Mr. Andres B. Sta. Maria

April 30, 1992 Mr. Andres B. Sta. Maria Sycip Salazar Hernandez & Gatmaitan 105 Paseo de Roxas, 1200 Makati, Metro Manila S i r : This refers to your letter of April 1, 1992 requesting confirmation on the following: 1. That the issuance by a corporation out of its unissued authorized capital stock of preferred shares convertible into common shares is not subject to pre-emptive right under Section 39 of the Corporation Code where the articles of incorporation expressly provide that common stockholders would enjoy no pre-emptive rights to new issues of preferred shares. 2. That subsequent conversion of convertible preferred stock into common stock in accordance with their terms would not be subject to the pre-emptive rights of common stockholders. The pertinent provision of the Corporation Code provides: "SECTION 39. Power to deny pre-emptive right . All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto :Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of previously contracted debt. "(Emphasis supplied) It is clear from the above provision that if expressly denied in the articles of incorporation the stockholders of record do not enjoy the pre-emptive right to subscribe to new issuances. We, therefore, confirm your opinion on the first issue. Relative to the second issue, while the articles of incorporation of the corporation referred to in our letter is silent as to the convertibility feature of preferred shares and only the Board is authorized to determine its convertibility, P.D. 217 (Establishing Basic Policies For the Telephone Industry, Amending For the Purpose The Pertinent Provisions of Commonwealth Act 146, As Amended, Otherwise Known as The Public Service Act, The Franchise of the Philippine Long Distance Company Under Act No. 3436, As Amended, And All Inconsistent Legislative And Municipal Franchises Including Other Existing Laws) requires that preferred shares of said corporation are convertible to common shares. The law provides thus: "SECTION 1. It is declared that in the interest of the social, economic and general well-being of the people, the state hereby adopts the following basic policies of the telephone industry : xxx xxx xxx 5) As part of any subscriber self-financing plan, when the issuance of preferred capital stock is contemplated ,it is required that the subscriber be assured, in all cases of a fixed annual income from his investments and that these preferred capital stocks be convertible into common shares, after a reasonable period and under reasonable terms, at the option of the preferred stockholder; ..." (Emphasis supplied) It was held in one case that common stockholders have no pre-emptive right in the common shares to be issued upon the conversion of outstanding preferred shares at the time of exercise of the conversion right by the holders of preferred shares .(11 Fletcher sec. 5136.5 citing Todd v. Maryland Cas. Co.,155 F 2d 29) Thus, in the light of the foregoing, we confirm your view that subsequent conversion of convertible preferred stocks into common stocks in accordance with the terms of their issuance is not subject to the pre-emptive rights of common stockholders. However, the same is subject to SEC Rules Governing Redeemable and Treasury Shares. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman