The Honorable Justice Querube Makalintal

January 22, 1980 The Honorable Justice Querube Makalintal Speaker Interim Batasang Pambansa Capitol Hills, Quezon City Sir : This is in connection with Parliamentary Bill No. 663, entitled "An Act Requiring Stock Corporations to Declare Cash Dividends Annually",copy of which you furnished the office of the Securities and Exchange Commission for its comments and recommendations. After extensive studies and due deliberations on said bill, this Commission finds the same to be an inadequate substitute of the existing law (Presidential Decree No. 270) and the SEC Implementing Rules and Regulations dated August 13, 1973 issued pursuant thereto. It also appears to unnecessarily hamstring or envelop the corporations and/or Board of Directors in strait jackets, for the following reasons: 1. PD 270 and the implementing rules and regulations vest in the Board of Directors sufficient discretion relative to the nature of the dividends that it may declare, their amount and the time, place and manner of their payment, provided only that surplus profits exist. In other words, the Board of Directors may declare dividends in cash or stocks, depending on their collective, wise business judgment, as they alone can emphatically gauge the financial condition of the corporation. It is therefore more in consonance with sound business and corporate practice that the discretion of the Board should not be unduly substituted or restricted, as when the bill obliges the Board to annually declare at least thirty (30%) percent of the net income of a corporation after tax as cash dividends only. 2. Likewise, it is undeniable that the Board of Directors may find that additional capital outlay is necessary to expand the business of the corporation. If it has surplus profits, the capital stock may be increased without an actual offer of additional capital stock for subscription since earned profits or surplus may be capitalized. This course of action by the Board is denominated in the Corporation Law as "Increase of Capital Stock by way of Stock Dividends". Section 17 of said law expressly authorizes the said method of increasing the authorized capital stock, and therefore, nobody may question its legality, not even this Commission. In the vent that the Board of Directors of the corporation avails of such method and exhaust all its surplus profits thereby, naturally it could not legally comply with the projected mandate of the bill. 3. Well-settled is the principle that the duty to pay debts of the corporation is superior to the duty to pay dividends. The mere existence of earned surplus profits may not necessary permit the corporation to declare cash or stock dividends if its financial condition were unstable and it can not meet its debts as they mature. Hence, instead of paying dividends out of surplus, the Board of Directors should legally and morally apply available earnings to the gradual retirement of debts or retain them as reserve funds to care for possible losses in future years (13 AM JR 677).Unfortunately, the bill has glossed over this question of corporate indebtedness or reserve funds, which the implementing rules and regulations has provided for earlier. LibLex 4. The bill also failed to consider the policy or requirement of government agencies relative to non-distribution of dividends in order to achieve harmony and orderliness in the implementation of law and rules and regulations, which again the SEC implementing rules and regulations already took into consideration. 5. The bill is unusually silent regarding the exact period or time within which the corporation should report the declarations of dividends to the SEC, while the implementing rules and regulations expressly provided for fifteen (15) days. 6. The bill is also unusually silent relative to penalties for future violations of the same, unlike the PD 270 and its implementing rules and regulations which have taken this eventuality or possibility into account. 7. Finally, modern corporate practice has suspended the declaration of dividends until such time that at least fifty (50%) percent of the authorized capital stock of the corporation shall have been paid in (11 Fletcher, Cyd. of Corps.,Sec. 5320, p. 951).And this is for good measure because the corporation has no business declaring dividends when it is not yet shown to be economically viable. In sum, Parliamentary Bill 663 is people and government-oriented. But, it is suggested that the IBP should study further and consider adopting the above-mentioned points and provided in the PD No. 270 and the SEC implementing rules and regulations, because of its multifarious legal implications and economic repercussions. Please be advised accordingly. prcd Very respectfully yours, (SGD.) ANGEL L. LIMJOCO, JR. Chairman