Mabuhay Vinyl Corporation

January 3, 1983 Mabuhay Vinyl Corporation 6th Floor, AIU Building Cor. Alvarado & Dela Rosa Sts. Legaspi Village, Makati, M.M. Gentlemen: This refers to your letter, dated December 13, 1982, requesting the opinion of this commission on the query posed therein. It appears therein that Mabuhay Vinyl Corporation is being granted by DBP a rehabilitation package, which includes the investment by DBP on P15M preferred shares of that corporation. The dividend features thereof are as follows: "Dividend and Preference 19% cumulative dividends. Payable semi-annually, these to have preference over common shares as to dividends and on corporate assets in the event of dissolution." Now, your query is whether the corporation can declare and pay to DBP the dividends even during the years when the corporation has no retained earnings. The pertinent provision of the Corporation Code relative to your query reads thus: "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) LibLex Dividend refers to corporate profit set aside, declared and ordered by the directors to be paid to the stockholders on demand or at a fixed time. Both in the technical sense and its ordinary acceptation, it is that part of the profits of the enterprise which the corporation, by its governing agents sets apart for ratable division among the holders of the capital stock. (Agbayani, Commercial Laws of the Philippines, p. 367, citing Fisher v. Trinidad, G.R. No. 17518, October 30, 1922, 43 Phil. 973; Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., GR. No. L-21601, Dec. 28, 1968). It is clear from the aforequoted Section 43 of the Corporation Code that generally, dividends may be declared only out of earned surplus profits. This seems to be the meaning in the new Corporation Code as it requires that dividends be from "earnings" that are retained and unrestricted. (Agbayani, Commercial Laws of the Philippines, p. 392). "The surplus of a corporation which may be used for the payment of dividend must be bonafide and not an artificial or fictitious one, and it must be founded upon actual earnings of profit and not be dependent for its existence upon a theoretical estimate, of an appreciation, in the value of the company's assets." ( SEC Opinion, dated August 7, 1962 ,citing Burks Broadcasting Co. v. Cruamer, 356 Pa. 620, 52 A (2d) 571). The existence, therefore, of surplus profits arising from the operation of corporate business is a condition precedent to the declaration of stock dividend ( SEC Opinion, dated October 24, 1968 ).Thus, from the rule that dividends can only be paid out of surplus profits, it follows that a corporation has no power to enter into an unconditional agreement to pay dividends to shareholders, without regard to the condition of the corporation at the time of payment. Such an agreement is ultra-vires and void (11 Fletcher, Cyc. Corps. 5332). In view of the foregoing, please be advised that, as a general rule, you cannot declare and pay to DBP dividends during the years when the corporation has no retained earnings. However, the exception made under the old law allowing the declaration of stock dividends from premium surplus resulting from the sale of shares above par value has been retained under Section 62(5) of the Corporation Code which recognizes issuances in consideration of amounts transferred from surplus to capital accounts. The declaration of dividend from paid-in surplus may be allowed only as stock dividends, but not as cash dividends ( SEC Opinion, dated August 10, 1973 ). Finally, please be further informed that dividends need not be declared out of the profits for the current year (11 Fletcher, Cyc. Corps.,Sec. 5329-1).Profits which have been made and allowed to accumulate may be paid out as dividends in subsequent years in which no profits are made. (Ibid.). Please be advised accordingly. Very truly yours, (SGD.) JESUS J. VALDES Associate Commissioner