Phinma Realty Corporation

May 12, 1983 Phinma Realty Corporation Phinma Building 166 Salcedo Street Makati, Metro Manila Gentlemen: This refers to your letter dated March 28, 1983, requesting the opinion of this Commission on the queries posed therein. It appears therein that you have an authorized capital stock of P3,000,000.00 divided into 20,000 Common shares and 10,000 Preferred shares, both of the par value of P100.00 each. It is further stated therein that 6,870 preferred shares have been redeemed from the retained earnings of the corporation. You alleged that your balance sheet as of October 31, 1982 showed a total retained earnings of P888,787.00 of which P687,000.00 was used to redeem the preferred shares, thus, leaving you without any outstanding preferred shares. You now pose the following queries: 1. Can you reclassify all your preferred shares to common shares? 2. Assuming that there is no violation of law in the reclassification, can you declare the converted stock (preferred shares converted to common),with the retained earning which was used in the redemption of the preferred share, as basis for the stock dividend? 3. Assuming that there is a violation of law in the conversion of preferred to common, can you declare the preferred stocks held in treasury as property dividends, and upon distribution thereof, can they be converted to common stock? While under Article VII, paragraph 2, letter (e) of your amended articles of incorporation, "preferred stock shall not be convertible into any other shares or securities",it appears, however, as manifested in your letter, that the corporation has redeemed all its preferred shares, leaving it without any outstanding preferred shares, thus, you may reclassify all your preferred shares to common shares via amendment to the amended articles of incorporation. As a matter of fact, your first query has been rendered academic by the filing of your amended articles of incorporation with this Commission on February 21, 1983. Anent your second query, the pertinent provision of the Corporation Code of the Philippines provides thus: "SECTION 43. Power to declare dividends . The board of directors of stock corporations 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) It is explicit that the law allows declaration of dividends, whether it be cash or stock or property, only when the corporation has sufficient and unrestricted retained earnings. In the case at hand, it appears that the company has already utilized the amount of P687,000.00 to redeem all its preferred shares, thereby, reducing the available retained earnings to only P199,787.00. The amount used by the company in the redemption of the preferred shares had been removed from the retained earnings account, thus, the same amount can no longer be made basis for the declaration of stock dividend. Your second query is therefore answered in the negative. Your third query is rendered academic by the above answers. Please be guided accordingly. Very truly yours, (SGD.) JESUS J. VALDES Associate Commissioner