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Nielson & Co. v. LEPANTO CONSOLIDATED (1968)
1) In its MR before SC, LEPANTO that this Court erred in ordering Lepanto to
issue and deliver to Nielson shares of stock together with fruits thereof.

2) In Our decision, We declared that pursuant to the modified agreement
regarding the compensation of Nielson which provides, among others, that
Nielson would receive 10% of any dividends declared and paid, when and as
paid, Nielson should be paid 10% of the stock dividends declared by Lepanto
during the period of extension of the contract.

3) It is not denied that on November 29, 1949, Lepanto declared stock
dividends worth P1M and on August 22, 1950, it declared stock dividends worth
P2M. In other words, during the period of extension Lepanto had declared stock
dividends worth P3M. We held in Our decision that Nielson is entitled to receive
10% of the stock dividends declared, or shares of stocks, worth P300T at the par
value of PO.10 per share. We ordered Lepanto to issue and deliver to Nielson
those shares of stocks as well as all the fruits or dividends that accrued to said

4) Lepanto contends in its MR that:

the payment to Nielson of stock dividends as compensation for its services
under the management contract is a violation of the Corporation Law, and
that it was not, and it could not be, the intention of Lepanto and Nielson-as
contracting parties-that the services of Nielson should be paid in shares of
stock taken out of stock dividends declared by Lepanto.

HELD: Under Section 16 of the Corporation Law stock dividends can not
be issued to a person who is not a stockholder in payment of services rendered.
And so, in the case at bar Nielson can not be paid in shares of stock which form
part of the stock dividends of Lepanto for services it rendered under the
management contract. We sustain the contention of Lepanto that the
understanding between Lepanto and Nielson was simply to make the cash value
of the stock dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of 10% of the
cash value of the stock dividends declared. And this conclusion of Ours finds
support in the record.

RATIO: The term "dividend" both in the technical sense and its ordinary
acceptation, is that part or portion of the profits of the enterprise which the
corporation, by its governing agents, sets apart for ratable division among the
holders of the capital stock. It means the fund actually set aside, and declared by
the directors of the corporation as a dividends, and duly ordered by the director,
or by the stockholders at a corporate meeting, to be divided or distributed among
the stockholders according to their respective interests.

BERKS BROADCASTING CORP. v. Craumer (Pennsylvania, 1947)
1) C, now under the control of new SHs, sued to recover for its treasury the
$13,000 w/c it alleged Defendants had unlawfully declared and paid out as

2) End of 1943- the balance sheet of the C showed assets in excess of the
liabilities and the issued capital stock in the amount of $2,545. However, the
existence of the alleged surplus depended on the inclusion in the assets of the
“write-ups” of $26,000 (represented an unrealized appreciation in the value of
the Plaintiff C’s fixed assets), w/c still remained on the balance sheets, for if
that amount were eliminated, there would be a deficiency of $23,454.

3) Defendants (who are the incorporators and Directors) declared cash
dividends of $13,000 based on the record sheet w/c included in the assets the
“write-ups” of $26,000 (represented an unrealized appreciation in the value of
the Plaintiff C’s fixed assets).

4) Defendants sold their stocks.

5) C, now under the control of new SHs, sued to recover for its treasury the
$13,000 w/c it alleged Defendants had unlawfully declared and paid out as

HELD: Since the “write-ups” of $26,000 represented an unrealized
appreciation in the value of the Plaintiff C’s fixed assets, their inclusion in
determining the existence of a surplus from w/c dividends might be declared was
unlawful and since, when eliminated, there would be, not a surplus, but a
revealed deficiency in capital, it would follow that the C is now entitled to recover
from these Defendants the amount improperly distributed by them as dividends.

Lich v. US RUBBER CO. (US District Court, 1941)
1) Sophia Lich (a holder of non-cumulative preferred stocks of US RUBBER
CO.) seeks to enjoin the payment of a dividend on the common stock declared in
1941 contending that:

the established preference as to dividends to wit, priority of payment,
extends not only to the current year of 1941, but to the prior years of 1935, 1936
and 1937, to the extent of the annual net earnings of the said year, and that
dividends may not be paid on the common stock at this time until the dividends
are paid to the PS for the years in question, either in full or in connection to the
annual net earnings of the said years and that the arrearages must be paid in full
to the holders of the non-cumulative PS before there can be any payment of
dividends on the CS even out of the current net profits.

2) The certificate of PS states:

“The holders of First PS shall be entitled to receive semi-annually or
quarterly all net earnings of the C determined and declared as dividends in each
fiscal year..”

3) In each of the fiscal years of 1935, 1936, and 1937, the annual net
earnings of the defendant C was positive.

4) In each of the said years, however, there was also a deficit respectively
and a corresponding impairment of capital.

5) The deficit, representing the accrued losses of prior years, existed in
1934, and was carried over into the succeeding years, varying in each year only
as to amount.

6) In each of said years, the annual net earnings were applied to deficit,
thereby effecting substantial reductions. There were no dividends declared on
either the PS or CS during the said fiscal years.

7) In 1941, the defendant C declared a dividend on both the PS and CS. This
declaration of dividends, w/c is herein questioned, specifically contemplates the
payment from the net profits of the current year and from no other fund.

8) During the said years, the C, despite the deficit, also maintained adequate
reserves. These reserves were maintained both prior to and subsequent to the
said period.

HELD: In the years in question (1935, 1936, and 1937) no net profits to w/c
the inchoate right to dividends, could have attached. There was in each of said
years a substantial deficit w/c greatly exceeded the annual net earnings of the
corresponding year, and, to the reduction of w/c the annual net earnings were
applied. It is manifest therefore that the annual net earnings of each of the said
years resulted, not in profits, but in a reduction of the deficit. There was in each
of the said years no source from w/c dividends could have been paid lawfully; the
payment of dividends under the circumstances would have been unlawful.

C maintained in the years in question, adequate reserves for insurance,
pensions, and contingencies. It does not appear, however, that the sum retained
in this account was disproportionate or that it represented profits withheld from
the non-cumulative PS (as was the fact in the Iron Pipe cases). It appears in the
immediate case that the reserves are, and have been, maintained in accordance
with sound business policy. Therefore the right to maintain the reserves is not
open to challenge.

Keough v. ST PAUL MILK CO. (Mnessota, 1939)
1) 1936- the C did not declare dividends in spite of the fact that there
was an accumulated surplus (about $394T).

2) Keough, a minority SH, sued to have a declaration of cash dividends
contending that:

Those in charge of the corporate affairs are wrongfully and needlessly
withholding profits available for cash dividend and conspiring to retain
them for heir benefit and to the prejudice of the majority.

HELD: It seems clear, in light of the facts, the C did not have a reasonable
need to for the large surplus accumulated and held as bonds or other easily
liquidated assets in December 1936.

a) The merchandise inventory was small with an almost daily cash
b) There were no substantial obligations to be met.
c) The evidence does not disclose any immediate expansion program.
d) Accounts for obsolescence and depreciation were adequately set

Hence, the surplus was easily available for dividends if the directors so

The large surplus also existed at the time when the Ryans (BOD) were
receiving salaries in excess of their worth and draining from the C cash
otherwise available for dividends. Viewed in light of these facts, the
spectacle takes on a distinct color of fraud and bad faith.

Dodge v. FORD MOTOR CO. (Mich, 1919)
1) Dodge (SH) sued the FORD MOTOR Co. to declare dividends.

2) When plaintiffs made their complaint, and demand for further dividends
the FORD MOTOR CO. had concluded its most prosperous year of business.
The demand for cars at the price of the preceding year continued.

3) C declared no special dividend during the business year except the
October 1915 dividend.

4) It had been the practice, under similar circumstances, to declare large
5) C justified the non-declaration of dividends on:
a) a general plan for the expansion of the productive capacity of the
concern (the erection of a smelter was considered and engineering
and other data secured)

b) the policy of the C for a considerable time to annually reduce the
selling price of cars, while improving their quality.

c) the changes will permit the increased output

HELD: WE are not persuaded that we should interfere with the
discretion of the BOD.

Burk v. OTAWA GAS & ELECTRIC CO. (Kan, 1912)
1) Preferred SHs of OTAWA GAS & ELECTRIC CO sue the C for it to declare

2) The Certificate of Preferred Stock provides:

“The PS shall …preferred, non-cumulative dividend, payable semi-
annually…. out of the net profits of the preceding ..”

3) C defense:

The expenditure in question was for the extensions of the C’s plants

HELD: Case remanded to the LC to ascertain facts necessary to protect
the rights of the P SH.

The Directors of the C owed a positive duty to pay a dividend to the
P SHs whenever in any year there were net profits available. The funds
that might be used for that purpose could not rightfully be expended for
extensions merely for the benefit of the business, nor could they be
withheld to meet the expenses of the next year.

Since the only possible source of profit to the P SH from his investment is
the distribution of earnings in the year in w/c they accrue, he has a right to
insist that an accounting shall be taken annually, and that the surplus of
one year, available for a dividend, shall not be carried over to meet a
possible deficiency of the next.

1) C being solvent and possessing ample funds, at a regular meeting of
the BOD unanimously adopted a resolution:

“Moved and seconded that the company declare a dividend of 6%.
Divided into 4 payments of 1.5% each, payable Feb 15, April 1, July 1,
and October 1, 1903.”

2) C was $29,000 surplus.

3) BOD failed to pass a resolution setting aside a fund for the said

4) The 1.5% installment falling due on Feb1 was paid.

5) However, the 1.5% installment falling due April 1 was not paid and at a
meeting of the BOD (held on April 11) it was shown that an error had
been discovered in the previous showing of the financial condition of
the company and that its assets were actually $6,000 less than had
been understood, w/c reduced its surplus from $29,000 to $23,000.

6) Hence, the BOD issued a resolution (April 11):

“…. recalling of dividends payable April 1, July 1, and October 1 be
adopted, that payment of said dividends be indefinitely deferred and
the said dividends rescinded and recalled.”

7) C sought to revoke and rescind the former declaration of dividends.
The C was perfectly solvent and had ample funds on hand at that time
to pay the dividend and retain a comfortable surplus of $20,000.

8) Plaintiff (McLaran is actually the administrator of the Plaintiff who died
during the appeal) requested the payment of his installment of the
dividend falling due April 1 but was refused on the ground that its
declaration and allowance had been superseded and set aside by the
resolution of April 11.

9) Plaintiff sued C.

10) Defense:

a) there was no declaration of a dividend because the BOD failed at
that time, or at any prior time to the institution of the suit, to set
apart funds for the payment of the same.
b) April 11 BOD resolution set aside its former action and thereby
rescinded and recalled the dividend.

HELD: The right of SHs to be paid dividends vests as soon as the same
has been lawfully declared by the BOD. From that time, it becomes a debt owing
by the C to each stockholder and no revocation of the dividends can be made.


1) If the declaration of the dividend is fairly and properly made, out of profits
existing at the time it is declared, the relation of debtor and creditor is hereby
established between the C and the SHs and a debt is hereby created against the
C and in favor of the SH for the amount of the dividend due on the stock held by

2) By the mere declaration, the dividend becomes immediately fixed and
absolute in the SH and from thenceforth the right of each individual SH is
changed by the act of declaration from that of partner and part owner of the C
property to a status absolutely adverse to every other SH and to the C itself, in so
far as his pro rata proportion of the dividend is concerned.

3) It follows that a cash dividend, properly and fairly declared, cannot be
revoked by the subsequent action of the C, for it, by the declaration of the
dividend, the C becomes the debtor of the SH, it goes w/o saying that the debtor
cannot revoke, recall or rescind the debt or otherwise absolve itself from its
payment by any action on its part against or w/o the consent of the creditor, and
therefore the resolution of April 11, attempting to do so, was of no force.

Marcus v. RH MACY CO. INC. (NY, 1947)
1) Marcus is a registered owner of 50 Common Stocks of RH MACY CO.
2) RH MACY CO. INC. gave formal notice to its SHs that among other
matters to be acted upon its annual meeting would be a proposal
recommended by the BOD that its certificate of incorporation be so
amended as to add to the rights of PS voting rights, equal share or
share to those w/c the holders of the C’s Common Stocks are entitled.

3) Prior to the annual meeting, Marcus sent a written notice to the C that
as a Common stockholder that:

a) she objected to the proposed amendment of the certificate of

b) demanded payment for the Common Stocks owned by her

4) The proposal was approved by the SHs w/ Marcus voting against.

5) Marcus instituted a suit to determine the value of her stock as a basis
for the enforcement of payment therefore.

6) Defense:

Marcus application was not made in good faith since the effect of the
amendment on her was trivial because she only owns 50 Common
Stocks (out of 1,656,000 shares of common stock).

HELD: An alteration or limitation on the voting power of the Common
Shares held by Marcus- when considered w/ the facts that she gave to the C
formal written notice of her objection to the proposed amendment to the C’s
charter w/ a demand for payment of her stock, and thereafter caused her shares
to be voted against that amendment at the annual meeting- was sufficient to
qualify her to invoke the statutory procedure upon w/c the present
proceeding is based.

By thus limiting the voting power of Marcus’ common shares to a
proportionate extent measured at a given time by the number of Preferred
Shares then issued and outstanding, the C action to w/c Marcus objected
was of such a character as to afford her a legal basis to invoke a procedure
prescribed by law as a means to accomplish the appraisal of her stock and
payment therefore.
HELD 2: As to the argument of C, it is enough to say that the legislature
has clearly prescribed the conditions under w/c a nonconsenting SH may
have hi stock evaluated and enforce payment therefore. We find in those
conditions no legislative declaration of a minimum percentage or value of
stock w/c must be owned by a nonconsenting SH to qualify him to invoke
the prescribed statutory procedure.

PHILIPPINE TRUST CO. v. Rivera (1923)
1) PHILIPPINE TRUST CO. (as assignee in insolvency of the C-
COOPERATIVE NAVAL FILIPINA) sued Rivera for the purpose of recovering a
balance of P22,500 alleged to be due upon his subscription to the capital stock of
said insolvent C.

2) COOPERATIVE NAVAL FILIPINA has a capital f P100,000 divided into
1,000 shares of a par value of P100/share.

3) Rivera subscribed for 450 shares (P45,000) and paid only half of it
4) C became insolvent and went into the hands of PHILIPPINE TRUST CO.

5) PHILIPPINE TRUST CO sued Rivera to recover ½ of his stock
subscription (P22,500).

6) Rivera’s Defense:

Not long after the COOPERATIVE NAVAL FILIPINA had been
incorporated, a meeting of its SHs occurred, at w/c a resolution was
adopted that the capital should be reduced by 50% and the subscribers
released from the obligation to pay any unpaid balance of their
subscription in excess of 50% of the same.

7) LC made a finding that the formalities of the Corporation Law relative to
the reduction of capital stock in Cs were not observed, and it does not appear
that any certificate was at any time filed in the Bureau of Commerce, showing
such reduction.

HELD: In the case before us, the resolution releasing the shareholders
from their obligation to pay 50% of their respective subscriptions was an
attempted withdrawal of so much capital from the fund upon w/c the C’s creditors
are entitled ultimately to rely and, having been effected w/o compliance w/ the
statutory requirements, was wholly ineffectual

RATIO: It is the established doctrine that subscriptions to the capital of a C
constitute a fund to w/c creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debt
(Velasco v Poizat).

A C has no power to release an original subscriber to its capital stock form
the obligation of paying his shares, w/o a valuable consideration for such release;
and as against creditors a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by the statute or the charter or the
AOI. Moreover, strict compliance w/ the statutory regulation is necessary.

[Campos Note: Did the Court imply that if the statutory requirements had been
complied with (i.e. SH’s meeting, 2/3 vote, and filling of certificate), the reduction
would have been valid even if the creditors were prejudiced? Whether under the
well-settled principles of corporation law or under the express provision of
Section 38, this implication cannot be legally supported.]