Mr. Jose S. Tayag

July 4, 1984 Mr. Jose S. Tayag Joaquin Cunanan & Co. 8th Floor, Rufino Bldg. 6784 Ayala Avenue Makati, Metro Manila Sir : This refers to your letter dated May 2, 1984 requesting for opinion on the query posed therein. llcd It appears that a corporation has an authorized capital stock of P5,000,000 divided into 50,000 shares of P100 par value each out of which P2,000 worth of shares have been issued and fully paid. Subsequently, another P1,000,000 worth of shares have been subscribed out of which subscription, only P250,000 have been collected from the stockholders and therefore, the company has outstanding subscription receivable amounting to P750,000. The corporation plans to declare a stock dividend of P750,000 out of its accumulated earnings and said dividend shall be applied against said subscription receivables. Your query is whether the corporation can legally declare stock dividends and offset the same against its unpaid subscription receivables which are not yet delinquent. It should be noted that the "declaration of stock dividend involves the creation and issue of new shares of stock. The basis of the issue ,insofar as payment into the corporation is not required of the recipient, is surplus assets which thus become converted into strict capital with all which that implies." (Fletcher Cyclopedia Corporations, Vol. II p. 747 citing Green v. Bissell, 79 Conn. 547, 65A1056, 8 LRA(NS) 1011, 118 An St. Rep 156, 9 Ann Case 287). Thus, a stock dividend which requires a transfer of surplus to capital account cannot be made without issuing new shares. Considering that the retained earnings/profits are already applied as payment to the new issuance of shares, the same cannot be reapplied to previous subscription which are still unpaid. Likewise, to allow the stocks issued pursuant to the declaration of stock dividend as payment to unpaid subscription would be, in effect, re-acquiring its own shares, the proceeds of which will be applied to the unpaid subscription, which case is not allowed under Section 41 of the Corporation Code which enumerates the instances and conditions wherein a corporation can legally purchase or acquire its own shares. prcd More important, Section 43 of the Corporation Code does not allow application of stock dividend to unpaid subscription. The same can only be withheld but only from delinquent stockholders. The law provides, 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, Provided, that any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividend shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid :Provided, further, That no stock dividend shall be issued without the approval of the 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." (emphasis supplied) On the basis of the foregoing, we answer your query in the negative. Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner