Mr. Candelario L. Verzosa, Jr.

May 13, 1992 Mr. Candelario L. Verzosa, Jr. Executive Director Cooperative Development Authority 5th Floor Ben-lor Bldg., 1184 Quezon Avenue, Quezon City S i r : This refers to your letter of March 19, 1992 relative to the request of Ugnayang Magsasaka Warehouse and Ricemill, Inc. to convert its status as ordinary "non-stock, non-profit corporation" into a "cooperative". LibLex Under the Corporation Code, corporations are classified into " stock " and " non-stock " (non-profit). "Stock corporations" are corporations which have capital stock divided into shares and are authorized to distribute to holders of such shares dividends or allotments of the surplus profits on the basis of the shares held. (Sec. 3, Corporation Code) "Non-stock corporation" is one where no part of its income is distributable as dividends to its members, trustees, or officers. (Section 87, Corporation Code) Under Article 3, of RA 6938, otherwise known as the Cooperative Code of the Philippines, a "cooperative" is defined as a "duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to a capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles." "The primary objective of every cooperative is to provide goods and services to its members and thus enable them to attain increased income and savings, investments, productivity ,and purchasing power and promote among them equitable distribution of net surplus ".(Article 7).Article 4 of the same law further states that " net surplus arising out of the operations of a cooperative belongs to its members and shall be equitably distributed " in accordance with the law on cooperatives. Therefore, the concept and nature of a "cooperative" is that of a "stock corporation" since its primary objective is to share among its members the profits that may be derived from its operation. Thus, while existing "stock corporations" may be converted into "cooperatives" as both types of business organizations have the same objective which is to divide the profits among the stockholders/members, conversion may not be legally feasible with respect to "non-stock", non-profit corporation as it would change its very nature from non-profit to monetary gain. As aptly defined in Section 87 of the Corporation Code, "a non-stock corporation is one where no part of its income is distributable as dividends to its members, trustees or officers". Accordingly, the members of a non-stock corporation are not entitled to any profit that may be obtained out of the income from operation or activities or from other assets of the corporation. Until the corporation is dissolved and unless it is so provided in the articles of incorporation or by-laws, the members are not entitled to any beneficial or vested interest over the assets of a non-stock corporation. In other words, non-stock/non-profit corporations hold their funds in trust for the carrying out of the objectives and purposes expressed in the charter or articles of incorporation. Thus, the Commission on several occasions had previously ruled that a non-stock corporation cannot be converted into a stock corporation by mere amendment of the articles of incorporation. For purposes of transformation, it is fundamental that the non-stock corporation be dissolved first under the methods specified in Title XIV of the Corporation Code. Thereafter, the members may organize a stock corporation directed to bring profits or pecuniary gains to themselves. ( SEC Ltr. to Mr. Conrado B. Roxas, dated February 24, 1989 ) We believe that outright conversion of existing "non-stock non-profit" corporation into a "cooperative" without dissolving it first would be tantamount to distribution of its assets or income to its members inasmuch as after its conversion into a cooperative, the assets of the non-stock corporation may now be treated as contribution of the members to the cooperative. Moreover, the scheme might defraud the public who may have contributed donations, gifts or grants to nonstock-nonprofit corporations in order to carry out the purposes for which they are organized since after its conversion the donated assets will now be in the name of the cooperative for the benefit of the members. It has to be emphasized that under Article 7 of the Cooperative Code of the Philippines, it is clearly stated that a cooperative cannot conduct its affairs for "eleemosynary or charitable purposes." Accordingly, a nonstock-nonprofit corporation cannot be converted into a cooperative by mere petition or letter-request of intent. It has to be dissolved first so that its assets shall be distributed in accordance with the procedure laid down under Sections 94 and 95 of the Corporation Code. Thereafter, the members who are interested may form a cooperative directed to bring profits or pecuniary gains to themselves. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman