Opinion No. 09-10 RE : Reclassification of Shares; Required Equity under the Financing Company Act

Republic of the Philippines Department of Finance Securities and Exchange Commission

SEC Bldg. EDSA, Greenhills, Mandaluyong City

SEC-OGC Opinion No. 09-10 19 May 2009

Re: Reclassification of Shares; Required

Equity under the Financing Company Act

COCHINGYAN & PERALTA LAW OFFICES Twelfth Floor, 139 Corporate Center, 139 Valero Street. Salcedo Village, Makati City 1227, Philippines

Attention: Atty. Jose Cochingyan, III

Sir:

This refers to your letter of 5 August 2008' primarily' requesting confirmation of your opinion that the proposed reclassification of shares of your client, Credit 24 Finance Company, Inc: ("Credit: 24", for brevity), still complies with the required Filipino equity participation under .Republic Act No. 5980, or the Financing Company Act of 1998, as amended1.(`FCA").

A financing company; Credit 24 has, at present, an authorized capital stock of Forty Million Pesos (Php: 40,000,000.00) divided into four hundred 'thousand (400,000) shares with each share having a par value of One Hundred Pesos (Php 100.00). Its subscribed and : paid. up capital stock amounts to Ten Million Five Hundred Thousand Pesos. (Php.:10,500,000.00) divided into one hundred five thousand (105,000) shaires with a par value.of One Hundred Pesos (Php 100.00). per share.2

You mentioned that Credit 24 intends to reciassify its shares of stock into common and preferred shares. Under the proposed reclassification, Credit 24 will have an authorized capital stock of One Hundred Eight Million Five Hundred Seventy -- Six Thousand Pesos (Php 108,576,000.00) composed of two (2) classes of shares: Class A shares and Class B shares, broken down as follows:

The Class A shares will constitute forty percent (40%) of the authorized capital. stock' at two thousand eight hundred eighty (2,880) shares with each 'share having a par.value of Two Hundred Pesos (Php 200.00): These. shares will be issued to Filipino citizens only in order to." ensure compliance. with the citizenship requirements for financihg'companies under the FCA.

2 See annexed Table A for illustration. ' By Republic Act No. 8556.

On the other hand, the Class B shares will constitute sixty percent (60%) of the authorized capital stock at four thousand

made availabie to Filipino citizens and foreigners alike.3 Thousand Pesos (Php :25,000.00) per share. These shares will be three hundred twenty (4,320) shares with par value of Twenty-Five

To implement the proposed (re)classification, the following shall be done:

1. The present shareholdings of the current stockholders will be

reclassified into Class"B"shares. All one hundred five thousand (105,000) current outstanding shares with par value at the current One Hundred Pesos (pHp 100.00) per share, or a total par value of

be converted to four hundred twenty (420) Ciass B shares with par value of Twenty-Five Thousand Pesos (Php 25,000.00) per share. Ten Million Five Hundred Thousand Pesos (Php 10,500,000.00), will

2. The debts or advances from the current shareholders amounting to

Sixteen Million Eight Hundred Seventy-Eight Thousand One Hundred Fifty-Four: Pesos andForty-Nine Centavos(Php shareholders will, be issued Class B shares corresponding to the 16,878,154.49) will be converted into equity. and. the -said amounts owed them by Credit 24.

3. The required twenty-five percent (25%) subscription for Class A shares will be coming :from new investment of One Hundred Forty- Six Thousand Eight: Hundred Pesos (Php 146,800.00) divided intc

seven hundred,thirty-four (734) shares with par,vafue of. Two Hundred Pesos (Php 200:00) per share.

required forty percent.(40%) Filipino equity participation under the FCA. additional Class A shares will likewise be issued to maintain compliance with the You also mentioned' that"in the event more Class B shares are issued,

There is neither a constitutional nor a statutory mandate for the ciassification of corporate shares .into Ciass A and Class B shares. Such.arrangement is only a

insuring compliance with constitutional or legal requirements. Each class of shares may be assigned varying par valuies, and likewise, one class of shares may be more than the others.4 device internally adopted by Philippine companies to facilitate monitoring of foreigr equity in the' company. This practice is recognized, but not mandated, by the Corporation Code which ailows a corporation to ciassify its shares for the purpose of

4 De Leon, Hector S. The Corporation Code of the Philippines Annotated, 2002 Edition, p.66; DOJ Opinion No. 3 See arinexed Table B for illustration. 195, 3 October 1989. 1

To compute the: required.percentage of Filipino ownership of a corporation engaged in a particular industry, resort must be had to the 1987 Constitution and/or the statutes enacted by Cohgress pursuant to its power to determine which areas of investment may be opened to foreign participation and which ones which should be completely reserved to Filipino citizens, such as Republic Act No. 7042 or the Foreign Investments Act (`FIA") including the applicable Foreign Investment Negative List (FINL

stock of a corporation is based on the total outstanding or subscribed/issued capital stock regardless of whether they are classified as common voting shares or preferred shares without voting rights. It is further said that the test for compliance with the nationality requirement is based on the total outstanding capital stock irrespective of the amount of the par value of. shares, and likewise without: regard to whether or November 2007.opinion"which explained that the term "capital"mentioned without not such shares have been.fully or partially paid.7 This rule was applied in a It is now well settled in this jurisdiction that the ownership of the shares of

qualification in Section 11, "Article XII of the..1987 Constitution (which prescribes a specific equity participation/structure in a public utility) should be interpreted to refer to the sum total of the:outstanding capital stock, irrespective of the nomenclature or classification as common, preferred, voting or non-voting.:

financing companies which are governed by a more specific or special, if not stringent, requirement under the FCA. The FCA expressly mandates that. the The above, however, appears to be the general rule and is not applicable to

nationality requirement applies only to voting stocks, to wit:

corporations at least forty percent *(40%) of the voting stock of which is owned by citizens of the Philippines and shall have a paid- Financing companies shall be organized in the form: of stock "Sec. 6. Form, of organization and capital requirements.

the financing comipany.is' located in Metro Manila and other first up capital.of.not less than Ten million pesos (P10,000,000) in.case

class cities, Five million pesos (P5,000,000) in other classes of cities and Two million: fivehundred thousand pesos (P2,500,000) in

allowed to own stock: in any financing company unless the country of which he is "a national accords the same reciprocal rights to Filipinos in the ownership of financing companies or municipalities: Projided. however,That no foreign national may be their counterpart entities .iri.Such a.country. x x x."

5 SEC Opinion No. 04-30 dated 28 April 2004 addressed to Ms. Marlene Caluya. SEC Opinion No. 04-49 &ated 22 December: 2004 addressed to Atty. Priscilla B. Valer of Romulo Mabanta

: SEC-OGC Opinion No. 18-07 dated 28 November 2007 addressed to Mr. Rafael C. Bueno, Jr. 9 SEC-OGC Opinion No..08-14 dated 2 June 2008 addressed to Atty. Demosthenes B. Donato of Donato Zarate Concepcion Regala & Cruz Law Offices Rodriguez. Buenaventura Sayoc & De Los Angeles. SEC Opinion No. 06-36 dated 21 September 2006 addressed to Atty. Tadeo F. Hilado of Angara Abello

common share and to a preferred share under the proposed reclassification, both the articles of incorporation and in the certificates of stock to the contrary, all stocks, general voting rights, and subject to the same liabilities.10 Thus, since you did not classes of shares shall 'be considered herein as voting stocks. state the specific rights,privileges and liabilities, if any, that would attach to a regardless of their nomenclature, enjoy the same rights and privileges, including Under the doctrine: of.equality"of shares, in the absence of any provision in .

the outstanding capital stock of Credit 24 would be one thousand eight hundred Using the planned manner of impiementation of the proposed reclassification

twenty-nine (1,829) shares; broken:down as follows::

Number and Type of Share Source/How Issued

420 Class B shares From the conversion of the present shareholdings of

the current stockholders 675 Class B shares From the conversion into equity of the debts or

E One HundredFifty-Four Pesos and Forty-Nine Sixteen Million Eight Hundred Seventy-Eight Thousand Centavos (Php 16,878,154.49) advances from the current shareholders amounting to

734 Class A shares .*. To be issued pursuant to new investments Total: 1.829 shares

amount of advances to' be converted to Class B shares, i.e. Sixteen Million Eight We arrived at the figure""675. C/ass B shares"in Row 2 by dividing the total

Hundred Seventy-Eight Thousand One Hundred Fifty-Four Pesos and Forty-Nine

Five'Thousand Pesos (Php 25,000.00): In this connection, please take note of the Centavos (Php 16,878,154.49) by the par value of one Class B share, i.e. Twenty

treatment under the law of fractional shares for voting purposes.

eight hundred twenty-nine (1,829) shares is' seven hundred thirty-two (732)1 shares. Since Class A shares under the proposed reclassification will be issued only Forty percent (40%) of the total outstanding voting stock of one thousand

to Filipinos, the seven hundred thirty-four (734) Class A shares in Row 3 would be more than enough to meet the requirement under the FCA.

dividends that may be declared and paid to Class A shareholders and Class B You also seek confirmation that in the proposed structure, the amount of

shareholders may vary, depending on the par value of shares held.

Iv:

1o Section 6, paragraph 5, of the Cofpofation Code; De Leon, Hector S. The Corporation Code of the Philippines 11 Rounded off from 731.6. Annotated, 2002 Edition, pp .67-68-citing. SEC Opinion, 16 July 1996, and SEC Opinion, 11 August 1988.

We note, however, that while there would now be common and preferred shares, you failed to mention which between, and/or to what extent of, the Class A

other. At any rate, and corollary to.:the doctrine of equality of shares adverted to above, the dividends may,'vary, as long as such benefits, privileges and all other shares and Ciass B shares would be common on one hand and preferred on the contained in the articies of incorporation and the certificates of stock and would not prejudice existing stockholders factors relative to distribution:of dividends that may bring about such variance(s) are

relevant solely to the particular.issues raised therein. It shall likewise be understood the Commission in other cases.12 that the foregoing shall not bei used in the nature of a standing rule binding upon The entire opinion is based solely on the facts disclosed in the queries and

Piease be guided accordingly.

Very truly, yours.

VERNETTE.G. UMALI-PACO

General Counsel

12 Paragraph 7, SEC Memorandum Circular No. 15, Series of 2003.

5

Table A

Present Present Classification of. Shares _: Par (Php) Value Number Shares of Amount (Php) Totai % Outstanding Capital Stock Unsubscribed 100.00 295,000 29,500,000.00 73.75% Foreigner 100.00 31,500 3,150,000.00 7.88% 30.00% Foreigner 100.00 31:500 3,150,000.00 7.88% 30:00% Filipino 100.00 41,998 4,199,800.00 10.50% 40.00% Filipino 100.00 3 100.00 0.00% 0.00% Filipino 100.00 1 100.00 0.00% 0.00% TOTAL 400,000 40,000,000.00 100% 100%

Table B

CLASS Proposed Reclassification of Shares PAR VALUE (Php)"{'NUMBER SHARES OF|AMOUNT (Php) TOTAL % OUTSTANDING CAPITAL STOCK Class A 200.00 2,880 576,000.00 40.00% 0.53% Class B 25,000:00 4,320 108,000,000.00 60.00% 99.47% TOTAL 7;200 108,576,000.00 100.00% 100.00%