Atty. Sabino Padilla, Jr.

July 6, 2001 SEC OPINION Atty. Sabino Padilla, Jr. Padilla Law Office 7/F Padilla-De Los Reyes Bldg., 232 Juan Luna St.,Binondo, Manila S i r : This has reference to your letter dated April 23, 2001 requesting for a review and reconsideration of the opinion issued in the letter dated June 25, 1996 addressed to Mr. Cornelio B. Carunungan ruling that Sec. 7 of the Corporation Code which limits the voting privileges of founders' shares to five years is equally applicable to non-stock, non-profit corporations, such as the Knights of Columbus Fraternal Association of the Philippines Inc. "KCFAPI". Said ruling is premised on Sec. 87 of the Corporation Code which states: "The provisions governing stock corporations, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this title." The request for review or reconsideration of the subject opinion is anchored on the ground, among others, that there is substantial difference between the qualifications of a founder member and a purchaser of a benefit certificate who becomes 'regular and non-voting member' and therefore the ruling in the questioned opinion of June 25, 1996 does not affect the by-laws provision of KCFAPI on the limitation of the voting rights (but not the right to be voted) to the founder members in the election of trustees of subject association. It is thus alleged that the substantial difference between a founder member and a benefit certificate holder ('regular' and 'non-voting member') is that the former has contributed per share exactly the same amount as the common stockholders, but who insists on reserving to himself the right to vote and be voted in the election of directors, however, in the case of latter the holder does not contribute any amount to the capital of the association and his contributions for his benefit certificates are the equivalent of the premiums paid for life insurance or endowment policies which do not form part of the capital of KCFAPI. Based on the foregoing, you now seek confirmation of your view that the proviso limiting to founder members, the voting rights (but not the right to be voted),in the election of trustees remains a valid and operative provision in the KCFAPI's articles of incorporation and by-laws The Code does not, however, define the term "founders' shares," but as the name suggests these are shares issued to those who founded the corporation. As the original stockholders who initiated the business and assumed greater risks thereon, the law vests them, through the concept of founders' shares, with certain rights and privileges not enjoyed by the owners of other stock. Founders' shares are no different from management shares. ( 1 Lopez, The Corporation C od e of the Philippines, Annotated, p. 119 ).Founders' shares are, in English Company Law, shares issued to the founders of (or vendors to) a public company as a part of the consideration for the business or concession, etc.,taken over, and not forming a part of, the ordinary capital. As a rule, such shares only participate in profits after the payment of a fixed minimum dividend on paid-up capital ( Black's Law Dictionary pp. 656-657 ). On the other hand, the Founder Members conceived in the Knight of Columbus Articles and By-laws connotes a different meaning, thus: Section 2 of KCFAPI's by-laws provides and we quote: 1. Members in good standing of the knights of Columbus in the Philippines who have contributed a sum of not less than P500.00 under such terms as may be decided by the Board of Trustees; or 2. Councils of the Knights of Columbus in the Philippines to be represented by the Grand Knights thereof upon payment of the membership fee of P500.00 and under such terms as may be decided by the Board of Trustees; 3. Members of the Catholic Hierarchy of the Philippines may become Founder Members without the payment of P500.00 upon their formal acceptance of such Founder Members as may be offered to them by the Board of Trustees. Founder Members shall have the exclusive rights to vote in the election of the members of the Board of Trustees, choosing from among themselves or among the other members of the association who have attained at least the Third Degree of the Order of the Knights of Columbus and at any and all corporate purposes whatsoever. The rights and privileges exercised by Founder Members shall be transmitted to their qualified assignees in case of individuals, or successors in office in case of councils or members of the Philippine Hierarchy, provided that such assignees or successors in office should be members of the Knights of Columbus in the Philippines of goods standing. Should an individual Founder Member be also the holder of an office or position to which the rights of Founder Member is attached such individual may exercise the rights and privileges pertaining to the position he holds. B. Regular or non-voting members . Those who paid the membership dues which shall be determined by the Board of Trustees and who subscribed to one or more benefit certificates under any of the benefit plans operated by the Association. They shall exercise all the rights and privilege of members of the Association, except that which specifically mentioned in the immediately foregoing provisions as exclusively pertaining to Founder Members. Nothing in these provisions shall prevent and individual Founder Member from subscribing to one or more benefit certificates and correspondingly exercise all the rights and privileges pertaining to holders of such certificates. A careful reading of the aforequoted provisos shows that the founder shares concept as contemplated in stock corporation is totally alien from the Founder Member classification as contemplated in KCFAPI's by-laws. Furthermore, it should be stressed that Section 7 of the Code shall be applicable to non-stock corporations only when the same may be pertinent and in the absence of any specific provisions governing non-stock corporations. In the instant query, the surrounding circumstances indicate that the cited definitions of founders' shares have no bearing with the features of the Founder Member as found in the KCFAPI's by-laws and there is a specific provision under Title XI of the Code governing non-stock corporation. It can therefore be concluded that Sec. 7 of the Corporation Code finds no application to the Founder Members' rights under Sec. 2 of the association's by-laws. Instead, Section 89 of the Code in which the rights of members of any class or classes to vote may be limited, broadened or denied to the extent specified in the articles of incorporation or the by-laws shall be applicable. Stress is laid however to the fact that while the founder members have complete voting rights nonetheless the other members shall not be deprived of their privilege to vote on substantial and vital issues as provided under Section 6 of the Corporation Code which is equally applicable to non-stock corporations. The pertinent provision of said section reads thus: "Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; xxx xxx xxx 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation. Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights." The letter-writer's view that the proviso limiting to founder members the voting rights (but not the right to be voted) in the election of trustees remains a valid and operative provision in the KCFAPI's articles of incorporation and by-laws is thus confirmed. Very truly yours, (SGD.) FE ELOISA C. GLORIA Commissioner