August 13, 1973

RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF CORPORATIONS

In the interest of investors and of the general public, the Commission, pursuant to the powers vested in it by law,
particularly Presidential Decree No. 270 and Republic Act No. 1143, hereby promulgates the following rules and regulations:

1. All corporations which have surplus profits in excess of necessary requirements for capital expansion and
reserves shall declare and distribute the excess profits as dividends to stockholders.

*2. Where the financial statements of the corporation show surplus profits in excess of 100% of paid-up capital, it
shall explain by footnotes why the same has not been declared as dividends. If the explanation is not satisfactory, the
Commission shall direct the corporation to distribute the excess as dividends.

The Commission will consider as sufficient justification for non-distribution of dividends, the following:

A. The corporation has definite expansion plans approved by the Board of Directors and Stockholders, and
whenever necessary, by the proper government authority. The amounts appropriated for such purpose shall be segregated from
the free surplus. Upon completion of the expansion program, the reserves established shall be declared as stock dividends.

B. 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.

C. The non-distribution of dividends is consistent with the policy or requirement of a government office.
Should an examination of the affairs of the corporation be necessary to determine the validity of the explanation given,
an examination fee of not exceeding five hundred (P500.00) pesos shall be charged and collected from the corporations.

3. It shall be the policy of all corporations whose securities are listed in any operating stock exchanges or
registered and licensed under the Securities Act to maintain and distribute an equitable balance of cash and stock dividends,
consistent with the needs of stockholders and the demands for growth or expansion of the business.

4. Any declaration of dividend, whether cash or stock, shall be reported to the Commission within fifteen (15)
days from date of declaration; Provided that, in the case of corporations whose securities are listed in any operating stock
exchange or registered and licensed under the Securities Act, the report shall be filed with the Commission before or
simultaneously with the release or publication of the notice of declaration of dividends to stockholders.

5. Any and all appropriations out of surplus profits for reserves shall have prior approval of the board of directors
and stockholders. The specific purpose and justification for each reservation shall be clearly stated in the financial statements by
footnotes.

6. These rules will be implemented taking into account the particular type of industry involved.

7. Any violation of these rules or of any requirement thereunder shall be punished by suspension or revocation
of the license or permit to sell securities issued to the corporation or by fine in such sum as the Commission may impose under
R.A. 1143.

Any person who may be found guilty of misrepresentation, fraud or misstatement of material facts in making
explanations to the Commission, shall be held criminally liable as provided under the law.

8. These rules and regulations, which shall be published in one newspaper of general circulation in the
Philippines and in the Official Gazette, shall take effect immediately.

(SGD.) ARCADIO E. YABYABIN

Securities and Exchange Commissioner
Approved: August 13, 1973
(SGD.) TROADIO T. QUIAZON, JR.
Acting Secretary of Trade
Footnotes
 As amended by Section 43, Corporation Code of the Philippines.
June 9, 1992

RULES REGULATING THE ISSUANCE OF PROPERTY DIVIDENDS

Pursuant to the authority vested in this Commission as provided for under Section 143 of the Corporation
Code of the Philippines and in order to protect the interest of stockholders and creditors in stock corporations, the
following rules regulating the issuance of property dividends are hereby promulgated.

SECTION 1. All corporations that have declared and/or issued property dividends in accordance with
the provisions of the Corporation Code of the Philippines shall send notice of such dividends within thirty (30) days
from the date of the declaration thereof.
The notice of the declaration and/or issuance of the property dividends shall show, in scheduled form, the
nature of property declared as dividends, their individual book values and market values, if any, and the manner in
which such property are distributed to the stockholders.

SECTION 2. The issuance of the property dividends shall conform with the following conditions:

a) That the property to be distributed as dividends shall consist only of property which are no longer
intended to be used in the operation of the business of the corporation and which are practicable to
be distributed as dividends;
b) That the issuance of the property dividends shall not result to an inequitable distribution of property
to the stockholders in terms of the book values and market values, if any, of the property
distributed; and
c) That when the distribution of dividends is made where some stockholders will receive cash and the
others will receive property, the prevailing market value of the property, as agreed upon by the
stockholders shall be considered in determining the equitable distribution of the total dividends.

SECTION 3. No property dividends in the form of land shall be issued to a foreign individual or foreign-
owned corporation which will violate the provision of the constitution of the Philippines on Land ownership.

SECTION 4. No actual distribution of property dividends shall be made unless approved by the
Commission.

SECTION 5. The issuance of property dividend shall be supported by the following:

a) board resolution approving the issuance of property dividend.

b) List of stockholders (certified by the Corporate Secretary) as of record date showing the
corresponding subscription of each stockholder and the allocation of the proposed dividend.
c) Audited financial statements as of the fiscal year prior to the declaration of the dividend.
d) Detailed schedule of the property account, (certified by the company accountant), which shall
include the property to be distributed as dividend, showing the cost and the book value of the
property as of the date coinciding with the aforecited audited financial statements.
e) When the distribution of dividend involves property and cash, such that some stockholders will
receive property and the others will receive cash, the detailed schedule of the property account
should also include the prevailing market value of property as agreed upon by the stockholders.

SECTION 6. Any violation of these rules shall be penalized by a fine of 1/10 of 1 per centum of the
amount declared as dividend but not less than Two Thousand (P2,000.00) Pesos and such other sanctions as
provided for under Section 144 of the Corporation Code of the Philippines.

SECTION 7. These rules shall take effect fifteen (15) days after their publication in two (2) newspapers
of general circulation in the Philippines.

(SGD.) ROSARIO N. LOPEZ

Chairman
July 28, 1994

AMENDED RULES GOVERNING THE DISTRIBUTION OF EXCESS PROFITS OF CORPORATION

In the interest of the investors and of the general public, the Commission pursuant to the powers vested in it by law,
hereby promulgates the following rules and regulations:

1. All domestic stock corporations which have surplus profits in excess of necessary requirements for capital
expansion and reserves shall declare and distribute the excess profits as dividends to stockholders. prcd

2. The Corporation Code, particularly Sec. 43, provides for the prohibition to retain surplus profits in excess of
100% its paid-in capital 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 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
c. When it can be clearly shown that such retention is necessary under special circumstances obtaining in the
corporation such as when there is a need for special reserve for probable contingencies.

3. The Commission considers as sufficient justification for non-distribution of dividends when such is consistent
with the policy or requirement of a government office like Central Bank, Insurance Commission, Board of Transportation, Board
of Investments etc., including this Office regarding the restriction on declaration of dividends where there are treasury shares
held by a corporation to cover the cost of said shares, until the same are re-issued or retired.

4. Any and all appropriations out of the surplus profits for reserves shall have the prior approval of the board of
directors.

5. The appropriations and justifications shall be fully disclosed in the notes to the financial statements to explain
why said surplus profits have not been declared as dividends.

6. Should an examination of the affairs of the corporation be necessary to determine the validity of the
explanation given, an examination fee of not exceeding Five Hundred (P500.00) Pesos shall be charged and collected from the
corporation.

7. For failure or neglect to:

a. declare dividends to its stockholders; or

b. disclose any appropriations/reserves approved by the board of directors; or
c. disclose the justification for non-distribution of dividends

the corporation shall be imposed a penalty of 1/10 of 1% of the excess amount over the paid-in capital but in no case shall it be
less than Two Hundred (P200.00) nor more than Ten Thousand (P10,000.00) Pesos for that given fiscal year, or be punished by
suspension or revocation of the license/permit to sell securities issued to the corporation.

8. Any person who may be found guilty of misrepresentation, fraud or misstatement of material facts in making
explanations to the Commission shall be held criminally liable as provided under the law.

These amended rules and regulations, which shall be published in a newspaper of general circulation in the Philippines
or in the Official Gazette, shall apply to the corporations whose fiscal years end December 31, 1994 and all fiscal years
thereafter.

Mandaluyong, Metro Manila, July 28, 1994.

(SGD.) ROSARIO N. LOPEZ

Chairman
August 5, 2003

SEC MEMORANDUM CIRCULAR NO. 11-03

TO : All Concerned
RE : Supervision Over Registered Corporations

This is to clarify the extent of the supervisory powers of the Securities and Exchange Commission (SEC) over all
registered corporations.

Section 5(a) of the Securities Regulation Code provides that the Commission has "jurisdiction and supervision over all
corporations, partnerships or associations which are grantees of primary franchises and/or a license or permit issued by the
Government".

The word "supervision", as used in the aforequoted provision of law, is interpreted to mean as follows:

1. The business operations of corporations which are grantees of secondary licenses or franchises by this
Commission, such as but not limited to financing companies, investment companies, investment houses, pre-need companies,
broker/dealers and exchanges, shall be under the direct supervision of this Commissioner, i.e.:

a. submission of reports (monthly, quarterly, operational, annual, etc.) required in the different laws governing the
type of activity engaged in by these corporations; and
b. compliance with provisions of the Corporation Code including those provisions requiring submission of documents
to effect compliance.

Additionally, the Commission exercises regulatory authority over said companies. For corporations with registered/listed
issues, compliance with registration requirements and the conditions imposed by the Commission for their registration shall
likewise be under its direct supervision.

2. For all other business operations of companies with certificates of registration with the SEC as corporations
but not requiring a secondary license from the SEC, the extent of its supervision and monitoring shall be limited to their
compliance with the Corporation Code, i.e.:
a. submission of financial statements;
b. submission of General Information Sheets (GIS);
c. compliance with provisions in their by-laws on:
i. number of directors
ii. qualifications, compensation of directors
iii. holding of meetings, etc.
d. declaration of dividends;
e. inspection of books; and
f. other provisions of the Code requiring submission of documents to effect compliance.

3. The business operations of corporations which are grantees of secondary licenses or franchises of other
government agencies such as but not limited to banking and quasi-banking institutions, building and loan associations, trust
companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other
corporations governed by special laws, shall not be under the direct supervision of this Commission, but under the direct
supervision of the concerned government agency granting such secondary license or franchise. The extent of the Commission's
supervisory powers over such corporations shall be limited to those mentioned in Item No. 2 hereof. All complaints regarding
their operations shall be directed to their primary regulator.

4. Notwithstanding the foregoing, the Commission, as provided in Section 5 of the SRC and the effective
provisions of PD 902-A, shall have the power to do any and all acts to carry out the effective implementation of the laws it is
mandated to enforce, i.e.: constitute a Management Committee; appoint receivers; issue Cease and Desist Orders to prevent
fraud or injury to the public; and such other measures necessary to carry out its role as a regulator.

For information and guidance.

Mandaluyong City.

5 August 2003.

(SGD.) LILIA R. BAUTISTA

Chairperson
April 29, 1987

Formeloza, Sabarillo & Co.

Doña Potenciana Bldg.
1195-C Pasong Tamo cor. Yakal St.
Makati, Metro Manila

Attention : Mr. Leandro N . Avendaño

S i r:
This has reference to your letter dated April 2, 1987, requesting for the opinion of this Commission on the queries posed therein.

It appears that your client corporation declared on February 28, 1985, cash dividends of P1.90 per share equivalent to the total
amount of P1.9 million payable on July 1, 1985. On June 15, 1985, during the special meeting of the Board of Directors of your client
corporation, a resolution was passed for the deferment of the payment of the above declared dividends. During the year 1986, your client
corporation sustained losses of about P2.0 million thereby totally wiping out the January 1, 1986 retained earnings balance of P1.0 million after
setting aside the P1.9 portion for dividends. Due to the above cited situation, your client corporation intends to cancel the cash dividends
originally declared on February 28, 1985 in order that the 1986 loss of about P2.0 million may be absorbed by the retained earnings apportioned
as dividends reverted back.

Hence, you pose the following queries:

1. May our client corporation, which declared cash dividends amounting to P1.9 million on February 28, 1985, but which
remained unpaid up to this date by virtue of a board resolution deferring payment of such dividends, be cancelled? The cancellation is proposed
in order to revert such dividends to retained earnings to replace losses incurred in the year 1986.
2. If the cancellation of the declared cash dividends is legally possible, what are the SEC requirements?
3. If the cancellation is not possible, what are the alternative courses of action?

Anent your first query, "since the right of the stockholders of a corporation to a dividend becomes vested as soon as the dividend has
been fully declared by the directors, and the corporation becomes their debtor for their respective shares, it necessarily follows that neither the
same board of directors nor their successors can afterward consider their action and revoke the declaration of a legally declared dividend
without their stockholders consent." (Fletchers, Vol. 11, p. 736 citing U.S. v. Southwestern Portland Cement Co., 97 F 2d 413 revg. 22F Supp.
846). This rule is especially true where a fund has already been set apart or deposited by the corporation out of which dividend is to be paid.
(Fletcher, Supra, citing Brown v. Lee Mfg. Co., 231 259. 96 SW 2d 1098). Where dividend has been declared and a fund set apart out of which
to pay the same, such action on the part of the corporation in setting the fund for the specific purpose constitutes such moneys a trust fund in
the hands of the corporation for the use of the stockholders and in the event of the subsequent insolvency of the corporation, the stockholders
are not required to go in pro rata with the general creditors for such unpaid dividends, but may proceed against a trustee on account of such
trust fund and recover the whole of their pro rata thereof. (Mc. Laran v. Crescent Planning Mill Co., 117 Mo. App. 40, 93 SW 819 (1906).
However, where the funds are not set apart from the general mass of the company's funds and not appropriated to the payment of a dividend
which has been declared, the stockholders are not entitled to any preference over the general creditors; they stand as the general creditors of
the corporation who can come in only notably with such creditors, looking to the general estate for the liquidation of their dividend debt. (Ibid)

Hence, a cash dividend properly and fairly declared by your client corporation cannot be revoked by the subsequent action of the
Board; for by the declaration of the dividend, the corporation becomes the debtor of the stockholders; such debtor corporation cannot revoke,
recall or rescind the debt or otherwise absolve itself from its payment by any action on its part against or without the consent of the creditor
stockholders.

In addition, please be advised, however, that there is authority to the effect that the rule precluding rescission does not apply to stock
dividend and that the declaration of such a dividend may be rescinded at any time before the actual issuance of the stock. (Fletcher, sec.
5323.1). "The reason for the exemption in the case of stock dividends is found in the difference in the nature of cash and stock dividends."
(Fletcher, Supra., citing Stoots v. Biograph Co., 236 Fed. 454, L.R.A. 1917 B 728; and others). As pointed out by Mr. Fletcher, "In the case of a
cash dividend the amount to be distributed is severed from the general fund and becomes the property of the stockholders pro rata as soon as
the dividend is voted, while in the case of a stock dividend, all the formalities necessary to a valid increase of stock must be complied with
before the stockholders are entitled to anything, and the mere declaration of the dividend does not, therefore, give them a vested right."

In view of our answer to your first query, the Commission need not answer your second query and third queries.

Finally, please be advised that the administrative opinion rendered herein does not preclude any judicial decision affecting the issues
raised in your basic letter in the event that the issues are litigated in court.

Very truly yours,

(SGD.) ROSARIO N. LOPEZ

Associate Commissioner
November 12, 1986
Philippine Overseas Drilling
and Oil Development Corporation
c/o Mr. Augusto B. Sunico
Quad Alpha Centrum
125 Pioneer, Mandaluyong
Metro Manila

Gentlemen:

This refers to your letter dated October 2, 1986, requesting for opinion on the query posed therein.

You alleged that a number of persons entered into a stock subscription contract with the corporation. Some of the subscribers
defaulted in their payment and the entire subscription was declared delinquent. During the delinquency, cash dividends were declared and
applied against the unpaid balances of the subscriptions. Stock dividends were also declared but the dividends were withheld from the
delinquent subscription in accordance with Section 43 of the Corporation Code. The corporation has sold in a delinquency sale all outstanding
delinquent stocks under Section 68 of the Corporation Code. In some cases, the winning bidders paid the total obligation (the balance due on
the subscription, plus accrued interest cost of advertisement and expenses of sale) for 100% of the stocks. In some cases, the winning bidders
agreed to pay the total obligation for a portion of the stocks. You are now inquiring as to who would be entitled to the withheld stock dividends:
the original subscriber, the purchaser for the 100% of the stock or both pro-rata in case some stocks are left to the original subscriber.

It is to be noted that under Section 43 of the Corporation Code, holders of delinquent stocks are entitled to the right of dividends,
except that any cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription plus cost and expenses,
while stock dividends shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid. The law partly provides, thus:

"SECTION 43. 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 dividend 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 stockholder, until his unpaid subscription is fully paid". . . .

The right of stockholders to be paid dividends vests as soon as the same has been lawfully declared by the Board of Directors. Since
the right to dividends vests upon its declaration, whoever owns the stocks at that time also owns the dividends. A subsequent transfer of such
stock would as a rule, not carry with it the right to dividends which have been declared but not yet paid. (Comments, Notes and Selected Cases,
Corporation Code, Campos and Lopez-Campos, 1981 Edition pp. 797-798). "As a general rule, dividends declared before a transfer belong to the
transferor and those declared after the transfer belong to the transferee, unless the parties have agreed otherwise or there is some statutory or
other controlling provision changing the rule." (11 Fletcher Cyclopedia Corporations Sec. 5377 Chapter 58). In other words, a dividend belongs
to the person who owns the stock when the dividend is declared.

It can also be implied from Section 68 of the Corporation Code that only the number of shares of which the bidder is willing to buy
shall be transferred to the highest bidder. The law provides, thus:

"SECTION 68. Delinquency sale. —

xxx xxx xxx

Unless the delinquent stockholder . . . said delinquent stock shall be sold at public auction to such bidder who
shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement
and expenses of sale, for the smallest number of shares or fraction of a share. . . . The remaining shares, if any, shall be
credited in favor of the delinquent stockholder who shall likewise be entitled to the issuance of a certificate of stock
covering such shares . . . (emphasis supplied)

Thus, unless there was an agreement beforehand that the dividends earned by the delinquent stocks before the delinquency sale was
effected shall inure to the winning bidder, the same belong to the delinquent stockholder.

Please be advised accordingly.

Very truly yours,

(SGD.) JULIO A. SULIT, JR.

Chairman
October 19, 1989

Mr. Ong Chee Han

Sir:

This refers to your letter dated August 9, 1989, requesting the opinion of this Commission on the following
queries:

1. Can the share premium or the excess over paid-up capital be used for the issuance of additional
stocks to the existing shareholders?

2. If not allowed, in what way can the share premium or excess over paid-up capital be reduced?

Considering that when a corporation converts the premium or contributed surplus into capital by issuing to
its stockholders shares of stock representing their respective participation, it actually parts with nothing but merely
transfers the surplus to capital account and issues shares of stock to represent the same, the Commission En Banc
in its Executive Meeting of October 17, 1989, resolved to allow the declaration of dividends from paid-in surplus
subject to the following conditions:

1. That they be declared only as stock dividends and not as cash dividends;
2. That no creditor shall be prejudiced therefrom;
3. That there shall be no resulting impairment of capital.

Very truly yours,

(SGD.) ROSARIO N. LOPEZ
Chairman
_____________
May 9, 1990

Pacific Seamen Services, Inc.

690 Aurora Boulevard
Quezon City

Attention : Mr. Edward S. De Los Reyes

Sir:

This refers to your letter dated March 14, 1990, requesting opinion on the query posed therein.

You stated that at one time your corporation sold its real property at gain since the same is not being used
for business. You wish to be clarified whether the income derived therefrom can be availed of for dividend
distribution.

The pertinent provision of the Corporation Code provides:

"SECTION 43. 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, in property, or in stock to all stockholders on the basis of outstanding stock held
by them: . . ." (Emphasis supplied)

The aforecited provision requires that dividends may be declared out of the "unrestricted retained
earnings". Section 3 of the Code, in defining stock corporations, uses the words "surplus profits" as being
authorized to be distributed to stockholders. For purposes of dividend declaration, the term "unrestricted retained
earnings" is therefore synonymous to "surplus profits".

In accordance with generally accepted accounting principles, retained earnings include not only earnings
realized from the ordinary course of business of the corporation but also those arising from transactions not
associated with but incidental to or necessary in keeping the business for which the corporation was organized.
Examples of these are gains on sale of the corporation's land, building or investment, as well as earnings from rent
royalties, fees and interests for use by others of the corporation's assets and resources. This is the concept of
retained earnings adopted by the Commission.

It has to be emphasized, however, that there cannot be surplus or net profits for the purpose of declaring
a dividend, unless the total value of the assets of the corporation at the time it is proposed to declare the dividend
exceeds the amount of its capital stock, after deducting all expenses which have been incurred, and all losses
which have been sustained. It may be laid down as a general principle therefore that the surplus or net profits of a
corporation is the difference between the total present value of its assets, after deducting losses and liabilities, and
the amount of its capital stock. (11 Fletcher Chap. 58, Sec. 5335).

Thus while the proceeds of gains on the sale of real property may be proper source of dividend
distribution, the corporation cannot distribute the same if after such division or distribution, the value of the
remaining assets is less than the amount of legal or stated capital and liabilities.

Please be advised accordingly.

Very truly yours,

(SGD.) ROSARIO N. LOPEZ

Chairman
August 6, 1990

The Philippine Banking Corporation

Philbanking Building
Ayala Avenue, Makati
Metro Manila
Attention : Domingo Lee
Chairman
Gentlemen :

This refers to your letter dated March 22, 1990 inquiring whether the reduction of surplus brought about by the
decrease in the par value of the bank's shares of stock is exclusively for the benefit of, and to be owned by, the stockholders
who subscribed to the shares of stock at the original par value.

It appears that the decrease of the par value of the bank's issued shares of stock from P100.00 to P50.00 which was
approved by the Commission on December 31, 1988, resulted in the emergence of a "reduction surplus" in the books of the
bank (a term synonymous with "paid-in capital in excess of par value) amounting to P97,156,485.00.

In accordance with the purpose of the decrease in the par value, P41,265,325.00 of the reduction surplus was used to
replace and erase the term accumulated losses or deficit of the bank amounting to the same amount. The balance of
P55,891,160.00 was retained as reduction surplus.

At this point in time, the remaining reduction surplus could have represented returnable capital to the stockholders
concerned if the agreement called for it and if the circumstances then had warranted such return of capital. However, the
stockholders approval of the decrease in the par value, pursuant to the bank's equity restructuring program, provided for the
retention of the remaining reduction surplus of P55,891,160.00. The said remaining reduction surplus, therefore, constituted
"additional paid-in capital" of the stockholders in the bank.

On December 22, 1988, the Commission approved a subsequent increase in the capital stock of the bank involving the
entry of new set of subscribers at the reduced par value of P50.00 per share. The total amount of the subscription and
payments was P500,000,000.00. After the increase in the capital stock, the bank now has two sets of stockholders: those who
originally bought at P100.00 per share and those who later subscribed at P50.00 per share.

The bank is now contemplating to declare all the remaining reduction surplus of P55,891,160.00 as dividends. Your
query is, in the event that the said reduction surplus be declared as dividends, who will be entitled to receive such dividends,
the original stockholders only or all the stockholders of records as of the time of the declaration of dividends?

It is the settled general rule that in the absence of agreement to the contrary, or where the resolution declaring the
dividend specifies a record date, all persons who own shares of stock in a corporation at the time a dividend is declared are
entitled, as a matter of absolute right, to share ratably in the dividend in proportion to their respective shares, without
discrimination and regardless of the time when their shares were acquired. So, one who receives stock from a corporation
immediately before a dividend is declared has the same right as the other stockholders to share therein, unless he is excluded
by the terms of his contract. (11 Fletcher, Sec. 5376 citing various cases)

A "record date" is the future date specified in the resolution declaring dividend, that the dividend shall be payable to
those who are stockholders of record on a specified future date, or as of the date of the meeting declaring said dividends. (SEC
Opinion dated June 5, 1974 citing Ballantine on Corporation p. 567)

Thus, applying the above-mention principle in your case, all the stockholders of record (original and new) are entitled
to the reduction surplus in the event the same is declared as dividends, subject, however, to the following conditions:

1. That the reduction surplus shall be declared only as stock dividends and not as cash dividends;
2. That no creditor shall be prejudiced therefrom;
3. That there shall be no resulting impairment of capital.

Very truly yours,

(SGD.) ROSARIO N. LOPEZ

Chairman
August 16, 1993
Ms. Efifania Mendoza
Rayomar Management, Inc.
2nd Flr. Marbella Manila II
Bldg., 2071 Roxas Blvd.
Malate, Manila
Madam:
This refers to your letter of July 7, 1993 requesting approval for the declaration of treasury shares of Transmar Agencies, Inc. as property
dividends out of its additional paid-in capital instead of its retained earnings.
The pertinent provision of the Corporation Code provides:
"SECTION 43. 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: ". . . .
(Emphasis supplied) LibLex
It is clear from the aforecited provision that dividends must be declared and paid out of the unrestricted retained earnings of the Corporation.
However, as an exception, the Commission in its Executive Meeting of October 17, 1989 resolved to allow the declaration of stock dividends
(but not as cash dividends) from paid-in surplus taking into consideration that when a corporation converts the premium or contributed surplus
into capital by issuing to its stockholders shares of stock representing their respective participation, it actually parts with nothing but merely
transfers the surplus to capital account and issues shares of stock to represent the same.
However, it would be different when property dividend is declared out of additional paid-in capital. Under this situation, the capital of the
corporation. represented by the additional paid-in capital, is reduced to the extent of the property dividend declared, as can be gleaned from
the Exhibit 1 attached to your letter to support your request. This is not allowable since this will involve return of capital to the stockholders.
cdasia
In view of the foregoing, your request is hereby denied.
Very truly yours,
(SGD.) ROSARIO N. LOPEZ
Chairman
________
July 15, 1994
Blue Cross Insurance, Inc.
7th Flr., PBCom Bldg.,
6595 Ayala Ave. cor. Herrera St.,
Makati, Metro Manila
Attention : Mr. Samuel F . Baldado
Corporate Secretary
S i r:
This refers to your letter of June 10, 1994 requesting advice relative to conversion of contributed surplus into paid-up capital by way of stock
dividend declaration. cdtai
As stated, sometime in June 1988, December 1988 and August 1989, some stockholders of Blue Cross Insurance, Inc. made contributions to
surplus to maintain a margin of solvency required by Insurance Commission. Calls for contribution were made to the individual stockholders for
them to make the corresponding contributions to cover the solvency deficiency. While a few did contribute, many refused or failed to do so. So
that the company can continue with its business operations, some stockholders aside from their own proportionate contributions also
contributed for the other stockholders. Thereafter, a new major stockholder came in by subscribing to the increase in capital stock of the
company. In 1994, the Insurance Commission approved the company's request for the conversion of the contributed surplus into paid-up
capital. The company now intends to declare the contributed surplus as stock dividends to complete the minimum paid-up capitalization as
mandated by the Department of Finance.
Your queries are:
1. Who are entitled to benefit from the stock dividend declaration? Should the stock dividend be limited only in favor of those
stockholders of record in 1988 and 1989 when the contributions to surplus were made? If so, this has the effect of returning to these
stockholders what they contributed or were under obligation to contribute.
2. May the stockholders under item "a" above who, up to the present time, are delinquent in respect of the contributions to surplus be
legally disqualified by the Board of Directors from participating in the stock dividend?
3. Are stockholders who came in as shareholders by way of subscription after the contributions to surplus were made, entitled to the
stock dividend or can the Board of Directors validly exclude them from the stock dividend declaration?
4. May the stock dividend declared accrue to the benefit of the transferees or successors in interest of stockholders referred to in item
"a" above who may have already sold or transferred their shares?
The Commission en banc, in its Executive Meeting of October 17, 1989, had previously allowed the declaration of stock dividends from paid-in
surplus taking into consideration that when a corporation converts the premium or contributed surplus into capital by issuing to the stockholders
shares of stock representing their respective participation, it actually parts with nothing but merely transfers the surplus to capital account.
(Letter to Mr. Ong Chee Han, dated October 19, 1989) cdtai
As to who are entitled to receive the stock dividends, it is a settled general rule that in the absence of an agreement to the contrary, or where
the resolution declaring the dividend specifies a record date, all persons who own shares of stock in a corporation at the time dividend is
declared are entitled, as a matter of absolute right, to share ratably in the dividend in proportion to their respective shares without
discrimination and regardless of the time when their share were acquired. So one who receives stock from a corporation immediately before a
dividend is declared has the same right as the others stockholders to share therein, unless he is excluded by the terms of his contract (Letter to
Philippine Banking Corporation, dated August 6, 1990 citing II Fletcher, Sec 5376 citing various cases).
The seemingly unfair situation allowing the stockholders who did not make contributions to the surplus to share in the stock dividend
declaration is remedied by Sec. 194 of the Insurance Code of 1978, as amended by P.D. No. 1455, which provides in part:
". . . Provided further, that a stockholder who aside from paying the contribution due from him, pays the contribution due from another
stockholder by reason of the failure or refusal of the latter to do so shall have a lien on the certificates of stock of the insurance company
concerned appearing in its books in the name of the defaulting stockholder on the date of default, as well as on any interests or dividends that
have accrued or will accrue to the said certificates of stock, until the corresponding payment of reimbursement is made by the defaulting
stockholder."
Relative to the last query, " as a general rule, dividends declared before a transfer belong to the transferor and those declared after the transfer
belong to the transferee, unless the parties have agreed otherwise or there is some statutory or other controlling provision changing the rule."
(Letter to Philippine Overseas Drilling and Oil Development Corporation dated November 12, 1986, citing II Fletcher Cyclopedia Corporations
Sec. 5377 Chapter 58) A subsequent transfer of a stock after the declaration of dividends would, as a rule, not carry with it the right to
dividends which have been declared but not yet paid. (Ibid, citing Comments, Notes and Selected Cases, Corporation Code, Campos and Lopez-
Campos, 1981 Edition, pp. 797-798) In other words, a dividend belongs to the person who owns the stock at the time when the dividend is
declared. cdtai
Please be advised accordingly.
Very truly yours,
(SGD.) FE ELOISA C. GLORIA
Associate Commissioner

_____________
October 2, 2001
SEC OPINION
Atty. Ma. Victoria A. Villaluz
Tax Division
SyCip Gorres Velayo & Co
6760 Ayala Ave.,
1226 Makati City
RE : William, Gothong & Aboitiz, Inc. (WG&A)
Madam:
This refers to your letter dated 23 August 2001 requesting confirmation on the following matters: IATSHE
1. WG&A can declare dividends out of the additional paid-in surplus, and that the stock dividends can be declared at premium;
2. In the event that there will be fractional shares arising from the declaration of stock dividends, WG&A can either pay to the
stockholder the cash equivalent of the fraction of the share or issue one full share;
3. The stock dividends can be in the form of redeemable preferred shares with the following features:
a. non-voting;
b. redeemable at any time or from time to time, in whole or in part, as may be determined by the Board of Directors, within a period of
not exceeding 10 years;
c. redeemable at a price that may be determined by the Board of Directors but shall not be lower than P6.00 per share;
d. may upon redemption, be exchanged with a bond to be issued by WG&A, such bond to bear interest at the rate of 4% over the
Treasury Bill rate at the time of the exchange;
4. The declaration of the stock dividend to the existing stockholders does not require a permit to sell from the SEC;
5. There is no legal impediment in the listing of the redeemable preferred shares declared as dividends in the Philippine Stock Exchange;
6. For accounting purposes, the redemption price can be charged to the capital stock and to the additional paid-in capital that was
existing prior to the declaration of the stock dividends in the form of redeemable preferred shares.
In connection with your first query, the Commission had consistently ruled in the past that stock dividends can be declared out of the additional
paid-in capital at premium subject to the availability of unissued shares, where the issuance will be taken. In SEC Opinion dtd. October 19,
1989, Mr. Ong Chee Han, the Commission ruled that when a corporation converts the premium or contributed surplus into capital by issuing to
its stockholders shares of stock representing their respective participation, it actually parts with nothing, but merely transfers the surplus to
capital account and issues shares of stock to represent the same. The SEC en banc therefore permitted the declaration of dividends from paid-in
surplus subject to the following conditions:
1. That they be declared only as stock dividends and not as cash dividends.
2. That no creditor will be prejudiced therefrom
3. That there shall be no resulting impairment of capital
Furthermore, the declaration of dividends should not exceed the paid-in surplus of the corporation.
Relative to your second query, the corporation (WG&A), pursuant to Section 41(1) of the Corporation Code quoted hereunder, can pay the
equivalent of such fractions in cash or issue one full share.
Section 41. A stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or
purposes, including but not limited to the following cases: Provided, that the corporation has unrestricted retained earnings in its books to cover
the shares to be purchased or acquired: CAcIES
1. To eliminate fractional shares arising out of stock dividends; . . .
As to the third query, the Commission has allowed the reclassification of common shares into preferred shares subject to the condition that all
the features of redeemable preferred shares shall be stated in the articles of incorporation. Provided further, that in the case of the latter, no
shareholder or creditor will be adversely affected by the reclassification. Moreover, it is a settled rule that unless restricted by the law or the
provision of its articles of incorporation, a corporation has unrestricted freedom to issue such classes or series of shares as the prospects and
the needs of its business may require to attract investors.
It must be stressed, however, that there should be a basis or standards for the determination of the redemption price of preferred shares to be
included in the features of said preferred shares. To allow the Board of Directors the discretion to determine the amount of redemption rate
may be subject to abuse to the detriment of other stockholders or creditors. In addition, shares of stock which have been issued but reacquired
by the issuing company by redemption are properly referred to as treasury stock which should be recorded at cost irrespective of whether these
are acquired below or above par value.
Anent the issue on whether or not the declaration of stock dividends to the existing stockholders does not require permit to sell from the SEC,
we confirm that stock dividends are exempt transactions pursuant to Section 10.1 (d) of the Securities Regulation Code, quoted as follows:
xxx xxx xxx
"The distribution by a corporation, actively engaged in the business authorized by its articles of incorporation, of securities to its stockholders or
other security holders as a stock dividend or other distribution out of surplus.
xxx xxx xxx
We regret to inform you, however, that the Commission is not in a position to confirm whether or not there is legal impediment in the listing of
the redeemable preferred shares declared as dividends in the Philippine Stock Exchange (PSE). You are thus advised to confer with the PSE on
the matter.
On the issue of whether the redemption price of redeemable shares reacquired can be charged to the capital stock and to the additional paid-in
capital that was existing prior to the declaration of the stock dividends in the form of redeemable preferred shares, the same is allowed provided
that the capital stock is reduced by its par value. Accounting treatment of the difference between the redemption price and the par value of the
redeemed share should be in accordance with SFAS 18 par. 9 and Section 5 of the Rules Governing Redeemable and Treasury Shares. ICAcHE
Very truly yours,
(SGD.) FE ELOISA C. GLORIA, Commissioner