Pacific Seamen Services, Inc.

May 9, 1990 Pacific Seamen Services, Inc. 690 Aurora Boulevard Quezon City Attention : Mr . Edward S . De Los Reyes S i r : This refers to your letter dated March 14, 1990, requesting opinion on the query posed therein. LibLex You stated that at one time your corporation sold its real property at gain since the same is not being used for business. You wish to be clarified whether the income derived therefrom can be availed of for dividend distribution. The pertinent provision of the Corporation Code provides: "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: ..." (Emphasis supplied) The aforecited provision requires that dividends may be declared out of the " unrestricted retained earnings ". Section 3 of the Code, in defining stock corporations, uses the words "surplus profits" as being authorized to be distributed to stockholders. For purposes of dividend declaration, the term "unrestricted retained earnings" is therefore synonymous to "surplus profits". In accordance with generally accepted accounting principles, retained earnings include not only earnings realized from the ordinary course of business of the corporation but also those arising from transactions not associated with but incidental to or necessary in keeping the business for which the corporation was organized. Examples of these are gains on sale of the corporation's land, building or investment, as well as earnings from rent royalties, fees and interests for use by others of the corporation's assets and resources. This is the concept of retained earnings adopted by the Commission. It has to be emphasized, however, that there cannot be surplus or net profits for the purpose of declaring a dividend, unless the total value of the assets of the corporation at the time it is proposed to declare the dividend exceeds the amount of its capital stock, after deducting all expenses which have been incurred, and all losses which have been sustained. It may be laid down as a general principle therefore that the surplus or net profits of a corporation is the difference between the total present value of its assets, after deducting losses and liabilities, and the amount of its capital stock. (11 Fletcher Chap. 58, Sec. 5335). Thus while the proceeds of gains on the sale of real property may be proper source of dividend distribution, the corporation cannot distribute the same if after such division or distribution, the value of the remaining assets is less than the amount of legal or stated capital and liabilities. Please be advised accordingly. Very truly yours, (SGD.) ROSARIO N. LOPEZ Chairman