Facts:

An operating agreement was executed between Nielson & Co. Inc. and the Lepanto Consolidated Mining
Co. whereby the former operated and managed the mining properties owned by the latter for a
management fee of P2,500.00 a month and a 10% participation in the net profits resulting from the
operation of the mining properties, for a period of 5 years. Lepanto modified a pertinent provision of the
contract. This time, Nielson will receive (1) 10% of the dividends declared and paid, when and as paid,
during the period of the contract and at the end of each year, (2) 10% of any depletion reserve that may
be set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account.
Both parties agreed to renew the contract for a period of 5 years. But the operation of the mining
properties was disrupted on account of the war. After the mining properties were liberated from the
Japanese forces, the mine operation was under Lepanto’s exclusive management. Lepanto declared stock
dividends worth one million in 1949 and two million in 1950. This was during the period covered by an
extension in the management contract. However, a disagreement arose between the parties.

Nielson claims his share in the stock dividends. On its motion for reconsideration, Lepanto contends 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 the
parties that the services of Nielson should be paid in shares of stock taken out of stock dividends declared
by Lepanto.

ISSUE: Whether or not Nielson is entitled to his share in the stock dividends.

RULING:

Negative. Stock dividends cannot be issued to a person who is not a stockholder in payment of services
rendered. Section 16 of the Corporation Law, in part, provides as follows:

“No corporation organized under this Act shall create or issue bills, notes or other evidence of debt, for
circulation as money, and no corporation shall issue stock or bonds except in exchange for actual cash
paid to the corporation”

In the case at bar, Nielson cannot be paid in shares of stock which form part of the stock dividends of
Lepanto for services it rendered under the management contract. The court 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.

In other words, Nielson must still be paid his 10% fee using as the basis for computation the cash value of
the stock dividends declared. Moreover, from the above-quoted provision of Section 16 of the
Corporation Law, the consideration for which shares of stock may be issued are cash, property; and
undistributed profits. Shares of stock are given the “special name,” “stock dividends,” only if they are
issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or property then
those shares do not fall under the category of “stock dividends”. A corporation may legally issue shares of
stock in consideration of services rendered to it by a person not a stockholder, or in payment of its
indebtedness. But a share of stock issued to pay for services rendered is equivalent to a stock issued in
exchange of property, because services is equivalent to property. Likewise a share of stock issued in
payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus
issued should be part of the original capital stock of the corporation upon its organization, or part of the
stocks issued when the increase of the capitalization of a corporation is properly authorized.

In other words, it is the shares of stock that are originally issued by the corporation and forming part of
the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has
original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the
increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to
a person already a stockholder in exchange for services rendered or for cash or property. But a share of
stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a
corporation.