Mr. Rolando D. Balleras

May 2, 1980 Mr. Rolando D. Balleras President Basic Integrated Management, Inc. Suite 1123 Sarmiento Bldg. Ayala Ave., Makati, MM Dear Mr. Balleras: This is to formally acknowledge receipt of your letter-query dated February 2, 1980 relative to a condominium corporation that you intend to organize. You stated in your letter that the proposed firm will be capitalized at Five Million Pesos (P5M) divided into five million (5,000,000) shares consisting of two million (2,000,000) common stocks and three million (3,000,000) preferred stocks, both with par value of One Peso (P1.00); that you intend to meet the paid-up capital requirement of Two Hundred Fifty Thousand Pesos (P250,000.00) through the subscription of P1,000,000.00 worth of common stocks only; that after its registration, the preferred shares will be offered and issued to the Land Bank bondholders on a one-to-one basis in order to entice bondholders who will presumably enjoy the following benefits: (a) Prevailing market value of said bonds is 50 to 60% of face value, (b) preferred shares will earn 12% annual interest compared to 6% annual interest of said bonds, (c) seat in the Board of Directors will be allocated for preferred shareholders, and (d) They shall be allowed to designate the comptroller of the corporation; that the proposed corporation will derive the following benefits: (a) It shall earn a 9% effective interest income from said bonds (b) The Land Bank shall treat it as a priority client and will charge only 16% annually as a priority client, compared to prevailing loan interest of 21%. (c) It can use said bonds as collaterals for loans in case of deficient security; and that the Land Bank of the Philippines will definitely benefit under said arrangement because the marketability of its bonds will be enhanced. Your question is whether or not the implementation of such scheme is legal. Your query may be divided into two parts: (c) the pre-incorporation portion, and (b) the post organization portion. This Commission has no objection to your plan for the first or the pre-incorporation portion, i.e., that you will allow subscription only on the common stocks, considering that the 20-25% requirements of the laws would be met. llcd Relative to your plan for the post organization portion by the issuance of preferred shares in exchange for Land Bank Bonds on a one-to-one basis, we believe that the same is legal provided that the transfer value of the Land Bank Bonds is equal to or is not more than the redemption value of the bonds at the time of exchange, based on the official redemption scale of the Philippine National Bank (PNB) or any of the government redemption outlets for Land Bank Bonds. Likewise, there is no legal impediment to the intention of the corporation to give the preferred shareholders a representation in the Board and the prerogative to designate the comptroller of the proposed firm. For the shares issued by a corporation are presumed to be equal, to wit: ". . . Except as otherwise provided by the articles of incorporation, as stated in the certificate of stock, each share shall in all respects equal to every other share." (Sec. 5, Act 1459, as amended.) Thus, where the articles of incorporation and the certificate of stock are silent on the question of voting rights, all issued shares shall be considered to have the right to vote and be voted for. Nevertheless, the said preference accorded to preferred shares should be specified both in the articles of incorporation and certificates of stock. However, with respect to your observation that preferred shares will automatically earn 12% annual interest as compared to the 6% annual interest of the bonds in question, please be advised that preferred shares shall only be entitled to receive dividends of 12% per annum payable out of surplus profits. If the net assets are insufficient to pay such preferred shares, either in whole or in part, any unpaid portion shall be charged against future surplus profits before any dividends are paid to common shares. For if the corporation would be made liable for interest on its preferred stocks, the contract of subscription between the corporation and the subscribers will become one of loan and would make the corporation a debtor of the subscriber, which is against corporate jurisprudence. It is settled that "shares of stock are in the nature of choices of action but are not such in a strict sense; they are not credits or debts due from the corporation to the stockholder or money or securities, in the ordinary sense of these terms. (II, Fletcher, Cyc. of Corp. Sec. 82)." The shareholders, both common and preferred, are risk takers who are required to invest capital in the business and who can look only to what is left after the creditors are fully provided for (Ballantine 503, cited in III, Agbayani, Commercial Laws of the Philippines, p. 1219). llcd Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Director Corporate and Legal Department