Mr. Ramon V. Tiaoqui

September 3, 1990 Mr. Ramon V. Tiaoqui Managing Director, Department II Supervision and Examination Sector Central Bank of the Philippines M a n i l a S i r : This refers to your letter dated June 19, 1990 requesting opinion relative to the request of the preferred shareholders of ComSavings Bank to convert their 7,475 preferred shares into common. You stated therein that subject bank has an authorized capital stock of P40,000,000.00 divided into 250,000 common shares and 150,000 preferred shares, both of the par value of P100.00 per share. The preferred shares are convertible into common stock at the option of the stockholders after five (5) years from date of issue of such preferred shares, or earlier, subject to bank approval, or immediately convertible at the holders' option whenever the rights which may have been acquired by them have not been satisfied by the bank within three (3 years from date of issue of such shares. The preferred shares have been outstanding for more than five (5) years without any dividend having been paid therefor. At present, the authorized common stock of the bank is fully subscribed so that it cannot issue new common shares for the requested conversion. ComSavings Bank now poses the following queries: 1. Is the conversion of preferred shares automatic such that the bank can immediately effect the conversion even in the absence of unsubscribed common shares? 2. If the conversion is not automatic, is the Bank required to amend its articles of incorporation to accommodate such conversion? 3. The features of the shares printed at the back of the certificate fix the conversion rate "at a price equal to the value of the common shares at the time of conversion",while the articles of incorporation states that "the conversion rate shall be subject to prior approval by the Monetary Board of the Central Bank of the Philippines." Considering that ComSavings Bank is not in a position to determine the book value of the common shares in view of the non-implementations of PDIC commitments under the Tri-Partite Agreement, what is the conversion rate to be used for the purpose? Please be advised that "where the corporation has previously issued stock to the entire authorized limit, it cannot, of course, issue additional stocks." (11 Fletcher, Cyc. Corp. 1986 Rev. Vol. 4, 5144, citing Hill v. Small, 228 GA, 31, 183 SE 2d 752, and others) In the present case, the authorized common stock of the Bank is fully subscribed . It is, therefore, necessary to create additional common stocks into which the preferred stocks can be converted. This can be done simply by reclassifying the preferred shares into common in such amount as would be necessary to cover the conversion through an amendment of the articles of incorporation of the Bank in accordance with Section 16 of the Corporation Code. Thus, although the preferred shares possess the quality of being convertible into common shares per articles of incorporation, such conversion is not automatic. The same requires an amendment of the articles of incorporation to formalize the conversion. As regard the third query, it is to be noted that the "charter of a corporation, whether it is created by a special act or formed under a general corporation law is a contract (1) between the state and the corporation; (2) between the corporation and the stockholders and (3) between the stockholders and the state." (Martin Commentaries and Jurisprudence of the Philippine Commercial Laws, Vol. 4, 1981 Edition p.78 citing Government vs. Manila Railroad Co., G.R. No. 30646, January 29, 1929, 52 Phil. 699) Such being the case, any provision therein cannot be changed without the consent of the contracting parties. Accordingly, since the articles of incorporation of the Bank requires that the conversion rate shall be subject to prior approval by the Monetary Board of the Central Bank, the determination of the conversion rate is properly within the competence of said Agency. In no event, however, should the conversion of the preferred shares into common result to watering of stocks or issuance of stocks in excess of the authorized capital stock of the corporation. (SGD.) RODOLFO L. SAMARISTA Associate Commissioner