Corporation Law: The Revised Corporation Code of the Philippines - Sec 42

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE IV -  POWERS OF CORPORATIONS

Section 42. Power to Declare Dividends. 

The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, property, or in stock to all stockholders on the basis of outstanding stock held by them: Provided, That any cash dividends due on delinquent stock shall be first be applied to the unpaid balance on the subscription plus costs and expenses, while stock holders until their unpaid subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders representing at least two-thirds (2/3)of the outstanding capital stock at a regular or special meeting duly called for the purpose.

Stock corporations are prohibited from restraining surplus profits in excess of one hundred percent (100%} of their paid-in capital stock, except: (a) when justified by the definite corporate expansion projects or programs approved by the board of directors; or (b) when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign, from declaring dividends without their consent, and such consent has not yet been secured; or (c) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies.

1. Board Discretion.

• The Board of Directors has the discretion to declare dividends. 
• Cash or property dividends. 
• The decision of the board alone is necessary to declare cash or property dividends. 
• Stock dividends
• In the case of stock dividends, the decision of the Board is subject to the approval of the stockholders representing 2/3 of the outstanding capital of the corporation.
• Nevertheless, the directors' discretion is maintained even if the dividends to be declared are stock dividends. 
• It is still up to the Board to declare stock dividends. 
• Once the Board decides to declare stock dividends, however, the Board must ask for the approval of the stockholders. 
• If the Board does not want to declare stock dividends then the stockholders cannot compel the Board to do so. 
• It is not necessary for the validity of dividend declaration to ask for approval or to seek for an advise from the SEC. 
• However, if declaration of stock dividend requires increase of the authorized capital stock, approval by the SEC of the increase of the authorized capital stock is necessary.

2. Requirements. 

• The following are required for dividend declaration:

1. unrestricted retained earnings;
2. resolution of the Board; and
3. if stock dividends are declared, there must be a resolution of the Board with the concurrence of 2/3 of the outstanding capital stock.

2.01. Property Dividends.

• Property dividends are those that are paid in property instead of cash where the surplus is in that form and it is practicable to so distribute them among the shareholders.
• When a corporation has retained earnings arising out of its operations, properties that represent investments in the capital stock of the corporation may be declared as property dividends out of such retained earnings, provided said properties constitute assets in excess of other assets that are adequate to support the issued and outstanding capital stock of the corporation.
• The notice of the declaration and/or issuance of the property dividends shall show, in scheduled form, the nature of property declared as dividends, their individual book values and market values, if any, and the manner in which such property is distributed to the stockholders.
• SEC rules provide that the property to be distributed as dividends shall consist only of property which is no longer intended to be used in the operation of the business of the corporation and which are practicable to be distributed as dividends.
• In addition, the issuance of the property dividends shall not result in an inequitable distribution of property to the stockholders in terms of the book values and market values, if any, of the property distributed.
• When the distribution of dividends is made where some stockholders will receive cash and the others will receive property, the prevailing market value of the property, as agreed upon by the stockholders shall be considered in determining the equitable distribution of the total dividends.

2.02. Stock Dividends.

• When stock dividends are declared, the earnings are distributed to the stockholders in the form of shares of stock. 
• It involves the conversion of surplus or undivided profits into capital. 
• They may be declared for the following reasons:

1. The corporation simply desires a larger permanent capitalization;
2. The market price may have increased above a desirable trading range and stock dividend will generally reduce the per share market value of the company's stocks;
3. The corporation may wish to have more stockholders (who might then buy its products) and expects to eventually increase their number by increasing the number of shares outstanding. Some of the shareholders receiving the stock dividend are likely to sell the shares to other persons; and
4. Stock dividends may be used to satisfy stockholders' demands for cash dividends when the corporation may not, be willing to pay cash dividends but have enough unrestricted retained earnings.

• The nature of stock dividends was discussed by the Supreme Court in Philippine Long Distance Telephone Company v. National Telecommunications Commission (2007):
• Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of the declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the declaration in the case of a stock dividend is the actual value of the original issuance of said stocks. In G.R. No. 127937, we said that "in the case of stock dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account" or "it is the amount that the corporation receives in consideration of the original issuance of the shares." It is "the distribution of current or accumulated earnings to the shareholders of a corporation pro rata based on the number of shares owned." Such distribution in whatever form is valued at the declared amount or monetary equivalent.
•  Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the declaration of stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a portion or its entire unrestricted retained earnings either· to its working capital or for capital asset acquisition or investments. It is simplistic to say that the corporation did not receive any actual payment for these. When the dividend is distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted retained earnings is distributed pro rata to corporate shareholders. 
•  When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the amount of the declared dividend while the stockholders' equity is increased. Furthermore, the actual payment is the cash value from the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares which he would otherwise receive as required by the Corporation Code to be given to the stockholders subject to the availability and conditioned on a certain level of retained earnings. Elsewise put, where the unrestricted retained earnings of a corporation are more than 100% of the paid-in capital stock, the corporate Board of Directors is mandated to declare dividends which the shareholders will receive in cash unless otherwise declared as property or stock dividends, which in the latter case the stockholders are forced to forego cash in lieu of property or stocks.
• In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary value of their dividend for capital stock, and the monetary value they forego is considered the actual payment for the original issuance of the stocks given as dividends. Therefore, stock dividends acquired by shareholders for the monetary value they forego are under the coverage of the SRF and the basis for the latter is such monetary value as declared by the board of directors.

3. Discretion of Board. 

• As already stated, declaration of dividends is discretionary upon the board.
• Dividends are payable only when there are profits earned by the corporation and as a general rule, even if there are existing profits, the Board of Directors has the discretion to determine whether or not dividends are declared.
• By way of exception, stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid-in capital. 
• Thus, in such case, declaration of dividends is no longer purely discretionary on the Board.
• However, even if the retained surplus profits are in excess of 100% of the paid-in capital, the board may still refuse to declare dividends based on any of the following grounds: 

1. It is justified by definite corporate expansion projects/programs approved by the Board; or 
2.  The corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or 
3. It can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation as for example, when there is a need for special reserve for probable contingencies.

4. SEC Rules. 

• On December 5, 2008, the SEC issued Memorandum Circular No. 11, Series of 2009 providing for the "Guidelines on the Determination of Retained Earnings Available for Dividend Declaration." 
• On September 19, 2023, the SEC issued Memorandum Circular No. 16, Series of 2023 providing for the amended Revised Guidelines on the Determination of Retained Earnings Available for Dividend Declaration.
• Read the Guidelines here.

5. Retained Earnings and Unrestricted Retained Earnings Defined. 

• The SEC defines "retained earnings" as the accumulated profits realized out of normal and continuous operations of the business after deducting therefrom distributions to stockholders and transfers to capital stock or other accounts. 
• The Retained Earnings shall be the amount as shown in the financial statements audited by the company's independent auditor. 
• If applicable, such amount shall refer to the retained earnings of the parent company but not the consolidated financial statements. 
• Retained earnings was earlier defined as the accumulated profits realized out of normal and continuous operations of the business after deducting therefrom distribution of stockholders or transfers to capital stock or other accounts. 
• Unrestricted Retained Earnings is defined by the SEC as the amount of accumulated profits and gains realized out of the normal and continuous operations of the company after deducting therefrom distributions of stockholders and transfers to capital stock or other accounts, and which is: 
1. not appropriated by its Board of Directors for corporate expansion projects or programs; 
2. not covered by a restriction for dividend declaration under a loan agreement; and
3. not required to be retained under special circumstances obtaining in the corporation such as when there is a need for a special reserve for probable contingencies.

5.01. No Dividends from Capital. 

• Dividends cannot be declared out of capital. 
• The exception is with respect to "wasting assets corporations" which are corporations solely or principally engaged in the exploitation of "wasting assets." 
• They are allowed to distribute the net proceeds derived from exploitation of their holdings such as mines, oil wells, patents and leaseholds, without allowance or deduction for depletion.
• The Trust Fund Doctrine will be violated if dividends are declared out of capital except only in two instances: 
• liquidating dividends and 
• dividends from investments in Wasting Assets Corporation. 
• The Trust Fund Doctrine considers the subscribed capital as a trust fund for the payment of the debts of the corporation to which the corporation may look for satisfaction.
• In determining the existence of unrestricted retained earnings for purposes of dividend declaration, the SEC primarily relies on the audited financial statement of the corporation as of the last fiscal year immediately preceding the declaration. 
• Under existing policy of the SEC, for purposes of conservatism, the unrestricted retained earnings to be considered shall be net of any qualification made by the auditor on the realizability of certain asset accounts that would later on possibly reduce the balance thereof. 
• This is to prevent the possibility of allowing the declaration of dividend out of unrestricted retained earnings that would later on be impaired by losses on account of such qualification
• The cost of treasury shares acquired from the redemption of redeemable shares is not deducted and forms part of the retained earnings available for dividend declaration. Hence, a dividend declaration from the unrestricted retained earnings gross of the cost of redeemed preferred shares is valid.

5.02. What is Included in Retained Earnings. 

• Section 5 of Memorandum Circular No. 11, Series of 2009, requires the existence of surplus profits arising from the operation of corporate business before dividends can be declared. 

1. Paid-in surplus. 
2. Revaluation surplus.
3. Gain from sale of real property.
4. Treasury shares.

a. Paid-in surplus. 

• Paid-in surplus cannot be declared as dividends because they are part of capital. Paid-in surplus is the difference between the par value and the issued value or selling price of the shares and are not therefore considered profits earned in the conduct of the business of the corporation. 
• It is also called ''premium." 
• Under the same principle, the Additional Paid-In Capital (APIC) cannot be used for dividend declaration. 
• APIC involves the infusion of cash or property by a stockholder whenever no additional shares are issued m consideration thereof.
• In a previous opinion, the SEC allowed the distribution of paid-in surplus in exceptional cases that is when the following are present: 
1. That they be declared only as stock dividends and not as cash dividends;
2. No creditor shall be prejud1ced therefrom; and 
3. There is no resulting impairment of capital. 
• As a rule, there should be no dividend declaration if there is a reduction surplus. 
• There is reduction surplus where surplus arises from the reduction of the par value of the issued shares of stocks. 
• The previous SEC opinion is to the effect that reduction surplus is exceptionally available for dividend declaration provided the following are met:
• they are declared only as stock dividends; 
• no creditor is prejudiced; and
• there is no resulting impairment of capital after declaration of dividends.
• It is believed, however, that the exceptions for both reduction surplus and paid-in surplus are no longer acceptable under the present rules provided in SEC Memorandum Circular No. 11  Series of 2009. 
• Section 5 of the Circular provides that the existence of surplus profits arising from the operation of corporate business is a condition precedent to the declaration of dividend. 
• Neither reduction surplus nor paid-in surplus arises out of the operation of the corporate business.

b. Revaluation surplus

• There is revaluation surplus if there is an increase in the value of assets. 
• Generally, they cannot be declared as dividend because they cannot be considered earnings of the corporation.
• They are by nature subject to fluctuations. 
• This is consistent with Section 5(g) of SEC Memorandum Circular No. 11 aforementioned.
• By way of exception, the SEC allowed the distribution of the portion of the increase in the value of fixed assets as a result of revaluation thereof after the assets are depreciated and the depreciation is charged against the operation provided the following conditions are complied with:
• The company has sufficient income from the operations from which the depreciation on the appraisal increase is charged; 
• The company has no deficit at the time the depreciation on the reappraisal increase was charged to operations; and 
• Such depreciation on the appraisal increase previously charged to operations is not erased or impaired by subsequent losses, otherwise, only that portion not impaired by subsequent losses is available for dividend. 
• It is believed that the author's opinion regarding paid-in surplus applies. There should be no exception to the rule that revaluation surplus is not available for dividend distribution. 
• Revaluation surplus is not the result of income from operation. Moreover, the intent of the legislature is definitely to consider revaluation surplus as not forming part of retained earnings. 
• Thus, it was explained: "That may be surplus, but it is not yet earned; it is unrealized value. If the corporation had assets and these had appreciated in value, on the books we may adjust the balance sheet, but in actuality the increment in value has not yet (been) earned. No income is realized."
• Additionally, even the Supreme Court noted in one case that it is not unaware that in accounting practice, the journal entries for transactions are recorded in historical value or cost.
• "Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with liabilities and equity transactions where the actual loan and the amount paid for the subscription are recorded at the actual payment, including the premiums paid for the subscription of capital stock."
• "Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not increased or decreased due to market forces. In the case of properties, the appreciation in values is generally not recorded as income or as an increase in the corresponding asset because the increase or decrease is not yet realized until the property is actually sold. The same is true with the capital account. The market value may be much higher than the actual payment of the par value and premium of capital stock. Still, the books of account will not reflect such increase; and vice-versa, any decrease of the value of stocks is likewise not reflected in the books of account."

c. Gain from sale of real property.

• Gains from sale of the corporation's real properties are available for dividend declaration because they are part of retained earnings. 
• Retained earnings include not only earnings realized from the ordinary course of business of the corporation but also those arising from transactions not associated with but incidental to or necessary in keeping the business for which the corporation was organized (other examples of the latter are earnings from rent, royalties, fees and interests for the use by others of the corporate assets and resources). 
• However, there must be surplus profits. 
• Hence, the corporation cannot distribute gains from sale of real properties as dividends if the remaining assets after distribution are less than the amount of legal or stated capital and liabilities.

d. Treasury shares.

• Treasury shares cannot be declared as stock dividends or cash dividends because they are not considered part of earned or surplus profits. 
• If the distribution of cash or stock dividends out of treasury shares is allowed, the corporation would be converted into both a debtor and creditor for the same amount at the same time. 
• It will lead to the absurd situation where it will take money or stock from one of its pockets and put it in another. 
• A corporation may use treasury share as property dividend only if the amount of the retained earnings previously used to support their acquisition has not been subsequently impaired by losses. 
• Consequently, the amount of retained earnings equivalent to the cost of the treasury shares being held cannot be declared and distributed as dividends. 
• The reason for this is that such amount of earnings equivalent to the cost of treasury shares is not considered part of earned or surplus profits that is distributable as dividends.
• If, however, there are retained earnings arising from the business of the corporation other than the amount equivalent to the cost of treasury shares, the said treasury shares may be declared as property dividends.

e. Interim income. 

• The presence of unrestricted retained earnings can be determined only at the end of the fiscal year. 
• The corporation will not be able to know if there are earnings until the end of the year. Thus, as a general rule, there can be no dividend declaration for profits in a fiscal year that has not yet expired.
• By way of exception, the SEC allowed dividends to be declared out of interim profits so long as the following are present:
1. the amount of dividends involved would not be impaired by losses during the remaining period of the year; 
2. the projected income for the remaining period shall be submitted to the SEC; and 
3. should the company sustain losses during the remaining period, the dividends should be refunded.

6. Who is Entitled. 

• Stockholders are entitled to dividends pro rata based on the total number of shares and not on the amount paid for the shares.
• However, only stockholders at the time of declaration are entitled to dividends.
• Dividends declared before the transfer of shares belong to the transferor, and dividends declared after the transfer belong to the transferee. 
• In other words, dividends belong to the person who owns the stock when the dividend is declared. 
• However, a record date may be provided for. 
• A record date is the future date specified in the resolution declaring dividend that the dividend shall be payable to those who are stockholders of record on such specified future date or as of the date of the meeting declaring said dividends.
• Even unpaid subscribers are entitled to dividends. Section 71 of the RCCP (previously Section 72 of the Corporation Code) provides that holders of shares not fully paid which are not delinquent shall have all the rights of a stockholder. 
• As a matter of fact, under Section 70 of the RCCP (Section 71 of the Corporation Code), even if the shares are delinquent, the delinquent shareholders shall also be entitled to dividends. 
• However, under Section 42 of the RCCP, any cash dividends shall first be applied to the unpaid balance on the subscription plus cost and expenses, while stock dividends shall be withheld from the delinquent shareholder until his unpaid subscription is fully paid.

7. Vesting. 

• The right of the stockholders to be paid dividends accrues as soon as the declaration is made in accordance with Section 42 of the RCCP. 
• From that time, the stockholder can already demand payment thereof.
• Since the right of the stockholders of a corporation to dividend becomes vested as soon as the dividend has been fully declared by the directors, and the corporation becomes their debtor for their respective shares in the dividends, it also necessarily follows that neither the same Board of Directors nor its successor/s can afterwards reconsider the Board's action and revoke the declaration of a legally declared dividend without the stockholders' consent.
• However, there is authority for the view that when it comes to stock dividends, the rule that the declaration cannot be revoked does not apply. 
• Declaration of stock dividends can be revoked before the issuance of the dividend declaration. 
• In case of cash dividend, the amount to be distributed is severed from the general fund and becomes the property of the stockholders pro rata as soon as the dividend is voted, while in the case of a stock dividend, all formalities necessary to a valid increase of stock must be complied with .before the stockholders are entitled to anything, and the mere declaration of the dividend does not, therefore, give them vested right.
• Note that with respect to cash dividends, the funds are actually not set apart from the general mass of the company's funds and are not appropriated for the payment of dividend that has been declared. 
• Hence, the stockholders are not entitled to any preference over the general creditors; they stand also as general creditors of the corporation who can come in only together with such other general creditors looking to the general estate for liquidation of their dividend debt.

8. Amount.

• The amount to be declared as dividends depends upon the amount of the unrestricted retained earnings. 
• After determining the available amount, dividends shall be declared pro rata unless there are preferred shares that are entitled to a fixed percentage.
• When it comes to stock dividends, the corporation is not required to pay dividend according to their par values. Stock dividends can be declared at a premium (at value higher than par).
• Considering that selling of shares of stock at a premium is not prohibited, it follows that stock dividends indirectly take the nature of sales of shares of stock at a premium. 
• When the amount of earned surplus capitalized per share of dividend stock exceeds its par or stated value, the excess should be credited to capital surplus.

9. Reportorial Requirement with SEC. 

• The right to dividend accrues even if there is no SEC approval. 
• However, paragraph 4 of the Rules Governing the Distribution of Excess Profits of Corporations provides that a declaration of dividend whether cash or stock shall be reported to the SEC within 15 days from date of declaration. 
• The SEC requires the following documents:

1. Cash Dividend Declaration
2. Stock Dividend Declaration
3. Property Dividend Declaration

a. Cash Dividend Declaration. 

1. Certification, under oath, by the corporate secretary, of the Board resolution declaring the cash dividends; 
2. Audited financial statements as of the last fiscal year, stamped received by the SEC and the BIR; and
3. Interim audited financial statements used as the basis for such declaration (to be submitted also if the basis is other than item 2);
4. Project income statement for the remaining period certified by the company accountant; 
5. Reconciliation of retained earnings available for dividend declaration certified by an independent auditor as provided for in SEC Memorandum Circular No. 11, Series of 2008.

b. Stock Dividend Declaration.

1. Certification, under oath, by the corporate secretary, of the declaration of stock dividends by majority of the directors and the stockholders representing at least 2/3 of the outstanding capital stock;
2. Audited financial statements as of the last fiscal year, stamped received by the SEC and the BIR;
3. Interim audited financial statements used as the basis for such declaration (to be submitted also if the basis is other than item 2);
4. Projected income statement for the remaining period;
5. Reconciliation of retained earnings available for dividend declaration certified by an independent auditor as provided for in SEC Memorandum Circular No. 11, Series of 2008;
6. Analysis of Capital Structure, signed under oath by the treasurer. 

c. Property Dividend Declaration.

1. Certification, under oath, by the corporate secretary, on the Board resolution declaring the property dividends;
2. List of stockholders and the allocation of the property dividend, as certified by the corporate secretary;
3. Audited financial statements as of the last fiscal year, stamped received by the SEC and the BIR;
4. Detailed schedule of the property account appearing in the audited financial statements; 
5. Certification by the president that the property is no longer needed in the operation of the company.

PROBLEMS:

X Corp. has an authorized capital stock of P500,000.00 divided into 50,000 shares with each share having a par value of Pl0.00, 30,000 shares of which have been subscribed. Total payment of the shares is P200,000.00 only. As of September 30, 2005, the corporation had an unrestricted retained earnings of P150,000.00. May the corporation declare a stock dividend? If so, to what extent? Explain.

Yes, X Corporation may declare stock dividends. X Corporation has 20,000 unissued shares and unrestricted retained earnings amounting to P150,000.00. Thus, it can declare stock dividends up to 15,000 shares because the par value thereof is equal to the unrestricted retained earnings that are available. The fact that the shareholders have not yet fully paid their shares is not material because they are already entitled to all the rights of shareholders. (1970 Bar) 

Taurus Corporation (TC) commenced operations in 1985. During that year TC's loss from operations amounted to P500,000.00. In 1986, TC recouped its losses in 1985, registering a net after tax profit of P500,000.00. In the same year, the management of the company discovered that a parcel of land originally acquired in 1985 for P300,000.00 had at least doubled in value and accordingly the Board of Directors of TC, with the conformity of the external auditors and backed up by a valuation report of a reputable appraiser, recognized a revaluation or appraisal surplus of P300, 000. 00. May the Board of Directors of TC declare a cash dividend out of this surplus? Explain. 

No, the Board of Directors cannot declare cash dividends out of the revaluation or appraisal surplus. Generally, the revaluation or appraisal surplus cannot be declared as dividend because the same cannot be considered earnings of the corporation. The surplus is by nature subject to fluctuations. In addition, SEC Rules require that dividends should come from income from operations. (1987 Bar) 

After one year of operation, Safe Realty, Inc., wanted to declare dividends to its stockholders. Ramos, its President, asked Santos, its Treasurer, whether this is feasible, considering the financial standing of the corporation. Santos reported that the corporation posted a Pl,000,000.00 profit and its real estate has appreciated in value to the tune of P4,000,000.00. The Board then declared dividends to its stockholders computed on the basis of P5,000,000.00 representing profits and appreciation in value of its real estate. Is the dividend declaration proper?

The dividend declaration is improper. The amount corresponding to the value of property cannot be declared as dividend because the same cannot be considered earnings of the corporation. The value of the property is by nature subject to fluctuations. In addition, SEC Rules require that dividends should come from income from operations. (1989 Bar)

During the annual stockholders' meeting, Riza, a stockholder proposed to the body that a part of the corporation's unreserved earned surplus be capitalized and stock dividends be distributed to the stockholders, arguing that as owners of the company, the stockholders, by majority vote; can do anything. As chairman of the meeting, how would you rule on the motion to declare stock dividends? 

I would rule against the motion. The resolution declaring stock dividends should first be approved by the Board of Directors, and it is only thereafter that the Board action will need to be concurred in by a 2/3 vote of the outstanding capital stock (Section 43, Corporation Code; Section 42, RCCP). The stockholders, by themselves, cannot order the distribution of unrestricted retained earnings. (1991 Bar)

Palmavera Corporation has an authorized capital stock of P500,000.00, all subscribed and outstanding as of December 31, 1981. The corporation also has unrestricted retained earnings in its books amounting to P375,000.00. Since ,the corporation needed the cash surplus to carry out its expansion projects, the Board of Directors, in its meeting held on January 5,1982, approved a resolution declaring and ordering the issuance of 50% stock dividends in lieu of cash dividends. 

Was the resolution declaring the issuance of stock dividends valid? Explain your answer. 

Yes, the resolution of the Board of Directors declaring the issuance of stock dividends was valid. However, it is still insufficient for purposes of declaring stock dividend. (Section 43, Corporation Code, now Section 42 of the RCCP) 

What step or steps need be taken in order that the decision of the Board could be implemented? State the required vote. 

The resolution of the Board of Directors for the declaration of stock dividends shall still be approved by the stockholders representing not less than 2/3 of the outstanding capital stock, at a regular or special meeting called for the purpose. In addition, there must be the increase of the authorized capital stock at least to accommodate the stock dividends, to be approved by the Securities and Exchange Commission, inasmuch as the authorized capital stock of Palmavera Corporation was fully subcribed already. (Sections 38 and 43, Corporation Code, now Sections 37 and 42 of the RCCP) (1982 Bar)

ABC Management, Inc. presented to DEF Mining Corp. the draft of its proposed Management Contract. As an incentive, ABC included in the terms of compensation that ABC would be entitled to 10% of any stock dividend which DEF may declare during the lifetime of the Management Contract. Would you approve of such a provision? If not, what would you suggest as an alternative?

No. I would not approve of a proposed stipulation in the management contract that the managing corporation, as an additional compensation to it, should be entitled to 10% of any stock dividend that may be declared. Only stockholders are entitled to dividends. Instead of giving dividends, the managing corporation should instead be given net profit participation. They can then use the money to acquire shares of the corporation. (1991 Bar) 

For the past three years of its commercial operation, "X" an oil company, has been earning tremendously in excess of 100% of the corporation's paid-in capital. All of the stockholders have been claiming that they share in the profits of the corporation by way of dividends but the Board of Directors failed to lift its finger. 

Is Corporation ''X" guilty of violating a law? 

Yes. Corporation "X" is guilty of violating Section 43 of the Corporation Code (now Section 42 of the RCCP) for retaining surplus profits in excess of 100% of its paid-in capital.

If in the affirmative, state the basis. Are there instances when a corporation shall not be held liable for not declaring dividends? 

Non-declaration of dividends is justified in any of the following instances: 

1. when justified by definite corporate expansion projects or programs approved by the board of directors; or
2. when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its or his consent, and such consent has not yet been secured; or
3. when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies. (2001 Bar)

At least 2/3 of the stockholders of Solar Corporation, meeting upon the recommendation of the Board of Directors, declared a 50% stock dividend during their annual meeting. The notice of the annual stockholders' meeting did not mention anything about a stock dividend declaration. The matter was taken up only under the item "Other Business" in the agenda of the meeting. C.K. Senwa, a stockholder, who received his copy of the notice but did not attend the meeting, subsequently learned about the 50% stock dividend declaration, and wishes to retain your services as a lawyer for the purpose. Will you accept the case? Discuss with reasons.

I will not accept the case. Section 43 of the Corporation Code, now Section 42 of the RCCP states that no stock dividend shall be issued without the approval of the stockholders representing not less than 2/3 of the outstanding capital stock at a regular or a special meeting duly called for that purpose. The annual meeting of the stockholders although not a special one called for the purpose of declaring dividends, is a regular meeting contemplated by the Code. As such, the notice of meeting must also state that one of the purposes is to declare stock dividends. (1990 Bar)

Ace Cruz subscribed to 100,000 shares of stock of JP Development Corporation, which has a par value of Pl per share. He paid P25,000.00 and promised to pay the balance before December 31, 2008. JP Development Corporation declared a cash dividend on October 15, 2008, payable on December 1, 2008. For how many shares is Ace Cruz entitled to be paid cash dividends? Explain. 

Ace Cruz is entitled to be paid cash dividends for all the 100,000 shares of stock that was covered by his subscription. Section 43 of the Corporation Code (Section 42 of the RCCP) provides that the dividends are payable to all stockholders on the basis of outstanding stock held by them. In addition, Section 72 of the Corporation Code (Section 71 of the RCCP) states that a shareholder is entitled to all the rights of a shareholder, including the right to dividends even if he has not fully paid for his shares of stock. A delinquent shareholder is even entitled to dividends provided that the cash dividends shall be applied first to the unpaid balance of the subscription while stock dividends shall be withheld until full payment of the subscription. (2008 Bar)