The Secretary

August 14, 1989 The Secretary Committee on Trade and Commerce Office of Senator Sotero H. Laurel 3/F ECJ Condominium Real Cor. Arzobispo Streets Intramuros, Manila Sir : This refers to your letter, dated July 17, 1989, requesting for comments of the Commission on Senate Bill No. 1096, entitled "An Act Instituting an Optional Shareholding Scheme in Favor of Regular Supervisory or Rank and File Employees in Private Corporations and For Other Purposes". LibLex Section 1 of Article XII of the Philippine Constitution provides: "SECTION 1. The goals of the national economy are a more equitable distribution of opportunities, income, and wealth ;a sustained increase in the amount of goals and services produced by the nation for the benefit of the people, and an expanding productivity as the key to raising the quality of life for all, especially the underprivileged. One of the goals of the national economy as enunciated in the aforecited provision of the Constitution, is a more equitable distribution of opportunities and wealth. The proposed bill is therefore in accord with the above national policy since it is directed to encourage equity participation thereby ameliorating the economically underprivileged employees. However, it is a well-recognized fact that a person has the right to choose the group with whom he can associate to organize a business. Thus, the formation of a "close corporation" is given a special recognition under the Corporation Code, taking into consideration that close corporations have special legitimate needs different from those widely held corporations, and treats them under a separate Title (Title XII), relaxing in their favor some of the general rules and requirements applicable to all business corporations. Where business associates belong to a small, closely-knit group, like a family, they usually prefer to keep the organization exclusive and would not welcome strangers. Since it is through their efforts and managerial skills that they expect the business to grow and prosper, it is quite understandable why they would not trust outsiders to come in and interfere with their management thereof, and much less share whatever fortune, big or small that the business may bring. (Comments, Notes and Selected Cases, Corporation C od e, Campos & Lopez-Campos). Recognizing the unique quality and legitimate needs of "close corporation", it is but fair to small investors to allow them to form "close corporations" limiting the shareholders to members of the family or to close business associates with whom they have trust and confidence. At any rate the Corporation Code has sufficient provision to protect public interest. Where the proposed business is affected with public interest the formation and in corporation of a close corporation is not legally possible. Under Section 96 of the Corporation Code, mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest cannot be incorporated as "close corporations". The Corporation Code, under Section 140 thereof, has further laid down a similar policy of authorizing the NEDA to recommend to the Batasang Pambansa (now Congress) the setting of maximum limits to family or group ownership of stocks in corporations vested with public interest. Thus, while we interpose no objection on the proposal to institute optional shareholding scheme in favor of employees in private corporations as the same is in accord with the government policy as enunciated in the Constitution, nevertheless, we, take exception to "close corporations" organized in accordance with the Corporation Code. Relative to the proposal to vest the National Labor Relations Commission (NLRC) the jurisdiction to hear decide any dispute or matter arising out of, involving or in connection with the shareholding scheme mandated in the proposed bill, it has to be emphasized that the SEC has been granted by Presidential Decree No. 902-A, as amended, the original and exclusive jurisdiction over all intra-corporate controversies. The law provides, thus: "SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange Commission over corporations, partnerships and other forms of associations registered with it as expressly granted under existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide cases involving: xxx xxx xxx b. Controversies arising out of intra-corporate or partnership relations ,between and among the stockholders, members or associates; between any or all of them and the corporation, partnership or association of which they are stockholders members or associates, respectively; and between such corporation, partnership or association and the state insofar as it concerns their individual franchise or right to exist as such entity".(emphasis supplied). It is very clear from the aforecited provision that settlements of intra-corporate conflicts are well within the exclusive jurisdiction of the SEC. Intra-corporate relation must be distinguished from employer-employee relationship .Jurisdiction over the former belongs to the SEC while that of the latter pertains to the NLRC. It is very evident that there exists an intra-corporate relationship in the proposed shareholding scheme. cdll Obviously, therefore, it is the Securities and Exchange Commission which has jurisdiction over cases arising out of, involving or in connection with the shareholding scheme. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman