NESTLE PHILIPPINES, INC., PETITIONER, VS. COURT OF APPEALS AND SECURITIES AND EXCHANGE COMMISSION, RESPONDENTS.

Sometime in February 1983, the authorized capital stock of
petitioner Nestle Philippines Inc. (“Nestle”) was increased from P300
million divided into 3 million shares with a par value of P100.00 per share, to
P600 million divided into 6 million shares with a par value of P100.00 per
share. Nestle underwent the necessary
procedures involving Board and stockholders approvals and effected the
necessary filings to secure the approval of the increase of authorized capital
stock by respondent Securities and Exchange Commission (“SEC”), which
approval was in fact granted. Nestle
also paid to the SEC the amount of P50,000.00 as filing fee in accordance with
the Schedule of Fees and Charges being implemented by the SEC under the
Corporation Code.^[1]

Nestle has only two (2) principal stockholders: San Miguel Corporation and Nestle S.A. The other stockholders, who are individual
natural persons, own only one (1) share each, for qualifying purposes, i.e., to
qualify them as members of the Board of Directors being elected thereto on the
strength of the votes of one or the other principal shareholder.

On 16 December 1983, the Board of Directors and stockholders of
Nestle approved resolutions authorizing the issuance of 344,500 shares out of
the previously authorized but unissued capital stock of Nestle, exclusively to
San Miguel Corporation and to Nestle S.A. San Miguel Corporation subscribed to and completely paid up 168,800
shares, while Nestle S.A. subscribed to and paid up the balance of 175,700
shares of stock.

On 28 March 1985, petitioner Nestle filed a letter signed by its
Corporate Secretary, M.L. Antonio, with the SEC seeking exemption of its
proposed issuance of additional shares to its existing principal shareholders,
from the registration requirement of Section 4 of the Revised Securities Act
and from payment of the fee referred to in Section 6(c) of the same Act. In that letter, Nestle requested
confirmation of the correctness of two (2) propositions submitted by it:

“1. That there is no need to file a petition for
exemption under Section 6(b) of the Revised Securities Act with respect to the
issuance of the said 344,500 additional shares to our existing stockholders out
of our unissued capital stock; and

2. That the fee provided
in Section 6(c) of [the Revised Securities] Act is not applicable to the said
issuance of additional shares.”^[2]

The principal, indeed the only, argument presented by Nestle was
that Section 6(a)(4) of the Revised Securities Act which provides as follows:

Sec. 6. Exempt
transactions. — (a) The requirement of registration under
subsection (a) of Section four of this Act shall not apply to the sale of
any security in any of the following transactions:

x x x                 x x x                 x x x

(4) The distribution by a corporation, actively
engaged in the business authorized by its articles of incorporation, of
securities to its stockholders or other security holders as a stock dividend or
other distribution out of surplus; or the issuance of securities to the
security holder or other creditors of a corporation in the process of a bona
fide reorganization of such corporation made in good faith and not for the
purpose of avoiding the provisions of this Act, either in exchange for the
securities of such security holders or claims of such creditors or partly for
cash and partly in exchange for the securities or claims of such security
holders or creditors; 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.” (Underscoring supplied)

embraces “not only an increase in
the authorized capital stock but also the issuance of additional shares to
existing stockholders of the unissued portion of the unissued capital
stock”.^[3]
Nestle urged that interpretation upon the following argument:

“The use of the term ‘increased capital stock’ should
be interpreted to refer to additional capital stock or equity
participation of the existing stockholders as a consequence of either an
increase of the authorized capital stock or the issuance of unissued capital
stock. If the intention of the
pertinent legal provision [were] to limit the exemption to subscription to
proposed increases in the authorized capital stock of a corporation, we see
no reason why the law should not have been more specific or accurate about it. It certainly should have mentioned
‘increase in the authorized capital stock of the corporation’ rather than
merely the expression ‘the issuance of additional capital stock’.^[4]
(Underscoring supplied)

Nestle expressly represented in the same letter that all the
additional shares proposed to be issued would be issued only to San Miguel
Corporation and Nestle S.A. and that no commission or other form of
remuneration had been given, directly or indirectly, in connection with the
issuance or distribution of such additional shares of stock.

In respect of its claimed exemption from the fee provided for in
Section 6(c) of the Revised Securities Act, Nestle contended that since Section
6(a)(4) of the statute declares (in Nestle’s view) the proposed issuance of
344,500 previously authorized but unissued shares of Nestle’s capital stock to
its existing shareholders as an exempt transaction, the SEC could not collect
fees for “the same transaction” twice. Nestle adverted to its payment back in 21 February 1983 of the
amount of P50,000.00 as filing fees to the SEC when it applied for and
eventually received approval of the increase of its authorized capital stock
effected by Board and shareholder action last 16 December 1983.

In a letter dated 26 June 1986, the SEC through its then Chairman
Julio A. Sulit, Jr. responded adversely to petitioner’s requests and ruled that
the proposed issuance of shares did not fall under Section 6(a)(4) of the
Revised Securities Act, since Section 6(a)(4) is applicable only where there is
an increase in the authorized capital stock of a corporation. Chairman Sulit held, however, that the
proposed transaction could be considered by the Commission under the provisions
of Section 6(b) of the Revised Securities Act which reads as follows:

“(b) The Commission may, from time to time and
subject to such terms and conditions as it may prescribe, exempt transactions
other than those provided in the preceding paragraph, if it finds that the
enforcement of the requirements of registration under this Act with respect to
such transactions is not necessary in the public interest and for the protection
of the investors by reason of the small amount involved or the limited
character of the public offering.”

The Commission then advised petitioner to
file the appropriate request for exemption and to pay the fee required under
Section 6(c) of the statute, which provides:

“(c)    A fee equivalent to one-tenth of one per
centum of the maximum aggregate price or issued value of the securities shall
be collected by the Commission for granting a general or particular exemption
from the registration requirements of this Act.”

Petitioner moved for reconsideration of the SEC ruling, without
success.

On 3 July 1987, petitioner sought review of the SEC ruling before
this Court which, however, referred the petition to the Court of Appeals.

In a Decision dated 13 January 1989, the Court of Appeals
sustained the ruling of the SEC.

Dissatisfied with the Decision of the Court of Appeals, Nestle is
now before this Court on a Petition for Review, raising the very same issues
that it had raised before the SEC and the Court of Appeals.

Examining the words actually used in Section 6(a)(4) of the
Revised Securities Act, and bearing in mind common corporate usage in this
jurisdiction, it will be seen that the statutory phrase “issuance of
additional capital stock” is indeed infected with a certain degree of ambiguity. This phrase may refer either to: a) the issuance of capital stock as part of
and in the course of increasing the authorized capital stock of a corporation;
or (b) issuance of already authorized but still unissued capital stock. By the same token, the phrase
“increased capital stock” found at the end of Section 6(a)(4), may
refer either: 1) to newly or
contemporaneously authorized capital stock issued in the course of increasing
the authorized capital stock of a corporation; or 2) to previously authorized
but unissued capital stock.

Under Section 38 of the Corporation Code, a corporation engaged
in increasing its authorized capital stock, with the required vote of its Board
of Directors and of its stockholders, must file a sworn statement of the
treasurer of the corporation showing that at least twenty-five percent (25%) of
“such increased capital stock” has been subscribed and that at least
twenty-five percent (25%) of the amount subscribed has been paid either in
actual cash or in property transferred to the corporation. In other words, the corporation must issue
at least twenty-five percent (25%) of the newly or contemporaneously authorized
capital stock in the course of complying with the requirements of the
Corporation Code for increasing its authorized capital stock.

In contrast, after approval
by the SEC of the increase of its authorized capital stock, and from time to
time thereafter, the corporation, by a vote of its Board of Directors, and
without need of either stockholder or SEC approval, may issue and sell shares
of its already authorized but still unissued capital stock to existing
shareholders or to members of the general public.^[5]

Both the SEC and the Court of Appeals resolved the ambiguity by
construing Section 6(a)(4) as referring only to the issuance of shares
of stock as part of and in the course of increasing the authorized capital
stock of Nestle. In the case at bar,
since the 344,500 shares of Nestle capital stock are proposed to be issued from
already authorized but still unissued capital stock and since the present
authorized capital stock of 6,000,000 shares with a par value of P100.00 per
share is not proposed to be further increased, the SEC and the Court of
Appeals rejected Nestle’s petition.

We believe and so hold that the construction thus given by the
SEC and the Court of Appeals to Section 6(a)(4) of the Revised Securities Act
must be upheld.

In the first place, it is a principle too well established to
require extensive documentation that the construction given to a statute by an
administrative agency charged with the interpretation and application of that
statute is entitled to great respect and should be accorded great weight by the courts, unless such
construction is clearly shown to be in sharp conflict with the governing
statute or the Constitution and other laws. As long ago as 1903, this Court said in In re Allen^[6]
that

“[t]he principle that the
contemporaneous construction of a statute by the executive officers of the
government, whose duty is to
execute it, is entitled to great respect, and should ordinarily control the
construction of the statute by the courts, is so firmly embedded in our
jurisdiction that no authorities need be cited to support it.”^[7]

The rationale for this rule relates not
only to the emergence of the multifarious needs of a modern or modernizing
society and the establishment of diverse administrative agencies for addressing
and satisfying those needs; it also relates to accumulation of experience and
growth of specialized capabilities by the administrative agency charged with
implementing a particular statute.^[8] In Asturias
Sugar Central, Inc. v. Commissioner of Customs^[9] the
Court stressed that executive officials are presumed to have familiarized
themselves with all the considerations pertinent to the meaning and purpose of
the law, and to have formed an independent, conscientious and competent expert
opinion thereon. The courts give much
weight to contemporaneous construction because of the respect due the
government agency or officials charged with the implementation of the law,
their competence, expertness, experience and informed judgment, and the fact
that they frequently are the drafters of the law they interpret.^[10]

In the second place, and more importantly, consideration of the
underlying statutory purpose of Section 6(a)(4) compels us to sustain the view
taken by the SEC and the Court of Appeals. The reading by the SEC of the scope of application of Section 6(a)(4)
permits greater opportunity for the SEC to implement the statutory objective of
protecting the investing public by
requiring proposed issuers of capital stock to inform such public of the
true financial conditions and prospects of the corporation. By limiting the class of exempt transactions
contemplated by the last clause of Section 6(a)(4) to issuances of stock done
in the course of and as part of the process of increasing the authorized
capital stock of a corporation, the SEC is enabled to examine issuances by a
corporation of previously authorized but theretofore unissued capital stock, on
a case-to-case basis, under Section 6(b); and thereunder, to grant or withhold exemption from
the normal registration requirements depending upon the perceived level of need
for protection by the investing public in particular cases.

When capital stock is issued in the course of and in compliance
with the requirements of increasing its authorized capital stock under Section
38 of the Corporation Code, the SEC as a matter of course examines the
financial condition of the corporation, and hence there is no real need for
exercise of SEC authority under the Revised Securities Act. Thus, one of the multiple documentation
requirements under the current regulations of the SEC in respect of filing a
certificate of increase of authorized capital stock, is submission of “a financial
statement duly certified by an independent Certified Public Accountant
(CPA) as of the latest date possible or as of the date of the meeting
when stockholders approved the increase/decrease in capital stock or
thereabouts.^[11]
When all or part of the newly authorized capital stock is proposed to be issued as stock dividends, the SEC requirements are even more exacting;
they require, in addition to the regular audited financial statements, the
submission by the corporation of a “detailed or Long Form Report of the
certifying Auditor.” Moreover, since approval of an increase in authorized capital stock by the stockholders holding two-thirds (2/3) of the outstanding
capital stock is required by Section 38 of the Corporation Code, at a
stockholders meeting held for that purpose, the directors and officers of the
corporation may be expected to take pains to inform the shareholders of the
financial condition and prospects of the corporation and of the proposed
utilization of the fresh capital sought to be raised.

Upon the other hand, as already noted, issuance of previously
authorized but theretofore unissued capital stock by the corporation requires
only Board of Directors approval. Neither notice to nor approval by the shareholders or the SEC is
required for such issuance. There
would, accordingly, under the view taken by petitioner Nestle, no opportunity
for the SEC to see to it that shareholders (especially the small stockholders)
have a reasonable opportunity to inform themselves about the very fact of such
issuance and about the condition of the corporation and the potential value of
the shares of stock being offered.

Under the reading urged by petitioner Nestle of the reach and
scope of the third clause of Section 6(a)(4), the issuance of previously
authorized but unissued capital stock would automatically constitute an
exempt transaction, without regard to the length of time which may have
intervened between the last increase in authorized capital stock and the
proposed issuance during which time the condition of the corporation may have
substantially changed, and without regard to whether the existing
stockholders to whom the shares are proposed to be issued are only two giant
corporations as in the instant case, or are individuals numbering in the
hundreds or thousands.

In contrast, under the ruling issued by the SEC, an issuance of
previously authorized but still unissued capital stock may, in a particular
instance, be held to be an exempt transaction by the SEC under Section 6(b) so
long as the SEC finds that the requirements of registration under the Revised
Securities Act are “not necessary in the public interest and for the
protection of the investors” by reason, inter alia, of the small
amount of stock that is proposed to be issued or because the potential buyers are very limited in number and are in
a position to protect themselves. In
fine, petitioner Nestle’s proposed construction of Section 6(a)(4) would
establish an inflexible rule of automatic exemption of issuances of additional,
previously authorized but unissued, capital stock. We must reject an interpretation which may disable the SEC from
rendering protection to investors, in the public interest, precisely when such
protection may be most needed.

Petitioner Nestle’s second claim for exemption is from payment of
the fee provided for in Section 6(c) of the Revised Securities Act, a claim
based upon petitioner’s contention that Section 6(a)(4) covers both
issuance of stock in the course of complying with the statutory requirements of
increase of authorized capital stock and issuance of previously authorized and
unissued capital stock. Petitioner
claims that to require it now to pay one-tenth of one percent (1%) of the
issued value of the 344,500 shares of stock proposed to be issued, is to
require it to pay a second time for the same service on the part of the
SEC. Since we have above rejected
petitioner’s reading of Section 6(a)(4), last clause, petitioner’s claim about
the additional fee of one-tenth of one percent (1%) of the issue value of the
proposed issuance of stock (amounting to P34,450 plus P344.50 for other fees or
a total of P37,794.50) need not detain us for long. We think it clear that the fee collected in 21 February 1983 by
the SEC was assessed in connection with the examination and approval of the
certificate of increase of authorized capital stock then submitted by
petitioner. The fee, upon the other
hand, provided for in Section 6(c) which petitioner will be required to pay if
it does file an application for exemption under Section 6(b), is quite different; this is a fee
specifically authorized by the Revised Securities Act, (not the Corporation
Code) in connection with the grant of an exemption from normal registration
requirements imposed by that Act. We do
not find such fee either unreasonable or exorbitant.

WHEREFORE, for all the foregoing, the Petition for Review
on Certiorari is hereby DENIED for lack of merit and the Decision of the
Court of Appeals dated 13 January 1989 in C.A.-G.R. No. SP-13522, is hereby
AFFIRMED. Costs against petitioner.

SO ORDERED.

Narvasa, (Chairman), Cruz, Griño-Aquino, and Medialdea, JJ., concur.

^[1]
Section 139.

^[2]
Record, pp. 12-13.

^[3]
Id., p. 11.

^[4]
Id.

^[5]
See e.g., SEC Ruling dated 4 November 1968 addressed to Maremco Mineral
Corporation; Securities and Exchange Commission Folio, p. 354
(1960-1976).

^[6]
2 Phil. 630 (1903).

^[7] 2 Phil. at 640.

^[8]
E.g., Abejo, et al. v. Hon. Rafael dela Cruz, etc., et al., 149 SCRA
654, 669-670 (1987).

^[9]
29 SCRA 617 (1969).

^[10]
Id. See also Ramos v.
Court of Industrial Relations, 21 SCRA 1282 (1967); Cagayan Valley Enterprises v.
Court of Appeals, 179 SCRA 218 (1989); Santiago v. Deputy Executive
Secretary, 192 SCRA 199 (1990).

^[11]
SEC, “Basic Requirements for filing certificate of increase/decrease of
authorized capital stock.”