Opinion No. 13-13 Re:Proprietary Shares; Vested Rights Registration Securities

SEC Building, EDSA, Greenhills, Mandaluyong City Securities and Exchange Commissior Republic of the Philippines Department of Finance

Office of the General Counsel

December 05, 2013

SEC-OGC Opinion No. 13-13 Re: Proprietary Shares; Vested Rights; Registration of Securities

MR. JERIC HECHANOVA

Cebu Country Club, Inc. P.O. Box 698, Banilad General Manager

Cebu City, 6000

Dear Mr. Hechanova,

your initial queries stated in your letter of 27 December 2012 This refers to your letter dated 25 October 2013 amending and consolidating

for an opinion on the following queries: Certificates (`POCs") it can issue from the present Eight Hundred (800) certificates to a higher number which is to be decided by the members. Thus, you requested Inc. ("ccCI") is a membership, non-stock corporation formed, among others, to Province of Cebu for the amusement, entertainment, instruction, recreation and refreshment of its members, and such others as may be designated in the by-laws of the corporation. You further stated that cccI is considering of amending its Articles of Incorporation to increase the number of Proprietary Ownership maintain, operate, manage and carry on a social and recreation club in the City and In your 27 December 2012 letter, you mentioned that Cebu Country Club,

a. Will the voting be limited to the 100 voting members only?

b. Will the voting have to include all members of the CCCI who are holders/owners of POC? Or

c.Will the voting have to be for all POC owners whether members'or not?

d. Assuming that CCCI decides to issue 120 new and additional POCs, on top of its already existing and issued 800 POCs, the purpose of which is to sell

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remodel its existing golf course, can cccI be exempted from registration them to members only, not to the public, and the proceeds thereof to be used to renovate its existing Club House with additional buildings and to of securities for these 120 new POCs?

due to the following reasons, to wit: However, in your 25 October 2013 letter, you amended your earlier request

a The Board of Directors of cccI ('Board") was planning to propose to its

its current limit of 800 certificates as an option to fund the project; members to renovate the club. : The Board was also considering to increase the number of Proprietary Ownership Certificates (`POCs") from

b. On March 8, 2013, the voting members of the club approved the plan to

fund the project. renovate its clubhouse and golf course. The Board was then given the authority to pursue the renovation project and to do and perform all acts necessary for such purpose. It was also approved that a special assessment would be imposed on the members of the club in order to

C The Board was further given the authority to look for other options to

fund the project and presently, the option being looked into is the lease of a portion of the club to a real estate developer.

d. However, during the March 8, 2013 meeting, one of the members raised

the issue of vested rights and co-ownership of the properties of the club of its members.

amended issues: Accordingly, you now seek our opinion on the following consolidated and

a. If the club amend its Articles of Incorporation by issuing new POCs, the

purpose of which is to fund the renovation project, will the voting be limited only to the 100 voting proprietary members; or to all the 800 POC holders of CCCI?

b. If the club enters into a long-term lease of a portion of its property, does the Board of Directors, by itself, have the opportunity to enter into such an agreement or does it need the approval of the 100 voting proprietary members; or does it need to be ratified by all the 800 members?

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Are the owners of POCs "co-owners" of the Corporation, thereby, giving them vested rights?

However, for purposes of information only, the following are imparted. turns out to be adverse to their interest. Such is the nature of your first query which involves voting rights that are litigious in nature and may thereafter lead to an of 2003, the Commission refrains from rendering an opinion on the matter stated in private parties who would, in all probability, contest the same in court if the opinion intra-corporate issue, jurisdiction over which is already transferred to the Regional Trial Courts, pursuant to Section 5.2 of the Securities and Regulation Code ('SRC"). your first query involving as it does the substantial and contractual rights of the Please be advised that pursuant to SEC Memorandum Circular No. 15, Series

12 January 19881 issued to CCCI and addressed to Mr. Julius Z. Neri, the Commission categorically answered the same question, viz: As to your first query, it is important to note that in a previous Opinion dated

hereunder: "The pertinent provision of Section 89 of the Corporation Code, is quoted

extent specified in the articles of incorporation or the by-laws. of class, shall be entitled to one vote. class or classes to vote may be limited, broadened or denied to the Unless so limited, broadened or denied, each member, regardless Sec. 89. Right to Vote. -- The right of the members of any

incorporation or the by-laws may limit, broaden or even deny a member's From the foregoing provision therefore it is clear that the artictes of

right to vote.

provide(s), and we quote: Sections 1 and 2 of Article III of your approved Amended By-laws

full resident members of the Cebu Country Club, Inc. each of whom has elected to purchase a Proprietary Ownership Certificate Section 1. Persons Exercising Voting Rights. -- All present

1 When Republic Act No. 8799 otherwise known as the Securities and Regulation Code and SEC Memorandum Circular No. 15, Series of 2003 did not yet exist.

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and to pay for the same within the period allowed therefor, shall be entitled to one vote in all affairs of the corporation and shall be designated as a "Voting Proprietary Member."

of the Philippines exceed FORTY (40) percent of the total voting unanimous approval of the Board, any proprietary member may be provided that at no time shall the number of voting proprietary members exceed one hundred (100) and provided further, that in no case shall the number of voting members who are not citizens proprietary membership. elected as and given the status of a voting proprietary member Section 2. How Voting Rights are Acquired. -- By a

corporation is limited to the Voting Proprietary members in accordance with the aforequoted provisions of your by-laws. Consequently, only such voting proprietary members shall be allowed to vote in the amendment of the club's From the above, there is no doubt that the right to vote in your

articles of incorporation."

Corporation Code which reads: With regard to your second query, we find reference to Section 40 of the

such terms and conditions and for such consideration, which may be money. stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders provisions of existing laws on illegal combinations and monopolies, a Iease, exchange, mortgage, pledge or otherwise dispose of all or substantially aliz of its property and assets, including its goodwill, upon corporation may, by a majority vote of its board of directors or trustees, sell, "Sec. 40. Sale or other disposition of assets. - Subject to the

representing at least two-thirds (2/3) of the outstanding capital two-thirds (2/3) of the members, in a stockholder's or member's stock, or in case of non-stock corporation, by the vote of at least

meeting duly called for the purpose.3 xxx

substantially all the corporate property and assets if thereby the A sale or other disposition shall be deemed to cover

2 Emphasis ours. 3 Emphasis ours.

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corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. xxx

Salazar Hernandez and Gatmaitan explained that: However, the Commission in its 21 October 2002 Opinion addressed to Sycip,

purpose for which it was incorporated. (Lopez, Corporation Code, p. 571) In 'sale or disposition of all or substantially all the assets' as one which will render the corporation incapable of continuing the business or accomplishing the purposes for which it was incorporated. Section 40 of the Code applies other words, if after the disposition of corporate assets, the disposing corporation can still continue the business for which it is organized, the disposition can be made without complying with the requirements set forth in the aforementioned provision as it is not covered by said section. (SEc Opinion dtd. February 16, 1987, citing Agbayani, Commercial Laws, Vol. 3, p. 355 only if after the disposition of corporate assets, the disposing corporation can no longer continue the business for which it was organized or accomplish the "Section 40 (par. 2 thereof) of the Corporation Code defines the term

by the effect of such transfer on the corporation's business. Any disposition which does not involve all or substantially all of the corporate assets as defined above, made in the ordinary course of business guided not so much by the number or volume of the assets transferred but In interpreting paragraph 2 of Section 40, this Commission has been

is not the amount involved but the nature of the transaction. (De Leon, Corporation Code, 1993 edition, p. 316) Hence, if the sale thereof will not render the corporation incapable of continuing its business or if the board of directors as it may deem expedient and in good faith, dispose the same without the approval of be stockholders. (SEC Opinion dtd. August 21, 1995, RP Enterprises Inc.) To determine if the sale is made in the ordinary course of business, the test disposition is necessary in the usual and regular course of business, the does not require the approval of the stockholders or members5 .

which, law and equity provides that a corporation is a distinct legal entity to be entrenched doctrine of separate juridical personality of a corporation. By virtue of Finally, as to your third query, please note that we abide by the long-

4 Emphasis ours. 5 Emphasis ours.

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Corporation Code, no stockholder or member could claim ownership or interest of compose it, and thus, a corporation is not affected by the personal rights, obligations and transactions of its stockholders or members. Consequently, the property of the corporation is its property and not that of the stockholders or members as owners, although to a certain extent, stockholders have equities in it.c corporate assets, and that until the corporation is dissolved and its assets are applied and distributed in accordance with the law i.e., Section 947 or 95 of the any of the specific properties owned by the corporation. considered as separate and apart from the individual stockholders or members who This means that the stockholders or members merely have inchoate rights over the

in the Amended Implementing Rules and Regulation of the Securities and Regulation Code, to wit: This is further bolstered by the definition of a Proprietary Share or Certificate

"Proprietary share or certificate is an evidence of interest or participation or privilege in a corporation which not only entitles the holder to enjoy the use

meeting. inconsistent with the provisions of this Title, may be adopted by a non-stock corporation in the process of dissolution in the following manner: The board of trustees shall, by majority vote, adopt a to each member entitled to vote, within the time and in the manner provided in this Code for the at least two-thirds (2/3) of the members having voting rights present or represented by proxy at such those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the resolution recommending a plan of distribution and directing the submission thereof to a vote at a regular or special meeting of members having voting rights. Written notice setting forth the proposed giving of notice of meetings to members. Such plan of distribution shall be adopted upon approval of 6 Sulo ng Bayan v. Araneta, G.R. No. L-31061, 17 August 1976. or conveyed in accordance with such requirements; 3. Assets received and held by the corporation similar purposes, but not held upon a condition requiring return, transfer or conveyance by reason of the dissolution, shall be transferred or conveyed to one or more corporations, societies or organizations engaged in activities in the Philippines substantially similar to those of the dissolving corporation according to a pian of distribution adopted pursuant to this Chapter; 4. Assets other than provisions of the articles of incorporation or the by-laws, to the extent that the articies of incorporation or the by-laws, determine the distributive rights of members, or any class or classes of members, or provide for distribution; and 5. In any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to this Chapter. 8'Sec. 95. Plan of distribution of assets. - A plan providing for the distribution of assets, not plan of distribution or a summary thereof and the date, time and place of such meeting shall be given 7 Sec. 94. Rules of distribution. - In case dissolution of a non-stock corporation in accordance with the provisions of this Code, its assets shall be applied and distributed as follows: 1. All liabilities and obligations of the corporation shall be paid, satisfied and discharged, or adequate provision shall be made therefore; 2. Assets held by the corporation upon a condition requiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred subject to limitations permitting their use only for charitabie, religious, benevolent, educational or

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proportionate ownership right over its assets." Upon liquidation of the company, a holder of a proprietary share shall have of a specific property but also to dividends or earnings of said company.

to their respective shareholdings before the same is offered to the general public.1o the corporation, they do have certain rights such as pre-emptive rights or the of your Articles of Incorporation as mentioned in your 06 March 2013 follow-up However, stockholders may be denied of their pre-emptive rights if such denial is permitted by the Articles of Incorporation.11 An example of such denial is Section 9 Ietter. privilege to subscribe to all issues or disposition of shares of any class, in proportion Thus, while stockholders merely have inchoate rights over the properties of

letter in relation to the exemption from registration of additional POCs is not included in your consolidated and amended issues, the Commission deems it best to On another note, although the 4th query stated in your 27 December 2012

answer the same.

transactions, especially paragraphs (e)12, (i)13 and (j)14. In this regard, please take note of the conditions for each exempt transaction in order to be exempted from We invite your attention to Section 10.1 of the SRC pertaining to exempt

registration.

Implementing Rules and Regulation of the SRC which provides: We also invite your attention to Section 10.1 Paragraph 3.A. of the Amended

12 The sale of capital stock of a corporation to its own stockholders exclusively, where no commission 14 The sale of securities by an issuer to fewer than twenty (20) persons in the Philippines during any twelve-month period" 10 Section 39, Corporation Code. incorporated, or its authorized capital stock increased. 11 Ibid. or other remuneration is paid or given directly or indirectly in connection with the sale of such capital 13 Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscription is to comply with the requirements of such law as to the percen'age of the capital stock of a corporation which should be subscribed before it can be registered and duly 9 SRC Rule 3 -- Definition of Terms Used in the Rules and Reguiations. pursuance of an increase in its authorized capital stock under the Corporation Code, when no stock.

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Registration of Securities

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"3. Exempt Transactions Requiring Notice

A. Notice of exemption on SEC Form 10-1 shall be required in an

offering or distribution of securities under Section 10.1 (k) and (I) of the Code."

Consequently, if the offering or distribution of your increased POCs falls within the conditions specified in Section 10.1 (e) or (i), a notice of exemption is not required. However, if the offering or distribution of such increased POCs falls in

Form 10-1 must be filed with the Corporate Governance and Finance Department ("`CGFD") of the Commission. Section 10.1 (k), a notice of exemption from the registration requirements on SEC

In any case, whether or not a notice is required, you may opt to file with our

Form 10-1, pursuant to Section 10.315 of the SRC. CGFD an application for confirmation or declaration of exemption, also through SEC

person claiming an exemption under Section 10 has the burden, if challenged, to Unless confirmation of the availability of such exemption is applied for, any

is optional, a party may avail of such confirmation to defeat future challenge from exemption at any time.16 This means that although an application for confirmation establish that the exemption is available and the Commission may challenge such

the Commission.

by reason of the small amount involved or the limited character of the public fall in any of the exempt transactions provided in Section 10.1 of the SRC, you may is not necessary in the public interest or for the protection of the investors such as offering. SRC, by providing justifications that the requirements of registration under the SRC still request for an exemption from the Commission, pursuant to Section 10.2 of the On a final note, if the offering or distribution of your increased POCs does not

16 Paragraph 7.A, SRC Rule 10.1, Amended Implementing Rules and Regulations 15 Any person applying for an exemption under this section, shal file with the Commission a notice identifying the exemption relied upon on such form and at such time as the Commission by rule may prescribe and with such notice shall pay to the Commission a fee equivalent to one-tenth (1/10) of one percent (1%) of the maximum aggregate price or issued value of the securities."

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particular issues raised therein and shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon courts, whether of similar or dissimilar circumstances. If upon investigation, it will be disclosed that the facts based solely on the facts and circumstances disclosed and relevant solely to the relied upon are different, this opinion shall be rendered null and void. Nevertheless, it shall be understood that the foregoing opinion is rendered

CAMiLO S./CORrEA Very truly yours, M I

General Counsel