LMG Chemicals, Inc.

July 28, 1988 LMG Chemicals, Inc. 7th Floor Chemphil Bldg., 851 Pasay Road, Makati, Metro Manila Attention : Mr . Rolando P . Navarro Corporate Secretary Sir : This has reference to your letter dated July 1, 1988, requesting for the opinion of this Commission on the queries posed therein. LexLib It appears therein that the respective boards of LMG Chemical, Inc. (LMG) and Chemphil Manufacturing Corporation (CMC) have made proposals for the merger of the two companies with the former as the surviving company. Said merger will be made in accordance with the provision of the law. LMG is a publicly listed company with 72% of its issued and outstanding capital stock owned by CIP, while 26.8% is held by Toyo Menka Kaisha (TMK).CMC on the other hand, is 99% owned by CIP. The merger would result in the shareholdings of CIP in LMG and correspondingly cause the dilution of the shareholdings of TMK in the said company. Under Section 39 of the Corporation Code, "all stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings unless such rights are denied in the articles of incorporation or an amendment thereto provided that such pre-emptive right shall not extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock in exchange for property needed for corporate purposes or in payment of a previously contracted debt ." Your queries are as follows: 1. Does the provision of Sec. 39 of the Corporation Code specifically the exception to the rule on the exercise of pre-emptive rights, as underscored, refer to mergers as contemplated under Title IX of the Corporation Code? 2. If the answer is in the affirmative, does this mean that TMK cannot demand, as a matter of right and by virtue of the merger, its pre-emptive rights in proportion to its shares in LMG Chemicals? Relative to your first query, the following ruling is squarely in point: "Where the shares are issued in exchange for property needed for corporate purposes, or for a debt previously contracted, the stockholder cannot demand his pre-emptive right. Thus, where the shares are issued by one corporation in exchange for shares in another corporation in pursuance of merger to which the former corporation is a party, the pre-emptive right does not exist , provided of course that the issue is made with the approval of the stockholders representing two-thirds of the authorized capital stock, and is not made in bad faith." (Campos Corporation Code, Comments, Notes and, Selected Cases, p. 649 citing Thom v. Baltimore Trust Co., 158 Md 352, 148 A-234 (1930) (Emphasis supplied). Anent your second query, and in view of our answer to your first query, TMK, therefore, cannot demand as a matter of pre-emptive right. Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman