Sycip, Salazar, Hernandez and Gatmaitan

April 6, 1990 Sycip, Salazar, Hernandez and Gatmaitan 105 Paseo de Roxas Makati, Metro Manila Attention : Mr . Andres G . Gatmaitan Gentlemen: This has reference to your letter dated March 20, 1990 requesting opinion of this Commission on the query posed therein. The facts as presented in your letter may be summarized as follows: Your client, Engineering Equipment, Inc. (EEI),a general engineering and contracting corporation, proposes to finance its working capital requirements through a private placement of subordinated debentures with the following basic terms and features: (a) Subordinated to existing liabilities and unsecured by specific corporate assets; (b) With a prior claim on company assets over preferred and common shares in case of liquidation; (c) Face value of P1.00 with subscription price at a discount of 25% face value; (d) Cumulative interest rate based on discounted price and subject evaluation and study; (e) Convertible to common shares at par value at the option of the hold and upon approval by the SEC of increase in authorized common shares; (f) Redemption at face value within ten (10) years with partial redemption of outstanding debentures allowed when there is a surplus and subject to the Board of Directors approval; g) If unredeemed on maturity date, convertible to straight debt at discounted subscription price; (h) Discount provided during subscription shall be considered as part of interest payment upon redemption and/or conversion. Based on these facts, the following queries have been raised: 1. Whether the proposed placement of convertible subordinated debentures against the general credit of EEI to fund the financial requirements of EEI does not constitute bonded indebtedness within the meaning of Section 38 of the Corporation Code; and accordingly, 2. The affirmative vote of shareholders of EEI holding two-thirds of EEI's outstanding capital stock is not necessary in order to authorize the aforementioned issuance of convertible subordinated debentures. We reiterate our earlier opinion, dated April 29, 1987, stating that debentures are not bonded indebtedness within the scope of Section 38 of the Corporation Code. The SEC Opinion states in part, thus: "debentures" are serial obligations or "notes" representing indebtedness but not ordinarily secured by any specific mortgage, lien or pledge of security. (Ballantine on Corporations, sec. 210, p. 496). "They are usually issued under an indenture in which a trust company agrees to supervise the execution of the covenants of the debtor for the benefit of all the holders." (Kesoler vs. General Cable Corp., 92 Cal. App. 3rd, 531, 155 Gal. Rptr. 94, cited in 6A Fletcher, Cyc. Corp., sec. 2649.1) Debentures are issued on the basis of the general credit of the corporation, and since debentures are not secured by collaterals, they are not bonded indebtedness in the true sense, and will not, therefore require approval of the stockholders, although it is a good corporate policy to require it. (Campos, Campos, Corporation Code, Comments, Notes and Selected Cases, 1981 ed., pp. 673)." However, while the issuance of debentures may not be subject to the provisions of Section 38 of the Corporation Code, the same is subject to the requirements under the Interim Guidelines For The Registration of Bonds. Please be advised accordingly. Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner