POWER TO DECLARE DIVIDENDS

We’re taking up the corporate power to declare dividend under section 42.

SEC. 42. Power to Declare Dividends. – The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, property, or in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose.

Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital
stock, except: (a) when justified by definite corporate expansion projects or programs approved by the board of directors; or (b)
when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign,
from declaring dividends without their consent, and such consent has not yet been secured; or (c) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.

*this provision grants every stock corporation the power to declare dividends tout of the Unrestricted Retained Earnings (URE)
or otherwise most commonly known as Surplus profits to the stockholders on the basis of the outstanding capital stock held by
each of them.

If A holds 10% of the outstanding capital stock, and dividends are declared. He’s entitled to 10% of the dividends declared by the
corporation. And the amount which the stockholder received as a share of dividends is based therefore on the number or amount
of stocks held by him.

So that if A subscribed to 1M shares, with a par value of 1 peso per share (or a total of Php1M), and the board declared cash
dividends of 1 peso per share, (1M shares-1peso/share), that means he is entitled to 1M cash dividends. Although he may have
paid only 50% out of his subscription. However, if the shares have become delinquent, under the 2 nd paragraph of section 42, any
cash dividends due him, will first be applied to the amount of his delinquency plus costs, expenses and/or interest if any. If there
remains more, it will be paid to him. However, if it is a stock dividend, it will be withheld from him, until he pays the full amount
of his delinquency. Meaning, if he is not delinquent, he gets all the dividends due him, although he has not paid his subscription
in full. This second paragraph of section 42 says delinquent shares only when any cash dividends will not be paid to him,
because it will first be applied to the amount of his delinquency plus cost and expenses and/or interest withheld. If there’s more,
then it will be aid to him. However, if it is a stock dividend, it will be withheld from him, until he pays his delinquency.

This is because of the express provision of section 71. It provides that subscribers to shares of stocks, not fully paid, and are not
delinquent, shall have all the rights of a stockholder.
*Section 71 is a very very important provision*

SEC. 71. Rights of Unpaid Shares, Non-delinquent. – Holders of subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder.

And the rights of the stockholders to be paid dividends will rest as soon as the same has been declared by the BOD. From that
time on, it becomes a debt owing by the corporation to each of the stockholders. And no revocation of dividends can be made
unless the dividend declaration has not yet been announced or communicated to the stockholders, or unless it is a stock dividend,
which is revocable prior to its actual issuance.

WHY? Because stock dividends do not result to the increase of the proportionate interest of the stockholders.

As we were saying, if A holds 10%, he’ll be entitled to 10% of the stock dividends that year. If A has 5%, he will be entitled only
to 5% of the stock dividends that year. Meaning that he will still hold/own 10% or 5%. Other than that, it is irrevocable once
communicated or announced to the stockholder. This rule is based on reasons of policy to prevent misleading investors and the
probable effect which revocation may have on the stability of stock transactions involving shares of stocks.

Situation:
The Board declared cash dividends, A holds 1M shares, and the corporation declares cash dividends of 1 peso per share, meaning
A is entitled to 1 peso per share, or 1M cash dividends. But declaration provides that it will be payable to stockholders on record
as of November 15, 2020. So A practically owns 2M. (1m worth of shares, and another 1M cash dividends on Nov 15). But A has
a daughter/son studying law in Arellano University, and he cannot wait for the said dividends to be paid. So what he did was to
sell his shares to Z, inclusive of the dividends already declared but not yet paid. Total is 2M. He sold it only for 1.9M. If, that
dividend declaration will be revoked, what happens to stability of stock transactions, nagbayad si Z ng 1.9M kay A. There you
go, edi babalik ni A yung 900K, or 1M for that matter.

Since the right to dividends will vest upon his declaration, whoever owns the shares at the time of the declaration also owns the
dividends. A subsequent transfer of such stocks would, as a rule, not carry with it the right to the dividends which have been
declared but not yet paid. Because many times, especially in widely held corporations, a dividend declaration will expressly
provide that it is payable to stockholders on a certain specified date.

As we were saying a while back, the corporation declared cash dividends today to be paid to stockholders of record as of
November 15, 2020. In such case, whoever owns, or is the registered owner on the specified date is, in so far as the corporation is
concerned, entitled thereto.

A holds 1M shares. The board declared 1eso per share today, kailangan ni A ng pera, kasi may mga alaga sya sa Arellano Law na
nag aaral, wala syang pera. So what he did, right after the declaration of cash dividends, was to sell his shares to Z for 1M.
Tomorrow he will do that. The day after, Z went to the corporate headquarters, armed with the stock certificates endorsed by A
for the cancellation of A’s stock certificate, and the issuance of a new stock certificate in his name. the corporation did just that.
Nov. 15 came, and Z was paid the 1M cash dividends, due to the fact that he is holding the 1M shares also.

Q: As between A, the transferor, and Z the transferee, who will have the right to the dividends?

A: It will be A, UNLESS they have agreed to the contrary.

TS: 14:00

Dividends- are corporate profits set aside, declared and ordered by the Board of Directors to be paid to the stockholders.
Dividends can only be declared out of Unrestricted Retained Earnings (URE). This is the undistributed earnings of a corporation
which have not been allocated for any managerial, contractual or legal purpose and which are free for distribution to the
stockholders as dividends. It is the surplus profits of the corporation.

TYPES OF DIVIDENDS:
1. Cash dividends – payable in lawful money or currency;
2. Property dividends - those paid in the form property (e.g., bonds, notes, shares in another corporation);
3. Stock dividends – corporation’s own shares of stock out of the remaining unissued shares which would require the approval of
the stockholders representing 2/3 of the outstanding capital stock at a regular or special meeting duly called for that purpose. This
is to be valued at par value or issue price.

Note: Sabi sa Sec 42, sa delinquent lang merong lien, kapag unpaid subscription pa lang, no lien, the dividends will not be
applied to the unpaid portion, Sec 72.

Note: Cash and property dividends have the effect of reducing corporate assets to the extent of the dividends declared. In stock
dividends, it would generally not increase the proportionate interest of the stockholders of the corporation although it will have
the effect of increasing the subscribed and paid-up capital (exception is when the stock dividend declaration would result in
fractional shares like when 1 share is declared as dividend for every 9 shares held)

Rules on dividends due on delinquent stock:

1. Cash dividend – first applied to the unpaid balance on subscription costs and expenses.
2. Stock dividend – withheld until subscription is fully paid.

General Rule: Walang obligation to declare ang BOD except for those shares na mandatory ang pagreceive ng dividends.
Discretion ng BOD on business judgment, they cannot be compelled to declared dividends.

Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their PAID IN CAPITAL (not
outstanding capital stock but rather paid up or paid in capital). They can be compelled.
Exceptions to the Exceptions:
1. When justified by definite corporate expansion projects or programs approved by the board of directors; or
2. When the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or
3. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.

General rule: The board of directors’ exercise exclusive authority in declaring dividends.
Exception: In declaring stock dividends, the approval of the stockholders representing at least 2/3 of the outstanding capital stock
is required.

The judgment of the board of directors in the matter of declaring dividends is conclusive except when they act in bad faith, or for
a dishonest purpose or act fraudulently, oppressively, unreasonably or unjustly or abuse of discretion can be shown so as to
impair the rights of the complaining stockholders to their just proportion of corporate profits.

The essential test of bad faith is to determine if the policy of the directors is dictated by their personal interest rather than the
corporate welfare.

Note: Not all forms of dividends would have an effect of decrease in the corporate assets. In effect, cash and property dividends
lang ang may effect sa corporate assets, because stock dividends is just a form of capitalization of URE. (Ladia)

Dividends, regardless of the form they are declared are valued at the amount of the declared dividends.
(PLDT vs NTC)

The right of the stockholders to be paid dividends vest as soon as they have been lawfully and finally declared by the Board of
Directors.

No revocation of dividend may be had unless it has not been officially communicated to the stockholders or is in the form of
stock dividends which is revocable at any time prior to distribution.

Stock dividends cannot be issued to a person who is not a stockholder. (Neilson & Co., Inc. vs. Lepanto Consolidated Mining
Co.)

Directors are not liable for declaration of dividend contrary to law, unless attended with bad faith, gross negligence or willful and
knowing assent. (Ladia)

OVERISSUANCE OF SHARES happens when a corporation issues shares beyond its authorized capital stock, even in the form
of stock dividends.

WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be compelled to declare dividends, except:
(1) When the unrestricted retained earnings is in excess of 100% of the paid-up capital; and
(2) In the case of Mandatory If Earned Preference Shares.

The judgment of the BOD is conclusive, EXCEPT:

(1) when they act in bad faith;
(2) for a dishonest purpose;
(3) they act fraudulently, oppressively, unreasonably or unjustly; or
(4) abuse of discretion can be shown as to impair the rights of the complaining shareholders.

The TEST of bad faith is to determine if the policy of the directors is dictated by their personal interest rather than the corporate
welfare.

WHEN DIVIDENDS RIGHTS VES It has been succinctly said that the right of the stockholders to be paid dividends vest as
soon as they have been lawfully and finally declared by the BOD. It is not revocable unless: (1) it has not been officially
communicated to the stockholders; or (2) it is in the form of stock dividends which is revocable any time prior to distribution
because this does not result in the distribution of assets but merely the division of existing shares of a stockholder into smaller
units or integers.
TRANSFER OF SHARES The dividends already declared belong to the owner at the time of declaration. Usually, however, the
dividends are payable to stockholders of record on a specific future date and as far as the corporation is concerned, the registered
owner is the one entitled to dividends. As against his transferor, however, the transferee has presumably the right to such
dividends and is oftentimes taken into account in entering effecting the transfer of shares.

POWER TO ENTER INTO MANAGEMENT CONTRACT

SEC. 43. Power to Enter into Management Contract. – No corporation shall conclude a management contract with
another corporation unless such contract is approved by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of the members in the case of a nonstock corporation,
of both the managing and the managed corporation, at a meeting duly called for the purpose: Provided, That (a) where a
stockholder or stockholders representing the same interest of both the managing and the managed corporations own or
control more than one-third (1/3) of the total outstanding capital stock entitled to vote of the managing corporation; or (b)
where a majority of the members of the board of directors of the managing corporation also constitute a majority of the
members of the board of directors of the managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to
vote, or by at least two-thirds (2/3) of the members in the case of a nonstock corporation.
These shall apply to any contract whereby a corporation undertakes to manage or operate all or substantially all of the
business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be entered into for such periods as may be provided by the pertinent
laws or regulations.
No management contract shall be entered into for a period longer than five (5) years for any one (1) term.

REQUIREMENTS OF A VALID MANAGEMENT CONTRACT:

1. Resolution of the BOD;
2. Approval by the stockholders representing a majority of the outstanding capital stock or majority of the members of both the
managing and the managed corporation;
3. The approval of the stockholders or members must be made at the meeting called for that purpose; and
4. The contract shall not be for a period longer than 5 years for any one term, except those which relate to exploration,
development or utilization of natural resources which may be entered into for such periods as may be provided by pertinent laws
and regulations;
5. 2/3 of the stockholders or members would be required, where:
a. The stockholders representing the same interest of both the managing and the managed corporation own or control more than
1/3 of the total outstanding capital stock of the managing corporation;
b. A majority of the members of the BOD of the managing corporation also constitute a majority of the directors of the managed
corporation;
c. The contract would constitute the management or operation of all or substantially all of the business of another corporation,
whether such contracts are called service contracts. If it will not constitute the management of all or substantially all of the
business of another corporation, the first paragraph of Sec. 43 will apply and not that of the second, that is, only the vote of the
majority is required.

ULTRA VIRES ACTS

SEC. 44. Ultra Vires Acts of Corporations. – No corporation shall possess or exercise corporate powers other than those
conferred by this Code or by its articles of incorporation and except as necessary or incidental to the exercise of the
powers conferred.

ULTRA VIRES ACTS are those which cannot be executed or performed by a corporation because they are not within its express,
inherent, or implied powers as defined by its charter or AOI. Accordingly, it may be subject to a collateral attack questioning the
authority of the corporation to engage in such particular endeavor.

CONSEQUENCES:

1. On the Corporation itself: The proper forum may suspend or revoke, after proper notice and hearing, the franchise or certificate
of registration of the corporation for serious misrepresentation as to what the corporation can do or is doing to the great damage
or prejudice of the general public.
2. On the rights of the Stockholders: A stockholder may bring either an individual or derivative suit to enjoin a threatened ultra-
vires act or contract. If already performed, a derivative suit against the directors may be filed, but their liability will depend on
whether they acted in good faith and with reasonable diligence in entering into the contract.
3. On the immediate parties:
a. If the contract is fully executed in both sides, the contract is effective and the courts will not interfere to deprive either party of
what has been acquired under it;
b. If the contract is executory on both sides, as a rule, neither party can maintain an action for its nonperformance; and
c. Where the contract is executory on one side only, and has been fully performed on the other, the courts differ as to whether an
action will lie on the contract against the party who has received benefits of performance under it. Majority of the courts,
however, hold that the party who has received benefits from the performance is ―estopped‖ to set up that the contract is ultra
vires to defeat an action on the contract.

CASES:
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil. 335; Dec. 29, 1954)
ISSUE: Whether the donation was an ultra vires act?

HELD: No. After a careful perusal of the AOI, we find that the corporation was given broad and almost unlimited powers to
carry out the purposes for which it was organized among them, (1) ―to invest and deal with the money of the company not
immediately required, in such manner as from time to time may be determined‖ and (2) ―to aid in any manner any person
association, or corporation or in the affairs of the property of which this corporation has lawful interest‖. The donation in question
undoubtedly comes within the scope of this broad power for it is a fact appearing in the evidence that the insurance proceeds
were not immediately required when they were given away. We don‘t see much distinction between the acts of generosity of the
benevolence extended to some employees of the corporation, and even to some in whom the corporation was merely interested
because of certain moral or political consideration, and the donations which the corporation has seen fit to give the children of the
late Enrico Privano from the point of view of the power of the corporation as expressed in the AOI. And if the former had been
sanctioned and had been valid and intra-vires, we see no plausible reasons why the latter should now be deemed ultra-vires. It
may perhaps be argued that the donation given to the children of the late Enrico Privano is so large and disproportionate that it
can hardly be considered a pension or gratuity that can be placed ona par with the instances above-mentioned, but this argument
overlooks one consideration: the gratuity here given was not merely motivated by pure liberality or act of generosity, but by a
deep sense of recognition of the valuable services rendered by the late Enrico Privano which had immensely contributed to the
growth of the corporation to the extent that from its humble capitalization it blossomed into a multi-million corporation that it is
today.

Granting that it was ultra-vires, it may be said that the same cannot be invalidated, or declared legally ineffective for that reason
alone, it appearing that the donation represents not only the act of the BOD but of the stockholders themselves as shown by the
fact the same has been expressly ratified in a resolution duly approved by the latter. By this ratification, the infirmity of the
corporate act, if any has been obliterated thereby making the act perfectly valid and enforceable. This is especially so if the
donation is not merely executory but executed and consummated and no creditors are prejudiced, or if there are creditors affected,
the latter has expressly given their conformity.

ISSUE2: What is the difference between an illegal act and that which is ultra-vires?
HELD: The former contemplates the doing of an act which is contrary to law, morals, or public order or contravene some rules
of public policy or public duty, and are, like similar transactions between the individuals, void. They cannot serve as basis of a
court action, nor acquire validity by performance, ratification or estoppel. Mere ultra-vires acts, on the other hand, or those which
are not illegal and void ab initio, but are merely beyond the scope of the AOI, are merely voidable and may become binding and
enforceable when ratified by the stockholders. Since it is not contended that the donation under consideration is illegal, or
contrary to any of the express provisions of the AOI, nor prejudicial to the creditors of the defendant corporation, we cannot but
logically conclude that said donation, even if ultra vires in the supposition we have adverted to, is not void, and if voidable its
infirmity has been cured by ratification and subsequent acts of the defendant corporation. The corporation is now prevented or
estopped from contesting the validity of the donation.

IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO., ET AL., defendant-appellees (57 Phil. 343; Oct. 26,
1932)
ISSUE: Whether PTC’s act was ultra-vires?
HELD: No. Firstly, PTC although secondarily engaged in banking, was primarily organized as a trust corporation with full
power to acquire personal property such as the bonds in question according to both sec. 13 (par. 5) of the Corporation Law and its
duly registered by-laws and AOI; Secondly, that being thus authorized to acquire the bonds, it was given implied power to
guarantee them in order to place them upon the market under better, more advantageous conditions, and thereby secure the profit
derived from their sale. ―It is not, however, ultra vires for a corporation to enter into contracts of guaranty where it does so in
the legitimate furtherance of its purposes and business. And it is well settled that where a corporation acquires commercial papers
or bonds in the legitimate transaction of its business it may sell them, and in furtherance of such a sale, it may in order to make
them more readily marketable, indorse or guarantee their payment. Even if PTC did not acquire the bonds in question, but only
guaranteed them, it would at any rate, be valid and the said corporation is bound to pay the appellant their value with the accrued
interest in view of the fact that they become due on account of the lapse of 60 days, without the accrued interest due having been
paid; and the reason is that it is estopped from denying the validity of its guarantee. The doctrine of ultra vires as a defense, is by
some courts regarded as an ungracious and odious one, to be sustained only where the most persuasive consideration of public
policy are involved, and there are numerous decisions and dicta to the effect that the plea should not as a general rule prevail
whether interposed for or against the corporation, where it will not advance justice but on the contrary will accomplish a legal
wrong. When a contract is not on its face necessarily beyond the scope of the power of the corporation by which it was made, it
will, in the absence of proof to the contrary, be presumed to be valid. Corporations are presumed to contract within their powers.
The doctrine of ultra vires, when invoked for or against a corporation, should not be allowed to prevail where it would defeat the
ends of justice or work a legal wrong.

JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC (101 Phil 540; May 23, 1957)
ISSUE: Whether the SEC erred in issuing the questioned order?
HELD: No. The articles authorize collection of fees from members; but they do not authorize the corporation to engage in the
business of registering and accepting war notes for deposit and collecting fees from such services. This was the ruling of the
Commission and this we find to be correct. Neither do we find any merit in the third contention that the association has authority
to accept and collect fees for reparation claims for civilian casualties and other injuries. This is beyond any of the powers of the
association as embodied in its articles and have absolutely no relation to the avowed purpose of the association to work for the
redemption of war notes.

ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15, 1989) -

ISSUE: WON private respondent, one of the signatories of the check issued under the account of Mover Enterprises, Inc., is an
accommodation party under NIL and a debtor of petitioner to the extent of the amount of said check?
HELD: Yes. The liability of an accommodation party to a holder for value, although such holder does not include nor apply to
corporations which are accommodation parties. This is because the issue or indorsement of negotiable paper by a corporation
without consideration and for the accommodation of another is ultra vires. One who has taken the instrument with knowledge of
the accommodation nature thereof cannot recover against a corporation where it is only an accommodation party. By way of
exception, an officer or agent of a corporation shall have the power to execute or indorse a negotiable paper in the name of the
corporation for the accommodation of a third person only if specifically authorized to do so. Corollary, corporate officers, such as
the president and vice-president, have no power to execute for mere accommodation a negotiable instrument of the corporation
for their individual debts or transactions arising from or in relation to matters in which the corporation has no legitimate concern.
Since such accommodation paper cannot thus be enforced against the corporation, especially since it is not involved in any aspect
of the corporate business or operations, the signatories thereof (president and vice president) shall be personally liable.

-DISCUSSION-

SEC. 40. Power to Acquire Own Shares. – Provided that the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired, a stock corporation shall have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including the following cases:
(a) To eliminate fractional shares arising out of stock dividends;
(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code.

SEC. 41. Power to Invest Corporate Funds in Another Corporation or Business or for Any Other Purpose. – Subject to the
provisions of this Code, a private corporation may invest its funds in any other corporation, business, or for any purpose other
than the primary purpose for which it was organized, when approved by a majority of the board of directors or trustees and
ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or by at least two thirds (2/3) of
the members in the case of nonstock corporations, at a meeting duly called for the purpose. Notice of the proposed investment
and the time and place of the meeting shall be addressed to each stockholder or member at the place of residence as shown in the
books of the corporation and deposited to the addressee in the post office with postage prepaid, served personally, or sent
electronically in accordance with the rules and regulations of the Commission on the use of electronic data message, when
allowed by the bylaws or done with the consent of the stockholders: Provided, That any dissenting stockholder shall have
appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably
necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.

SEC. 42. Power to Declare Dividends. – The board of directors of a stock corporation may declare dividends out of the
unrestricted retained earnings which shall be payable in cash, property, or in stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld from the delinquent stockholders until their unpaid
subscription is fully paid: Provided, further, That no stock dividend shall be issued without the approval of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock at a regular or special meeting duly called for the purpose.
Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital
stock, except: (a) when justified by definite corporate expansion projects or programs approved by the board of directors; or (b)
when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign,
from declaring dividends without their consent, and such consent has not yet been secured; or (c) when it can be clearly shown
that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special
reserve for probable contingencies.
SEC. 40. POWER TO ACQUIRE OWN SHARES
A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes,
including the following cases:
(a) To eliminate fractional shares arising out of stock dividends (fractional shares are not anymore allowed);
(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale;
(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code;
(d) To redeem redeemable shares under section 8 of the Code (irrespective of existence of URE)
(e) To eliminate capital stock; and
(f) In cases of indebtedness.

SECTION 41. POWER TO INVEST FUNDS

- Requirements
- Stockholder’s approval is applicable only to investments that:
▪ are beyond the corporation’s primary purpose, or
▪ outside the express or implied powers of the corporation.

Example Scenario:
Realty Co. invested its funds for general construction, one of its purposes. Does the Board need SH approval?
No. Where the investment is reasonably necessary to accomplish its primary purpose, the approval of the SH or Members is not
required. Mere board resolution is necessary.

Read Case: Dela Rama vs. Ma-Ao Sugar Central Co., Inc.

SEC. 42. POWER TO DECLARE DIVIDENDS

Dividends
Are corporate profits set aside, declared and ordered by the BOD to be paid to the stockholders either on demand or on a fixed
date.
Limitation: dividends are to be declared out of the URE or Unrestricted Retained Earnings.

Unrestricted Retained Earnings

This is the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal
purposes and which are free for distribution to the stockholders as dividends. It is also known as “Surplus Profits”.

Kinds of Dividends: cash, property and stock dividends.

Q: Who has the power to declare what kind of dividends shall be declared?
Board of Directors whether cash or property dividends. As for stock dividends, the approval of the SH, holding or representing at
least 2/3 of OCS is required.

Example Scenario:
X Co.
ACS – 3M
SUB – 2M
1M paid-up capital
URE – 2M
A 200T
B 200T
C 200T
D 100T
E 100T
F 100T
G 50T
H 25T
I 25T

Q1: X Co. invested 500T to SMC shares. SMC gave 500T dividends. Is SH approval required for the distribution of the
dividend?
No. 500T is considered Property Dividend. The 500T is property of X Co.
- Bonds, notes, shares of stock can be considered property dividends because they make surplus profits.
Q2: Same facts. X Co. declared 1M as cash dividends. May the BOD declare the entire 2M URE as stock dividends with
the approval of the SH?
No. There is only 1M free portion in the ACs. If declared, there will be an increase of ACS to 4M which results to over issuance,
penalized by the Code under section 71.
Remedy: Corporations can only increase the ACS through the amendment of the AOI.

Q3: How much will the SH receive?

The amount w/c each SH receives as his share in the dividends is based on the stock held by him regardless of whether he has
paid his subscription in full. (Section 71, RCCP)

Q4: Will there be an increase in the proportionate interest of SH if there is a declaration of stock dividends?
No. They receive their dividends in their proportionate interest.
If A has 3.333% this is considered Fractional Shares thus it may be paid by cash or property dividend.

When Dividend Rights Vest

General Rule: The SH can compel the Board to declare dividends.

Exception: Regardless if the URE exceeds 100% of their paid-in capital, the Board of Directors have 3 justifications to deny the
SH.
(a) when justified by definite corporate expansion projects or programs approved by the board of directors; or
(b) when the corporation is prohibited under any loan agreement with financial institutions or creditors, whether local or foreign,
from declaring dividends without their consent, and such consent has not yet been secured; or
(c) when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies.

Can a stockholder compel the BOD to declare dividends when the URE is exactly 100% of the paid-up capital?
Yes, when the SH is a holder of a mandatory- if-earned dividend kind of shares.

A sold Z his shares. Dividends was declared on Oct. 15. The payment is on Oct. 30. On Oct. 30, Z was named at record as
the owner of shares. Who has the better right, A or Z?
A has the better right. The SH named at the time of the declaration of the dividend has the right for the dividends, unless there is
a contract that such declared dividends shall inure to the name of the buyer.

Corp Assets in Stock Dividends will not have a reduction because they are considered capital of URE. (Forced Purchase)
Dividends illegally paid (paid from capital), are directors liable?
Directors are not liable unless there is bad faith or negligence. Apply Business Judgement Rule).

Example Scenario:
1M No Par Value Shares
P 10/s
P20/s

Counsel said the no par value are profits. Is he liable?

He may be under Section 30 of the Code. The entire consideration of no par value shares are considered as capital. (Limitation of
no par value)

*As between A the transferor and Z the transferee, who has the .. (before part 2)ss