Attys. Rose Marie M. King

October 21, 2002 SEC OPINION Attys. Rose Marie M. King, Maria Teresa D. Mercado-Ferrer and Jose M. Layug, Jr. SyCip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas, Makati City 1226 Gentlemen : This is in reply to your letter seeking confirmation of your opinion that the contemplated transfer by Company L and Company M of the LMAs to LandCo (the "Transfer") and their subscription to LandCo shares (the "investment") do not require stockholders' approval because: DSEaHT 1. the Transfer is not a transfer of all or substantially all of the assets of Company L and Company M, and 2. the Investment is reasonably necessary for, and consistent with, the accomplishment of the primary purpose of Company L and Company M as cement manufacturers and distributors. The statutory authority for sale of corporate assets is found in Section 40 of the Corporation Code, which provides in part: "Sec. 40. Sale or other disposition of assets . Subject to the provisions of existing laws ...,a corporation may, by a majority vote of its board of directors, or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets ,including its goodwill, upon such terms and conditions and for such consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose . . . Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated ...[Emphasis Supplied] The subject transfer does not involve all of the corporate assets of each of Company L and Company M. As mentioned in your letter, the LMAs constitute only about 9% and 8%,respectively, of the total assets of Company L and Company M. Paragraph 2 of the said section of the Corporation Code defines the term "sale or disposition of all or substantially all the assets" as one which will render the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated. In other words, Section 40 of the Code applies only if after the disposition of corporate assets, the disposing corporation can no longer continue the business for which it was organized or accomplish the purposes for which it was incorporated. ( Lopez, Corporation C od e, p. 571 ) Any disposition short of this will not need stockholders action. If after the disposition of corporate assets, the disposing corporation can still continue the business for which it is organized, the disposition can be made without complying with the requirements set forth in Section 40 as it is not covered by said section. ( SEC Opinion dtd. February 16, 1987 citing Agbayani, Commercial Laws of the Philippines, Vol. 3, p. 355 ).Conversely, any disposition which does not involve all or substantially all of the corporate assets as defined above, made "in the regular course of business does not need approval by or authority of stockholders or members." ( Villanueva, Philippine Commercial Law, 1998 ed.,p. 396 ) In interpreting paragraph 2 of Section 40, this Commission has been guided not so much by the number or volume of the assets transferred but by the effect of such transfer on the corporation's business. To determine if the sale is made in the ordinary course of business, the test is not the amount involved but the nature of the transaction . (De Leon, Corporation C od e, 1993 edition, p. 316) In this regard, this Commission, in a number of opinions, has held that when, as in this case, the corporate property to be disposed of is merely part of the corporation's assets, such that its disposition will not render the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated, the board of directors as it may deem expedient and in good faith, dispose of it without stockholders' approval. (SEC Opinion dated March 14, 1991 addressed to Mr. Rodolfo B. Valdez; SEC Opinion dated August 21, 1995 addressed to RP Enterprise, Inc.; SEC Opinion dated February 16, 1987 addressed to Forbes Park Association, Inc.; SEC Opinion dated January 29, 1986 addressed to Ms. Aida Samante) Company L and Company M can continue the business for which they were organized to conduct cement manufacturing and distribution business. The sale or transfer of the LMAs will not render Company L and Company M incapable of producing and selling cement. The last paragraph of Section 40 of the Corporation Code is also relevant. The same reads: "Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business ..." [Emphasis Supplied] Related to Section 40 is Section 42 of the Corporation Code, which pertains to the power of a corporation to invest its corporate funds in another corporation or for any purposes other than the primary purposes for which it was organized. Section 42 provides: "Sec. 42. Power to invest corporate funds in another corporation or business or for any other purpose . Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock . . . at a stockholder's or member's meeting duly called for the purpose . . . Provided, That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, However, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary ." [Emphasis Supplied] Based on the foregoing, a transfer, even if involving all or substantially all of a corporation's assets, would not require stockholders' approval if the transfer is necessary in the usual and regular course of business of the corporation or if the proceeds of the sale will be appropriated for the conduct of the corporation's business. The investment of each of Company L and Company M in LandCo is reasonably necessary considering the primary purpose for which these corporations were incorporated cement manufacturing. The investment in a company that owns land and mining assets that can be used to further the primary business of the investing company is in line with the principal business of the investing company. LandCo owns or will own assets that are necessary for the primary business of Company L and Company M. (See, De la Mama vs. Ma-ao Sugar Central Co., Inc. (27 SCRA 247 (1969)) .Accordingly, the Transfer and the Investment do not need approval of the stockholders of each of Company L and Company M. Let it be emphasized however that the transactions and dealings of the board of directors are subject to the provisions of Sections 31 to 34 of the Corporation Code of the Philippines and to the equitable limitations/restrictions under the law. TcSaHC Very truly yours, (SGD.) LILIA R. BAUTISTA Chairperson