Nestle Philippines vs CA

On February 1983, Nestle Philippines increased their Authorized share capital from 300 milliion
pesos to 600 million pesos or 3 million shares to 6 million share with par value of 100 pesos. They
complied with the requirements of such transaction.

There are two main stockholders in the company namely: San Miguel and Nestle SA while the
other stockholders have only 1 stock as qualification as to becoming the Board of Directors.

On December of that same year, they issued 344,500 shares to the two main shareholders of
the company. They sent a letter to SEC seeking for the exemption of such issuance from the registration
requirement in Section 4 of the revised securities act (RSA) claiming that such transaction is included in
the provided exemptions in Section 6 of the same Act. The last part of

Section 6(4) … or the issuance of additional capital stock of a corporation sold or distributed by it among
its own stockholders exclusively, where no commission or other remuneration is paid or given directly or
indirectly in connection with the sale or distribution of such increased capital stock.

So the argued statement in this case is the term “increased capital stock”. Nestle provided that
when you say increase in capital stock, it would mean not only the increase the authorized but increase
corresponding to issuance of unissued stocks.

However, as interpreted by SEC, what is meant by “increased capital stock” would only refer to
increase in the additional capital stock. Meaning, what is only exempted from the registration
requirement are the issuance of new stock corresponding to an increase in authorized capital stock.
Therefore the issuance in December is not exempted from the registration requirement. CA affirmed the
decision of SEC.

Issue:

Whether or not the interpretation of SEC regarding the increased capital stock be given greater
weight?

Held:

The court ruled that indeed there is ambiguity in the phrase used. Because the contention of
Nestle is correct that when we say “increase capital stock” it may mean either an increase in the
authorized capital stock or an increase in capital brought by the issuance of unissued stocks.

However, the interpretation of SEC must be given a greater weight since they are believed to be
more knowledgeable in that field.

Also, as a further defense of SEC, the reason behind such exemption is that there is a
requirement in the Corporation Code, that if you apply for authorized capital stock or its increase, you
have to comply with the 25% requirement. That 25% of the authorized stock must be subscribed and
25% of such subscription must be paid. Therefore, it is only logical to exempt the issued that would
corresponding to the compliance of the 25% subscribed shares. And this exemption does not extend to
issuances of already authorized stocks.