Mr. Efren S. Valiente

December 10, 1992 Mr. Efren S. Valiente Cebu Polytechnic College Cor. Mabini-Manalili streets Cebu City S i r : This refers to your letter of November 3, 1992 inquiring whether Cebu Polytechnic College can amend its Articles of Incorporation converting the same from a "non-stock" to "stock" corporation. It is your contention that the provision under Section 25 of the Education Act of 1982 (B.P. Blg. 232) requiring that a "private school proposed to be established must incorporate as a non-stock corporation" is not applicable in the present case, as said provision draws the inference that the school referred to herein is a new one (proposed to be established). Since subject Corporations already existing, you believe that the requirement does not apply. Likewise, you claim that it can be implied from Article XIV, Sec. 4 paragraph 2 of the Philippine Constitution that educational institutions may now be organized as stock corporations. Hence, you believe that the above proposal is allowable. While an existing "stock corporation" may be converted into a "non-stock corporation" by mere amendment of its articles of incorporation, conversion from non-stock to stock corporation is not legally feasible. As aptly defined in Section 87 of the Corporation Code, "a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees or officers". Accordingly, the members of a non-stock corporation are not entitled to any profit or income that may be obtained out of the operation or activities or from other assets of the non-stock corporation. Until the corporation is dissolved and unless it is so provided in the articles of incorporation or by-laws, the members are not entitled to any beneficial or vested interest over the assets of a non-stock corporation. In other words, a non-stock, non-profit corporation only holds its funds in trust for the carrying out of the objectives and purposes expressed in its charter or articles of incorporation. The conversion of an existing "non-stock non-profit" corporation into a "stock corporation" without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion, the assets of the non-stock corporation would now be treated as payment to the subscriptions of the members who will now become the stockholders of the stock corporation. Moreover, the scheme might defraud the public who may have contributed donations, gifts or grants to the non-stock, non-profit corporation to enable it to carry out the purposes for which it is organized since after its conversion the donated assets will now be considered as part of the capital of the stock corporation to the benefit of the stockholders. Thus, the Commission on several occasions has previously ruled that a non-stock corporation cannot be converted into a stock corporation by mere amendment of the articles of incorporation. For purposes of transformation, it is fundamental that the non-stock corporation must be dissolved first under any of the methods specified in Title XIV of the Corporation Code. Thereafter, the members may organize a stock corporation directed to bring profits or pecuniary gains to themselves. ( SEC Ltr. to Mr. Conrado B. Roxas, dated February 24, 1989 ) LibLex As to your contention that an "educational institution" to be incorporated may now be organized as a "stock corporation", as argued above, we are referring the matter to the Department of Justice for a definite ruling, a copy of the indorsement is herewith attached. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman