Philippine Overseas Drilling and Oil Development Corporation

November 12, 1986 Philippine Overseas Drilling and Oil Development Corporation c/o Mr. Augusto B. Sunico Quad Alpha Centrum 125 Pioneer, Mandaluyong Metro Manila Gentlemen: This refers to your letter dated October 2, 1986, requesting for opinion on the query posed therein. You alleged that a number of persons entered into a stock subscription contract with the corporation. Some of the subscribers defaulted in their payment and the entire subscription was declared delinquent. During the delinquency, cash dividends were declared and applied against the unpaid balances of the subscriptions. Stock dividends were also declared but the dividends were withheld from the delinquent subscription in accordance with Section 43 of the Corporation Code. The corporation has sold in a delinquency sale all outstanding delinquent stocks under Section 68 of the Corporation Code. In some cases, the winning bidders paid the total obligation (the balance due on the subscription, plus accrued interest cost of advertisement and expenses of sale) for 100% of the stocks. In some cases, the winning bidders agreed to pay the total obligation for a portion of the stocks. You are now inquiring as to who would be entitled to the withheld stock dividends: the original subscriber, the purchaser for the 100% of the stock or both pro-rata in case some stocks are left to the original subscriber. It is to be noted that under Section 43 of the Corporation Code, holders of delinquent stocks are entitled to the right of dividends , except that any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus cost and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid. The law partly 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, property or in stock to all stockholders o n the basis of outstanding stock held by them: Provided, that any cash dividend due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder, until his unpaid subscription is fully paid ".... The right of stockholders to be paid dividends vests as soon as the same has been lawfully declared by the Board of Directors. Since the right to dividends vests upon its declaration, whoever owns the stocks at that time also owns the dividends. A subsequent transfer of such stock would as a rule, not carry with it the right to dividends which have been declared but not yet paid. (Comments, Notes and Selected Cases, Corporation Code, Campos and Lopez-Campos, 1981 Edition pp. 797-798). "As a general rule, dividends declared before a transfer belong to the transferor and those declared after the transfer belong to the transferee, unless the parties have agreed otherwise or there is some statutory or other controlling provision changing the rule." (11 Fletcher Cyclopedia Corporations Sec. 5377 Chapter 58). In other words, a dividend belongs to the person who owns the stock when the dividend is declared. It can also be implied from Section 68 of the Corporation Code that only the number of shares of which the bidder is willing to buy shall be transferred to the highest bidder. The law provides, thus: "SECTION 68. Delinquency sale . xxx xxx xxx Unless the delinquent stockholder ...said delinquent stock shall be sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement and expenses of sale, for the smallest number of shares or fraction of a share .... The remaining shares, if any, shall be credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock covering such shares ...(emphasis supplied) Thus, unless there was an agreement beforehand that the dividends earned by the delinquent stocks before the delinquency sale was effected shall inure to the winning bidder, the same belong to the delinquent stockholder. Please be advised accordingly. llcd Very truly yours, (SGD.) JULIO A. SULIT, JR. Chairman