Atty. Melva M. Evangelista

January 11, 1990 Atty. Melva M. Evangelista Bengzon, Zarraga, Narciso, Cudala, Pecson & Bengson 6th Floor, Sol Building Amorsolo St.,Legaspi Village Makati, Metro Manila M a d a m : This refers to your letter dated November 13, 1989, requesting opinion on the queries posed therein. LibLex As stated in your letter, the board of directors of a corporation is considering to declare as property dividend the land which is presently used as assembly plant of the company. The corporation is duly organized and existing under Philippine laws and is 60% controlled by Filipinos and 40% Japanese-owned. Your queries are 1. Can a corporation declare as property dividend the land being used as assembly plant assuming that its retained earnings is sufficient to match the acquisition cost of the property? 2. Since the foreign stockholders are prohibited by the Constitution to own real property, can they assign their rights to the dividend to stockholders who are qualified to own land? The pertinent provision of the Corporation Code provides: "SECTION 43. Power to declare dividends . The board of directors of a stock corporation may declare dividends out of the unrestricted retained earnings which shall be payable in cash, in property, or in stock to all stockholders on the basis of outstanding stock, held by them: ...".(emphasis supplied) From the foregoing, it is evident that dividends must be declared and paid out of the unrestricted retained earnings of the corporation. The term "retained earnings" as defined under the generally accepted accounting principles is understood to mean "the accumulated profits realized out of the normal and continuous operations of the business after deducting therefrom distributions to stockholders and transfers to capital stock or other accounts".( SEC letter to Carlos Uy Corporation ,citing the minutes of the 31st meeting of the Committee on Revision of Laws and Codes and Constitutional Amendments at the VIP Lounge at Room "A",Batasan Complex, Quezon City, Metro Manila, March 10, 1980) Property dividends are those that are paid in property instead of cash, where the surplus is in that form, and it is practicable to so distribute them among stockholders. (Agbayani, Commercial Laws of the Phil. citing 11 Fletcher 8922).Considering that the property intended to be distributed does not form part of the surplus or retained earnings of the corporation, the same cannot be declared as property dividends. Likewise, Section 122 of the Corporation Code provides: "SECTION 122. Corporate Liquidation . ... xxx xxx xxx. Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities ." (emphasis supplied) Thus, while a going concern and not in the process of liquidation, the corporation cannot distribute any part of its legal capital and property among its stockholders. It is a well-settled principle that, as between the stockholders of a corporation and its creditors, the assets of the corporation are, in a sense, a trust fund for the payment of its debts, and they cannot lawfully be distributed among the stockholders, even in part, to the prejudice of creditors. (11 Fletcher, Sec. 5329). In view of the foregoing, the above-mentioned proposal is not legally feasible. Your queries are therefore answered in the negative. Please be advised accordingly. Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner