In the realm of Philippine corporate law, the right to dividends is one of the most significant "proprietary rights" of a stockholder. It represents the ultimate fruit of an investment—the distribution of corporate profits to those who risked their capital. Under Republic Act No. 11232, otherwise known as the Revised Corporation Code (RCC), the rules governing these distributions are designed to balance the interests of the investors with the financial stability of the corporation and the protection of creditors.
1. The Power to Declare Dividends
Section 42 of the RCC grants the Board of Directors (BOD) the primary authority to declare dividends. However, the requirements differ depending on the form of the dividend:
Cash and Property Dividends
These require only a majority vote of the Board of Directors at a meeting where a quorum is present. No stockholders' approval is necessary because these distributions involve moving existing assets out of the corporation.
Stock Dividends
Because stock dividends involve the issuance of new shares and the capitalization of retained earnings, they require:
- A majority vote of the Board of Directors; and
- The approval of stockholders representing at least two-thirds (2/3) of the outstanding capital stock at a regular or special meeting.
2. The Fundamental Prerequisite: Unrestricted Retained Earnings
The "Lifeblood" of a dividend declaration is Unrestricted Retained Earnings (URE). A corporation cannot simply declare dividends because it has cash in the bank.
The Trust Fund Doctrine: Under Philippine jurisprudence, the capital stock of a corporation is considered a "trust fund" for the protection of creditors. Therefore, dividends can only be paid out of surplus profits (URE) and never out of the capital of the corporation, except in cases of corporate dissolution and liquidation.
| Element | Description |
|---|---|
| Retained Earnings | Accumulated profits of the corporation which have not been distributed. |
| Unrestricted | Earnings that have not been "earmarked" or appropriated by the Board for specific projects or required by law to be retained. |
3. Compulsory Declaration of Dividends
While the declaration of dividends is generally discretionary, the RCC imposes a "Compulsory Declaration" rule to prevent corporations from hoarding profits to avoid taxes or to disadvantage minority stockholders.
The Rule: Stock corporations are prohibited from retaining surplus profits in excess of one hundred percent (100%) of their paid-in capital stock.
Exceptions to the Compulsory Declaration
A corporation may justify retaining surplus profits even if they exceed 100% of paid-in capital under three specific circumstances:
- Expansion Programs: When justified by definite corporate expansion projects or programs approved by the Board of Directors.
- Loan Agreements: When the corporation is prohibited under any loan agreement with financial institutions or creditors from declaring dividends without their consent, and such consent has not yet been secured.
- Special Circumstances: When it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as the need for special reserves for probable contingencies.
4. Rights of Delinquent Stockholders
The RCC is very clear on how dividends are handled when a stockholder has failed to pay the full amount of their subscription:
- Cash Dividends: These shall first be applied to the unpaid balance on the subscription plus any costs and expenses.
- Stock Dividends: These shall be withheld from the delinquent stockholder until their unpaid subscription is fully paid.
This ensures that the corporation prioritizes the collection of its capital before handing out profits to a non-compliant investor.
5. The "Record Date" and "Payment Date"
To manage the transfer of shares, the Board usually sets two critical dates:
- Record Date: The date on which a person must be registered as a stockholder in the corporate books to be entitled to the dividend.
- Payment Date: The actual date the dividend is disbursed.
If no record date is fixed, it is deemed to be the date of the resolution declaring the dividend. Once a dividend is lawfully declared and announced, it becomes a debt of the corporation to the stockholder and cannot be unilaterally revoked, especially in the case of cash dividends.
6. Liability for Illegal Dividends
If a corporation declares dividends in the absence of Unrestricted Retained Earnings, or in violation of the Trust Fund Doctrine, the declaration is void.
- Director Liability: Under Section 30 of the RCC, directors who willfully and knowingly vote for or assent to patently unlawful acts of the corporation (such as illegal dividends) can be held jointly and severally liable for all damages resulting therefrom.
- Stockholder Liability: Stockholders may be compelled to return dividends received if they were paid out of capital rather than earnings, as this prejudices the rights of corporate creditors.