Merger and Consolidation

Section 75. Plan of Merger or Consolidation

General rule: A corporation that purchases the assets of another will not be liable for the debts of
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the selling corporation
. the former acted in good faith - acted honestly and without any fraudulent or deceptive
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intentions in the asset acquisition process
. paid adequate consideration for such assets - must provide a fair and reasonable value
(consideration) in exchange for the assets it is acquiring

Exception:
. where the purchaser expressly or impliedly agrees to assume the debts
. where the transaction amounts to a consolidation or merger of the corporations
. where the purchasing corporation is merely a continuation of the selling corporation
. where the transaction is fraudulently entered into in order to escape liability for those debts.

The board of directors or trustees of each corporation, party to the merger or consolidation, shall
approve a plan of merger or consolidation setting forth the following:
(a) The names of the corporations proposing to merge or consolidate, hereinafter referred to as the
constituent corporations;
(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

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 by the surviving corporation. Although there is a dissolution of the absorbed
or merged corporations, there is no winding up of their affairs or liquidation of their assets because
the surviving corporation automatically acquires al their rights, privileges, and powers, as well as
their liabilities.
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The merger, however, does not become effective upon the mere agreement of the constituent
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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.
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Section 76. Stockholders’ or Members’ Approval.
. majority vote of each of the board of directors or trustees of the constituent corporations of
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the plan of merger or consolidation
. approval by the stockholders or members of each of such corporations at separate corporate
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meetings duly called for the purpose. Notice of such meetings shall be given to all
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stockholders or members of the respective corporations
. affirmative vote of stockholders representing at least two- thirds (2/3) of the outstanding
capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3)
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of the members in the case of nonstock corporations

Note: A dissenting SH may exercise his/her appraisal right

Except: if after the approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the right of appraisal shall be extinguished.

Amendment
. amendment is approved by a majority vote of the respective boards of directors or trustees of
all the constituent corporations
. 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.

Section 77. Articles of Merger or Consolidation

● After the approval, articles of merger or articles of consolidation shall be executed by each of
the constituent corporations
● signed by the president or vice president
● certified by the secretary or assistant secretary of each corporation setting forth
● the approval by the Securities and Exchange Commission (SEC) of the articles of merger or
consolidation is required

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

(b) As to stock corporations, the number of shares outstanding, or in the case of nonstock
corporations, the number of members;
(c) As to each corporation, the number of shares or 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;
(f) The provisional or pro-forma values, as merged or consolidated, using the accounting method;
and
(g) Such other information as may be prescribed by the Commission.

Section 78. Effectivity of Merger or Consolidation.

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.

Steps to Accomplish A Merger or Consolidation

. 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.
. Submission of plan to stockholders or members of each corporation for approval. A meeting
must be called and at least twenty-one (21) 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 of the
 outstanding capital stock will be needed. Appraisal rights, when proper, must be respected.
. Execution of the formal agreement, referred to as the articles of merger or consolidation, by
the corporate officers of each 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.
. Submission of said articles of merger or consolidation to the SEC for approval.
. 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,
. Issuance of certificate of merger or consolidation.

When will merger be effective?

– 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.
If a party to the merger is governed by special laws or own charter
– a favorable recommendation of the appropriate government agency should first be obtained.

When will consolidation be effective?

– It becomes effective not upon mere agreement of the members but only upon issuance of the
certificate of consolidation by the SEC, subject to its prior determination that the merger is
not inconsistent with the Corporation Code or existing laws.
– Upon the issuance of the certificate, the reorganization becomes official. The new
consolidated corporation comes into existence and the constituent corporations dissolve and
cease to exist.

Section 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 case of consolidation, shall be
the consolidated corporation designated in the plan of consolidation;

(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 al 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 deemed transferred to and
vested in such surviving or 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 liabilities are acquired by the surviving corporation. Although there is a dissolution of
the absorbed 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 issuance of the certificate of merger 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.

Section 80. When the Right of Appraisal May Be Exercised.

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.

The reason behind Appraisal right

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 stocks will have to prevail over his objections, the law considers it only fair to allow him
to get back his investment and withdraw from the corporation.

FOUR INSTANCES OF APPRAISAL RIGHT

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.

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

SECTION 81. How Right is Exercised.

By making a written demand on the corporation for the payment of the fair value of shares held
within thirty (30) days from the date on which the vote was taken
● Failure to make the demand within such period shall be deemed a waiver of the appraisal
right.

If the proposed corporate action is implemented, the corporation shall pay the stockholder, upon
surrender of the certificate or certificates of stock representing the stockholder’s shares,

In case of disagreement in determining the fair value of 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:
● No payment shall be made to any dissenting stockholder unless the corporation has
UNRESTRICTED RETAINED EARNINGS in its books to cover such payment
● Upon payment by the corporation of the agreed or awarded price, the stockholder shall
forthwith transfer the shares to the corporation.

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.

SECTION 82. Effect of Demand and Termination of Right.

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

SECTION 83. When Right to Payment Ceases.

General Rule: A dissenting stockholder who demands payment of his shares is no longer allowed to
withdraw from his decision.
Exceptions:
. The corporation consents to the withdrawal;
. The proposed corporate action is disapproved by the SEC where its approval is necessary;
. The proposed corporate action is abandoned or rescinded by the corporation; and
. The SEC determines that such stockholder is not entitled to appraisal right.

SECTION 84. Who Bears Costs of Appraisal.

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

● The corporation is responsible for covering the expenses of hiring appraisers, legal fees, and
other costs incurred during the appraisal.

Exception:
The fair value ascertained by the appraisers is approximately the same as the price which the
corporation may have offered to pay the stockholder, in which case they shall be borne by the
stockholder.
● If the stockholder's demand for a fair value is similar to what the corporation was willing to
pay, it's considered fair for the stockholder to bear the appraisal costs.

In the case of an action (court) to recover such fair value, the corporation shall bear all costs and
expenses, UNLESS the refusal of the stockholder to receive payment was unjustified.

SECTION 85. Notation on Certificates; Rights of Transferee.

– If a stockholder disagrees with a corporate decision and wants to be paid the fair value of
their shares, they must, within ten days of making this request, give their stock certificates to
the corporation to mark them as "dissenting shares." If they don't do this, the corporation can
choose to cancel their rights under the law. If someone else later gets hold of these marked
shares and the certificates are canceled, the previous stockholder's rights as a dissenter end,
and the new owner gets regular shareholder rights. Any dividends that would have gone to
the original stockholder are paid to the new owner.

Effects of transfer of dissenting shares

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

In case the corporation has no available unrestricted retained earnings in its books, Section 83 of
the 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.

SECTION 86. Definition of Non-stock Corporation

Is one where no part of its income is distributable as dividends to its members, trustees, or officers.
Any profit which a non-stock corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.

The provisions governing stock corporations, when pertinent, shall be applicable to nonstock
corporations, except as may be covered by specific provisions of this Title.

Example of non-stock corporation:

St. Luke's Medical Center, Inc. is organized as a non-stock and non-profit charitable institution.

Note:
The fact that a non-stock corporation earns a profit does not make it a profit-making corporation
where such profit or income is used for purposes set forth in its articles of incorporation and is not
distributed to its incorporators, members or officers.

SECTION 87. Purposes.

Characteristics ofanon-stock corporation

. It does not have capital stock divided into shares.
. No part of its income during its existence is distributable as dividends to its members,
trustees, or officers.
. As a general rule, it is not empowered to engage in business with the object of making
income or profits directly or indirectly. However, it is not prohibited to make income or profits
as an incident to its operation;
. There is non-transferability of membership.
. The right to vote of members may be limited, broadened, or even denied in the articles of
incorporation or the by-laws.
. Non-stock corporation may, through their articles of incorporation or their by-laws, designate
their governing boards by any name other than as board of trustees.
. By-laws may provide that the members may hold their meetings at any place even outside the
place where the principal office of the corporation is located, provided that such place is
within the Philippines
. A non-stock corporation is not allowed to distribute any of its assets or any incidental income
or profit made by the corporation during its existence.
. Anon-stock corporation cannot be converted into a stock corporation by mere amendment of
its articles of incorporation because the conversion would change the corporate nature from
non-profit to profit.

SECTION 88. Right to Vote.

The right of the members of any class or classes to vote may be limited, broadened, or denied to
the extent specified in the articles of incorporation or the bylaws. Unless so limited, broadened, or
denied, each member, regardless of class, shall be entitled to one (1) vote.

Unless otherwise provided in the articles of incorporation or the bylaws, a member may vote by
proxy, in accordance with the provisions of this Code. The bylaws may likewise authorize voting
through remote communication and/or in absentia.

● In stock corporations, shareholders may generally transfer their shares. Thus, on the death of
a shareholder, the executor or administrator duly appointed by the Court is vested with the
legal title to the stock and entitled to vote it. Until a settlement and division of the estate is
effected, the stocks of the decedent are held by the administrator or executor.
● On the other hand, membership in and all rights arising from a nonstock corporation are
personal and non-transferable, unless the articles of incorporation or the by-laws of the
corporation provide otherwise. In other words, the determination of whether or not "dead
members” are entitled to exercise their voting rights (through their executor or administrator),
depends on those articles of incorporation or by-laws.

SECTION 89. Nontransferability of Membership.

● Membership in a nonstock corporation and all rights arising therefrom are personal and
nontransferable, unless the articles of incorporation or the bylaws otherwise provide.
SECTION 90 Termination of Membership.
Membership shall be terminated in the manner and for the causes provided in the articles of
incorporation or the bylaws. Termination of membership shall extinguish all rights of a member in
the corporation or in its property, unless otherwise provided in the articles of incorporation or the
bylaws.

Requirements for termination of membership

. Notice to the member; and
. Opportunity to be heard.

Clearly, the right of a non-stock corporation such as Valley Golf to expel a member through the
forfeiture of the Golf Share may be established in the by-laws alone. Obviously recognizing the
peculiarity of a religious corporation, the Corporation Code leaves the matter of ecclesiastical
discipline to the religious group concerned.‘