Naga Regional Development Bank

January 28, 1986 Naga Regional Development Bank corner Elias Angeles St. Naga City Attention : Atty . Leoncio M . Clemente Sir : This has reference to your letter dated June 7, 1985, requesting for the opinion of this Commission on the query posed therein. It appears that there is a proposed amendment of Article VII of the Articles of Incorporation of the Naga Regional Development Bank (NRDB), which corporation was duly organized under Republic Act 4093 as amended by R.A. 4887, P.D. 119 and B.P. Blg. 63. It likewise appears that when the NRDB was organized, the private stockholders put up a paid-up capital of P2,000,000 and the Development Bank of the Philippines(DBP) put up a counterpart in the amount of P2,000,000, which amount is classified as preferred shares of stock with voting rights as described in Article VII of the Articles of Incorporation par. 3 quoted hereunder: "Such preferred shares issued to the DBP shall be entitled to cumulative dividends at the yearly rate of one per centum (1%) during the first five years from date of subscription, two per centum (2%) during the following five (5) years, and three per centum (3%) thereafter before any dividends at all are paid to the holder of the other preferred and common stocks. Subsequent subscription of the DBP to the preferred shares of stocks shall be entitled to cumulative dividends to be determined by the DBP Board of Governors." You alleged that under Republic Act 2081 when the Rehabilitation Finance Corporation was converted into the DBP, the dividend rates that should be imposed upon private development banks were categorically stated under Sec. 9, a portion of which is hereby reproduced as follows: " ...Provided, further, that the Board of Governors shall act on the representation made by the private stockholders within thirty (30) days from the date it is filed; Provided, further, that such shares of stocks subscribed by the bank shall be preferred shares entitled to cumulative dividends at the rate of One Percent during the First Five years, two percent during the following five years, and three percent thereafter ..." You further alleged that the funds contributed by the DBP with the NRDB came from the funds provided for under the Special Economic Development Fund (SEDF) appropriated by Congress out of the sale or reparation goods made available to the RFC under R.A. 1789. According to you, when NRDB consolidated its rediscounted notes with DBP, the latter imposed a condition among others that DBP's preferred shares shall henceforth earn 16% p.a. cumulative dividends. Inasmuch as NRDB could not interpose any objection, the private stockholders are now bent on amending the Bank's articles of incorporation, in order to incorporate said condition. cdlex Under the circumstances, you would like to request for the opinion of this Commission on whether or not the proposed amendment of the articles of incorporation changing the dividends rate from one per cent to sixteen per cent will be valid even if passed unanimously by the NRDB stockholders, common and preferred. An examination of the proper laws on the matter discloses that DBP investments in preferred shares of stock in private development banks may consist of either:(a) counterpart capital authorized under Republic Act No. 4093, as amended, and Republic Act No. 85 as amended, and made prior to the passage of Batas Pambansa Blg. 63, which terminated the authority of DBP to provide said counterpart to private development banks, or (b) other investments in the capital stock of PDBs. If the investment is as counterpart capital, the yearly rate of dividends thereon are fixed in Section 4 in said Article VII of your articles of incorporation. However, if the investments of DBP is other than as counterpart capital to PDBs effected before Batas Pambansa Blg. 63, it appears from Sections 4-A and 4-B of RA No. 4093, as amended, that the dividend rate thereon may either be the dividend rate fixed in Section 4 of said law or any rate as may be agreed upon by the parties .In your case, subsequent subscription of the DBP to your preferred shares of stock were to receive cumulative dividends to be determined by the DBP Board of Governors. It must be noted that a corporate charter is a contract of a three-fold nature, that is, a contract between the state and the corporation, a contract between the corporation and its stockholders (or members),a contract among the stockholders inter se (18 Am. Jur. 2d, 625, 626). It is likewise well-settled that under Art. 1306 of the Civil Code, parties to a contract may establish such stipulations, clauses, terms and conditions as they may deem convenient provided they are not contrary to law, morals, good customs, public order or public policy. Thus, Section 16 of the Corporation Code (Batas Pambansa Blg. 68) requires that amendment of any provisions or matters stated in the articles of incorporation must be for legitimate purposes. In the light of the foregoing, we believe and the Central Bank is of the same opinion, that if the stockholders of NRDB were to increase to 16% per annum the dividend rate on the DBP counterpart capital or on these shares entitled to the annual rates of 1%, 2% or 3% as the case may be, the same may run counter to Section 4 of Republic Act No. 4093, as amended. However, if the dividend rates to be revised pertain to the DBP additional subscription to the capital stock of NRDB , we believe that there is no legal impediment thereto inasmuch as the rates or dividends prescribed in Section 4 of Rep. Act No. 4093, as amended, do not apply to said shares and said amendment finds sanctions in Article VII or the bank's articles of incorporation. The following ruling is likewise appropriate: "In some states, the payment of dividends on preferred stock is regulated by statute. The preferred dividends may be made cumulative or non-cumulative; the dividend may be a fixed amount each year to be paid out of earning .... As in the case of any other agreement, the parties to a contract of this character are found to carry it out according to its terms (Fletcher's Vol. 12, Ch. 58, p. 171 citing Cratty vs. Peoria Law Library Ass'n.,219 Ill. 516, 76 N.E. 707, emphasis ours) It must likewise be noted that dividends on the preferred stock, even if guaranteed, may only be given out of unrestricted retained earnings as provided under Sec. 43 of the Corporation Code. "Accordingly, notwithstanding the language or terms of the certificate guaranteeing dividends on preferred stock, it will be construed to be a guaranty of payment only in the event that dividends are earned, because a corporation can only pay dividends out of profits. That is, the guaranty merely means that the holders of the stock are entitled to the specified dividends when there are profits to pay them, and not otherwise (p. 178, supra). llcd Please be guided accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman