Mr. Vicente Alejandro Araneta

March 9, 1994 Mr. Vicente Alejandro Araneta Silangan Airways, Inc. Facilities Center, 548 Shaw Blvd. Mandaluyong, Metro Manila 1501 S i r : This refers to your letter of March 7, 1994 inquiring whether Silangan Airways, Inc. is allowed to sell convertible preferred shares to its customers. The pertinent provision of the Corporation Code provides: SECTION 6 . Classification of shares . The shares of stock of stock corporations may be divided into classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation . xxx xxx xxx Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code. Provided, That preferred shares of stock may be issued only with a stated par value. The board of directors, where authorized in the articles of incorporation, may fix the terms and conditions of preferred shares of stock or any series thereof: Provided, That such terms and conditions shall be effective upon the filing of a certificate thereof with the Securities and Exchange Commission. xxx xxx xxx Except as otherwise provided by the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other shares." (Emphasis supplied) It is clear from the above provision that if the articles of incorporation do not provide for classification of shares, all shares issued by the corporation are to be treated equal. Accordingly, a corporation cannot, without an express authority in the articles of incorporation, issue preferred shares. A perusal of the articles of incorporation of subject corporation on file with the Commission, disclosed that it is not authorized to issue preferred shares. Should the corporation desire to issue preferred shares it should amend its articles of incorporation in accordance with Section 16 of the Corporation Code. Regarding your claim that selling of preferred shares to its " customers " may not constitute selling to the public, as they become customers first before any sale is affected, please be informed that Section 4 of the Revised Securities Act clearly provides that no securities, except of a class exempt under any of the provisions of Section five thereof or unless sold in any transaction exempt under any of the provisions of Section six thereof, shall be sold or offered for sale or distribution to the public within the Philippines unless such securities shall have been registered and permitted to be sold as provided therein. The term "public" has been defined as: "The whole body politic, or the aggregate of the citizens of a state, nation, or municipality. The inhabitants of a state, county, or community. In one sense, everybody, and accordingly the body of the people at large; the community at large, without reference to the geographical limits of any corporation like a city, town, or county; the people. In another sense the word does not mean all the people nor most of the people, nor very many of all people of a place, but so many of them as contradistinguishes them from a few. Accordingly, it has been defined or employed as meaning the inhabitants of a particular place; all inhabitants of a particular place; the people of the neighborhood. Also, a part of the inhabitants of a community." (Black's Law Dictionary, Sixth Edition) Applying this legal definition, "customers" of a corporation are considered segment of the "public". Likewise, take note that issuance of share of stock by public utility corporation is not exempt per se under the Revised Securities Act. The exemption under Section 6 (11) thereof applies only when the issuance is in compliance with or pursuant to law or regulation. The Law provides: "SECTION 6. Exempt transactions . (a) The requirement of registration under subsection (a) of Section four of this Act shall not apply to the sale of any security in any of the following transaction. xxx xxx xxx (11) Any issuance of any security by public utility or service corporation which, in compliance with or pursuant to law, regulation or decree ,is intended to broaden its equity base as well as to finance a part of the capital investment thereof through the issuance and sale of stock." (Emphasis supplied) The mandated issuance of shares by the corporation under RA No. 7349, the law which granted the corporation the franchise to operate is only with respect to the common share of the corporation, not to preferred shares. The law provides: "SECTION 9. Public Equity Participation . In compliance with the constitutional mandate to democratize ownership of public utilities, the herein grantee shall make public offering through the stock exchange of at least thirty percent (30%) of its common stock within a period of ten (10) years from the date of effectivity of this Act: Provided, That no single person or entity shall be allowed to own more than five percent (5%) of the stock offerings. (Emphasis supplied) xxx xxx xxx." Accordingly, sale of preferred shares by the corporation is subject to the following: 1. That the issuance of preferred shares is authorized in the articles of incorporation; 2. That the preferred shares shall be registered pursuant to the provisions of the Revised Securities Act. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman