Legality of Redemption Option on Preferred Shares of SSS and GSIS in the Small Business Guarantee and Finance Corp.

DOJ OPINION NO. 032, s. 2006 May 19, 2006 Ms. Zorayda Amelia C. Alonzo Chairperson and Chief Executive Officer Small Business Guarantee and Finance Corporation (Small Business Corporation) 17th & 18th Floors, 139 Corporate Center 139 Valero Street, Salcedo Village 1227 Makati City Madam: This refers to your request for opinion regarding the legality of (a) the redemption option on the preferred shares of the Social Security System (SSS) and the Government Service Insurance System (GSIS) in the Small Business Guarantee and Finance Corporation (SB Corp.),and (b) the amendment of the terms and features of the said preferred shares as approved by SB Corp.'s Board of Directors and ratified by its stockholders. The request, it appears, was precipitated by the apparently conflicting positions taken by the SSS and GSIS, on one hand, and the SB Corp.,on the other, concerning the said issues raised. On the legality of the redeemable feature of the preferred shares, both the SSS and GSIS, which, admittedly, account for 23% of the Corporation's capitalization as of December 2005, are of the position that the certificate of stock of its preferred shares expresses the contract between SB Corp. and its stockholders; and that the redemption option feature of the preferred shares as approved by the Board of Directors was not contrary to SB Corp.'s Charter or any law for that matter. Upon the other hand, SB Corp.,which is inclined to oppose the preferred shareholders' redemption option, is of the position that, if granted, the redemption of the preferred shares will definitely have adverse effects on the Corporation's financial status and its capacity to meet its short and medium-term commitments to the National Government as contained in the Medium Term Development Plan, as well as to its foreign funding sources; and that, specifically, the redemption will impact on the Corporation's liquidity, capital adequacy, borrowing limit and covenants and commitments to its foreign creditors. TADIHE It adds that while the stockholders' redemption option is grounded upon the Corporation Code, as oft-cited legal basis, it believes that the Code is supplementary only to the SB Corp. Charter and R.A. No. 6977 1 and, in case of conflict of the Code and R.A. No. 6977, the provisions of the latter must prevail. Finally, it stresses that the stock redemption option is contrary to the spirit and intent of its Charter, which mandates the two institutions' equity infusion in the Corporation and assures them of seats as members of the Board of Directors; and that there is no provision in the law which gives such features to the preferred shares of SSS and GSIS. Relative to the amendment of the features of the preferred shares, both the SSS and GSIS believe that the stock certificate, being a contract between the Corporation and its stockholders, any amendment to the terms and conditions thereof requires the concurrence of both parties and cannot be unilaterally amended by the Corporation, more so if the terms of the issue are indicated on the certificate itself, as in the case of the shares in SB Corp. of both SSS and GSIS. SB Corp.,however, is of the position that the decision of SB Corp.'s Board of Directors, as ratified by its stockholders, can legally amend the features of the preferred shares so long as the new features are not contrary to the Charter of SB Corp. and the Corporation Code. Hence, this query. Please be informed that the Secretary of Justice, pursuant to law and precedent, renders opinion or gives legal advice only upon request of national government functionaries, such as heads of departments, chiefs of bureaus and offices of equivalent rank and then only on specific questions of law arising in the performance of their respective powers and duties. Accordingly, he has, in practice and precedent, consistently declined to render opinion or give legal advice upon request of other public officers and employees and private individuals and entities. 2 By explicit provision of law, the Office of the Government Corporate Counsel (OGCC) is "the principal law office of all government-owned or controlled corporations" and that "to enable it to discharge its functions as such, it shall be the duty of all said corporations to refer to it all important legal questions for opinion, advice and determination, all proposed contracts and all important cases for his services." 3 Moreover, the resolution of your query would inevitably involve a determination of the validity/propriety of the action of SB Corp.'s Board of Directors, over which the Secretary of Justice exercises no revisory authority. 4 As an alternative, however, since the subject matter of your query necessarily involves a controversy among SSS, GSIS and the SB Corp., all of which are government-owned and controlled corporations, arising from the interpretation and application of the provisions of the Charters of the SB Corp., GSIS and SSS and the Corporation Code, the subject issues are matters proper for administrative settlement or adjudication under Presidential Decree No. 242, 5 as adopted in Chapter 14, Book IV of the Executive Order No. 292, 6 which reads: SEC. 66. How Settled . All disputes, claims and controversies, solely between or among departments, bureaus, offices, agencies and instrumentalities of the National Government, including government-owned or controlled corporations, such as those arising from the interpretation and application of statutes, contracts or agreements, shall be administratively settled or adjudicated in the manner provided in this Chapter. This Chapter shall, however, not apply to disputes involving the Congress, the Supreme Court, the Constitutional Commissions, and local governments. DHEcCT SEC. 67. Disputes Involving Questions of Law . All cases involving only questions of law shall be submitted to and settled or adjudicated by the Secretary of Justice as Attorney-General of the National Government and as ex-officio legal adviser of all government-owned or controlled corporations. His ruling or decision thereon shall be conclusive and binding on all parties concerned. SEC. 68. Disputes Involving Questions of Fact and Law . Cases involving mixed questions of law and of fact or only factual issues shall be submitted to and settled or adjudicated by: (1) The Solicitor General, if the dispute, claim or controversy involves only departments, bureaus, office and other agencies of the National Government as well as government-owned or controlled corporations or entities of whom he is the principal law officer or general counsel; and (2) The Secretary of Justice, in all other cases not falling under paragraph (1). As a matter of procedure, the petition for administrative settlement of disputes or controversies shall be signed by the chief of the office, bureau or agency concerned, copy furnished the other party as respondent. The petition shall state the name(s) and addresses of all the parties, the legal question(s), the factual issues and all the relief(s) sought. 7 Enclosed herewith, for your reference and guidance, is a copy of this Department's Administrative Order No. 121 dated July 25, 1973, which provides for the rules concerning the administrative settlement or adjudication of cases under P.D. No. 242, as adopted in the Administrative Code of 1987. TaCDIc Very truly yours, (SGD.) RAUL M. GONZALEZ Secretary Footnotes 1. Magna Carta for Small Enterprises (1991). 2. Secretary of Justice Opn. No. 14, current series; Opn. Nos. 3 and 67, s. 2001. 3. Ibid .,Opn. No. 20, current series; Opn. Nos. 20 and 76, s. 2004; Opn. No. 73, s. 2003. 4. Ibid .,Opn. Nos. 5 and 15, s. 2004; No. 4, s. 2002. 5. Prescribing the Procedure for Administrative Settlement or Adjudication of Disputes, Claims and Controversies Between or Among Government Offices, Agencies and Instrumentalities, Including Government-Owned or Controlled Corporations, and for Other Purposes. 6. Administrative Code of 1987. 7. Supra, Opn. No. 9, current series; Opn. No. 30, s. 2005.