Emerald Registry And Transfers Corporation

August 25, 2003 SEC OPINION NO. 41-03 Emerald Registry And Transfers Corporation Unit 2501, 25th Floor, Pacific Star Building Sen. Gil Puyat Avenue corner Makati Avenue, Makati City Attention: Atty. Eliseo R. Fernandez Managing Director Gentlemen : This refers to your letter dated 28 July 2003, requesting a formal opinion/ruling as to whether a director loses the legal title over his shares lodged with the Philippine Central Depository, Inc. (PCD) and issued in the name of the PCD Nominee Corporation, so much so that he automatically ceases to be a director of the corporation. In your letter, you stated that this query was precipitated by your experience in connection with an initial public offering (IPO) of a client wherein as a condition imposed by a lock-up of shares, all shares issued prior to the IPO have to be delivered to and lodged with the PCD. As a consequence, all lodged shores including those of the incumbent directors, has to be cancelled and a new certificate issued in the name of PCD Nominee Corporation. The lock-up provisions of the Philippine Stock Exchange's (PSE) General Requirements for Admission to Listing for First Board and Small and Medium Enterprises (SME) Board 1 are quoted herein viz : First Board The applicant company shall cause its existing stockholders or security holders who own an equivalent of at least 10% of the issued and outstanding shares not to sell, assign or in any manner dispose of their shares for a minimum period of 180 days after the listing of the said shares . If there is any issuance of shares or securities or instruments which lead to issuance of shares or securities done and fully paid for within 180 days prior to the start of the offering period, and the transaction price is lower than that of the offer price in the IPO, all shares or securities availed of shall be subject to a lock-up period of at least 365 days from full payment of the aforesaid shares or securities. SME Board The applicant company shall cause all its existing stockholders not to sell, assign or in any manner dispose of their shares for a minimum period of three hundred sixty-five (365) consecutive calendar days after the listing of such shares .After said period has elapsed, two-third (2/3) of the shares of each stockholder shall remain locked-up for another three hundred sixty five days (365);and after the second 365-day period has elapsed, one-third (1/3) of said shares and any residual fractional shares shall remain locked up for another 365 days. Provided that, existing shareholders whose shares are subject to the lock-up can only sell, assign or in any manner dispose such shares if and only if the earnings of the company for the periods covered are within or beyond the projections as submitted to the Exchange. If there is any issuance or shares or securities or Instruments which lead to issuance of shares or securities done and fully paid for within 180 days prior to the start of the offering period, and the transaction price is lower than that of the offer price in the IPO, all shares or securities availed of shall be subject to a lock-up period of at least 365 days from full payment of the aforesaid shares or securities. 2 Hence, you are expressing concern that if all previously issued shares will be lodged with the PCD and the shares cancelled and issued in the name of PCD Nominee Corporation, the incumbent directors of the issuer corporation will automatically cease to be directors since they no longer own any share/s in their names, leaving a vacuum in the Board of Directors of the issuer. In this regard, the pertinent provisions of the Corporation Code of the Philippines on the matter is quoted as follows: HcSCED Sec. 23. The board of directors or trustees. xxx xxx xxx Every director must own at least one (1) share of the capital stock of the corporation of which he is a director, which share shall stand in his name on the books of the corporation. Any director who ceases to be the owner of at least one (1) share of the capital of the corporation of which he is a director shall thereby cease to be director . Trustees of nonstock corporations must be members thereof. A majority of the directors and trustees of all corporations organized under this code must be residents of the Philippines. Before we can dispose of your query, it is imperative to first discuss the prevailing "scripless" or "uncertificated" 3 equities trading regime in the PSE and the role of the PCD in this exercise. Under the scripless trading environment being observed at the PSE, settlement is carried out via book-entry system (BES) rather than by physical movement of certificates or documents. 4 The PCD uses the BES to record the ownership of shares. Under this set-up, when a trade is done at the PSE, securities are moved via electronic debit and credit of PCD participants' securities accounts to effect settlement. There will be no need for the physical movement of stock certificates (scrip) between the buyer and the seller. This is first done by depositing eligible shares in PCD through a process called " lodgment " where a stockholder/investor can deposit stock certificates through a PCD participant in exchange for book-entry credits in the records of PCD. However, if an investor wants a certificate in his name pursuant to his right under the Corporation Code of the Philippines, he will have to specify with his broker that he wants a stock certificate for the stocks he bought by uplifting or withdrawing his shares in BES. The process of " upliftment" should likewise be coursed through a PCD Participant, provided that when these certificated shares are eventually sold at the PSE, they will have to be re-lodged in the PCD system for settlement purposes. The PCD acts as a depository of securities in connection with a system for the handling of securities whereby all securities of any issuer deposited within the system are treated as fungible and may be transferred, encumbered, or otherwise dealt with by bookkeeping entry without physical delivery of certificates. The PCD Nominee Corporation on the other hand, as a wholly owned subsidiary of PCD, holds legal title to all immobilized or dematerialized securities listed and traded in the PSE for Exchange trades or traded in any over-the-counter market for non-Exchange (outside the stock exchange) trades for and on behalf of participants of PCD. In regard to the requirement of the Corporation Code on stock ownership, the weight of authority supports the view that mere naked title to stock is sufficient to qualify one as a director under the statutes, charter provisions and by-laws, requiring directors to be stockholders. The general rule is that beneficial ownership is not necessary, and that a person who holds legal title to stock on the books of the corporation is qualified to be director, although the beneficial ownership may be in another. In other words, it is sufficient that the title to the stock, as it appears on the books of the corporation, is in the director, since the legal title is what counts and it is the person whose name appears as owner on the books of the company who is a stockholder and eligible as director ( SEC opinion dated 12 February addressed to PEFTOK Integrated Services ). Thus, based on the facts presented, it would appear that once legal title to the qualifying share is transferred to PCD Nominee Corporation, and assuming that the director has no other share standing in his name in the books of the corporation of which he is a director, then the director ceases to own his qualifying stock and, by provision of law, automatically ceases to be director ( See SEC opinion dated September 2, 1991 addressed to Filipino-Indian Chamber of Commerce (Phil), Inc .). However, it is submitted that while the naked or legal title to the qualifying shares shall be transferred in the name of the PCD Nominee Corporation as evidenced by e "jumbo," "street" or "mother" certificate, the transfer is more of a trust and not a transfer of ownership. It does not follow that the PCD Nominee Corp. as holder thereof holds the qualifying shares in its own right but as mere nominee in trust and for the benefit of real owner .( See SEC opinion dated May 21, 1991 addressed to Atty. Victor Africa ).To rule otherwise would create an injustice to corporate stockholders, who, under the law, have the right to be represented in the board of directors. Be that as it may, it is necessary, therefore, for the minimum number of qualifying shares for directors (one share each) to be uplifted from PCD and registered directly in the names of the nominee-director's. This would be possible by opening their own securities account via the Client Account Registry (CAR) of the PCD where individual investors are enabled to hold accounts directly with PCD. Another option is to open a Sub-Account Registry (SAR) which allows clients of brokers to be identified in the system so that transactions will settle directly at the sub-account level. In both cases, holders thereof will receive a Statement of Stock Position directly from PCD. The only consequence of the above arrangement is that it will entail the payment of a maintenance fee to the PCD, which is minimal. The variance to this rule is, if the publicly listed corporation has, in the meantime, amended its articles of incorporation and by-laws so as to fully "dematerialize" its capital stock. On this score, Section 43(b) of the Securities Regulation Code, provides, to wit: "If so provided in the its articles of incorporation and by-laws, issue all of the shares of a particular class in the form of uncertificated securities and subject to a condition that investors may not require the corporation to issue a certificate in respect of any shares recorded in their name." Lastly, there are other options available to the affected directors such as lodging their qualifying shares with a custodian bank instead of the PCD. Another alternative is to keep said shares but with a corresponding annotation in the stock and transfer book and the stock certificates that they are holding, that it is subject to a lock-up period for a specified number of days. We hope we have sufficiently addressed your concerns. Very truly yours, (SGD.) VERNETTE UMALI-PACO General Counsel Footnotes 1. The provision for lock-up for the Second Board is under review. 2. Amended Rules as of June 22, 2000. 3. A security evidenced by electronic or similar records (Sec. 3.14, Securities Regulation Code.) 4. Under Sec. 43.3 of the Securities Regulation Code (R.A. 8799), "(t)ransfers of securities, including uncertificated securities, may be validly made and consummated by appropriate book-entries in the securities accounts maintained by securities intermediaries, or in the stock transfer book held by the corporation or the stock transfer agent and such bookkeeping entries shall be binding on the parties to the transfer. A transfer under this subsection has the effect of the delivery of a security in bearer form or duly indorsed in blank representing the quantity or amount of security transferred, including the unrestricted negotiability of that security by reason of such delivery. However, transfer of uncertificated shares shall only be valid, so far as the corporation is concerned, when a transfer is recorded in the books of the corporation so as to show the names of the parties to the transfer and the transfer and the number of shares transferred. .."