G.R. No. 51765, 3 March 1997

FACTS:

Private respondent Corporation secured a loan from petitioner in the amount of P120,000.00. As part of the proceeds of the loan, preferred shares of stocks were issued to private respondent Corporation, through its officers then, private respondent Adalia F. Robes and one Carlos F. Robes.

In other words, instead of giving the legal tender totaling to the full amount of the loan, which is P120,000.00, petitioner lent such amount partially in the form of money and partially in the form of stock certificates numbered 3204 and 3205, each for 400 shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of P8,000.00.

Private respondents proceeded against petitioner and filed a Complaint anchored on private respondents’ alleged rights to collect dividends under the preferred shares in question and to have petitioner redeem the same under the terms and conditions of the stock certificates.

The trial court rendered the herein assailed decision in favor of private respondents. In ordering petitioner to pay private respondents the face value of the stock certificates as redemption price, plus 1% quarterly interest thereon until full payment, the trial court ruled:

There being no issue of fact raised by either of the parties who filed their respective memoranda delineating their respective contentions, a judgment on the pleadings, conformably with an earlier order of the Court, appears to be in order.

From a further perusal of the pleadings, it appears that the provision of the stock certificates in question to the effect that the plaintiffs shall have the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating, clearly and unequivocably [sic] indicates that the same are “interest bearing stocks” which are stocks issued by a corporation under an agreement to pay a certain rate of interest thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled to the payment thereof as a matter of right without necessity of a prior declaration of dividend.

ISSUE:

Whether or not petitioner entitled to collect dividends under the preferred shares in question.

RULING:

A preferred share of stock, on one hand, is one which entitles the holder thereof to certain preferences over the holders of common stock. The preferences are designed to induce persons to subscribe for shares of a corporation. Preferred shares take a multiplicity of forms. The most common forms may be classified into two:

(1) preferred shares as to assets; and
(2) preferred shares as to dividends.

The former is a share which gives the holder thereof preference in the distribution of the assets of the corporation in case of liquidation; the latter is a share the holder of which is entitled to receive dividends on said share to the extent agreed upon before any dividends at all are paid to the holders of common stock. There is no guaranty, however, that the share will receive any dividends.

On the question of the redemption by the defendant of said preferred shares of stock, the very wordings of the terms and conditions in said stock certificates clearly allows the same.

To allow the herein defendant not to redeem said preferred shares of stock and/or pay the interest due thereon despite the clear import of said provisions by the mere invocation of alleged Central Bank Circulars prohibiting the same is tantamount to an impairment of the obligation of contracts enshrined in no less than the fundamental law itself.

*Case Digest by JAY MARK P. BALBOSA JD – IV, Andres Bonifacio College, SY 2019 – 2020