Romulo, Mabanta, Buenaventura Sayoc and De los Angeles

November 21, 1989 Romulo, Mabanta, Buenaventura Sayoc and De los Angeles C/o Atty. Reynaldo G. Geronimo 4th Floor, King's Court 2129 Pasong Tamo Street Makati, Metro Manila Gentlemen: This refers to your letter dated November 9, 1989, requesting opinion on the legality of the corporate structure of the proposed project of one of your Hongkong-based clients, Mr. Toby E.F. Heale, of Sassoon Securities Limited. The proposal is to establish a domestic corporation with the following primary purpose clause, to wit: "Actively to promote, undertake and arrange for, domestic investments consistent with the aims and policies of the Philippine Government and provide a sound vehicle for implementing the privatization and debt to equity conversion programmes of the Philippine Government. In furtherance of the aforementioned purpose, the Corporation shall have the power and authority, to the extent permitted by, and subject to the limitations of, applicable laws, to: 1. Acquire, own, and hold or otherwise deal in or with existing or new shares of the capital stock, and/or property real or personal, and assets of all kinds, of corporations which are for sale under the privatization programme of the Philippine government or such other corporations engaged in projects and ventures that contribute to the development and growth of the Philippine economy, including but not limited to, hotels, factories and fabrication facilities, real estate both developed and undeveloped, utilities and transportation companies, mineral resources and distribution, construction, retailing, manufacturing and financial corporations. 2. Initiate and promote, whenever warranted, the formation, reorganization, expansion or recapitalization of productive enterprises by providing debt to equity financing or extending other forms of financial, management, investment and technical advice and services." The equity would consist basically of two (2) classes of shares with the following features: 60% "A" shares at P0.01 per share to be owned by Filipinos only 40% "B" shares at P10.00 per share to be owned by Foreigners and Filipinos Regardless of the disparity of the par value, "A" and "B" shares are entitled to one (1) vote for each share and dividends shall be declared on the basis of the number of shares held by the stockholders. With the foregoing corporate structure, you would like to ask confirmation of your view that: 1. The proposed corporation, with the split parity equity structure as above-described, is a Filipino corporation, since it is to be owned and controlled at all times by at least 60% Filipinos; and 2. If and when, it gets into a joint venture or partnership with other corporations in the pursuit of the activities mentioned in the primary purpose clause of its articles of incorporation, its shareholders are to be considered for all legal purposes, owned by a Filipino corporation. Corporations organized under the Corporation Code have the power to classify shares. This authority is conferred under Section 6 of the Corporation Code which provides: "SECTION 6. Classification of Shares . The shares of stock of corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation. ...(emphasis supplied). As to the basis of computation of the 60-40 percentage nationality requirement under existing laws (whether it should be based on the number of shares or the aggregate amount in pesos of the par value of the shares),the following definitions of corporate terms are worth mentioning. "The term capital stock signifies the aggregate of the shares actually subscribed ".(11 Fletcher, Cyc. Corps. (1971 Rev. Vol.) sec. 5082, citing Goodnow v. American Writing Paper Co.,73 NJ Eq. 692, 69 A 1014 aff'g 72 NJ Eq. 645, 66 A, 607). "Capital stock means the capital subscribed (the share capital)".(Ibid.,emphasis supplied). "In its primary sense a share of stock is simply one of the proportionate integers or units, the sum of which constitutes the capital stock of corporation .(Fletcher, sec. 5083). The equitable interest of the shareholder in the property of the corporation is represented by the term stock ,and the extent of his interest is described by the term shares .The expression shares of stock when qualified by words indicating number and ownership expresses the extent of the owner's interest in the corporate property (Ibid, Sec. 5083, emphasis supplied). Likewise, in all provisions of the Corporation Code the stockholders' right to vote and receive dividends is always determined and based on the "outstanding capital stock", defined as follows: "SECTION 137. Outstanding capital stock defined . The term " outstanding capital stock " as used in this Code, means the total shares of stock issued to subscribers or stockholders ,whether or not fully or partially paid (as long as there is a binding subscription agreement, except treasury shares." (emphasis supplied). The computation, therefore, should be based on the total outstanding capital stock, irrespective of the amount of the par value of the shares . llcd In determining the nationality of corporations with foreign equity, the Commission has adopted the following rule: "Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality ,but if the percentage of Filipino ownership in the corporation or partnership is less than 60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. Thus, if 100,000 shares are registered in the name of a corporation or partnership at least 60% of the capital stock or capital respectively, of which belong to Filipino citizens, all of the said shares shall be recorded as owned by Filipinos. But if less than 60% or, say, only 50% of the capital stock or capital of the corporation or partnerships respectively belongs to Filipino citizens, only 50,000 shares shall be counted as owned by Filipinos and the other 50,000 shares shall be recorded as belonging to aliens." ( SEC letter dated November 6, 1989 ,citing Department of Justice opinion No. 18, S. 1989, dated January 19, 1989, emphasis supplied). In the light of the foregoing, the Commission hereby confirms your view on the matter. However, while the proposed corporation may be considered a Filipino corporation, it is not qualified to invest in or enter into a joint venture agreement with corporations or partnerships, the capital or ownership of which, under the constitution or other special laws, are limited to Filipino citizens only. Please be advised accordingly. cdll Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman