Opinion No. 05-09 RE : Corporate Nationality under the Special Purpose Vehicle Act; Acquisition of Non-Performing Assets

Republic of the Philippines SECURITIES & EXCHANGE COMMISSION SEC Building, EDSA, Greenhills, Mandaluyong City July 6, 2005 SEC Opinion No. 05-09 Re: Corporate Nationality under the Special Purpose Vehicle Act; Acquisition of Non-Performing Assets Angara Abello Concepcion Regala & Cruz ACCRA Bldg., 122 Gamboa St., Legaspi Village, 0770 Makati City Attention: Atty. Tadeo F. Hilado Gentlemen: This refers to your letters dated .,April 8 and May 5, 2005 requesting confirmation of your opinion that the ownership structure of two special purpose vehicles ("SPV 1" and "SPV 2" ) incorporated pursuant to Republic Act No. 9182 ("SPV Act") is legal and valid. As stated, Equitable PCI Bank ("Bank") has a portfolio of non-performing loans ("NPL's) and real and other properties owned or acquired ("ROPOA's") which the Bank intends to dispose. , Iri order to acquire the Bank's NPLs and ROPOAs, your clients will be . establishing two (2) Special Purpose Vehicles, namely, SPV 1 and SPV 2. SPV 1 is Cam~ron 'Granville Asset M~nagement (SPV_AMC) Inc. It is duly incorporated and organized pursuant to the Spy Act of 2002 and has complied with the minimum capital and other requirements imposed by the Spy rY

Act. As disclosed in your Jetter, Spy 1 will be 100% o"\vned by the Singapore branch of Bayerische Hypound Vereinsbank AG (HVB). Spy 2 is LNC ( SPV-AMC) Corporation. It is 60% owned by HoldC.o and 40% by Spy 1. HolqCowill be owned 60% by Filipinos, holding Class "A" cammon shares and 40% by Spy 1, hal ding Class "B" c.omm.on shares. Please refer to the attached diagram on the corporate structures of the subject corporations. Based on your letter, Spy 1 will acquire Non-Performing Loans (NPLs) from local banks pursuant to the SPV Act. Further, Spy 1 will acquire: (a) 40% .ofthe capital stock of Spy 2,; and (b) 40% of the capital stock of HoldCo," which in turn will acquire 60% .ofthe capital stock of SPV2. Spy 2 will acquire Real and Other Properties Owned or. Acquired (ROPOAs) from local banks pursuant to the Spy Act. Since some of the ROPOAs will consist of land, 60%.of the capital stock.of Spy 2 must be .owned by "Philippine Nationals", as defined in Sec. 3(a) .ofRepublic Act No. 7042 (the "Foreign Investments Act of 1991" or "FlA"). We answer your queries as follows: 1. Spy l's acquisiti.on .of the Non-Perf.orming Loans (NPLs) .of l.ocal banks is all.owed under Section 5, Article II of the Spy Act, which provides: ' " Sec. 5. Powers of an SPV. - An SPV will have the following powers: (a) to invest in, or acquire NPAs of Fis; xxx On the other hand, NPL; are included in the definition of NP As which are defined by Secti.on 3, Article II .ofthe Spy Act as: "xxx (g) "Non-Performing Assets or NPAs" consist of the NOll-Perfon1lillg Loa1ls alld Real alld Other Properties OWlled or Acquired by Fis". 2

I , ,'i, \ '. .•; " .. ' ~"'; , \ .•'''~,''-, .l'~: $.'.'ii.' ~ o It is thus clear from the foregoing, that Spy 1 can acq uire , NPLs of local banks. 2. T1:le acquisition by Spy 1 of shares of stock of HoldCo is legal 1 mder Section 4, Article II of the same Act which provides: " Sec. 4. Special Purpose Vel/icle - An SPV shall lie organized as a stock corporation in accordance with Batas Pambansa BIg. 68, otherwise known as "TI,e Corporation Code of the Philippines" and the niles promulgated by the Commission for purposes of registering the SPV; Provided., That if the SPV will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be moned by Philippine nationals pursuant to Republic Act NO. 7042, as amended, othenoise known as "The Foreign Investment Act." (underscoring ours) By statutory definition, an Spy is a corporation organized in accordance with the Corporation Code. Thus, an Spy h~s alI the express powers of a corporation provided by Sec. 36 of the Code, to wit: "Sec. 36. Express Pmoers of a Corporation xxx (g) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and othenoise deal with all types of properties; xxx (k) To exercise such other powers as may be essen:ial or necessanj to carry out its purpose or purposes as stated in the articles of incorporation. " In relation thereto, Section 42 of the Corporation Code likewise provides that: "Sec. 42. Power to illvest corporate fimds in another corporation or business orJor allY other purpose. - Subject to the provisiolls of this Code, a private corporatioll may invest its funds; in any other corporation or business or for any pufpose other than the primary pl/rpose for which it was organized x x x. " 3

., .""'4- ,'if' II. 0, The power' of a corporation to invest its funds in another corporation or business is well established. An SPY, being a corporation, can acquire shares in another corporation. Thus, it is . clear from the foregoing that Spy 1 can acquire shares of stock of HoldCo. 3. SPV 2's acquisition of real properties shall be subject to the nationality requirement of the Spy Act in relation to the Philippine Constitution and the Foreign Investments Act (FIA). Section 4, Article II of the Spy Act provides: Provided, That if the SPV will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be owned by Philippine nationals pursuant to Republic Act No. 7042, as amended, otherwise known as "The Foreign In'Vestments Act." The issue here is whether or not at least 60%. of SPV 2 is owned by Philippine nationals. Thus, it must be determined whether or not HoldCo, which owns 60% of LNC Corporation, is a Philippine national. A Philippine national is defined by Sec. 3 of the PIA as follows: •. (a) the term "Philippine national" shall mean a citizen of the Philippines or a domestic partnership or association wholly owned by citizens of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to 'Vote is owned and held by citizens of the Philippines; or a corporation organized under the laws of the Philippines of which at least sixty percent (60%) of the capital stock outstanding and entitled to 'vote is owned illld held by citizens of the Philippines; or a corporation org~nized abroad and registereq as doing business in the Philippines under the Corporation Code of which one hundred percent (100%) of the capital stock outstanding and entitled to 7Joteis wholly owned by Filipinos; or a (jJ-4

, 1_' '",', 5' ..;~ ••• , I'). ' o. trustee of funds for pension or other employee retirement. or separation benefits, where the trustee is a Philippine national and at least sixty percent (60%) of the fund will accrue to the benefits of Philippine nationals; Provided, That where a corporation and its non-Filipino stockholders own stocks in a Securities and Exchange Commission (SEC) registered enterprise, at least sixty percent (60%) of the capital stock outstanding and entitled to vote of both corporations must be owned and held by citizens of the Philippines and at least sixty (60%) of the members of the Board of Directors of both corporations must be citizens of the Philippines, in order that the corporation shall be considered a Philippine national". As stated in your letter, HoldCo will be 60% owned by . Filipino individuals and/ or a Philippine corporation which is 100% owned Filipinos. It is clear that HoldCo is a Philippine national under the abovequoted provision. In determining whether Holdco is a Philippine national, the computation of the 60% Filipino ownership shall be based on the total number of outstanding capital stock entitled to vote, regardless of the par value of the shares. Further, considering that HoldCo is a Philippine national and owns 60% of SPY 2, then the latter complies with Section 4, Article II of the SPV Act. Thus, Spy 2 is qualified to acquire lands from the bank's ROPOAs. The opinion rendered herein specifically applies only to the facts and circumstances as stated herein and can not be used as precedent in other cases. Very truly yours, VERNETTE G. UMALI-PACO General Counsel 5

0; HOLDeo 60% owned by Philippine nationals 40% owned by Spy 1, a foreign-owned corooration SPV2 60% owned by Roldco 40% ownectl;y'SPV-I, a foreign-owned . corooration