China Banking Corporation

November 27, 1990 China Banking Corporation Dasmarias, Corner Juan Luna Sts. M a n i l a Attention : Mr . Arsenio L . Lim , Jr . (Vice-President & Corporate Secretary) Gentlemen : This refers to the letter of Siok Sin Hiang, Kok Guan Huan and Illuminada O. Huang dated September 6, 1990 requesting the Commission to order China Banking Corporation to honor or recognize their subscriptions to the proposed increase of capital of the Bank from P500 Million to P1 Billion, on the ground that they received the subscription agreement relative to their pre-emptive rights to subscribe to the increase, only after the deadline to subscribe and pay. As stated, the above-mentioned stockholders are residents of 181 Session Road, Baguio City which, at the time they were supposed to exercise their pre-emptive rights to subscribe to the proposed increase, were suffering from the July earthquake. Due to the catastrophe, they received the subscription agreement only on August 25, 1990, twelve (12) days after the deadline. Allegedly, they tried to exercise their pre-emptive rights but the Bank refused to admit their subscriptions, hence, their request. In your letter dated October 31, 1990 you manifested that the Bank's Executive Committee unanimously refused to accede to the request since to allow them would require the Bank to write again the other stockholders pursuant to the previous SEC letter dated October 9, 1990 which states that stockholders who failed to exercise their pre-emptive rights to subscribe to the proposed increase within the prescribed period, may be allowed to exercise the same, provided that all previous non-subscribing stockholders together with other stockholders who are interested, are also given the opportunity to subscribe again. Allegedly, this procedure would delay the Bank's timetable to become a universal bank which is already overdue due to some unexpected complications that it encountered. In the previous letter of the Bank dated August 31, 1990 the reason given why the stockholders failed to exercise their pre-emptive rights was not specifically mentioned. It merely stated that they failed to exercise their rights on time for one reason or another. Thus, to be fair to all stockholders, the Commission opined that stockholders who failed to exercise their pre-emptive rights to subscribe to the increase of capital of the Bank on time, may be allowed to subscribe even beyond the prescribed period, provided all the previous non-subscribing stockholders are also given the opportunity to subscribe together with other stockholders who are interested. In the instant case, however, the failure of the stockholders to exercise their rights was due to a "fortuitous event". It is worth mentioning along this line that to constitute a valid waiver of a right, which may either be expressed or implied, the person waiving the right must have the actual knowledge that he has a certain right to waive. In the present case, the above-mentioned stockholders took hold of the subscription agreement only after the lapse of the prescribed period. Therefore, the failure of said stockholders to notify their intention to subscribe within the prescribed period due to the catastrophe should not be treated as an implied waiver on their part. Because of the uncontrollable event, the bank should have given the stockholders living within the calamity area, a reasonable opportunity to exercise their pre-emptive rights. Likewise, the Commission had occasion to rule that if the shares corresponding to one stockholder are not subscribed or purchased by him, it does not follow that said shares shall again be offered on a pro-rata basis to stockholders who already took advantage of their right of pre-emption. This is because for as long as they exercise their pre-emptive rights, their relative and proportionate voting strength in the corporation will not be affected adversely. Thus, the shares may be offered to non-stockholders of record on a first-come, first-serve basis without violating the pre-emptive rights of the stockholders. The Commission, however, considers it a sound corporate practice to offer always the remaining shares to interested stockholders of record whenever practical and feasible before offering them to third parties. ( SEC Opinion dated September 24, 1974 ) It appears therefore that the reoffering of the unsubscribed portion to the existing stockholders is not mandatory. Thus, taking into consideration the circumstances surrounding the instant case, the Commission En Banc, in its meeting of November 20, 1990, resolved to allow the Bank to grant the request of the above-mentioned stockholders to subscribe to the proposed increase even without giving the other stockholders who already subscribed thereto the opportunity to subscribe again. cdll (SGD.) RODOLFO L. SAMARISTA Associate Commissioner