Ms. Tomasa H. Lipana

July 22, 1993 Ms. Tomasa H. Lipana Joaquin Cunanan & Co. 8th Flr. BA Lepanto Bldg. 8747 Paseo de Roxas, Makati, Metro Manila M a d a m : This refers to your letter of June 21, 1993 requesting confirmation that the SEC Opinion dated January 9, 1974 which exempts wholly-owned subsidiaries of foreign companies from the prohibition on retention of surplus profits as provided under P.D. No. 270 also applies in the interpretation and implementation of Section 43 of the Corporation Code. Although the intention of the previous law on the matter P.D. 270 and the present law, Section 43 of the Corporation Code, are substantially the same, the only difference being the retention limit of the paid-in capital: 50% under the old law and 100% under the present law, we are not inclined to adopt the previous opinion on the matter. As embodied in previous opinion, the exemption of wholly-owned subsidiaries of foreign corporations was predicated on the fact that only publicly-held corporations are required to comply with the required distribution of excess profits of corporations considering that only publicly held corporations are required to comply with the rules governing the submission of financial statement. Nowhere in the Rules Governing the Distribution of Excess Profits Implementing P.D. 270 can we find that said prohibition applies only to publicly held corporations. In fact, the Rules clearly states that " all corporations which have surplus profits in excess of necessary requirements for capital expansion and reserves shall declare and distribute the excess profits as dividends to stockholders" (No. 1). Secondly, under Section 141 of the Corporation Code, every corporation is now required to file financial statements. Accordingly, the rationale behind the previous opinion is no longer applicable. Moreover, Section 43 of the Corporation Code, quoted hereunder, does not make any qualification. Stocks corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except :(1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies." (Emphasis supplied). The above provision uses the words "stock corporations". Under the generally accepted principles on statutory construction, it is well settled that where the law does not qualify, we should not distinguish or qualify. Accordingly, the provision is applicable to all stock corporations, including wholly owned subsidiaries. We believe that the mandatory requirement under Section 43 of the Corporation Code would not pose a problem with respect to a wholly owned subsidiary considering that it would not be difficult for it to justify a retention of retained earnings taking into consideration that no other stockholder would object if the sole stockholder wants to retain the surplus profits for reasons falling under any of the exceptions enumerated in said Section. Moreover, exception No. 3, quoted above, is broad enough to cover meritorious circumstances obtaining to justify retention of retained earnings. This opinion supersedes the above-mentioned previous SEC opinion on the matter. LexLib Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman