A. E. Dacanay

August 9, 1985 A. E. Dacanay Attorney-at-Law Rm. 221, Madrigal Bldg. Escolta, Manila Madam: This refers to your letter, dated July 1, 1985, requesting the opinion of this Commission on the queries posed therein. LibLex It appears therein that a corporation has a total outstanding capital stock of 5,276,700 of the par value of P10 each. Its retained earnings, as of April 30, 1985 amount to P15,039,517. A majority of the stockholders therein plans to increase the capital stock of subject corporation by P2M. Your client, who owns 22% of the outstanding capital stock, has been required to subscribe to his proportionate share in the proposed increase. However, before your client does so, he would like that dividends be first declared out of the retained earnings of the corporation. Hence, your queries are: 1. Does your client have the absolute right to have dividends declared before he subscribes to the increase of capital of the corporation? 2. If he has, but the majority of the stockholders insist on increasing the authorized capital stock of the corporation, what steps must your client take in order to enforce his right to have dividends declared first? 3. Will your client lose his pre-emptive right to subscribe to the additional issue of shares should he insist that dividends be first declared? 4. In that particular case, isn't is illegal for the corporation to have accumulated retained earnings amounting to P15,039,517? The pertinent provisions of the Corporation Code of the Philippines provide as follows: "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: ....Provided, further that no stock dividends shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. xxx xxx xxx." The right to declare dividends is vested in the board of directors, and not in the stockholders nor in the Corporate officers. 11 Fletcher, Cyclopedia Corporations, (1958 Rev. Vol.),sec. 5320 at 951; sec. 5349 at 1087-1088. Distribution of corporate surplus to stockholders is within the sound discretion of directors as to time, manner, and terms subject only to such limitations as may be imposed by statutes or corporate charters. (Fraser v. Great Western Sugar Co.,14 N.J. Misc. 610, 185, atl 60, aff'd 120 N.J. Eq. 288, 185 ATd. 64, cited in fletcher, Supra, at 951-952) The fact that profits have accrued in the prosecution of the corporate business does not necessarily impose upon the directors the duty of distributing them as dividends to the stockholders. (13 Am. Jur.,sec. 676 at 673).Even though the earnings are such as to permit the lawful distribution of dividends, they remain corporate property until so distributed and those entrusted with the control of the corporation must necessarily be left free to deal with them as prudent management and the exigencies of the enterprise may suggest so long as they act in good faith. (Am. Jur.,Supra.,p. 674).The apportionment of net earnings to payment of dividends is largely a question of policy entrusted to the discretion of the directors of the corporation whose duty to the stockholders is to exercise an honest and impartial judgment with reference to the declaration of dividends and to declare them only when, under the circumstances, a declaration will seem best to serve the corporate interest. (Am. Jur.,loc. cit).It is the declaration of the dividends which creates both the dividend itself and the right to the stockholders to demand and receive it. 11 Fletcher, Cyc. Corps.,(1958 Rev. Vol.),sec. 5321, at 957-958. Considering the foregoing, our answer to your first query is in the negative. Your second query has become academic in view of our answer to your first query. Anent your third query, Section 39 of the Corporation Code of the Philippines provides thus: "Power to deny pre-emptive right. All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings unless such right is denied by the articles of incorporation or an amendment thereto: Provided, that such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt." In the absence, therefore, of the exceptions cited above, your client has a pre-emptive right to subscribe to new allotment of shares in proportion to his holdings of outstanding shares. Finally, your fourth query is directly answered by Section 43 (paragraph 2) of the Corporation Code, which is quoted hereunder: "xxx xxx xxx Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-in capital stock, except: (1) when justified by definite corporate expansion projects or programs approved by the board of directors; or (2) when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or (3) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for special reserve for probable contingencies. llcd Please be advised accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman