Wire Rope Corporation of the Philippines

October 1, 1985 Wire Rope Corporation of the Philippines A G & P House 345 Sen. Gil J. Puyat Ave. Makati, Metro Manila Attention : Mr . Salvador Cequerra Corporate Secretary Sir : This has reference to your letter dated August 29, 1985, requesting for the opinion of this Commission on the query posed therein. It appears that the following Resolution was unanimously approved in the meeting of the stockholders of your corporation held on September 28, 1979, after its due approval by the Board of Directors, to wit: cdll "RESOLVED, That dividends be as they are hereby declared payable on 5,433 shares, being held as Treasury Stock of the Corporation, to stockholders of record as of September 28, 1979 provided that no factional shares shall be issued. Any stockholder entitled to a fraction of 50 or less shall receive the cash equivalent thereof at acquisition value and any stockholder entitled to a faction of 51 or more shall be eligible to the full share by paying the difference at acquisition value." In accordance therewith, Bridon Ltd.,a British Corporation and a major stockholder of WRCP, received 769 shares taken out of Treasury shares as evidenced by WRCP Stock Certificate No. 319 dated October 1, 1979. Likewise, the following Resolution was unanimously approved in the WRCP stockholders' meeting of September 26, 1980 after its due approval by the Board of Directors, to wit: "RESOLVED, That acting upon the recommendation of the Board of Directors, resolved in its regular meeting on May 23, 1980 for the declaration of stock dividends amounting to a total of 9,634 shares to be taken from the following: 3,319 shares of treasury stock and 6,315 shares of unissued stock, be it approved as it is hereby approved, to declare and issue the aforesaid stock dividends payable to stockholders of record as of October 9, 1980, in proportion to their holdings as of that date, provided a stockholder entitled to a fractional share of 50 or less shall receive the cash equivalent thereof at acquisition value and a stockholder entitled to a fraction of 51 or more shall acquire a full share by paying the difference at acquisition value." Pursuant thereto, Bridon Ltd. got 891 shares out of unissued stock under WRCP stock certificate No. 356 and 468 shares out of Treasury Shares under WRCP Stock Certificate No. 357, or a total of 1,359 shares. You further alleged that said shares were sought to be registered with the Central Bank as an additional foreign equity investment so that dividends earned by these shares may be remitted to Bridon Ltd. abroad. However, the CB rejected the registration of said shares on the ground that stock dividends cannot be declared out of treasury shares. Likewise, you alleged that in both declarations, it was the basic intention of the Board of Directors and the stockholders of WRCP to declare stock dividends, for in both cases there were surplus profits arising from the business operations of WRCP. prcd Moreover, although the par value of each treasury share was P100.00, said shares declared as dividends were distributed at their acquisition value of P200.00 per share. However, as to obviate the objections of the Central Bank and facilitate the registration of said dividends, your corporation is contemplating in the forthcoming regular and annual meetings on September 27, 1985, of its Board of Directors and its stockholders, respectively, to separately pass identical resolutions amending the aforequoted Resolutions in such a way as to make the stock dividends therein declared payable out of the unissued shares of WRCP, in accordance with their original intention. Anent thereto, we hereby reiterate our previous ruling: "Treasury stocks, being property of the corporation, may not be distributed among the stockholders as stock dividends but would constitute property or cash dividends." ( Ltr. to G.A. Machinery, Inc. dated June 13, 1963 ) From the foregoing, it is clear that treasury stock cannot be declared a stock dividends. Regarding the matter of revoking or amending your previous resolutions, the following precedents are appropriate: "It has commonly been asserted that there is a distinction between the power of directors to rescind or revoke a dividend payable in cash or property. The current of opinion favors the power of revocation of declared share dividends even if announced. A so-called "stock dividend" in shares of the kind already gives the stockholder nothing in the way of a distribution of assets but merely divides his existing shares into smaller units. There is no increase in his proportionate claim upon the corporate assets or income by reason of such paper dividend. There is no obligation upon the corporation even to make stock dividends which are not distributions, but only a change of the shares and capital structure".(Ballantine on Corporations, p. 560) The foregoing therefore, authorizes the revocation of your previous resolution declaring stock dividends from treasury shares, and instead, declaring stock dividends out of the unissued shares considering the existence of surplus profits arising out of the business operation of your corporation. Likewise, the pertinent provision of Sec. 43 of the Corporation Code provides, and we quote: "SECTION 43. Power to declare dividends . ....Provided, further, that no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose." The revocation, therefore, must be approved by 2/3 of the outstanding capital stock of your corporation. Consequently, it is advised that you revoke your previous resolutions and recall all the treasury shares which you have issued thereunder. Said revocation, however, does not affect the stock certificates issued from the declaration of dividends taken out of the unissued shares and approved by the stockholders on September 20, 1980. Likewise, said revocation cannot be made retroactive but is only effective as of the date of the approval of the resolution by the stockholders and the board of directors. Moreover, please be informed that the Commission on August 13, 1973, adopted the rules and regulations implementing P.D. 270, which requires, among others to wit: "xxx xxx xxx 5) Any declaration of dividend, whether cash or stock, shall be reported to the Commission within fifteen (15) days from date of declaration ..." Furthermore, the resolution of the Board of Directors declaring the stock dividend and that of the stockholders representing at least 2/3 of the outstanding capital stock approval the resolution shall be submitted to the Commission for determination of the existence of sufficient surplus profit of the corporation. ( Ltr. to Mr. C.A. Patio, Jr. dated November 6, 1979 ). Lastly, you are not exempted from any liability for your previous violation of issuance without prior permit. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman