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Rep.

Planters Bank v Agana Sr


Mar. 3, 1997
Hermosisima, J.
Recit-Ready Version:
As part of a loan agreement, Rep. Planters bank issued preferred shares, which
gave 1% dividends and terms for redemption at the option of the bank, to Robes.
Robes filed a petition for specific performance to compel the bank to redeem the
shares. CFI granted the petition.
SC reversed, holding that dividends are never a matter of right, but of consensus,
and that redemption was at the option of the bank. It also discussed the nature of
preferred and redeemable shares.
Facts:
On September, 18, 1961, Robes-Francisco Realty and Development Corporation
(Robes) secured a loan from Republic Planters Bank for P120k. As part of the
proceeds of the loan, preferred shares were issued to Robes Co., through its thenofficers Adalia F. Robes and Carlos F. Robes. Thus, instead of giving legal tender in
the amount of P120k, the bank lent that amount partially in money, and partially in
the form of the preferred shares.
Pertinently, the preferred shares gave the right to a 1% dividend quarterly, and a
right to redeem, by a system of drawing lots, within 2 years at the option of Robes.
Robes Corp., as well as Adalia F. Robes, filed a petition for specific performance to
compel Rep. Planters to redeem the preferred shares and to pay interest thereon.
CFI ruled in favour of Robes.
In doing so, the CFI ruled that the provisions of the stock certificates themselves
gave both the right to dividends and the right to redemption. To allow the bank not
to redeem would be tantamount to impairment of contracts.
Hence this petition for certiorari on pure questions of law.
Issues:
1. WON Rep. Bank can be compelled to redeem the stocks. (No)
2. WON the shares are interest bearing stocks. (No.)
3. WON the claim has prescribed. (Yesit took 18 years.)
Ratio:

The Nature of Preferred Shares


A preferred share of stock is one which entitles the holder thereof to certain
preferences over holders of common stock in order to induce persons to subscribe
for shares of a corporation. The most common forms of preferred stocks are 1) as
to assets and 2) as to dividends.
Preferred stock as to assets gives the holder preference in the distribution of
assets after liquidations, while that as to dividends entitles the holder to receive
dividends before any dividends at all are distributed to holders of common stock.
However, there is no guarantee that the share will receive any dividends.
This is because, as stated in the old Corporation Law, in effect at the time of the
contract subject of this case, dividends could only be distributed out of surplus
profits arising from its business. The Corporation Code is even more precise when
it says that dividends can only be declared out of unrestricted retained
earnings.
Thus, the declaration of dividends is dependent on the availability of surplus profit
or unrestricted retained earnings. In other words, dividends are only payable if
there are profits earned by the corporation. Even when there are profits, the
distribution of dividends is a matter left to the discretion of the board of directors.
Shareholders are thus considered risk takers who invest capital in the business
and who can look only to what is left after corporate debts and liabilities are paid.
On redeemable shares
A redeemable share is a share, usually preferred, which by their terms are
redeemable at a fixed date, or ath the option of the issuing corporation, of the
stockholder, or both. A redemption is in essence a repurchase of it for a
cancellation. The present code allows redemption even if there are no unrestricted
retained earnings.
This new provision is a qualification to the general rule that a corporation cannot
purchase its own shares except out of current retained earnings. The exception,
however, is subject to the condition that after the redemption, the corporation has
sufficient assets in its books to cover debts and liabilities inclusive or capital stock.
1. While the stock certificates did, by their terms, allow redemption, the option
to do so was clearly vested in Rep. Planters Bank, making the redemption an
optional redemption. Thus, except as otherwise provided, the redemption
rests entirely with the corporation (here, the bank) and not with the
stockholder.
Further, the Central Bank had made a finding that Rep. Planters had been
suffering from chronic reserve deficiency, as stated in a directive issued by
Gov. Licaros of the CB. That directive prohibited the redemption for

reducing the assets of the bank and prejudicing its depositors and creditors.
The redemption was thus prohibited for a just and valid reason, namely to
prevent the financial ruin of a banking institution, in the valid exercise of
police power.
2. There is no legal basis for this observation. The issuance of a stock dividend
without the approval of stockholders representing not less than 2/3 of the
outstanding capital stock at a meeting duly called for that persons is not
allowed, underscoring the fact that the issuance of dividends is not a matter
of right, but a matter of consensus. Further, interest-bearing stocks, by
which the corporation absolutely binds itself to pay interest before dividends
are paid to common shareholders, are legal only when construed as
requiring payment of interest as dividends from net earnings or surplus nly.
Petition Granted. Decision set aside.
Gabe.