NIELSON & CO. INC. V. LEPANTO CONSOLIDATED MINING CO.

Facts: Pursuant to an agreement in a management contract regarding thecompensation of Nielson, Lepanto Consolidated will pay Nielson 10% of any dividends declared and paid. Lepanto declared stock dividends worth one million in 1949 and two million in 1950. This was during the period covered by an extension in the management contract. Nielson sued for his share in the stock dividends. The Supreme Court declared that Nielson was entitled to receive 10% of the stock dividends declared or shares of stock worth 300T. In this motion for reconsideration, Lepanto maintains that the court erred in such order because it is a violation of the Corporation Law, Section 16. Issue: Whether or not a corporation can issue stock dividends to a person who is not a stockholder in payment of services rendered. Held: The Supreme Court ruled that Nielson is not entitled to a share in the stock dividends since he is not a stockholder. However, he must still be paid his 10% fee using as the basis for computation the cash value of the stock dividends declared. Important Points on the Case of Nielson: Effects of the Inclusion of a Non-stockholder as a Stock Dividend Beneficiary 1. It deprives a stockholder of his right share in the corporate profits. 2. The proportion of a stockholders interest changes radically to his or her detriment. 3. The non-stockholder benefits without assuming the same risks as those born by a stockholder. Source of Dividends General Rule: No Stock dividend may be declared, except out of unrestricted retained earnings. Retained Earnings the net accumulated earnings of the corporation out transactions with individuals or firms outside of the corporation. Retained earnings include earnings from the sale of goods or services in the ordinary course of its business, as well as earnings from the sale of corporate property other than its stock in trade, at a price higher than cost. Implicit from the term retained earnings is the limitation that a corporation has no power to declare dividends unless its legal or stated capital is maintained. Retained earnings do not include transactions involving treasury stock, since the purchase and sale of such stock are regarded as contractions and expansions or paid-in capital. Neither do they include donations which are also considered as additional paid-in capital. Where the value of existing assets has increased and a are appraisal is made, the increase is merely an unrealized capital element and therefore does not constitute earnings from which dividends, whether in cash or stock, may be declared. Unrestricted Retained Earnings the undistributed earnings of the corporation which have NOT been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stockholders as dividends.