Sycip Salazar Hernandez & Gatmaitan

May 13, 2002 SEC OPINION Sycip Salazar Hernandez & Gatmaitan 105 Paseo De Roxas Makati City Gentlemen : This refers to your memorandum dated April 22, 2002 as a supplement to your previous letter regarding the decrease in the subscribed capital of your client, Mindanao Portland Cement Corporation ("Mindanao Portland") effected in September 1996. In connection with the application for increase of authorized capital stock filed by your client, Mindanao Portland, you were requested by this Office to explain the decrease in the subscribed capital stock in the amount of P1,494,113,371.11 which appears based on the amount of subscribed capital stock appearing the last increase in capital stock approved on September 6, 1996 (P2,697,121,655.96) and the Audited Financial Statements as of December 31, 2000 and List of Stockholders as of December 21, 2000 (P1,203,008,184.19).Accordingly, your client was advised to decrease its authorized capital stock by the amount of the decrease in Eagle's subscription or 1,494,113,372 before its application for increase will be acted on. Briefly, the corporation increased its authorized capital stock from P20 million to P3 billion. Said increase was approved by the Securities and Exchange Commission on September 6, 1996. Of the increased amount, Eagle Cement Corporation ("Eagle") subscribed to 268,200,000,000 shares worth P2,682,000,000 at the par value of P.01 each share and paid P1,187,886,628. On September 12, 1996, MPCC and Eagle entered into an amendatory agreement ("The Agreement") to the subscription relative to the 1998 increase of capital stock. Under the "agreement",Eagle was released from subscribing to 149,411,337,200 shares worth P1,494,113,392. Pursuant to the agreement, Eagle's earlier payment of P1,187,886,628 was applied to the full payment of 118,788,622,800 shares. As a result of the reduction in Eagle's original subscription the subscribed capital of MPCC was decreased by P1,494,113,372. As stated, in the audited financial statements of MPCC since 1996, the subscribed capital of MPCC has always been as decreased. The original subscription of Eagle as well as the originally unpaid subscription of P1,494,113,372 (which was cancelled by "the agreement") were not reflected in the said statements. MPCC submits the following arguments: (a) Validity of the amendatory agreement MPCC reiterates its position in its letter to the SEC dated October 24, 1997 and December 2, 1997 that the execution of the amendatory agreement reducing Eagle's subscription was valid. Under the "agreement",the Corporation released Eagle from the remaining balance of the subscription because with the additional capital infusion already provided by Eagle, the construction works required for the rehabilitation, refurbishing and upgrading of the Corporation's cement plant facilities were already satisfactorily completed. Hence, the capital infusion provided by Eagle already enabled the corporation to satisfactorily complete construction works, meet the target production of 30,000 bags of cement annually to generate revenues and ensured that the Corporation had a source for immediately available funds. No prejudice to the financial plans or operations of the corporation resulted from the execution of the "agreement". Citing the case of Lingayen Gulf Electric Power Company Inc. vs. Baltazar, 93 Phil. 404, you claim that a release from a subscription agreement, supported by consideration is valid. In the present case, the stockholders of the corporation consented to the release of Eagle from payment of the balance of its subscription. The release was valid because Eagle has completely satisfied the capital infusion requirements of the corporation with its contribution. Further, you allege that even with the reduction of Eagle's subscription to P1,187,886,628, the corporation has still complied with the provisions of the Corporation Code requiring that at least 25% of the authorized capital stock be subscribed and 25% of the subscribed capital stock be paid. Section 38 of the Corporation Code prescribes the procedure to be complied with to effect a legal increase or decrease of the capital stock which is now subject to prior approval of the Securities and Exchange Commission. It provides that: ESIcaC "Section 38 ... No corporation shall increase or decrease its capital stock ...unless approved by a majority vote of the board of directors and, at a stockholders' meeting duly called for the purpose, two-thirds (2/3) of the outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Written notice of the proposed increase or diminution of the capital stock ...and of the time and place of the stockholders' meeting at which the proposed increase or diminution of the capital stock ...is to be considered, must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. A certificate in duplicate must be signed by a majority of the directors of the corporation and countersigned by the chairman and the secretary of the stockholders' meeting, setting forth the following: (1) That the requirements of this section have been complied with; (2) The amount of increase or diminution of the capital stock; (3) If an increase of the capital stock, the amount of capital stock or number of shares of no-par stock thereof actually subscribed, the names, nationalities and residences of the persons subscribing, the amount of capital stock or number of no-par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no-par stock allotted to each stock-holder if such increase is for the purpose of making effective stock dividend therefor authorized; (4) Any bonded indebtedness to be incurred, created or increased; (5) The actual indebtedness of the corporation on the day of the meeting; (6) The amount of stock represented at the meeting; and (7) The vote authorizing the increase or diminution of the capital stock, or the incurring, creating or increasing of any bonded indebtedness. Any increase or decrease in the capital stock or the incurring, creating or increasing of any bonded indebtedness shall require prior approval of the Securities and Exchange Commission. One of the duplicate certificates shall be kept on file in the office of the corporation and the other shall be filed with the Securities and Exchange Commission and attached to the original articles of incorporation. From and after approval by the Securities and Exchange Commission and the issuance of its certificate of filing, the capital stock shall stand increased or decreased ...as the certificate of filing may declare: Provided ,That the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the treasurer of the corporation lawfully holding office at the time of the filing of the certificate, showing that at least twenty-five (25%) percent of the amount such increased capital has been subscribed and that at least twenty-five (25%) percent of the amount subscribed has been paid either in actual cash to the corporation or that there has been transferred to the corporation property the valuation of which is equal to twenty-five (25%) percent of the subscription; Provided, further ,That no decrease of the capital stock shall be approved by the Commission, if its effect shall prejudice the rights of the corporate creditors. xxx xxx xxx" Pursuant to the aforequoted provision, the capital stock of a corporation stands increased or reduced only from and after approval and the issuance by the SEC of a certificate of filing of increase or decrease of capital stock .It is settled rule that a corporation may increase or decrease its capital stock when there is a statutory authority for it to do so and it complies with the conditions and formal requirements prescribed by the statutes (11 Fletcher Cyc. Corp.,Sec. 5128).Such that it has no power in the absence of authority from the legislature, to reduce the same, either directly or indirectly, than it has to increase the same ...Any reduction of capital stock can be effected only in the manner provided by statute or charter, at least so far as it affects the rights of creditors. [ Lopez, Corporation C od e of the Philippines, p. 538 citing Botz v. Helvering, 134 F (2d) ]. In the case of Mindanao Portland Cement Corp., the release of Eagle Cement from its subscription amounting to P1,494,113,372, unmistakably resulted in the reduction of the capital stock of the corporation. This was made by the corporation without complying the minimum requirements prescribed under Section 38 of the Corporation Code. As you alleged in your letter, the amendatory agreement releasing Eagle from its subscription was ratified only later after the release was effected, that is, on September 10, 1999 or three years after the amendatory agreement was executed and implemented. Neither was the decrease approved by the Securities and Exchange Commission. Section 122 of the Corporation Code explicitly provides that "except by decrease of capital stock and as otherwise allowed by the Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities." Subscription receivables form part of the assets of the corporation. Thus, a release of a subscriber from the payment of his unpaid subscription may be effected through a reduction of the capital stock, and as against creditors, such reduction can take place only in the manner and under the conditions prescribed by Section 38. Further, "the Trust Fund doctrine considers this subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no part of the subscribed capital may be returned or released to the stockholder without violating this principle" ( NTC vs. CA, G.R. No. 127937, July 28, 1999 ). You argue that the provision does not provide when a corporation should decrease its capital stock as the same could only be determined by the corporation itself. Contrary to your stance, Section 38 mandatorily sets forth the manner by which the decrease should be accomplished. And that procedure can not be dispensed with. The Commission does not interfere with the business judgment of the corporation as to when the decrease should be made. But still, the procedure and requirements have to be complied with at any time when the corporation decides to decrease its capital stock. In one case, the corporation reduced its capital stock by 50% and the subscribers released from the obligation to pay any unpaid balance of their subscription in excess of 50% of the same. The formalities prescribed in Section 17 of the Corporation Law (Act No. 1459) relative to the reduction of the capital stock were not observed, nor was any certificate filed in the Bureau of Commerce and Industry showing such reduction. In that case, the Court ruled that releasing the shareholders from their obligation to pay 50% of their respective subscriptions was an attempted withdrawal of so much capital from the fund upon which the company's creditors were entitled ultimately to rely and, having been effected without compliance with the statutory requirements, was wholly ineffectual. It further clarified that a corporation has no power to release an original subscriber to its capital stock from the obligation of paying for his shares, without a valuable consideration for such release; and as against creditors, a reduction of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the charter or the articles of incorporation, ... Strict compliance with the statutory regulations is necessary. (Philippine Trust Co. vs. Rivera, 44 Phil. 470) Similarly, in the case of Lingayen Gulf Electric Power Corp. vs. Baltazar which you cited in your letter, the reduction of capital stock was invalidated by the Court precisely for non-compliance with the requirements set forth in the law. In that case, the stockholders' resolution approving the release of a stockholder from his liability for unpaid subscription, was not validly passed for lack of quorum. Verily, as expounded by the Court in the said decision, in particular instances, as where it is given pursuant to a bona fide compromise ,or to set off a debt due from the corporation ,a release supported by consideration, will be effectual as against dissenting stockholders and subsequent and existing creditors, a release which might have originally been held invalid may be sustained after a considerable lapse of time. The exception in this instance only refers to the requirement of "consent of stockholders",that is, even without mustering the required vote of the stockholders, the release may still be effected as against the dissenting stockholders. The same does not however imply in any way that the procedure under Section 38 may be waived absolutely. Hence, it may be said that the decrease in capital stock of your client has not yet taken effect until after the issuance by the Commission of the Certificate of Filing of Decrease of Capital Stock. Accordingly, the subscribed capital stock of the corporation as of September 6, 1996 (when the increase in the authorized capital stock of your client was approved by the Commission) still stands. Very truly yours, (SGD.) BENITO A. CATARAN Director Company Registration and Monitoring Department