SANTOS, Pauline M.
Law on Business Organizations
MWF/6:00 PM 7:00 PM/118
A dividend, as applied to corporate stock, is that portion or part of the
profit or retained earnings which the corporation has set aside for ratable
distribution to shareholders in the form of assets or share capital of the
issuing company among stockholders.
The board of directors of a stock corporation has the power to declare
dividends out of the unrestricted retained earning which shall be payable in
the forms of: (1) Cash Dividends; (2) Property Dividends; (3) Stock Dividends;
(4) Scrip Dividends.
Cash Dividends are the usual form of distributions to shareholders. The
board of directors may declare cash dividends if both retained earnings and
cash are available. Before a cash dividend can be paid to ordinary
shareholders, any preference dividends must be paid, including those
dividends in arrears.
When a non-cash asset is distributed, it is referred to as a property
dividend. In accounting practices, property dividends are valued at their fair
market value. This may require the appraisal of the property distributed.
Share or Stock Dividends, is the distribution of additional; shares to
current shareholders of the corporation. It is important to take note that
stock dividends can only be declared to the extent of the maximum
authorized shares. Issuance of stock dividends results in a transfer of
retained earnings to the shareholders capital account.
In case of the issuance of stock dividends, it shall not be issued without
the approval of stockholders representing at least 2/3 of the capital stock
then outstanding at a regular meeting of the corporation or at a special
meeting duly called for the purpose. For other dividends, a mere majority of
the quorum is sufficient to declare dividends.
Lastly, Scrip Dividends are dividends represented by promissory notes
called scrip. These are often used when an enterprise has temporary cash
shortage and issues scrip to maintain its continuing dividend policy.
In the distribution of dividends, a corporation cannot make a valid
contract to pay dividends other than from the retained earnings or profits,
and any payment out of the entitys capital account is considered unlawful.
Also, there is no legal obligation for the company to distribute its retained
earnings in full. Only those from the unrestricted portion of the retained
earnings may be distributed.
The following sequential events are typical in the distribution of
dividends to stockholders: (1) the date of declaration; (2) the date of record;
and (3) the date of payment.
On the date of declaration, the board of directors formally announces
the dividend distribution. A declared dividend constitutes an enforceable
contract between the corporation and its shareholders. Normally, declaration
of dividends requires the concurrence of two things: (1) the existence of the
unrestricted retained earnings; and (2) the resolution of the board declaring
payment of a portion of such earnings to the stockholders.
Subsequently, on the date of record, a list of shareholders of record is
prepared to identify those who hold shares at this specific date and are this
entitled to receive declared dividends.
To provide time for the transfer of the shares, the stock exchanges
advance the effective ex-dividend date by three or four days beyond the
date of record. In that case, one who holds the shares on the day prior to the
stipulated ex-dividend date receives the dividend.
Lastly, on the date of payment, cash, non-cash asset, or the
corporations share is distributed to those shareholders who are entitled to
the dividend. This date typically follows the declaration date by four to six
weeks.
