Mr. Ismael Seferino

May 24, 1994 Mr. Ismael Seferino Door No. 4, Espinos Building Araneta-Alunan Streets Singcang, Bacolod City S i r : This refers to your letter of May 5, 1994 requesting opinion on the legality of the proposed amendment to the articles of incorporation of Southern Negros Development Bank, Inc. relative to the change of dividend rate of preferred shares. prcd As stated, the articles of incorporation of the Southern Negros Development Bank, Inc. provide, among others, that Preferred Class "C" shares are entitled to cumulative, preferred annual dividend rate of 19% of the par value of the share. The board of directors of the bank would like to amend the aforestated dividend rate by inserting therein a proviso authorizing the-board to reduce the stipulated 19% cumulative dividend to a lesser rate determinable within the sole discretion of the board, whenever the profit of the bank does not, in its judgment, justify the grant of the maximum 19% fixed in the present articles of incorporation. Your query is: Assuming that the proposed amendment is approved by the required votes of the Board and stockholders, would the amendment be valid? The pertinent provision of the Corporation Code provides in part: "SECTION 6. Classification of shares . The shares of stock of corporations may be divided into classes or series of shares or both, any of which class or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation :... .... The Board of Directors, when 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 effective upon the filing of a certificate thereof with the Securities and Exchange Commission . ...." (Emphasis supplied) The above statutory provision permits the Board of Directors, if authorized in the articles of incorporation, to fix the terms of preferred shares. However, the Commission had previously ruled that giving the Board a blanket authority to fix the terms and conditions of preferred shares might result to an abuse of such authority that might adversely affect the rights of shares already issued. Thus, in order to protect the interest of the stockholders, the Commission does not allow a provision giving the Board a blanket authority to determine the terms of preferred shares, unless certain features, guidelines or standards to be followed in the issuance of preferred shares are spelled out in the articles of incorporation .( Ltr. to Sabido, Sabido & Associates dated January 17, 1983 ; Ltr. to Jose C. Vitug dated January 11, 1982 ) Accordingly, in consonance with said SEC ruling, it is advised that the above proposal to authorize the Board to fix the dividend rate of preferred shares at its discretion should be made subject to certain guidelines to be spelled out in the articles of incorporation such as setting a specific range of dividend rate (minimum and maximum limit). The Corporation Code further requires that in order to be effective, any Board Resolution fixing the dividend rate shall be filed with the SEC. Likewise, considering that the corporation is a bank, the dividend rate shall be subject to the Rules and Regulations of the Bangko Sentral ng Pilipinas. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner