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at 3 pm, AVR.
February 17 WerWerWetch
What is the effect if shares become
delinquent?
The owner of the shares will lose the right
to vote, be voted upon, to inspect the books and
other rights except the right to dividends.
So that a director whose shares become
delinquent, would he remain to be in the
Board?
Yes. As stockholders, they could no longer
vote, but as a director, they could still vote
because they still own at least 1 share of stock.
As a matter of fact, the moment they pay the full
amount, all rights are restored.
However, if despite the declaration of being
delinquent, still they refused, what will the
corporation do now?
The corporation may sell the shares at a
public auction to the highest bidder (According to
JD Class, Sir said that the highest bidder is the
person who offers to pay the highest price for the
least number of shares. According to the
corporation code, the highest bidder is the person
who offers to pay the full amount of the balance
together with interest and cost of advertisement
and expenses of sale for the smallest number of
shares.)
What would happen now to the director
whose shares are sold in public auction?
If he no longer owns at least 1 share, he
will be removed as a director.
In an extreme situation where all the shares
of all the directors are sold in a public
auction because they are delinquent, what
will happen?
It will result to a situation where none of
the directors are qualified because they are no
longer holders of any shares. In such case, there
is a need to call for a special election to elect new
BOD who are owners of at least one share as
required by law. If the president will not call a
meeting for the election, any interested
stockholder may petition to the SEC who will
make an order to the petitioning stockholder to
call for a meeting by giving notice to the other
stockholders. Otherwise, the unqualified BOD will
continue to stay in office UNTIL THEIR
SUCCESSORS
HAVE
BEEN
ELECTED
AND
QUALIFIED. So, there is a need for a special
election.
As a requirement for one to be a director,
he needs to own at least one share of the

corporation he sits as a director. In the


event that he is considered a delinquent
SH, there is a danger that all his shares
might be sold in a public auction. If you
were the counsel of the director, what
would you advise your client?
The director can opt to avail of the
different options on the application of payments.
The director can ask the corporation to apply his
initial payment to as much stocks that it can fully
pay, so that the director can be assured that he
will hold at least one stock and hence making him
qualified to sit as a director.
The options for application of payments are as
follows:
1.) Apply pro rata to the partial payment to all
stocks subscribed.
2.) Apply partial payment to as much number
of shares as to fully pay them.
Effects of delinquency:
1. The SH cannot vote
2. The SH cannot be voted upon
Only the rights to dividends continue.
As a SH what is more important is the right
receive dividends, so why would the SH pay
in case of delinquency when he is still going
to receive dividends?
It is because there is a danger that the
shares considered delinquent will be sold at a
public auction.
So what is the purpose of depriving the
delinquent SH of their right to vote?
This is a way to pressure the non-paying
SH to already pay his unpaid subscription.
What happens when there is a declaration
of dividends?
Cash dividends the cash dividends shall
be applied to the unpaid balance of the
subscribed stocks of the delinquent SH.
Stock Dividends the dividends shall be
withheld until the payment of the unpaid
subscription.
Ms. Adan (secretary), here is Mr. Gupana
(shareholder), he called you and asked if he
can look at the books of the corporation.
Will you allow him?
A shareholder has the right to inspect the
corporate books. However, it has limitations. The
inspection must be made at reasonable hours on
business days. Nevertheless, if it is very
necessary for him to inspect the books, then I can
accommodate him.
James called the secretary to inspect the
corporate books. After showing him, he
asked if he can at least touch it?

If it is necessary to touch it, then the


secretary can allow it.
How about taking a selfie?
The right to inspect does not include the
right to copy. He may demand in writing for the
copy of the excerpts, for as long as the
shareholders purpose is legitimate, then he can
have a copy provided that it is at his own
expense. Do not offer.
The books and records of the Corporation
1. Articles of Incorporation
2. By laws
3. Stock and transfer books
4. Stock certificates
5. Minutes of the shareholders meetings
6. Minutes of the board meeting
7. Records of all business transactions of the
corporation (journals, ledgers, financial
statements)
The stock certificates are numbered and
before it is issued to a stockholder, he will have to
fill it up, the number of shares, the name of
corporation and subscriber, signed by the
president of the corporation.
Merger
2 or more constituent corporations
combined which results to dissolution of one
corporation and the survival of one corporation.
Consolidation
a form of business combination of two or
more constituent corporations from which an
entirely new corporation or entity is created.
What are the reasons why corporations
merge or consolidate?
-Business Expansion
-One corporation with asset, another with
managerial skill, they can combine
-increase profit
---INSERT the SEXth part here
You want to be part of that other
corporation which engages in that similar
business, what would you propose?
The Company which would not want to
continue the business could exchange its
buses/assets for the stocks in another corporation
who engages in similar business. In other words,
if corporation A has no energy to carry out the
business although it still wants to make use of its
assets but the corporation doesnt want to lease
them, they could make use of this Stock-Asset
Swap (Assets Swapped with Stocks) combination.
The disposing corporation would deliver the

assets to the acquiring corporation then they will


determine the value and once they agree on the
value, corporation B would give shares of stock
equivalent to the value of the assets. Corporation
A becomes a stockholder of the acquiring
corporation or if they so prefer, the stocks might
not be given to the disposing corporation itself
but may be given directly to stockholders of
disposing corporation in which case they are
dissolving the corporation and the individual
stockholders of disposing corporation become
stockholders of acquiring corporation.
We also learned about the right of the
corporation to sell all or substantially all of
its assets. The third is the sale of assets,
meaning, the disposing corporation could sell all
assets to the acquiring corporation and there is a
payment of cash to the former. However in this
case, acquiring corporation does not acquire
liabilities of the disposing corporation but only
acquires the assets.
Corporate Combinations or Options or
choices that may be available to a
corporation:
1. Sale of assets
2. Lease of assets
3. Sale of Stock
4. Stock-Asset Swap
5. Merger
6. Consolidation
These are used to attain certain objectives.
Section
77. Stockholders
or
members
approval. 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
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.

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

STEPS FOR MERGER


1. Approval of plan of merger by majority of the
BoD/BoT of each constituent corp.
2. Approval of 2/3 of SHs representing the
outstanding capital stock/members of each
constituent corp.
3. Articles of Merger to be signed by the Pres. or
VP and certified by the Corp. Sec. or Asst. Corp.
Sec.
4. AoM submitted to SEC for approval
5. Cert. of Merger issued by SEC after it examines
the AoM and finds nothing inconsistent with the
Corp. Code or any other law.
2 PHASES IN MERGER
1. PLANNING
Directors will have to study the best
option for the corporation whether they will go for
any
of
the
abovementioned
corporate
combinations. The moment they decide to go for
merger, they will now have to lay down the plan
(how the merger will be carried out).
FIRST: Determine who could be a good
partner in Merger (just like marriage). Look at the
assets [look at the age of the assets
(receivables), chances of collecting them; land
(personally inspect the land)] and liabilities

(even if just a few cases pending in court, dont


just trust their word for it; dig the records of the
case and ascertain for yourself that such cases
may not jeopardize your business after the
merger; ask the lawyer how long this case has
been pending and what the chances are of
winning). Bottomline: DUE DILIGENCE(MUST
HAVE A KEEN EYE FOR DETAILS)
Words of Wisdom from the Prof: DO NOT PLAN
YOUR WEDDING...PLAN YOUR MARRIAGE!
The wedding is very easy...its marriage thats
very scary!
SECOND: Based on your due diligence in
determining the value of the assets, you will now
determine the number of stocks to be issued for
their equivalent. If their assets are rated HIGH,
they will be given more stocks. So you must be
very careful so that the stocks you will be issuing
will be equitable and fair.
THIRD: With all these results from your
due diligence, you now draw your merger plan
and present them to the SHs in a SHs meeting.
2. EXECUTION of the plan
With the necessary approval and the
required signatures of the Pres. and the Corp.
Sec., the AoM will now be submitted to the SEC
for approval.
In the first 3 kinds of corporate
combination,
no
SEC
approval
was
necessary. Why is that so?
In the first 3 corporate combinations, it did
not involve the dissolution of any corp. and thus
no legal existence was extinguished. Unlike in
Merger or Consolidation.
Before SEC will approve the AoM and issue
the corresponding certificate approving such
merger, it will have to examine the AoM and
determine if it is accordance with the Corp. Code
and other existing laws, like laws on Monopolies
and Unfair Competition. Otherwise, if the SEC
finds something wrong, it will give the
corporations involved a chance to be heard.
(2014-2015 transcript)
Discussion:
First, there will be a meeting of the SHs
these
two
corporations
or
constituent
corporations will conduct a meeting among
themselves first, and discuss what the plans are
of the 2 corporations. Each of the constituent
corporation has to know their potential partners.
They will have to know their assetsthey will
have to go over their financial statements. IOWs,
you are preparing for marriage, you are not
preparing for wedding, a wedding is very easy,
you can just hire an event organizer. DUE

DILIGENCE is important, you have to check the


networth of the corporation.
Check the UNION of the Company
(Labor unions, siguro ang pasabotni sir)- is it
a reasonable union? A radical union? Will they
always ask for a 1 sack of rice for a month? Or
are they also asking for 5-days leave? So in
deciding all these, you have to determine WON to
proceed with the merger. So that you will have to
know who are the managers here, are managers
professional manangers or just managers
because they are children of the owner? They did
not even graduate in college? Like a corporation
who is run now by children of the previous
owners, however, if the children are not ready,
you are better off hiring professionals. If mao ni
nga corporation (katunga manager wala kagraduate ug highschool) imo kuhaon, then youll
never get to the objective of a merger, the
objective of a merger is more profit.
EFFECTS OF MERGER:
Sec. 80. Effects or merger or consolidation. - The
merger or consolidation shall have the following
effects:
1. 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;
2. The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
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;
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 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 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)
Discussion:
he assets will be absorbed by the
corporation. There is automatic transfer. All
liabilities, franchises, privileges will be transferred
to that merged corporation.
If Corporations A and B decided to merge,
where Corp. B is the surviving corp, and
Corp.A before the merger, had a collection
case against his customer, what happens to
this collection case?
It will continue. The defendant cannot ask
for the dismissal of the case on the ground that
there is no personality to sue as long as the court
is duly informed of the merger since the surviving
corporation stands as if it is in itself.
It is now the new party of the case, of
course, if you are the counsel of the corporation
you can file a manifestation in the court and tell
the court about the merger your honor, please,
Corp.A which is the plaintiff here, has been
merged with Corp.B and Corp. B is now the
surviving corporation. So here, you could make
that manifestation and the court will take note of
that and will consider Corp. B as the new plaintiff.
So that any award that the court may give in the
future, Corp. B will be entitled to the award. As
we said, one effect of the merger is to enjoy all
benefits and privileges and rights and
prerogatives
of
the
other
constituent
corporation (Corp.A).
Nextmeeting: Merger to Appraisal right.