The Philippine Banking Corporation

August 6, 1990 The Philippine Banking Corporation Philbanking Building Ayala Avenue, Makati Metro Manila Attention : Domingo Lee Chairman Gentlemen : This refers to your letter dated March 22, 1990 inquiring whether the reduction of surplus brought about by the decrease in the par value of the bank's shares of stock is exclusively for the benefit of, and to be owned by, the stockholders who subscribed to the shares of stock at the original par value. prcd It appears that the decrease of the par value of the bank's issued shares of stock from P100.00 to P50.00 which was approved by the Commission on December 31, 1988, resulted in the emergence of a "reduction surplus" in the books of the bank (a term synonymous with "paid-in capital in excess of par value) amounting to P97,156,485.00. In accordance with the purpose of the decrease in the par value, P41,265,325.00 of the reduction surplus was used to replace and erase the term accumulated losses or deficit of the bank amounting to the same amount. The balance of P55,891,160.00 was retained as reduction surplus. At this point in time, the remaining reduction surplus could have represented returnable capital to the stockholders concerned if the agreement called for it and if the circumstances then had warranted such return of capital. However, the stockholders approval of the decrease in the par value, pursuant to the bank's equity restructuring program, provided for the retention of the remaining reduction surplus of P55,891,160.00. The said remaining reduction surplus, therefore, constituted "additional paid-in capital" of the stockholders in the bank. On December 22, 1988, the Commission approved a subsequent increase in the capital stock of the bank involving the entry of new set of subscribers at the reduced par value of P50.00 per share. The total amount of the subscription and payments was P500,000,000.00. After the increase in the capital stock, the bank now has two sets of stockholders: those who originally bought at P100.00 per share and those who later subscribed at P50.00 per share. The bank is now contemplating to declare all the remaining reduction surplus of P55,891,160.00 as dividends. Your query is, in the event that the said reduction surplus be declared as dividends, who will be entitled to receive such dividends, the original stockholders only or all the stockholders of records as of the time of the declaration of dividends? It is the settled general rule that in the absence of agreement to the contrary, or where the resolution declaring the dividend specifies a record date, all persons who own shares of stock in a corporation at the time a dividend is declared are entitled, as a matter of absolute right, to share ratably in the dividend in proportion to their respective shares, without discrimination and regardless of the time when their shares were acquired . So, one who receives stock from a corporation immediately before a dividend is declared has the same right as the other stockholders to share therein, unless he is excluded by the terms of his contract. (11 Fletcher, Sec. 5376 citing various cases) A "record date" is the future date specified in the resolution declaring dividend, that the dividend shall be payable to those who are stockholders of record on a specified future date , or as of the date of the meeting declaring said dividends . ( SEC Opinion dated June 5, 1974 citing Ballantine on Corporation p. 567) Thus, applying the above-mention principle in your case, all the stockholders of record (original and new) are entitled to the reduction surplus in the event the same is declared as dividends, subject, however, to the following conditions: 1. That the reduction surplus shall be declared only as stock dividends and not as cash dividends; LibLex 2. That no creditor shall be prejudiced therefrom; 3. That there shall be no resulting impairment of capital. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman