Subject : Issuance of common shares as dividendsto preferred shares allowed

April 27, 2004 SEC OPINION NO. 28-04 Subject : Issuance of common shares as dividends to preferred shares allowed Atty. Christine P. Base Pacis & Reyes Law Offices 8th Floor, Chatham House, 116 Valero St. (corner V.A. Rufino St.) Salcedo Village, Makati City Dear Atty. Base, This refers to your letter dated April 21, 2004 requesting confirmation of your opinion that preferred shares may be given common shares as dividends. As stated, the increase in the capital stock of your client, Banco De Oro Universal Bank ("Banco De Oro") was approved on June 15, 2001. Of the increase, the subscribed capital stock was fully paid by way of stock dividend declaration, among others. Common shares of stock were issued as stock dividend to preferred shareholders of record as of 31 December 1997, 31 December 1998 and 31 December 1999. We quote pertinent 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 stock held by them: ..." "Section 6. Classification of Shares . ... Preferred shares of stock issued by any corporation may be given preference in the distribution of the assets of the corporation in case of liquidation and in the distribution of dividends, or such other preferences as may be stated in the articles of incorporation which are not violative of the provisions of this Code: . . ." Under Section 43, all stockholders, without qualification as to the kind of shares held by them, are entitled to dividends declared by the corporation, whether it be in cash, property or stock. Moreover, Section 6 merely states that preferred shares are given preferential right in the distribution of dividends among others. There is nothing in the law which prohibits preferred shares from acquiring shares of whatever class by way of stock dividend. For so long as all the requirements for the declaration of stock dividend are complied with by your client, the issuance of common shares in favor of stockholders holding preferred shares is in order. 2004cdtai The Commission in its previous opinions required the following conditions, among others, in the declaration of stock dividends: 1. "there are sufficient class of shares to cover the stock dividend declaration 2. the requirements under Section 43 of the Corporation Code relative to declaration of dividends are complied with 3. the stock dividends should be declared in such a manner that the rights of other classes of shares pursuant to law and the articles of incorporation are not ignored or disregarded"; 1 and 4. the stockholders affected consent to such declaration. 2 Hence, your query is answered in the affirmative. AaITCH Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. SEC Opinion dated September 4, 1992 addressed to Cagayan Electric Power & Light Co., Inc. 2. SEC Opinion dated September 15, 1972 addressed to Lyceum of the Philippines.