VELASCO, Von Laurentz Corporation Law

3G Sat. 10:00-3:30

I. What are Wasting Assets Corporations, and why

are they allowed to declare dividends out of
Capital?
Wasting Assets Corporations are those corporations engaged solely or principally in the
exploitation of wasting assets to distribute the net proceeds derived from the exploitation of
their holdings such as mines, oil wells, patents, and leaseholds, without allowance or reduction
for depletion. Wasting Assets Corporations are exempted from the general rule though what is
otherwise known as the Wasting Assets Doctrine, which has been adopted and applied by
Philippine jurists but given scant discussion or consideration. The Wasting Assets Doctrines
development began when an English court in the case of Lee v. Neuchantel Asphalte Company1
made a distinction between depreciation of assets in the case of ordinary corporations, and the
depletion of assets suffered by wasting assets corporations. The American case of Excelsior v.
Pierce2, citing Neichantel gave birth to the Doctrine when it held that the rule which forbade
the withdrawal of capital or capital stock, and confined divideds to surplus profits arising from
business did not forbid mining corporations (wasting asset corporations) from distributing net
proceeds. Jovito Salonga notes in the Philippine Law Journal3 that the Pierce case was decided
on a statute identical with the Philippine dividend section, hence the application in this
Jurisdiction. Scholars4 argue that the Doctrine finds no basis in law, there being no sufficient
statutory factual and statutory authority for the ruling, and hence falling dangerously close to
Judicial Legislation. Grimes5 notes that both the Lee and Excelsion cases had sufficiently proven
that the respective corporations had surplus income for which dividends could be declared.
However, both Grimes and Salonga are in agreement that the Wasting Assets Doctrine is more
an expression of policy rather than statutory pronouncement.

The rationale for the Doctrine seems to arise from the nature of Wasting Asset
Corporations, or particularly from the fact that they deal with wasting assets. It would seem
that the consensus is that investors and creditors of corporations involved in such business are
aware of the temporary nature of such enterprises, rather than being for long-term purposes 6.
Arguments for the doctrine therefore, state that an investor or stockholder for Wasting Asset
Corporations, being aware of their nature, are not interested in having its capital kept intact or
held for further investment. He is, therefore, interested in the capital being exhausted for profit,
rather than kept for long term investment.

Despite being a critic of the doctrine himself, Salonga notes that there is an absence of
any statory or jurisprudential authority to hold the inapplicability of the said Doctrine in our
jurisdiction7 But he also concedes to the fact that mining is a vital sector to the Philippine
economy. It could be logically inferred that if such case arose, the Wasting Assets Doctrine
would likely be upheld.

1 41 Ch. Div. 1. (1899).

2 90 Cal. 131.
3 Vol. 28, No. 4; Sept 1953.
4 Corporations: Liquidating Dividends by Wasting Assets Corporations in California; California
Law Review; Vol. 34, No. 1; Mar. 1946.
5 Ibid.
6 Note (1926) 12 Cornell L.Q. 79, 83.
7 Ibid.
II. Why can a Treasury Share be issued as a property
dividend, but not as a cash or stock dividend?
Treasury shares cannot be declared as stock dividends or cash dividends for the reason
that they are not considered as part of the earned or surplus profits8. In the case of cash
dividends, the declaration of such would run counter to the nature of dividends and the nature
of the treasury stocks. Treasury stocks are those reacquired by the corporation at a cost, and to
re-issue them as cash would not only be burdensome (the cost of re-acquisition in addition to
being declared as cash dividends) but also results in the absurd situation of the corporation
being the creditor, and debtor of itself by pulling out money in one pocket and placing it in the
other9. The same goes for stock dividends. The purpose of the issue of stock dividends is for the
increase of the capitalization of the corporation. The same creditor-debtor absurdity applies in
the case of issuing stock dividends out of treasury shares. By issuing stock dividends out of
treasury shares, the corporation would be in effect incurring additional liability to its
stockholders without the corresponding increase in capitalization, and would instead be
incurring a loss due to the costs of the re-acquisition of the treasury shares. But in the case of
property dividends, property dividends may be declared out of the retained earnings previously
used to support their acquisition provided that the amount of the said retained earnings has not
been subsequently impaired by losses.

8 Reviewer on Commercial Law; Aquino and Sundiang (2014)

9 Ibid.