Supreme Technetronic Corporation

April 14, 1987 Supreme Technetronic Corporation Pacific Banking Corp. Bldg. Ayala Avenue, Makati, MM Attention : Mr . Eddie R . Salvacion Gentlemen: This relates to your letter, dated February 26, 1987 requesting the opinion of this Commission on the queries posed therein. It appears that Supreme Technetronic Corporation is in the process of entering into a preliminary underwriting agreement with Corporacion Transnacional De Valores E Inversiones, S.A. of the Republic of Panama for the offering abroad of your preferred shares. In this connection, your queries are: Aware of the 60/40 constitutional limitation on local and foreign equity participation, and uncertain of whether the previously applicable "control test" is still possible, may you issue voting preferred shares limited to 40% of the equity while the rest of the preferred shares to be issued by the corporation in excess of 40% equity, be non-voting? In other words, your query is: Are non-voting shares excluded in the computation of the 60/40% Filipino-alien equity requirement under Section 2, Article XII of the Constitution of the Philippines? What is the effect should non-voting preferred shares issued to foreigners exceed 40% of the equity of the corporation. The pertinent provision of the Constitution under Article XII thereof reads thus: "SECTION 2. All lands of public domain, waters, minerals, coal, petroleum, and other mineral oils, all forces of potential energy, fisheries, forests, or timber, wildlife, flora and fauna, and other natural resources are owned by the State. With the exception of agricultural lands, all other natural resources shall not be alienated. The exploration, development, and utilization of natural resources shall be under the full control and supervision of the State. The State may directly undertake such activities, or it may enter into co-production, joint venture, or production-sharing agreements with Filipino citizens, corporations or associations at least sixty per centum of whose capital is owned by such citizens. . . . " (emphasis supplied) The issue raised in your queries focuses on the meaning of the word "capital" as used in the Constitution. Apropos of said issue, please be informed that the term "capital" is used synonymously with the term "capital stock" as meaning the amount subscribed and paid-in by the shareholders, or secured to be paid in, and upon which the corporation is to conduct its operation. (11 Fletcher, Cyc. Corps., 1958 Rev. Vol., sec. 5080, pp. 20-21). Legal jurisprudence is replete with authorities to the effect that the capital of a corporation is the fund or other property, actually or potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his exchange by it for property other than money. These funds comprise not only money or other property received by the corporation for shares of stock but all balances of purchases, money, or installments, due the corporation for shares of stock sold by it, and all unpaid subscriptions for shares. (Williams v. Brounstein, 1 F2d 470, cited in Fletcher, Supra.). The capital stock of a corporation is the amount paid in by its stockholders in money, property, or services with which it is to conduct its business, " and it is immaterial how the stock is classified " (Haggard v. Lexington Utilities Co., 26 Ky 251, 84 SW 2d 84, citing Fletcher, Cyc. Corps., perm. ed., sec. 5090). In view of the foregoing, it is opined that the term "capital" denotes the sum total of the shares subscribed and paid by the shareholders, or secured to be paid, irrespective of their nomenclature to be issued by the corporation in the conduct of its operation. Hence, non-voting preferred shares are considered in the computation of the 60-40% Filipino-alien equity requirement of certain economic activities under the Constitution. Generally, the formation and validity of a subscription to stock is governed by the laws of the country in which the corporation was created. (4 Fletcher, Cyc. Corps., 1965 Rev. Vol., sec. 1362). And, it has been held that a subscription to stock in a corporation in its legal effect, is governed by the provisions of the Constitution and must be effectuated in accordance with its terms. (McAlister v. Eclipse Oil Co., Tex. Civ. App., 79 SW 2d 895, 897, cited in Fletcher, Supra.) Quoted hereunder are the pertinent provisions of the New Civil Code as to the effects should subscription for non-voting preferred shares exceed the 40% limitation for foreign investment in such activities regulated by the Constitution, to wit: "ARTICLE 5. Acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity." "ARTICLE 1409. The following contracts are inexistent and void from the beginning: (1) Those whose cause, object or purpose is contrary to law, morals, good customs, public order or public policy. xxx xxx xxx Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman