Joint Venture Corporations Must Follow Philippine Corporate Law

The SEC Office of the General Counsel (OGC) recently addressed critical questions regarding the interplay between Philippine Corporation Law (R.A. No. 11232, or the Revised Corporation Code of the Philippines [RCCP]) and Partnership Law (R.A. No. 386, or the Civil Code) when parties incorporate a domestic entity to serve as their joint venture (JV) vehicle.

The Opinion confirms that choosing a corporate structure subjects the entity entirely to the provisions of the RCCP, rendering foreign choice-of-law clauses and internal contractual stipulations that contravene the RCCP ineffective.

The inquiry was submitted on behalf of an undisclosed foreign corporation incorporated in Japan. This corporation (Corporation A) and another foreign corporation (Corporation B) intended to form a domestic corporation, “Entity X,” to engage in power generation and electricity supply businesses in the Philippines. Entity X was designed to own and hold shares/interests in other various corporations.

The arrangement between Corporation A and Corporation B included several features typical of a JV or partnership: they would own an equal number of shares in Entity X, have equal board representation, and stipulate restrictions on the transfer of shares without the other party’s consent. Importantly, the parties explicitly stated in their written agreement (the Agreement) that they did not intend to form a partnership and stipulated that the laws of Japan would govern the Agreement, specifically intending to prevent the application of the Philippine Civil Code (Partnership Laws).

The OGC stated that Philippine laws, particularly the RCCP, apply to Entity X. Entity X is a domestic corporation and, therefore, a creature of the state whose existence is prescribed by law. Entity X has a distinct and separate personality from its foreign stockholders (Corporations A and B). Thus, Entity X must yield obedience to Philippine law.

While a joint venture is often considered “akin to a partnership”, JVs may take the form of a corporation. The choice to incorporate as a Joint Venture Corporation (JVC) is material in determining the applicable law. An unincorporated JV may be governed by partnership laws when the contractual agreement is silent. On the other hand, an incorporated JV (JVC) is a corporation created by operation of law and is governed by the RCCP.

Citing Mabuhay Holdings Corporation vs. Sembcorp Logistics Limited, the OGC noted that by choosing the JVC medium, the parties are bound by corporate law principles, allowing them to take full advantage of the limited liability feature of the corporate vehicle, which is not present in a formal partnership arrangement.

The relationship between the parties is governed by the shareholders’ agreement, which is a contract separate from the Articles of Incorporation. However, the principle of autonomy in contracts is not absolute. Provisions of applicable law, especially the RCCP, are deemed written into the contract.The OGC concluded that the parties are free to enter into a shareholders’ agreement, but the RCCP and other corporation laws take precedence over, and shall prevail when in conflict with, any stipulations concerning the rights, duties, and liabilities of stockholders, directors/trustees, and officers. Partnership Laws will not govern the stockholders’ rights and liabilities.