Angara Abello Concepcion Regala & Cruz Law Office

July 2, 1991 Angara Abello Concepcion Regala & Cruz Law Office c/o Attys. Armando Q. Ongsioco and Tadeo F. Hilado ACCRA Building, 122 Gamboa Street, Legaspi Village, Makati 1200 Metro Manila S i r : This refers to your letter of June 13, 1991 requesting confirmation of your position regarding the proper valuation of shares of stock of a domestic corporation. As stated, the major stockholders of Sterling Tobacco Corporation (STC), namely: Macondray Holdings Corporation (MHCO) and Rothmans Asia Pacific Limited, A.C.N. (RAPL), agreed to transfer their STC shares to Consumer Brands Holdings, Inc. (CBHI), another domestic corporation, as payment for shares of stock. It is your contention that in determining the proper valuation of the STC shares, properties under a " capital lease " with option to purchase are included. These capital lease assets are composed of land, buildings and certain cigarette making equipment located at Mandaluyong, Metro Manila which are being leased by STC from the Philippine National Bank (PNB). These properties are previously foreclosed by PNB from their original owner, Columbia Tobacco Company which ceased operations in 1986 due to financial losses. Since PNB has never been in the tobacco business, it readily agreed to lease (on a "financing lease" or "capital lease" basis the cigarette manufacturing complex to STC in October 1986. The salient provisions of the lease contract between PNB and STC are as follows: 1. The lease is for a period of ten (10) years (starting from October 1986) subject to renewal for another ten (10) years. 2. The lease payments are P6.5 million annually payable monthly in the amount of P551,666.66. 3. The advance lease payment of P9.75 million was made. 4. The lessee has the option to purchase the properties anytime within the first ten (10) years at a fixed price of P130 Million. The lease payments are deemed and credited as partial payments of the agreed purchase price . From the above terms you claim that in essence, the lease agreement between PNB and STC has the characteristic of a sale payable in installments , and therefore should be classified as transfer of ownership . Accordingly, it is your contention that the current fair market value of STC's assets as appraised including the properties covered by the capital lease, should be considered in determining the proper valuation of the STC shares. The pertinent provisions of the Civil Code provide: "ARTICLE 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof." (Emphasis supplied) "ARTICLE 1497. The thing shall be understood as delivered, when it is placed in the control and possession of the vendee . (Emphasis supplied) Under the present case, there is neither actual or constructive delivery of the properties as the corporation has not yet exercised the option to purchase the properties. Hence, the transaction does not make the corporation the owner of the leased properties above-mentioned. While the properties may have pecuniary value capable of ascertainment, the corporation has no full control of the same by which its full value may at once be realized. The company's willingness to purchase the said property is not an assurance that it will exercise the option to purchase the property considering that as of March 31, 1991, it manifested a total deficit of P68,093,395.00. If we allow the same to be considered in the valuation, and the company fails to exercise the option for whatever reason, such failure may result to stock watering of the shares of CBHI for lack of consideration of the shares taken, which is prejudicial to the interest of its existing & future stockholders, creditors and the public dealing with it. In view of the foregoing, capital lease assets with option to repurchase should be excluded in determining the proper valuation of the STC shares. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman