Mr. Federico Y. Alikpala, Jr.

February 19, 1991 Mr. Federico Y. Alikpala, Jr. Philippine National Oil Company PNOC Building 7901 Makati Avenue Makati, Metro Manila S i r : This refers to your letter of January 8, 1991, requesting opinion on the legality of the proposed transaction of Philippine National Oil Company (PNOC) and National Development Corporation (NDC) relative to the acquisition by PNOC of NDC's shareholdings in Manila Gas Corporation (MGC) in exchange for the redemption of NDC preferred shares owned by PNOC as consideration therefor. As stated, PNOC is interested in acquiring NDC's controlling interest (35,000 shares or 77.78%) in MGC which is engaged in the manufacturing and distribution of pipe gas and liquefied petroleum gas (LPG).As consideration for the acquisition, PNOC proposes to surrender or exchange a portion of its shareholdings in NDC corresponding to the value of the MGC shares. PNOC is the owner of 369,151 preferred shares in NDC with a par value of P1,000.00 per share. The preferred shares are subject to redemption by NDC in accordance with the five-year schedule beginning January 1, 2001. However, under the contemplated transaction the redemption schedule will be modified so as to effect the acquisition by PNOC of NDC's interests in MGC in exchange for the NDC preferred shares owned by PNOC. To your knowledge, NDC has no existing retained earnings . While under Section 8 of the Corporation Code redeemable shares may be redeemed regardless of the existence of unrestricted retained earnings, under Section 41 of the same Code, issued shares may be reacquired by the corporation only if it has unrestricted retained earnings to cover the shares to be purchased. Hence, your request for opinion on the matter. It appears that PNOC and NDC were created by virtue of special laws, PD 334, as amended and CA No. 182 ,as amended by CA No. 311 , respectively, and are not registered with the Commission. Their statutory articles of incorporation are not the ones contemplated under the Corporation Code. Hence, in line with our previous ruling with respect to corporations created by special laws: Re: Alfredo Gray, Sr., et al. vs. Agustin Marketing, et al., SEC Case No. 2102, dated March 9, 1982, it is advised that the Commission has no jurisdiction over said corporations. However, please be advised that said corporations are subject to Section 4 of the Corporation Code quoted hereunder: "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) Thus, in all special corporations, the Corporation Code would have a suppletory effect insofar as the provision thereof may be applicable and are not inconsistent with such special laws. In case of conflict, the special statutes should prevail. Accordingly, in the absence of any contradictory provision in the above-mentioned special laws relative to redemption of preferred shares, our ruling that provisions in the articles relating to the retirement of preferred stocks are in effect a contract between the issuing corporation and the preferred stockholders may apply. We reiterate that the right, when it exists, can only be exercised in conformity with the terms of the contract, and in the manner, if any, prescribed by the statute . Thus, strict compliance with statutory or contractual provisions of redemption is essential .The board of directors cannot redeem shares of preferred stock upon any basis other than the corporate authority pursuant to which the preferred stock was issued and accepted by the preferred stockholders. ( SEC letter dated January 23, 1985 addressed to Sycip, Gorres, Velayo & Co .,citing several authorities). As to the redemption of preferred shares in the absence of retained earnings, quoted hereunder is the provision of Section V, par. 5 of SEC Rules Governing Redeemable Shares, implementing Section 8 of the Corporation Code: "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). Thus, redemption of preferred shares may not be made if after their redemption the corporation would manifest a negative equity position. Such a limitation is based on the principle that corporate assets are a "trust fund" for the benefit of the creditors to the extent that the credit are entitled to payment before any distribution of capital to shareholders. LexLib For further information, it is suggested that the matter be referred to the Office of the Government Corporate Counsel which, under PD 1415, is the principal law office of all government owned or controlled corporations. Very truly yours, (SGD.) ARMANDO Z. GONZALES Associate Commissioner