Re : Right of a nominee/candidate to vote in the election

June 28, 2004 SEC OPINION NO. 37-04 Re :Right of a nominee/candidate to vote in the election Philippine Stock Exchange, Inc. Philippine Stock Exchange Center, Exchange Road Ortigas Center, Pasig City Attention: Atty. Zayber Protacio General Counsel Dear Atty. Protacio, This refers to your letter dated June 28, 2004 requesting confirmation of your opinion that an incumbent member of the board of directors, who is likewise a nominee/candidate can vote during the election of the president of the Philippine Stock Exchange, Inc. (PSE). Section 25 of the Corporation Code provides that "Immediately after their election, the directors of a corporation must formally organize by the election of a president, . . . and such other officers as may be provided for in the by-laws. . . ." 1 It is unequivocal from the aforecited provision that the vote necessary to elect the officers of the corporation is majority of the entire number of the board. 2 All members of the board who are elected shall vote among themselves the president and other officers of the corporation immediately after their election. Further, the by-laws of the PSE, in consonance with the law also specifically state that immediately after their election, the Directors, by the majority vote of the entire Board of FIFTEEN (15) Directors ,shall elect the In another letter dated 19 April 2004, the following additional queries were posed: a. Whether POPI (parent company of TPI, a publicly listed holding company, which is 26.72% foreign owned is qualified to engage in retail trade; and b. Whether POPI may also be considered as a foreign investor and exempt from the prequalification requirements of Section 5, Rule IV of the Implementing Rules of the Retail Trade Law, as amended. DCATHS As alleged, TPI is a duly registered corporation under Philippine laws engaged in real estate business, with a paid-up capital of P200M or US$3,571,428. * TPI is wholly owned by Orion Land Inc. (OLI),a domestic holding company which in turn is 100% owned by Prime Orion Philippines, Inc. ("POPI").The latter corporation is a publicly listed company of which 26.72 % of its outstanding capital is owned by foreigners as of 31 January 2004. As of 19 April 2004, POPI's paid-up capital amounted to P2.896B or US$51,714,285M. It is further alleged that TPI corporation is engaged in the business of leasing commercial stalls and intends to diversify its operation by establishing a department store or supermarket while POPI, as earlier stated, is a publicly listed investment company. It appearing that TPI and POPI are domestic corporations partially owned by foreigners, engaged in their respective real estate business and investment company business, not in retail trade, with a paid-up capital of P200M way beyond the required capital under RA 8762 of only US$2,500,000.00 for Category B or P140,000,000.00 and US$7,500,000.00 for Category C or P420,500,000.00,* more or less, said corporations may engage in retail trade subject to the conditions set forth under Sec. 5 of Retail Trade Liberalization Act of 2000 or R.A. 8762, as well as its implementing rules and regulations. Section 5 of the aforesaid law states: * US$1.00 = P56.00 "Section 5. Foreign Equity Participation . Foreign-owned partnerships, associations and corporations formed and organized under the laws of the Philippines may, upon registration with the Securities and Exchange Commission (SEC) and the Department of Trade and Industry (DTI),or in case of foreign-owned single proprietorships, with the DTI, engage or invest in the retail trade business, subject to the following categories xxx xxx xxx Category B Enterprises with a minimum paid-up capital of the equivalent in Philippine Pesos of Two million five hundred thousand US dollars (US2,500,000.00) but less than Seven million five hundred thousand US dollars (US$7,500,000.00) may be wholly owned by foreigners except for the first two (2) years after the effectivity of this Act wherein foreign participation shall be limited to not more than sixty percent (60%) of total equity. Category C Enterprises with a paid-up capital of the equivalent in Philippine Pesos of Seven million five hundred thousand US Dollars (US$7,500,000.00) or more may be wholly owned by foreigners: Provided, however, That in no case shall the investments for establishing a store in Categories B and C shall be less than the equivalent in Philippine Pesos of Eight hundred thirty thousand US dollars (US$830,000.00). xxx xxx xxx The foreign investor shall be required to maintain in the Philippines the full amount of the prescribed minimum capital unless the foreign investor has notified the SEC and the DTI of its intention to repatriate its capital and cease operations in the Philippines. The actual use in Philippine operations of the inwardly remitted minimum capital requirement shall be monitored by the SEC. Failure to maintain the full amount of the prescribed minimum capital prior to notification of the SEC and the DTI, shall subject the foreign investor to penalties or restrictions on any future trading activities/business in the Philippines. " Relative to the query on whether TPI is a "foreign investor" and therefore exempt from pre-qualification requirements under Section 1 of RA 8762 and Sections 1 and 2, Rule IV of its Implementing Rules and Regulations, the Commission is of the belief that TPI may be considered as a "domestic corporation partially owned by foreigner". The foreigner holding interest or shares in the domestic corporation intending to engage in retail trade is deemed a "foreign investor." The same interpretation holds true in the case of POPI. The two corporations, nonetheless, are not considered as a "foreign retailer" defined under Sections 8 of the cited law which means "an individual who is not a Filipino citizen, or a corporation, partnership, association or entity that is not wholly owned by Filipinos, engaged in retail trade". 3 TPI and POPI, not being foreign retailers, need not comply with Sec. 5 of subject rules, the pertinent portion of which provides and we quote: Foreign investors which are not foreign retailers . Foreign investors which are not foreign retailers shall not be required to satisfy the pre-qualification requirements under Rule IV hereof. DHAcET The replies therefore to the foregoing queries are in the affirmative subject to certain qualifications or conditions such as capital and reciprocity 4 requirements laid down under RA 8752 and its implementing rules and regulations. Please be advised, however, that TPI should amend its articles of incorporation to include the intended "retail trade business" in its purpose clause. POPI need not amend its articles considering that "retail trade" may be covered in paragraph 3, Secondary Purpose of its articles of incorporation. 5 Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. Section 25, Corporation Code of the Philippines. 2. SEC Opinion dated July 26, 1989, addressed to Mr Teodoro Cabrieto. 3. Rule IV, Sec. 5, Pre-qualification of Foreign Retailers, Rules and Regulations Implementing Republic Act No. 8762. 4. R.A. 8762 Sec. 8[d] "Only nationals from or juridical entities formed or incorporated in countries which allow the entry of Filipino retailers shall be allowed to engage in retail trade in the Philippines." * Reciprocity rights, on the other hand, denote the relation between two states when each of them, by their respective laws, or by treaty, gives the citizens or nationals of the other certain privileges, as in the undertaking of retail trade activities, on condition that its own citizens or nationals shall enjoy similar privileges in the latter state. Notwithstanding the law allowing one hundred percent foreign ownership of retail activities subject to the capitalization requirements, a foreign retailer shall be allowed only to own up to the extent of the foreign ownership allowed for retailing in its home country. (Rule 1, Sec. 1 [n], Rules and Regulations Implementing Republic Act No. 8762) 5. To deal In, engage and transact, directly or indirectly, all forms of mercantile acts and transactions concerning all kinds of real or personal property, movables, semi-movables, goods, wares, chattels, choses in action, tangible and intangible property, technical and industrial equipment and machinery, personal and real rights, commercial papers and documents, securities, evidences of indebtedness or representative of value or other forms of obligations, services, and all things, including future ones, which are not excluded from the commerce of man or which are not contrary to law or good morals, excluding however, financing business.