The Board of Directors of Mabini Corporation (MC) unanimously adopted a resolution directing its management to issue as fully paid 10,000 common shares to Atty. Apolinario for successfully prosecuting in favor of MC the derivative suit filed by a minority stockholder over mismanagement of corporate affairs. If the issuance of the 10,000 common shares in the name of Atty. Apolinario is by way of stock dividends to be credited from the unrestricted retained earnings of MC, would such issuance be valid? Explain your answer.
Suggested answer only. Not an official answer and not legal advice.
No, the issuance of the 10,000 common shares to Atty. Apolinario as stock dividends is not valid.
Under Section 42 of the Revised Corporation Code (R.A. No. 11232) and Nielsen & Co., Inc. v. Lepanto Consolidated Mining Co., stock dividends can only be declared and issued to existing stockholders pro rata based on their outstanding shareholdings. A stock dividend is a distribution of surplus profits transferred to capital stock, and non-stockholders are not entitled to receive dividends.
Here, Atty. Apolinario is legal counsel who rendered legal services to MC, not an existing stockholder. While MC may issue unissued shares to him as compensation for services actually rendered under Section 61, it cannot distribute shares to a non-stockholder by way of stock dividends.
Therefore, the issuance of stock dividends in favor of Atty. Apolinario is invalid.
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Quick check
Under Section 42 of the Revised Corporation Code, who is eligible to receive stock dividends declared by a corporation?
Stock dividends can only be declared and issued to existing stockholders pro rata based on their outstanding shareholdings.
In Nielsen and Company, Inc. versus Lepanto Consolidated Mining Company, why is a non-stockholder ineligible to receive stock dividends?
Stock dividends represent surplus profits converted to capital stock and belong exclusively to existing shareholders.
Under Section 61 of the Revised Corporation Code, may a corporation issue unissued shares of stock to a lawyer for legal services rendered?
Section 61 explicitly permits the issuance of stock for labor done or services actually rendered to the corporation.
What stockholder vote is required to approve the declaration of stock dividends under Section 42 of the Revised Corporation Code?
Section 42 requires the approval of stockholders representing at least two-thirds of the outstanding capital stock for stock dividends.
What is the legal effect of a corporate resolution issuing stock dividends to a non-stockholder as payment for professional services?
Issuing stock dividends to a non-stockholder is invalid because dividends are reserved exclusively for existing shareholders.
Learn more about these topics
1. Stock Dividend Eligibility
Under Section 42 of the Revised Corporation Code (Republic Act Number 11232) and Nielsen and Company, Inc. versus Lepanto Consolidated Mining Company, stock dividends can only be declared and issued to existing stockholders pro rata based on their outstanding shareholdings. A stock dividend represents a distribution of corporate surplus profits transferred to capital stock. Because non-stockholders hold no underlying equity interest in the corporation, they are not legally entitled to receive dividends of any kind, whether cash, property, or stock dividends.
2. Shares for Services
Under Section 61 of the Revised Corporation Code, a corporation may validly issue unissued shares of stock in exchange for labor done or services actually rendered to the corporation. Legal services successfully performed by an attorney, such as prosecuting a derivative suit on behalf of the company, constitute valid consideration for the issuance of shares. However, shares issued as compensation for professional services must be issued as unissued capital stock representing fair consideration, rather than distributed under the guise of stock dividends.
3. Dividend Surplus Requirement
Stock dividends require the presence of unrestricted retained earnings transferred to capital stock, coupled with the approval of the board of directors and stockholders representing at least two-thirds of the outstanding capital stock. Even if unrestricted retained earnings exist, distributing shares as stock dividends to a non-stockholder violates corporate law principles. While unrestricted retained earnings enable dividend declarations for shareholders, paying non-shareholders for services rendered must be recorded as corporate expenses or capital stock issuances for valuable consideration.