Mr. Mario T. Meneses, Jr.

October 23, 1992 Mr. Mario T. Meneses, Jr. 14th Floor, Sagittarius Bldg., H. dela Costa, Salcedo Village Makati, Metro Manila 3117 S i r : This refers to your letter requesting opinion on the following queries: 1. Whether or not a corporation may declare dividends which may be taken at the option of the stockholders either in cash or stock dividends considering that the stockholders who opt to take their dividends in cash will suffer a proportionate erosion in their percentage equity ownership vis-a-vis those stockholders who elect to take their dividends in stock. LexLib 2. If the dividends declared per share is greater than the par value, may the corporation issue the stock dividends on the basis of only one stock dividend for the totality of the amount of dividends attributable to each share and treating the amount in excess of par value as paid-in capital surplus which shall be transferred from retained earnings or may the corporation issue one share of stock dividend for each twenty peso dividend treating the ten peso excess over par as a premium to be recorded as paid-in capital surplus? While there is no express prohibition under the Corporation Code for the directors to declare cash and stock dividends which may be taken at the option of the stockholders, it is well settled that dividends among stockholders of the same class must always be pro rata, and without discrimination. The dividends must be general on all the stock, so that each stockholder will 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 an equal participation in the profits of the company. So the directors cannot discriminate by voting a dividend to certain stockholders only, to the exclusion of others of the same class or by giving certain stockholders more than others of the same class. Accordingly, since the above-mentioned scheme appears to be discriminatory to other stockholders inasmuch as there would be a change in the stockholders percentage equity ownership, the same may not be allowed. Relative to the second query, the Commission previously ruled that a corporation may be allowed to declare stock dividends which carry a premium. A stock dividend is a conversion of surplus or undivided profits into capital which means the distribution of earnings to the stockholders in the form of shares of stock. This would have the same effect of distributing the earnings of a corporation as cash dividends to the shareholders and subsequently, said cash dividend declarations are used by the stockholders in purchasing the shares of stock of the corporation at premium. "An agreement by subscribers to pay more than par for their stock is not ultra vires as an attempt to increase the par value of the stock, but is valid and enforceable according to its terms." (SEC Opinion dated March 6, 1984 citing Fletcher Cyclopedia Corporations, Vol. XI, p. 328) Considering that selling of shares of stock at a premium is not prohibited, it follows that stock dividends which carry a premium can also be validly made because such stock dividends indirectly take the nature of sales of shares of stock at a premium. When the amount of earned surplus capitalized per share of dividend stock exceeds its par or stated value, the excess should be credited to capital surplus. (Ibid, citing Financial Handbook, J.I. Bogen, p. 794). However, as stated earlier, dividend declaration should always be declared pro rata among the stockholders and without discrimination, and considering further that the surplus profits are to be declared as stock dividend, such declaration is subject to the approval of the stockholders. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman