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Chapter XIII – Dividends/Purchase by Corporations of dividends; as soon as cash dividends are publicly declared, SHs

Shares have the right to their pro rata shares


o No par shares: must be fully paid to be considered as issued
Sec 43  Thus holders of no par shares not fully paid are not
entitled to dividends
— Sec 43: power of the corporation to declare dividends—-only the board — Property: SEC rules
may declare dividends and only out of unrestricted retained earnings, — Stock: distribution to the SHs of the company’s own stock
payable in cash, property, or stock to SHs of OCS o Stock dividends are in the nature of shares of stock, the
— Most important rights of a SH: consideration for which is the amount of unrestricted retained
o Right to vote earnings converted into equity in the corporation’s books
o Right to proportional share of the corporate assets upon liquidation o It is actually two (2) things:
o Right to share in the corporate profits  A dividend, and…
 … the enforced use of dividend money to purchase
— Concept of Dividend additional shares of stock at par
o A dividend is that portion of the profits of a corporation set aside, o stock dividends require:
declared and ordered by the directors to be paid ratably to the SHs
 board resolution
on demand or at fixed time.
o It is payment to the SHs as a return upon their investment  ratification of SHs representing 2/3 OCS
o All SHs of the same class share in it is proportion to the respective o Villanueva: stock dividends, unlike cash or property dividends,
amounts of stock which they hold may be declared out of premium surplus or paid-in capital
o Corporate profits are transferred to capital stock and shares
— Defn of Dividend: portion of corporate profits which is set aside for representing the increase in capitalization are distributed
distribution to the SHs in proportion to their subscription to the capital
o Stock dividends cannot be declared without first increasing the
stock of the corporation
— Power of the corporation to declare a dividend only out of unrestricted capital stock, unless there are still unissued shares
retained earnings on the basis of outstanding capital stock held by SHs o Although number of shares increase, their investment and
proportional interest remain the same
o Cannot be issued ifo persons not SHs
Form of Dividends — Liquidating dividends: form part of the capital, and cannot be
declared from the unrestricted retained earnings
Cash, property, or stock dividend
Nielson & Co v Lepanto Consolidated Mining Co. F: MR filed by
— Cash: most common form Lepanto Corp which involves an agreement subsequently extended, as to the
o May be declared by the board under a formal resolution and does compensation of Nielson (a promoter?) which provides that he is entitled to receive
not require the approval or ratification of the SHs 10% of any dividends declared and paid by Lepanto.
o Amount to be received by SH as his share of the dividends would Nielson is not a SH of the corporation. During the extension period the corporation
depend on the amount of stock held by him, regardless of whether declared dividends worth P3M. SC ruled that Nielson was entitled to the 10% of the
or not he has paid his full subscription dividends paid and declared and Lepanto was ordered to issue and deliver to
 But if shares become delinquent, any cash dividends due will Nielson shares of stocks as well as fruits or dividends accruing to the same. Lepanto
first be applied to the amount of the delinquency (if stock contends that payment to Nielson of stock dividends as compensation violates the
dividends, he cannot get them until he has fully paid his Corporation Law.
subscription)
 Cash dividends due on delinquent stock shall first be applied I: W/n the corporation can be compelled to issue and deliver to Nielson shares of
to the unpaid balance on the subscription plus costs and stock and the fruits thereof
expenses
o Revocable before the announcement to the SHs of the declaration of H: Under the Code stock dividends cannot be issued to a person who is not a SH in

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payment of services rendered. Nielson cannot be paid in shares of stock which form
part of the stock dividends of Lepanto. — (property or cash)
The understanding between Lepanto and Nielson was simply to make the cash value of  Any and all items included in retained earnings—income
the stock dividends as the basis for determining the amount of compensation that of all types, prior period adjustments, net income, special
should be paid to Nielson. distribution to SHs—can be declared as dividends, unless
R: Consideration for shares of stock: (1) cash; (2) property; (3) undistributed profits. restricted
A corporation may legally issue shares of stock in consideration of services rendered by  All other items not falling within the term “retained
a person not a SH, or in payment of indebtedness, which is equivalent to issuing a stock earnings” are necessarily included in “capital” and are
in exchange for cash. But a share of stock thus issued should be part of the original unavailable for dividend declaration—donated assets or
capital stock of the corporation, or part of the stocks issued when the increase in funds, paid-in surplus arising from issuance of no-par
capitalization was properly authorized. In other words, it is the shares that are stock, premium paid on par value shares, revaluation
originally issued by the corporation and forming the part of capital that can be
surplus created to write-ups of assets, etc
exchanged for cash or services rendered, or property—if the corporation has original
o Difference between the total present value of its assets after
shares of stock unsold or unsubscribed, either coming from the original capitalization
deducting losses and liabilities and the amount of its capital stock
or from the increased capitalization—these may be issued to a person already a SH.
But a share of stock coming from stock dividends cannot be issued to one who is not a o Balance of net worth or net assets after deducting the value of
SH of a corporation. the corporation’s outstanding stock
o Refer to the undistributed earnings or profits realized by the
A stock dividend is any dividend payable in shares of stock of the corporation declaring corporation from its business
or authorizing it—a distribution of shares among SHs, as dividends. It is actually 2 o If not reserved or not set aside by the board for some corporate
things: (1) a dividend; (2) the enforced use of dividend money to purchase additional purpose or for some other legal or contractual purpose, such
shares at par. When a corporation issues stock dividends, it shows that the retained earnings are unrestricted
corporation’s accumulated profits have been capitalized instead of distributed to the o There must be an actual bona fide surplus to justify declaration of
SHS or retained as surplus. Far from being a realization of profits, it tends rather to dividends
postpone said realization, in that the fund represented by the new stock has been — Def’n of retained earnings: the net accumulated earnings of the
transferred from the surplus to the assets and are thus no longer available for actual corporation out of transactions with individuals or firms outside of the
distribution. It really adds nothing to the interest of each SH; the proportional interest corporation; sometimes referred to as earned surplus. Includes:
remains the same. It is the civil fruits of the original investment, and to the owners of o earnings from sales of goods and services of the corporation in
the shares go the fruits.
the ordinary course of business
o earnings from sale of corporate property other than stock trade
Although Lepanto says that the value of the dividends declared should be the basis for
determining the amount of compensation due to Nielson, it does not mean that the o does not include premium on par value stock
compensation should be taken from the amount actually declared as cash dividends to  where par value shares are issued and SHs pay a
be distributed to the SHs. Otherwise there would be a dilution of the dividend that premium therefor over par, a paid-in surplus results.
corresponds to each share of stock held by the SHs.  RP law does not allow paid-in surplus to be declared as
dividends either as cash or property, because 43 requires
Decision modified….Nielson to get P300,000 in cash, as equivalent to 10% of dividends be paid out of unrestricted retained earnings
thew value of the 3M stock dividend.  Paid-in surplus is considered paid-in capital
Source of Dividends o does not include treasury stock—considered as contractions or
expansions of paid-up capital
— Source: unrestricted retained earnings o does not include donations
— Sec 6: consideration for no-par value stock must be treated as capital
— Def’n of unrestricted retained earnings: the undistributed earnings and is not available for distribution as dividends
of the corporation which have not been allocated for any managerial, o This is because SHs intended that the consideration for no par
contractual, or legal purposes and which are free for distribution to the value shares shall constitute the basic business fund of the
SHs as dividends corporation to be permanently devoted to the corporate business

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o Retained earnings = Assets – (Liabilities + Legal capital) theoretical estimate of an appreciation in the value of the company’s assets. Such
— If subscribed shares have not been fully paid, the unpaid portion is a appraisals and conjectural valuations cannot be considered for the purpose of
receivable and is an asset of the corporation dividends because are subject to market fluctuations, and are merely anticipatory of
o Any excess would be surplus or earnings for dividend declarations future profits, and may never be actually realized as an asset of the company.
o Net assets(+unpaid portion of subscribed shares) – total par value of
subscribed shares = earnings =dividends It is thus clear that since the “write-ups” of $26,000 represented an unrealized
appreciation in the value of the fixed assets, their inclusion in determining the
— If watered stock exists, subscriber would be liable for the difference existence of a surplus from which dividends might be declared was unlawful, and
between what he paid and the par value since when eliminated there would be not a surplus, but a deficiency in capital.
o This liability of the SH is a receivable of the corporation
o Net assets (+receivable from SH) - total par value of subscribed ---Sir: so long as the assets (even if they appreciate in value) are not yet disposed,
shares = earnings = dividends dividends cannot be declared based on the appreciated value (because it is still an
o expectancy).
— Board has discretion to appropriate retained earnings for designated
purposes CAMPOS: Since our Corpo Code allows dividends only out of unrestricted
— Agreements with creditors may also provide for restrictions on dividends retained earnings, an increase in the value of existing assets cannot be a source of
distributions even a stock dividend.

Berks Broadcasting v Craumer. F: Craumer et al together with one Landis (4 Lich v US Rubber. F: Lich is a holder of 300 non-cumulative PS of United States
people), are the incorporators and directors of the Berks Broadcasting Company. The Rubber Company. She seeks to enjoin payment of a dividend on common stock
books indicate that the stock is fully paid (auth. Capital stock = $100K) , through cash declared.
($5K each) and the fixing of a value of $80K upon an asset denominated “Franchise and During 3 fiscal years (1935-37), the corporation experienced a deficit of close to
Promotion Expense.” $24M, $17M and $10M for each of the 3 years, and a corresponding impairment of
A year later, this was written off and in its place were substituted 1) $50K as an amount capital. In each of these years, the annual net earnings were applied to the deficit,
“Due on Unpaid Stock Subscriptions” -- (each SH paid $4.2K reducing the item to and no dividends were declared.
$23,300. Then it was cancelled altogether and was replaced w/ the entry “Goodwill The company underwent a reconstruction of its capital structure. It issued, in lieu of
and Promo Expense) and 2) “write-ups” or increases in the valuation of fixed assets no-par value CS, CS of par value $10. In the next 3 years the deficit was reduced and
over and above depreciation costs, totaling $30K. cancelled and net profts were made available for dividends for non-cumulative PS,
but not common shares.
Balance sheet showed assets in excess (“surplus”) of liabilities iao $2,545.94. However, The company then declared a dividend, from the net profits for the current year and
the existence of that alleged surplus depended on the inclusion of the assets of the from no other fund, on both PS and CS. In the deficit years, the company
write-ups of $26K; otherwise, there would be a deficiency to the extent of almost $24K. maintained adequate reserves, which remain intact even when dividends were
Directors sold their stock, and declared a series of dividends totaling $13K based on the declared. Lich contends that the preference of PS holders as to dividends extends
earnings of the company of 12K+ plus the “surplus.” not only to the current year, but to the prior deficit years, and dividends cannot be
The corporation, now under the control of new SHs, sued the directors to recover the paid out to CS holders until dividends are paid to PS on the years in question and
$13K which was allegedly unlawfully declared and paid out as dividends. the arrearages must be paid in full.

H: GR: Capital of a corporation must not be impaired in any manner H: the doctrine of the Cast Iron Pipe Cases, based on sound equitable principles, is a
Exception: impairments involuntarily made through losses resulting from business departure from the GR that holders of non-cumulative preferred stock lose with the
operations. It is illegal to declare and pay dividends from other than a surplus close of the fiscal year all rights in the undistributed net profits of that year. It
consisting of an excess in the value of the assets over the aggregate of the liabilities and preserves to the holders of the non-cumulative PS their right in the undivided net
the capital stock. The object of this prohibition is to afford a margin of protection for profits withheld from them and retained in the business, but otherwise available for
creditors in view of the limited liability of the SHs, and to protect the interest of the SHs the payment of dividends. The right to earned dividends is not extinguished upon
themselves by preserving the capital so that the purposes of the corporation will be the mere passing of the fiscal year. The doctrine, however, cannot be extended by
carried out. implication beyond its clear intendment.
The surplus must be a bona fide and not an artificial or fictitious one; it must be It may be generally stated that as to the payment of dividends the holders of PS are
founded upon actual earnings or profits and not be dependent for its existence upon a in no better position than the holders of CS except as to priority of payment.

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Dividends on PS are not payable absolutely and unconditionally, but only out of the  If for expansion of business, SH cannot complain
sources designated by law.  If board capitalizes profits instead of distributing them
The payment of dividends on non-cumulative PS is further circumscribed by the (i.e. issues stock dividends), requires approval of at least
certificate of incorporation and stock certificate; dividends on such stock are payable 2/3 OCS
only out of net profits and for the years in which the same were earned. o But the board cannot abuse their discretion and accumulate
Thus the right of non-cumulative PS is conditional upon: (1) accrual of net profits (2) profits unreasonably
retention of the same in the business. If there are no net profits, the deficiency is not o Remedy of SH: file an action in court to compel payment of
chargeable against the net profits of succeeding years. The test of applicability is W/N
dividends
there were in the years in which dividends were not declared, net profits available for
the lawful declaration and payment of dividends, but withheld from non-cumulative PS  Burden of proof lies with the SH
and retained in the business. Net profits connotes clear pecuniary gain remaining after  Mandamus is not a proper remedy since the SH has no
deducting from gross earnings the expenses incurred. It is not synonymous with annual individual interest in the profits of a corporation until and
net earnings, which may be productive of net profits, or reductive of the deficit. unless a dividend is declared
Retention of excess profits
In this case there were in 1935-37 no net profits to which the inchoate right to dividends — 43: stock corporations are prohibited from retaining surplus profits in
could have attached. There was a substantial deficit in each of the three years which excess of 100% of their paid-in capital stock
greatly exceeded the annual net earnings of the corresponding year. It is manifest — Exceptions:
therefore that the annual net earnings of each year resulted, not in a profit, but in a o When justified by corporation expansion projects approved by the
reduction of the deficit. board
There was no source from which dividends could be paid out lawfully; the payment of o When corporation is prohibited under any loan agreement with
dividends under such circumstance would have been unlawful. The corporation is any financial institution or creditor and without the latter’s
charged with the duty of maintaining the integrity of the capital, on the faith of which consent
credit was extended, as a trust fund for the security of creditors. o When such retention is necessary under special circumstances
When a man buys stock instead of bonds, he takes a greater risk in the business. No one
suggests that he has a right to the dividends if there are no net earnings. But the Keough v St Paul Milk. F: Action to compel corporation to declare a cash
investment presupposes that the business is to go on, and therefore even if there are net dividend, on the ground that those in charge of the corporate affairs (the Ryans) are
earnings, the holder of stock is entitled to have a dividend declared only out of such part wrongfully and needlessly withholding profits available for cash dividends and
of them as can be applied to the dividends consistently with a wise administration of a conspiring to retain them for their benefit and to the prejudice of the majority. The
going concern. If the annual net earnings of a corporation are justifiable applied to business, assets, liabilities of the partnership were exchanged for 597 shares of the
legitimate corporate purposes, such as payment of debts, reduction of deficits, and St Paul Milk Co. The 597 shares represent the only stock issued until the stock
restoration of impaired capital, the right of non-cumulative preferred SHs to the dividend. By amendment, the authorized capital was increased to $300K. A 6-to-1
payments of dividends is lost. The payment of dividends from annual net earnings, stock dividend was declared and the amount necessary to cover the issued shares
when the liabilities of a corporation exceed the assets, would be in derogation of the was transferred from the surplus account to the capital account. When the
rights of creditors. The payment of dividends under such circumstances, while debts corporation paid out its first dividend, a total of $169,470 was distributed to SHs or
accrue, would be contrary to sound business practice. about a 335% return. There were no mortgages or liens or any other substantial
indebtedness. Sales are predominantly cash basis. Fixed assets were in good
Dividend Declaration discretionary with Board condition. Wages were paid. The corporation had investments in bonds, CS in a
wholly-owned subsidiary, but the merchandise inventory was small. TC held that a
— GR: The decision to declare dividends are matters addressed to the liberal and reasonable capitalization and surplus was the sum equal to the original
business judgment of the board outstanding stock plus 2/3 of the accumulated surplus, and that all sums in excess
o The fact that profits have accrued does not necessarily impose upon were unreasonable and constituted a violation of the fiduciary relation. Keough et al
the directors the duty to declare them as dividends claims that the capitalization in 1936 by the Ryans of a large percentage of the
o Courts have no power to compel them to make the distribution of accumulated surplus without reason or necessity other than to keep it within the
dividends in the absence of BF or fraud or clear abuse of discretion corporation under the dominating control of the Ryans. The Ryans contend that the
o Unless tainted with BF, fraud, or gross negligence, courts will not capitalization was for avoiding possible federal taxes upon undistributed surplus. TC
interfere, and SHs will be bound found that the capitalization was to strengthen control of the Ryans over the
corporation and surplus to prevent a distribution of earnings.

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surplus of $112M.
Issue: WON corp can be compelled to declare dividends. -- Liabilities continue the corporation as a semi-eleemosynary institution, and not
as a business concern. Henry Ford himself testified that the company he built had
H: In this case, YES> The determination of w/n to declare a dividend is essentially a made too much money, had too large profits, and that a sharing of profits with the
matter of internal management. It is primarily for the corporate directors in their sound public, by reducing the prices. It expected a profit upwards of $60M. Ford’s
discretion to decide, and judicial review may be secured when abuses contravening the defense was that its policy was to reduce the selling price of Ford cars while
SHs rights manifest themselves. A court will not compel a dividend unless the directors improving their quality, with the goal of producing 1M cars per year.
act fraudulently, unjustly, or unreasonably so as to impair the rights of the complaining There was a general plan for expansion of the productive capacity of the business.
SHs to their just proportion of the corporate profit. Generally the mere fact that a large Management decided not to reduce in the meantime the price, but to maintain the
corporate surplus exists is not enough to warrant equitable intervention. Ultimately the same and accumulate a large enough surplus to pay for the proposed expansion of
test is an examination of the GF and reasonableness of the policy of retaining that plant and equipment. There was a large daily, weekly, monthly, receipt of cash. The
which is otherwise available for dividends. output was practically continuous and within a few days, turned into cash.
-- Dodge et al contend that the plan was to the selling price of cars should be
The corporation did not have a reasonable need for the large surplus accumulated and attained. Ford argues that although a manufacturing corporation cannot engage in
held as bonds or other easily liquidated assets. Inventory was small, cash turnover was humanitarian works as its principal business, the fact that it is organized for profit
liquid, no substantial obligations, no expansion program, accounts for depreciation does not prevent the existence of implied powers to carry on with humanitarian
were set up—in short, the surplus was easily available for dividends, if the directors so motives such as charity as are incidental to the main business of the corporation.
elected to do so. The large surplus existed at the time the Ryans were receiving salaries
in excess of their worth and draining from the corporation money otherwise available H: the plan does not call for and is not intended to produce immediately a more
for dividends. The capitalization of the surplus did not serve a corporate need; it was profitable business but a less profitable one, with the apparent immediate effect to
referable only to the desires and purposes of those in control to keep it under their diminish the value of shares and return to SHs. There is no doubt that certain
control and subject to their machinations. sentiments, philantrophic and altruistic, creditable to Ford, had largely influenced
the policy to be pursued by the company. There is an obvious difference between an
Furthermore, fraudulent expense items and other anomalies point to the intent of the incidental humanitarian expenditure of corporate funds for the employees, and a
directors. Generally directors are proper parties to determine whether a divided shall be general purpose and plan to benefit all mankind at the expense of others. There
in cash of stock, and a court will not interfere with the exercise of their discretion; but should be no confusion of the duties Mr Ford conceives as owed to the general
where it appears that the object was to primarily benefit those in whom the discretion public and the duties which in law he and his directors owe to the protesting
rests, equitable powers can be called into operation. Directors and officers of the minority SHs. A business corporation is organized for the benefit and profit of the
corporation owe SHs the active duty of honesty and GF in the transaction of the SHs. The powers of directors are to be exercise to that end. Discretion of directors is
business and in their dealings. While it is true that the court cannot ordinarily compel a to be exercised in the means to attain that end, and does not include the end itself,
corporation to declare a dividend at the suit of a minority SH, yet where dividends are through the reduction of profits or nondistribution thereof. It is not within the
withheld for an unlawful purpose—to deprive a SH of his rights—he may have the aid of lawful powers of the board to shape and conduct the affairs of a corporation for the
equity for adequate protection. incidental benefit of SHs and for the primary purpose of benefiting others.

A stock dividend really takes nothing from the property of the corporation, and adds The Court however did not interfere in the proposed expansion of the business of
nothing to the interest of the SHs. Its property is not diminished, and their interests are Ford Motor. It is recognized that plans must often be made for a long future, for
not increased. Where profits clearly warrant payment would be proper, the SHs cannot expected competition, for continuing as well as an immediately profitable venture.
be cut off by a stock dividend when it purpose is wrongfully to keep the profits of the The experience of FMC is evidence of capable management of its affairs. But it
business with the control of those dominating the affairs so as to be available to them. noted that the company took from the public money required for its plan but that
Such action is oppressive and evinces BF sufficient to justify equitable intervention. the considerable salaries of Mr Ford were not diminished.

Dodge v Ford Motor Co. F: Action by John Dodge, a minority SH, against the --It is true that a considerable cash balance must be at all times carried by such a
Ford Motor Company to compel the declarations of dividends. concern. But, cash is coming in and output immediately converted into cash… So, it
--TC granted motion and ordered the payment of dividends. would appear that, accepting and approving the plan of the directors, it was their
-- At this time, Ford Motor Co had just concluded its most prosperous year of duty to distribute a very large sum of money to stockholders.
operations. Demand for Ford cars continued. It could make and market 500,000 cars.
Sales of parts and repairs increase. It had assets of more than $132M, COH $54M, Preference as to Dividends (SEE CHAP XI—FINANCING)

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— Right vests as soon as the dividends have been lawfully declared by
— AOI may provide for stocks with preferences in the distribution of the board; from that time on, it becomes a debt owing by the
dividends corporation to each SH and no revocation can be made
o Voting — Whenever such dividend is declared, or the declaration of dividends
o Non-voting is made, the corporation becomes a debtor and the right of the SH to
 Cumulative distribution, unless a record date is specified, becomes fixed by the
 Non-cumulative declaration.
o The amount due to a SH belongs to him and it cannot without his
Burk v Ottawa Gas & Electric Co. F: Suit by preferred SHs of Ottawa Gas, consent be reverted to the surplus account of the corporation
demanding an accounting of all property and assets and declare and payment of — Whoever owns or is the SH-of-record of the stocks at the time of
dividends. Burk claims that earnings of the business were such that the directors owed declaration also own the dividends
them an imperative duty to declare a dividend. o GR: Subsequent transfer would not carry with it the right to
--Ottawa Gas maintain that the corporate has been unable to declare a dividend because dividends
its funds were exhausted by expenditures which it was obliged to make, which was for
the extensions of the company’s plant. TC ruled the extensions necessary and for the McLaran v. Crescent Planning Mill Co. F: McLaran is the administrator of
betterment of the plant and its patrons. the estate of Humber, owner of 57 paid-up shares of stock of the Crescent Planning
Mill Co. and director of the company as well as President. The company declared a
H: Reversed and remanded to TC. Under the certificate of PS, the conditions which the dividend of 6%, divided into 4 payments of 1/1/2% each. No other action taken to
holder may demand a dividend depend on the precise terms of the contract upon which set apart a fund out of which to pay the dividend although the company was solvent
it is issued. and had adequate surplus. Nonetheless the officers proceeded to pay Humber and
The fair interpretation of the contract between the corporation and the PS holder is other SHs the 1st installment of the dividend. The next installment was not paid, the
that if in any year net profits are earned, a dividend is to be declared. To hold that the board having discovered an error in the financial statements of the company such
board has a discretion to declare or not a dividend when it has funds it can use is to that its assets were overstated by $6000. The board then voted to rescind and recall
hold that one of the parties to a contract has the option to pay something to the other or the order paying out the dividends and defer the payment indefinitely. The company
not, at its own election since, if the dividend is not declare, the benefits of accumulated was still perfectly solvent and had amply funds to pay the dividend. Humber
profits are practically lost to these SHs. Such a construction should be avoided. demanded payment of his dividend but was refused on account of the recent action
by the board. The corporation contends that there was no declaration because the
The directors owe a positive duty to pay a dividend to the PS whenever in any year there board failed to set aside funds for the purpose, and that by virtue of the resolution
were net profits available. Inasmuch as the only possible source of profit to the its former action was rescinded and the payouts were recalled and put on hold.
preferred SH from his investment is the distribution of earnings in the year in which
they accrue, he has the right to insist that an accounting be taken annually, and that the I: W/n the mere declaration of a dividend by a solvent corporation creates a debt in
surplus of one year, available for a dividend, shall not be carried over to meet a possible favor of the SH
deficiency of the next.
I: W/n the corporation, having declared a dividend and paid one installment, turn
The holder of PS, is however not generally a creditor until a dividend is declared, but if around and rescind installments yet unpaid
a dividend ought to have been declared in a certain year to such SHs, they should be H: Case concerns the declaration of a cash dividend by a solvent corporation
regarded as creditors to such extent from such time or times. The company’s contract possessed of ample undivided profits and surplus. The corporation contends that a
with the PS is not to pay him at all events the amount of 6% of the net profits, but to resolution declaring a dividend is not sufficient to create a dividend or create a debt
declare a dividend on that basis. The obligation of the corporation to pay dividends on from the corporation in the absence of further action in setting apart a fund for the
the PS out of the yearly net profits is subordinate to whatever obligation it owes to the purpose. The court held that if the declaration of the dividend is fairly and properly
public. Therefore if it was necessary for the corporation to use the surplus in any year to made, out of profits existing at the time it was declared, the relation of debtor and
make extension to which patrons were entitled, a dividend for that year would have creditor is thereby established between the corporation and the SHs for the payment
been excused. of the dividend to the SH. The declaration of dividends operates as a severance
thereof from the stock in the general mass of the corporate property, and raises an
When Right to Dividends Vests; Rights of Transferee implied promise on the part of the corporation to pay the SH the amount of the
dividend. Action on the part of the corporation in setting aside the fund for the
specific purpose constitutes such moneys as a trust fund in the hands of the
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corporation for the use of the SHs and in the event of bankruptcy of the corporation, the
SHs are not required to go in pro rata with the general creditors for such unpaid Sec 41: expressly empowers the corporation to acquire its own shares for
dividends, but may proceed as against a trustee on account of such trust fund. Mere a legitimate corporate purpose, provided it has unrestricted retained
declaration of the dividend, without more, by competent authority under proper earnings to cover the shares to be purchased.
circumstances, creates a debt against the corporation ifo the SHs the same way as any o So long as the acquisition of shares does not exceed the
other general creditor of the concern. The setting apart of a fund thereafter, passes one unrestricted retained earnings, the corporate creditors are
step further toward securing the payment of the debt to the SH. deemed protected
o Equivalent to subjecting dividend declaration to the extent of
Thus the mere declaration of the dividend itself, without the setting aside of the fund, unrestricted retained earnings
creates a debt, and the act of declaring a dividend from the stock and corpus of the o Acquired shares by the corporation become treasury shares
corporate property is ipso facto, in and of itself, the setting apart, setting aside and
segregating such dividends and it creates an immediate right of the SH to demand and Corporate purposes:
recover the same when due.
— To eliminate fractional shares
— To collect or compromise an indebtedness to the corporation arising
Liability for Illegal Dividends
out of an unpaid subscription, in a delinquency sale, and to purchase
delinquent shares sold
1. Directors
— To pay dissenting or withdrawing SHs entitled to payment (appraisal
— GR: not liable personally
right)
— Exception: BF, negligence, willful violation of the law
— If liable: liable to corporation and creditors upon insolvency
1. Limitations on power: proper purposes and existence of
surplus
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— A corporation has the power to purchase its own stocks,
2. SHs
provided…
— GR: in the absence of an express provision of law, an innocent
o … that payment is made out of surplus profits, i.e.
SH is not liable to return the dividends received by him out of
unrestricted retained earnings, and…
capital, unless the corporation was insolvent at the time of
o … it is for a legitimate purpose…
payment
o … subject to appraisal right of SH under 81
— SHs who received wrongfully or illegally declared dividends can
be held liable to refund them to the corporation or its creditors — shares reacquired by the corporation become treasury
o Why? In receiving the dividends, they do not act in a shares, which may be declared as property dividends to be
issued out of retained earnings previously used to support
corporate capacity and is not a ratificatory act of the SHs
their acquisition, provided that the amount of the retained
earnings has not be impaired by losses
Steinberg v Velasco: In determining the legality of declared dividends, the
existence of unrestricted retained earnings alone cannot be the test. The — reasons for purchase of own shares:
existence of “surplus profits” alone does not suffice; the corporation should o deadlocks in close corporations (no need for unrestricted
have an actual bona fide surplus from which the dividends could be paid, retained earnings)
and the payment in full at the time would not affect the financial condition of o SHs may want to keep the corporation close and prevent
the corporation unwelcome strangers
o Corporation may want to exercise contractual right to
Remedy in case of illegal distribution of dividends: directors in BF may be redeem PS or bonds, regardless of URE (Sec 8)
held solidarily liable for the reimbursement of the amount declared as
dividend Sec 41

2. Remedies in case of improper purchase


Purchase by corporation of its own shares

7
— As to creditors: those prejudiced by the repurchase by an
insolvent corporation can recover against the selling SHs by
recovering the consideration paid
o Directors can be personally liable for approving the
repurchase in BF or with negligence (Sec 31)
— As to SHs: it reduces what is due them as dividends
o Repurchase can be discriminatory to the other SHs
o Shift in voting control
o Remedy: right of action against the directors under Sec 31

Dividends: cash—director’s approval sufficient;


stock/property—2/3 approval OCS
GR: only those who contributed are entitled to
dividends;
contributions become part of corporate assets; no
declaration of dividends, still corporate property
GR: dividend declaration discretionary with the board
(23)
Why? Unrestricted retained earnings are owned by the
corporation
Cash v stock/property dividend; willing to risk a stock
dividend (more often than not, stock prices drop when
stock dividends are declared)
Unrestricted retained earnings represent fruits of the
investment money; corporation doesn’t need the
money.
As anPrior to declaration,
investor, verify
I am entitled if any
to return!
retained
Services earnings
rendered can beform part
used asof the
consideration for
assets of the corporation
subscription
GR:paid
If 100% disposition of corporate
up capital, assets= But it does
declare dividends!
authority
not mean of the
that the board
capital stock is fully-paid up (could
Reasonable
only be 25%) exercise of judgment=
board may opt not
43: limitations—needs ofto declare contractual
company,
Remedy
obligation of SH: mandamus
(ex IPO)
Burden
but need not of proof:w/
comply SH43;
to other
proveways to do it…
… butcorporate
corporation does
hasnot
to need
contendit with an opposing
SH Declaration of dividends: once
cash: declared,
just boardSH does not
approval obtain shares
required
stock:ofdeferring
ordinarydividends;
creditor plowed back as corporate
Cash:cannot
funds; resultsyet
in recovery
be enjoyed of investment
and possibility that it
SHnever
can need benotrealized
wait for dissolution…
… but does
property: samenotasguarantee
stock divs;that
riskitthat
will be
it could be 0%
paid
book value
non-cash: SH conformity must be secured
why? Deferring payment of cash prolongs
exposure to risk of SHs dividends
8
stock dividends: plowed back into
corporation