Opinion No. 24-15 Re: Corporate Restructuring of a Domestic Corporation; Rice and Corn Industry; and Property Swap

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Exchange Securities and Commission

BACONG PILIPINAS

OFFICE oF THE GENerAL CoUNSEL

June 2024

SEC OGC Opinion No.24-t Re: Corporate restructuring of 2

domestic corporation; Rice and corn industry: and Property swap DEL ROSARIO AND DEL ROSARIO LAW OFFICES 2515 High Street South Corporate Plaza Tower 2, 26th St. Cor. 11th Ave, Taguig City

Attn: Atty. Saben Loyola

Atty. Rowneylin Sia Dear Attys. Loyola and Sia:

This refers to your letter dated 22 July 2020, requesting, on behalf of your client, for an opinion on the corporation's proposed conversion to a one hundred percent (100%) foreign-owned company.

In your letter, you disclosed the following:

a)"The corporation is duly organized and existing under Philippine laws primarily engaged in

b "It owns parcels of land used for its business": "Currently, it is 60% Filipino-owned and 40% Chinese-owned with an Authorized Capital the business of research for breeding and testing of agricultural seeds, distribution and selling on a wholesale basis of seeds and planting materials for local and overseas markets": Stock ("ACS") of PhP500,000.00 divided into 500,000 shares with a par value of PhP1.00 per

"The corporation's primary purpose is: share": to the accomplishment of the foregoing corporate business insofar as may be allowed by applicable laws and regulations; To conduct agricultural research for breeding and testing of new rice varieties and other agricultural crops such as, but not limited to, vegetables, corn, fruit trees, and the like; to engage in the distribution and selling, on wholesale basis, of seeds, seedlings, and planting materials in the local and overseas markets; and to do and perform such other acts necessary or incidental

( "The corporation intends to restructure its capital and, in view thereof, desires to know if its intended plan of action outlined below is legally feasible:

It will issue new shares or convert outstanding shares to be divided into Class B Common Shares and Class A Preferred Shares the features of which are as follows:

Features Class B Common Shares Class A Preferred Shares

Ownership May be issued to foreign or Filipino shareholders Issued to Filipino shareholders only # of Shares 40% 60% Par Value PhP1.67 per share PhP0.55 per share Voting rights With voting rights With voting rights

Dividend shareholdings. However, if the All of excess in proportion to dividends with a limit of 10% of Preferred : to received (sic)

www.sec.gov.ph ( imessagemo@sec.gov.ph The SEC Headquarters, 7907 Makati Avenue (+63 2) 5322 7696 Salcedo Village, Bel-air, Makati City IN PEOPl INVESTORS We invest in people w.C 09 O EE

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dividends declared for the total par value. non

total par value of Class A Wwill not get any dividends. year is less than 10% of the shares, then Class B shares non-participating guaranteed non-cumulative,

Other intended features of the Class A Preferred Shares are as follows: E The dividends are not guaranteed and will be given only if the corporation has

unrestricted retained earnings; Each will be of equal rank, preference and priority and identical in all respects,

2 Each shall have the same voting rights as common shares; regardless of its issuance;

The preferred shares shall be entitled to a dividend of up to a maximum of 10%

The preferred shares shall not be convertible into common shares: The preferred shares may be redeemable upon approval of the Board of of total par value, preferred but non -guaranteed, noncumulative, non- participating. (sic) Directors and at the redemption price equal to the issue price plus any accrued and undistributed dividends. Shareholders' vote shall not be required for redemption. However, the preferred shares shall be redeemable only if the issued/paid-in shares so as to maintain the corporation's total paid-in equity redeemed shares are replaced with at least an equivalent amount of newly and Filipino ownership at the same level immediately prior to redemption. To

"In addition to the above corporate restructuring, the corporation may transfer via sale its > Redeemed shares shall be retired and no longer issuable."; and be able to do this, there will always be unissued shares in the corporation. (sic)

parcels of land to a holding company ("HoldCo"). The corporation is also studying the possibility of investing in HoldCo via property swap. Should the corporation choose to invest in HoldCo, the corporation will purchase up to 60% of HoldCo and it will use its lands as the consideration for the shares it subscribed in HoldCo pursuant to Section 61(b) of our Revised Corporation Code." You are now asking for an opinion on the following matters:

a)"May the corporation convert into a 100% foreign owned (sic) entity considering the SEC's b "If 100% foreign ownership is not feasible, whether the (a) intended corporate restructuring previous opinion in SEC [OGC Opinion] No. 09-15?":

c) "Whether the corporation can use its lands to invest in and acquire 60% of the shares of of the corporation to be done through the issuance of new shares divided into (or conversion of existing shares to) (sic) common and preferred shares explained in detail in pages 2-4 above is legally feasible; and (b) whether the corporation will maintain its standing as a 60% Filipino-owned company after restructuring:" and

HoldCo." Definition of Rice and Corn Industry

Act (R.A.) 3018 and Presidential Decree (P.D.) No. 194, is instructive. As to your first query, the broad definition of the rice and corn industry as defined under Republic

Section 2, P.D. No. 1941 defines the activities included in "rice and corn industry" as follows:

As used in this Decree, the term "rice and/or corn industry" shall include the following activities:

a. Acquiring by barter, purchase or otherwise,rice and corn and/or the by- products thereof, to the extent of their raw material requirements when these are used as raw materials in the manufacture or processing of their finished

Engaging in the culture, production, milling, processing and trading, except products. retailing, of rice and corn; Provided, That the designation of the area in the

1 Section 2, Presidential Decree (P.D.) No. 194, Authorizing Aliens to Engage in the Rice and Corn Industry, 17 May 1973, as cited in SEC-0GC Opinion No. 09-15.

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culture and production, as well as the trading of the produce in the domestic or foreign markets, shall be under the direction and control of the National Grains Authority. SEC-0GC Opinion No. 09-152 applied the definition of "rice and corn industry," citing Section 1, R.A. No. 3018, viz.:

the distribution, either in wholesale or retail, the provisions of [R.A. No. 1180] to A definition of "rice and corn industry" is instructive. Under [R.A.] No. 3018, it means "the culture, milling, warehousing, transporting, exportation, importation, handling

contrary notwithstanding, or the acquisition for the purpose of trade of rice (husked or unhusked) or corn and the by-products thereof.

only forty percent (40%) foreign equity is allowed for "(c]ulture, production, milling, processing, trading except retailing, of rice and corn and acquiring, by barter, purchase or otherwise, rice and corn and the by- products thereof (Section 5 of P.D. No. 194), subject to period of divestment (National Food Authority (NFA)] Council Resolution No. 193, [Series of] 1998)."3 In addition, Item No. 9, List B of the 12th Foreign Investment Negative List (FINL) provides that

The corporation's primary purposes as disclosed in your letter are as follows:

b} a C "to conduct agricultural research for breeding and testing of new rice varieties and other "to engage in the distribution and selling, on wholesale basis, of seeds, seedlings, and agricultural crops such as, but not limited to, vegetables, corn, fruit trees, and the like: "to do and perform such other acts necessary of incidental to the accomplishment of the planting materials in the local and overseas markets"; and foregoing corporate business insofar as may be allowed by applicable laws and regulations." "Breeding and testing" of rice and corn may include or connote culture, production, and/or processing of the same which puts the activities within the ambit of the rice and corn industry, so is the wholesale distribution and sale of seeds and seedlings thereof. Thus, the corporation falls within the rice and corn industry, hence, only 40% foreign equity is allowed.

Please note, however, that it might be prudent to consult the National Food Authority (NFA), as the main agency dealing with the rice and corn industry. Corporate restructuring through issuance of new shares or stock conversion

As to the first part of your second query, SEC-0GC Opinion No. 22-174 is instructive as to conversion of existing shares, to wit:

Corporation Code of the Philippines (RCCP), which states that stock corporations are authorized to divide shall issue are first determined by the incorporators as stated in the AOI filed with the Commission. After the shares into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges, or restrictions as may be stated in the AOI. The classes and number of shares which a corporation corporation comes into existence, they may be altered by the board of directors and the stockholders by amending the Aol The power to classify shares is provided under Section 6 of Republic Act (R.A.) No. 11232 or the Revised

in the corporation's AOI. For instance, in the absence of an express provision in the AOI as to their convertibility formalize the conversion which must not result in the watering of stock or issuance of stock in excess of The conversion of shares can only be effected if the shares have a convertibility feature expressly provided for feature, preferred shares cannot be converted into common shares.5 Further, although the shares may have a convertible feature in the AOI, their conversion is not automatic. An amendment of the AOI is required to the authorized capital stock of the corporation.

XXXXX Moreover, and among other requirements, in the event that the conversion or reclassification of shares has the in any respect superior to those of outstanding shares of any class, any stockholder of a corporation shall have effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences the right to dissent and demand payment for the fair value of the shares.

by the Commission's Company Registration and Monitoring Department (CRMD), upon showing Finally, please note that the reclassification of shares and the amendment of the AOI must be approved

2 Section 1, Republic Act (R.A.) No. 3018, Rice and Corn Industry Act, 02 August 1960 as cited in SEC-OGC Opinion No. 09-15 3 Item No. 20, List B, Twelfth Foreign Investment Negative List (FINL), Executive Order (E.O.) No. 175, Series of 2022, 27 June 2022. addressed to Sycip Salazar Hernandez & Gatmaitan dated 17 June 2009. 4 SEC-OGC Opinion No. 22-17 addressed to Padernal and Paras Law Offices dated 23 November 2022. 5 SEC Opinion addressed to Mr. Leoncio Palanca dated 19 May 1992.

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regards the application for amendment to reclassify that will be filed by PMHI. compliance with the above, among other requirements. Thus, we defer to the evaluation by the CRMD as

To sum up, a corporation may reclassify its shares through an amendment of the AOl, provided that the shares have a convertibility feature expressly provided in the AOI, and subject to approval by the Commission, through CRMD. This authority of a corporation ta reclassify its shares includes the creation of redeemable shares subject to compliance with the requirements under the RCCP and the 1982 SEC Rules Governing Redeemable and Treasury Shares. (Citations omitted, emphasis supplied)

stocks to subscribers and to sell treasury stocks in accordance with the provisions of Republic Act (R.A.) No. 11232 or the Revised Corporation Code of the Philippines (RCCP).5 Please take note, however, of the As to the issuance of new shares, every corporation has the power and capacity to issue or sell

pre-emptive rights of the stockholders.

SEC-0GC Opinion No. 23-117 provides the following discussion:

Section 38 of the RCCP provides that "[a]l stockholders of a stock corporation shall enjoy pre-emptive right te unless such right is denied by the articles of incorporation or an amendment thereto." Since Section 38 of the treasury shares. Ubi lex non-distinguish nee nos distinguere debemos. Where the law does not distinguish, courts subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. [RCCP] uses the phrase "all issues or disposition of shares of any class," pre-emptive right extends not only to unsubscribed shares which form part of the existing authorized capital stock, as well as to disposition of issuance of new shares resulting from should not distinguish. (Citations omitted) an increase in capital stock, but also to issuance of previously

stocks or the issuance of new stocks subject to the evaluation and the requirements to be imposed by Thus, we confirm that a corporate restructuring can be effected through the conversion of existing

the Company Registration and Monitoring Department (CRMD) Effect of corporate restructuring

restructuring which would necessitate the determination of factual issues such as the amount of As to the second part of your second query, the same deals with the effect of the capital

outstanding capital stock, the presence or absence of corporate stockholders or corporate layering, and

render an opinion on the same.: compliance with requirements imposed by the CRMD, among others. As such, we cannot categorically

However, for purposes of information only we impart the following: SEC-0GC 0pinion No. 19-249 discussed the determination of nationality of a corporation, to wit:

In the case of Gamboa vs. Teves, the Supreme Court ruled that the "term 'capital' in Section 11, Article XII of the present case only to common shares, and not to the total outstanding capital stock (common and non- the 1987 Constitution refers only to shares of stock entitled to vote in the election of directors, and thus in voting preferred shares]. Pursuant to this, the Commission issued SEC Memorandum Circular No. 8, Series of 2013 (SEC MC No. 8) determining compliance with the required percentage of Filipino ownership. Under the two-tiered test, the 60% required Filipino ownership shall be applied to BOTH: (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, which was upheld by the Supreme Court in Roy vs. Herbosa. whether or not entitled to vote in the election of directors. (Citations omitted) SEC MC No. 8 uses the two-tiered test in

case10 provides that either the Control Test or the Grandfather Rule may be used as may be warranted In case there is corporate layering, the Narra Nickel Mining and Development Corporation

under the prevailing facts. Property swap for stocks in a holding company.

As to your third query, we confirm that lands owned by a corporation can be swapped for stocks in another corporation.

Section 61(b) of the RCCP provides that stocks shall not be issued for a consideration less than the par or issued price thereof. Consideration for the issuance of stock may be property, tangible or intangible, provided that the following requisites occur:

b It is actually necessary or convenient for its use and lawful purposes; The property is actually received by the corporation;

7 SEC-OGC Opinion No. 23-11 addressed Tomas Claudio Colleges Inc. dated 19 May 2023. 6 Section 35, R.A. No. 11232, Revised Corporation Code of the Philippines (RCCP), 23 February 2019. Section 5.8, SEC Memorandum Circular (MC) No. 15, Series of 2003, 16 December 2003. 9 SEC-OGC Opinion No. 19-24 addressed to Atty. Dennis Quiokeles dated 24 June 2019. 1o G.R. No. 195580, 21 April 2014. [Per J. Velasco Jr., Third Division]

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d e C It must be subject to a fair valuation equal to the par or issued value of the stocks issued; The valuation shall be initially determined by the stockholders or board of directors; The valuation is subject to the approval of the Commission.11 and

subject to levy and sale on execution for the satisfaction of any judgment or decree against the stock, the said property or interest should be free from any right of redemption or pre-emption of the other or an interest therein is capable of being applied to the payment of the corporation's debts or can be corporation.12 co-owners considering that the transfer to the corporation must be in such a manner that the property Whenever a property or an interest therein is used as consideration for the issuance of shares of

circumstances and documents disclosed/submitted, and should be considered relevant solely to the It shall be understood that the foregoing opinion is rendered solely on the basis of the facts,

particular issue raised therein. It shall not be used in the nature of a standing rule binding upon the Commission in other cases or upon the courts whether of similar or dissimilar circumstances.13 If upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null and void.

Please be guided accordingly.

Very truly yours,

ROMUALD C. PADILLA Ia : Aayc General Counsel

11 Section 61(b), RCCP, supra Note 6. 12 SEC-OGC Opinion No. 10-21 addressed to Kapunan Lotilla Garcia & Castillo Law Offices dated 26 May 2010. 13 Section 7, SEC MC No. 15, Series of 2003, supra Note 8.