The Association of State Prosecutors

November 20, 1986 The Association Of State Prosecutors And Fiscals Of The National Prosecution Service, Inc. (NAPROSA) Room 137, Mezzanine, Justice Building Padre Faura, Manila Attention : Atty . Bartimeo M . Velaquez President Sir : This relates to your letter, dated February 3, 1986, requesting authority from the Commission for that association to issue and sell bonds to your members and prospective members. Quoted are the pertinent provisions of the Corporation Code: "SECTION 36. Corporate Powers and Capacity . Every corporation incorporated under this Code has the power and capacity: xxx xxx xxx 7. To purchase, receive, take or grant, hold, convey, sell lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the constitution. xxx xxx xxx". "SECTION 38. Power to increase or decrease capital stocks; incur, create or increase bonded indebtedness. xxx xxx xxx. Non-stock corporations may incur or create bonded indebtedness, or increase the same, with the approval by a majority vote of the board of trustees and at least two-thirds (2/3) of the members in a meeting duly called for the purpose. Bonds issued by a corporation shall be registered with the Securities and Exchange Commission which shall have the authority to determine the sufficiency of the terms thereof." In relation to the foregoing, the Charter of NAPROSA, INC. expressly provides thus: "SECOND That the purpose for which the Association is formed are as follows: xxx xxx xxx 2. To acquire, purchase, own, hold, develop, lease, mortgage, pledge, sell, exchange or otherwise in any manner permitted by law, personal, real or intellectual properties of every kind or any interested therein that may be necessary to carry out its primary purpose. xxx xxx xxx". Whenever a corporation has the power to borrow or raise money, to purchase property, to contract for services or labor, to pay debts or take up bonds of another corporation, or to otherwise contract a debt, it has the implied power, as an incident thereto, to issue its bonds in payment or as security, provided it violates no express or implied prohibition or restriction in its charter or any other statute. (6A Fletcher, Cyc Corps.,1950 replacement vol.,sec. 2650, p. 22)."To hold that a corporation organized for any legitimate purpose did not have the power to borrow money and issue its notes, bonds or other evidences of indebtedness, to raise money to effectuate any lawful purpose connected with and germane to its corporate objects would be to deprive such corporation of the means of carrying out the purpose of its creation".(Peoria Star Co. v. Cutright, 115 Ill App. 492, cited in Fletcher, Supra)."No corporation, however, can lawfully issue bonds for a purpose which is entirely foreign to the objects for which it is created." (Fletcher, Supra.,sec. 2651, p. 27, citing Smith v. Alabama Life Insurance & Co.,4 Ala 558). By analogy, the following precedents are likewise cited relative to your case: "If the directors of a company are all its stockholders, then acting at a stockholders' meeting they may procure the issuance of bonds and distribute the same among themselves, in the absence of fraud upon creditors, for it is elementary that in such a case, all of the stockholders of a solvent corporation by unanimous consent may make any disposition of the company assets they desire." (Pueblo Foundry & Machine Co. v. Lannon, 68 Colo. 131, 187 Pac. 1031 cited in Fletcher, sec. 2651)."Also, such corporations, with the unanimous consent of its stockholders, may issue bonds for the benefit of individual stockholders, provided no third parties are injured." (Ibid). Considering the foregoing, your request may be favorably granted, subject to the limitation prescribed by statute, as well as NAPROSA's charter, to the effect that the power to sell the Association's credit by floating bonds must be necessary to the exercise of some granted power . Hence, pursuant to Section 38 of the Corporation Code, a certificate in duplicate signed by a majority of the directors and countersigned by the chairman and secretary of the meeting of members, setting forth the following, must be filed with this Commission, to wit: 1. That the requirements of Section 38 of the Corporation Code have been complied with; 2. Bonded indebtedness to be incurred or created; 3. The actual indebtedness of the corporation on the day of the meeting; 4. The number of members represented at the meeting; 5. The vote authorizing the creation or incurring of any bonded indebtedness. Such creation of bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with this Commission and attached to the original articles of incorporation. From and after approval by the Commission and its issuance of the certificate of filing, the creation of the bonded indebtedness is authorized as the certificate of filing may declare. Finally, your attention is invited to the provisions of Section 4 (b) of the Revised Securities Act which provide, thus: "(b) Notwithstanding the provisions of paragraph (a) of this Section and of the succeeding Sections regarding exemption, no commercial paper as defined in Section two hereof shall be issued, indorsed, sold, transferred or in any other manner conveyed to the public, unless registered in accordance with the rules and regulations that shall be promulgated in the public interest and for the protection of investors by the Commission. The Commission, however, with due regard to the public interest and the protection of investors, may, by rules and regulations, exempt from registration any commercial paper that may otherwise be covered by this paragraph. In either case, the rules and regulations promulgated by the Commission shall be subject to the approval of the Monetary Board of the Central Bank of the Philippines. The Monetary Board shall, however, have the power to promulgate its own rules on the monetary and credit aspects of commercial paper issues, which may include the imposition of ceilings on issues by any single borrower, and the authority to supervise the enforcement of such rules and to require issues of commercial papers to submit their financial statements and see periodic reports as may be necessary for such enforcement. As far as practicable, such financial statements and periodic reports when required by both the Commission and the Monetary Board, shall be uniform." Please be guided accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman