Yelp Pictures Inc. (Yelp Pictures), a movie production company based in California, USA, entered into a contract with Yehey Movies Inc., a Filipino movie production and distribution company which is registered in the Philippines under the Securities Regulation Code (SRC) and listed in the Philippine Stock Exchange Inc. (PSE), for the exclusive distribution in the Philippines of movies produced in the USA by Yelp Pictures. Yehey Movies is currently owned 85% by Yavic Yamson, and the balance, by the public in the Philippines. For purposes of entering into the contract, suing for breach of such contract, and prosecuting unauthorized showing of movies produced by Yelp Pictures, it appointed Atty. Yson, a local lawyer, as its attorney-in-fact.
Simultaneously with the execution of the film distribution agreement, Yehey Movies also granted Yelp Pictures an option to acquire up to 40% of the total outstanding capital stock in Yehey Movies post-exercise of the option, at the option price of PhP .01 per number of shares covered by the option, exercisable within a period of one (1) year from the date of the grant, at the exercise price of PhP 100 per share. Once exercised, Yelp Pictures was granted the right to nominate two (2) directors to the Board of Yehey Movies, and Yavic Yamson agreed to vote all his shares for the election of directors to be nominated by Yelp Pictures.
(a) May the acts of entering into the film distribution contract, the subsequent execution and performance of the terms of the contract in the Philippines, and the appointment of Atty. Yson, be considered as act of “doing business” in the Philippines that will require Yelp Pictures to register as a foreign corporation and obtain a license to do business in the Philippines? (2.5%)
(b) Will your answer in (a) be the same if Yelp Pictures exercises the option, becomes a substantial shareholder, and is able to elect two (2) directors in the Board of Yehey Movies? (2.5%)
(c) Must the option granted to Yelp Pictures be registered under the SRC? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
(a) No, Yelp Pictures is not doing business in the Philippines. (b) Yes, the answer is the same. (c) No, the option need not be registered under the SRC. Under foreign investment rules, appointing an attorney-in-fact to protect property
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Quick check
Under the Foreign Investments Act, which act does NOT constitute doing business in the Philippines?
Appointing a local attorney-in-fact to protect property rights does not constitute doing business.
Does acquiring 40% equity and nominating two directors in a domestic company constitute doing business by a foreign firm?
Acquiring equity and electing directors are acts of passive investment and do not constitute doing business.
Why is a stock option granted exclusively to a single foreign corporate partner exempt from SEC registration under the SRC?
Stock options granted privately without a public offering are exempt transactions under Section 10 of the SRC.
Which law defines the concept and scope of doing business by foreign corporations in the Philippines?
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Which statute governs the registration of securities and exempt transactions in the Philippines?
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Learn more about these topics
1. Doing Business Concept
Under the Foreign Investments Act of 1991 (Republic Act Number 7042, as amended) and the Revised Corporation Code, doing business implies continuity of commercial dealings or performance of acts incident to the organization's enterprise. Appointing a local representative or attorney-in-fact solely to protect intellectual property, prosecute copyright infringements, or enforce distribution agreements does not constitute doing business requiring a license. Isolated transactions or acts protecting property rights do not subject a foreign corporation to local licensing requirements.
2. Passive Shareholder Equity
Under Philippine foreign investment jurisprudence, subscribing to shares of stock in a domestic corporation, exercising voting rights, and electing directors to the corporate board constitute passive equity investment. Merely acquiring up to forty percent stock ownership and nominating corporate directors do not transform a foreign investor into an entity doing business locally. So long as the domestic corporation operates independently, the foreign stockholder does not engage in doing business in the Philippines.
3. Private Option Exemption
Under Section 8 in relation to Section 10 of the Securities Regulation Code (Republic Act Number 8799), securities, including stock options, cannot be sold or offered for sale without prior registration with the Securities and Exchange Commission. However, an option granted privately to a single entity, without any public distribution, solicitation, or offering, constitutes an exempt transaction under Section 10. Consequently, a stock option issued exclusively to a foreign corporate partner does not require registration.