Atty. Rosalie F. Borguilla

August 18, 1994 Atty. Rosalie F. Borguilla R.C. Garcia and Associates 4th Flr. Centro Bldg., 180 Salcedo St.,Legaspi Village, Makati, Metro Manila M a d a m : This refers to your letter of August 12, 1994 requesting opinion on the queries posed therein relative to quasi-reorganization. prcd As stated, a certain corporation which accumulated past losses, desires to undergo quasi-reorganization to wipe out its deficit. Said corporation has substantial increment in the market value of its properties and equipments which are sufficient to absorb the losses. As presumed in your letter, there will be an increase of capital after the quasi-reorganization which will be paid through subscription deposits and conversion of advances from stockholders. At the same time, there is a proposal to reduce the par value of the shares to P1.00. Queries: 1. Whether or not the appraisal increment of lands and improvements thereon, permanently installed fixed assets and other machineries and equipments of the corporation may be used to wipe out its deficit in the process of quasi-reorganization. 2. Considering that our client is a listed corporation, will it be necessary to obtain individual waivers of pre-emptive rights from all its stockholders? If not, what document/s will be submitted in lieu thereof? 3. Can the application for reduction of par value be filed simultaneously with and pursuant to an application for quasi-reorganization? Regarding the first query, the Commission has issued the following guidelines for approval of quasi-reorganization: cdll 1. That only companies which are financially in distress, may be allowed to undergo quasi-reorganization. 2. That the company has substantial increment in the market value of its fixed assets as appraised by a reputable licensed appraiser which is adequate to absorb its accumulated past losses. 3. That the appraisal increments to be considered in the plan shall be limited to real properties, permanently installed fixed assets ,and other machineries and equipment directly needed and actually used in the operations of the company .(Emphasis supplied) 4. That the appraisal increment of fixed assets undergoing repair or will require repair before the same can be put into productive use shall not be included in the appraisal of assets for purposes of quasi-reorganization. (Emphasis supplied) 5. The company shall present a viable project study on its future operations to support its quasi-reorganization. 6. That the remaining appraisal surplus set up in the books of the company after the deficit shall have been offset will not be used to wipe out losses that may be incurred in the future without prior approval of the Commission. 7. For purposes of dividend declaration, the retained earnings of the company shall be restricted to the extent of the deficit wiped out (and not yet recovered by accumulated depreciation on appraisal increment) by the appraisal surplus. 8. That after the quasi-reorganization of the company has been effected and approved by the Commission, the company shall disclose in all its financial statements for a minimum period of three (3) years the mechanics, purpose and effect of such quasi-reorganization on the financial condition of the company. Relative to the second query, the pertinent provision of the Corporation Code provides: "SECTION 39. Power to deny pre-emptive right . All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto; Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt." (Emphasis supplied) Thus, unless denied in the articles of incorporation or the issuance of shares falls under any of the exceptions enumerated above, all existing stockholders of record at the time of the increase of capital stock shall have the right, in preference to any other person, and as between themselves, to subscribe to the new stocks to be issued in connection with the increase of capital in proportion to the number of shares held by them. It is a generally accepted principle on statutory construction that there should be no distinction in the application of the law where none is indicated therein. Hence, there being no distinction, the above provision is applicable to listed companies. Your third query may be answered in the affirmative, provided however, that should the reduction involve a return of capital to stockholders, it should be solvent and should remain solvent after the partial return of capital is effected, and that consent of existing creditors should be obtained on the attendant decrease of capital stock. Please be advised accordingly. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner