13 Acquisitions Mergers and Consolidations

CORPORATION LAW REVIEWER (2013-‐2014)
ATTY. JOSE MARIA G. HOFILEÑA
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

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
corporation’s 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 buyer’s.
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

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As a rule, a corporation that purchases the

assets of another will
not be liable for the debts of the
selling corporation, provided
the former acted in good faith and paid

adequate consideration
for such assets, except when any of the
following circumstances
is present: (1) where the 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

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 LUSTEVECO’s 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 former’s
obligations.
In the "business-‐enterprise" level, the purchaser's

interest goes
beyond the assets or properties of the business
enterprise. The
purchaser’s 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
former’s 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 NPC’s assets

by operation
of law—these properties may be used to
satisfy the Court’s
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).
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

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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
•
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
1
2
3
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
7
8

2014)
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

1
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
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 company’s 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 Workmen’s 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 Vasquez’s 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.

2014)
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 Biñan 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 Biñan 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.

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
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.
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 à Peggy Mills à Far Eastern Textile Mills

à 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
McLeod’s 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

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-‐à-‐vis
the estate, should continue to remain with it
even after the
percentage of the estate’s 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).
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.
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.”

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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.
the PRI to the PHILSUCOM. Two days

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


2014)
o
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
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:

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.

2014)
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

2014)
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
SEC’s 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)
•
1
Mindanao Savings and Loan Asso. V. Willkom, 634

SCRA 291 (2010).

2014)
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:

2014)
1. Approval by the SEC of the articles of merger

2. Must have been duly approved by a majority
of the respective
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. Hofileña à 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 Global’s
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 Sundowner’s 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 latter’s
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

2014)
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 MDII’s 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

1
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).

2014)
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.
2014)
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 plant’s
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 latter’s
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 company’s 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

2014)
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.
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. Peñafrancia

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
company’s 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
Yute’s 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).

2014)
Yute’s 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
2014)
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).

2014)
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
corporation’s 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. Hofileña à 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.

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.

2014)

13 Acquisitions Mergers and Consolidations

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13 Acquisitions Mergers and Consolidations

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CORPORATION LAW REVIEWER (2013-‐2014)

ATTY. JOSE MARIA G. HOFILEÑA

ACQUISITIONS, MERGERS AND CONSOLIDATIONS

I. ACQUISITIONS AND TRANSFERS

A. Concept of “Business Enterprise”, “Economic

Section 40. Sale or other disposition of assets.

Subject to the provisions of existing laws on

the corporate property and assets if thereby the

Nothing in this section is intended to restrict the

In non-‐stock corporations where there are no

office with postage prepaid, or served personally:

A sale or other disposition shall be deemed

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3,

Business enterprise constitutes the goodwill, the customer

Villa Rey Transit, Inc. v. Ferrer

ATTY. JOSE MARIA G. HOFILEÑA

Facts: Villarama entered into a Contract of Sale

pay for his own obligations, and that

new TPUs for 10 years identical or competing with

3 months alter, a corporation called Villa Rey

personal checks Ford trucks for the

The clear intention of the parties was to

Commission (PSC) to grant it provisional authority

for the duration of such period. If the prohibition

the other hand initiated a third-‐party complaint

Issue: Whether or not the stipulation on the original

Held: YES. Evidence discloses that for someone

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

As a rule “Personal Liabilities” remain with

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3,

As a rule, a corporation that purchases the

ATTY. JOSE MARIA G. HOFILEÑA

the former acted in good faith and paid

corporations. Edward J. Nell Co. v. Pacific, 15 SCRA

Edward J. Nell Co. v. Pacific

including the pumping equipment it sold to

Doctrine: See above.

Facts: Edward J. Nell Company (EJNC) secured a

Issue: Whether or not Pacific Farms is liable

Held: NO. The theory of EJNC that Pacific Farms

Philippines National Bank v. Andrada Electric &

Even under the provisions of the Civil Code, a

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

Facts: The PNOC Shipping and Transport

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3,

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

Held: YES. The Agreement provides that PSTC

In other instances, the purchaser is

purchasing the assets to ensure that he would not

Assumption of Obligations but also in the Agreement of

Even without the Agreement, PSTC is still liable.

In the "business-‐enterprise" level, the purchaser's

Doctrine: To allow an assignor to make a transfer

As will be shown in the discussions

PSALM took ownership over most of NPC’s assets

ATTY. JOSE MARIA G. HOFILEÑA

the case and a writ of execution was

Issue: Whether or not Caltex may recover from

Villanueva, C. L., & Villanueva-‐Tiansay, T. S.

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3,

business enterprise as it is owned and operated

In an assets-‐only transfer, the transferee is

When another corporation takes over the assets