Atty. Alejandro M. Villamil

August 10, 1995 Atty. Alejandro M. Villamil of Luzon Colleges, Inc. Dagupan City S i r : This refers to your letter dated July 31, 1995, requesting opinion on the queries posed therein relative to the effect of Section 7 of the Corporation Code and the SEC Opinion dated September 27, 1989 (the correct date of the opinion referred to in your letter) on the existing founders shares of Luzon Colleges, Inc. As stated, Luzon Colleges, Inc. was incorporated as a stock corporation in 1948. It has two classes of shares: founders and preferred. The articles of incorporation of the corporation states that only founders shares have the right to vote and the preferred shares cannot vote except in those cases provided for by law. However, preferred shares are given preference with respect to dividends. Luzon Colleges, Inc. is now in the process of amending its articles of incorporation by extending its corporate life; increasing its capital stock; and allowing all shares to enjoy equal rights and voting power. Your queries are summarized as follows: 1. Are the rights of preferred shares affected by the above-mentioned SEC opinion, particularly on the preference of dividend rights? 2. Is it legal for the corporation to retain the existing founders shares and thereafter issue common shares out of the proposed increase of capital stock to replace the preferred shares with a specific provision that all shares shall enjoy equal rights and voting power? 3. Is it necessary to recall all shares and replace it with common shares? prcd Section 7 of the Corporation Code provides: "SECTION 7. Founders' shares . Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks. Provided, that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. (Emphasis supplied) and the above-cited SEC opinion states in part: ". . . if a corporation does not file an amendment to its articles of incorporation to comply with the above-mentioned limitation period on or before May 1, 1982, the Commission will consider the limitation laid down by Section 7 of the Corporation Code as inserted into the articles of incorporation, on May 1, 1980. (SEC Opinions dated July 11, 1983, April 26, 1982 and May 5, 1982). Accordingly, the provisions in the articles of incorporation granting the founders' shares the exclusive right to vote and be voted for as directors shall be effective up to April 30, 1985. After said date, the holders of common and founders shares shall enjoy equal rights and voting power ." (Emphasis supplied) The limitation in the above provision refers only to the exclusive right to vote and be voted for in the election of directors , a right normally enjoyed by holders of common shares, the class of shares which are supposed to have complete voting rights. Thus, if such right is removed from the founders shares, the same should be transferred to the common shareholders who are supposed to exercise such right had there been no founders shares. Take note that under Section 6 of the Corporation Code, preferred shares can be denied the right to vote. Moreover, the SEC opinion clearly states that after the expiration of the limitation period, founders shares shall have equal rights with the holders of common shares ,other classes of shares not included. Therefore, preferred shares are not affected by the above provision of the Corporation Code and the SEC opinion. To hold otherwise, would be contrary to the provision of Section 6 of the Corporation Code, quoted hereunder, which expressly allows corporations to provide in their articles of incorporation classification of shares which may have such rights, privileges or restrictions as may be stated therein. "SECTION 6. Classification of shares . The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation : Provided, That no share may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares , unless otherwise provided in this Code: Provided, further, That there shall always be a class or series of shares which have complete voting rights. . . . " (Emphasis supplied) Accordingly, the present status of preferred shares remains even after the expiration of the period provided for under Section 7 of the Corporation Code, and therefore, there is no need to replace them with common shares coming from the proposed increase of capital stock of the corporation. In order to reflect the present status of the founders' shares, what the corporation should do is to amend its articles of incorporation renaming the existing founders shares to common shares but retain the status of preferred shares. The proposed increase of capital stock may either be classified into common or preferred. . . . Please be advised accordingly. cdlex (SGD.) FE ELOISA C. GLORIA Associate Commissioner