Mr. Reynaldo C. Lacerna

November 11, 1987 Mr. Reynaldo C. Lacerna Philippine National Oil Company PNOC Bldg.,7901 Makati Avenue Makati, Metro Manila Sir : This refers to your letter dated September 21, 1987, requesting opinion on the following issues: 1. Whether the creation of the joint venture agreement resulting in a corporation under the Corporation Code to be jointly owned by PNOC-EDC (a PNOC subsidiary), Kenmare, a foreign firm, and other qualified investors as stockholders contravenes Section 5(g) of the PNOC Charter? 2. Are there any other legal restrictions and/or impediments which would otherwise adversely affect or prohibit the creation of such joint venture corporation? It appears therein that PNOC was created by virtue of P.D. No. 334, as amended, with mandate to undertake and transact business relative to oil or petroleum operations and other energy resources exploitation. As provided in Section 5(g) of P.D. No. 334, among its powers and functions is to invest in any activity related to its mandated purposes as well as the creation of subsidiary corporations. In line with this mandate, the PNOC Energy Development Corporation was incorporated on March 5, 1976 as a subsidiary of PNOC to engage primarily in the exploration, exploitation and development of geothermal energy resources. Among its secondary purposes, is the exploration and exploitation of minerals and mineral substances of all kinds, grades, forms and descriptions. PNOC-EDC had just completed negotiations with Kenmare, a Northern Irish firm, for a proposed joint venture project to undertake the exploration and development of gold in its geothermal service contract areas. The joint venture project is being targeted for these areas based on technical studies which show that gold has been found either as by-products of geothermal operation or as mineral deposits found in place therein .Since PNOC-EDC is already actively operating and producing geothermal steam from these areas as a geothermal service contractor, PNOC-EDC is the logical partner of Kenmare and the other Filipino investors to enable the full, cost efficient, and simultaneous development of the said areas for both geothermal steam production and gold exploitation. As proposed, the joint venture project will culminate in the creation of a joint venture corporation to be organized under the Corporation Code. Its capital stock will be jointly subscribed to and/or owned by PNOC-EDC and Kenmare at forty percent (40%) each, with the remaining twenty percent (20%) to be offered to qualified Filipino investors. This capital structure is intended to conform with the 60-40 ownership structure of the capital stock of the corporation which will engage in the exploration, exploitation, and development of the country's resources as provided for in the 1987 Constitution. Hence, your queries: The Charter of Philippine National Oil Company (P.D. No. 334, as amended), provides, thus: "g) * Any provision of law to the contrary notwithstanding, including but not limited to Section 13 of Article 1459, as amended, to invest its funds as it may deem proper and necessary in any activity related to its purposes ,including in any bonds or securities issued and guaranteed by the Government of the Philippines and the company may organize and incorporate subsidiary corporations for the purpose .The capital stock of corporations organized and incorporated by the company may be subscribed in whole or in part by the company. Where the company has a controlling interest of not less than fifty-one (51%) of the outstanding capital stock of such subsidiaries and corporation owned and/or controlled by it, as well as the sale of and/or subscription to such securities and shares of capital stock shall be exempt from registration, licensing or other requirements imposed under the Securities Act (C.A. 83, as amended by any other law, decree, order or regulation). h) To purchase ,hold, alienate, mortgage, pledge or otherwise dispose of the shares of the capital stock of ,or any bond security of other corporations or associations of this or any other country; and while the owner of said stock, to exercise all the rights of ownership, including the right to vote thereof. i) To hold lands and acquire rights over mineral lands in excess of the areas permitted to private corporations, associations and persons by statute." (emphasis supplied). It is quite clear from the foregoing provisions that the creation of PNOC Energy Development Corporation (PNOC-EDC),as a subsidiary, the business of which is the development of mineral substances other than energy producing substances is within the power of the PNOC granted under its charter. prcd Going into the query on whether the subsidiary, PNOC-EDC can form a joint venture corporation with a foreign firm, the proposed business of which is the exploration and development of gold in the geothermal service contract area, the articles of incorporation of PNOC-EDC provide: "4. To prospect, explore, dig and drill for, exploit, extract, produce, store, hold, transport, distribute, export, and trade and generally deal in any and all kinds of volatile substances, sulphur, clays, bituminous substances, carbon, carbon black, hydrocarbon substances, phosphates, nitrates, ores, minerals and mineral substances of all grades, kinds, forms, descriptions and combinations, and, in general, subsoil products and subsurface deposits of every nature and description and the products and by-products which may be derived, produced, prepared, developed, compounded, made or manufactured therefrom and substances obtained by mixing any of the foregoing with other substances." "10. Insofar as may be permitted by law, to acquire by purchase, exchange or otherwise, and to own, hold for investment or otherwise, and to sell, assign, transfer, exchange, mortgage, pledge, or otherwise dispose of shares of the capital stock of, and any bonds, mortgages, securities and evidences of indebtedness of or other obligations issued or created by any corporation or corporations organized under the laws of any state, country, nation or government, and while the holder or owner thereof, to exercise all the rights, powers, and privileges of the capital stock, bonds, or other obligations of the Corporation or to make payment therefor by any other lawful means whatsoever." (emphasis supplied). Likewise, Section 36 of the Corporation Code provides: "SECTION 36. Corporate powers and capacity . Every corporation incorporated under this Code has the power and capacity: 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage, and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution." It is evident from the aforequoted provisions that PNOC Energy Development Corporation can legally enter or form a joint venture corporation to be owned by the company, Kenmare and other qualified investors as stockholders. It is to be emphasized in this connection that the tendency of the more recent decisions is to hold an act within corporate powers, if possible, where it is clearly beneficial to the company, as where the act directly tends to increase the business of the company." (Fletcher, Ch. 24, Sec. 2488, p. 315, citing United States Armstrong Corh. Co. v. H.A. Meldrum Co., 285 F 58). However, to enable the corporation to engage in any of its secondary purposes, Section 42 of the Corporation Code must be complied with. In view of the foregoing, the proposed organization of joint venture corporation is legally feasible. However, the venture must comply with all policies, rules and regulations relative to the government's policy of privatization. Thus, subject to the foregoing, the Commission interposes no objection to the proposed joint venture of PNOC-EDC and Kenmare. cdlex Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman * Copied verbatim from documents obtained directly from the Securities and Exchange Commission .