Mr. Jaime A. Sy, Jr.

August 12, 1998 Mr. Jaime A. Sy, Jr. Torres & Sy Law Office 3/F G.A. Estebam Bldg.,Lacson St., Bacolod City S i r : This refers to your letter dated July 8, 1998, inquiring whether it is allowable to include the following prohibition in the Articles of Incorporation and By-laws of a stock corporation: LibLex " That none of the stockholders shall engage in a similar, competing or antagonistic business or activity as that to which the corporation is primarily engaged in . The foregoing restriction must appear at the back of all certificates of corporation ." We believe that the above disqualification provision is a valid and reasonable exercise of corporate authority since a corporation, under the principle of self-preservation, has the inherent right to preserve and protect itself by excluding competitors or hostile interests. The provision is made obviously to prevent a stockholder from creating an opportunity to take advantage of the information which he may have acquired as such to promote his individual interests to the prejudice of the corporation and other stockholders. The stockholders have a fiduciary relation with their corporation for the collective benefit of the stockholders. Any person who intends to buy stock in a corporation does so with the knowledge that its affairs are governed by the articles of incorporation and by-laws. With this knowledge, the stockholders may be considered to have consented to the disqualification to engage in the same line of business and thus, it cannot be said that the stockholder's right is infringed. Further, it is well-settled that the articles of incorporation is a " contract " between the stockholders/subscribers and the corporation, by and among themselves and between the corporation and the State. Likewise, the By-laws constitute the private " laws " or internal set of " rules and regulations " to govern corporate affairs. As such, the contracting parties (stockholders) may provide therein such matters which they may deem necessary and convenient to accomplish the purpose(s) of incorporation, such as qualifications or disqualifications of stockholders as a preventive measure to assure protection against competitors. This power is expressly granted under Sections 14 and 47 of the Corporation Code, quoted hereunder: cdlex "SECTION 14. Contents of articles of incorporation . ... xxx xxx xxx 10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient ." "SECTION 47. Contents of by-laws . ... xxx xxx xxx 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs. " Your query is therefore answered in the affirmative, subject however to the condition that the facility of transferring ownership of shares of stock must not be unduly hampered by imposing unreasonable restrictions as would amount to restraint on free alienation of property. Very truly yours, (SGD.) DANILO L. CONCEPCION Chairman