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    Wasting Assets Corporations

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    Von Velasco
    Wasting assets corporations are allowed to declare dividends out of capital because they deal with depleting assets like mines and oil wells. The wasting assets doctrine originated from an English case that distinguished depletion of assets for these corporations from ordinary depreciation. This doctrine was later adopted in an American case and applied in the Philippines. While some scholars argue it lacks statutory basis, others see it as an expression of policy given the temporary nature of these businesses. Treasury shares cannot be issued as cash or stock dividends because they are not considered earned profits. Issuing them this way would burden the corporation financially and create an absurd situation of the corporation being both creditor and debtor to itself. However, property dividends can be declared from treasury

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    Wasting Assets Corporations

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    Von Velasco
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    Wasting assets corporations are allowed to declare dividends out of capital because they deal with depleting assets like mines and oil wells. The wasting assets doctrine originated from an English case that distinguished depletion of assets for these corporations from ordinary depreciation. This doctrine was later adopted in an American case and applied in the Philippines. While some scholars argue it lacks statutory basis, others see it as an expression of policy given the temporary nature of these businesses. Treasury shares cannot be issued as cash or stock dividends because they are not considered earned profits. Issuing them this way would burden the corporation financially and create an absurd situation of the corporation being both creditor and debtor to itself. However, property dividends can be declared from treasury

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    A short write-up on why wasting assets corporations are allowed to issue dividends out of capital

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    Wasting assets corporations are allowed to declare dividends out of capital because they deal with depleting assets like mines and oil wells. The wasting assets doctrine originated from an English case that distinguished depletion of assets for these corporations from ordinary depreciation. This doctrine was later adopted in an American case and applied in the Philippines. While some scholars argue it lacks statutory basis, others see it as an expression of policy given the temporary nature of these businesses. Treasury shares cannot be issued as cash or stock dividends because they are not considered earned profits. Issuing them this way would burden the corporation financially and create an absurd situation of the corporation being both creditor and debtor to itself. However, property dividends can be declared from treasury

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    © All Rights Reserved
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    1K views2 pages

    Wasting Assets Corporations

    Uploaded by

    Von Velasco
    Wasting assets corporations are allowed to declare dividends out of capital because they deal with depleting assets like mines and oil wells. The wasting assets doctrine originated from an English case that distinguished depletion of assets for these corporations from ordinary depreciation. This doctrine was later adopted in an American case and applied in the Philippines. While some scholars argue it lacks statutory basis, others see it as an expression of policy given the temporary nature of these businesses. Treasury shares cannot be issued as cash or stock dividends because they are not considered earned profits. Issuing them this way would burden the corporation financially and create an absurd situation of the corporation being both creditor and debtor to itself. However, property dividends can be declared from treasury

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    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.

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