186 Nielson & Company, Inc. v.

Lepanto Consolidated AUTHOR: Mendoza

Mining Company NOTES: 1.This is an MR filed by Nielson to the SC when
[G.R. No. DATE]L-21601, December 28, 1968 the latter denied his petition in the December 17 case.
TOPIC: Form of Dividends and Stock Dividends 2. Lepanto 9 grounds in his MR but only
PONENTE: J.Zaldivar the '7th' grounds is relevant.

FACTS:
 1.The suit involves an operating agreement executed before World War II between the Nielson and
the Lepanto Consolidated 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. The contract in
question was made by the parties on January 30, 1937 for a period of 5 years. In the latter part of
1941, the parties agreed to renew the contract for another period of five (5) years, but in the
meantime, the Pacific War broke out in December, 1941.
 2.In January, 1942 operation of the mining properties was disrupted on account of the war. In
February of 1942, the mill, power plant, supplies on hand, equipment, concentrates on hand and
mines, were destroyed upon orders of the United States Army, to prevent their utilization by the
invading Japanese Army. The Japanese forces thereafter occupied the mining properties, operated the
mines during the continuance of the war, and who were ousted from the mining properties only in
August of 1945.

After the mining properties were liberated from the Japanese forces, Lepanto took possession and
embarked in rebuilding and reconstructing the mines and mill; setting up new organization; clearing
the mill site; repairing the mines; erecting staff quarters and bodegas and repairing existing
structures; installing new machinery and equipment; repairing roads and maintaining the same;
salvaging equipment and storing the same within the bodegas; doing police work necessary to take
care of the materials and equipment recovered; repairing and renewing the water system; and
remembering. On June 26, 1948 the mines resumed operation under the exclusive management of
Lepanto.

 3.Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose
between NIELSON and LEPANTO over the status of the operating contract in question which as
renewed expired in 1947. Under the terms thereof, the management contract shall remain in
suspense in case fortuitous event or force majeure, such as war or civil commotion, adversely affects
the work of mining and milling.

Nielson held the view that, on account of the war, the contract was suspended during the war; hence
the life of the contract should be considered extended for such time of the period of suspension. On
the other hand, Lepanto contended that the contract should expire in 1947 as originally agreed upon
because the period of suspension accorded by virtue of the war did not operate to extend further the
life of the contract.No understanding appeared from the record to have been bad by the parties to
resolve the disagreement. In the meantime, Lepanto rebuilt and reconstructed the mines and was able
to bring the property into operation only in June of 1948,..
 When the SC ruled against Nielson in the December 17 case, he filed this MR citing 9 grounds: 1. The court failed to
apply the proper law to the contract; 2.the court erred in holding that the contract was suspended; 3. that it erred when
ruled that the management contract was only but not extended; 4. That Petiioner Nielson's action has prescribed; 5. it
erred in holding that the period of suspension of contract lasted from Feb 1942- June 26 1948 because of World War
II; 6. it erred on amount of awarded damages; 7. Assuming Nielson is entitled to any relief,the court erred in
ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof; 8. it erred in
awarding Nielson and undetermined amount of shares of stock; and 9.erred in rendering judgment for attorney's fees.
 In 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 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.
ISSUE(S):
WON Lepanto is under the obligation to issue and deliver shares of stock to Nielson as the latters compensation.
HELD:
SC sustained Lepanto's contention that Nielson enttiled to P300,000 in cash (not stocks) as payment for its services,
which is equivalent to 10% of the money value of the stock dividends worth P3,000,000 which were declared on
November 28,1949 and August 20,1950, with interest at the rate of 6% from Feb 6,1958.

RATIO:
 That 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. That 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.
 That the understanding between Lepanto and Nielson was simply to make the cash of the value of the stock
dividends declared as the basis for determining the amount of compensation that should be paid to Nielson which
amounted to 10% percent of the cash value of the stock dividends declared.

 3.According to their contract as included in one of their sentence that,
"The Chairman stated that he believed that it would be better to tie the
computation of the 10% participation of Nielson & Company, Inc., to the
dividend, because Nielson will then be able to definitely compute its net
participation by the amount of the dividends declared" The idea is conveyed that
the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to make the value of the
dividends declared — whether the dividends were in cash or in stock — 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 dividends so declared.
 It does not mean, however, that the compensation of Nielson would be taken from the
amount actually declared as cash dividend to be distributed to the stockholder, nor from the
shares of stocks to be issued to the stockholders as stock dividends, but from the other
assets or funds of the corporation which are not burdened by the dividends thus declared.
CASE LAW/ DOCTRINE:
1.Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1)
cash; (2) property; and (3) 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. 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. 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.

2.A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or
authorizing such dividend. It is, what the term itself implies, a distribution of the shares of stock of the
corporation among the stockholders as dividends. A stock dividend of a corporation is a dividend paid
in shares of stock instead of cash, and is properly payable only out of surplus profits. So, a (stock
dividend is actually two things: 1) a dividend, and (2) the enforced use of the dividend money to purchase
additional shares of stock at par. When a corporation issues stock dividends, it shows that the
corporation's accumulated profits have been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or kind, should opportunity offer.

3.Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only
stockholders are entitled to dividends. They are the only ones who have a right to a proportional share in
that part of the surplus which is declared as dividends.

DISSENTING/CONCURRING OPINION(S):