RE : Reduction of Paid-In Equity of a Foreign Branch

July 12, 2005 SEC OPINION NO. 10-05 Valdes, Valdes, Rodulfa & Associates 4th Floor, CJV Building, 108 Aguirre Street Legaspi Village, Makati City Attention : Atty. Jesus J. Valdes RE : Reduction of Paid-In Equity of a Foreign Branch Gentlemen : This refers to your letter dated May 3, 2005 requesting permission on behalf of your client Daifuku Co. Ltd. of Osaka, Japan to reduce the original paid-in equity for its Philippine Branch from US$ 500,000 to the present required minimum of US$ 200,000. On November 8, 1995, Daifuku Co. Ltd. of Osaka, Japan deposited US$ 500,000 (P12,975,000.00) at the Bank of Tokyo, Manila Branch in the name of Daifuku Co. Ltd.,Philippine Branch. This represents the paid-in equity of Daifuku Co. Ltd.,Philippine Branch. The reasons you cited for your request are: (a) that the previous minimum paid-in equity requirement of US$ 500,000 is too large for the local Branch's needs considering that its business has not substantially increased as earlier expected and (b) that its local projects do not require that much paid-in equity. You also stated that the reduction of the Branch's paid-in equity to the present minimum requirement of US$ 200,000 is justified inasmuch as R.A. 8179 (An Act To Further Liberalize Foreign Investments, Amending for the Purpose Republic Act No. 7042, and For Other Purposes) amended the minimum requirement accordingly. It should be borne in mind that the US$ 500,000 deposit of Daifuku Co. Ltd.,Japan constitutes an inward remittance. By definition, such inward remittance by a foreign corporation is considered to be a paid-in-equity capital ,in accordance with the Implementing Rules of the Foreign Investment Act. Par. (q),Sec. 1, Rule 1 of said Act provides: q. Paid-in-equity Capital shall mean the total investment that has been paid-in in a corporation or partnership or invested in a single proprietorship, which may be in cash or in property. It shall also refer to inward remittance or assigned capital in the case of foreign corporations . EAHcCT Thus, for purposes of application of the pertinent laws on paid-in equity capital, the US$ 500,000 deposit of your client is considered paid-in equity capital. We regret to inform you that we cannot grant your request for the following reasons : First, no evidence was submitted to justify the decrease in paid-in equity/capital stock of Daifuku Co. Ltd.,Philippine Branch . Sec. 38 of the Corporation Code expressly provides that "no decrease of the capital stock shall be approved by the SEC, if its effect shall prejudice the rights of the corporate creditors ." Sec. 38 is thus a mandate for the Commission to ascertain that creditors shall not be prejudiced by the proposed decrease in capital stock. In order to fulfill this mandate, the Commission must then weigh the evidence to prove the foregoing condition. Considering that no such evidence was presented, the Commission is constrained to deny your request to decrease the capital stock of Daifuku. Secondly, the provision of RA 8179 lowering the minimum paid-in equity requirement to US$ 200,000 is not retroactive in application . In your letter, you assert that the reduction of the Branch's paid-in equity capital to the present minimum requirement of US$ 200,000 is justified inasmuch as R.A. 8179 amended the minimum requirement accordingly. This assertion cannot hold. Sec. 3 of RA 8179, which lowered the minimum paid-in equity requirement to US$ 200,000, is prospective in application. It provides: xxx xxx xxx "Small and medium-sized domestic market enterprises with paid-in equity capital less than the equivalent of Two hundred thousand US dollars (US$ 200,000.00),are reserved to Philippine nationals: Provided. .." xxx xxx xxx "...Provided, however, That each Foreign Investment Negative List shall be prospective in operation and shall in no wail affect foreign investment existing on the date of its publication." (emphasis ours) xxx xxx xxx The law is clear on the matter. Foreign investments existing on the date of the publication of RA 8179 shall in no way be affected by new or amended Foreign Investment Negative Lists. Thus, the present lowered minimum requirement is not a valid justification to reduce the paid-in equity capital of Daifuku. DIcSHE Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel