Atty. Roberto C. Leong

December 7, 1993 Atty. Roberto C. Leong Leong Amihan Esuerte & Associates 3rd Flr.,FEBTC Bldg. Araneta St.,Bacolod City S i r : This refers to your letter requesting opinion on the queries posed therein relative to the proposed Stock Distribution Option (SDO) plan of Wuthrich Hermanos, Inc. (WHI) under the Agrarian Reform Program. As stated, your client, Wuthrich Hermanos, Inc. (WHI) with an authorized and fully paid capital stocks of P2,000,000.00 (20,000 shares) filed with the DAR an application for SDO plan. Under this plan, the laborers of WHI would become stockholders of the corporation instead of the land of the corporation to be divided into small parcels and distributed individually to them. The decision to file the SDO plan was approved by the board of directors and ratified by the stockholders of WHI. The SDO was approved by the DAR on September 1, 1992. Under the SDO plan as approved by the DAR, WHI is required to increase its authorized capital stock from 20,000 shares to 28,785 shares. The increase of 8,785 shares which is 30.52% of the new authorized capital stock and which represents the ratio of the value of the land to the value of the total assets of WHI, will be distributed to the Farmer Worker Beneficiaries (FWB) of WHI. Your queries are: 1. Whether or not the existing stockholders still have the pre-emptive right to the 8,785 shares? 2. What papers or documents shall be submitted to the SEC to support the application for an increase in authorized capital stock of WHI? Under the present law, the Corporation Code (BP Blg. 68), the grant of pre-emptive right to existing stockholders is made mandatory, unless the issuance falls under any of the exceptions enumerated therein. The Code provides: "SECTION 39. Power to deny pre-emptive right . All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock ,in exchange for property needed for corporate purposes or on payment of a previously contracted debt." (Emphasis supplied) Thus, unless denied in the articles of incorporation or the issuance falls under any of the exceptions, all existing stockholders of record are entitled to exercise their pre-emptive right to subscribe to all additional issuance of shares of stock of the corporation in proportion to their present stockholdings. The foundation or underlying basis of this right is to maintain the proportionate voting strength and control of existing stockholders, that is, the existing ratio of their interest and voting power in the corporation. Anent the second query, under the Accounting point of view the above SDO plan can be implemented provided that the land distributable to FWB is set up in the books as liability to pave the way for its eventual conversion into equity. This is only possible, however, if the provision of SEC 21 of the Comprehensive Agrarian Reform Law (CARL) on the "Payment of Compensation by Beneficiaries under Voluntary Land Transfer" is complied with. In addition to the requirement listed in the attached Checklist of Requirements, the following should likewise be submitted: 1. Copy of SDO plan approved by DAR 2. Proof of compliance with Sec. 21 of CARL referred to above. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman