Sunico, Ma. Shenna Daryl S.

2001
Dissolution and Liquidation

QUESTION:

X company is a stock corporation composed of the Reyes family engaged in the real
estate business. Because of the regional crisis, the stockholders decided to convert
their stock corporation into a charitable non-stock and non-profit association by
amending the articles of incorporation.

a) Could this be legally done? Why?

b) Would your answer be the same if at the inception, X Company is a non-stock
corporation? Why?

OWN SUGGESTED ANSWER:

a) Yes, it can be legally done. Should there be a conversion of the stock corporation
to a non-stock corporation by amendment of the Articles of Incorporation, the
stock corporation is not distributing any assets to its stockholders. Furthermore,
the stockholders are deemed to have waived their right to share in the profits of
the corporation which is not considered a loss to the corporation.

b) No, my answer will not be the same. Members are not entitled to share in the
profits of the corporation in the case of a non-stock corporation since all present
and future profits belong to the corporation itself. By converting the non-stock
corporation to a stock-corporation through amendment of its Articles of
Incorporation, the non-stock corporation is deemed to have distributed an asset
of the corporation without a prior dissolution of a corporation. In a non-stock
corporation, the members are not entitled to share in the profits of the corporation
because all present and future profits belong to the corporation. In converting the
non-stock corporation to a stock corporation by a mere amendment of the Articles
of Incorporation, the non-stock corporation is deemed to have distributed an
asset of the corporation – i.e. its profits, among its members, without a prior
dissolution of the corporation. Section 139 of the Revised Corporation Code
provides that: “Except by decrease of capital stock and as otherwise allowed by
this Code, no corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all of its debts and liabilities.”