Commercial Law, 2018 Bar — Question IX

ESSAY

Yangchou Inc.'s (YI) Articles of Incorporation (AOI) provides for two (2) types of shares of stock: common and preferred shares. Its AOI further provides that “the preferred shares shall have a guaranteed annual dividend of 3% of the par value.” Its By-Laws also specifically provides that “preferred shareholdings shall be cumulative and participating.” No other terms of preference are provided for preferred shares in either the AOI or By-Laws of YI. For the first five years of operations, the company was operating at a loss. At the end of the sixth year, YI realized a net profit of PhP100 million, and unrestricted retained earnings of PhP30 million. The YI Board of Directors declared and paid out dividends of 1% on common shares, and 5% on preferred shares, which amounted to a total of PhP30 million. However, the preferred shareholders made a formal demand that they be given an additional 3% dividend for each of the five (5) years based on the preferred shares features of “cumulative and participating,” and an additional 1% given to the common shareholders, which could all be accommodated within the remaining balance of the net profits. Should YI's Board heed the demand of its preferred shareholders?

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