On September 15, 2007, XYZ Corporation issued to Paterno 800 preferred shares with the following terms:
"The Preferred Shares shall have the following rights, preferences, qualifications, and limitations, to wit:
1. The right to receive a quarterly dividend of One Per Centum (1%), cumulative and participating;
2. These shares may be redeemed, by drawing of lots, at any time after two (2) years from date of issue, at the option of the Corporation; x x x."
Today, Paterno sues XYZ Corporation for specific performance, for the payment of dividends on, and to compel the redemption of, the preferred shares, under the terms and conditions provided in the stock certificates. Will the suit prosper? Explain.
Paterno cannot compel the corporation to declare dividends as this is a discretionary act on the part of the corporation and cannot be subject of a specific performance. A corporation can only declare dividends only if there are unrestricted retained earnings otherwise this would result to the violation of the trust fund doctrine. The right of Paterno of preference over payment of dividends arises only if the corporation actually declares dividends. Paterno cannot compel the Corporation to redeem its shares since the agreement clearly provides that the shares may be redeemed at the option of the corporation. Redemption therefore as stated in the agreement is optional on the part of the corporation and not mandatory. (2009 Bar Question)
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