Del Rosario Lim De Vera Vigilia and Panganiban

October 9, 1990 Del Rosario Lim De Vera Vigilia and Panganiban 3rd Floor, China Bank Bldg. Annex Dasmarias St.,Manila Gentlemen : This refers to your letter dated August 31, 1990 requesting opinion on the queries posed therein based on the following facts: You stated that on March 7, 1990, your client's (China Banking Corporation) Board approved the increase of the Bank's authorized capital stock from P500 Million to P1.0 Billion, fixing May 14, 1990 as tentative record date and June 13, 1990 as tentative last payment date; said dates were made tentative because the Board may fix other dates "in compliance with the requirement/s of the Central Bank of the Philippines (CBP),Securities & Exchange Commission (SEC),the Manila and Makati Stock Exchanges and other offices and agencies" (per said Board approval),and giving stockholders as of record date the pre-emptive right to subscribe to one share for every 2.75 shares held by them at par value of P100.00 each share; as required by the Board, advance notice of said approval and the salient features thereof were given to the stockholders by a form letter dated March 15, 1990. At the regular annual meeting of the Bank's stockholders on May 3, 1990, the aforesaid Board's approval was unanimously confirmed by more than 2/3 of the Bank's outstanding capital stock; thereafter, Subscription Agreements were sent to the individual stockholders, the third to the last paragraph of which reads as follows: "It is understood that to be valid, ...the aforesaid increase of capital stock, the listing thereof, and the like shall have approved by the Central Bank of the Philippines, the Securities and Exchange Commission and the Stock Exchanges." However, inspite of your client's strong representation with the Manila and the Makati Stock Exchanges, they did not recognize the May 14, 1990 record date proposed by your client, but required your client to apply for the listing of the shares to be issued in favor of those who will exercise their pre-emptive rights to subscribe; to avoid further delay in your client's plan to become a universal bank, they complied with the requirement of the stock exchanges; after the approval in principle of the additional listing of your client's shares, its Board fixed July 12, 1990 as the new record date and August 13, 1990 as the last payment date, and notice thereof were duly published in the Manila Bulletin on June 29, 1990, and the United Daily News and the World News on June 30, 1990, and forwarded to the stockholders by special messengers for residents of Metro Manila and by mail for those staying outside Metro Manila, together with the new Subscription Agreement. Unfortunately, for one reason or another, some stockholders got hold of their Subscription Agreements after August 13, 1990 the last payment date; hence, they were unable to exercise their pre-emptive right to subscribe. Your queries are: 1. May your client still allow their stockholders who failed to exercise their pre-emptive rights to subscribe within the prescribed period that ended on August 13, 1990, to subscribe at this time, assuming that its Board is willing to accommodate them? 2. As regards stockholders who exercise their pre-emptive rights after the original record date (May 14, 1990) and paid within the original but tentative last payment date, but disposed of their shares prior to the new record date (July 12, 1990),may your client honor the subscriptions and payment they made between May 14, 1990 and June 12, 1990, insisting that they have already a perfected contract with your client, despite their knowledge that the ex-date of the Bank's offering was not posted as yet by the Exchanges, when they sold their shares? The Commission had previously ruled that shares corresponding to existing stockholders who did not exercise their pre-emptive rights to subscribe to an increase of capital stock may be offered to any interested persons on a first come first serve basis. But the Commission considers it a sound corporate practice to offer the remaining shares to interested stockholders of record whenever practical and feasible before offering them to third parties. (SEC Opinion dated May 14, 1990 addressed to Batangas Sugar Central citing SEC Opinion dated September 24, 1974 addressed to Atty. Salvador P. De Guzman, Jr. ) In line with the foregoing opinion, your first query may be answered in the affirmative, provided that all previous non-subscribing stockholders are given the opportunity to subscribe together with other stockholders who are interested again to subscribe. Relative to your second query, it can be stated that a stockholder's right to a preference in subscribing for or purchasing the new stock, when the capital stock of a corporation is increased, may be sold or assigned by the stockholder, unless there is some legal obstacle. (11 Fletcher, Sec. 5140 citing United States Schriguer v. Sutherland, 19 F2d 688) When shares of original stock are sold by the holder after an increase of the capital stock has been voted ,the purchaser acquires, as an incident to the stock, the same right to a preference in subscribing for or purchasing the new stock as was possessed by the transferor. (Ibid, citing Hogg v. Eckhardt, 343 Ill 246, 175 NE 382, Nevg 249 Ill App 346, 639 (abst.) In the light of the foregoing, your second query may also be answered in the affirmative. However, it has to be emphasized that under Section 63 of the Corporation Code, no transfer of stocks shall be valid except as between the parties, until the transfer is recorded in the books of the corporation. Likewise, subscription to the proposed increase and the increase in the authorized capital stock itself, shall be effective only upon approval by the Commission. LexLib (SGD.) RODOLFO L. SAMARISTA Associate Commissioner