Carlos Uy Corporation

October 18, 1983 Carlos Uy Corporation c/o Mr. William Carlos Uy Rm. 301 Padilla de los Reyes Bldg. Juan Luna St.,Manila Gentlemen: This refers to the proposed increase of capital stock of CARLOS UY CORPORATION from P3,000,000.00 to P15,000,000.00 out of which P3,000,000.00 has been subscribed and fully paid by way of 100% stock dividend declared to stockholders of record out of the corporation's retained earnings account amounting to P1,916,894.90 and premium on capital stock amounting to P1,560,807 . 70 . In connection with the declaration of stock dividend out of the above-mentioned paid-in surplus, please be informed that the same cannot be given due course in view of the following provisions of the Corporation Code: "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 stocks held by them." ...(Emphasis supplied) From the foregoing, it is evident that dividends must be declared and paid out of the unrestricted retained earnings of the corporation. The term "retained earnings" as defined under the generally accepted accounting principles is understood to mean "the accumulated profits realized out of normal and continuous operations of the business after deducting therefrom distribution to stockholders and transfers to capital stock or other accounts." (Minutes of the 31st meeting of the Committee on Revision of Laws and Codes and Constitutional Amendments at the VIP Lounge at Room "A",Batasan Complex, Quezon City, Metro Manila on March 10, 1980). It has been held that the entire proceeds of sales of a corporation of its own stock, even when sold for more than par value, are part of its capital stock, and therefore cannot be considered as profits earned through the conduct of business out of which dividends may be paid. (Merchants Insurers Reporting Co. and Youtz (1918) 39 Cal. App. 226, 178, p. 540) To permit this capital surplus to be distributed as cash dividend is a fraud upon the creditors who extend credit on the faith of its capital stock. Furthermore, every stockholder is entitled as a matter of right to have the capital unimpaired for the purpose of carrying out the purpose for which the corporation has been created. It has also been stated that the capital stock of a corporation is a trust fund for the security of creditors and cannot be withdrawn or diverted to their prejudice (14 C.J. Sec. 1210). cdll In view thereof, the corporation is advised to limit the declaration of stock dividend to its present retained earnings, and consequently recall the declaration made out of the paid-in surplus. Likewise, the certificate of increase of capital stock relative thereto filed with this Commission may be revised to reflect therein two (2) sets of subscription: (1) subscription by declaration of stock dividend out of the corporation's retained earnings; and (2) by way of cash but payment to be effected at a later date. On the other hand, it may be pointed out that shares of stocks could have been issued in consideration of said paid-in surplus at the time of the Corporation's merger with Headway Trading Corporation. The said capitalization of paid-in surplus could however still be effected by a revision of the merger agreement. Please be guided accordingly. Very truly yours, (SGD.) MANUEL G. ABELLO Chairman