Posted in Mercantile Law case digests

NIELSON & CO. INC. VS. LEPANTO CONSOLIDATED MINING CO. (GR. No. L-21601; December 28, 1968)

FACTS:

            On January 30, 1937, the parties have entered into an operating agreement wherein Nielson & Co. would operate and manage the mining properties owned by Lepanto Consolidated Mining Co. for a period of five years. Before the lapse of the five year period, the parties have renewed the contract for another five years with modifications made by Lepanto on the management fee.

On its modified contract Nielson will receive (1) 10% of the dividends declared and paid, when and as paid during the period of the contract and at the end of each year, (2) 10% of any depletion reserve that may set up, and (3) 10% of any amount expended during the year out of surplus earnings for capital account.

            In January, 1942 operation of the mining properties was disrupted on account of the war. The Japanese forces thereafter occupied the mining properties, operated the mines during the continuance of the war, and who were ousted from the mining properties only in August of 1945.

            After the mining properties were liberated from the Japanese forces, Lepanto took possession thereof and embarked in rebuilding and reconstructing the mines and mill. The restoration lasted for nearly three years and the mines have resumed its operation under the exclusive management of Lepanto.

            Shortly after the mines were liberated from the Japanese invaders in 1945, a disagreement arose between NIELSON and LEPANTO over the status of the operating contract in question which as renewed expired in 1947.

ISSUE: Whether or not Nielson is entitled to his share in the stock dividends.

HELD:

            Stock dividends cannot be issued to a person who is not a stockholder in payment of services rendered.

Section 16 of the Corporation Law, in part, provides a follows:

            No corporation organized under this Act shall create or issue bills, notes or other evidence of debt, for circulation as money, and no corporation shall issue stock or bonds except in exchange for actual cash paid to the corporation or for: (1) property actually received by it at a fair valuation equal to the par or issued value of the stock or bonds so issued; and in case of disagreement as to their value, the same shall be presumed to be the assessed value or the value appearing in invoices or other commercial documents, as the case may be; and the burden or proof that the real present value of the property is greater than the assessed value or value appearing in invoices or other commercial documents, as the case may be, shall be upon the corporation, or for (2) profits earned by it but not distributed among its stockholders or members; Provided, however, That no stock or bond dividend shall be issued without the approval of stockholders representing not less than two-thirds of all stock then outstanding and entitled to vote at a general meeting of the corporation or at a special meeting duly called for the purpose.

            In the case at bar Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it rendered under the management contract. We sustain the contention of Lepanto that the understanding between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the stock dividends declared. In other words, Nielson must still be paid his 10% fee using as the basis for computation the cash value of the stock dividends declared.

            Moreover, from the above-quoted provision of Section 16 of the Corporation Law, the consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock are given the special name “stock dividends” only if they are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or property then those shares do not fall under the category of “stock dividends”. A corporation may legally issue shares of stock in consideration of services rendered to it by a person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services rendered is equivalent to a stock issued in exchange of property, because services is equivalent to property.14 Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be part of the original capital stock of the corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the corporation and forming part of the capital that can be exchanged for cash or services rendered, or property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from the original capitalization or from the increased capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one who is not a stockholder of a corporation.

            A “stock dividend” is any dividend payable in shares of stock of the corporation declaring or authorizing such dividend.

            So, a stock dividend is actually two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of stock at par.16 When a corporation issues stock dividends, it shows that the corporation’s accumulated profits have been capitalized instead of distributed to the stockholders or retained as surplus available for distribution, in money or kind, should opportunity offer. Far from being a realization of profits for the stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has been transferred from surplus to assets and no longer available for actual distribution.17 Thus, it is apparent that stock dividends are issued only to stockholders. This is so because only stockholders are entitled to dividends. They are the only ones who have a right to a proportional share in that part of the surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the stockholder; the proportional interest of each stockholder remains the same.18If a stockholder is deprived of his stock dividends – and this happens if the shares of stock forming part of the stock dividends are issued to a non-stockholder — then the proportion of the stockholder’s interest changes radically. Stock dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.

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