Pacific Cement Company, Inc.

July 25, 1986 Pacific Cement Company, Inc. Prince Bldg.,117 Rada St. Legaspi Village, Makati Metro Manila Gentlemen: This relates to your letter, dated July 21, 1986, requesting the resolution of the Commission on the following issues: LibLex Is Pacific Cement permitted under the law to buy-back its own Class "A" Common shares from DBP under the existing circumstances: 1. Capital deficit situation; 2. After the buy-back, PCC assets are not sufficient to cover liabilities and equity; 3. Disruption of the 40:60 foreign/domestic equity ratio constitutional requirements for mining firms such as PCC; 4. Even without the written approval of the Securities and Exchange Commission, Central Bank, BOI and the company stockholders. It appears from the DBP Cement Industry Rationalization Program that DBP has developed a rationalization scheme which places all cement companies with past due accounts on equal footing by developing a uniform repayment period over 2 years of the total exposure of DBP to each cement company inclusive of equity investment. This plan was approved by the DBP Board on May 9, 1986 for implementation. Hence the present request. Article VII, paragraph 3, of the amended articles of incorporation of Pacific Cement Company, Inc. expressly provides that all shares of Class "A" Common stock subscribed by the DBP in pursuance of the Financial Restructuring Plan approved by the stockholders on April 30, 1983 shall be subject to a buy-back arrangement ,to the extent permitted by law, under such terms as may be mutually agreed in writing between the DBP and the corporation. This provision, therefore, gives such Class "A" Common shares held by DBP certain redemption features. "Redemption in literal sense, means the act of buying or repurchasing." (Ballantine & Sterling, California Corporation Laws, Vol. 1, (1982 ed.) sec. 144.01, p. 8-68, citing Stafford v. Realty Bond Serv. Corp.,39 Col. 2d, 797, 803, 249 p2d 241 (1952).It implies there is something lost to be gotten back (Ibid).Thus, where a corporation "redeems" or makes a redemption of its shares it repurchases or buys them back. (Ballantine, Supra.)."A corporation's redemption of its redeemable shares, whether a full or partial redemption of them, is simply a form of purchase by the corporation of its own shares and is one of the transactions within the meaning of "distribution to its shareholders" by a corporation. Such redemption is therefore subject to the same restrictions imposed on all such distribution." (Ballantine, sec. 144.03, p. 8-70) cdll Common stock may be divided into classes or series, one or more of which may be redeemable. Considering that as per your amended articles of incorporation such Class "A" Common shares subscribed by DBP may be purchased or taken up by the corporation to the extent permitted by law and upon such terms and conditions as may be mutually agreed upon between the DBP and the Corporation, said redeemable common shares do not have a compulsory redemption feature. Article * 8 of the Corporation Code of the Philippines provides, thus: "Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the book of the corporation, and upon such terms and conditions as may be stated in the articles of incorporation which terms and conditions must also be stated in the certificates of stock representing said shares." In line with the above provision, Section V (5) of the SEC Rules and Regulations Governing Redeemable and Treasury Shares (1982) reads as follows: "Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, provided that the corporation has, after such redemption sufficient assets in its book to cover debts and liabilities inclusive of capital stock." Purchase or redemption of shares are subject to the general restriction in favor of priority of creditors and may not be made when a corporation is insolvent or if such purchase or redemption will cause insolvency or inability to meet debts and liabilities as they accrue. (Ballantine on Corp., sec. 263 p. 620, citing Mueller v. Kreauter & Co., Inc. 131 N. J. Eq. 475, 25 A (2d) 874). It is a general rule that a corporation cannot without express legislative authority, issue even preferred shares with provisions which will give the shareholders a claim for a return of investment equal or superior to the right of creditors to payment of their claims. Such arrangement unless authorized by statute is deemed contrary to the policy of corporation law. (Ballantine, Supra., sec. 214, p. 503). The shareholders of both common and preferred ,are risk-takers who are required to invest capital in the business and who can look only to what is left after creditors are fully provided for. Thus, in the absence of a clear statute, the claims of shareholders cannot be secured by a lien on the corporate assets. (Ibid) Redemption of shares is, therefore, subject to the limitation quoted hereunder: "The obligation to redeem is at all times subject to the implied condition that it will not render the corporation insolvent in the sense that it would be unable to meet the debts as they mature in the usual cause of business." (11 Fletcher, Cyc. Corps.,1971 Rev. Vol.,sec. 5310, p. 593, citing Kraft v. Rochambeau Holdings Co.,210 Md. 325, 125 A 2d 287); "It has been held that such contracts for redemption of stock are subject to the implied limitation that they cannot be enforced if the effect is to render the corporation insolvent, or if there are other express limitations upon the right." (Fletcher, Supra.,sec. 5310, p. 593, citing Cremmins Pierce Co. v. Kidder Peabody Acceptance Corp.,282 Mass 367, 185 NE 383, 387). "Before shares can be redeemed, three obligations must be overcome: (1) there must be no violation of the contract of those shareholders, (2) it must not constitute a preferential treatment of those shareholders, and (3) it must not prejudice creditors .(Agbayani, Commercial Laws of the Philippines, Vol. 3, 1984 ed.,p. 103, citing Stevens).For the protection of creditors, the most general limitation is that redemption shall not be paid out of capital but only from surplus (Agbayani, citing Rohrlick, 339 and Stevens, 439),but there is statutory authority that it can be made even out of capital provided that the assets remaining after redemption are equal to the corporate debts plus the amount of the capital stock item if the same is redeemed by the cancellation of the redeemed shares." (Agbayani, citing Stevens, 440). In all the foregoing, it clearly appears that the "trust fund" doctrine is strictly adhered to. Corporate assets are a trust fund for creditors to the extent that creditors are entitled to payment before any distribution of capital to shareholders. Hence, the answer to your first and second queries is in the negative. In relation to the third query, quoted hereunder is Section III (2) of our Rules Governing Redeemable and Treasury Shares: "Treasury shares do not revert to the unissued shares of the corporation but are regarded as property acquired by the corporation which may be reissued or sold by the corporation at a price to be fixed by the Board of Directors; provided, however, that in the case of redeemable shares reacquired, the same shall be considered retired and no longer issuable, unless otherwise provided in the Articles of Incorporation ." (Emphasis supplied) LexLib The amended articles of incorporation of Pacific Cement Company, Inc. does not provide that the Class "A" Common shares "bought back" or redeemed by the corporation in pursuance of Article VII, paragraph 3 thereof, may be reissued by the corporation. Accordingly, said reacquired shares (Treasury shares), granting the redemption is legally feasible, shall be considered retired and no longer issuable. Undoubtedly, therefore, the 40:60 foreign/domestic equity ration required by the Constitution of corporations engaged in the disposition, exploration, development exploitation or utilization of any of the natural resources of the Philippines shall correspondingly be disrupted with the resulting redemption. The term "outstanding stock" as used in the Corporation Code does not include treasury shares. (Sec. 137, Corporation Code). Anent your fourth query, please be advised that "When the articles of incorporation prohibit the re-issuance of shares that have been reacquired or redeemed by the corporation, the number of shares of the class and series, if any, to which the reacquired or redeemed shares belonged is reduced by the number of shares so reacquired or redeemed. Thereupon, the corporation's articles of incorporation must be amended to reflect such reduction in authorized shares. (Ballantine & Sterling sec. 145.02, p. 8-80).In such instance, therefore, the approval of the Commission must be secured. Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Acting Chairman * Copied verbatim from documents obtained directly from the Securities and Exchange Commission.