Opinion No. 14-36 RE: Minimum number of Independent Directors; Articles of Incorporation

Securities and Exchange Commission SEC Building.EDSA,GreeniflsMandaluyong City Republic of the Philippines Department of Finance

Office of the General Counsel

Incorporation SEC-OGC Opinion No.14-36 Independent Directors; 04 December 2014 Re: Minimum Number Articles of of

Makati City Ms.Nimfa Balmes-Pastrana 45TFlr.G.T.Tower International, Vice President,FIRST METRO INVESTMENT CORPORATION Ayala Ave.cor.H.V.Dela Costa St.

Dear Madam:

opinion on the interpretation of the rules of the Commission and the Bangko Sentral ng Pilipinas (BSP) on the number of independent directors for entities supervised by the said agencies,in relation to First Metro Investment CorporationFMIC This refers to your ietter of 14 July 2014 requesting for a confirmation of your

July 2012 which were mentioned in your letter-request. Circular No.15,Series of 2003the Commission shall refrain from the interpretation of BSP Circular No.749 dated 27 February 2012 and BSP Memorandum No M-2012-032 dated 05 At the onset, it should be noted that, pursuant to Section 5.6 of SEC Memorandum

well as the Commission's relevant circulars. In your queryyou quoted Article VI of FMIC's Articles of Incorporation (Aol as

Article VI of the Aol of FMIC provides that

Sixth -That the number of directors of said corporation shall be eleven 11 including two (2 indcpendent directors and that the name, citizenship, and residences of the first directors who are to serve until their successors are elected and qualified as provided by the By-Laws

5. As a matter of policy, the Comnission shall refrain from rendering opinion in the following

5.1xxx

5.6 Requests which involve interpretation of administrative rules and issuances of other government agencies considering that it is the promulgating agencies which are competent to undertake such construction by reason of their knowledge of the specific intent and extent of application of the subiect issuancesxxx

In re Minimum Number of Independent Directors Articles of Incorporation First Metro Investment Corproation Page 2 of 4

SEC Memorandum Circular No.16,series of 2002,states as follows

All companies are encouraged to have independent directors. independent directors in their boards than as above required." issuers of registered securities and public companies are required to have at least two 2 independent directors or at least 20% of its board size,whichever is the lesser. Provided further that said companies may choose to have more However.

Governanceprovides that SEC Memorandum Circular No.6,series of 2009,the Revised Code of Corporate

All companies covered by this Code shall have at least two 2 independent directors or such nunber of independent directors that constitutes twenty percent (20% of the members of the Board, whichever is lesserbut in no case less than two 2. All other companies are encouraged to have independent directors in their boards."

is clear as to the required number of independent directors. number of independent directors in the Board of Directors (BoD can be stated as follows The language used in the above-quoted provisions of the SEC Memorandum Circulars The rules in relation to the

1 The number of independent directors in the BoD of a concerned entity must be at least two (2 or such number of directors equivalent to twenty percent (20%) of the entire board, whichever is lesser.

In short, the number of independent directors can never be less than two 2 even if two 2) is more than twenty percent (20% of the entire board. 2 The number of independent directors of a corporation may go over the minimum requirernent provided by law.

limit the number of independent directors to two 2,we concur As to your query on whether Article VI of FMCIs Aol is properly interpreted not to

A reading of the Aol provision of FMIC provides that

I) There should be II regular directors. 2)Including 2 independent directors

2 This applies to registered corporations and to branches of subsidiaries of foreign corporation operating in the Philippines that a sell equity anc/or debt securities to the public that are required to be registered with the Commission. or (b have asscts in cxcess of Fifty Million Pesos and at least two hundred (200 stockholders who own at least one hundrcd 100 shares each of equity securities,or (c whose equity securities are listed on an Exchange; or (d are grantees of secondary licenses from the Commission

In re Minimum Number of Independent Directors Articles of Incorporation First Metro Investment Corproation Page 3 of 4

properly construed. Admittedly, there is an ambiguity in the subject provision, thus the need for it to be

not the use of the word includingpertaining to the additional independent directors,FMIC limited the number to two 2. Pivotal to the discussion is the interpretation of the word including and whether or

but may have more at its option. ordinary parlance means with or inclusive ofIt does not necessarily impose or designate a limit. Hence, when the Aol states including two 2 independent directorsit does not say that the corporation can only have two (2 independent directors. Instead,it sets a minimum. The corporation,in this case,must have at least two (2 independent directors Words have to be taken in their natural, plain and obvious meaning. Including in

considered. The amendment to Article 6 of the Aol of FMIC dated 08 June 2004 providing for independent directors to be part of the BoD for the first time since their last amendment the said regulation, especially as regards the minimum number of independent directors and dated 21 June 2001,was obviously pursuant to and after SEC Memorandum Circular No.16 series of 2002 came into effect. FMIC adopted words which it believed was compliant with the possibility of having more in the BoD. Circumstances under which the amendment to the Aol was undertaken should also be

independent directorsand not merely two 2,as made explicit in Article IIISection 3 paragraph 2 of the Amended By-Laws of FMIC approved by this Commission also on 08 June 2004quoted hereunder Moreover, a check with available records show the intention to have at least two 2

of the Corporation shall be Nine 9.Each Director must be a registered shareholder of record. Each Directors (sic shall hold office until the next annual meeting of sharcholder (sic and until his successor shall have been elected and qualified. Section 3.Number,Tenure and Qualification-aThe number of Directors

regular directors, officers, substantial stockholders or relatives up to the third stockholders of the Corporation shall be elected in accordance with the rules and regulations of the Securities and Exchange Commission on the nomination and election of independent directors.xxx At least two 2 independent directors (underscoring ours, who are neither degree of consanguinity and affinity of directors, officers, or substantial

and 2 considering the contemporaneous circumstances under which the subject provision was adopted,we opine that the clear intention of FMIC when it amended Article 6 of its Aol Thus, l construing the word including and taking in its natural and plain meaning.

The number of directors has been subsequently increasedto II eleven in an amendment of the AolofFMIC approved on 11 September 2007.

In reMinimum Number of Independent Directors Articles of Incorporation First Metro Investment Corproation Page 4 of 4 in 2004 stating therein that the number of directors of said corporation shall be nine (9) including two (2 independent directors" is to provide a minimum number of independent directors in conformity with SEC Memorandum Circular No.16,series of 2002

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

Please be guided accordingly.

Very truly yours.

anos. General Counsel CORREA

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