Attys. Rose Marie M. King

October 21, 2002 SEC OPINION Attys. Rose Marie M. King, Maria Teresa D. Mercado-Ferrer and Jose M. Layug, Jr. SyCip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas, Makati City 1226 Gentlemen : This refers to your letter dated September 10, 2002 seeking confirmation of your opinion that the approval by the stockholders of Company A is not necessary for the contemplated transfer of its shares in Company X and Company Y (the "Shares") to Company B (the "Transfer") and Company A's subscription to Company B shares (the "Investment") because: 1. the Transfer is not a transfer of all or substantially all of the assets of Company A, and 2 the Investment is reasonably necessary for, and consistent with, the accomplishment of Company A's primary purpose as a holding company. The statutory authority for sale of corporate assets is found in Section 40 of the Corporation Code, which provides in part: "Sec. 40. Sale or other disposition of assets . Subject to the provisions of existing laws ...,a corporation may, by a majority vote of its board of directors, or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets ,including its goodwill, upon such terms and conditions and for such consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the members, in a stockholder's or members' meeting duly called for the purpose . . . Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated ..." [Emphasis Supplied] The transfer does not involve all of the corporate assets of Company A. As mentioned in your letter, the Shares constitute only about 75.18% of Company A's total assets. cDHCAE Section 40 (par. 2 thereof) of the Corporation Code defines the term "sale or disposition of all or substantially all the assets" as one which will render the corporation incapable of continuing the business or accomplishing the purposes for which it was incorporated. Section 40 of the Code applies only if after the disposition of corporate assets, the disposing corporation can no longer continue the business for which it was organized or accomplish the purpose for which it was incorporated. (Lopez, Corporation C od e, p. 571) In other words, if after the disposition of corporate assets, the disposing corporation can still continue the business for which it is organized, the disposition can be made without complying with the requirements set forth in the aforementioned provision as it is not covered by said section. (SEC Opinion dtd. February 16, 1987, citing Agbayani, Commercial Laws, Vol. 3, p. 355) In interpreting paragraph 2 of Section 40, this Commission has been guided not so much by the number or volume of the assets transferred but by the effect of such transfer on the corporation's business. Any disposition which does not involve all or substantially all of the corporate assets as defined above, made in the ordinary course of business does not require the approval of the stockholders or members ...To determine if the sale is made in the ordinary course of business, the test is not the amount involved but the nature of the transaction . (De Leon, Corporation C od e, 1993 edition, p. 316) Hence, if the sale thereof will not render the corporation incapable of continuing its business or if the disposition is necessary in the usual and regular course of business, the board of directors as it may deem expedient and in good faith, dispose the same without the approval of be stockholders. (SEC Opinion dtd. August 21, 1995, RP Enterprises Inc.) The intended disposition of subject corporation of its shareholding in Co. X and Y does not constitute a "substantial sale" considering that the disposition will not render the company incapable of continuing its business. On the contrary, its business will still continue with the remaining shareholdings in other companies and its acquisition of shares from the purchaser, Co. B. Related to Section 40 is Section 42 of the Corporation Code, which pertains to the power of a corporation to invest its corporate funds in another corporation or for any purpose other than the primary purposes for which it was organized. Section 42 provides: "Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose. Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock . . . at a stockholder's or members meeting duly called for the purpose . . . Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary." [Emphasis Supplied] Based on the foregoing provision, the investment of subject corporation with Co. B does not require the ratification of the stockholders. The requirement relative to approval of the stockholders or members is not absolute and applies only to investments that are beyond the corporation's primary purpose, or outside the express or implied powers of the investing corporation. The investment with Co. B is well within the primary purpose of subject corporation as a holding company. Let it be emphasized however that the transactions and dealings of the board of directors are subject to the provisions of Sections 31 to 34 of the Corporation Code of the Philippines and to the equitable limitations/restrictions under the law. Very truly yours, (SGD.) LILIA R. BAUTISTA Chairperson