Re: Declaration of Dividends and Compensation

January 24, 2005 SEC OPINION NO. 47-04 Re: Declaration of Dividends and Compensation Defense Specialist Corporation 11 Ermin Garcia St., Cubao, Quezon City Attention: Mr. Daniel N. Jayme S i r : This refers to your letter dated 25 October 2004 inquiring whether the Board of Directors of your corporation can set aside from its retained earnings the amount of P172,500.00 to pay the entire unpaid subscription of one of your subscribers, Mr. Alfa. Unpaid subscriptions are not due and payable until a call for payment is made by the corporation through a board resolution. 1 Your by-laws is silent on the call for payment except for the possible accrued interest from unpaid subscription, to wit: "Section 1. Subscriptions . Subscribers to the capital stock of the corporation shall pay to the corporation the subscription value or price of the stock in accordance with the terms and conditions prescribed by the Board of Directors. Unpaid subscription shall not earn interest unless. determined by the Board of Directors ." (Emphasis supplied) Unpaid subscriptions, including delinquent stocks, may be settled by cash dividends which the corporation may wish to declare in accordance with Sec. 43 below. ICcaST "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: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid :Provided, further, That no stock dividend shall be issued without the approval of stockholders representing not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose. Shares of stock declared delinquent are covered by Section 71 which provides: SECTION 71. Effect of delinquency . No delinquent stock shall be voted for or be entitled to vote or to representation at a stockholder's meeting, nor shall the holder thereof be entitled to any of the rights of a stockholder except the right to dividends in accordance with the provisions of this Code, until and unless he pays the amount due on his subscription with accrued interest, and the costs and expenses of advertisement, if any." (Emphasis supplied)." Further, Section 71 clearly states, that once an unpaid subscription becomes delinquent, the subscriber loses the right to be voted for and to vote at any stockholders' meeting as well as all the rights pertaining to a stockholder, except the right to dividends in accordance with Sec. 43 of the Corporation Code. 2 Take note that the provision provides for only one exception re: right to dividend. 3 However, the cash dividend due shall first be applied to the unpaid balance, while stock dividend shall be withheld until the unpaid balance is fully paid. 4 Hence, in effect, the stockholder's dividend right is being restricted. 5 Thus, the intention of the law is really to deprive a delinquent stockholder of all rights pertaining to a stockholder until full payment of the unpaid subscription. 6 In other words, should the board of directors of your corporation decide to declare dividends out of the unrestricted retained earnings which shall be payable in cash, such cash dividends may be applied as payment of the unpaid subscription of all delinquent shares. Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel Footnotes 1. Apodaca vs. NLRC ,172 SCRA 442. 2. SEC Opinion dated 13 March 1998 addressed to Atty. Jose A. Feria, Jr. 3. Ibid. 4. Ibid. 5. Ibid. 6. Ibid.