Blue Cross Insurance, Inc.

July 15, 1994 Blue Cross Insurance, Inc. 7th Flr., PBCom Bldg., 6595 Ayala Ave. cor. Herrera St., Makati, Metro Manila Attention : Mr . Samuel F . Baldado Corporate Secretary S i r : This refers to your letter of June 10, 1994 requesting advice relative to conversion of contributed surplus into paid-up capital by way of stock dividend declaration. As stated, sometime in June 1988, December 1988 and August 1989, some stockholders of Blue Cross Insurance, Inc. made contributions to surplus to maintain a margin of solvency required by Insurance Commission. Calls for contribution were made to the individual stockholders for them to make the corresponding contributions to cover the solvency deficiency. While a few did contribute, many refused or failed to do so. So that the company can continue with its business operations, some stockholders aside from their own proportionate contributions also contributed for the other stockholders. Thereafter, a new major stockholder came in by subscribing to the increase in capital stock of the company. In 1994, the Insurance Commission approved the company's request for the conversion of the contributed surplus into paid-up capital. The company now intends to declare the contributed surplus as stock dividends to complete the minimum paid-up capitalization as mandated by the Department of Finance. Your queries are: 1. Who are entitled to benefit from the stock dividend declaration? Should the stock dividend be limited only in favor of those stockholders of record in 1988 and 1989 when the contributions to surplus were made? If so, this has the effect of returning to these stockholders what they contributed or were under obligation to contribute. 2. May the stockholders under item "a" above who, up to the present time, are delinquent in respect of the contributions to surplus be legally disqualified by the Board of Directors from participating in the stock dividend? 3. Are stockholders who came in as shareholders by way of subscription after the contributions to surplus were made, entitled to the stock dividend or can the Board of Directors validly exclude them from the stock dividend declaration? 4. May the stock dividend declared accrue to the benefit of the transferees or successors in interest of stockholders referred to in item "a" above who may have already sold or transferred their shares? The Commission en banc, in its Executive Meeting of October 17, 1989, had previously allowed the declaration of stock dividends from paid-in surplus taking into consideration that when a corporation converts the premium or contributed surplus into capital by issuing to the stockholders shares of stock representing their respective participation, it actually parts with nothing but merely transfers the surplus to capital account. ( Letter to Mr. Ong Chee Han, dated October 19, 1989 ) As to who are entitled to receive the stock dividends, it is a settled general rule that in the absence of an agreement to the contrary, or where the resolution declaring the dividend specifies a record date, all persons who own shares of stock in a corporation at the time dividend is declared are entitled, as a matter of absolute right, to share ratably in the dividend in proportion to their respective shares without discrimination and regardless of the time when their share were acquired . So one who receives stock from a corporation immediately before a dividend is declared has the same right as the others stockholders to share therein, unless he is excluded by the terms of his contract ( Letter to Philippine Banking Corporation, dated August 6, 1990 citing II Fletcher, Sec 5376 citing various cases). The seemingly unfair situation allowing the stockholders who did not make contributions to the surplus to share in the stock dividend declaration is remedied by Sec. 194 of the Insurance Code of 1978, as amended by P.D. No. 1455, which provides in part: ". . . Provided further, that a stockholder who aside from paying the contribution due from him, pays the contribution due from another stockholder by reason of the failure or refusal of the latter to do so shall have a lien on the certificates of stock of the insurance company concerned appearing in its books in the name of the defaulting stockholder on the date of default, as well as on any interests or dividends that have accrued or will accrue to the said certificates of stock, until the corresponding payment of reimbursement is made by the defaulting stockholder." Relative to the last query, " as a general rule, dividends declared before a transfer belong to the transferor and those declared after the transfer belong to the transferee, unless the parties have agreed otherwise or there is some statutory or other controlling provision changing the rule." ( Letter to Philippine Overseas Drilling and Oil Development Corporation dated November 12, 1986 , citing II Fletcher Cyclopedia Corporations Sec. 5377 Chapter 58) A subsequent transfer of a stock after the declaration of dividends would, as a rule, not carry with it the right to dividends which have been declared but not yet paid. (Ibid, citing Comments, Notes and Selected Cases, Corporation Code, Campos and Lopez-Campos, 1981 Edition, pp. 797-798) In other words, a dividend belongs to the person who owns the stock at the time when the dividend is declared. Please be advised accordingly. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner