Bito, Misa & Lozada

June 25, 1986 Bito, Misa & Lozada 40 Alfaro Street Makati, Metro Manila Gentlemen: This refers to your letter dated May 15, 1986, requesting for confirmation that the Board of Directors of Cawi Dynamics, Inc. may release Republic Dynamics Corporation (RDC), a stockholder, from its obligation to pay its unpaid subscription amounting to P850,000. It appears therein that Cawi Dynamics, Inc., a domestic corporation, is a joint venture between a Filipino (Republic Dynamics Corporation (RDC) 70%) and Dutch investors: Nederlandse Financierrings Mastchapoij Voor Outwikkelingslanden N.V. (FMO) and Cawi International (CAWI), which subscribed to 15% each. Prior to incorporation, the parties thereto executed an investment agreement fixing their respective capital contribution under the following set up: NO. OF STOCKHOLDER: NATIONALITY SHARES: AMOUNT: RATIO: RDC Filipino 41,500 P4,150,000 70% CAWI Dutch 8,750 875,000 15% FMO Dutch 8,750 875,000 15% Total 59,000 P5,900,000 100% ====== ======== ==== To facilitate its incorporation RDC initially subscribed to Five Million (P5M) pesos worth of shares divided into fifty thousand (50,000) shares of the par value of P100 per share, intending to limit its participation to only P4,150,000 and to correspondingly transfer P850,000 in favor of CAWI and FMO. Thus, RDC paid only the amount of P4,150,000. However, instead of transferring P850,000 worth of shares from RDC to CAWI or FMO, the Board of Directors of CAWI Industries, Inc. on January 30, 1985, passed a resolution authorizing the issuance in favor of CAWI & FMO 8,750 shares each, from the unissued portion of the authorized capital stock, thereby resulting in the change of equity ratio agreed upon prior to incorporation. Consequently, RDC equity was increased from 70% to 74% while that of CAWI and FMO was decreased from 15% to 13% each, broken down as follows: NO. OF SUBSCRIBERS: NATIONALITY: SHARES: AMOUNT: PAID-IN RDC Filipino 49,995 P4,999,500 P4,150,000 Jose Concepcion, Jr. Filipino 1 100 100 Augusto L. de Leon Filipino Filipino 1 100 100 Albert Bussem Dutch 1 100 100 Wilfredo Santiano Filipino 1 100 100 Thelma Jover Filipino 1 100 100 FMO Dutch 8,750 875,000 875,000 CAWI Dutch 8,750 875,000 875,000 Total 67,500 P6,750,000 P5,900,500 ====== ======== ======== To carry out the real intention of the parties limiting Filipino investment to only 70%, FMO and CAWI would now want RDC to reduce its resubscription from P4,999,500.00 to P4,150,000.00. Consequently, RDC will be released from its obligation to pay its unpaid subscription amounting to P849,500 . Hence, the present request. cdll In connection therewith, attention is invited to the rule that a corporation has no power to release a subscriber from the payment of his unpaid subscription. "A corporation has no power to release an original subscriber of its capital stock from the obligation of paying for his shares, and as against creditors a reduction of the capital stock can only take place in she manner and under the conditions prescribed by the statutes. The capital stock constitutes the sole fund to which creditors look for liquidation of their demands; it is regarded in law as a trust fund, pledged for the payment of the debts of the corporation. And, subscribed shares cannot be cancelled by the board of directors, without justifiable cause which vitiates a simple contract as this is tantamount to relieving an original subscriber from this subscription which a corporation has no power to do." (Velasco v. Poizat, 37 Phil. Trust Co. v. Rivera, G.R. No. L-11528, March 15, 1918, 44 Phil. 469). The only exception to the foregoing rule is when the release from his unpaid subscription is approved by all the stockholders of the corporation as decided in the case of Lingayen Gulf Electric Power Co., vs. Baltazar, G.R. No. L-4824, June 30, 1953; but even then, such release must not prejudice creditors of the corporation. ( SEC Opinion dated July 12, 1965 addressed to Clemente Tiampo, Inc. ) However, considering your allegation that prior to incorporation, there was already an agreement of the parties to transfer after incorporation the P850,000 worth of unpaid subscription of RDC in favor of FMO and CAWI, it is advised that instead of cancelling the said unpaid subscription amounting to P849,500, the same be transferred in favor of FMO and/or CAWI. Consequently, a Board resolution may be adopted by the corporation clarifying the real intention of the parties by correcting the resolution of January 30, 1985 and authorizing the issuance of shares worth P900,500 out of. the unissued capital stock to cover the balance on the "foreign component" of the subscription as agreed upon in the pre-incorporation investment agreement. Please be advised accordingly. Very truly yours, (SGD.) JESUS J. VALDES Associate Commissioner