SGV & Co.

July 26, 1984 SGV & Co. Sycip, Gorres Velayo & Co. P. O. Box 224, Bacolod City 6001 Attention : C . B . Fuentesfina Gentlemen: This refers to your letter dated January 30, 1984, requesting for opinion on the following queries: 1. Is prior approval of the Commission necessary for purposes of stock dividend declaration? cdll 2. If in the affirmative, what, if any, are the liabilities of the corporation which declared stock dividends without said approval? 3. Is it necessary to file a request for exemption from the registration requirements of the Revised Securities Act prior to the stock dividend declaration or may this be done after the declaration but prior to the issuance of the certificate of stock covering said declaration? 4. In the event that stock dividends declared by the corporation be more than the surplus profit available for declaration as determined by the Commission, what are the steps necessary to rectify the over-declaration? The power to declare dividends is an express power granted to corporations under Section 43 of the Corporation Code. The law provides, thus: "SECTION 43. 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, in property, or in stock to all stockholders on the basis of outstanding stock held by them: ...Provided, further, That no stock dividend shall be issued without the approval of the 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." (Emphasis supplied) The aforementioned provision requires only the approval by the board and at least two-thirds (2/3) of the outstanding capital stock as a requisite for the declaration of stock dividend. It does not require prior approval of the Commission. However, pursuant to the Rules Governing the Distribution of Excess Profits of Corporations promulgated by the Commission on August 13, 1973 pursuant to P.D. No. 270, any declaration of dividend, whether cash or stock, shall be reported to the Commission within fifteen (15) days from date of declaration. The rule provides, thus: "4. Any declaration of dividend, whether cash or stock, shall be reported to the Commission within fifteen (15) days from date of declaration; Provided that, in the case of corporations whose securities are listed in any operating stock exchange or registered and licensed under the Securities Act, the report shall be filed with the Commission before simultaneously with the release or publication of the notice of declaration of dividends to stockholders." The rules further provide, to wit: "7. Any violation of these rules of any requirement thereunder shall be punished by suspension or revocation of the license or permit to sell securities issued to the corporation or by a fine in such sum as the Commission may impose under R.A. 1143 ." Relative to your third query, issuance of stock dividend is considered an exempt transaction under Section 6(4) of the Revised Securities Act. The law provides, thus: "SECTION 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: xxx xxx xxx (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; ... Request for exemption for issuance of stock dividend is therefore unnecessary. As to your last query, it is well settled that for a certain act to be valid, the requirements under the law must be followed/complied with. Section 43 of the Corporation Code provides, to wit: "SECTION 43. .... The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings ."...(Emphasis supplied) Thus, any declaration of stock dividend may in excess of the available unrestricted retained earnings of the corporation is not considered valid as the same is in violation of the foregoing provision. Hence, the same must be rescinded/recalled. Please be advised accordingly. LexLib Very truly yours, (SGD.) MANUEL G. ABELLO Chairman