Mr. Mitsuhiro Otsuki

July 16, 1996 Mr. Mitsuhiro Otsuki The Tokai Bank, Limited 9th Flr., Metrobank Plaza Building, Sen. Gil J. Puyat Ave., Makati Metro Manila Sir : This refers to your letter dated June 25, 1996, requesting opinion on the following queries. (1) Are preferred shares voting or non-voting? (2) Are preferred shares counted or considered for purposes of determining Philippine national status when 60% of the capital stock is required to be owned and held by Philippine nationals an 40% by foreign nationals? (3) Is the following capital structure legally possible? An existing company owning land and factory , of which 60% of its shares is held by a Philippine corporation and 40% by a Japanese corporation: A. number of shares amount/share held by 400,000 (regular) 100 peso Japanese Co. 600,000 (preferred) 1 peso Philippine Co. If possible, is it legal for the Articles of Incorporation to have the following clause? "When the profit is to be given to shareholders in any way, including cash dividends or assets allocation in case of the company's liquidation, the value of the allocation to the shareholders shall be determined based on the total face value but not on the number of shares ." (4) If Structure A is not possible, what is the legal explanation, and, is the following structure legally possible? B. number of shares amount/share held by 400,000 (regular) 100 peso Japanese Co. 600,000 (preferred) 1 peso Philippine Co. The Articles of Incorporation, in the above structure will also contain the provision in A basing the value of allocation on the total face value and not on the number of shares. Anent query No. 1, Section 6 of the Corporation Code provides in part: "SECTION 6. Classification of shares . . . . " Except as otherwise provided by the articles of incorporation and stated in the certificate of stock , EACH SHARE shall be equal in all respects to every other share." (Emphasis supplied) Thus, where the Articles of Incorporation and the certificate of stock are silent on the matter of voting rights, all issued shares, regardless of their class nomenclature , shall be considered to have equal voting rights. Relative to the second issue, "In the absence of special provisions the holders of preferred stock in a corporation are in precisely the same position , both with respect to the corporation itself and with respect to the creditors of the corporation, as the holders of common stock , except only that they are entitled to receive dividends on their shares, to the extent guaranteed or agreed upon, before any dividends can be paid to the holders of common stock. They are stockholders in the corporation , with all the rights and liabilities of stockholders and are not creditors of the corporation , unless made such by valid provisions in their contract, except in a limited and peculiar sense in some degree assimilating that relation, as upon dissolution, and the fact that the dividends are, in terms, guaranteed does not make them creditors." (11 Fletcher Cyc. Corps. Sec. 5290) Accordingly, as a general rule, they are considered in the computation of the 60-40% Filipino-alien equity percentage requirement, unless the law covering the type of business to be undertaken provides otherwise. As to the percentage requirement in the case of " land ownership ", please find attached herewith a xerox copy of the SEC previous opinion on the matter Re: Letter to Joaquin Cunanan and Company dated December 27, 1995. Under Structure A in your letter, while the distribution in the number of shares is allowable, the agreements as to the distribution of dividends is questionable. Section 43 of the Corporation Code, quoted in part hereunder, explicitly provides that stockholders participation in dividend declaration is based on the outstanding capital stock held by them, not on the amount paid by him on account thereof. "SECTION 43. Power to declare dividends . The board of directors of stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them : Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid: Provided further, That no stock dividend shall be issued without the approval of the stockholders representing not less than two-thirds (2/3) of the outstanding capital stock of a regular or special meeting duly called for the purpose. . . . ." (Emphasis supplied) The terms " outstanding capital stock " is defined in the Corporation Code as follows: "SECTION 137. Outstanding capital stock defined . The term " outstanding capital stock ", as used in this Code, means the total shares of stock issued to subscribers or stockholders, whether or not fully or partially paid, (as long as there is a binding subscription agreement) except treasury shares." (Emphasis supplied) Accordingly, dividends shall be declared on the basis of the number of shares held by the stockholders, not on the amount paid in consideration thereof. However, holders of preferred shares may be given preference over common shares in the distribution of dividends and the extent of their preference depends upon the terms indicated in the Articles of Incorporation, but the distribution of dividends to preferred shareholders must always be based on the number of shares held by them. Relative to Structure B , since all the shares are classified as common shares, ("regular" as termed in your letter) they are to be treated as equal in all respect, and hence, they are not supposed to be given different par values. If the intention is to give certain shareholders different rights, then the shares of the corporation may be divided into different classes with privileges specifically indicated in the Articles of Incorporation. In such a case, the higher class of shares may be given a corresponding higher par value. LexLib Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner