Sabido, Sabido & Associates

January 17, 1983 Sabido, Sabido & Associates Emerald Building, Emerald Ave. Ortigas Office Buildings Complex Pasig, Metro Manila Attention : Atty . Juan S . Sarte Gentlemen: This refers to your letter of December 17, 1982, requesting the approval of the Commission on the following proposed provision in the articles of incorporation: LexLib "2. Preferred Stock .The preferred stock of the corporation consists of Twenty-Five Million (25,000,000) shares with a par value of Ten (P10) Pesos per share, and authority is hereby conferred upon the Board of Directors to issue such shares and accept subscriptions thereof, upon such terms and conditions, and in accordance with such rights, privileges, and restrictions that the Board of Directors may fix and specify on the certificate to be filed with the Securities and Exchange Commission and on the certificate of stock." The pertinent provision of the Corporation Code of the Philippines relevant thereto reads, thus: "SECTION 6. Classification of shares . The shares of stock of stock corporations may be divided into classes or series of shares or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation :... Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation, which are not violative of the provisions of this Code ;...The Board of Directors, where authorized in the articles of incorporation may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, that such terms and conditions shall be effected upon the filing of a certificate thereof with the Securities and Exchange Commission. ...".(Emphasis supplied) The Commission has ruled in its previous opinions that "giving the Board blanket authority to fix the terms and conditions of the preferred shares, without stating the privileges, preferences, restrictions or rights of the preferred shares is contrary to the above-quoted Section 6 of the Corporation Code. Unless certain features, guidelines and standards as to the issue of preferred shares are stated or spelled out in the articles of incorporation, such authorization becomes a dangerous power which may adversely affect the rights of shares already issued .( Letters to Mr. Jose Vitug & PT & T Corp., dated January 11, 1982 and August 9, 1982 ,respectively). While under Section 6 of the Corporation Code the "Board of Directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, that such terms and conditions shall be effected upon the filing of a certificate thereof with the Securities and Exchange Commission", the same is an amended provision of the old law and is an off-shoot of modern statute and/or corporate practice. It authorizes the Board to fix the terms and conditions of the preferred shares in such a way as to "tailor the securities to meet changes in market conditions which cannot be foreseen at the time of incorporation or later, amendment of the articles of incorporation. Typical of the changes is the variance of the dividend rate to meet the demands of the money market . . . The resolution of the directors fixing such preferences is generally required to be certified and filed or recorded in the same manner as the articles of incorporation, thus, providing certain information as to the terms of the contract." (Ballantine, Law of Corp. pp. 502-503; 2 Fletcher, Cyc. Corp. 52841, p. 531). The issue of a series of shares, otherwise called "blank stock" is a concept explicitly recognized for the first time under the Code although it is not novel in other jurisdictions. As practiced in other jurisdictions, the series is used with reference to preferred shares and devised in response to the peculiar conditions of the securities market and what the issuer corporation deems needed to make a sale. It permits the board of directors of the issuer corporation to fix the terms of a series of preferred shares, subject to certain limitations, so as to promptly meet current requirements in the securities market without need of amending the Organization: New Dimensions, p. 14-15). Hence, the articles of incorporation fixes the classes of shares, creating the preferred or special class and authorizing the issue thereof, in series. The variations in the relative rights and preferences as between different series within the class are fixed by the articles of incorporation, but the terms of a series may be defined by the board subject to certain limitations imposed in the articles . In consonance with the aforementioned rulings and provisions, it is advised that the privileges and preferences in the company's preferred shares should be stated and indicated in the articles of incorporation. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman