Wire Rope Corporation of the Philippines

July 17, 1984 Wire Rope Corporation of the Philippines P. O. Box 626, Manila Attention : Mr . Salvador Ceguerra Corporate Secretary Sir : This has reference to your letter dated June 20, 1984, requesting the opinion of this Commission on the queries posed therein. It appears therein that in your annual meeting on September 26, 1980, your stockholders unanimously passed a resolution approving the recommendation of your Board of Directors, contained in a resolution passed in its regular meeting on May 23. 1984, for the declaration of stock dividends to be taken out of unissued stocks and treasury stocks on the basis of Section 43 of the new Corporation Code (which took effect on April 1, 1980) authorizing the declaration of "dividends out of the unrestricted retained earnings, which shall be payable in cash, in property or in stock". You then cited Sec. III, par. 2 of the "Rules Governing Redeemable and Treasury Shares", promulgated by this Office on April 26, 1982, which provides that "Treasury Shares do not revert to the unissued shares of the corporation but are regarded property acquired by the corporation at a price to be fixed by the Board of Directors". You now request the opinion of this Commission on the following: 1. Is your ruling in Sabido, Sabido & Associates (November 2, 1966) and G.A. Machineries, Inc. (June 13, 1963),to the effect that stock dividends may not be declared from treasury stock, still applicable or in force? 2. If it is still applicable and in force, may the aforesaid declaration of "stock dividends" out of treasury shares be not deemed tantamount or equivalent to declaration of "property dividends"? 3. If it is no longer applicable or in force, will it apply and govern stock dividends declared out of treasury shares prior to April 1, 1980? Anent your first query, the same is hereby answered in the affirmative. In a similar query, this Commission has reiterated the following opinion: "The distribution of cash or stock dividends out of treasury shares would be converting the corporation into both a debtor and creditor for the same amount at the same time, or requiring it to take money or stock from one of its pockets and putting it in another, which is absurd." "Treasury shares being unrealized income, are not considered as part of earned or surplus profits, and therefore, not distributable as dividends, either in cash or stock." ...( Ltr. to Filipino Financial Corporation dtd. Oct. 1, 1982 citing ltr. to Mr. Angala dtd. April 24, 1979 ). LexLib As regards your second query, please be informed that as stated above, stock dividends may not be declared out of treasury stock. However, in the above-mentioned ruling, this Commission also ruled, and we quote: "But if there are surplus profits arising from the business operations of the corporation, treasury shares, being the property of the corporation, may properly be distributed as property dividend." (Supra) Section V, par. 2 * of the Rules Governing Redeemable and Treasury Shares provides, and we quote: "Treasury shares may be declared as property dividend to be issued out of the retained earnings previously used to support their acquisition ,provided that the amount of the said retained earnings has not been subsequently impaired by losses. Any declaration and issuance of treasury shares as property dividend shall be disclosed and properly designated as property dividend in the books of the corporation and in its financial statements." (emphasis supplied) Likewise, pertinent to the provision of the Rules Governing Redeemable and Treasury Shares which you have cited is the following ruling of this Commission: "Thus, when stock has been issued and fully paid and reacquired by the corporation to be disposed of for its benefit, the corporation may dispose of the stock even at less than its par value or acquisition cost, provided the price is reasonable, as fixed by the Board of Directors. By "reasonable",it would mean that if it is issued at less than the par or issued value, the consideration for their issuance plus whatever profit the corporation made in their acquisition shall not be below their par or issued value. Otherwise, they might still be classified as watered stock." (Supra) Relative to your third question, the same is rendered moot and academic by our answers to your first and second queries. Please be advised accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman * Copied verbatim from documents obtained directly from the Securities and Exchange Commission .