Philippine Export and Foreign Loan Guarantee Corporation

May 7, 1986 Philippine Export and Foreign Loan Guarantee Corporation 5th Floor, Executive Building Center Buendia Ave.,Ext. corner Makati Ave., Makati, Metro Manila Attention : Ms . Josephine J . Milan Asst . Manager Legal Department Madam: This has reference to your letter dated November 13, 1985, requesting for the opinion of this Commission on the queries posed therein. LibLex It appears that recently, the Board of Directors of the Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee),a wholly owned government financial institution, approved in principle, the conversion into equity of the outstanding debt of one of its clients. Philguarantee management intends to convert the said outstanding obligations to preferred shares with the following features: P.01 par value 12% cumulative dividend rate voting and participating as to dividends as that of common shares convertible to common shares on a 1:1 basis at anytime at Philguarantee's option redeemable, redemption to start in 1992 partially or fully at the clients option, with full mandatory redemption by 1994 It is in this regard that you request the assistance of the Commission in the resolution of the following queries: 1. Can the Philguarantee client redeem the preferred shares on redemption date if after redemption, the client corporation will have a negative equity, taking into consideration, among them, the following: a) Section 8 of the Corporation Code b) Section III 1 (a) and V (5) of CCP No. 1 c) A sinking fund has been established for the purpose of redeeming the preferred shares. 2. "Are holders of mandatory redeemable preferred shares treated and/or considered creditors?" It appears that the Philippine Export and Foreign Loan Guarantee Corporation was created by special law, P.D. No. 550, as amended by P.D. No. 1080. Its statutory articles of incorporation is not the one contemplated and registered under the Corporation Law (Act 1459), now the Corporation Code. Hence, in line with our previous ruling, it is advised that the Commission has no jurisdiction over the Philippine Export and Foreign Loan Guarantee Corporation. To hold otherwise would be arrogating unto the Commission the power and authority to interpret and implement laws outside its competence and jurisdiction. (Alfredo Gray, Sr. et al. v. Agustin Marking, et al., SEC Case No. 2102, dated March 9, 1982.) Considering, however, that Philguarantee was created by special law, Section 4 of the Corporation Code applies, and we quote: "SECTION 4. Corporations created by special laws or charters . Corporations created by special laws or charters shall be governed primarily by the provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of this Code, insofar as they are applicable ." (Emphasis supplied). An examination of Presidential Decree No. 550, as amended, the law creating Philippine Export and Foreign Loan Guarantee Corporation (Philguarantee) shows that the same does not contain provisions on preferred shares. In the absence of said provision, therefore, we resort to the Corporation Code and its Implementing Rules. Thus for purposes of information only and without assuming jurisdiction over the Philguarantee, the following information may be imparted: Relative to your first query, it must be noted that Section 8 of the Corporation Code and Section III, 1 (a) of CCP No. 1, or the Implementing SEC Rules Governing Redeemable and Treasury Shares allow a corporation to reacquire its outstanding redeemable shares regardless of the existence of unrestricted retained earnings, provided that the reacquisition is made in accordance with the conversion or redemption features as provided for in the articles of incorporation and covering stock certificates. It is believed that the corporation cannot validly exercise its option or yield to the client's option to redeem said preferred shares if after the redemption the corporation would manifest a negative equity position as this would violate Section V (5) of CCP No. 1, quoted hereunder: "SECTION V * . Redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings provided that the corporation has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock ." (Emphasis supplied) Furthermore, the violation would still exist even if a sinking fund has been set up for redemption purposes. The following precedents are squarely in point: "Such redemption may not be made when a corporation is insolvent or if such purchase or redemption would cause insolvency or inability to meet debts as they mature." (Fletcher, Vol. 11, p. 581) "A corporation cannot be obliged to appropriate a portion of its capital or assets to redeem the shares of preferred stockholders when there is no surplus available for the redemption of their shares." ( Ltr. to Coco-Chemical Phil. dtd. July 15, 1974 ) "It is clear that the corporation, while a going concern and not in process of liquidation, cannot distribute any part of its legal capital or property other than surplus profits among its stockholders ...The redemption of preferred stock out of capital is a distribution thereof to the holders of such stock so redeemed ..." xxx xxx xxx Anent your question No. 2, "redeemable preferred shareholders are not creditors of the corporation in which they hold stock, since their dividends are not payable absolutely but only from the earnings of the corporation and only when and as declared." (Fletchers vol. 11, p. 537 citing Arizona Power Co. V. Stuart, 212 F2d 535) "While holders of preferred stock are not creditors and have no rights as such, they are, however, stockholders of corporation and, subject to terms and conditions on which their stock was issued, have all the rights of stockholders." (Fletcher, supra, p. 539 citing Kistler v. Caldwell Cotton Mills Co. 205 N.C. 809, 172 SE 373.) Insofar as voting rights of preferred shares are concerned, there is authority that "In the absence of charter or statutory provision or valid stipulation to the contrary, holders of preferred stock have the same right as holders of common stock to vote at stockholders' meeting. (Fletcher's Vol. 11 p. 565 citing Hazel Atlas Glass Co. v. Van Dyke & Reures, Inc. 8 f2d 716),although, "it is also within the power of a corporation when it issues preferred stock to provide expressly that it shall confer no right to vote ..." (Supra) Sec. 6 of the Corporation Code further provides, thus: "SECTION 6. ... "Where the articles of incorporation provide for non-voting shares in the cases allowed by this Code, the holders of such shares shall nevertheless be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws, 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation Except as provided in the immediately preceding paragraph, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights." LexLib Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman