PSE Circular for Brokers No. 2144-98

September 15, 1998 PSE CIRCULAR FOR BROKERS NO. 2144-98 September 14, 1998 PHILIPPINE STOCK EXCHANGE Disclosure Department Listings & Disclosure Group 4th Floor, Phil. Stock Exchange Centre Ortigas Center, Pasig City Gentlemen : We reply to your request for clarification/verification on the news article captioned "Danding may lose SMC voting rights" published in the September 14, 1998 issue of the Manila Times. LexLib This company can comment only on the proposed amendment to its By-laws. Under Philippine law, dispositions of corporate assets are within the authority of the Board of Directors. Stockholders approval is required only when such disposition involves all or substantially all of the assets of the company . This is the principle that governs asset dispositions of all Philippine corporations, whether publicly-listed or not. This same principle has always governed asset dispositions of the Company. In 1987, shortly after the Philippine government sequestered two large blocks of shares of the Company, the Board of Directors, at the instance of the government's director representatives, proposed the addition of Article V as a totally new provision into the Company By-laws. Article V imposed restrictions stricter than what the law provides on the disposition of assets. It also contained provisions restricting the ability of the Company to make investments and to enter into management contracts. As adopted by the Board of Directors on June 25, 1987, the original Article V of the Company By-laws provided. "Article V SECTION 1 . The following acts shall require the vote of stockholders owning at least 2/3 of the outstanding capital stock. (a) Sale of all or substantially all of interest in subsidiaries or affiliates unless the aggregate transaction value of the interest sold does not exceed P500 Million. (b) Investments that involve an outlay of more than P500 Million. (c) Management contracts where (a) a stockholder or stockholders representing the same interest of both the managing and the managed corporation own and control more than one third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation or (b) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the board of directors of the managed Corporation. (d) Non-allied investments for a purpose other than the primary purposes of the corporation." Seven years later, in 1994, prompted by the need for flexibility, Management proposed two amendments to Article V. First it moved to amend subparagraph (a) by redefining the cut-off from the former P500 Million to the present "10% of the total assets of the Corporation as reflected in its latest audited financial statements". Secondly, Management proposed that subparagraph (b) of Section 1 of Article V be altogether deleted. Management pointed out that the P500 Million ceiling was no longer meaningful given the magnitude of the Company's growing business, and the restriction deprived the Company of flexibility. Management also maintained that subparagraph (b) was unnecessary because Section 42 of the Corporation Code already required that investments of corporate funds in any other corporation or business or for any purpose other than the corporation's primary purpose be approved by stockholders representing at least 2/3 of the corporation's outstanding capital stock. With the support of government appointed directors, the Board of Directors agreed with Management's view and approved the amendments on January 27, 1994. At the 1994 annual stockholders' meeting, the stockholders, including the government representatives, ratified both amendments. As amended, Article V thus, presently reads. "Article V SECTION 1 . The following acts shall require the vote of stockholders owning at least 2/3 of the outstanding capital stock. (a) Sale of all or substantially all of interest in subsidiaries or affiliates unless the aggregate transaction value of the interest sold does not exceed 10% of the total assets of the Corporation as reflected in its latest audited financial statements. (As amended on 25 June 1987 and further amended on 20 April 1994). (b) Deleted (As amended on 20 April 1994). (c) Management contracts where (a) a stockholder or stockholders representing the same interest of both the managing and the managed corporation own and control more than one third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation or (b) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the board of directors of the managed Corporation. (As amended on 25 June 1987). (d) Non-allied investments for a purpose other than the primary purposes of the corporation. (As amended on 25 June 1987)." This year, in light of rapid and significant changes in business condition, Management proposes to make further changes to Article V by deleting subparagraphs (a) and (d) of Section 1. Management felt it imperative to propose the change to enable the Company to cope with prevailing and foreseeable major challenges in the business environment and to keep the Company attuned to the needs of the business. prLL Deletion of Article V, Section 1 (a) of the By-laws As stated, the Corporation Code requires stockholders approval of asset dispositions only if the disposition involves all or substantially all of the assets of the company . Article V, Section 1(a) however, even after the 1994 amendment, continues to impose a restriction greater than that required by the Corporation Code with respect to asset dispositions. It requires stockholder approval even if the asset disposition does not involve all or substantially all of the assets of the Company. Dynamic business conditions may require a company to restructure its investments and thereby divest business or assets. A company's decision to divest any business or asset is dictated by considerations of competitive advantage and better asset utilization, rather than by the size or value of the interest. While a corporate asset may be large and of significant value, its disposition may be more beneficial to the company if the proceeds therefrom could be put to better use. For example, the Company's interest in Nestle Philippines, Inc. while large and profitable, is a passive investment. Management feels that its disposition can unlock the true value of the investment, which can better contribute to the Company's financial strength. A cut-off on divestments, whether in terms of a percentage of the Company's total assets or by some other measure, is therefore not relevant to making a decision on the wisdom or merit of an asset disposition. The need for stockholder approval only slows down the Company's ability to close transactions. This can easily result in lost opportunities and lost competitive advantage, which the Company cannot afford, particularly in times of economic crisis such as that obtaining today. The powers of the Company's Board are, thus, curtailed by a self-imposed limitation which does not apply to the boards of other large publicly listed companies. Management therefore proposes the amendment to give the Company the ability to swiftly respond to changing conditions and take advantage of business opportunities, and to restore the Company to a position of equal footing with all other Philippine public companies bound only by the provisions of the Corporation Code. Deletion of Article V, Section 1(d) of the By-laws Article V, Section 1(d) of the Company By-laws, requires approval by stockholders owning at least 2/3 of the outstanding capital stock of the Company for non-allied investments for a purpose other than the primary purposes of the Corporation. However, Section 42 of the Corporation Code already requires 2/3 stockholders approval for investment of corporate funds in any other corporation or business or for a purpose other than the company's primary purpose. Article V, Section 1(d) of the By-law, therefore, merely reiterates Section 42. Its deletion will not deprive the stockholders of their right to participate in any decision to make non-allied investments because the Company must at all times, comply with Section 42 of the Corporation Code. Section 42 provides adequate and sufficient protection to stockholders. On August 21, 1998, the Board of Directors unanimously approved the deletion of subparagraphs (a) and (d) of Article V, Section 1. The government representatives in the Board supported and voted for the amendments. Upon ratification by the stockholders, Article V, Section 1 of the By-laws will read as follows: "Article V SECTION 1. The following acts shall require the vote of stockholders owning at least 2/3 of the outstanding capital stock. (a) Deleted (As amended on 12 November 1998). (b) Deleted (As amended on 20 April 1994). (c) Management contracts where (a) a stockholder or stockholders representing the same interest of both the managing and the managed corporation own and control more than one third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation or (b) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the board of directors of the managed Corporation. (As amended on 25 June 1987). (d) Deleted (As amended on 12 November 1998)." Very truly yours, (SGD.) FRANCIS H. JARDELEZA Senior Vice-President, General Counsel & Assistant Corporate Secretary