Pelaez, Jalandoni & Adriano

January 26, 1981 Pelaez, Jalandoni & Adriano 6th Flr.,Padilla Bldg.,Emerald Ave. Ortigas Commercial Center Pasig, Metro Manila Attention : Ms . Aurora Ma . F . Timbol Gentlemen: This refers to your request for opinion on: 1. Whether a corporation could enforce the stipulation of waiver of pre-emptive rights against its stockholders who would dissent in the issuance of new shares to the government as payment for previously contracted debts; 2. Whether the denial of pre-emptive rights of the stockholders would impair their ratable interests in the corporation; 3. Whether the dissenting stockholders could exercise their appraisal rights; and 4. Whether Section 39 of the Corporation Code of the Philippines would have any effect in this case. It appears that a corporation proposes to increase its authorized capital stock; that 38% of the said increase of capital stock shall be subscribed and fully paid by the Philippine government through unpaid royalties due to it and outstanding loan accommodations to PNB, and that the existing stockholders cannot exercise their pre-emptive rights to subscribe to the new shares owing to a provision in the articles of incorporation denying them such right, which is quoted below: "Seventh ... B. That no holder of any class of capital stock or any other securities of the corporation, whether such class of stock or other securities are now or hereafter authorized, shall have any right, as such stockholder or security holder, to purchase or subscribe for any shares of any class of the capital stock or any other securities of the corporation, whether such shares of capital stock or other securities are now or hereafter authorized by the corporation. (as amended stockholders' annual meeting on 30 April 1973). The right conferred upon all stockholders of a stock corporation to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, under Section 39 of the Corporation Code of the Philippines, is not an absolute right. The stockholders may be denied such right when so provided in the articles of incorporation or an amendment thereto. Apparently, when its articles of incorporation was amended denying said right and upon the effectivity of such amendment, the stockholders cannot claim any right of pre-emption over any share of any class of the capital stock or any other securities of the corporation, whether such shares of capital stock or other securities are now or hereafter authorized by the corporation. Likewise, the same provision admits of certain exceptions, among others, that pre-emptive right does not extend to share to be issued in payment of a previously contracted debt. Your specific case is a classic example of an exception to the exercise of the right, where the new issues in the proposed increase of capital stock will be subscribed by the Philippine government to offset the unpaid royalties to it as well as the outstanding loan obligation to the PNB. In view of the foregoing, it is our opinion that the existing stockholders; ratable rights and interests are not impaired and therefore, they cannot dissent and demand payment of the fair value of their shares. Very truly yours, (SGD.) ROSARIO N. LOPEZ Director Corporate and Legal Department