Formeloza, Sabarillo & Co.

April 29, 1987 Formeloza, Sabarillo & Co. Doa Potenciana Bldg. 1195-C Pasong Tamo cor. Yakal St. Makati, Metro Manila Attention : Mr . Leandro N . Avendao Sir : This has reference to your letter dated April 2, 1987, requesting for the opinion of this Commission on the queries posed therein. It appears that your client corporation declared on February 28, 1985, cash dividends of P1.90 per share equivalent to the total amount of P1.9 million payable on July 1, 1985. On June 15, 1985, during the special meeting of the Board of Directors of your client corporation, a resolution was passed for the deferment of the payment of the above declared dividends. During the year 1986, your client corporation sustained losses of about P2.0 million thereby totally wiping out the January 1, 1986 retained earnings balance of P1.0 million after setting aside the P1.9 portion for dividends. Due to the above cited situation, your client corporation intends to cancel the cash dividends originally declared on February 28, 1985 in order that the 1986 loss of about P2.0 million may be absorbed by the retained earnings apportioned as dividends reverted back. Hence, you pose the following queries: 1. May our client corporation, which declared cash dividends amounting to P1.9 million on February 28, 1985, but which remained unpaid up to this date by virtue of a board resolution deferring payment of such dividends, be cancelled? The cancellation is proposed in order to revert such dividends to retained earnings to replace losses incurred in the year 1986. 2. If the cancellation of the declared cash dividends is legally possible, what are the SEC requirements? 3. If the cancellation is not possible, what are the alternative courses of action? Anent your first query, "since the right of the stockholders of a corporation to a dividend becomes vested as soon as the dividend has been fully declared by the directors, and the corporation becomes their debtor for their respective shares, it necessarily follows that neither the same board of directors nor their successors can afterward consider their action and revoke the declaration of a legally declared dividend without their stockholders consent." (Fletchers, Vol. 11, p. 736 citing U.S. v. Southwestern Portland Cement Co., 97 F 2d 413 revg. 22F Supp. 846). This rule is especially true where a fund has already been set apart or deposited by the corporation out of which dividend is to be paid. (Fletcher, Supra, citing Brown v. Lee Mfg. Co., 231 259. 96 SW 2d 1098). Where dividend has been declared and a fund set apart out of which to pay the same, such action on the part of the corporation in setting the fund for the specific purpose constitutes such moneys a trust fund in the hands of the corporation for the use of the stockholders and in the event of the subsequent insolvency of the corporation, the stockholders are not required to go in pro rata with the general creditors for such unpaid dividends, but may proceed against a trustee on account of such trust fund and recover the whole of their pro rata thereof. (Mc. Laran v. Crescent Planning Mill Co., 117 Mo. App. 40, 93 SW 819 (1906). However, where the funds are not set apart from the general mass of the company's funds and not appropriated to the payment of a dividend which has been declared, the stockholders are not entitled to any preference over the general creditors; they stand as the general creditors of the corporation who can come in only notably with such creditors, looking to the general estate for the liquidation of their dividend debt. (Ibid) Hence, a cash dividend properly and fairly declared by your client corporation cannot be revoked by the subsequent action of the Board; for by the declaration of the dividend, the corporation becomes the debtor of the stockholders; such debtor corporation cannot revoke, recall or rescind the debt or otherwise absolve itself from its payment by any action on its part against or without the consent of the creditor stockholders. llcd In addition, please be advised, however, that there is authority to the effect that the rule precluding rescission does not apply to stock dividend and that the declaration of such a dividend may be rescinded at any time before the actual issuance of the stock. (Fletcher, sec. 5323.1). "The reason for the exemption in the case of stock dividends is found in the difference in the nature of cash and stock dividends." (Fletcher, Supra., citing Stoots v. Biograph Co., 236 Fed. 454, L.R.A. 1917 B 728; and others). As pointed out by Mr. Fletcher, "In the case of a cash dividend the amount to be distributed is severed from the general fund and becomes the property of the stockholders pro rata as soon as the dividend is voted, while in the case of a stock dividend, all the formalities necessary to a valid increase of stock must be complied with before the stockholders are entitled to anything, and the mere declaration of the dividend does not, therefore, give them a vested right." In view of our answer to your first query, the Commission need not answer your second query and third queries. Finally, please be advised that the administrative opinion rendered herein does not preclude any judicial decision affecting the issues raised in your basic letter in the event that the issues are litigated in court. Very truly yours, (SGD.) ROSARIO N. LOPEZ Associate Commissioner