Mr. Leoncio Palanca

May 19, 1992 Mr. Leoncio Palanca 35 Victoria Avenue New Manila, Quezon City S i r : This refers to your letter of March 31, 1992 requesting opinion of the query posed therein. As stated, you are a holder of preferred shares of Bacolod Real Estate Development Company (BREDCO). The shares have the following restrictions: they are non-voting, carry a dividend rate of 10%, non-cumulative (payable when and as declared by BREDCO) and they are nonconvertible . However, the terms of the preferred shares stipulate that if dividends are not paid for three years from and after the date of issue (July 20, 1964), the shares are then entitled to voting rights until dividends are paid (at the 10% annual rate) for at least one year. You have been holding these shares for the last 17 years without any dividend. BREDCO has a very big real estate reclaimed property. The latest sale of the land was at 1,200 pesos per square meter. So, it is estimated that the land value, less the obligation to Bacolod City and the DBP, make the book value per share worth more than 25 times its par value of one peso per share. The majority stockholders have not made any effort to sell the land except to pay the Company's immediate obligations. Under these circumstances, there is no chance for the Company to have a profit. Your query is, whether or not you have the right to demand the conversion of your preferred shares into common voting shares . It is to be noted that the "charter of a corporation, whether it is created by special act or formed under a general corporation law is a contract (1) between the state and the corporation; (2) between the corporation and the stockholders and (3) between the stockholders and the state". (Martin, Commentaries and Jurisprudence of the Philippine Commercial Laws Vol. 4, 1981 Edition p. 78 citing Government vs. Manila Railroad Co., G.R. No. 30646, January 30, 1929, 52 Phi. 699). As such, any provision therein cannot be changed without the consent of the stockholders . "Without authority from the legislature, a corporation has no power to make any material change in the number, kind, or value of its shares , especially where these matters fixed or determined by the statute or charter . (Vol. 11 Sec. 5151, citing California Telephone & Light Co. vs. Jordan, 19 Cal App. 536, 126 P 598, changing common stock to preferred). In many states, all the terms of the preferred share contract must be set forth in the certificate of incorporation and cannot be added to or changed by the by-laws, stock certificates or corporate resolution. The preferred share contract, that is the preferences and priorities given to the classes of preferred shares must be set forth in the certificates of incorporation under many acts and in such states preferences cannot be created or altered by by-law provision but only by charter amendment ". (Ballantine Corporations p. 63 citing Gashill v. Gladys Belle Oil Co. 16 Del Ch. 289, 146 Atl. 337). Thus, other than those privileges provided in the articles of incorporation, the corporation is not empowered to grant different privileges or preferences on its preferred shares. Accordingly, in the absence of an express provision in the articles of incorporation as to their convertibility feature, preferred shares cannot be converted into common shares. Please be advised accordingly. Very truly yours, (SGD.) ARMANDO Z. GONZALES Associate Commissioner