Office of Senator Sotero H. Laurel

July 19, 1988 Office of Senator Sotero H. Laurel 3/F ECJ Building Real cor. Arzobispo Sts. Intramuros, Manila Attention : Mr . Robert E . Llantada Committee Secretary Sir : This refers to your letter, dated July 29, 1988, requesting for the comments of this Commission on Senate Bill No. 494, amending Section 44 of Batas Pambansa Bldg. 68, otherwise known as the Corporation Code of the Philippines. cdll Section 44, paragraph 1, of the Corporation Code of the Philippines is hereby amended as follows: SECTION 44. Power to enter into management contract . No corporation shall conclude a management contract with another corporation unless such contract shall have been approved by the Board of directors and by stockholders owning at least the majority of the outstanding capital stock, or by at least a majority of the members in the case of a non-stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose. Provided, that (1) where a stockholder or stockholders representing the same interest of both the managing and the managed corporations own or control more than one third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (2) where a majority of the members of the board of directors of the managing corporation also constitute a majority of the members of the board of directors of the managed corporation, then the management contract must be approved by the stockholders of the managed corporation owing at least two-thirds (2/3) of the total outstanding capital stock entitled to vote or by at least two-thirds (2/3) of the members in the case of a non-stock corporation. No management contract shall be entered into for a period longer than (five) THREE years for any one term. ANY RENEWAL OR EXTENSION OF A MANAGEMENT CONTRACT BETWEEN THE SAME PARTIES SHALL ONLY BE EFFECTIVE UPON DETERMINATION BY THE SECURITIES AND EXCHANGE COMMISSION THAT THE PROPOSED RENEWAL OF EXTENSION SHALL BE IN THE INTEREST OF THE MANAGED CORPORATION. (Amendments emphasized). As stated in the explanatory note of Senate Bill No. 494, the proposed amendment would restrain perpetuation of the dependent relationship between the managing corporation and the managed corporation to the possible detriment of the latter corporation. Thus, the Bill seeks to bring within the range of the regulatory powers of the SEC such renewals of management contracts, so as to ensure that perpetuation of management relationship redounds to the benefit of the managed corporation. The period of five (5) years representing the maximum term of management contract is sought to be reduced to a maximum of three (3) years, arguing that five years is too long a time for the state to be taciturn in its protective duties vis-a-vis the stockholders of the managed firm. Conformably to your letter of June 29, 1988, presented hereunder are our comments on Senate Bill No. 494: Section 44 of the Corporation Code is a remedial legislation which seeks to remedy or avoid abuses that have resulted from the conclusion of a management contract between a corporation and another corporation controlled by majority shareholders. Most often, the management corporation receives substantial management fees from the managed corporation which hardly makes any profit at all, if ever it does not incur a loss. ( Batasan Proceedings on Cabinet Bill No. 3, November 12, 1979 ). The unfortunate reality has come to be perceived that "ownership of corporate shares without appreciable corporate control, and control of corporate wealth without appreciable ownership, has become a natural phenomenon of our economic system." (Ballantine on Corp.,sec. 182, citing Detroit Edison Co. v. SEC, 119 F, (2d) 730, 739; and others).As aptly pointed out by the United States S.E.C.,"Like voting trusts, management contracts can create control without the necessity for any financial stake in the enterprise by the managers and serve as a means of discouraging others ....The management contract form of control avoids the necessity for offering to the public non-voting stocks or voting trust certificates, which, in view of the obvious disenfranchisement involved may be difficult to sell. In addition, the period of duration and right of renewal of such contracts are not presently regulated by statute .... (Such) contracts are obtained (by the sponsors) in a self dealing transaction in which no one represents the prospective shareholders ." (Ballantine on Corp.,Supra.,p. 418, citing S.E.C. report, Investment Trusts and Investment Companies (1941),part III, pp. 1881, 1882, n. 23. Emphasis supplied). In view of the foregoing, we interpose no objection to the bill limiting the term of management contract to a maximum period of three (3) years. On the matter of bringing within the range of the regulatory powers of the Securities and Exchange Commission the renewal or extension of management contracts, the same may be well justified by the provision of Section 3 of P.D. 902-A, granting the Commission absolute jurisdiction, supervision and control over all corporations, partnerships, or associations who are grantees of primary franchises; as well as Section 5(a) thereof, granting the Commission original and exclusive jurisdiction to hear and decide cases involving "devices or schemes employed by or any acts, of the board of directors, business associates, its officers or partners, amounting to fraud and misrepresentation which may be detrimental to the interest of the public and or of the stockholders partners, members of associations or organizations registered with the Commission." We trust that the foregoing merits your request. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman