Gozon, Fernandez, Defensor & Associates

February 15, 1988 Gozon, Fernandez, Defensor & Associates 15th Flr., Sagittarius Condominiums H.V. dela Costa St., Salcedo Village Makati, Metro Manila Attention : Atty . Felipe Gozon Sir : This refers to your letter, dated January 5, 1988, requesting the opinion of this Commission on the query posed therein. It appears therein that your client, Cellcom, Inc. is engaged in the operation of a public utility. You stated that the present composition of the stockholders of subject corporation is such that 60% of the capital is owned by Filipinos and the remaining 40% is owned by foreigners. As alleged in your letter, your client has increased its authorized capital stock to P40,000,000. It contemplates to issue non-voting preferred shares. In so doing, it could happen that the foreigners would own more than 40% of the common stocks but the total foreign ownership of the aggregate outstanding capital (common and preferred) would not exceed 40%. Hence, your query is: Would it be legal for foreigners to own more than 40% of the common shares but not more than 40% of the total outstanding capital stock which would include both common and non-voting preferred shares? cdll The pertinent provision of the Philippine Constitution under Article XII, Section 7, reads in part thus: "No franchise, certificate, or any form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines, or to corporations or associations organized under the laws of the Philippines at least sixty per centum of whose capital is owned by such citizens . . . .." (emphasis supplied) The issue raised on your letter zeroes in on the meaning of the word "capital" as used in the above constitutional provision. Anent thereto, please be informed that the term "capital" as applied to corporations, refers to the money, property or means contributed by stockholders as the form or basis for the business or enterprise for which the corporation was formed and generally implies that such money or property or means have been contributed in payment for stock issued to the contributors. (United Grocers, Ltd. v. United States F. Supp. 834, cited in 11 Fletcher, Cyc. Corp., 1986, rev. vol., sec. 5080 at 18). As further ruled by the court, "capital of a corporation is the fund or other property, actually or potentially in its possession, derived or to be derived from the sale by it of shares of its stock or his exchange by it for property other than money. This fund includes not only money or other property received by the corporation for shares of stock but all balances of purchase money, or installments, due the corporation for shares of stock sold by it, and all unpaid subscriptions for shares." (Williams v. Brownstein, 1F. 2d 470, cited in 11 Fletcher, Cyc. Corp., 1058 rev. vol., sec. 5080, p. 21). The term "capital" is also used synonymously with the words "capital stock", as meaning the amount subscribed and paid-in and upon which the corporation is to conduct its operation. (11 Fletcher, Cyc. Corp. 1986, rev. vol., sec. 5080 at 15). And, as held by the court in Haggard v . Lexington Utilities Co ., (260 Ky 251, 84 SW 2d 84, cited in 11 Fletcher, Cyc. Corp., 1958 rev. vol., sec. 5079 at 17), "The capital stock of a corporation is the amount paid-in by its stockholders in money, property or services with which it is to conduct its business, and it is immaterial how the stock is classified, whether as common or preferred ." The Commission, in a previous opinion, ruled that the term 'capital' denotes the sum total of the shares subscribed and paid by the shareholders or served to be paid, irrespective of their nomenclature. ( Letter to Supreme Technotronics Corporation, dated April 14, 1987 ). Hence, your query is answered in the affirmative. Your attention is however invited to the ultimate provision of Sec. 11, Article XII of the Constitution which prescribes: "The participation of foreign investors in the governing body of any public utility enterprise shall be limited to their proportionate share in its capital, and all the executive and managing officers of such corporation or association must be citizens of the Philippines." Finally, please be informed that the increase of capital stock and the corresponding amended articles of incorporation of Express Telecommunications Co., Inc. (Article 1 of the latter manifests an intention to change its name to Cellcom, Inc.), on file with Commission, relates to, among other provisions, the increase of capital from P380,000.00 to P8,000,000.00 divided into 480,000 Class "A" shares and 320,000 Class "B" shares, both of the par value of P10.00 each. Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman