Republic Planters Bank vs. Agana

Redeemable preferred shares issued under terms providing that they "may" be redeemed at the option of the corporation grant a discretionary, not mandatory, right of redemption to the issuing corporation; consequently, stockholders cannot compel redemption, and such redemption is subject to statutory solvency requirements and regulatory restrictions imposed by the Central Bank in the exercise of its police power.

• On September 18, 1961, private respondent Robes-Francisco Realty and Development Corporation obtained a loan of P120,000.00 from petitioner Republic Planters Bank.
• As part of the loan proceeds, petitioner issued preferred stock certificates numbered 3204 and 3205 to private respondent Adalia F. Robes and Carlos F. Robes (who later endorsed his shares to Adalia), representing 800 shares with a par value of P10.00 per share, totaling P8,000.00.
• The stock certificates contained terms and conditions stating: (1) the preferred stock shall have the right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating; and (2) such preferred shares may be redeemed, by the system of drawing lots, at any time after two (2) years from the date of issue at the option of the Corporation.
• On January 31, 1979, private respondents filed a Complaint for specific performance to compel petitioner to redeem the preferred shares for their face value and to pay 1% quarterly interest as dividends.
• Private respondents attached to their complaint a letter-demand dated January 5, 1979, which was not formally offered in evidence during the trial.
• Petitioner had been suffering from chronic reserve deficiency, and on January 31, 1973, the Central Bank Governor issued a directive prohibiting petitioner from redeeming any preferred shares or paying dividends thereon to prevent reduction of assets to the prejudice of depositors and creditors.
• The trial court rendered judgment on September 7, 1979, ordering petitioner to pay the face value of the stock certificates as redemption price plus 1% quarterly interest, ruling that the shares were "interest bearing stocks" and that redemption was mandatory based on the certificate terms.

• The trial court committed grave abuse of discretion in ordering petitioner to pay interest on the preferred shares from 1961 to 1979, as dividends are not payable as a matter of right but only from surplus profits and upon declaration by the board of directors.
• The trial court committed grave abuse of discretion in ordering petitioner to redeem the preferred shares, as the term "may" in the stock certificate indicates discretion vested solely in the corporation, not a mandatory obligation.
• The trial court committed grave abuse of discretion in disregarding the Central Bank directive prohibiting redemption, which was issued to protect depositors and creditors and constitutes a valid exercise of police power that does not impair the obligation of contracts.
• The complaint fails to state a cause of action because the stock certificates do not create a vested right to compel redemption or payment of dividends.
• The claim of private respondent Adalia F. Robes is barred by prescription and laches, having been asserted only after almost eighteen years from the issuance of the stock certificates in 1961.

• The terms and conditions of the stock certificates clearly indicate that the preferred shares are "interest bearing stocks" entitling the holders to receive 1% quarterly dividends as a matter of right without necessity of prior declaration of dividends by the board.
• The clear wording of the stock certificates allows redemption of the preferred shares, and petitioner is estopped from invoking the General Banking Act provision prohibiting banks from buying their own shares because the redemption terms were petitioner's own handiwork.
• The Central Bank directive prohibiting redemption constitutes an impairment of the obligation of contracts in violation of the Constitution.
• The prescriptive period was interrupted by written extrajudicial demands made by the plaintiffs, and the action is not barred by laches.

• Procedural Issues:
  • Whether the Supreme Court may properly exercise jurisdiction over the petition for certiorari to annul the trial court's decision on the ground of grave abuse of discretion amounting to lack or excess of jurisdiction.
• Substantive Issues:
  • Whether the petitioner-bank may be compelled to redeem the preferred shares issued to private respondents.
  • Whether the preferred shares constitute "interest bearing stocks" entitling holders to dividends as a matter of right without prior declaration.
  • Whether the Central Bank directive prohibiting redemption constitutes an impairment of the obligation of contracts.
  • Whether the claim for redemption and dividends is barred by prescription and/or laches.

• Procedural:
  • The Supreme Court held that certiorari is the proper remedy to annul the trial court's decision which was rendered with grave abuse of discretion amounting to lack or excess of jurisdiction, as the trial court ignored the clear terms of the stock certificates and the mandate of law in compelling redemption and payment of dividends.
• Substantive:
  • The Court ruled that redemption of preferred shares cannot be compelled by the stockholder where the stock certificate provides that the shares "may" be redeemed at the option of the corporation, as the word "may" denotes discretion and not obligation; redemption rests entirely with the corporation and the stockholder is without right to compel it.
  • The Court held that dividends on preferred shares are not payable as a matter of right; payment depends on the existence of unrestricted retained earnings (or surplus profits under the old law) and requires declaration by the board of directors. The "interest bearing stocks" theory applied by the trial court has no legal basis unless construed as requiring payment only from net earnings or surplus.
  • The Court ruled that the Central Bank directive prohibiting redemption was a valid exercise of police power to protect depositors, creditors, and the banking industry, and does not constitute an impairment of the obligation of contracts, as public welfare is superior to private rights.
  • The Court held that the claim is barred by prescription under Article 1144 of the New Civil Code (10 years for written contracts) and by laches, as private respondents asserted their rights only after 18 years of inaction, indicating abandonment or neglect to assert their rights within a reasonable time.

• Nature of Preferred Shares — Preferred shares entitle holders to certain preferences over common stockholders, such as priority in dividend distribution or asset liquidation, but do not give them a lien on corporate property nor make them creditors of the corporation; their rights remain subordinate to creditors.
• Redeemable Shares — Shares that are redeemable at the option of the issuing corporation (optional redemption) grant discretion to the corporation alone, and the stockholder has no right to compel redemption; redemption is permitted only when the corporation has sufficient assets to cover debts and liabilities after redemption, and may not be made where the corporation is insolvent or if such redemption will cause insolvency.
• Dividends as Matter of Discretion — The declaration of dividends depends on the availability of unrestricted retained earnings (or surplus profits) and requires action by the board of directors; shareholders have no vested right to dividends until they are declared, and preferred shareholders are risk takers who can look only to what is left after corporate debts and liabilities are fully paid.
• Police Power vs. Non-Impairment Clause — The constitutional guaranty against impairment of the obligation of contracts is limited by the state's exercise of police power, as public welfare is superior to private rights; regulatory measures by the Central Bank to preserve banking solvency constitute valid police power.
• Statutory Construction of "May" — The word "may" in statutory and contractual provisions denotes discretion and permissiveness, as opposed to "shall" which denotes mandate or obligation.
• Laches — Laches is defined as the failure or neglect for an unreasonable length of time to do that which by exercising due diligence could or should have been done earlier, warranting a presumption that the party entitled to assert a right has either abandoned it or declined to assert it.

• "What respondent Judge failed to recognize was that while the stock certificate does allow redemption, the option to do so was clearly vested in the petitioner bank. The redemption therefore is clearly the type known as 'optional'. Thus, except as otherwise provided in the stock certificate, the redemption rests entirely with the corporation and the stockholder is without right to either compel or refuse the redemption of its stock."
• "It is a settled doctrine in statutory construction that the word 'may' denotes discretion, and cannot be construed as having a mandatory effect."
• "Preferences granted to preferred stockholders, moreover, do not give them a lien upon the property of the corporation nor make them creditors of the corporation, the right of the former being always subordinate to the latter."
• "The directive, in limiting the exercise of a right granted by law to a corporate entity, may thus be considered as an exercise of police power. The respondent judge insists that the directive constitutes an impairment of the obligation of contracts. It has, however, been settled that the Constitutional guaranty of non-impairment of obligations of contract is limited by the exercise of the police power of the state, the reason being that public welfare is superior to private rights."
• "Laches has been defined as the failure or neglect, for an unreasonable length of time, to do that which by exercising due diligence could or should have been done earlier; it is negligence or omission to assert a right within a reasonable time, warranting a presumption that the party entitled to assert it either has abandoned it or declined to assert it."

• Philippine National Bank v. Remigio, G.R. No. 78508, March 21, 1994 — Cited for the principle that the constitutional guaranty of non-impairment of obligations of contract is limited by the exercise of police power, as public welfare is superior to private rights.
• Olizon v. Court of Appeals, G.R. No. 107075, September 1, 1994 — Cited for the definition of laches as the failure or neglect to assert a right within a reasonable time.

• Act No. 1459, Section 16 (Old Corporation Law) — Provided that no corporation shall declare dividends except from surplus profits arising from its business; underscored that dividends must come from profits, not capital.
• Corporation Code, Section 8 — Cited regarding redeemable shares and the condition that redemption may not be made where the corporation is insolvent or if such redemption will cause insolvency.
• Corporation Code, Section 43 — Provides that the board of directors may declare dividends only out of unrestricted retained earnings, and prohibits issuance of stock dividends without approval of stockholders representing not less than two-thirds of outstanding capital stock.
• New Civil Code, Article 1144 — Provides that actions based upon written contracts prescribe in ten (10) years; applied to bar the claim after 18 years of inaction.

• Padilla, Bellosillo, Vitug, and Kapunan, JJ. — Concurred in the decision without writing separate opinions.