Mr. Marcelo N. Fernando

March 6, 1984 Mr. Marcelo N. Fernando Corporate Secretary Meralco Industrial Engineering Services Corporation Lopez Bldg., Ortigas Ave. Pasig, Metro Manila S ir : This has reference to your letter dated August 23, 1983, requesting the opinion of this Commission on the query posed therein. cdlex In your letter you alleged that the Meralco Industrial Engineering Services Corporation has presently 12,500 common shares which remain unissued from its authorized capital stock of P10,000,000.00 (100,000 shares); that the par value of each share is P100.00; that prior to June 30, 1983, the board of directors decided to declare the 12,500 common shares as stock dividends; that the stockholders of the company have approved said declaration of stock dividend; that the assigned value given each share is P240.00 instead of P100.00; that the aggregate value of said stock dividend declaration amounted to P3,000,000.00 instead of P1,250,000.00; that there are sufficient retained earnings to cover the P3,000,000.00 assigned value to said 12,500 common shares; and that by virtue of such declaration, said amount of P3,000,000.00 should be transferred into equity, the premium of P1,750,000.00 constituting part of capital or paid-in surplus. Your query is: Can a corporation be allowed to declare stock dividends which carry a premium? A stock dividend is a conversion of surplus or undivided profits into capital which means the distribution of earnings to the stockholders in the form of shares of stock. This would have the same effect of distributing the earnings of a corporation as cash dividends to the shareholders and subsequently, said cash dividend declarations are used by the stockholders in purchasing the shares of stock of the corporation. "An agreement by subscribers to pay more than par for their stock is not ultra vires as an attempt to increase the par value of the stock, but is valid and enforceable according to its terms." (Fletcher Cyclopedia Corporations, Vol. XI, p. 328). Considering that selling of shares of stock at a premium is not prohibited, it follows that stock dividends which carry a premium can be validly made because such stock dividends indirectly take the nature of sales of shares of stock at a premium. When the amount of earned surplus capitalized per share of dividend stock exceeds its par or stated value, the excess should be credited to capital surplus. (Financial Handbook, J. I. Bogen, p. 794). In view of the foregoing, the answer to your query is in the affirmative. Please be guided accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman