Atty. Vicente A. Torres

April 5, 1982 Atty. Vicente A. Torres c/o Guerrero & Torres PhilBanking Building Ayala Avenue, Makati Metro Manila Dear Atty. Torres: This is in connection with your letter-request dated January 20, 1982 regarding the amendment to Section 2 of Article VI of the By-Laws and Article VII of the amendment Articles of incorporation of the Deltron-Sprague Electronics Corporation (DSEC). prcd It appears from your letter that the stockholders of the DSEC approved an amendment to its articles of incorporation and by-laws that "the stockholder who owns the most number of shares shall have the option to acquire at book value on date of demise or date of inability to act of such individual stockholder all shares owned by him"; that the SEC ordered that said amendment be rewarded to contain and/or secure the consent of the heirs of the deceased stockholders; that DSEC is a joint venture between Sprague Electric Company of USA and a group of Filipinos; that Sprague Electric holds sixty (60%) of the capital stock; that the essential factors which persuaded Sprague Electric Company to enter into the venture and put in fresh capital are the confidence and friendship between its officers and the Filipino stockholders; that the business involves the transfer of special technology which Sprague Electric is not willing to transfer except to persons whom it trusts; that the Stock Purchase Agreement provides that in the event any of the individual comprising the Filipino group dies or becomes disabled, Sprague Electric has the option to acquire his shares; that said provision protects Sprague Electric from being to compelled to become partners with Filipinos who do not enjoy its confidence and friendship as now exist between the joint ventures; and that said amendment was incorporated to both articles and by-laws of DSEC, after approval by the stockholders. You now argue that the agreement to sell the share upon one's death or incapacity is in effect a contract of sale subject to a "suspensive term" (death or incapacity); that the contracting parties may establish such stipulations, terms and conditions that they may deem convenient, provided that they are not contrary to laws, morals, good customs, public order or public policy (Article 1306, Civil Code); that there is nothing in said agreement contrary to the same, considering that per agreement, all the Filipino stockholders have already disposed of their shares in favor of Sprague Electric which disposition becomes effective upon their death or incapacity; that this condition is allowed by law because obligations for whose fulfillment a day certain has been fixed, shall be demandable only when that day comes (Art. 1193, id); that the heirs have no right to the aforesaid shares because the inheritance includes only all properties, rights and obligations of a person which are not extinguished by his death (Art. 776, id); that at most, the heirs are only entitled to receive the book value of the shares at the time that the Sprague Electric exercises its aforementioned option; and that the proposed amendment is in accordance with law, for which reason you request that the original amendment be approved and the re-worded amendment be withdrawn. After a very careful study and deliberation on this matter, we are happy to inform you that we are inclined to grant your request, and treat this matter as a petition to correct the amended by-laws and amended articles of incorporation in order to reflect the true intention of the parties, upon payment however, of the proper filing fees therefore. However, we prefer to prescind from any discussion of the laws of succession (supra) as it will only complicate matters. Instead, we have applied the liberal construction of the provisions of articles and by-laws in order to give business considerable latitude so that the SEC will not be denounced as unduly interfering with business contracts: . . . and it is well settled that reasonable restrictions upon the transfer of stock of a corporation, such are necessary and convenient to the attainment of the objects for which the company was incorporated, are valid and within the powers usually delegated to companies by the corporation laws in most states. In other words, considerable latitude is allowed incorporators and shareholders in imposing transfer restrictions in articles of incorporation and they will not usually be declared against public policy palpably unreasonable under the circumstances . Under some corporation acts restrictions upon the transfer of shares can only be imposed in the character or articles (12 Fletcher, Cyclopedia Corp. Sec. 5455, pp. 291-292; emphasis, supplied) More importantly, such a construction will encourage the entry of foreign ventures and/or fresh capital necessary for the economic development and progress of the country. Please be advised accordingly. llcd Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner