SEC OGC Opinion No. 09-2024: Re: Doing Business in the Philippines

On 24 April 2024, the Securities and Exchange Commission Office of the General Counsel (“SEC OGC”) issued SEC OGC Opinion No. 09-2024 in response to the letter of Lhotse Enterprises Limited (“Lhotse”) which sought confirmation from the SEC on whether their activities within the Philippines would constitute “doing business” and thus, would require them to obtain a license from the SEC. 

In a letter, Lhotse claimed that it is a foreign corporation that has shareholdings in 2 Philippine corporations, namely Orient Capital Ventures Inc. (“OCVI”) and Megasports Holdings Inc. (“MHI”). It also claimed that it has no other activities in the Philippines aside from a service agreement with OCVI to provide support, maintenance and development services which shall be performed entirely outside the Philippines. 

The SEC, citing Section 3(d) of the Foreign Investments Act of 1991, held that “mere investment in the form of stock ownership or subscription in a domestic corporation does not fall within the coverage of the term “doing business” for purposes of licensing of foreign corporations.” Thus, Lhotse’s investment in the above Philippine corporations does not constitute as “doing business”. 

With regard to Lhotse’s service agreement with OCVI, the SEC noted the following factors based on previous SEC opinions and prevailing jurisprudence:

1. As to perfection and consummation – The general rule is that foreign corporations will not be regarded as doing business in a State simply because it enters into contracts with the residents of the State, as long as such contracts are consummated outside the State.
2. As to place of performance – If the actual performance of specific commercial acts was done within the territory of the Philippines, it shall be considered as “doing business” in the Philippines.
3. As to income derived – If the activity within the Philippines do not create profits to the foreign corporation, it will not constitute “doing business”.
4. As to continuity – An isolated transaction cannot qualify as “doing business” because it lacks the element of continuity.

Furthermore, the SEC mentioned the “twin characterization test” which was laid down by the Supreme Court in the case of The Mentholatum Co., Inc., et. al. v. Mangiliman. The test provided for the following:

1. Substance Test – When the foreign corporation is continuing the body or substance of the business for which it was organized or whether it has substantially retired from it and turned it over to another; and
2. Continuity Test – When the foreign corporation is engaged in activities which imply a continuity of commercial dealings and contemplates, to that extent, the performance of acts normally incident to, and in the progressive prosecution of the purpose and object of its organization. 

Based on the above, the SEC held that Lhotse is not doing business in the Philippines, provided that the following concur:

1. Lhotse only invested in OCVI and MHI through stock ownership or subscription;
2. Lhotse’s service agreement with OCVI is entirely performed outside of the Philippines;
3. Lhotse and OCVI’s service agreement is an isolated transaction; and
4. Lhotse evinces no intention to continue the body of its business in the country.