessary to give rise to
a partnership.
The previous ruling of the SEC on the matter is that a corporation cannot
enter into a contract of partnership with an individual or another corporation on
the premise that if a corporation enters into a partnership agreement, it would be
bound by the acts of the persons who are not its duly appointed and authorized
agents and officers, which is entirely inconsistent with the policy of the law that
the corporation shall mange its own affairs separately and exclusively.15
Later, the SEC provided for a clear exception to the foregoing ruling, and
allowed corporations to enter into partnership arrangement, provided the
following conditions are met:16
(a) The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the
corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business
authorized by the charter or articles of incorporation;
(b) The agreement on the articles of partnership must provide
that all the partners shall manage the partnership, and the
articles of partnership must stipulate that all the partners
shall be jointly and severally liable for all the obligations of
the partnership;
(c) If it is a foreign corporation, it must obtain a license to
transact business in the country in accordance with the
Corporation Code of the Philippines.
In one opinion, the SEC clarified that the conditions imposed meant that
since the partners in a partnership of corporations are required to stipulate that
all of them shall manage the partnership and they shall be jointly and severally
liable for all the obligations of the partnership, it necessarily followed that a
partnership of corporations should be organized as a general partnership. 17
Lately, the SEC, realizing that the second condition actually prevented a
corporation from entering into a limited partnership, which if allowed to do so
would then be more congruent with the policy that the corporation would then not
be held liable for its venture beyond the investments made and determined by its
board of directors, and would therefore not be held liable (beyond its investment)
for debts arising from the acts of the general partners, reconsidered its position
and ruled that a corporation may become a limited partner in a limited
partnership, since there is no existing Philippine law that expressly prohibits a
corporation from becoming a limited partner in a partnership. In effect, the SEC
dropped the second condition imposed previously.18
15SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 6 FLETCHER CYC.
CORP., Perm. Ed. Rev. Repl. 1950, Sec. 2520.
16SEC Opinion, 29 February 1980; SEC Opinion, dated 3 September 1984. Under Sec. 192 of
the NATIONAL INTERNAL REVENUE CODE, documentary stamps of P15.00 must be affixed on each
proxy.
17SEC Opinion, 23 February 1994, XXVIII SEC QUARTERLY BULLETIN 18 (No. 3, Sept. 1994).
18SEC Opinion, 17 August 1995, XXX SEC QUARTERLY BULLETIN 8 (No. 1, June 1996).
7
In the field of Taxation, both a partnership and a joint venture are treated
as corporate taxpayers, and both are subject to corporate income tax, except that
under the National Internal Revenue Code of 1997, "a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract with the
Government," shall not be taxed separately as a corporate taxpayer.19
4. Intrinsic Validity
The intrinsic validity of a joint venture agreement, as in all contracts in
general executed in the Philippines, including consideration or cause thereof, the
interpretation or constructions of its provisions, and the nature and amount of
damages for breach thereof, are governed by the law voluntarily agreed upon by
the parties. The parties to a joint venture arrangement can therefore validly
stipulate which laws shall govern their arrangement.
However, any stipulation in the joint venture agreement cannot operate to
oust Philippine courts of their jurisdiction under the law, although the local courts
would still apply the laws chosen by the parties to the agreement. 38
Although the parties to a contract, including a joint venture arrangements,
are granted liberty under Philippine laws to stipulate on governing laws, including
the laws of another country, nevertheless, Philippine restrictive laws, on taxes
and prohibition on foreign equity in some business areas or activities are likely to
be imposed as mandatory if suit is brought before a local forum seeking any
remedy under the joint venture arrangement.
Under the Retail Trade Liberalization Act of 2000, 55 the retail trade industry
has been liberalized to accommodate foreign investments and foreign direct
participation. Currently, foreigners are excluded only in retail enterprises with
paid-up capita of less than US$2,500,000.00 (Category A) which is resecured
exclusively for Filipino citizens and corporations wholly-owned by Filipino
citizens.
List B covers defense-related materials which by law are licensed and
regulated by the Department of National Defense, unless specifically authorized,
with substantial export, by the Secretary of National Defense. For example, 40%
foreign equity is allowed manufacture, repair storage and/or distribution of
explosives, munitions, and armaments.56
List B also includes activities regulated by law because of risks they may
pose to public health and morals. For example, dangerous drugs, gambling,
nightclubs, bars, and message clinics are not open for foreign investments. 57
A third area under the negative List B refers to domestic market
enterprises with less than US$200,000 paid in equity capital, unless determined
by the Department of Science and Technology as involving advanced technology.
Finally, the negative List B also includes export enterprises using raw
materials from depleting natural resources and with less than US$200,000 paid
in equity capital.
The following therefore are covered under List B and would be open to
100% foreign equity investments:
(a) Manufacture and repair of firearms and similar defense-
related material with substantial export component and with
specific authorization from the Secretary of National
Defense.
(b) Domestic market enterprises certified by the DOST as
involving advanced technology even if the paid-in equity
capital is less than US$200,000.
(c) Export enterprises that use raw materials from depleting
natural resources but with paid-in capital of at least
US$200,000.
Negative List, and took effect last October, 1994. There is in effect no longer
Negative List C.
Note that the SEC may allow the remittance to be maintained in a foreign
currency account (not converted into pesos) so long as a letter-explanation is
given to the SEC on the non-conversion (e.g., the foreign currency will be
immediately used to buy capital equipment abroad).
e. SEC Registration
However, the Corporation Code requires certain registration compliance.
For foreign corporation or partnerships seeking to do business in the Philippines,
the following would be required:
f. Additional Requirements
The following would be required for specially defined activities:
a. SEC Requirements
The following documentary requirements would have to be filed with the
SEC:
b. Issuance of License
Where the SEC is satisfied that the applicant has complied with all the
requirements of this Code, and other special laws, rules and regulations, the
SEC shall issue a license to the applicant to transact business in the Philippines
for the purpose or purposes specified in such license. Upon the issuance of the
license, such foreign corporation may transact its 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 of its state of incorporation, unless such license
is soonest surrendered, suspended or annulled in accordance with this Code or
other special laws.
down which economic activities are considered preferred pioneer and which are
preferred non-pioneer.
Foreigners may invest up to the extent of 100% in the economic activities
listed down as preferred pioneer subject only to constitutional or statutory
limitations and only up to 40% in economic activities declared as preferred non-
pioneer.
If an enterprise is not listed in the Investment Priorities Plan and foreign
equity shall not exceed 40% it must, to be entitled to the incentives given, export
50% of its production.
If an enterprise is not listed in the Investment Priorities Plan and foreign
equity shall exceed 40% it must export 70% of its production to be entitled to the
incentives given.
A location restriction, however is imposed on the enterprise in order to
avail of certain incentives. Thus, projects locating in Metro Manila are not entitled
to income tax holiday and capital equipment incentives.
Among the incentives granted by the Code are:
(k) Exemption from wharfage dues and any export tax, duty,
impost and fee.
In addition, under Pres. Decree No. 66, the following incentives are
expressly granted to locators within the export processing zone areas are:
65Officially designated as Bangko Sentral ng Pilipinas under Rep. Act No. 7653.
24
Republic Act 7718 defines "reasonable rate of return" as the rate of return
that reflects the prevailing cost of capital in the domestic and international
markets.
4. Period Covered
The contractor transfers the facility to the government unit concerned at
the end of the fixed term which shall not exceed 50 years.
5. Financing Allowed
For the construction stage, the contractor may obtain financing from
foreign and/or domestic sources and/or engage the services of a foreign and/or
Filipino contractor.
The financing of a foreign or foreign-controlled contractor from Philippine
government financing institutions shall not exceed 20% of the total cost of the
infrastructure facility or project.
The financing from foreign sources shall not require a guarantee by the
Government or by government-owned or controlled corporation.
Projects which would have difficulty in sourcing funds may be financed
partly from direct government appropriations and/or from Official Development
Assistance (ODA) funds of foreign governments or institutions not exceeding
50% of the project cost, and the balance to be provided by the project proponent.
6. Priority Projects
The Philippine Congress passed Joint Resolution No. 03 enumerating the
following national priority infrastructure projects:
8. Repayment Schemes
For the financing, construction, operation and maintenance of any
infrastructure project undertaken pursuant to the B-O-T Law, the contractor shall
be entitled to a reasonable return of its investment and operating and
maintenance costs in accordance with its bid proposal as accepted by the
concerned contracting infrastructure agency or local government unit and
incorporated in the contract's terms and conditions.
In the case of a BOT arrangement, this repayment scheme is to be
effected by authorizing the contractor to charge and collect reasonable tolls, fees,
rentals, and charges for the use of the project facility not exceeding those
proposed in the bid and incorporated in the contract.
The government infrastructure agency or local government unit concerned
shall approve the fairness and equity of the tolls, fees, rentals, and charges
except in case of tolls for national highways, roads, bridges and public
thoroughfares which shall be approved by the Toll Regulatory Board.
28
The imposition and collection of tools, fees, rentals and charges shall be
for a fixed term as proposed in the bid and incorporated in the contract but in no
case shall this term exceed 50 years.
During the lifetime of the franchise, the contractor shall undertake the
necessary maintenance and repair of the facility in accordance with standards
prescribed in the bidding documents and in the contract. In the case of build-and-
transfer arrangement, the repayment scheme is to be effected through
amortization payments by the government infrastructure agency or local
government unit concerned to the contractor according to the scheme proposed
in the bid and incorporated in the contract.
Republic Act 7718 also allows for the receipt by the project proponent of
payment in non-monetary terms such as land (subject, however, to constitutional
limitations on ownership of land).
(a) Any person who shall enter into any contract or agreement
or shall take part in any conspiracy or combination in the
form of a trust or otherwise, in restraint of trade or commerce
or to prevent by artificial means free competition in the
market;
(b)Any person who shall monopolize any merchandise or object
of trade or commerce, or shall combine with any other
person or persons to monopolize said merchandise or object
in order to alter the price thereof by spreading false rumors
or making use of any other artifice to restrain free
competition in the market;
(c) Any person who, being a manufacturer, producers, or
processor of any merchandise or object of commerce or an
importer of any merchandise or object of commerce from
any foreign country, either as principal or agent, wholesale or
retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production,
processing, assembling or importation or such merchandise
or object of commerce, or with any person not so similarly
engaged, for the purpose of making transactions prejudicial
to lawful commerce, or of increasing the market price in any
part of the Philippines.
4. Governing Law
Under the Rules, the governing law under a technology transfer
arrangement shall be Philippine laws in the interpretation of the contract, and in
the event of litigation, the venue shall be the proper courts in the place where the
technology recipient has its principal office.
6. Warranty/Guarantee Provisions
Under the Rules, a warranty from the technology supplier is required
reflecting that the technology, if used in accordance with the specific instructions
32
7. Royalty
Except for pure trademark licensing agreements where a maximum royalty
fee of 1% of net sales is allowed, the Rules do not prescribe any ceiling on the
rate of fees due under a technology transfer arrangement. However, the rate is
subject to evaluation by the Registry based on set criteria in the Rules.
8. Incentives
A bonus royalty of 2% of net foreign exchange earnings can be availed of
by a supplier who commits to an export development program to assist the
recipient to penetrate the export market for the first time.
DISPUTE RESOLUTION
Outside of judicial remedies, parties to a joint venture arrangement are
authorized to submit their controversies to arbitration, 68 or they can provide as
part of their joint venture arrangements that all issues and controversies shall be
resolved by arbitration through a procedure drawn out in the joint venture
contract. The stipulation on arbitration can validly provide that the resolution or
decision of the board of arbitrators is valid and final. 69
When the parties to a contract have a provision requiring arbitration in
case of disputes, no party may seek remedy from the courts of law. However,
should a case be filed in court without having resorted to prior arbitration, the
court will not dismiss the case; instead the court will refer the matter to the
arbitrators.70
In case there is a provision for arbitration, and one party refuses to
arbitrate, the other party may, through a summary court proceeding, enforce the
arbitration provisions of their contract; but the court is without authority to resolve
the issues on the merits.71
1. Arbitration Law
The special or particular law governing arbitration stipulation and
proceedings is Republic Act No. 876 (1953), formally designated as "The
Arbitration Law."
Under the said Law, two and more persons or parties may submit to the
arbitration of one or more arbitrators any controversy existing, between them at
the time of the submission and which may be subject of an action, or the parties
to any contract may in such contract agree to settle by arbitration a controversy
thereafter arising between them.
Such submission or contract shall be valid, enforceable and irrevocable,
save upon such grounds as exist at law for the revocation of any contract. Also,
such submission or contract may include questions arising out of valuations,
appraisals or other controversies which may be collateral, incidental, precedent
or subsequent to any issue between the parties.
c. Appointment of Arbitrators
If, in the contract for arbitration or in the submission to arbitration,
provision is made for a method of naming and appointing arbitrators, such
method shall be followed; but if no method be provided therein, it is the Regional
Trial Court that shall designate an arbitrator or arbitrators.
The Arbitration Law provides specifically for the procedure of arbitration,
qualification of arbitrators, challenge of arbitrators, hearing by arbitrators,
rendering of awards and the form and contents of award, confirmation of award,
grounds for vacating, modifying or correcting awards, and appeals procedure.
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