Mr. Jose C. Vitug

January 11, 1982 Mr. Jose C. Vitug Marinduque Mining and Industrial Corporation 2263 Pasong Tamo Extension Makati, Metro Manila Dear Mr. Vitug: This refers to your letter-query dated July 24, 1981 requesting opinion on the questions posed therein relative to the Marinduque Mining & Industrial Corporation (MMIC). It appears from your letter that MMIC has increased its authorized capital stock from P1,000,000,000.00 to P2,000,000,000.00 worth of shares; that the increase of P1,000,000,000.00 consists of 80% common shares and 20% preferred shares; that the features of the preferred shares are not at all stated in the amended articles of incorporation and instead the Board of Directors had been authorized in said amended articles to fix the terms and conditions thereof; that the preferred shares are intended to be issued to a lender in payment of certain outstanding obligations due it from MMIC, and that said increase is pending evaluation by the Commission, particularly by the Examining and Appraisers Department. Your first query is whether or not the terms and conditions to be fixed by the Board, which may result in some preferences over outstanding shares, must likewise be later incorporated as a mandatory provisions in the articles of incorporation in order to be effective, thus, necessitating also the approval of the stockholders owning 2/3 of the outstanding capital stock of MMIC. The pertinent provision of the Corporation Code of the Philippines (Batas Pambansa Blg. 68) applicable to your first inquiry reads as follows: "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 restriction as may be stated in the articles of incorporation :... Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are violative of the provisions of this Code ;...The Board of Directors, where authorized in the articles of incorporation may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, that such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission (emphasis, supplies). At this juncture, please note that while the Amended Articles of Incorporation of the MMIC spelled out in details the rights, preferences, restrictions and or limitations of the 108,000,000 shares of Class A Common Stock and the 72,000,000 shares of Class B Common Stock, no statement has been made at all as to the rights, preferences or restrictions of the preferred shares in question, to wit: prcd "...Consisting of (i) P200,000,000.00 divided into 20,000,000 Preferred Shares of the par value of 10 per share with such terms and conditions as the Board of Director's may determine, ...." D. That the Board of Directors shall have the power to fix the terms and conditions of the Preferred Shares (as amended, meeting of shareholders on 23 July 1981). We believe that the above-quoted amended provision giving the Board blanket authority to fix the terms and conditions of the preferred shares, without stating the privileges, preferences, restrictions or rights of the preferred shares is contrary to Section 6 of the Code as above-quoted. Unless certain features, guidelines and standards as to the issue of preferred shares are stated or spelled out in the amended articles of incorporation, such authorization becomes a dangerous power which may adversely affect the rights of shares already issued. Being in unlimited delegation to the Board, we suggest that you revise your amended articles of incorporation for the purpose of including their rights, preferences or restrictions along the following guidelines or features: a) That the preferred shares shall be non-voting except those cases where the law expressly allows them to vote; b) That the said shares shall be redeemable within one to ten years from date of issue as the Board may fix; c) That they shall earn cumulative dividend of say 6% to 16% per annum, as the Board may determine; d) That they are convertible to common shares in proportion to redemption period but in no case shall be the first conversion be effected earlier than after one year from date of subscription. Relevant thereto is our opinion dated April 3, 1976 addressed to Mr. Antonio Roque, a xerox copy of which is hereto enclosed for your reference and guidance. You also wish to be informed if there is a need to amend the articles of incorporation each time that the Board fixes the terms and conditions of the preferred shares or a series thereof under Section 16 of the Code, considering that Section 6 thereof prescribes that such terms and conditions shall be effective only upon the filing of a certificate thereof with the Commission. The last two (2) lines of the second paragraph of Section 6 as above-quoted is an amended provision of the old law and is an off-shoot of modern statute and/or corporate practice. It authorizes the Board to fix the terms and conditions of the preferred shares in such a way as to "tailor the securities to meet changes in market conditions which cannot be foreseen at the time of incorporation or later amendment of the articles of incorporation. Typical of the changes is the variance of the dividend rate to meet the demands of the money market ....The resolution of the directors fixing such preferences is generally required to be certified and filed or recorded in the same manner as articles of incorporation, thus, providing certain information as to the terms of the contract." (Ballantine, Law of Corp. pp. 502-505; 2 Fletcher, Cyc Corps. 52841 p. 331). We believe therefore that a Secretary's Certificate under oath relative to the resolution of the Board fixing the terms and conditions of the preferred shares (such as giving the proper designation thereto as Series A 10% Cumulative Convertible Preferred Stock for issuance from Jan. 1, 1982 to Dec. 31, 1982; fixing the number of shares included in said series and the relative rights, preferences or limitations of said series) should be filed with this Commission for which a filing fee may be charged thereto. Please note that this is an existing practice even before the enactment of the new Code, observed by public utilities. It would not therefore need the concurrence of 2/3 of the outstanding capital stock under Section 16 of the Code on amendment of the articles of incorporation. Otherwise, it would defeat the very purpose for which it was incorporated in Section 6 of the Code, allowing the corporation to respond quickly to the fluctuating conditions in the market. Besides, Section 16 of the Code admits or recognizes of exceptions thereto which is Section 6 of the code, to wit: SECTION 16. Amendment of Articles of Incorporation . Unless otherwise prescribed by this Code or by special law, and for legitimate purpose, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the Board of Directors or Trustees and the vote or written assent of the stockholders representing at least at least two-thirds (2/3) of the outstanding capital stock. ..." Your second query relates to Sections 81 and 86 of the Code on appraisal rights, specifically the precise time that the appraisal rights begins "Is it at the time of filing of the certificate with the SEC, or the amendment of the articles of incorporation expressing the preferences of the preferred shares, or the issuance of such shares, or is it at any other time? Section 82 is clear that the appraisal right may be exercised by a dissenting stockholder or one who voted against the proposed corporate action by making a written demand on the corporation within thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares. The proposed corporate action insofar as MMIC is concerned refers to the stockholders' meeting approving the increase of the capital stock and the corresponding amended articles of incorporation reflecting the said increase authorizing the Board of Directors to fix the terms and conditions of the preferred shares. In the light of the discussion above, the appraisal right does not arise each time that the Board of Directors fixes the terms and conditions of the preferred shares considering that such authority was given to it by the stockholders at the outset; that such delegation is not unlimited (if and when revised) and would not change or restrict the rights of stockholders or class of shares of create preferences in any respect superior to those of outstanding shares of any class. Please note that the appraisal right does not normally belong to a stockholder as a matter of absolute right. Otherwise, a stockholder can withdraw from a corporation anytime by returning his shares and getting back his capital, which is truly violative of the trust fund doctrine. However, it is only under certain circumstances and within the limits and/or conditions circumscribed by the law that such right may be availed of, as where the corporation decides to undertake certain acts of a substantive nature affecting the organizational set-up of the corporation not contemplated by him during the time he makes his investment in the corporation. Cognizant of the trust fund doctrine, such right may be effectively exercised only if the corporation has unrestricted retained earnings in its books to cover such payment (Sec. 82). cdll Finally, under Section 83 thereof, if the dissenting stockholder is not paid the value of his shares within thirty (30) days after the award, his voting and dividend rights shall immediately be restored. Accordingly, even if his rights as stockholder are suspended after his demand in writing is made, he cannot therefore be considered as ordinary creditor of the corporation. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner