Atty. Ma. Victoria A. Villaluz

October 2, 2001 SEC OPINION Atty. Ma. Victoria A. Villaluz Tax Division SyCip Gorres Velayo & Co 6760 Ayala Ave., 1226 Makati City RE : William, Gothong & Aboitiz, Inc. (WG&A) M a d a m : This refers to your letter dated 23 August 2001 requesting confirmation on the following matters: 1. WG&A can declare dividends out of the additional paid-in surplus, and that the stock dividends can be declared at premium; 2. In the event that there will be fractional shares arising from the declaration of stock dividends, WG&A can either pay to the stockholder the cash equivalent of the fraction of the share or issue one full share; 3. The stock dividends can be in the form of redeemable preferred shares with the following features: a. non-voting; b. redeemable at any time or from time to time, in whole or in part, as may be determined by the Board of Directors, within a period of not exceeding 10 years; c. redeemable at a price that may be determined by the Board of Directors but shall not be lower than P6.00 per share; d. may upon redemption, be exchanged with a bond to be issued by WG&A, such bond to bear interest at the rate of 4% over the Treasury Bill rate at the time of the exchange; 4. The declaration of the stock dividend to the existing stockholders does not require a permit to sell from the SEC; 5. There is no legal impediment in the listing of the redeemable preferred shares declared as dividends in the Philippine Stock Exchange; 6. For accounting purposes, the redemption price can be charged to the capital stock and to the additional paid-in capital that was existing prior to the declaration of the stock dividends in the form of redeemable preferred shares. In connection with your first query, the Commission had consistently ruled in the past that stock dividends can be declared out of the additional paid-in capital at premium subject to the availability of unissued shares, where the issuance will be taken. In SEC Opinion dtd. October 19, 1989, Mr. Ong Chee Han ,the Commission ruled that when a corporation converts the premium or contributed surplus into capital by issuing to its stockholders shares of stock representing their respective participation, it actually parts with nothing, but merely transfers the surplus to capital account and issues shares of stock to represent the same. The SEC en banc therefore permitted the declaration of dividends from paid-in surplus subject to the following conditions: 1. That they be declared only as stock dividends and not as cash dividends. 2. That no creditor will be prejudiced therefrom 3. That there shall be no resulting impairment of capital Furthermore, the declaration of dividends should not exceed the paid-in surplus of the corporation. Relative to your second query, the corporation (WG&A),pursuant to Section 41(1) of the Corporation Code quoted hereunder, can pay the equivalent of such fractions in cash or issue one full share. Section 41. A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the following cases: Provided, that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired: CAcIES 1. To eliminate fractional shares arising out of stock dividends; ... As to the third query, the Commission has allowed the reclassification of common shares into preferred shares subject to the condition that all the features of redeemable preferred shares shall be stated in the articles of incorporation. Provided further, that in the case of the latter, no shareholder or creditor will be adversely affected by the reclassification. Moreover, it is a settled rule that unless restricted by the law or the provision of its articles of incorporation, a corporation has unrestricted freedom to issue such classes or series of shares as the prospects and the needs of its business may require to attract investors. It must be stressed, however, that there should be a basis or standards for the determination of the redemption price of preferred shares to be included in the features of said preferred shares. To allow the Board of Directors the discretion to determine the amount of redemption rate may be subject to abuse to the detriment of other stockholders or creditors. In addition, shares of stock which have been issued but reacquired by the issuing company by redemption are properly referred to as treasury stock which should be recorded at cost irrespective of whether these are acquired below or above par value. Anent the issue on whether or not the declaration of stock dividends to the existing stockholders does not require permit to sell from the SEC, we confirm that stock dividends are exempt transactions pursuant to Section 10.1 (d) of the Securities Regulation Code ,quoted as follows: xxx xxx xxx "The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or other security holders as a stock dividend or other distribution out of surplus. xxx xxx xxx We regret to inform you, however, that the Commission is not in a position to confirm whether or not there is legal impediment in the listing of the redeemable preferred shares declared as dividends in the Philippine Stock Exchange (PSE).You are thus advised to confer with the PSE on the matter. On the issue of whether the redemption price of redeemable shares reacquired can be charged to the capital stock and to the additional paid-in capital that was existing prior to the declaration of the stock dividends in the form of redeemable preferred shares, the same is allowed provided that the capital stock is reduced by its par value. Accounting treatment of the difference between the redemption price and the par value of the redeemed share should be in accordance with SFAS 18 par. 9 and Section 5 of the Rules Governing Redeemable and Treasury Shares. Very truly yours, (SGD.) FE ELOISA C. GLORIA Commissioner