Corporate Ownership: Foreign equity

April 28, 2004 SEC OPINION NO. 30-04 Corporate Ownership: Foreign equity Ms. Marlene Caluya Kinoshita Pearls Philippines, Inc. (KPPI) Liaison Office, Rm. 1 Suico Bascara Bldg., 12-C Ouano St.,Centro, Mandaue City M a d a m : This refers to your request for opinion dated 30 March 2004 on the issue whether the ownership of a company should be based on holdings of common shares with voting rights and not on ownership of preferred shares without voting rights, based on the following disclosed facts: Kinoshita Pearls Philippines, Inc. (KPPI for brevity) is a domestic company with P12M outstanding capital stock, 40% or P4.8M of which is owned by Kinoshita Pearl Co. Ltd. of Japan (KPCL for brevity).KPPI intends to increase its authorized capital stock from 12M to 100M. In the proposed increase of capital, P70M worth of shares are classified as preferred non-voting cumulative shares while P30M thereof is classified as common shares with rights to vote and be voted upon. KPCL shall subscribe to P70M preferred non-voting cumulative shares. However, KPPI would like to maintain its current (60% Filipino and 40% Japanese equity participation) domestic corporate status. Relative thereto, please be informed that it is well-settled in this jurisdiction that the ownership of the shares of a stock corporation is based on the total outstanding or subscribed/issued capital stock regardless of whether they are classified as common voting shares or preferred shares without voting rights. Outstanding capital stock is defined as " 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. (Sec. 137 of the Corporation Code of the Philippines.) Under the principle of equality of shares ,regardless of the classification of shares, each share is equal in all respects to every other share except when otherwise provided under the articles of incorporation, and certificate of stock. Thus, the total number of shares issued, whether voting or non-voting which comprises the outstanding capital stock and accorded equal stockholders rights, shall be considered in the determination of the ownership of a corporation. Accordingly, under the proposed increase KPPI cannot maintain its current equity participation, if P70M worth of shares representing 70% of the outstanding capital, as increased, shall be subscribed by KPCL. Simply stated, the foreign equity percentage participation shall be increased from 40% to 70% rendering KPPI no longer a Philippine national under the control test but a foreign corporation covered by the Foreign Investment Act (FIA). IDSEAH Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel