Mr. Jess G. Tabora

June 25, 1991 Mr. Jess G. Tabora Philippine Agriculture & Marine Refrigerated Foods, Inc. No. 3 Brent Road, Baguio City S i r : This refers to your letter of June 20, 1991, inquiring whether the exercise of Pilipino Telephone Corporation of the option to redeem Series C Preferred Shares can be contested by preferred shareholders, and if yes, what alternative option does a preferred shareholder have. Section 8 of the Corporation Code provides: "Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation .They may be purchased or taken up by the corporation upon the expiration of a fixed period ,regardless of the existence of unrestricted retained earnings in the books of the corporation and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares." (Emphasis supplied) Likewise, Article VII of subject corporation provides in part: "6. Subject to the limitations or conditions herein or in the terms of any series, the whole or any part of Preferred Stock at any time outstanding, or the whole or any part of any series thereof, may be redeemed by the Corporation at its election ,expressed by resolution of the Board of Directors, upon notice to the holders of record of the Preferred Stock to be redeemed, given as hereinafter provided, ..." (Emphasis supplied) As a general rule, provisions in articles relating to the retirement of preferred stock is in effect a contract between the issuing corporation and the preferred stockholders. (11 Fletcher, Sec. 5309 citing Franzer v. Fred Reuping Leather Co.,255 Wis. 265, 38 NW 2d 517) Thus, provisions of this character, if in accordance with law, are valid and enforceable as between stockholders and the corporation. However, the right of redemption is at all times subject to the implied condition that it will not render the corporation insolvent in the sense that it would be unable to meet the debts as they mature in the usual course of business. (11 Fletcher, Sec. 5310, citing Kraft v. Rochambeam Holding Co. 210 Md. 325, 123 Azd 287) It has been held that such contracts for redemption of stock are subject to the implied limitation that they cannot be enforced if the effect is to render the corporation insolvent, or if there are other express limitations upon the right. (11 Fletcher citing Cremmins & Peirce Co. v. Kidder Peabody Acceptance Corp.,282 Mass 367, 185 N.E. 383, 387) The "Trust Fund Doctrine" is always strictly adhered to. Corporate assets are a trust fund for creditors to the extent that creditors are entitled to payment before any distribution of capital to shareholders." (Ballantine on Corporations sec. 264 p. 621) The importance of this doctrine has been emphasized when the Commission included in its Rules Governing Redeemable and Treasury Shares a provision that: LexLib "Redeemable shares may be redeemed, regardless of the existence of unrestricted retained earnings, provided that the corporation, has, after such redemption sufficient assets in its books to cover debts and liabilities inclusive of capital stock." (Sec. 5-5) Thus, while subject corporation under its articles of incorporation is allowed to redeem its preferred shares, such redemption should be made in accordance with applicable existing laws and terms and conditions imposed in the articles of incorporation and should not be violative of the "trust fund doctrine" Should you feel you have a cause for action against the corporation, you may file a verified complaint with the Securities Investigations and Clearing Department of this Commission pursuant to P.D. 902-A, as amended. Please be advised accordingly. LexLib Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman