Ms. Pastora T. O'Connor

October 5, 1994 Ms. Pastora T. O'Connor Dumaguete Rural Bank, Inc., Dumaguete City M a d a m : This refers to your letter of September 23, 1994 relative to your inquiry on whether or not Christmas Gift Certificates given to stockholders in the spirit of Christmas season are dividends. LexLib As stated, last December 11, 1992, the stockholders were granted Christmas Gift Certificates in equal amount of P10,000.00 each regardless of their shareholdings. In December 17, 1993, the stockholders were also granted Christmas Gift Certificates. However, the Board classified the stockholders into two: those who own 1,000 or more shares received P10,000.00 each regardless of their shareholdings, and those who own less than 1,000 shares received P3,500.00 each regardless of their shareholdings. Your query is, whether or not the aforesaid Christmas Gift Certificates are classified as dividends. The answer to your query depends on whether the gift certificates were given to the stockholders as share in the profits earned by the corporation. If so, they may be treated as dividends. The object of a corporation is to earn money for the stockholders. When a corporation earns profit over and above the amount of its capital, the stockholders are entitled to have a share in such profit in proportion to their shareholdings and the fund being set apart for this purpose is called dividend . (11 Fletcher, Sec. 5318) Dividends are declared rightfully only from profits after they are earned, and the profits of a corporation in its hands do not become a dividend until they have been set apart, or at least declared, as dividends. (Ibid, Sec. 5319) The pertinent provision of the Corporation Code 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 just 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: 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. Stock corporations are prohibited from retaining surplus profits in excess of one hundred (100%) percent of their paid-up 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 stock 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 profitable contingencies." (Emphasis supplied) The above provision requires that dividends among stockholders of the same class must always be pro rata ,and without discrimination, so that each stockholder should receive his proportionate share. The directors have no authority to declare a dividend on any other principle. They cannot exclude any portion of the stockholders from participating in the profits of the company and they cannot discriminate by giving certain stockholders more than the others of the same class. It is also well-settled that all persons who own shares of stock in a corporation at the time a dividend is declared are entitled as a matter of right, to share ratably in the profit or dividend in proportion to their respective shares regardless of the time when their shares were acquired . Any scheme of distribution of corporate profits to stockholders which is discriminating to other stockholders is violative of the above provision of the Corporation Code. Please be advised accordingly. Very truly yours, (SGD.) FE ELOISA C. GLORIA Associate Commissioner