Republic Planters Bank vs. Agana

Redemption of preferred shares is optional, not mandatory, when the stock certificate provides that the corporation "may" redeem them at its sole option; dividends on preferred shares are not payable as a matter of right but only when declared by the board from unrestricted retained earnings (or surplus profits); a regulatory directive prohibiting redemption to protect banking solvency is a valid exercise of police power that limits the constitutional guarantee against impairment of contracts; and claims for redemption and dividends are barred by prescription after 10 years and by laches when asserted 18 years after issuance.

In 1961, Republic Planters Bank extended a loan to Robes-Francisco Realty & Development Corporation. As part of the loan proceeds, the bank issued preferred shares worth P8,000.00 instead of full cash payment, with stock certificates containing specific terms regarding quarterly dividends and optional redemption.

• Filed in CFI: Action for specific performance filed in the Court of First Instance of Rizal, Branch XXVIII, Pasay City (Civil Case No. 6965-P)
• Decision of lower court: September 7, 1979 — CFI rendered judgment ordering petitioner to redeem shares and pay dividends plus interest
• Elevated to SC: Petition for certiorari filed seeking annulment of CFI decision for grave abuse of discretion amounting to lack or excess of jurisdiction

• September 18, 1961: Private respondent Corporation secured a P120,000.00 loan from petitioner
• As part of loan proceeds, petitioner issued preferred shares (Stock Certificates Nos. 3204 and 3205) instead of full cash payment
• Certificates represented 800 shares (400 each) with P10.00 par value, totaling P8,000.00, issued in names of Adalia F. Robes and Carlos F. Robes (who subsequently endorsed his shares to Adalia)
• Stock certificate terms provided:
  • Right to receive 1% quarterly dividend, cumulative and participating
  • Shares "may be redeemed... at any time after two (2) years from the date of issue at the option of the Corporation"
  • January 31, 1973: Central Bank Governor Gregorio S. Licaros issued directive prohibiting petitioner from redeeming preferred shares due to chronic reserve deficiency, to protect depositors and creditors from prejudice
  • January 5, 1979: Private respondents sent letter-demand for redemption and dividends (not formally offered in evidence)
  • January 31, 1979: Respondents filed Complaint for specific performance to compel redemption (P8,000.00 face value) and payment of 1% quarterly dividends
  • Petitioner filed Motion to Dismiss on grounds of lack of jurisdiction, unenforceability, and prescription/laches; denied by trial court on March 16, 1979
  • Trial court rendered assailed decision on September 7, 1979 ordering redemption and payment

• Trial court committed grave abuse of discretion in ordering payment of dividends and redemption of shares
• Cannot be compelled to redeem preferred shares as the term "may" in the certificate indicates option, not obligation
• Dividends are not payable as a matter of right; require declaration from surplus profits or unrestricted retained earnings
• Central Bank directive prohibiting redemption is valid and binding; issued due to chronic reserve deficiency to protect depositors and creditors
• Police power justifies the directive, limiting the non-impairment clause
• Claim barred by prescription (10 years under written contract) and laches (18-year delay)
• Trial court erred in not holding that complaint fails to state a cause of action for mandatory redemption

• Stock certificates' "very wordings" clearly allow redemption
• The 1% quarterly dividend provision makes the shares "interest bearing stocks" entitling them to payment as a matter of right without necessity of prior declaration of dividend
• Central Bank directive prohibiting redemption constitutes impairment of contractual obligations under the Constitution
• Petitioner is in estoppel from invoking General Banking Act provisions against purchasing own shares because the redemption terms are its own handiwork
• Prescriptive period was interrupted by written extrajudicial demand (January 5, 1979 letter)

• Procedural Issues:
  • Whether the trial court committed grave abuse of discretion amounting to lack or excess of jurisdiction in ordering payment of dividends and redemption
  • Whether the complaint states a cause of action for mandatory redemption
• Substantive Issues:
  • Whether redemption of preferred shares is mandatory or optional when the certificate provides the corporation "may" redeem them at its option
  • Whether preferred shares with guaranteed quarterly dividends constitute "interest bearing stocks" payable as a matter of right without declaration
  • Whether the Central Bank directive prohibiting redemption constitutes an unconstitutional impairment of the obligation of contracts
  • Whether the claim is barred by prescription (Article 1144 of the NCC) and/or laches

• Procedural: The trial court committed grave abuse of discretion amounting to lack or excess of jurisdiction in ordering mandatory redemption and payment of dividends contrary to the clear terms of the stock certificates and governing law; the complaint fails to state a cause of action for mandatory redemption where the certificate grants only an option.
• Substantive:
  • Optional Redemption: The word "may" in the stock certificate denotes discretion and cannot be construed as mandatory; optional redemption rests entirely with the corporation, and stockholders have no right to compel it.
  • Dividends Not Automatic: The 1% quarterly dividend provision does not create "interest bearing stocks" payable as a matter of right; dividends can only be declared from unrestricted retained earnings (or surplus profits under the old law) and require board discretion; preferences do not create a lien or creditor status.
  • Police Power Valid: The Central Bank directive prohibiting redemption due to chronic reserve deficiency is a valid exercise of police power to protect the banking industry, depositors, and creditors; public welfare is superior to private rights, limiting the non-impairment clause of the Constitution.
  • Barred by Prescription and Laches: The claim prescribed under Article 1144 of the NCC (10 years for written contracts) as the action was filed 18 years after issuance of the stock certificates; the letter-demand was not formally offered in evidence; claim also barred by laches due to unreasonable delay (16 years beyond the agreed 2-year redemption period).

• Preferred Shares Classification:
  • Preferred shares as to assets: Give preference in distribution of assets upon liquidation
  • Preferred shares as to dividends: Entitle holders to receive dividends to the extent agreed before any dividends paid to common stockholders, but no guaranty of dividends exists
• Dividend Declaration Requirements:
  • Under Section 16 of Act No. 1459 (Old Corporation Law) and Section 43 of the Corporation Code (Batas Pambansa Blg. 68), dividends may be declared only from unrestricted retained earnings (or "surplus profits" under the old law)
  • The board has discretion to determine whether to declare dividends; shareholders are risk-takers subordinate to creditors and have no lien on corporate property
• Optional vs. Mandatory Redemption:
  • "May" denotes discretion: When stock certificates provide that redemption "may" be made "at the option of the Corporation," redemption is optional, not mandatory
  • Optional redemption rests entirely with the corporation; stockholders cannot compel or refuse redemption
• Redemption Limitations:
  • Under the Corporation Code, redeemable shares may be redeemed regardless of unrestricted retained earnings provided the corporation has, after redemption, assets to cover debts and liabilities inclusive of capital stock
  • Redemption prohibited where corporation is insolvent or redemption would cause insolvency or inability to meet debts as they mature
• Police Power Over Contracts:
  • The Constitutional guaranty against impairment of the obligation of contracts is limited by the exercise of police power
  • Public welfare is superior to private rights
• Prescription and Laches:
  • Article 1144, NCC: Actions founded upon written contracts prescribe in ten (10) years
  • Laches: Failure or neglect for an unreasonable length of time to do that which exercising due diligence could or should have done earlier; negligence to assert a right within reasonable time warrants presumption of abandonment or declination

• "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... 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."
• "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."

• Philippine National Bank v. Remigio, G.R. No. 78508, March 21, 1994 — Cited for the doctrine that the constitutional guaranty against impairment of contracts is limited by police power; public welfare superior to private rights.
• Olizon v. Court of Appeals, G.R. No. 107075, September 1, 1994 — Cited for the definition and application of laches.

• Article 1144 of the New Civil Code — Actions founded upon written contracts prescribe in ten (10) years; applied to bar claim after 18-year delay.
• Section 16 of Act No. 1459 (Old Corporation Law) — Prohibited declaration of dividends except from surplus profits arising from business; applied to reject "interest bearing stock" theory.
• Section 43 of the Corporation Code (Batas Pambansa Blg. 68) — Board may declare dividends only out of unrestricted retained earnings; underscores that dividend payment is not a matter of right.
• Section 8 of the Corporation Code — Governs redemption of redeemable shares; supports optional redemption at corporation's option.
• Constitutional Provision on Non-Impairment of Contracts — Limited by police power; public welfare is superior to private rights.

• N/A (Padilla, Bellosillo, Vitug, and Kapunan, JJ., concurred without separate opinions)