Mr. Edward S. delos Reyes

August 1, 1989 Mr. Edward S. delos Reyes Pacific Seamen Services, Inc. 69 Aurora Boulevard Quezon City Metro Manila Sir : This refers to your letter, dated May 16, 1989, inquiring on the legality of the proposal of one director of Pacific Seamen Services, Inc.,a corporation engaged in general shipping business/crewing of foreign vessels, to buy provincial parcel of land purposely for re-distribution to the stockholders. The pertinent provision of the Corporation Code provides: "SECTION 36. Corporate powers and Capacity . Every corporation incorporated under this Code has the power and capacity. xxx xxx xxx 7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property ,including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require subject to the limitations prescribed by law and the Constitution; ..." (emphasis supplied). It is clear from the aforequoted provision of law that a corporation can only purchase or acquire real property as may be reasonably necessary to enable it to carry out the purposes for which it was organized. Since the power of a corporation to acquire and own real property embraces only such property as is appropriate, convenient or suitable to the corporate purposes as defined in its charter, it follows that a corporation, unless expressly authorized to do so, cannot lawfully purchase, obtain, title to or own real property, where such property is entirely foreign to or only remotely connected with, the purposes and objects for which the company was organized. (6A Fletcher, Cyc. on Corps. 2789). Taking into consideration the nature of the corporation's business, which is shipping, the acquisition of the land is neither necessary or incidental in the furtherance thereof. Accordingly, it is not within the power of the corporation to buy the same. Likewise, Section 43 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). Under the aforequoted provision, it is evident that dividends must be declared and paid out of the "unrestricted retained earnings" of the corporation. The Minutes of the Thirty First Meeting of the Committee in Revision of Laws and Codes and Constitutional Amendments of the VIP Lounge, Room "A" Batasan Complex Quezon City, Metro Manila on March 10, 1980, disclosed a definition of the term " retained earnings " as the " accumulated profits realized out of normal and continuous operations of the business after deduction therefrom distributions to stockholders and transfer to capital stocks or other accounts ". From the foregoing, a corporation cannot declare dividends in the absence of surplus profits earned through the conduct of the business. Moreover, while a going concern and not in the process of liquidation, the corporation cannot distribute any part of its legal capital and property among its stockholders other than surplus profits (retained earnings) .The reason is obvious. The said capital is necessary for the pursuit of its business and is intended to answer for the claims of its creditors. ( SEC letter dated May 20, 1971, addressed to Atty. Serafin E. Camilon ). In the light of the foregoing, the above-mentioned proposal is not legally feasible. Please be advised accordingly. cdll Very truly yours, (SGD.) RODOLFO L. SAMARISTA Associate Commissioner