Mr. Frumencio A. Lagustan

August 16, 1993 Mr. Frumencio A. Lagustan Assistant Executive Secretary for Legislation Office of the President Malacaang Manila S i r : This refers to your letter of July 28, 1993 requesting comments and/or recommendation on whether or not the President should endorse to Congress its passage as an urgent administration measure, the draft Bill entitled: "An Act Granting Workers The Right To Own And Subsequently To Buy Certain Percentage Of The Authorized Shares Of Stocks Of Any Commercial, Industrial, Agricultural Enterprises Or Cooperatives. Including Government-Owned Or Controlled Corporations As Well As Religious, Medical Or Educational Institutions Operated For Profit To Assure Them Of Ownership And Representation In The Board of Directors Or Any Other Equivalent Management Body And Ensure Workers Representation In Enterprises Not Organized For Profit To Encourage Productivity, Promote And Maintain Industrial Peace." Though the intent of the proposed measure is indeed laudable as it is in accord with the government's effort to implement the national policy embodied in the Philippine Constitution to provide equitable distribution of economic opportunities and wealth especially to the economically underprivileged, the Bill still requires a thorough and careful study so as not to send wrong signals to both domestic and foreign investors. The Bill provides for "automatic" transfer or allocation of shares of stocks to "workers cooperative" to assure ownership and representation in the management body or Board of Directors of domestic corporations. In this connection, it is a well-recognized fact that a person has the right to choose the group with whom he can associate to organize a business. Thus, the formation of a "close corporation" is given a special recognition under the Corporation Code, taking into consideration that close corporations have special legitimate needs different from those widely held corporations, and treats them under a separate Title (Title XII), relaxing in their favor some of the general rules and requirements applicable to all business corporations. Where business associates belong to a small, closely-knit group, like family, they usually prefer to keep the organization exclusive and would not welcome strangers. Since it is through their efforts and managerial skills that they expect the business to grow and prosper, it is quite understandable why they would not trust outsiders to come in and interfere with their management thereof, and much less share whatever fortune, big or small, that the business may bring. (Comments, Notes and Selected Cases, Corporation Code, Campos & Lopez-Campos) Recognizing the unique quality and legitimate needs of "close corporations", it is but fair to small investors to allow them to form "close corporations" limiting the shareholders to members of the family or close business associates with whom they have trust and confidence. Because of this reality, it would be impractical to strictly require every corporation to comply with the scheme introduced in the Bill. Such an idea might discourage formation of corporations and instead of encouraging investments, it may hamper capital market development, thereby bringing adverse effect on Philippine business. Compulsory enforcement of the scheme might shy away willing moneyed and competent investors who may have the capacity of investing and whose efficient management skills, competence or technical expertise can contribute to economic recovery. At any rate, the Corporation Code has sufficient provisions to protect public interest. Where the proposed business is affected with public interest, the formation and incorporation of a close corporation is prohibited. Under Section 96 of the Corporation Code, mining or oil companies, stock exchanges, banks, insurance companies, public utilities, educational institutions and corporations declared to be vested with public interest cannot be incorporated as "close corporations". The Corporation Code, under Section 140 thereof, has further laid down a similar policy of authorizing the NEDA to recommend to the Batasan Pambansa (now Congress) the setting of maximum limits to family or group ownership of stocks in corporations vested with public interest. Thus, while the intention to give employees the opportunity of ownership and representation in the Board is laudable, we believe that mandatory application of the scheme may be disadvantageous to Capital Market Development. Instead, we suggest that the adoption of the scheme be made voluntary giving companies who would voluntarily adopt the schemes some forms of incentives, such as tax incentives. Likewise, your attention is invited to Section 5 of the Bill which grants the shares free of monetary consideration. It is a well-settled corporate doctrine that shares of stock cannot be issued by a corporation gratuitously under an agreement that nothing at all shall be paid to the corporation for this would result in "watering of shares". Thus, it is expressly provided in the Corporation Code that stocks shall not be issued for a consideration less than the par or issued price thereof. cdll Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman