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CORPORATION

LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA

ACQUISITIONS, MERGERS AND CONSOLIDATIONS



I. ACQUISITIONS AND TRANSFERS

A. Concept of Business Enterprise, Economic Unit or Going
Concern (Section 40)

Section 40. Sale or other disposition of assets.
Subject to the provisions of existing laws on illegal combinations and
monopolies, a corporation may, by a majority vote of its board of
directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets,
including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
or in case of non-stock corporation, by the vote of at least to two-
thirds (2/3) of the members, in a stockholder's or member's meeting
duly called for the purpose. Written notice of the proposed action and
of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post

the corporate property and assets if thereby the corporation would be


rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.

After such authorization or approval by the stockholders or members,
the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval
by the stockholders or members.

Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary in the
usual and regular course of business of said corporation or if the
proceeds of the sale or other disposition of such property and assets
be appropriated for the conduct of its remaining business.

In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section. (28 1/2a)

office with postage prepaid, or served personally: Provided, That any


dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.

A sale or other disposition shall be deemed to cover substantially all


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

Business enterprise constitutes the goodwill, the customer lists


and all factors that make a business profitable. Villa Rey Transit,
Inc. v. Ferrer, 25 SCRA 845 (1968).

Villa Rey Transit, Inc. v. Ferrer

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



Facts: Villarama entered into a Contract of Sale with PANTRANCO for 2
certificates of public convenience (first set) which authorizes the owner
to operate 32 units of buses along the Pangasinan to Manila route. The
contract contains a stipulation that prohibits Villarama from applying for

pay for his own obligations, and that he also bought money into the
corporations coffers. Evidence further shows that the initial cash
capitalization of the corporation of P105,000 was mostly financed by
Villarama. Further, the evidence shows that when the Corporation was
in its initial months of operation, Villarama purchased and paid with his

new TPUs for 10 years identical or competing with the buyers.



3 months alter, a corporation called Villa Rey Transit Inc. was organized
with a capital stock of P500,000. The incorporators are Natividad
Villarama (wife) and other relatives. After registering with the SEC, Villa
Rey bought five TPUs (second set) from Fernando along with 49 buses,
tools and other equipment. Villa Rey prayed for the Public Service

personal checks Ford trucks for the Corporation. Villarama had co-
mingled his personal funds and transactions with those made in the
name of the Corporation.

The clear intention of the parties was to prevent the seller from
conducting any competitive line for 10 years since, anyway, he has
bound himself not to apply for authorization to operate along such lines

Commission (PSC) to grant it provisional authority to operate. Before


the PSC could take action on the application, two of the five TPUs were
levied in favor of Ferrer in cases against Fernando. Ferrer then sold
these two TPUs to PANTRANCO. Subsequently, the PSC ordered that
PANTRANCO would have the authority to operate on the two TPUs
acquired from Ferrer. Villa Rey now questioned this order and initiated
an action in the CFI of Manila to annul these two TPUs. PANTRANCO on

for the duration of such period. If the prohibition is to be applied only to


the acquisition of new certificates of public convenience thru an
application with the Public Service Commission, this would, in effect,
allow the seller just the same to compete with the buyer as long as his
authority to operate is only acquired thru transfer or sale from a
previous operator, thus defeating the intention of the parties.

the other hand initiated a third-party complaint alleging that


Villarama/Villa Rey Inc. was disqualified from operating on the two TPUs
by virtue of their original contract of Sale.

Issue: Whether or not the stipulation on the original contract between
PANTRANCO and Villarama binds Villa Rey Inc. as well.

Held: YES. Evidence discloses that for someone claiming he is only a

Doctrine:

part-time manager, the evidence on record shows Villarama practically


controlled the corporation because he used the corporation funds to

As a rule Personal Liabilities remain with the company even


where assets are disposed. But those liabilities that attach to
the object disposed of follow that object and become the
liability of the purchaser/transferee.


B. Types of Acquisitions\Transfers


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

As a rule, a corporation that purchases the assets of another will


not be liable for the debts of the selling corporation, provided

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


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 purchasers expressly or impliedly
agrees to assume the debts; (2) where the selling corporation
fraudulently enters into the transactions to escape liability for
those debts (3) where the purchasing corporation is merely a
continuation of the selling corporation, and (4) where the
transaction amounts to a consolidation or merger of the
corporations. Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965).1

Edward J. Nell Co. v. Pacific

including the pumping equipment it sold to Insular Farms. The sale


transaction was not entered into fraudulently. The sale between Insular
and Pacific took place nearly 6 months before the rendition of the
judgment sought to be collected. In addition, Pacific purchased the
shares of stock of Insular as the highest bidder at an action sale at the
instance of a bank. The claim that the amount paid (P10,000) is grossly
inadequate cannot be assailed because the sale was submitted to and
approved by the SEC and as such, presumed fair and reasonable.

Doctrine: See above.


Facts: Edward J. Nell Company (EJNC) secured a judgment against
Insular Farms, Inc. representing unpaid balance of the price of a pump
sold by EJNC to the former. The writ of execution was returned stating
that Insular Farms had no leviable property. A few months later, EJNC
filed this present action against Pacific Farms, Inc. for the collection of
the judgment against Insular Farms, upon the theory that Pacific Farms
is the alter ego of Insular Farms.

Issue: Whether or not Pacific Farms is liable for the unpaid obligation of
Insular Farms.

Held: NO. The theory of EJNC that Pacific Farms is an alter ego of Insular
Farms, arose because the former purchased all or substantially all of the
shares of stock, as well as the real and personal properties of the latter,

Philippines National Bank v. Andrada Electric & Engineering Co., 381 SCRA 244
(2002); McLeod v. NLRC, 512 SCRA 222 (2007); Jiao v. NLRC, 670 SCRA 184
(2012).

Even under the provisions of the Civil Code, a creditor has a real
interest to go after any person to whom the debtor fraudulently
transferred its assets. Caltex (Phils.), Inc. v. PNOC Shipping and
Transport Corp., 498 SCRA 400 (2006).

Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp.


Facts: The PNOC Shipping and Transport Corporation (PSTC) and the
Luzon Stevedoring Corporation (LUSTEVECO) entered into an
Agreement of Assumption of Obligations, which provides that PSTC shall
assume all obligations of LUSTEVECO with respect to certain claims
enumerated in the Annexes of the Agreement. This Agreement also
provides that PSTC shall control the conduct of any litigation pending
which may be filed with respect to such claims, and that LUSTEVECO
appoints and constitutes PSTC as its attorney-in-fact to demand and
receive any claim out of the countersuits and counterclaims arising from
said claims. Among the actions mentioned is Caltex (Phils) v. Luzon
Stevedoring Corporation, which was then pending appeal. Caltex won


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

In the "assets-only" acquisition, the purchaser is only interested


in the "raw" assets and properties of the business, perhaps to
be used to establish his own business enterprise or to be used
for his on-going business enterprise. In such an acquisition, the
purchaser is not interested in the entity of the corporate owner
of the assets, nor of the goodwill and other factors relating to
the business itself.


Held: YES. The Agreement provides that PSTC shall assume all the
obligations of LUSTEVECO. LUSTEVECO transferred, conveyed and
assigned to PSTC all of LUSTEVECOs business, properties and assets
pertaining to its tanker and bulk business together with all the
obligations relating to the said business, properties and assets. The
assumption of obligations was stipulated not only in the Agreement of

In other instances, the purchaser is interested only in

purchasing the assets to ensure that he would not be embroiled


in issues relating to the liabilities and other contractual
commitments of the business enterprise or those pertaining to
the transferor.
2. "Business-Enterprise" Level. 2

Assumption of Obligations but also in the Agreement of Transfer.



Even without the Agreement, PSTC is still liable. While the Corporation
Code allows the transfer of all or substantially all the properties and
assets of a corporation, the transfer should not prejudice the creditors
of the assignor by holding the assignee liable for the formers
obligations.

In the "business-enterprise" level, the purchaser's interest goes


beyond the assets or properties of the business enterprise. The
purchasers primary interest is essentially to obtain the earning
capability of the venture. However, the purchaser in such is not
interested in obtaining the juridical entity that owns the
business enterprise, and therefore purchases directly the
business from the corporate entity.


Doctrine: To allow an assignor to make a transfer without the consent
of its creditors and without requiring the assignee to assume the
formers obligations will defraud creditors.

As will be shown in the discussions hereunder, the essence of


the "business-enterprise" transfer is that the effect is that the
transferee merely continues the same business of the
transferor.


PSALM took ownership over most of NPCs assets by operation
of lawthese properties may be used to satisfy the Courts
judgment, and such being the case, the employees may go after
such properties. NPC Drivers and Mechanics Association (NPC
DAMA) v. NPC, 606 SCRA 409 (2009).

ATTY. JOSE MARIA G. HOFILEA

1. "Assets-Only" Level.1

the case and a writ of execution was issued in its favor but was not
satisfied. When it learned about the agreement between PSTC and
LUSTEVECO, it sued PSTC and brought an action.

Issue: Whether or not Caltex may recover from PTSC.

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)


3. "Equity" Level. 1

business enterprise as it is owned and operated by the


corporation. The purchaser takes control and ownership of the
business by purchasing the shareholdings of the corporate
owner. The control of the business enterprise is therefore
indirect, since the corporate owner remains the direct owner of
the business, and what the purchaser has actually purchased is
the ability to elect the members of the board of the corporation
who run the business.

In an assets-only transfer, the transferee is not liable for the

When another corporation takes over the assets of another

corporation which is dissolved, the succeeding corporation is


liable for the claims against the dissolved corporation to the
extent of the fair value of the assets assumed.
4. Voluntary Assumption of Liabilities.7

The other instance in an assets-only transfer when the


transferee becomes liable for the obligations of the transferor is
when by contract, express or implied, the transferee voluntarily
assumes such obligations of the transferor.


D. Business Enterprise Transfers:
1. Nature of Business-Enterprise.8

debts and liabilities of the transferor, except where the


transferee expressly or impliedly agrees to assume such debts.
2. Coverage of the Bulk Sales Law.3

ATTY. JOSE MARIA G. HOFILEA

title of the transferee over the assets would be void, even if he


were a purchaser in good faith.5
3. Special Rule in Corporate Dissolution.6

The "equity" level constitutes looking at the entirety of the


C. Assets Only Transfers
1. Rationale for Non-Assumption of Liability.2

An assets-only transfer if constituting "bulk sale" under the Bulk

A business enterprise, apart from the juridical personality under


which is operates, has a "separate being" of its own. Properly
speaking, a business enterprise comprises more than just the

Sales Law,4 would affect the transferee in the sense that if the
sale has not complied with the requirements of the Law, the
sale could be classified as fraudulent and void, and therefore

properties of the business, but includes a "concern" that covers


the employees, the goodwill, list of clientele and suppliers, etc.,
which give it value separate and distinct from its owners or the

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
3
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
4
Act No. 3952, as amended by Rep. Act No. 111.

The Court of Appeals in People v. Wong, 50 O.G. 4867, has held that the Bulk
Sales Law applies only to merchandising business or establishments, and has no
application to other forms of activities such as in that case the sale of the
equipment, tools and machineries of a foundry shop.
6
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
7
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.
8
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


juridical entity under which it operates. This is what is termed as
the "economic unit", "the enterprise", "the going concern", or
the "financial unit", recognized in other disciplines, such as
Economics and Accounting.

Although, jurisprudence refuses to recognize a separate

existence of the business enterprise apart from the juridical


personality which the State grants in corporations, 1 and
partnerships, 2 such separate existence of the business
enterprise does exist and is recognized in the business world.
2. Statement of Doctrine. 3

Jurisprudence has held that in a business-enterprise transfer,


the transferee is liable for the debts and liabilities of his
transferor.
The purpose of the jurisprudential doctrine is to protect the

creditors of the business by allowing them a remedy against the


new controller or owner of the business enterprise.
3. Application of Doctrine

A.D. Santos v. Vasquez, 22 SCRA 1156 (1968)



A.D. Santos v. Vasquez

Tayag v. Benguet Consolidated Inc., 26 SCRA 242 (1968). It rejected the


genossenchaft theory of Friedman that would recognize the corporate entity as
"the reality of the group as a social and legal entity independent of state
recognition and concession."
2
Ang Pue & Co. v. Section of Commerce and Industry, 5 SCRA 645 (1962). The
formation of a corporate entity or a partnership is not a matter of right, but
rather of a privilege.
3
Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.
(2013 ed.). Manila, Philippines: Rex Book Store.

Facts: A.D. Santos, Inc. operates taxicabs. Ventura Vasquez was one of
his taxi drivers. While driving A.D. Santos, Inc.s taxi cab, Vasquez
vomited blood. The companys physician, Dr. Roman, treated him. He
was sent to and confined in Santo Tomas Hospital. Afterwards, he was
admitted at the Quezon Institute where he was diagnosed with
pulmonary tuberculosis. He did not resume work. Vasquez filed a claim
with the Workmens Compensation Commission. A.D. Santos, Inc. was
ordered to pay compensation and reimburse Vasquez the amount he
spent for his treatment.

Issue: Whether or not A.D. Santos is liable for the expenses of Vasquez

Held: YES. Vasquez cause of action against A.D. Santos, Inc. is complete.
In its answer to Vasquezs claim, A.D. Santos, Inc. categorically admitted
that Vasquez was its taxi driver. Further, Vasquez contracted pulmonary
tuberculosis by reason of his employment.

Vasquez cited in his testimony that he worked for City Cab, a company
operated by a certain Amador Santos. This does not detract the validity
of Vasquez right to compensation. Amador Santos was the sole owner
and operator of City Cab (sole proprietorship). It was subsequently
transferred to A.D. Santos, Inc. in which Amador Santos was a majority
stockholder. In business enterprise transfers, the transferee is liable for
the liabilities of his transferor arising from the business enterprise
transferred. Mentioning Amador Santos as his employer should not
confuse the facts relating to the employer-employee relationship. In this
case, the veil of the corporate fiction is used as a shield to perpetrate a
fraud or confuse legitimate issues.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Doctrine: In business enterprise transfers, the transferee is liable for the
liabilities of his transferor arising from the business enterprise
transferred.

Where a corporation is formed by, and consisted of members of


a partnership whose business and property was conveyed and
transferred to the corporation for the purpose of continuing its
business, in payment for which corporate capital stock was
issued, such corporation is presumed to have assumed
partnership debts, and is prima facie liable therefore. Laguna
Trans. Co., Inc. v. SSS, 107 Phil. 833 (1960).


Laguna Trans. Co., Inc. v. SSS

Facts: In 1940 the Bian Transportation Co., a corporation duly
registered with the SEC, sold part of the lines and equipment it operates
to G. Mercado, A. Mercado, Mata and Vera Cruz. After this, the vendees
formed an unregistered partnership under the name of Laguna
Transportation Company which continued to operate the lines and
equipment bought from Bian Transportation Co. Later on, the original
partners forming Laguna Transport Company along with 2 new
members organized a corporation known as the Laguna Transportation
Co., Inc. and the corporation was registered in the SEC on June 20, 1956,
which continued the same transportation business of the unregistered
partnership. Laguna Trans. Co. Inc. requested for exemption from
coverage by the System on the ground that it started operation only on
June 20, 1956, when it was registered with the Securities and Exchange
Commission but on November 11, 1957, the Social Security System
notified plaintiff that it was covered.


Issue: Whether or not Laguna Trans Co. Inc. was bound by the
compulsory coverage of the Social Security Act

Held: YES. While it is true that a corporation once formed is conferred a
juridical personality separate and district from the persons composing it,
it is but a legal fiction introduced for purposes of convenience and to
subserve the ends of justice. To adopt Laguna Trans. Co. Inc.s argument
would defeat, rather than promote, the ends for which the Social
Security Act was enacted. An employer could easily circumvent the
statute by simply changing his form of organization every other year,
and then claim exemption from contribution to the System as required,
on the theory that, as a new entity, it has not been in operation for a
period of at least 2 years. In this case, it can be said that there was only
a change in the form of organization of the entity in the common carrier
business. This is said to be so because when the unregistered
partnership was turned into a corporation, the firm name was not
altered save for the fact that Inc. was added to show that it was duly
incorporated under existing laws.

Doctrine: The law provides that the Commission may not compel any
employer to become a member of the System unless he shall have been
in operation for at least two years, such is not applicable to a
corporation that merely changed its form of organization.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

A business enterprise operated under a partnership and later


incorporated, or where a corporation assumed all the assets
and liabilities of the partnership, then the corporation cannot be
regarded, for purposes of the SSS Law, as having come into

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


being only on the date of its incorporation but from the date the
partnership started the business. Oromeca Lumber Co. v. SSS, 4
SCRA 1188 (1962); San Teodoro Dev. v. SSS, 8 SCRA 96 (1963).

When a corporation transferred all its assets to another


corporation to settle its obligations that would not amount to
a fraudulent transfer. McLeod v. NLRC, 512 SCRA 222 (2007).

McLeod v. NLRC


Facts: John F. McLeod filed a complaint for unpaid benefits and
damages, against Filipinas Synthetic Corporation (Filsyn), Far Eastern
Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu
(respondents). McLeod said that he is an expert in textile manufacturing
process, and was hired as the Manager of Universal Textiles, Inc. (UTEX)
under its President, Patricio Lim. Lim later formed Peggy Mills, Inc. (with
Filsyn having controlling interest), and it absorbed McLeod. Filsyn then

counsel holds office in the same address, and that all respondents have
the same key personnel such as Lim.

Issue: Whether or not an employer-employee relationship exists
between private respondents and McLeod

Held: YES BUT he was an employee of Peggy Mills ONLY. What
happened between Peggy Mills and Sta. Rosa textile was dation in
payment with lease. Peggy Mills had ceded, conveyed and transferred
all of its rights, title and interests in and to the assets to Sta. Rosa Textile
to settle its obligations.

Doctrine: See above.

sold Peggy Mills to Far Eastern Textile Mills with Lim as the chairman
and president. Peggy Mills was renamed Sta. Rosa Textile. When
McLeod reached retirement age, he was only given a reduced 13 month
pay. Lim offered McLeod a compromise settlement but was rejected.

UTEX Peggy Mills Far Eastern Textile Mills Sta. Rosa Textile

Respondents allege that Filsyn and Far Eastern Textiles are separate
legal entities and have no employer relationship with McLeod. Sta. Rosa
only acquired the assets and NOT the liabilities of Peggy Mills. In
McLeods reply, he alleged that all the respondents are solidarily liable
for all salaries and benefits he is entitled to, being one and the same
entity. McLeod said that their offices were all in the same building, their


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

When the bus operations belonging to the estate of the


deceased spouses is duly incorporated by the administratrix
with the intention to make the corporation liable for past and
pending obligations of the estate as the transportation business
itself, then that liability on the part of the corporation, vis--vis
the estate, should continue to remain with it even after the
percentage of the estates shares of stock in the corporation
should have been diluted. Buan v. Alcantara, 127 SCRA 845
(1984).

Settled now is the rule that where one corporation sells or


otherwise transfers all its assets to another corporation for
value, the latter is not, by that fact alone, liable for the debts
and liabilities of the transferor. Pantranco Employees
Association (PEA-PTGWO) v. NLRC, 581 SCRA 598 (2009).

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Pantranco Employees Association (PEA-PTGWO) v. NLRC

Facts: The Gonzales family owned two corporations, PANTRANCO North
Express Inc. (PNEI) and Macris Realty Corporation (Macris). PNEI
provided transportation services and its terminals were on the
Pantranco properties registered under the name of Macris. Due to
financial losses, creditors took over both corporations and later
transferred to the National Investment Development Corporation
(NIDC), a subsidiary of the Philippine National Bank. Macris was later
renamed and merged to another corporation to form the new PNB
subsidiary, the PNB-Madecor. NIDC sold PNEI to North Express
Transport, Inc. (NETI), PNEI was later placed under sequestration by the
PCGG. Eventually PNEI ceased its operation which came with the various
labor claims commenced by the former employees of PNEI where the
employees won. The employees now seek to attach on the properties
registered to PNB-Madecor to satisfy their claim.

Issue: Whether or not the former PNEI employees can attach the
properties (specifically the Pantranco properties) of PNB, PNB-Madecor
and Mega Prime to satisfy their unpaid labor claims against PNEI

Held: NO. First, the subject property is not owned by the judgment
debtor, PNEI. The properties were owned by Macris, the predecessor of
PNB-Madecor. Hence, they cannot be pursued against by the creditors
of PNEI. It is a settled rule that the court in executing judgments extends
only to properties unquestionably belonging to the judgment debtor
alone. Second, the general rule is that a corporation has a personality
separate and distinct from those of its stockholders and other
corporations to which it may be connected. Obviously, PNB, PNB-

Madecor, Mega Prime, and PNEI are corporations with their own
personalities. PNB was only a stockholder of PNB-Madecor which later
sold its shares to Mega Prime; and that PNB-Madecor was the owner of
the Pantranco properties. Neither can we merge the personality of PNEI
with PNB simply because the latter acquired the former.

Doctrine: See above.

4. Rationale of Doctrine in Business Enterprise Transfers

The doctrine in business-enterprise transfers recognizes the


reality in the business world that although no formal mortgage
contract is executed, creditors and suppliers extend credit to
the business enterprise because they see the business's earning
capacity and assets as a "security" to the undertaking that they
will eventually be paid back.1 The doctrine therefore puts the
burden on the shoulder of the person who is in the best position
to protect himself, namely the transferee, by obtaining certain
guarantees and protection from his transferor.

It would be instructive to see the judicial attitude to the extension of credit as


underpinning a clear intention to establish a long-term business. On the issue
of whether a foreign corporation intended to engage in business in the
Philippines, in Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567 (1997), the
Supreme Court found that the extension of credit terms to be indicative of
intent to do business in the Philippines for an indefinite period, thus: "More
than the sheer number of transactions entered into, a clear and unmistakable
intention on the part of petitioner to continue the body of its business in the
Philippines is more than apparent. . . Further, its grant and extension of 90-day
credit terms to private respondent for every purchase made, unarguably shows
an intention to continue transaction with private respondent, since in the usual
course of commercial transactions, credit is extended only to customers in good
standing or to those on whom there is an intention to maintain long-term
relationship.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA



E. Equity Transfers
1. Rationale of Doctrine. 1

In an equity transfers, the transferee is not liable for the debts


and liabilities of the transferor, except where the transferee
expressly or impliedly agreed to assume such debts.

The logic of the doctrine in equity transfer finds support in the

main doctrine of separate juridical personality, that by


purchasing the shares in a corporation that owns a business, the
stockholder does not by that reason alone become the owner
directly of the business assets and does not become personally
liable for the debts and liabilities of the business.
2. Application of the Doctrine

The transfer by the controlling shareholder of all of its equity in


the corporation warrants the application of the alter ego
piercing doctrine since it shows that the transferor had
complete control of the corporation. Phividec v. Court of
Appeals, 181 SCRA 669 (1990).

Phividec v. Court of Appeals


Facts: On March 29, Violeta M. Borres was injured in an accident which
the trial court ruled was due to the negligence of PHIVIDEC Railways,
Inc. (PRI). Prior, on May 25, PHIVIDEC sold all its rights and interests in

operate the railway assets of PHIVIDEC. Borres sued PRI and Panay, and
Panay disclaimed liability on the ground that in the Agreement
concluded between PHIVIDEC and PHILSUCOM, it was provided that
PHIVIDEC holds PHILSUCOM free from any action that might arise from
any act of omission prior to the turn-over.

Issue: Whether or not PHIVIDEC should be held liable.

Held: YES. It is clear from the evidence of record that by virtue of the
agreement between PHIVIDEC and PHILSUCOM, particularly the
stipulation exempting the latter from any claim or liability arising out of
any act or transaction prior to the turn-over, PHIVIDEC had expressly
assumed liability for any claim against PRI. Since the accident happened
before that agreement and PRI ceased to exist after the turn-over, it
should follow that PHIVIDEC cannot evade its liability for the injuries
sustained by the private respondent. In the interest of justice and
equity, and to prevent the veil of corporate fiction from denying her the
reparation to which she is entitled, that veil must be pierced and
PHIVIDEC and PRI regarded as one and the same entity.

Doctrine: See above.

the PRI to the PHILSUCOM. Two days later, PHILSUCOM caused the
creation of a wholly-owned subsidiary, the Panay Railways Inc. to

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

The general rule therefore is that in an equity transfer,


the transferee does not become personally liable for the
obligations of the corporate enterprise under the main
doctrine of separate juridical personality, unless either

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


the transferee by contract assumes such obligations, or
there is basis for piercing the veil of corporate fiction. 1

Proper Doctrine: The mere fact that a stockholder sells his


shares of stock in the corporation during the pendency of a
collection case against the corporation, does not make such
stockholder personally liable for the corporate debt, since the
disposing stockholder has no personal obligation to the creditor,
and it is the inherent right of the stockholder to dispose of his
shares of stock anytime he so desires. Remo, Jr. v. IAC, 172
SCRA 405 (1989).2


II. MERGER AND CONSOLIDATIONS

A. Concepts (McLeod v. NLRC, 512 SCRA 222 [2007]).

A consolidation is the union of two or more existing entities to


form a new entity called the consolidated corporation. A
merger, on the other hand, is a union whereby one or more
existing corporations are absorbed by another corporation that
survives and continues the combined business. 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. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244
(2002).


B. Procedure:

Villanueva, C. L., & Villanueva-Tiansay, T. S. (2013). Philippine Corporate Law.


(2013 ed.). Manila, Philippines: Rex Book Store.
2
PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

1. Plan of Merger or Consolidation (Section 76)



Section 76. Plan or merger of consolidation.
Two 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, shall approve a plan of merger or
consolidation setting forth the following:

1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;

2. The terms of the merger or consolidation and the mode of carrying
the same into effect;

3. A statement of the changes, if any, in the articles of incorporation of
the surviving corporation in case of merger; and, with respect to the
consolidated corporation in case of consolidation, all the statements
required to be set forth in the articles of incorporation for
corporations organized under this Code; and

4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable. (n)

2. Stockholders or Members Approvals (Section 77)

Section 77. Stockholder's or member's approval.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Upon approval by 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, at least two (2) weeks prior to the date of the
meeting, either personally or by registered mail. Said notice shall state
the purpose of the meeting and shall include a copy or a summary of
the plan of merger or consolidation. The 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

the president or vice-president and certified by the secretary or


assistant secretary of each corporation setting forth:

1. The plan of the merger or the plan of consolidation;

2. As to stock corporations, the number of shares outstanding, or in
the case of non-stock corporations, the number of members; and

least two-thirds (2/3) of the members in the case of non-stock


corporations shall be necessary for the approval of such plan. Any
dissenting stockholder in stock corporations may exercise his appraisal
right in accordance with the Code: Provided, That if after the approval
by the stockholders of such plan, the board of directors decides to
abandon the plan, the appraisal right shall be extinguished.


3. As to each corporation, the number of shares or members voting for
and against such plan, respectively. (n)

Any amendment to the plan of merger or consolidation may be made,


provided such amendment is approved by 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. (n)

not earlier than 120 days prior to the date of filing of the
application and the long-form audit report for absorbed
corporation(s) are always required. Long form audit report for
the surviving corporation is required if it is insolvent. (SEC
Opinion 14, s. of 2002, 15 November 2002).
5. Approval by SEC (Section 79)


3. Articles of Merger or Consolidation (Section 78)

Section 78. Articles of merger or 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


4. Submission of Financial Statements Requirements: For
applications of merger, the audited financial statements of the
constituent corporations (surviving and absorbed) as of the date


Section 79. Effectivity of merger or consolidation.
The articles of merger or of consolidation, signed and certified as
herein above required, shall be submitted to the Securities and


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


transferred to and vested in the surviving corporation. Poliand
Industrial Ltd. V. NDC, 467 SCRA 500 (2005).1

Exchange Commission in quadruplicate for its approval: Provided, That


in the case of merger or consolidation of banks or banking institutions,
building and 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 not inconsistent with the provisions of this
Code and existing laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or consolidation shall be
effective.

If, upon investigation, the Securities and Exchange 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

When the procedure for merger/consolidation prescribed under


the Corporation Code are not followed, there can be no merger
or consolidation, and corporate separateness between the
constituent corporations remains, and the liabilities of one
entity cannot be enforced against another entity. PNB v.
Andrada Electric & Engineering Co., 381 SCRA 244 (2002).


C. Effects of Merger or Consolidation (Section 80): Associated Bank v.
CA, 291 SCRA 511 (1998).

Section 80. Effects of merger or consolidation.
The merger or consolidation shall have the following effects:

1. The constituent corporations shall become a single corporation

The issuance by the SEC of the certificate of merger is crucial


because not only does it bear out SECs approval but also marks

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;

2. The separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation;

the moment whereupon 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

3. 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;

as provided in this Code. (n)


Mindanao Savings and Loan Asso. V. Willkom, 634 SCRA 291 (2010).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises
of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every


Issue: Whether or not Associated Bank, the surviving corporation, may
enforce the promissory note made by private respondent in favor of
CBTC, the absorbed company.

other interest of, or 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

5. The surviving or consolidated corporation shall be responsible and
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated

Held: YES. 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

corporation had itself incurred such liabilities or obligations; and any


pending claim, action or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the
surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not be
impaired by such merger or consolidation. (n)

and powers, as well as their liabilities. The merger, however, does not
become effective upon the mere agreement of the constituent
corporations. The procedure to be followed is prescribed under the
Corporation Code. Assuming that the effectivity date of the merger was
the date of its execution, we still cannot agree that petitioner no longer
has any interest in the promissory note. The agreement itself clearly
provides that all contracts irrespective of the date of execution


Associated Bank v. CA

Facts: Associated Banking Corporation (ABC) and Citizens Bank and Trust
Company (CBTC) merged to form just one banking corporation known as
Associated Citizens Bank (ACB), which changed its name to Associated
Bank (AB). Lorenzo Sarmiento Jr. executed in favor of AB a promissory
note whereby the former undertook to pay on or before March 6, 1978.
Sarmiento still owes AB today despite repeated demands. He alleges
that AB is not the proper party in interest because the promissory note
was executed in favor of Citizens Bank and Trust Company.

entered into in the name of CBTC shall be understood as pertaining to


the surviving bank, herein petitioner. Clause have been deliberately
included in the agreement in order to protect the interests of the
combining banks; specifically, to avoid giving the merger agreement a
farcical interpretation aimed at evading fulfillment of a due obligation.

Doctrine: The merger, however, does not become effective upon the
mere agreement of the constituent corporations Section 79 requires:


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

1. Approval by the SEC of the articles of merger


2. Must have been duly approved by a majority of the respective

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


stockholders of the constituent corporations.
3. Merger shall be effective only upon the issuance by the SEC of a
certificate of merger.
4. The effectivity date of the merger is crucial for 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.

Atty. Hofilea The assumption of rights is a matter of law.

Global is bound by the terms of the contract entered into by its


predecessor-in-interest, Asian Bank. Due to Globals merger
with Asian Bank and because it is the surviving corporation, it is
as if it was the one which entered into contract with Surecomp.
In the merger of two existing corporation, one of the
corporations survives and continues the business, while the
other is dissolved, and all its rights, properties, and liabilities are
acquired by the surviving corporation. In the same way, Global
also has the right to exercise all defenses, rights, privileges, and
counter-claims of every kind and nature which Asian Bank may
have or invoke under the law. Global Business Holdings Inc. v.
Surecompsoftware, B.V., 633 SCRA 94 (2010)

It is settled that in the merger of two existing corporations, one


of the corporations survives and continues the business, while
the other is dissolved and all its rights, properties and liabilities
are acquired by the surviving corporation. The surviving
corporation therefore has a right to institute a collection suit on
accounts of one of one of the constituent corporations. Babst v.
CA, 350 SCRA 341 (2001).

III. EFFECTS ON EMPLOYEES OF CORPORATION



A. Assets Only Transfers: Sundowner Dev. Corp. v. Drilon, 180 SCRA 14
(1989).

Sundowner Dev. Corp. v. Drilon

Facts: Hotel Mabuhay, Inc. (Mabuhay) leased the premises belonging to
Santiago Syjuco, Inc. (Syjuco) but failed to pay their rentals, and so
Syjuco instituted and ejectment case. They settled the case with the
surrender of the premises to Syjuco. The assets of Mabuhay within it
were sold to Sundowner who also leased the property from Syjuco. The
National Union of Workers in Hotel, Restaurant and Allied Services
(NUWHRAIN) picketed the leased premises, barricaded the entrance
and denied Sundowners officers, employees and guests access. The
Secretary of Labor ordered the workers to return and for Mabuhay to
accept them pending final determination of the issue of the absorption
of the former employees of Mabuhay. Mabuhay argues that such is
impossible because it has ceased operations. NUWHRAIN alleged that
Mabuhay and Sundownder connived to sell the assets and close the
hotel to escape its obligations to the employees and asked that
Sundowner accept the workforce of Mabuhay and pay backwages.

Issue: Whether or not the purchaser of the assets of an employer
corporation can be considered a successor employer of the latters
employees.

Held: NO. It was only when Mabuhay offered to sell its assets and
personal properties in the premises to Sundowner that they came to


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


deal with each other. Thus, the absorption of the employees of
Mabuhay may not be imposed on Sundowner. In a tripartite agreement
that was entered into by Sundowner with NUWHRAIN and Mabuhay, it
is clear that Sundowner has no liability whatsoever to the employees of
Mabuhay and its responsibility if at all, is only to consider them for re-

B. Business-Enterprise Transfers: Central Azucarera del Danao v. CA,


137 SCRA 295 (1985); Complex Electronics Employees Assn. v. NLRC,
310 SCRA 403 (1999).1

employment in the operation of the business in the same premises.


There is no implied acceptance of the employees of Mabuhay by
Sundowner and no commitment or duty to absorb them.

Doctrine: Also, while it is true that Sundowner is using the leased
property for the same type of business as that of Mabuhay, there can be
no continuity of the business operations from Mabuhay to Sundowner


Facts: Bana-ay, Cosculluela, and Palma were among the regular and
permanent employees of Central Danao, the owner and operator of a
sugar mill. Central Danao later sold its sugar mill to DADECO. DADECO
actually took over operations of the mill pursuant to the Deed of Sale.

Although the Deed made no mention of currently employed employees,

because Mabuhay had not retained control of the business. Sundowner


is a corporation entirely different from Mabuhay and has no controlling
interest whatever in the same. What is obvious is that the Sundowner,
by purchasing the assets in the hotel premises, enabled Mabuhay to pay
its obligations to its employees. There being no employer-employee
relationship between the Sundowner and the Mabuhay employees, it
cannot be compelled to absorb the latter and to pay them backwages.

DADECO did hire regular and permanent employees pursuant to its own
hiring and selection processes, including Bana-Ay, Cosculluela, and
Palma. During the period of their employment, they were terminated by
DADECO. Bana-Ay, Cosculluela, and Palma filed a complaint against
Central Danao and DADECO.

Central Danao claimed that DADECO was the employer during that time

since the former had already transferred its assets to DADECO at the
time of termination. DADECO claims that it was Central Danao who was
liable since the termination happened during the time that Central
Danao was there employer.

Issue: Whether or not Central Danao is liable

There is no law requiring that the purchaser of MDIIs assets


should absorb its employees . . . the most that the NLRC could
do, for reasons of public policy and social justice, was to direct
[the buyer] to give preference to the qualified separated
employees of MDII in the filling up of vacancies in the facilities.
MDII Supervisors & Confidential Employees Asso. v. Pres.
Assistance on Legal Affairs, 79 SCRA 40.

Central Azucarera del Danao v. CA

Yu v. NLRC, 245 SCRA 134 (1995); Sunio v. NLRC, 127 SCRA 390 (1984); San
Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Held: YES, CENTRAL DANAO IS LIABLE. The Deed reveals no express
stipulation whatsoever relative to the continued employment by
Dadeco of the former employees of Central Danao. There was in fact, an
interruption of the employment of the private respondents in the sugar
central. In reality then, they were rehired anew by Dadeco, their new

the employees that it was left with no alternative but to close down the
operations of Lite-On. The Union pushed for a retrenchment pay
equivalent to 1 month salary for every year of service, which Complex
refused.

employer. The records also reveal that negotiations for the sale were
made behind the back of the employees who were taken by surprise
upon its consummation. Technically then, the employees were
terminated on the date of the sale. Worse, they were not even given the
required notice of termination.

Doctrine: The sale or disposition must be motivated by good faith.

The machinery, equipment and materials being used for production at


Complex were pulled-out from the company premises and transferred
to Ionics Circuit, Inc. (Ionics) at Cabuyao, Laguna. The following day, a
total closure of company operation was effected.

A complaint was filed with the Labor Arbitration Branch of the NLRC.
Ionics was impleaded as a party because the officers and management

Indeed, an innocent transferee of a business establishment has no


liability to the employees of the transferor to continue employing them.
Nor is the transferee liable for past unfair labor practices of the previous
owner, except, when the liability therefor is assumed by the new
employer under the contract of sale.

personnel were also holding office there. Ionics contended that it was
an entity separate and distinct from Complex and had been in existence
8 years before the labor dispute arose. Ionics further argued that the
hiring of some displaced workers of Complex was an exercise of
management prerogatives.

Issue: Whether or not there was transfer of business from Complex to


Complex Electronics Employees Assn. v. NLRC

Facts: Complex was engaged in the manufacture of electronic products.
There were different lines, including Ionics and Lite-On. The rank and
file workers of Complex were organized into the Complex Electronics
Employees Association (Union). Complex received a fax message from
Lite-On, requiring it to lower its price by 10%.

Complex informed its Lite-On personnel that such request of lowering
their selling price was not feasible as they were already incurring losses
at the present prices of their products. Complex regretfully informed

Ionics

Held: NO. There was no transfer of business. A runaway shop is
defined as an industrial plant moved by its owners from one location to
another to escape union labor regulations or state laws, but the term is
also used to describe a plant removed to a new location in order to
discriminate against employees at the old plant because of their union
activities. A runaway shop in this sense, is a relocation motivated by
anti-union animus rather than for business reasons.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


earlier firm. Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277
(1992).

In this case, however, Ionics was not set up merely for the purpose of
transferring the business of Complex. At the time the labor dispute
arose at Complex, Ionics was already existing as an independent
company. It cannot, therefore, be said that the temporary closure in
Complex and its subsequent transfer of business to Ionics was for anti-

union purposes. The Union failed to show that the primary reason for
the closure of the establishment was due to the union activities.

Doctrine: The mere fact that one or more corporations are owned or
controlled by the same or single stockholder is not a sufficient ground
for disregarding separate corporate personalities. Ionics may be
engaged in the same business as that of Complex, but this fact alone is

Facts: Private respondent Encabo was employed as a maintenance


manager in Pepsi Cola Distributors (PCD). His employment was
terminated because of his negligence in repairing the beverage plants
CEM-72 soaker machine which needed rehabilitation. According to PCD,
his delays in repairing the machine caused the company to incur
significant losses.

not enough reason to pierce the veil of corporate fiction of the


corporation. Well-settled is the rule that a corporation has a personality
separate and distinct from that of its officers and stockholders.

Encabo filed a complaint for illegal dismissal and unfair labor practice
claiming that he was denied due process. The NLRC found in favor of
Encabo and issued a writ of execution addressed to Pepsi Cola Bottling
Corp (PBC) ordering PCD to reinstate him. The writ was delivered to
Pepsi-Cola Products Philippines (PCPPI). PCCPI alleged that
reinstatement is no longer possible since PCD had closed down its
business on the ground of serious business losses and the new franchise

Furthermore, under the principle of absorption, a bona fide


buyer or transferee of all, or substantially all, the properties of
the seller or transferor is not obliged to absorb the latters
employees. The most that the purchasing company may do, for
reasons of public policy and social justice, is to give preference
of reemployment to the selling companys qualified separated
employees, who in its judgment are necessary to the continued

Although a corporation may have ceased business operations


and an entirely new company has been organized to take over

holder, PCPPI, is a new entity.



Issue: Whether or not PCPPI is liable

Held: YES. PCPPI is liable and must reinstate Encabo. PCD may have
ceased business operations and PCPPI may be a new company but it
does necessarily follow that one may now be held liable for illegal acts
committed by the earlier firm. The complaint was filed when PCD was

the same type of operations, it does not necessarily follow that


no one may now be held liable for illegal acts committed by the

still in existence. Pepsi-Cola never stopped doing business in the


Philippines. The same soft drink products sold in 1988 when the

operation of the business establishment. Barayoga v. Asset


Privation Trust, 473 SCRA 690 (2005).

Pepsi-Cola Bottling Co., v. NLRC


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


complaint was initiated continue to be sold now. The sale of products
did not stop at the time PCD bowed out and PCPPI came into being.
There is no evidence presented showing that PCCPI, as the new entity or
purchasing company is free from any liabilities incurred by the former
company.

In fact, in the surety bond put up by petitioners, both PCD and PCPPI
bound themselves to answer for monetary awards which clearly implies
that the PCPPI as a result of the transfer of the franchise bound itself to
answer for the liability of PCD to its employees.

Doctrine: See above.

Where a corporation is closed for alleged losses and its


equipment are transferred to another company which engaged
in the same operations, the separate juridical personality of the
latter can be pierced to make it liable for the labor claims of the
employees of the closed company. National Federation of
Labor Union v. Ople, 143 SCRA 124 (1986).

transgressions of his or her precedessor. Peafrancia Tours and


Travel Transport v. Sarmiento, 634 SCRA 279 (2010).

C. Equity Transfers: Pepsi Cola Distributors v. NLRC, 247 SCRA 386
(1995); Manlimos v. NLRC, 242 SCRA 145 (1995).1

Pepsi Cola Distributors v. NLRC

Facts: Private respondent Yute started working with Pepsi-Cola Bottling
Company (PCBCP) as contractual maintenance electrician and when
Pepsi Cola Distributors (PCD) took over the companys manufacturing
operations, he was absorbed as a regular employee. PCD terminated
Yute for alleged abandonment of work and/or absence without leave so
he filed a complaint for illegal dismissal before the NLRC wherein the
labor arbiter declared the dismissal illegal and ordered PCD to reinstate
him. However, 33 days after his reinstatement, PCD stopped payment of
Yutes salary on the ground that it allegedly sold its business interest
with Pepsi Cola Products Philippines, Inc. (PCPPI)

a corporation (i.e., business enterprise transfers), the liabilities


of the previous owners to its employees are not enforceable
against the buyer or transferee, unless (a) the latter
unequivocally assumes them; or (b) the sale or transfer was
made in bad faith. Barayoga v. Asset Privatization Trust, 473
SCRA 690 (2005).

NLRC issued a writ of execution ordering PCD to pay the salaries. PCPPI
filed in the case a motion praying that the change of ownership of the
company be taken cognizance of by the NLRC saying that PCPPI has a
separate personality from PCD and therefore, not a party to the cases
filed. Not being a party, they cannot be subjected to the issue writ of
execution. NLRC in resolving the MR modified its decision by ordering
both PCD and PCPPI to reinstate Yute. PCD was further ordered to pay

Where the change of ownership is done in bad faith, or is used

In the case of a transfer of all or substantially all of the assets of

to defeat the rights of labor, the successor-employer is deemed


to have absorbed the employees and is held liable for the

Robledo v. NLRC, 238 SCRA 52 (1994); Pepsi-Cola Bottling Co. v. NLRC, 210
SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 (1990); Coral v. NLRC, 258 SCRA
704 (1996); Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 (1995).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


Yutes separation pay.

Issue: Whether or not the dismissal of Yute on the ground that the
company already sold its business interest to PCCPI was proper

petitioners continued to work for the new owner and were considered
terminated, with their conformity much later when they received their
separation pay and all other benefits due them. Each of them then
executed a Release and Waiver which they acknowledged before Atty.
Nolasco Discipulo, Hearing Officer of the Butuan City District Office of

Held: NO. The contention that the second dismissal of private


respondent presents an issue separate and distinct from the issue of the
earlier dismissal on December 15, 1988 is nothing but an attempt of
PCD to evade liability. Pepsi Cola Distributors of the Philippines may
have ceased business operations and Pepsi-Cola Products Philippines,
Inc. may be a new company but it does not necessarily follow that no
one may now be held liable for illegal acts committed by the earlier

DOLE.

The new owner caused the publication of a notice for the hiring of
workers, indicating therein who of the separated employees could be
accepted on probationary basis. The petitioners were hired on
probationary basis for six months as patchers or tapers, but were
compensated on piece-rate or task basis.

firm. The complaint was filed when PCD was still in existence. Pepsi-Cola
never stopped doing business in the Philippines. The same soft drinks
products sold in 1988 when the complaint was initiated continue to be
sold now.

Doctrine: The sale of products, purchases of materials, payment of
obligations, and other business acts did not stop at the time PCD bowed


For their alleged absence without leave, Perla Cumpay and Virginia Etic
were considered to have abandoned their work. The rest were
dismissed later because they allegedly committed acts prejudicial to the
interest of the new management which consisted of their "including
unrepaired veneers in their reported productions on output as well as
untaped corestock or whole sheets in their supposed taped

out and PCPPI came into being. There is no evidence presented showing
that PCPPI, as the new entity or purchasing company is free from any
liabilities incurred by the former corporation.

veneers/corestock."

The employee-petitioners allege that they remained regular employees
of the corporation because the change in ownership and management
of Super Mahogany left its separate juridical personality unaffected. In
their defense, the corporation claims that it was within their
management prerogative to terminate the employee-petitioners, as
they were re- hired by the new management under probationary status.


Manlimos v. NLRC

Facts: Manlimos along with 15 others were employees of Mahogany
Plywood Corporation. A new owner/management group headed by
Alfredo Roxas acquired complete ownership of the corporation. The
petitioners were advised of such change of ownership; however, the


Issue: Whether or not an innocent transferee of a business


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


establishment has liability to the employees of the transfer or to
continue employing them.

Held: NO. The change in ownership of the management was done bona
fide and the petitioners did not for any moment before the filing of their
complaints raise any doubt on the motive for the change. On the
contrary, upon being informed thereof and of their eventual
termination from employment, they freely and voluntarily accepted
their separation pay and other benefits and individually executed the
Release or Waiver which they acknowledged before no less than a
hearing officer of the DOLE.

Since the petitioners were effectively separated from work due to a
bona fide change of ownership and they were accordingly paid their
separation pay, which they freely and voluntarily accepted, the private
respondent corporation was under no obligation to employ them; it
may, however, give them preference in the hiring. The private
respondent in fact hired, but on probationary basis, was legally
permissible.

The hiring of employees on a probationary basis is an exclusive
management prerogative. The employer has the right or privilege to
choose who will be hired and who will be denied employment.

Doctrine: Where such transfer of ownership is in good faith, the
transferee is under no legal duty to absorb the transferor employees as
there is no law compelling such absorption. The most that the
transferee may do, for reasons of public policy and social justice, is to
give preference to the qualified separated employees in the filling of

vacancies in the facilities of the purchaser.



D. Mergers and Consolidations: Filipinas Port Services v. NLRC, 177
SCRA 203 (1989).1

Filipinas Port Services v. NLRC

Facts: On Feb. 16, 1977, the government adopted a policy in Davao that
only one company can operate stevedoring and arrastre services in the
ports of Davao. Because of this, the companies providing such services
consolidated together and formed a corporation named Davao
Dockhandlers, Inc. which was later renamed Filipinas Port Services.
Among the corporations in the consolidation agreement was Davao
Maritime Stevedoring Corporation (DAMASTICOR).

In the articles of incorporation of the new corporation, it provided that
all labor force together with its necessary personnel complement, of
the merging operators shall be absorbed by the merged or integrated
organization to constitute its labor force.

Private respondent, an employee of DAMASTICOR, upon retirement
from Filipinas, was paid his retirement fee from 1977-1987. He however
contends that his employment from DAMASTICOR should be counted in
computing his retirement fee.

Issue: Whether or not the successor-in-interest of an employer is liable

Reiterated in Filipinas Port Services v. NLRC, 200 SCRA 773 (1991); National
Union Bank Employees v. Lazaro, 156 SCRA 123 (1988); First Gen. Marketing
Corp. v. NLRC, 223 SCRA 337 (1993).


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)

ATTY. JOSE MARIA G. HOFILEA


for the differential retirement pay of an employee earned by him when
he was still under the employment of the predecessor-in-interest.

Held: NO. Petitioner cannot be held liable for the payment of the
retirement pay of private respondent while in the employ of
DAMASTICOR. It is the latter who is responsible for the same as the
labor contract of private respondent with DAMASTICOR is in personam
and cannot be passed on to the petitioner.

Doctrine: Unless expressly assumed, labor contracts are not enforceable
against a transferee of an enterprise, labor contracts being in personam.

It is more in keeping with the dictates of social justice and the


State policy of according full protection to labor to deem
employment contracts as automatically assumed by the
surviving corporation in a merger, even in the absence of an
express stipulation in the articles of merger or the merger plan.
By upholding the automatic assumption of the non-surviving
corporations existing employment contracts by the surviving
corporation in a merger, the Court strengthens judicial
protection of the right to security of tenure of employees
affected by a merger and avoids confusion regarding the status
of their various benefits. Bank of P.I. v. BPI Employees Union-
Davao Chapter, etc., 658 SCRA 828 (2011).
o Atty. Hofilea the surviving corporation, in a merger
situation, is absorbing everything including employees.
As such, there is no interruption. This case seems to
suggest that the employees have a choice whether to
join the new company or not. However, the rule still is

that employment, because they are obligations, are


carried over.

E. Spin-Offs: SMC Employees Union-PTGWO v. Confessor, 262 SCRA 81
(1996).

SMC Employees Union-PTGWO v. Confessor

Facts: SMC-Union entered into a Collective Bargaining Agreement with
SMC. SMC management informed its employees in a letter that the
company - which was composed of 4 operating divisions (1) beer, (2)
packaging, (3) feed and livestocks and (4) Magnolia and Agri-business -
would undergo a restructuring. Magnolia and Feeds and Livestock
divisions were spun-off and became 2 separate and distinct
corporations: Magnolia Corp. (Magnolia) and San Miguel Foods (SMFI).
Because of this, the CBA was renegotiated. During the negotiations,
SMC-Union insisted that the bargaining unit of SMC should still include
the employees of the spun-off corporation and the CBA shall be
effective for 2 years. SMC, on the other hand, contended that the
members/employees who had moved to Magnolia and SMFI,
automatically ceased to be part of the bargaining unit at the SMC.

Issue: Whether or not the bargaining unit of SMC includes also the
employees of Magnolia and SMFI.

Held: NO. Magnolia and SMFI were spun-off to operate as distinct
companies. Undeniably, the transformation of the companies was a
management prerogative and business judgment which the courts
cannot look into unless it is contrary to law, public policy or morals.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

CORPORATION LAW REVIEWER (2013-2014)



Neither can we impute any bad faith on the part of SMC so as to justify
the application of the doctrine of piercing the corporate veil. Magnolia
and SMFI became distinct entities with separate juridical personalities.
Thus, they cannot belong to a single bargaining unit.

Doctrine: In determining an appropriate bargaining unit, the test of
grouping is mutuality or commonality of interests. Considering the spin-
offs, the companies would consequently have their respective and
distinctive concerns in terms of the nature of work, wages, hours of
work and other conditions of employment.


NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

ATTY. JOSE MARIA G. HOFILEA