Right of pre-emption of stockholders.

Whenever the capital stock of a corporation is increased and new shares of stock are issued, the new issue
must be offered first to the stockholders who are such at the time the increase was made in proportion to
their existing shareholdings and on equal terms with other holders of the original stocks before
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subscriptions are received from the general public.

A stockholder whose pre-emptive right is violated may maintain an action to compel the corporation to
give him that right. If the denial is by an amendment to the articles of incorporation, he may exercise his
appraisal right under Section 81(1).

The requisites for the validity of such sale, etc. are as follows:
(a) The sale, etc., must be approved by the board of directors or trustees;
(b) The action of the board of directors or trustees must be authorized by the vote of stockholders representing 2 /3
of the outstanding capital stock including holders of nonvoting shares (see Sec. 6, par. 6[3].) or 2 / 3 of the members,
as the case may be; and
(c) The authorization must be done at a stockholders' or members' meeting duly called for that purpose after written
notice.

A private corporation may invest its funds in any other corporation or business or for any purpose
other than the primary purpose for which it was organized when approved by a majority of the
board of directors or trustees and ratified by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or by at least two-thirds (2/3) of the members in the case of
non-stock corporations, at a stockholders' or members' meeting duly called for the purpose.

A dividend is that part or portion of the profits of a corporation set aside, declared and ordered by the
directors to be paid ratably to the stockholders on demand or at a fixed time. (Fisher vs. Trinidad, 43 Phil.
480 [1922]; Nielson & Co., Inc. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968].) It is a
payment to the stockholders of a corporation as a return upon their investment

The term profit means the "return to capital rather than earnings from labor performed or services
rendered." (U.S. Employees Association Employees Association [USEAEA] vs. U.S. Employees
Association [USEA], 107 SCRA 87 [1981], citing Ballantine's Law Diet., 3rd ed.) It has also been defined
as "the excess of return over expenditure in a transaction or series of transactions," or the "excess of an
amount received over the amount paid for goods and services" (Nicolas vs. Court of Appeals, 288 SCRA
307 [1998].), citing Webster's Third
New Int. Diet., p. 1986 and Barron's Law Dictionary, p. 1991.)

As applied to a corporation, the term has a larger meaning than dividends and covers benefits of any kind,
the excess of value over cost, acquisition beyond expenditures, gain or advance. {Ibid., citing Booth vs.
Gross, Kelly & Co., 238 P. 289, 831, 41 A.L.R. 868.) It is the excess of receipts over expenditures, that is,
net earnings. (Ibid., citing American cases.)
"

Dividends distinguished from profits or earnings.

(1) A dividend, as applied to corporate stock, is that portion of the profits or net earnings which the
corporation has set aside for ratable distribution among the stockholders. Thus, dividends come from
profits, while profits are the source of dividends.
(2) Profits are not dividends until so declared or set aside by the corporation. In the meantime, all profits
are a part of the assets of the corporation and do not belong to the stockholders individually. (19 Am. Jur.
2d 284.) They may be in cash as well as in kind.

Dividends received by a company which is a stockholder in another corporation are corporate earnings
arising from corporate investment.

Meaning of by-laws.
By-laws may be defined as the rules of action adopted by a corporation (or association) for its internal
government and for the government of its stockholders or members and those having the direction,
management and control of its affairs in their relation to the corporation and as among themselves (see 18
C.J.S. 589, p. 344; 8 Fletcher, pp. 632-633.), including rules for routine matters such as calling meetings
and the like.

By-laws and resolutions distinguished.

In addition to the by-laws, a corporation may adopt other rules and regulations for its government, which
may be in the form of a board resolution. (SEC Opinion, July 12,1993.) Generally speaking, by-laws and
resolutions are recognized and treated by the courts as distinct and different, not merely in name, but with
regard to their respective offices, functions, and operations.

(1) Nature and subject matter. A resolution is merely a declaration of the will of the corporation in a
given matter and in the nature of a ministerial act. (Evans vs. City of Jackson, 30 So. 2d 315, 317, 202
Miss. 9; 37-A Words and Phrases 3.) A by-law, on the other hand, is a permanent rule of action (except
only insofar as it may be repealed or amended) of the conduct of corporate affairs while a resolution is
ordinarily limited in its operation, applying usually to a single act or transaction of the corporation or to
some specific person, situation or occasion.

(a) So-called election laws adopted by a corporation as mere rules on motion and not by the procedure
specified in the by-laws for adoption of a by-law, to meet a particular situation then existing, without any
intention to legislate for similar future situations, partake of the nature of resolutions and are not operative
as by-laws. (Hornady vs. Goodman,
167 G.A. 555,146 S.E. 713; 8 Fletcher, p. 646.)
(b) While the power to amend the by-laws may be delegated to the board of directors or trustees, such
delegated power is temporary in nature and may be revoked at any time by the vote of the majority of the
outstanding capital stock or of the members; hence, it cannot be permanently be embodied in the by-laws
but merely in a stockholders' or members' resolution. (SEC Opinion, Feb. 9,1994.)

(2) Rule in case of conflict. The by-laws of a corporation are, in effect, its constitution, and will prevail
over a resolution of the board of directors/trustees. (SEC Opinion, Jan. 4,1985, citing Fletcher, 1st ed.,
Sec. 481.)

(3) Necessity of approval by SEC. While corporate by-laws are subject to the approval of the
SEC, other rules and regulations do not need its approval, unless they involve matters where the law
requires such approval. (SEC Opinion, July 13,1993.)

Corporation X owns more than 20% of the voting common shares of Corporation Y. Under the Equity
35

Method of Accounting, Corporation X is required to book its share in the net earnings or loss of Corporation
Y. Can Corporation X declare cash or stock dividend or both from its recorded equity earnings in
Corporation Y which are not yet received in cash? No. Retained earnings or surplus profits referred to under
Section 43 from which dividends can be legally declared do not include participation or share of a corporation
in the profits of its subsidiaries and affiliates, unless and until such profits are actually received in the form of
cash or property dividends. Thus, while for purposes of management accounting, Corporation X can
recognize as income its equity in the net earnings in Corporation Y, the same cannot be declared as dividends
since it is not yet actually realized as income inasmuch as Corporation Y has not yet declared the same as
dividends.

Validity of by-laws

The following are considered as the elements of valid bylaws:

(1) They must not be contrary to existing law and inconsistent with the Code (Sec. 36[5]; Sec. 46.);
(2) They must not be contrary to morals and public policy
(Sec. 36[5]; see Fletcher vs. Botica Nolasco Co., Inc., 47 Phil. 583 [1925].);
(3) They must not impair obligations of contract (Ibid.);

(4) They must be general and uniform in their operation and not directed against particular individuals (8
Fletcher, p. 734.), i.e., not discriminatory;

(5) They must be consistent with the charter or articles of incorporation; and
(6) They must be reasonable.