Atty. Liezl Z. Parajas

October 21, 2003 SEC OPINION NO. 51-03 Atty. Liezl Z. Parajas Bernaldo Mirador Law Offices Unit 1807 Cityland Condominium 10-Tower 1, 6815 Ayala Avenue corner H.V. Dela Costa St., Makati City M a d a m : This refers to your letter-query dated July 22, 2003 inquiring whether or not a corporation may convert its additional paid-in capital (APIC) into capital stock and issue shares of stock to represent the value of the same. acEHCD It is worth mentioning that the issue up for discussion is technically not one of conversion but simply an issue of whether or not a corporation may issue stock dividends to be paid from its paid-in surplus. The answer is in the affirmative. As a rule in corporate practice, additional paid-in surplus has two general uses to wipe off deficits during quasi-reorganization and as payment for issuance of stock dividends. Basic in Corporate Law is the rule that Paid-In Surplus cannot be issued as cash or property dividends because it would, in effect, result in a return of capital which is prohibited under Section 43 of the Corporation Code: "Sec. 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, property, or in stock to all stockholders on the basis of outstanding stock held by them; ..." However, in the case of issuance of stock dividends, the same may be sourced from the corporation's paid-in surplus because that would only involve a reclassification of one capital account to another. In an earlier Opinion of the SEC, the declaration if the stock dividends (not cash dividends) from paid-in surplus was allowed; taking into consideration that when a corporation converts the premium or contributed surplus into capital by issuing to its stockholders shares of stock representing their respective participation, it actually parts with nothing but merely transfers the surplus to capital account and issues shares of stock to represent the same. It would be different when property dividend is declared out of additional paid-in capital. Under this situation, the capital of the corporation represented by the additional paid-in capital is reduced to the extent of the property dividend declared. This is not allowable since this will involve return of capital to the stockholders. (SEC Opinion dated August 16, 1993, addressed to Ms. Efipania Mendoza) TEcADS As reiterated by the SEC in a subsequent Opinion, dated March 27, 1995, addressed to Atty. Marietta P. Turingan, "The capital surplus or additional paid-in capital can only be declared as stock dividends, but not as cash or property dividends." For your information and guidance. Very truly yours, (SGD.) VERNETTE G. UMALI-PACO General Counsel