Opinion No. 22-17Re: Conversion of Common/Preferred Shares into Redeemable Shares

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Exchange Commission Securities and iNE

OFFICE oF tHE GeNerAL CoUNSEL

Re: Conversion of Common/Preferred SEC OGC Opinion No. 22-{ Shares into Redeemable Shares

23 November 2022

8F Sagittarius Office Condominium Makati City, Philippines lawyers@applawoffices.com PADERNAL AND PARAS LAW OFFICES 111 H.V. Dela Costa Str., Salcedo Village

Attention: Atty. Edgar Dennis A. Padernal

Dear Sir:

client, Prime Media Hoidings, Inc. (PMHI), pertaining to the proposed conversion of common or preferred shares into redeemable shares to eliminate foreign equity holdings. This refers to your letter dated 05 September 2022 requesting for an opinion on behalf of your

In your letter, you disclosed the following matters:

b) During the annual stockholders' meeting on 13 October 2021, the stockholders owning a) PMHI is a publicly-listed holding company duly registered and existing under Philippine laws; hundred eighty-seven (570,153,887) shares or at least eighty-one point forty-two percent (81.42%) of the outstanding capital stock of PMHI voted in favor of the amendment of the of shares, to wit: and/or representing five hundred seventy million one hundred fifty-three thousand eight Articles of Incorporation (AOI) of PMHI to include a provision prohibiting foreign ownership

Ownership of the Corporation's shares shall be limited to Philippine citizens, or to corporations, cooperatives, or associations wholly-owned and managed by such citizens. which are required to be wholly owned by Philippine citizens or corporations. Section 11, Article XVI of the Philippine Constitution in order to enable the Corporation to invest in shares of stock of corporations, or entities cooperatives, or associations wholly-owned and managed by such citizens as provided in

f C d e PMHI sent out letters to foreign shareholders through their brokerage companies requesting The amendment was unanimously approved by the members of the board of directors of At present, the authorized capital stock of PMHI is five billion pesos (Php 5,000,000,000.00) to transfer or sell their shares to qualified persons, i.e. Filipino citizens: At present, PMHI still has zero point zero six percent (0.06%) of foreign equity remaining divided into the following: because some foreign shareholders cannot be located; PHMI and by the Commission; Three billion (Php 3,000,000,000.00) common shares with par value of one peso (Php 1.00) per share; One billion (Php 1,000,000,000.00) Series "A" preferred shares with par value of one peso (Php 1.00) per share; and One billion (Php 1,000,000,000.00) Series "B" preferred shares with par value of one peso (Php 1.00) per share;

The SEC Headquarters, 7907 Makati Avenue 1

www.sec.gov.ph | imessagermo@sec.gov.ph (+63 2)8818 0921 Salcedo Village. Bel-air, Makati City BS

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g) To fully eliminate the remaining foreign equity, PMHI intends to redeem all foreign-owned m) PMHI intends to redeem all Series "C" shares in cash and later reclassify Series "C" into h t j k 1 At present, the foreign shareholders own the following: The proposed conversion of Series "A" preferred shares to common shares will result to the All Series "A" preferred shares amounting to 109,650 shall be converted into common shares at a conversion rate of twenty-five (25) preferred shares to 1 common share after The conversion, its rate, and the par-down were approved by the board and subject to shares by creating Series "C" redeemable shares with a par value of one peso (Php 1.00) which may be redeemed in cash: implementation of a par down from one peso (Php 1.00) to four centavos (Php 0.04): shareholders' approval on 23 September 2022; Thereafter, all foreign owned shares totaling three hundred forty thousand six hundred sixty- At present, PMHI has no unrestricted retained earnings but "PMHI has sufficient cash on hand four (340,664) common shares shall be converted into Series 'c" redeemable shares with a to cover said redemption amount and will not cause insolvency or the inability of PMHI to issuance of four thousand three hundred eighty-six (4,386) common shares; par value of one peso (Php 1.00) per share; common shares; and meet debts when due. three hundred thousand thirty-six thousand and two hundred seventy-eight common shares .one hundred nine thousand six hundred and fifty (109,650) Series "A" preferred shares: (336,278) Common shares; and

You are now requesting for an opinion on the following:

b C "In compliance with the duly-approved amended A0I that requires 100% Filipino shareholders, may PMHI create Series "C" redeemable shares to reclassify all foreign-held "May PHMI redeem the Series "C" shares owned by foreign shareholders in cash regardless "After the redemption, may PMHI reclassify all Series "C" shares into common shares by amendment of its AOI with the approval of the Board and its shareholders?" common shares into redeemable shares by amendment of the A0I that will be approved by the Board of Directors and its stockholders?": of the existence of unrestricted retained earnings?"; and

Discussion on the first query

Power to classify and reclassify shares

Revised Corporation Code of the Philippines (RCCP),9 which states that stock corporations are authorized to divide 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 shall issue are first determined by the incorporators as stated in the AOI filed with the Commission. After the corporation comes into existence, they may be altered by the board of directors and the stockholders by amending the A01.2 The power to classify shares is provided under Section 6 of Republic Act (R.A.) No. 11232 or the

issuance of stock in excess of the authorized capital stock of the corporation.4 provided for in the corporation's AOI. For instance, in the absence of an express provision in the AOI as to the shares may have a convertible feature in the AOI, their conversion is not automatic. An amendment of the AoI is required to formalize the conversion which must not result in the watering of stock or their convertibility feature, preferred shares cannot be converted into common shares.3 Further, although The conversion of shares can only be effected if the shares have a convertibility feature expressly

shares (First Conversion); and (2) Common shares to Series "C" redeemable shares (Second Conversion). In your letter, there are two (2) conversions, namely: (1) Series "A" preferred shares to common

1 Republic Act (R.A.) No. 11232, Revised Corporation Code of the Philippines (RCCP), 23 February 2019 2 SEC-OGC Opinion No.10-18, addressed to Nolledo Hermosura & Uriarte-Tan dated 12 April 2010 3 SEC Opinion addressed to Mr. Leoncio Palanca dated 19 May 1992. 4 SEC-0GC Opinion No. 10-18, supra.

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to effect the same. Notably, PMHI's A015 does not expressly provide for a convertibility feature. It only contains an authority to the board of directors to adopt resolutions regarding convertibility, among others.e As such, PMHI's AOI needs to be amended to add a convertibility feature and to formalize the conversion As to the First Conversion, a convertibility feature must be specifically indicated in the AOI in order

subject to the foregoing rules.

shares are preferred or common shares. We note, however, that redeemable shares are usually preferred shares.7 As such, a convertibility feature should also be indicated in the AOI. As to the Second Conversion, we note that you did not indicate whether Series "C" redeemable

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

approved by the Commission's Company Registration and Monitoring Department (CRMD), upon showing compliance with the above, among other requirements. Thus, we defer to the evaluation by the CRMD as regards the application for amendment to reclassify that will be filed by PMHI. Finally, please note that the reclassification of shares and the amendment of the AOI must be

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 to 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. To sum up, a corporation may reclassify its shares through an amendment of the AOI, provided

Discussion on the second query

Nature of redeemable shares

incorporation. They are shares which may be purchased by the corporation from the holders of such issued by the Commission.1 As such, the redeemable characteristic of the shares must be specifically stated in the books of the corporation, and upon such other terms and conditions stated in the articles of incorporation and the certificate of stock representing the shares, subject to rules and regulations shares upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the AOI. Redeemable shares may be issued by the corporation when expressly provided in the articles of

redeemable shares, to wit: In Republic Planters Bank, Inc. vs. Hon. Enrique Agana Sr., the Court discussed the nature of

5 Attached to your letter as Annex "A" : SEVENTH:

XXXX

preferences as it may deem beneficial to the Corporation. The resolution thus adopted shall be recorded with The Board of Directors is hereby expressly granted and authorized to adopt resolutions authorizing the establishment, designation and issuance of one or more series for such number of shares and relative rights and and amendment and part of this Articles of Incorporation. The resolution(s) herein authorized to be adopted by the Board of Directors shall specify with respect to a given series, the following: the Securities and Exchange C nission and the Philippine Stock Exchange, if required, and thereupon deemec

XXXX (g) the terms and conditions, if any, on which shares of such. series shall be convertible into, or exchangeable for, shares of stock of any other class or classes, or other series of the same class of the Corporation;

7 Republic Planters Bank, Inc. vs. Hon. Enrique Agana Sr., G.R. No. 51765, 03 March 1997. : Section 80, RCCP. 9 Section 8, RCCP. XXXX

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at a fixed date, or at the option of either issuing corporation, or the stockholder, or both at a certain Redeemable shares, on the other hand, are shares usually preferred, which by their terms are redeemable redemption price. A redemption by the corporation of its stock is, in a sense, a repurchase of it for cancellation.1c

corporation to adjust its capital structure to meet its varying conditions. n This redemption feature is envisaged to effectively eliminate the market volatility risks on the side of the share owners. Undoubtedly, dividend yield on their investments and, on the other hand, want security from the uncertainty of market these are clear advantages and benefits that inure to the share owners who, on one hand, prefer a stable forces over which they do not have control.1 The issuance of redeemable shares may be likened to temporary borrowings which enables a

Power to acquire its own shares

For a corporation to be able to acquire its own shares, the following conditions must be present: (1) it is for a legitimate and proper corporate purpose; (2) there shall be unrestricted retained earnings to purchase the same and its capital is not (4) the conditions of corporate affairs warrant it. If the aforementioned conditions are (3) the corporation acts in good faith and without prejudice to the rights of creditors and present, a corporation may acquire the shares of its alien stockholders to comply with the constitutional requirements prescribing the minimum capital stock ownership of Filipino thereby impaired; stockholders; and citizens in educational institutions. 13

This general rule is provided under Section 40 of the RCCP, to wit:

purchased or acquired, a stock corporation shall have the power to purchase or acquire its own shares Provided that the corporation has unrestricted retained earnings in its books to cover the shares to be for a legitimate corporate purpose or purposes, including the following cases: (a)" To eliminate fractional shares arising out of stock dividends; [b C} To collect or compromise an indebtedness to the corporation, arising out of unpaid To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. 14 and ubscription, in a delinquency sale, and to purchase delinquent shares sold during said sale:

own shares except out of current retained earnings. However, while redeemable shares may be redeemed corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital will cause insolvency or inability of the corporation to meet its debts as they mature.1s the present Code allows redemption of shares even if there are no unrestricted retained earnings on the books of the corporation. This, in effect, qualifies the general rule that the corporation cannot purchase its regardless of the existence of unrestricted retained earnings, this is subject to the condition that the stock. Redemption, therefore, may not be made where the corporation is insolvent or if such redemption The exception to the foregoing rules pertains to redeemable shares. Jurisprudence provides that

up and maintain a sinking fund to be deposited with a trustee bank which shall not be invested in risky and aside in order to accumulate the amount necessary to meet the redemption price of redeemable shares at speculative ventures. A sinking fund refers to a fund set up by a corporation where cash is gradually set specified dates in the future.1 For the protection of the stockholders, a corporation that has issued redeemable shares shall set

12 Philippine Coconut Producers Federation Inc. (COCOFED), et. al. vs. Republic of the Philippines, G.R. No. 177857-58, 17 September 1o Republic Planters vs. Agana, supra. 11 SEC-0GC Opinion No. 07-03 addressed to Ms. Teodora San Pedro dated 07 March 2007. 13 SEC-0GC Opinion No. 14-33 addressed to Tiongco Siao and Abello dated 18 November 2014. 14 Section 2(c), The 1982 SEC Rules Governing Redeemable and Treasury Shares (The 1982 SEC Rules), 26 April 1982 15 Republic Planters vs. Agana, supra. 2009 16 SEC-0GC Opinion No. 09-21 addressed to KEPCO Philippines Corporation dated 13 August 2009. for any managerial, contractual, or legal purposes and which are free for distribution to the stockholders as dividends. Unrestricted Retained Earnings refer to the undistributed earnings of the corporation which have not been allocated

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the books of the corporation. This is subject to the condition that the corporation has, after such redemption, assets in its books to cover debts and liabilities inclusive of capital stock.17 Thus, redeemable shares may be redeemed even if there are no unrestricted retained earnings on

the existence of unrestricted retained earnings, provided that it has, after such redemption, sufficient assets in its books to cover debts and liabilities inclusive of capital stock.1 Based on the foregoing, we confirm that PMHI may redeem its redeemable shares, regardless of

Discussion on the third query

Effect of redemption

exchange for property, whether or not the acquired stock is cancelled, retired or held in the treasury. Essentially, the corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and continues in business as before.19 Redemption is a repurchase or a reacquisition of stock by a corporation which issued the stock in

Treasury shares do not revert to the unissued shares of the corporation but are regarded as property Board of Directors; provided, however, that in the case of redeemable shares reacquired, the same acquired by the corporation which may be reissued or sold by the corporation at a price to be fixed by the Shall be considered retired and no longer issuable, unless otherwise provided in the AOl, 2 Conversely, where the AOI is silent on the reissuable nature of the redeemed shares, the same shall be considered retired.21 Once retired, the authorized capital stock of the corporation will be reduced by the corresponding number of shares since the shares can no longer be reissued. This deduction should be reflected in the AOI through an amendment. In this case, the repurchase was effected for cancellation.22 The redeemable shares, once redeemed, becomes part of the treasury shares of the corporation.

First is non-reissuable, as when the AOI is silent on the reissuable nature of the redeemable shares. The same will be considered retired and can no longer be reissued. Second is reissuable, when the AOI itself specifically provides for such effect of redemption.23 Based on the foregoing, there are two types of treasury shares out of the redemption of shares.

a redemption, if effected, would entail retirement of the shares. In order to enable PMHI to reissue the same, an amendment to the AOI must be made to specifically provide that after redemption, the redeemed shares shall be reissued as common shares, subject to other requirements to be imposed by the CRMD As to your third query, we note that PMHI's AOI is silent as to the effect of redemption. As it stands,

Commission in other cases or upon the courts whether of similar or dissimilar circumstances. If upon investigation, it will be disclosed that the facts relied upon are different, this opinion shall be rendered null circumstances and documents disclosed/submitted' and should be considered relevant solely to the particular issue raised therein. It shall not be used in the nature of a standing rule binding upon the and void.24 It shall be understood that the foregoing opinion is rendered solely on the basis of the facts,

Please be guided accordingly.

ery truly your

Ca tmaX ROMUALD C. PADILLA General Cqunsel

z2 SEC-OGC Opinion No. 06-35 addressed to Ms. Danielle Maria L. Sales-Tort dated 07 September 2006 24 Section 7, SEC Memorandum Circular (MC) No. 15-03, Series of 2003 dated 16 December 2003. 19 Commissioner of Internal Revenue vs. Court of Appeals, et. al., G.R. No. 108576, 20 January 1999 21 SEC-0GC Opinion No. 19-20 addressed to Quadriver Energy Corporation dated 27 May 2019. 20 Section 3(2), The 1982 SEC Rules, supra. 23 SEC-0GC Opinion No. 19-20, supra. 8 Section 5(5), The 1982 SEC Rules, supra. Republic Planters vs. Agana, suprd