Mr. Jose P. Llopis

December 28, 1989 Mr. Jose P. Llopis J. P. Llopis & Co. 164 P. Domingo Street B.F. Resort Village Las Pias, Metro Manila Sir : This refers to your letter dated November 13, 1989, requesting opinion on the queries posed therein. As stated, your client corporation has an authorized capital stock of P4 million, of which P.8 million has been subscribed and P.5 million paid-up. The board of directors plans to offer the unsubscribed P3.2 million worth of shares to the present subscribers; per subscription contracts, no initial payments shall be made, rather, all payments shall be made upon call by the board. Your queries are: 1. May the shareholdings, as per above-mentioned subscriptions be voted during a stockholders' meeting? 2. If a stockholder subscribes to only a portion of the total shares he is otherwise entitled to under his pre-emptive right (i.e.,a 40% stockholder subscribing to only 10% of the 32,000 shares),will a waiver for the balance be necessary before the other stockholders may subscribed to the said balance? 3. Will exemption from registration requirements for the P3.2 million be required at the time of subscription? As regards payment to additional subscriptions, the Commission in a previous opinion, has held that, the Board of Directors in the honest and reasonable exercise of discretionary powers may fix the amount that would be considered sufficient down payment on subscription to the unissued shares of the corporation. ( Letter to Paredes Poblador Nazareno Azada and Toma-Cruz Law Offices dated November 6, 1970 ).Subsequent subscriptions should be distinguished from pre-incorporation subscription and subscription to an increase of capital stock under Sections 13 and 38 of the Corporation Code of the Philippines which reads in part as follows: "SECTION 13. Amount of capital stock to be subscribed and paid for purposes of incorporation .At least twenty-five (25%) percent of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) percent of the total subscription must be paid upon subscription, the balance to be payable on date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: ...". cdlex "SECTION 38. Power to increase or decrease capital stock; ...Provided that the Securities and Exchange Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the sworn statement of the Treasurer of the corporation lawfully holding office at the time of filing of the certificate showing that at least twenty-five (25%) percent of such increased capital stock has been subscribed and that at least twenty five (25%) percent of the amount subscribed has been paid ...".(emphasis supplied) Except therefore in those two (2) instances, the Board has the authority to determine the amount as well as the time and manner of payment of subsequent subscriptions. Moreover, under Section 72 of the Corporation Code, full payment of subscription is not a requisite to make one a stockholder. The law provides: "SECTION 72. Rights of unpaid shares . Holders of subscribed shares not fully paid which are not delinquent shall have all the rights of a stockholder ." (emphasis supplied) Thus, subscriptions not fully paid but not delinquent have all the rights of a stockholder which rights include, among others, the right to vote. Anent your second query, it is a settled general rule that all stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings unless such right is denied by the articles of incorporation. (Section 39, Corporation Code). The reason for the rule in the case of new issues is to maintain unimpaired and unaltered the relative voting strength of the issued stocks and the voting control of the company to prevent disproportionate dilution of the voting power of the stocks. (11 Fletcher, Sec. 5135 citing Borg v. International Silver Co.,11 F2d, affg. 11 F2d 143).In view of the rationale behind the rule on preemptive rights, waiver of the stockholder to subscribe to the balance as stated in your letter is necessary. However, if the entire number of shares to which the stockholder is entitled to subscribe is offered to him and he subscribes only to a portion thereof, the stockholder is deemed to have impliedly waived his right to subscribe to the balance. Anent your third query, Section 4(a) of the Revised Securities Act provides that no securities, except of a class exempt under any of the provisions of Section five thereof or unless sold in any transaction exempt under any of the provisions of Section Six thereof, shall be sold to the public within the Philippines, unless such securities shall have been registered and permitted to be sold in accordance with the said Act. The Commission, however, from time to time may exempt transactions other than those provided for under said sections if it finds that the enforcement of the registration requirements with respect to such transactions is not necessary in the public interest and for the protection of the investors by reason of the small amount involved or the limited character of the public offering. (Sec. 6 (b) Revised Securities Act). Since subscriptions to the unissued shares are not considered exempt per se, appropriate request for exemption from the registration requirements under the Revised Securities Act is necessary. Please be advised accordingly. Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner