Mr. Miguel M. Gonzales

July 2, 1992 Mr. Miguel M. Gonzales 6th Floor, LBP Building 11 317 Sen. Gil J. Puyat Avenue Makati, Metro Manila S i r : This refers to your letter dated April 10, 1992 questioning the letter of the Commission dated February 14, 1992 denying the request of Masaganang Sakahan, Inc. (MSI) for reconsideration of the penalty charges imposed against it amounting to P39,920.00 for unauthorized issuance of shares worth P19,985,000.00 out of its unissued shares claiming that the case of Nestle Philippines, Inc. v. Court of Appeals and Securities and Exchange Commission G.R. No. 86738, November 13, 1991 which serves as the basis of the SEC's denial of the corporation's previous request for reconsideration does not apply in the case of MSI. LibLex Section 6(4) of the Revised Securities Act provides: "SECTION 6. Exempt transactions . The requirement of registration under subsection (a) of Section four of this Act shall not apply to sale of any security in any of the following transactions: xxx xxx xxx (4) ...:or the issuance of additional capital stock of a corporation sold or distributed by it among its own stockholders exclusively, where no commission or other remuneration is paid or given directly or indirectly in connection with the sale or distribution of such increased capital stock .(Emphasis supplied) The term "additional capital stock" as used in the aforecited provision refers to increase in capital stock and not to issuance of additional shares from the unissued but authorized capital stock. This interpretation is supported by the use of the term " increased capital stock " in the last sentence of the provision. Issuance of shares out of the unissued capital stock, therefore, is not considered exempt " per se " from registration requirements under the Revised Securities Act. (SEC Opinion dtd. December 14, 1984 addressed to Meralco Industrial Engineering Services Corporation) The reason why the exemption is limited only to increase of capital stock is that in the course of and in compliance with the requirements of increasing authorized capital stock under Section 38 of the Corporation Code, the SEC, as a matter of course, examines the financial condition of the corporation before approving the same, and hence, there is no real need for exercise of SEC authority under the Revised Securities Act. On the other hand, issuance of previously authorized but unissued capital stock by the corporation requires only Board of Directors approval. Neither notice to nor approval by shareholders is required. Therefore, there would be no opportunity for the shareholders to be informed about such issuance and about the present condition of the corporation. Hence, there is still a need for the SEC to see to it that all the shareholders interests are protected. The above view was upheld by the Supreme Court in the case of Nestle Philippines, Inc. v. Court of Appeals and Securities and Exchange Commission, G.R. No. 86738, dated November 13, 1991 wherein both the Court of Appeals and Supreme Court resolved the ambiguity by construing Section 6 (4) of the Revised Securities Act as referring only to the issuance of shares of stock as part of and in the course of increasing the authorized capital stock. Quoted in part hereunder is part of said Supreme Court decision: "In the second place, and more importantly, consideration of the underlying statutory purpose of Section 6(a) (4) compels us to sustain the view taken by the SEC and the Court of Appeals .The reading by the SEC of the scope of application of Section 6 (a) (4) permits greater opportunity for the SEC to implement the statutory objective of protecting the investing public of the true financial conditions and prospects of the corporation. ..." xxx xxx xxx "....We must reject an interpretation which may disable the SEC from rendering protection to investors, in the public interest, precisely when such protection may be most needed." (Emphasis supplied) However, while issuance of shares out of the unissued authorized capital is not exempt per se, the Commission may grant exemption to such transaction pursuant to Section 6 (b) of the Revised Securities Act which states: "(b) The Commission may, from time to time and subject to such terms and conditions as it may prescribe, exempt transactions other than those provided in the preceding paragraph, if it finds that the enforcement of the requirements of registration under this Act 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 ." (Emphasis supplied) "(c) A fee equivalent to one-tenth of one per centum of the maximum aggregate price of issued value of the securities shall be collected by the Commission for granting a general or particular exemption from the registration requirements of this Act." Thus, while the above issuance by MSI of shares out of its unissued authorized shares may be exempted in view of its limited character, as said Corporation is wholly owned by Land Bank of the Philippines, the same, pursuant to the above provision of Law, still has to secure exemption from the Commission prior to such issuance. The corporation, therefore, in issuing shares of its unissued capital stock without first securing exemption therefrom from this Commission prior to the issuance, has violated the Revised Securities Act. In view thereof, subject Corporation is hereby ordered to pay the amount of P39,970.00 as penalty for said violation. Unless you settle the penalty charges, your application for increase of authorized capital stock pending before this Commission shall be held in abeyance. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman