Fil-Hispano Ceramics, Inc.

June 18, 1986 Fil-Hispano Ceramics, Inc. 419 MacArthur Hi -way (Km. 14) Valenzuela, Metro Manila Attention : Mr . Alfredo Tayag Vice-President, Finance/Adm . Gentlemen: This relates to your letter, dated April 2, 1986, requesting clarification on the effectivity date of the merger between Fil-Hispano Ceramics, Inc. (Fil-Hispano) and Fil-Mosaic Corporation (Fil-Mosaic),and the quasi reorganization of the surviving corporation, Fil-Hispano. It appears that on December 28, 1984, a merger agreement was entered into between Fil-Hispano and Fil-Mosaic, with the former as the surviving corporation. Under the plan of merger, Fil-Mosaic conveyed unto Fil-Hispano all its assets and liabilities as of December 31, 1981. Among the documents submitted to the Commission were the audited financial statements of the constituent corporations for the period ended October 31, 1984. The Certificate of Filing of the Articles of Merger was issued by this Commission on October 28, 1985 , after being satisfied that the merger of subject corporations is not inconsistent with the provisions of the Corporation Code and existing laws. Subsequently, on December 11, 1985 ,Fil-Hispano submitted to this Commission for approval its proposal for a plan of quasi-reorganization, and using as basis its audited financial statements as of September 30, 1985, the following procedures were adopted to improve its equity posture: a) elimination of its deficit of P140,238,652 as of September 30 1985 against its revaluation increment of P151,131,236; b) conversion of its liabilities amounting to P10,525,856 into capital stock of the corporation. The Commission, in its letter of April 21, 1986, approved the quasi-reorganization proposal of Fil-Hispano for purposes of restructuring its equity position as of September 30, 1985. Hence the following queries: 1. May the effective date of the merger relate back to October 31, 1984 which was the cut-off date of the companies audited financial statements submitted in the course thereof? 2. May the effective date of the quasi reorganization relate back to September 30, 1985, the cut-off date of the company's audited financial statements? Anent the first query, Section 79 of the Corporation Code is squarely in point, to wit: cdlex "If the Commission is satisfied that the merger or consolidation of the corporation concerned is not inconsistent with the provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which time the merger or consolidation shall be effective . xxx xxx xxx (Emphasis supplied) Pursuant to the above provisions, only upon the issuance by the Commission of the Certificate of Filing of the Articles of Merger shall the combination of constituent companies become effective. (Campos, Campos, The Corporation C od e, "Notes, Comments and Selected Cases." 1981 ed., p. 947). Thus, the effective date of the merger between Fil-Hispano and Fil-Mosaic is October 28, 1985, using as basis the audited financial statements of the constituent corporations for the period ended October 31, 1984 . Relative to the second query, please be advised that while quasi-reorganization may be a form of corporate reorganization, yet it is not really a bonafide mode of corporate reorganization. It may probably relate to a situation where there is a recapitalization. (Santos, Gonzalo, Jr., Corporation L a w and Finance, Series One, "Some Related Problems in Corporate Reorganization", Publisher: Philippine Law Gazette, 1984, p. 6, citing 15 Fletcher, pp. 321-331). The reasons inducing a reorganization are not in every case the same, but for the most part, they are to be found in the weak or financial condition of the particular corporation. (15 Fletcher, 1961 Rev. Vol.,sec. 7201, p. 385).And so, the aim of a corporate reorganization is generally to put the company upon a sound financial basis, and to enable it to take care of its obligations, thereby, avoiding liquidation or bankruptcy. (Ibid, pp. 385-386). Quasi-reorganization is not a legal term but an accounting concept .From the accounting context, there are two methods of effecting quasi-reorganization, to wit: 1. Through the use of the reappraisal surplus to wipe out the deficit. 2. By filing amended articles of incorporation, reducing the capital stock, and applying the reduction of the capital stock to wipe out the deficit. (Santos, Op. Cit.,p. 21) It appears that Fil-Hispano undertook a quasi-reorganization through the reappraisal of its assets, and using the resulting reappraisal surplus in wiping out the capital deficit sustained by the company in previous years. The Corporation Code and other laws entrusted to the Commission for enforcement do. not contain any express provision on quasi-reorganization. This is probably because it is more of an accounting principle or procedure. The Commission, however, has established "Guidelines for the Approval of Quasi-Reorganization." Any quasi-reorganization agreement be legally binding and enforceable must conform to the "Guidelines" prescribed by this Commission. The Commission, has the right to approve or disapprove the reorganization plan. Thus, paragraph 8 of said "Guidelines" provides as follows: "That after the quasi-reorganization of the company has been effected and approved by the Commission, the company shall disclose in all its financial statements for a minimum period of three (3) years the mechanics, purpose and effect of such quasi-reorganization on the financial condition of the company." Thus, anent your second query, please be informed that the effective date of the quasi-reorganization of Fil-Hispano may relate back to October 28, 1985 (effective date of the merger agreement between Fil-Mosaic and Fil-Hispano),based on its audited financial statements for the period ended September 30, 1985 . Please be guided accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Acting Chairman