These are surplus corporate profits (coming from unrestricted retained earnings) which are [SDD] set apart, declared, and ordered to be distributed to stockholders.
- Profits are not dividends. As long as a profit is not set apart, declared, and distributed, it shall never be considered dividends.
- No matter how big is the profit, if the directors do not declare them, stockholders do not have a claim to them.
- They can be distributed in the form of cash, property, or stocks through the discretion of the Board of Directors (Sec. 42 RCCP)
- If cash dividends, it must first be applied to the unpaid subscription of a stockholder, if there’s any.
- If stock dividends, approval of the shareholders at least 2/3 of OCS is required; and also the amount of unsubscribed shares is sufficient (otherwise, amend the AoI).
What is the source of dividends and what happens after the deduction of dividends?
Corporate profits go to a “surplus account” -> this is where stock dividends are taken from. The remainder goes to the capital account by virtue of the Trust Fund Doctrine or for the protection of the corporate creditors. The remainder will now increase the legal capital.
When is the retention of dividends prohibited?
If it exceeds the equivalent of 100% of the paid-in capital. However, the retention is justified if the dividends are subject to:
- Definite corporate expansion projects as approved by the Directors;
- or limited by foreign or local creditors/financial institutions and the latter’s consent has not been secured.
- or if retention is necessary under special circumstances.