SGV & COMPANY

January 15, 1986 SGV & COMPANY 6760 Ayala Avenue Makati, Metro Manila Attention : Atty . R . Noval Tax Division Sir: This relates to your letters, dated September 9 and October 25, 1985, respectively, requesting confirmation that the Commission will not interpose any objection to your clients' proposals to declare cash dividends in 1985 out of the retained earnings realized in their first six (6) months of operation for the same year. LibLex It appears that Hoechst Philippines, Inc. had retained earnings of P3.7M and net profits, after taxes, during the first six months of 1985 of P4.5M, or a total of P8.2M. The company proposes to declare cash dividends of P3M which shall be specifically designated in the covering board resolution as coming from the net profits realized in 1985. The company expects to continue to be profitable as the first 6 months of operation. On the other hand, Hoechst Far East Marketing Corporation appears to have P3.5M retained earnings as of December 31, 1984. The company's income after tax for the first six months of 1985 is P4.2M. The company proposes to declare cash dividends amounting to P1.6M, which shall likewise be specifically designated in the board resolution as coming from the net earnings realized during the first six (6) months of operation for the current year 1985. The company also expects to continue to be as profitable as the first six months of its operation. The reason behind both companies' proposals to declare cash dividends on the basis of current earnings for the first six months of their respective operations for year 1985, is a Central Bank rule allowing the remittance of profits and dividends earned only on or after October 15, 1984. Hence, this present request. Anent thereto, our law on the matter provides as follows: "The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock held by them. . . . " (Section 43, Corporation Code) "Retained earnings represent the balance of net profits, income, gains and losses of a corporation from the time of its incorporation after deducting distribution therefrom to shareholders and transfers therefrom to capital stock or capital surplus accounts. For all practical purposes, the term has the same meaning as earned surplus." (Ballantine & Sterling, Vol. 1 (1982 ed),et 141.26 (3). The board of directors, may in its discretion, appropriate retained earnings or portions thereof for designated purposes in which they will not be available for dividends. These appropriations may be for various purposes: expansion, possible future loss and other contingencies. Restrictions may be imposed by law or by this Commission in pursuance of authority granted by law. All these constitute restrictions on retained earnings which render the amounts represented by such appropriations unavailable for dividends. The retained earnings which are not so appropriated are what are referred to as unrestricted retained earnings, the only fund out of which dividends can be legally paid. (Campos, Campos, The Corporation C od e, "Comments, Notes and Selected Cases", 1981 ed., p. 773). prcd In an opinion, dated October 22, 1974, the Commission interposed no objection to the proposal of USIPHIL, Inc. to declare 20% cash dividends from the accumulated net earnings of the company as of the end of an interim period. In said opinion, the Commission ruled that while it is indeed a normal corporate practice to declare dividends after the end of the fiscal year when the company could definitely determine whether it made profits and the amount thereof, yet the Commission proceeded that it had had occasions in the past granting corporation's declaration of dividends even before the end of its fiscal year, provided it has sufficient earned surplus for the purpose which will not be impaired by losses whether expected or not, during the remaining period of the fiscal year. Foreign jurisprudence likewise rules as follows: "Whether or not there were surplus profits, so as to render it lawful to declare a dividend, is to be determined as of the time when dividend was made." (11 Fletcher, Cyc. Corps.,1971 Rev. Vol.,sec. 5338, p. 684, citing Main v. Mills, 6 Biss 98 F Cas No. 8, 974). "Distribution of corporate surplus to stockholders is within the sound discretion of directors as to time, manner and terms, subject only to such limitations as may be imposed by statutes or corporate charters." (Fraser v. Great Western Sugar Co.,14 N.J. Misc 610, 185 Atl 60, aff'd 120 N.J. Eq. 288, 185, Atl 64, cited in Fletcher, Vol. II, Sec. 5320, pp. 951-952). Considering that the respective net profits of Hoechst Philippines, Inc. and Hoechst Far East Marketing Corporation during the year 1985 could be identified, the Commission interposes no objection to their proposals to declare cash dividends payable from the net earnings realized by the companies during the first six (6) months of their operation for the year 1985, subject to the provisions of Section 43 of the Corporation Code, and subject further to the following conditions: That the amount of dividends involved would not be impaired by losses during the remaining period of 1985; That projected income statement of the company for the remaining period of the year as well as the bases and assumptions used therein shall be submitted to this Commission; and That should the company sustain losses during the year, cash dividends distributed to the stockholders of record must be correspondingly refunded to the company. Please be advised accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman