Atty. Edwin Reyes

April 26, 1982 Atty. Edwin Reyes Delta Motor Corporation P.O. Box 305, MCC, Makati Metro Manila 3117 Dear Atty. Reyes: This refers to your letter-query dated March 11, 1982 requesting opinion relative to the Articles of Incorporation of an undisclosed corporation registered with this Office in June 1977 which expressly provides, inter alia, that only holders of founders' shares shall be entitled to be voted upon as directors, without any period of limitation within which such privilege may be enjoyed. Your queries are: 1) Will Section 7 of the New Corporation Code which limits the exercise of the said privilege to only five (5) years from date of approval by the SEC automatically amend the said provision in the corporation's Articles of Incorporation? 2) If so when will the five (5) year limiting period commence? Section 7 of the New Corporation Code requires that said provision in the corporation's Articles of Incorporation be amended. Section 7 of the Corporation Code of the Philippines is a remedial legislation designed to prevent the abuse of founders' shares (wherein the right to elect the director is reserved only to a minority holding founders' shares) by limiting the privilege of holders of founders' shares to a period of five (5) years and subjecting the classification of founders' shares to the approval or the Commission. Note that in the deliberation of the Batasang Pambansa on founders' shares, it was the consensus of the lawmakers that the SEC will have to take into account: ...whether those persons to whom the prerogative or right is reserved have, shall be say, contributed substantially in the organization of the corporation or whether also the business of the corporation is of a character that is necessary for a period of time that its control must be to a certain group of individuals. Otherwise it may not be able to obtain certain concessions, certain loans or certain business because these founders' shares may not only serve to remunerate possibly promoters ... ...because of the existence of a certain group of individuals who have perhaps special qualifications to manage a corporation by reason of which it is in their competence only that certain other groups with which the corporation may be dealing with and willing or agreeable to enter into transactions with the corporation but only if the management of that corporation is reserved to that group. (Proceedings, Nov. 15, 1979) ... In short, as Solicitor General Mendoza explains, the SEC is granted the authority to disapprove any provision on founders' shares ...in case it fears that the classification of certain shares into founders' shares with this prerogative is unwarranted. (Ibid) prcd Under Article 148 of the Corporation Code of the Philippines, existing corporations affected by the new requirements under the Code are given a period of two (2) years from its effectivity (May 1, 1980) within which to comply with the same. Consequently, since said articles of incorporation did not provide for a period of limitation within which such prerogative may be exercised, you are required to file amended articles of incorporation specifying such period, subject to the approval of this Commission, on or before May 1, 1982. Such period (not exceeding five years) will commence from the date such amendment to the articles of incorporation is approved by the Commission. If a corporation does not file an amendment to its articles of incorporation acceptable to the Commission on or before May 1, 1982, the Commission will consider the limitation laid down by Section 7 of the Corporation Code as inserted into the said articles on May 1, 1980 (the date the Corporation Code became effective). As a matter of policy, the Commission will consider the limitation period in the corporation's articles of incorporation providing for founders' shares to be effective only up to April 30, 1985. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner