Attys. Emmanuel Paras

May 10, 2002 SEC OPINION Attys. Emmanuel Paras Angel Salita, Jr. Philbert Varona Sycip Salazar Hernandez & Gatmaitan SycipLaw-All Asia Capital Center, 105 Paseo de Roxas, Makati City Dear Attys. Paras, et al., This refers to your letter dated February 5, 2002 inquiring on the validity of the proposed capital restructuring of your client, Laguna AAA Water Corporation. As you propose, the Preferred shares are cumulative and convertible to Common "B" shares. The Preferred Shares are entitled to dividends at an agreed rate (plus dividends for any unpaid dividends at the same agreed rate from the time the unpaid dividends cumulated until they are actually paid). Such dividends (and dividends on the dividends) will be paid only if the Corporation has unrestricted retained earnings. Upon conversion of the Preferred Shares into Common "B" Share, if all or part of such dividends (and dividends on the dividend) remains unpaid, the Common "B" Shares will be entitled to receive such unpaid dividends (and dividends on the dividends) only if the Corporation has unrestricted retained earnings. Common "A" Shares (and Common "B" Shares) will be entitled to receive cash dividends only after such receipt of unpaid dividends by the Common "B" Shares. You opine that the abovementioned structure is valid under our laws. DTAESI We agree. Section 6 of the Corporation Code of the Philippines provides that the shares 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. "Corporations are thus expressly empowered to classify their shares of stock into classes, or series of shares, or both, possessing such rights, privileges or restrictions as may be stated in the articles of incorporation" (Lopez, Corporation Code of the Philippines, p. 90) subject to certain legal and statutory limitations. The proposed reclassification appears to be valid. With respect to the terms of payment of the dividends, the SEC in an opinion has clarified that "there is no hard and fast rule describing the interval of time between the date for the declaration of dividends, the date of record or stockholders entitled thereto, and the date of payment, the same being left to the sound and judicious discretion of the director." (SEC Opinion dated April 11, 1962 as cited in De Leon, Corporation Code of the Philippines, p. 353). As proposed, the dividend rights only contemplate actual payment of dividends when the Corporation actually has unrestricted retained earnings available. It is worth mentioning that for a valid declaration of dividends, two requisites must concur: (1) the existence of unrestricted retained earnings out of which the dividends may be declared and distributed; and (2) the resolution of the board of directors declaring the corporate policy of paying a portion or all of such earnings to the stockholders of the corporation. Hence, the condition regarding the availability of unrestricted retained earnings is legal. On the declaration of stock dividend, the same can not be made without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. As to the convertibility feature of the preferred shares, it is proposed that the "Holders of the Preferred Shares shall have the option to convert all or a portion of the Preferred Shares into Common "B" Shares of the corporation, at any time and from time to time upon giving at least thirty (30) days written notice to the corporation, until the end of the third (3rd) year from the issue date of the Preferred Shares. . . At the end of such three (3) year period, all unconverted Preferred Shares shall be converted into Common "B" Shares at par value, regardless of the existence of unrestricted retained earnings but subject to the Corporation's compliance with applicable laws, rules and regulations. Each unconverted Preferred Share shall be converted into one (1) Common "B" Share. . ." AECcTS Relative thereto, the Securities and Exchange Commission previously opined that although the preferred shares possess the quality of being convertible into common shares per articles of incorporation, such conversion is not automatic. An amendment of the articles of incorporation is required to formalize the conversion which must not result in watering of stock . . . or issuance of stocks in excess of the authorized capital stock of the corporation. (De Leon, Corporation Code of the Philippines, 1993 ed., p. 71 citing SEC Opinion dtd. Sept. 3, 1990). Finally, it should be emphasized that in amending the articles of incorporation by reclassification and conversion of shares, the amendment must not be prejudicial to the interest of the creditors and stockholders. Hence, the proposed amendments may be allowed subject to applicable laws, rules and regulations. Very truly yours, (SGD.) BENITO A. CATARAN Director Company Registration and Monitoring Department