DOJ Opinion No. 008, s. 1996

DOJ OPINION NO. 008 , s. 1996 January 19, 1996 The Chief Executive Trustee Asset Privatization Trust 10th Floor, BA-Lepanto Building 8747 Paseo de Roxas P.O. Box (2685), MCPO Makati City Sir : This refers to your request for opinion on whether or not the Asset Privatization Trust (APT) should adopt the "Terms of Reference" proposed by the Department of Transportation and Communication (DOTC) in the disposition of the government-held shares in Pacific East Asia Cargo Corporation (PEAC). prcd You state that the DOTC-proposed "Terms of Reference" (TOR) appears designed to specifically protect the "alleged corporate and contractual document under which the Australian company, Thomas National Transport (TNT), made its investment in the subject corporation", and that while there is a representation that TNT might take legal action against Philippine Aerospace Development Corporation (PADC) and other concerned parties should the disposition of PADC shares of stock in PEAC violate such "corporate and contractual document", you doubt whether the interested parties would be willing to be bound by the "Undertakings/Warranties" enumerated in the said proposal. We assume that APT is fully aware of its authority under Proclamation No. 50 to sell assets referred to it for disposition "on such terms as in its discretion are in the best interest of the National Government" (Sec. 12[2], Procl. No. 50). It would definitely not be in the best interest of the National Government to expose it to unnecessary court litigation as a consequence of a disposition of government asset referred to it for disposal under Proclamation No. 50. By virtue of its powers under Proclamation No. 50, APT is of course, not bound by the DOTC-proposed TOR. However, in formulating its own TOR, APT should be guided by the general law on contracts which accords binding and obligatory force to contracts between parties thereto (Arts. 1159 and 1315, Civil Code). The DOTC-proposed TOR contains the following "Undertakings/Warranties": "a. Prospective bidders must agree to be bound by the terms and conditions of the Shareholders Agreement dated September 27, 1990, as amended, between PADC and TNT. b. Prospective bidders, shall honor all valid and existing contracts of the PEAC Management. c. Prospective bidders must agree to amend the Articles of Incorporation to reclassify the shareholdings in PEAC, i.e. 60% Class A shares and 40% Class B shares. d. The sale and transfer of 15% Class A shares to the PEAC Retirement Fund based on the government's policy of providing opportunities and benefits for small investors and/or employees, at the same price as the successful bid, shall be implemented. e. Financial capacity to infuse funds to repay PEAC's outstanding shareholders loans in order to meet the debt-to-equity ration requirements of the Board of Investments. f. The funds to be used by prospective bidders to pay for the PEAC shares, as well as for the immediate recapitalization of PEAC's as provided above, must not be sourced through in the other arrangement which will result in the creation or subsistence of any lien or charge on the PEAC shares in favor of any third party. g. Bids shall be accompanied by cash/managers' check or bonds equal to 10% of the amount of the bid. j. Winning bidders shall absorb all PEAC employees as a condition in participating in the bidding." We find the undertakings/warranties stipulated in paragraphs (a) and (b) above to be consistent with the above-stated principle respecting the obligatory force of contracts and should bind the purchaser of the government-held shares in PEAC. Paragraph (c), however, has no basis either in the Articles of Incorporation and By-Laws of PEAC or in the Shareholders Agreement between PADC and TNT, and may unduly restrict the rights of the purchaser as a stockholder of PEAC. Nonetheless, since under the Shareholders Agreement, TNT's consent is required before any sale and transfer of shares can be effected by PADC, we assume that in drafting the TOR, PADC consulted TNT, and that TNT's consent had been obtained. As a consideration, PADC must have agreed to allow TNT to hold 40% of the shares which is the maximum number allowed to a foreign investor under the law (R.A. No. 776, "The Civil Aeronautics Act"). If this is the case, paragraph (c) could be reworded as hereunder suggested, and such undertaking would be contractually consistent as set out above. "c. In consideration of TNT's consent being given to PADC under the Shareholders Agreement for the sale and transfer of PADC's shares of stock in PEAC, prospective bidders must agree to amend the Articles of Incorporation to reclassify the shareholders in PEAC, i.e. 60% Class A shares and 40% Class B shares." With respect to paragraph (d), if there is already a standing commitment of PEAC to sell and transfer 15% of Class A shares to the PEAC Retirement Fund, such commitment should legally bind the purchaser of the government-held shares in PEAC. In the absence of such previous commitment, paragraph (d) might be adopted by APT, as disposition entity, in observance of the requirement under Section 2(f) of R.A. No. 7661, as amended by R.A. No. 7886, regarding the sale to small local investors of at least 10% of the assets to be sold in corporate form. The adoption of paragraphs (e), (f) and (g), as in the case of paragraph (i) [should be (h)], it is best to consider this stipulation in the light of the provision of Section 2(a) of R.A. No. 7661, which reads: "SEC. 2. The following conditions shall be adhered to in privatization: (a) In the disposition of assets in corporate form, there shall be no undue dislocation of labor unless all benefits as provided by existing laws or Collective Bargaining Agreements (CBA), shall be complied with; and provided , That the old qualified personnel shall be given preference in the hiring of new personnel by the new owners ." (Emphasis supplied.) Please be guided accordingly. Very truly yours, (SGD.) TEOFISTO T. GUINGONA, JR. Secretary