SEC. 73. Books To Be Kept Stock Transfer Agent. - Every Carefully

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TITLE VIII

CORPORATE BOOKS AND RECORDS

SEC. 73. Books to be Kept; Stock Transfer Agent. - Every


corporation shall keep and carefully preserve at its principal office all
information relating to the corporation including, but not limited to:

The articles of incorporation and bylaws of the


(a)
corporation and all their amendments;

The current ownership structure and voting rights of


(b)
the corporation, including lists of stockholders or
members, group structures, intra-group relations,
ownership data, and beneficial ownership;

The names and addresses of all the members of the


board of directors or trustees and the executive officers;

(d) Arecord ofall business transactions;


(e) A record of the resolutions of the board of directors or

trustees and of the stockholders or members;


( Copies of the latest reportorial requirements submitted
to the Commission; and
(8) The minutes of all meetings of stockholders or
members, or of the board of directors or trustees. Such
minutes shall set forth in detail, among others: the time
and place of the meeting held, how it was authorized, the
notice given, the agenda therefor, whether the meeting
was regular or special, its object if special, those present
and absent, and every act done or ordered done at the
meeting. Upon the demand of a director, trustee,
stockholder or member, the time when any director,
trustee, stockholder or member entered or left the
meeting must be noted in the minutes; and on a similar
demand, the yeas and nays must be taken on any motion
or proposition, and a record thereof carefully made. The
protest of a director, trustee, stockholder or member on
any action or proposed action must be recorded in full
upon their demand.

Corporate records, regardless of the form in which they are


stored, shall be open to inspection by any director, trustee, stockholder
or member of the corporation in person or by a representative at
reasonable hours on business days, and a demand in writing may be
made by such director, trustee or stockholder at their expense, for
383
The inspecting or
copies of such records or excerpts from said records.
rules under
reproducing party shall remain bound by confidentiality
secrets or processes under
prevailing laws, such as the rules on trade
"Intellectual Property
Republic Act No. 8293, otherwise known as the
otherwise
Code of the Philippines", as amended, Republic Act No. 10173,
Act No. 8799,
known as the "Data Privacy Act of 2012", Republic
otherwise known as "The Securities Regulation Code", and the Rules of
Court
A requesting party who is not a stockholder or member of record,
stockholder or
or is a competitor, director, officer, controlling
otherwise representsthe interests of a competitor shall have no right to
records.
inspect or demand reproduction of corporate

Any stockholder who shall abuse the rights granted under this
section shall be penalized under Section 158 of this Code, without
prejudice to the provisions of Republic Act No. 8293, otherwise known
as the "Intellectual Property Code of the Philippines", as amended, and
Republic Act No. 10173, otherwise known as the "Data Privacy Act of
2012".

Any officer or agent of the corporation who shall refuse to allow


the inspection and/or reproduction of records in accordance with the
provisions of this Code shall be liable to such director, trustee,
stockholder or for and
member damages, in addition, shall be guilty of
an offense which shall be punishable under Section 161 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted
for such refusal: Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior
examination of the records or minutes of such corporation or of any
other
corporation,
or was not acting in good faith or for a
purpose in making the demand to examine or reproduce corporate
legitimate
records, or is a competitor, director, officer, controlling stockholder or
otherwise represents the interests of a competitor.

If the corporation denies or does not act on a demand for


inspection and/or reproduction, the aggrieved party may report such
denial or inaction to the Commission. Within five (5) days from
receipt
of such report, the Commission shall conduct a
summary investigation
and issue an order directing the inspection or reproduction of the
requested records.
Stock corporations must also keep a stock and transfer book,
which shall contain a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and unpaid
on all stocks for which subscription has been made, and the date of
payment of any installment; a statement of every alienation, sale or
transfer ofstock made,the date thereof, by and to whom made; and such
other entries as the bylaws may prescribe. The stock and transfer book
shall be kept in the principal office of the corporation or in the office of
its stock transfer agent and shall be open for inspection by any director
or stockholder of the corporation at reasonable hours on business days.

A stock transfer agent or one engaged principally in the business


of registering transfers of stocks in behalf of a stock corporation shall
be allowed to operate in the Philippines upon securing a license from
the Commission and the payment ofa fee to be fixed by the Commission,
which shall be renewable annually: Provided, That a stock corporation
is not precluded from performing or making transfers of its own stocks,
in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be
applicable: Provided, further, That the Commission may require stock
corporations which transfer and/or trade stocks in secondary markets
to have an independent transfer agent.

SEC. 74. Right to Financial Statements. - A corporation shall

furnish a stockholder or member, within ten (10) days from receipt of


their written request, its most recent financial statement, in the form
and substance of the financial reporting required by the Commission.

At the regular meeting of stockholders or members, the board of


directors or trustees shall present to such stockholders or members a
financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and certified
in accordance with this Code, and the rules the Commission may
prescribe.

However, if the total assets or total liabilities of the corporation


are less than Six hundred thousand pesos (P600,000.00), or such other
amount as may be determined appropriate by the Department of
Finance, the financial statements may be certified under oath by the
treasurer and the president.

The proper custodian of the books, minutes and official records ofa
corporation is usually the corporate secretary. Being the custodian of
corporate records, the corporate secretary has the duty to record and
385
prepare the minutes of the meeting. The signature of the corporate secretary
gives the minutes of the meeting probative value and credibility.

Thus, without the certification of the corporate secretary, it is


incumbent upon the other directors or stockholders as the case may be, to
submit proof that the minutes of the meeting is accurate and reflective of
what transpired during the meeting

Basis of stockholder's right of inspection


The stockholder's right of inspection of the corporation's books and
records is based upon their ownership of the assets and property of the
corporation. It is, therefore, an incident of ownership of the corporate
property, whether this ownership or interest be termed an equitable
ownership, a beneficial ownership, or a quasi-ownership. This right is
predicated upon the necessity of self-protection. It is generally held by
majority of the courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by him with
respect to his interest as a stockholder and for some purpose germane
thereto or in the interest of the corporation. In other words, the inspection
has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the
corporation.2

Right of inspection not absolute


The right of inspection granted by Sec. 74 of the Corporation Code
(Now Section 73, Revised Corporation Code) is not absolute, as when the
stockholder is not acting in good faith and for a legitimate purpose or when
the demand is purely speculative or merely to satisfy curiosity.3

Books and records required to be kept by the corporation


1. The articles of incorporation and bylaws of the corporation and all
their amendments;
2. The current ownership structure and
voting rights of the corporation,
including lists of stockholders or members, group structures, intra-
group relations, ownership data, and beneficial ownership;
3. The namesand addresses of all the members of the board of directors
or trustees and the executive
officers;
4. A record of all business
transactions;
5. A record of the resolutions of the board of directors or
trustees and of
the stockholders or members;
TITLE VIII - CORPORATE BOOKS AND RECORDS

6. Copies of the latest reportorial requirements submitted to the


Commission; and
7. The minutes of all meetings of stockholders or members, or of the
board of directors or trustees.

General rule:
All the above books and records must be kept at the principal office
of the corporation.

Exception:
The stock and transfer book may be kept in the principal office of the
corporation or in the office of its stock and transfer agent, if any.

Note:
Corporate records, regardless oftheform in which they are stored, shall be
open to inspection by any director, trustee, stockholder or member of the
corporation in person or by a representative at reasonable hours on business days,
and a demand in writing may be made by such director, trustee or stockholder at
their expense, for copies ofsuch records or excerpts from said records.

Note:
A requesting party who is not a stockholder or member of record, or is a
competitor, director, officer, controlling stockholder or otherwise represents the
interests ofa competitor shall have no right to inspect or demand reproduction of
corporate records

Limitations on the right of inspection


1. The person demanding the right has not improperly used any
information obtained through any previous examination ofthe books and
records of the corporation;
2. The demand is made in good faith or for a legitimate purpose;
3. The person demanding the right is not a competitor, director, officer,
controlling stockholder or otherwise represents the interests of a
competitor.
Stock transfer agent
A stock transfer agent or one engaged principally in the business of
shall be
registering transfers of stocks in behalf of a stock corporation the
allowed to operate in the Philippines upon securing a license from
which
Commission and the payment of a fee to be fixed by the Commission,
shall be renewable annually.
TITLE VIII -

CORPORATE BOOKS AND RECORDS

Note:
A stock corporation is not precluded from performing or making transfers
of its own stocks, in which case all the rules and regulations imposed on stock
transfer agents, except the payment of a license fee herein provided, shall be
applicable.

Note:
The SEC may require stock corporations which transfer and/or trade
stocks in secondary markets to have an independent transfer agent.
TITLE IX- MERGER AND CONSOLIDATION

TITLE IX
MERGER AND CONSOLIDATION

As a rule, a corporation that purchases the assets of another will not


be liable for the debts of the selling corporation, provided the former acted in
good faith and paid adequate consideration for such assets, except when any
of the following circumstances is present: (1) where the purchaser expressly
or impliedly agrees to assume the debts, (2) where the transaction amounts
to a consolidation or merger of the corporations, (3) where the purchasing
corporation is merely a continuation of the selling corporation, and (4) where
the transaction is fraudulently entered into in order to escape liability for
those debts.1

SEC. 75. Plan of Merger or Consolidation. -Two (2) or more


corporations may merge into a single corporation which shall be one of
the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.

The board of directors or trustees of each corporation, party to the


merger or consolidation, approve a plan of merger or
shall
consolidation setting forth the following:

The names of the corporations proposing to merge or


(a)
consolidate, hereinafter referred to as the constituent
corporations;
b)
(b) The terms of the merger or consolidation and the mode
of carrying the same into effect;
(c) A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of
merger; and, in case of consolidation, all the statements
required to be set forth in the articles of incorporation
for corporations organized under this Code; and
(d) Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable.

What is merger?
A merger is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the combined
business.
What is consolidation?
A consolidation is the union of two or more existing entities to form a
new entity called the consolidated corporation.

Law authorizing merger or consolidation


The merger or consolidation, however, does not become effective
Since a merger or
upon the mere agreement of the constituent corporations.
consolidation involves fundamental changes in the corporation, as well as in
the rights of stockholders and creditors, there must be an express provision
of law authorizing them.
Ordinarily, in the merger of two or more existing corporations, one
of the corporations survives and continues the combined business, while the
rest are dissolved and all their rights, properties, and liabilities are acquired
dissolution of the absorbed
by the surviving corporation. Although there is a
or merged corporations, there is no winding up of their affairs or liquidation
of their assets because the surviving corporation automatically acquires all
their rights, privileges, and powers, as well as their liabilities.

The merger, however, does not become effective upon the mere
agreement of the constituent corporations. Since a merger or consolidation
involves fundamental changes in the corporation, as well as in the rights of
stockholders and creditors, there must be an express provision of law
authorizing them.2

SEC. 76. Stockholders'or Members'Approval. - Upon approval by a


majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation, the
same shall be submitted for approval by the stockholders or members
of each of such corporations at separate corporate meetings duly called
for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations in the same
manner as giving notice of regular or special meetings under Section 49
of this Code. The notice shall state the purpose of the meeting and
include a copy or a summary of the plan of merger or consolidation.

The affirmative vote of stockholders representing at least tw0


thirds (2/3) of the outstanding capital stock of each corporation in the
case of stock corporations or at least two-thirds (2/3) of the members
in the case of nonstock corporations shall be
necessary for the approval
of such plan. Any dissenting stockholder may exercise the right of
appraisal in accordance with this Code: Provided, That if after the
TITLE IX MERGER AND CONSOLIDATION
approval by the stockholders of such plan, the board of directors
decides to abandon the plan, the right of appraisal shall be extinguished.

Any amendment to the plan of merger or consolidation may be


made: Provided, That such amendment is approved by a majority vote
of the respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of two-thirds (2/3) of the members of each of the constituent
corporations. Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.

Problem:
F, Inc. and D, Inc. are entities duly registered with the SEC
primarily engaged in the business of granting loans and receiving
deposits from the general public, and treated as banks.
Sometime in 1985, F, Inc. and D, Inc. entered into a merger, with
D, Inc. as the surviving corporation. The articles of merger were
not registered with the SEC due to incomplete documentation. On
August 12, 1985, D, Inc. changed its corporate name to M, Inc. by way of
an amendment to Article 1 of its Articles of Incorporation, but the
amendment was approved by the SEC only on April 3, 1987.
Meanwhile, on May 26, 1986, the Board of Directors of F, Inc.
assigned its assets in favor of D, Inc. which in turn assumed the formers
liabilities.
The business of M, Inc, however, failed. Hence, the Monetary
Board of the Central Bank of the Philippines ordered its closure and with
PDIC as its liquidator.
It appears that prior to the closure of M, Inc., X filed an action for
collection of sum of money against F, Inc. On October 19, 1989, the court
issued a decision in favor of X.
On April 28, 1993, the sheriff levied on 6 parcels of land owned
by F, Inc. and the notice of sale was subsequently published. W was the
highest bidder. New certificates of title covering the subject properties
were issued in favor of W. On September 20, 1994, W sold one of the
subject parcels of land to Z.
On June 14, 1995, M, Inc., represented by PDIC, filed a complaint
for Annulment of Sheriffs Sale, Cancellation of Title and Reconveyance of
Properties against X and Z. M, Inc. alleged that the sale on execution of the
subject properties was conducted without notice to it and PDIC.
In answer, X and Z averred that M, Inc. had no cause of action
against them or the right to recover the subject properties because M, Inc.
is a separate and distinct entity from F Inc. They further contended that
the unofficial merger between F, Inc. and D, Inc. (now M, Inc.) did not take
effect considering that the merging companies did not comply with the
393
TITLE IX- MERGER AND CONSOLIDATION

formalities and procedure for merger or consolidation as prescribed by


the Corporation Code of the Philippines. Finally, they claimed that F, Inc.
is still a SEC registered corporation and could not have been absorbed by
M, Inc.
Was the merger between F, Inc. and D, Inc. (now M, Inc.) valid and
effective?
Answer:
In this case, it is undisputed that the articles of merger between
F, Inc. and D, Inc. were not registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue the required
certificate of merger. Even if it is true that the Monetary Board of the
Central Bank of the Philippines recognized such merger, the fact remains
that no certificate was issued by the SEC. Such merger is still incomplete
without the certification
There being no merger between F, Inc. and D, Inc. (now M,
Inc.), for third parties such as X and Z, the two corporations shall not be
considered as one but two separate corporations. A corporation is an
artificial being created by operation of law. It possesses the right of
succession and such powers, attributes, and properties expressly
authorized by law or incident to its existence. It has a personality
separate and distinct from the persons composing it, as well as from any
other legal entity to which it may be related. Being separate entities, the
property of one cannot be considered the property of the other.
Thus, in the instant case, as far as third parties are concerned, the
assets of F, Inc. remain as its assets and cannot be consideredas
belonging to D, Inc. and M, Inc., notwithstanding the Deed of Assignment
wherein F, Inc. assigned its assets and properties to D, Inc., and the latter
assumed all the liabilities of the former. As provided in Article 1625 of
the Civil Code, an assignment of credit, right or action shall produce no
effect as against third persons, unless it appears in a public instrument,
or the instrument is recorded in the Registry of Property in case the
assignment involves real property. The certificates of title of the subject
properties were clean and contained no annotation of the fact of
assignment3

SEC. 77.Articles ofMergeror Consolidation.- After the approval by


the stockholders or members as required by the preceding section,
articles of merger or articles of consolidation shall be executed by each
of the constituent corporations, to be signed by the president or vice
president and certified by the secretary or assistant secretary of each
corporation setting forth:

(a) The plan of the merger or the plan of consolidation;


TITLE IX -

MERGER AND CONSOLIDATION

(b) As stock corporations, the number of shares


to
outstanding, or in the case of nonstock corporations, the
number of members;
As to each corporation, the number of shares or
(c)
members voting for or against such plan, respectively;
(d) The carrying amounts and fair values of the assets and
liabilities of the respective companies as of the agreed
cut-off date;
(e) The method to be used in the merger or consolidation of
accounts of the companies;
The provisional or pro-forma values, as merged or

consolidated, using the accounting method; and


Such other information may be prescribed by the
(g) as

Commission.

For a valid merger or consolidation, the approval by the Securities


and Exchange Commission (SEC) of the articles of merger or consolidation
is required. These articles must likewise be duly approved by a majority of
the respective stockholders of the constituent corporations.

SEC. 78. Effectivity of Merger or Consolidation. The articles of


merger or of consolidation, signed and certified as required by this
Code, shall be submitted to the Commission for its approval: Provided,
That in the case of merger or consolidation of banks or banking
institutions, loan associations, trust companies, insurance companies,
public utilities, educational institutions, and other special corporations
governed by special laws, the favorable recommendation of the
appropriate government agency shall first be obtained. If the
Commission is satisfied that the merger or consolidation of the
corporations concerned is consistent with the provisions of this Code
and existing laws, it shall issue a certificate approving the articles and
plan of merger or of consolidation, at which time the merger or
consolidation shall be effective.

If, upon investigation, the Commission has reason to believe that


the proposed merger or consolidation is contrary to or inconsistent
with the provisions of this Code or existing laws, it shall set a hearing to
give the corporations concerned the opportunity to be heard. Written
notice of the date, time, and place of hearing shall be given to each
constituent corporation at least two (2) weeks before said hearing. The
Commission shall thereafter proceed as provided in this Code.
TITLE IX - MERGER AND CONSOLIDATION

Steps to accomplish a merger or consolidation


The steps necessary to accomplish a merger or consolidation of the
Corporation Code, are:

(1) The board of each corporation draws up a plan of merger or


consolidation. Such plan must include any amendment, if necessary,
to the articles of incorporation of the surviving corporation, or in case

of consolidation, all the statements required in the articles of


incorporation of a corporation.
each corporation
(2) Submission of plan to stockholders or members of
least twenty-one (21)
for approval. A meeting must be called and at
days' notice must be sent to all stockholders or members, personally
or by registered mail. A summary of the plan must be attached to the
notice. Vote of two-thirds of the members or of stockholders
representing two-thirds ofthe outstanding capital stock will be needed.
Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of
officers of each
merger or consolidation, by the corporate
constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the articles
of incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SECfor
approval
(5) If upon investigation, the Commission has reason to believe that the
proposed merger or consolidation is contrary to or inconsistent with
the provisions of this Code or existing laws, it shall set a hearing to
give the corporations concerned the opportunity to be heard.
(6) Issuance of certificate of merger or consolidation.

Clearly, the merger shall only be effective upon the issuance of a


certificate of merger by the SEC, subject to its prior determination that the
merger is not inconsistent with the Corporation Code or existing laws. Where
a party to the merger is a special corporation governed by its own charter,
the Code particularly mandates that a favorable recommendation of the
appropriate government agency should first be obtained.5

Consolidation becomes effective not upon mere agreement of the


members but only upon issuance of the certificate of consolidation by the
SEC. When the SEC, upon processing and examining the articles of
consolidation, is satisfied that the consolidation of the corporations is not
inconsistent with the provisions of the Corporation Code and existing laws, it
issues a certificate of consolidation which makes the reorganization
TITLE IX - MERGER AND CONSOLIDATION

official. The new consolidated corporation comes into existence and the
constituent corporations dissolve and cease to exist.6

SEC. 79. Effects of Merger or Consolidation. - The merger or


consolidation shall have the following effects:

(a)The constituent corporations shall become a single


corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger;
and, in the
case of consolidation,shall be consolidated
corporation designated in the plan of consolidation;
(b)
(b) The separate existence of the constituent corporations
shall cease, except that of the surviving or the
consolidated corporation;
(c) The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities, and
powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
(d) The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and
franchises of each constituent corporation; and all real
or personal property, all receivables due on whatever
account, including subscriptions to shares and other
choses in action, and every other interest of, belonging
to, or due to each constituent corporation, shall be
transferred to and vested in such surviving or
deemed
consolidated corporation without further act or deed;
and
(e) The surviving or consolidated corporation shall be
responsible for all the liabilities and obligations of each
constituent corporation as though such surviving or
consolidated corporation had itself incurred such
liabilities or obligations; and any pending claim, action
or proceeding brought by or against any constituent
corporation may be prosecuted by or against the
surviving or consolidated corporation. The rights of
creditors or liens upon the property of such constituent
corporations shall not be impaired by the merger or
consolidation.

Ordinarily, in the merger of two or more existing corporations, one


of the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties and
TITLE IX- MERGER AND CONSOLIDATION

there is a
liabilities are acquired by the surviving corporation. Although
of their
dissolution of the absorbed corporations, there is no winding up
affairs or liquidation of their assets, because the surviving
corporation
and powers, as well as their
automatically acquires all their rights, privileges
liabilities.

effective upon the mere


The merger, however, does not become
The procedure to be followed is
agreement of the constituent corporations.
prescribedunder the Corporation Code. Section 79 of said Code (Now
the approval by the
Section 78, Revised Corporation Code) requires
Securities and Exchange Commission (SEC) of
the articles of merger which, in
a majority of the respective
turn, must have been duly approved by
same provision further
stockholders of the constituent corporations. The
issuance by the SEC of
states that the merger shall be effective only upon the
a certificate of merger. The date of the merger is crucial for
effectivity
determining when the merged or absorbed corporation ceases to exist; and
when its rights, privileges, properties as well as liabilities pass on to the
surviving corporation.

The issuance of the certificate ofmerger is crucial because not only


does it bear out SEC's approval but it also marks the moment when the
consequences of a merger take place. By operation of law, upon the effectivity
of the merger, the absorbed corporation ceases to exist but its rights and
properties, as well as liabilities, shall be taken and deemed transferred to
and vested in the surviving corporation.3

The same rule applies to consolidation which becomes effective not


upon mere agreement of the members but only upon issuance of the
certificate of consolidation by the SEC. When the SEC, upon processing and
examining the articles of consolidation, is satisfied that the consolidation of
the corporations is not inconsistent with the
provisions of the Corporation
Code and existing laws, it issues a certificate of consolidation which makes
the reorganization official. The new consolidated
corporation comes into
existence and the constituent corporations are dissolved and cease to exist.

Problem:
On March 29, 1999, Software
Corp., a foreign corporation duly
organized and existing under the laws of the Netherlands, entered into a
software license agreement with A Bank, a domestic
use of its Software corporation, for the
System in the bank's computer system for a period of
20 years.
TITLE IX -
MERGER AND CONSOLIDATION

In July 2000, A Bank merged with B Corp., with B Corp. as the


surviving corporation. When B Corp. took over the operations of A Bank,
it found the Software System unworkable for its operations, and and
informed Software Corp. of its decision to discontinue with the
for
agreement and to stop further payments thereon. Consequently,
failure of B Corp. to pay its obligations under the agreement despite
demands, Software Corp. filed a complaint for breach of contract.
In its complaint, Software Corp. alleged that it is a foreign
on an
corporation not doing business in the Philippines and is suing
isolated transaction. Pursuant to the agreement, it installed the Software
System in A Bank's computers for a consideration of US$298,000
as

license fee. A Bank also undertook to pay Software Corp. professional


services.
Is B Corp. liable?
Answer
it is the
Due to B Corp.'s merger with A Bank and because
surviving corporation, it is as if it was the one which entered into contract
with Software Corp. In the merger of two existing corporations, one of
the other
the corporations survives and continues the business, while
is dissolved, and all its rights, properties, and liabilities are acquired
true in this case. Under
by the surviving corporation. This is particularly
or consolidation, B Corp. assumed
all the
the terms of the merger
liabilities or
liabilities and obligations of A Bank as ifit had incurred such
to exercise
obligations itself. In the same way, B Corp. also has the right
kind and
all defenses, rights, privileges, and counter-claims of every
nature which A Bank may have or invoke under the law.?
TITLEX - APPRAISAL RIGHT

TITLEX
APPRAISAL RIGHT

What is appraisal right? Explain its nature.


Appraisal right means that a stockholder who dissented and voted
against the proposed corporate action, may choose to get out of the
corporation by demanding payment of the fair market value of his shares.
When a person invests in the stocks of a corporation, he subjects his
investment to all the risks of the business and cannot just pull out such
investment should the business not come out as he expected. He will have to
wait until the corporation is finally dissolved before he can get back his
investment, and even then, only if sufficient assets are left after paying all
corporate creditors. His only way out before dissolution is to sell his shares
should he find a willing buyer. If there is no buyer, then he has no recourse
but to stay with the corporation. However, in certain specified instances, the
Code grants the stockholder the right to get out of the corporation even
before its dissolution because there has been a major change in his contract
of investment with which he does not agree and which the law presumes he
did not foresee when he bought his shares. Since the will of two-thirds of the
have over his it to
stocks will to prevail objections, the law considers only fair
allow him to get back his investment and withdraw from the corporation.1

SEC. 80. When the Right of Appraisal May Be Exercised. Any


stockholder of a corporation shall have the right to dissent and demand
payment of the fair value of the shares in the following instances:
(a) In case an amendment to the articles of incorporation has
the effect of changing or restricting the rights of any
stockholder or class of shares, or of authorizing preferences
in any respect superior to those of outstanding shares of any
class, or of extending or shortening the term of corporate
existence;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge
or other disposition of all or substantially all of the
corporate property and assets as provided in this Code;
C) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose
other than the primary purpose of the corporation.

FOUR INSTANCES OF APPRAISAL RIGHT


The Corporation Code expressly made appraisal rights available to
the dissenting stockholder in the following instances:
1. In case any amendmentto thearticles ofincorporgtion has the
effect of
TITLEX-APPRAISAL RIGHT

a. changing or restricting the rights of any stockholders or


class of shares, or
b. authorizing preferences in any respect superior to those of

outstanding shares of any class,


or
of existence;
C. extending or shortening the term corporate
2. In caseof sale, lease, exchange, transfer,mortgage, pledge or
all of the corporate
other disposition of all or substantially
in this Code;
property and assets as provided
and
3. In case ofmerger or consolidation;
for any purpose other
4. In case of investment ofcorporate funds
than the primary purpose of the corporation.

Note:
Ina close corporation, any stockholder of a close corporation may, for any
to purchase his shares at their fair value, which
reason, compel the said corporation
shall not be less than their par or issued value, when
the corporation has sufjficient
stock.
assets in its books to cover its debts and of capital
liabilities exclusive

SEC. 81. How Right is Exercised. The dissenting stockholder who


-

exercise the right of


votes against a proposed corporate action may
for the
appraisal by making a written demand on the corporationfrom the
within thirty (30) days
payment of the fair value of shares held
make the
date on which the vote was taken: Provided, That failure to
demand within such period shall be deemed a waiver of the appraisal1
the corporation
right. If the proposed corporate action is implemented,
shall pay the stockholder, upon surrender of the certificate or
certificates ofstockrepresenting the stockholder's shares, the fair value
thereof as of the day before the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
If, within sixty (60) days from the approval of the corporate action
by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom shall be
named by the stockholder, another by the corporation, and the third by
the two (2) thus chosen. The findings of the majority of the appraisers
shall be final, and their award shall be paid by the corporation within
thirty (30) days after such award is made: Provided, That no payment
shall be made to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover such payment:
Provided, further, That upon payment by the corporation of the agreed
or awarded price, the stockholder shall forthwith transfer the shares to
the corporation.
TITLEX- APPRAISAL RIGHT

Valuation date
The fair value of the shares of the dissenting stockholder is
determined as of the day prior to the date on which the vote was taken

excluding any appreciation or depreciation in value of the shares in


anticipation of such corporate action.

Note:
Section 81 of the Corporation Code provides that the stockholder may
exercise the right if he or she yoted against the proposed corporateaction andifhe

made a written demand for pavment on the corporation within thirty (30) days
after the date ofvoting.

SEC. 82. Efect of Demandand Termination ofRight. -From the


time
shares until
of demand for payment of the fair value of a stockholder's
involved or the
either the abandonment of the corporate action
all rights accruing to
purchase of the said shares by the corporation,
such shares, including voting and dividend rights, shall
be suspended in
accordance with the provisions of this Code, except
the right of such
stockholder to receive payment of the fair value
thereof: Provided, That
of the said shares
if the dissenting stockholder is not paid the value
and dividend rights
within thirty (30) days after the award, the voting
shall immediately be restored.

Effect of demand and termination of right


1. From the time of demand for payment of the
fair value ofa stockholder's
action involved or
shares until either the abandonment of the corporate
all rights accruing to
the purchase of the said shares by the corporation,
including voting and dividend rights, shall suspended.
be
such shares,
entitled to receive payment of the
2. The dissenting stockholder shall be
between him and the
fair value of his shares as agreed upon chosen them.
corporation or as determined by the appraisers by
the value ofhis shares within 30
3. If the dissenting stockholder is not paid
and dividend rights shall immediately be
days after the award, his voting
restored.
not merely suspended.
4. Upon such payment, all his rights are terminated,
action is abandoned, his
But if before he is paid the proposed corporate
shall thereupon be permanently
rights and status as a stockholder
restored.
unrestricted retained
5. Payment may be made only if the corporation has
its books to the same.
earnings in cover

SEC. 83. When Right to Payment Ceases. - No demand for payment

unless the corporation consents


under this Title may be withdrawn
for payment is withdrawn with the
thereto. If, however, such demand
consent of the corporation, or
if the proposed corporate action is

405
TITLE X- APPRAISAL RIGHT

abandoned or rescinded the corporation or disapproved by the


by
or if the Commission
Commission where such approval is necessary,
entitled to the appraisal right,
determines that such stockholder is not
the fair value of the shares
then the right of the stockholder to be paid and all
stockholder shall be restored,
shall cease, the status as the shares shall be
dividend distributions which would have accrued on the

paid to the stockholder.

General Rule: is
demands payment of his shares
no
A dissenting stockholder who
from his decision.
longer allowed to withdraw

Exceptions:
1. The corporation consents to
the withdrawal;
action is disapproved by the SEC where its
2. The proposed corporate
approval is necessary;
the
action is abandoned or rescinded by
3. The proposed corporate
corporation; and
stockholder is not entitled to appraisal
4. The SEC determines that such
right.
The costs and expenses of
SEC. 84. Who Bears Costs of Appraisal.
-

the corporation, unless the fair value


appraisal shall be borne by the same as the price
ascertained by the appraisers is approximately
offered to pay the stockholder, in
which the corporation may have
latter. In the case of an action to
which case they shall be borne by the
recover such fair value, all costs and expenses shall be assessed against
stockholder to receive
the corporation, unless the refusal of the
payment was unjustified.

General rule:
The corporation shall bear the costs of appraisal.

Exception: the
The fair value ascertained by the appraisers is approximately
same as the price which the corporation may
have offered to pay the
stockholder.
stockholder, in which case they shall be borne by the

SEC. 85.Notation on Certificates; Rights of Transferee. Within


-
ten
a dissenting
(10) days after demanding payment for shares held, the
stockholder shall submit the certificates of stock representing
shares to the corporation for notation that such shares are dissenting
shares. Failure to do so shall, at the option of the corporation, terminate
the rights under this Title. If shares represented by the certificates
bearing such notation are transferred, and the certificates consequently
406
TITLEX- APPRAISAL RIGHT

cancelled, the rights of the transferor as a dissenting stockholder under


this Title shall cease and the transferee shall have all
the rights of a
regular stockholder; and all dividend distributions which would have
accrued on such shares shall be paid to the transferee.

Effects of transfer of dissenting shares


1. The rights of the transferor as a
the transferee shall have all the
dissenting stockholder shall cease and
2. All dividend distributions which
rights of a regular stockholder.
would have accrued on such shares
shall be paid to the transferee.

Problem:
X and Y are stockholders of Z Corp. Later, Z Corp. decided to
amend its articles of incorporation to remove the
stockholders' pre
emptive rights to newly issued shares of stock. X and Yvoted against the
amendment and demanded payment of their shares at the rate
of P2.27/share based on the book value of the shares.
Z Corp. found the fair value of the shares demanded by X and Y
unacceptable. It insisted that the market value should be the value, or
P0.41/share and that the payment could be made only if Z Corp. had
unrestricted retained earnings in its books to cover the value of the
shares, which was not the case.
Thedisagreement on the valuation of the shares led the parties
to constitute an appraisal committee, each of them nominating a
representative, who together then nominated the third member who
would be chairman of the appraisal committee. The appraisal committee
reported its valuation of P2.54/share for X and Y. Subsequently, X and Y
demanded payment based on the valuation of the appraisal committee.
ZCorp.refused Xand Y's demand as they could be paid only when
the corporation had unrestricted retained
earnings to cover the fair value
of the shares, but that it had no retained
earnings at the time of X and Y's
demand as borne out by its Financial Statements.
Upon z Corp.s refusal to pay, X and Y sued Z Corp. for collection
and damages.
Is Z Corp. correct?
Answer:
A stockholder who dissents from certain corporate actions has
the right to demand payment of the fair value of his or her shares.
This
right, known as the right of appraisal.
Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation
substantially prejudicing the rights of the stockholders. It does not
vest unless objectionable corporate action is taken. It serves the
purpose
of enabling the dissenting stockholder to have his
interests purchased
and to retire from the corporation.
407
TITLE X-APPRAISAL RIGHT

Under the common law, there wereoriginally conflicting views


or purchase its own
whether a corporation had the power to acquire
on its
it was held invalid
for a corporation to purchase
stocks. In England, method of reducing
was an indirect
issued stocks because such purchase
aside from being inconsistent
was statutorily restricted),
capital (which creditors. Only a few American
limited liability to
with the privilege of the strict English rule
decision or statute
jurisdictions adopted by its own shares. In some
forbidding a corporation from purchasing statutes
where the English rule used to be adopted,
American states w e r e enacted, while
to purchase out of surplus funds
granting authority of capital provided the
shares might be purchased even out
in others, underlying the
prejudiced. The
reason
creditors were not
rights of from the necessity of imposing
limitation of share purchases sprang
a corporation of
its assets and against
safeguards against the depletion by
of creditors.
needed for the protection
the impairment of its capital own shares,
can purchase its
Now, however, a corporation
payment is made out of surplus
profits and the acquisition
provided
is for a legitimate corporate purpose.

how the right of appraisal is


Corporation Code defines
The
the right of appraisal, as
exercised, as well as the implications of
follows: stockholder who has voted
1. Theappraisal right is exercised by any
action by making a written demand
against the proposed corporate which the vote
on the corporation
within 30 days after the date on
his shares. The failure
was taken for the payment ofthe fair value of
is deemed a waiver of the
to make the demand within the period
appraisal right
the corporation cannot agree on
2. 1fthe withdrawing stockholder and
60 days from the date
the fair value of the shares within a period of
the fair value shall
the stockholders approved the corporate action,
one of
be determined and appraised by three disinterested persons,
whom shall be named by the stockholder, another by the corporation,
and award of the
and the third by the two thus chosen. Thefindings
and the corporation shall
majority of the appraisers shall be final,
30 days after the award is made. Upon
pay their award within
or awarded price, the
payment by the corporation of the agreed
stockholder shall forthwithtransfer his or her shares to the
Corporation.
stockholder's shares,
3. All rights accruing to the withdrawing the
including voting and dividend rights, shall be suspended fromuntil
time of demand for the payment of the fair value of the
shares
or the
either the abandonment of the corporate action involved
such
purchase of the shares by the corporation, except the right of
stockholder to receive payment of the fair value of the shares.
408
EX- APPRAISAL RIGHT

4. Within 10 days after demanding payment for his or her shares, a


dissenting stockholder shall submit to the corporation the
certificates ofstock representing hisshares for notation thereon that
such shares are dissenting shares. A failure to do so shall, at the
option of the corporation, terminate his rights under this Title X of
the Corporation Code. If shares represented by the certificates
bearing such notation are transferred, and the certificates are
consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have
all the rights ofa regular stockholder; and all dividend distributions
that would have accrued on such shares shall be paid to the
transferee.
5.If the proposed corporate action is implemented or the
effected,
corporation shall pay to such stockholder, upon the surrender of the
certificates ofstock representing his shares, the fair value thereofas
of the day prior to the date on which the vote was taken, excluding
any appreciation or depreciation in anticípation of such corporate
action.

Notwithstanding the foregoing, no payment shall be made to


unrestricted
any dissenting stockholder unless the corporation has
retained earnings in its books to cover the payment In case the

corporation has no available unrestricted retained earnings in its


books, Section 83 of the Corporation Code (Now Section 82, Revised
Corporation Code) provides that if the dissenting stockholder is not
paid the value of his shares within 30 days after the award, his voting
and dividend rights shall immediately be restored.

The trust fund doctrine backstops the requirement of


unrestricted retained earnings to fund the payment of the shares of
stocks of the withdrawing stockholders. Under the doctrine, the capital
stock, property, and other assets of a corporation are regarded
as

who are
equity in trust for the payment of corporate creditors,
preferred in the distribution of corporate assets. The creditors of a
directors will
corporation have the right to assume that the board of
own stock for as
not use the assets of the corporation to purchase its
and liabilities. There can
long as the corporation has outstanding debts
be no distribution ofassets among the stockholders withoutfirst paying
and assets to
corporate debts. Thus, any disposition ofcorporatefunds
the prejudice ofcreditors is null and void2

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