University of the Philippines College of Law | Corporation Law | D2021

Topic Effects of Merger or Consolidation

Case Name ASSOCIATED BANK, vs. CA and LORENZO SARMIENTO JR.
Case No. & Date
Ponente
Petitioners Please input all petitioners/respondents here. Para immediately apparent kung ano yung role ng
parties kahit summary lang babasahin.
Respondents

Summary (recit- In 1975 Associated Banking Corporation (ABC) and Citizens Bank and Trust Company
friendly) (CBTC) merged to form what later became Associated Bank (AB). In 1977, Sarmiento
executed in favor of AB a promissory note whereby he undertook to pay P2.5M.

He failed to pay and AB sued to recover the said amount. In his defense, Sarmiento alleged
that AB is not the proper party in interest because the PN was executed in favor of CBTC.
TC ruled for AB, however the CA reversed and held that the AB had no cause of action
against Sarmiento, since AB was not privy to the PN executed by Sarmiento in favor of
CBTC.

The issue was W/N AB, the surviving corporation, may enforce the PN made by Sarmiento
in favor of CBTC, the absorbed company, after the merger agreement had been signed.

The SC answered in the positive. Ordinarily, in the merger of two or more existing
corporations, one of the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties and liabilities are
acquired by the surviving corporation. Although there is a dissolution of the absorbed
corporations, there is no winding up of their affairs or liquidation of their assets, because
the surviving corporation automatically acquires all their rights, privileges and powers, as
well as their liabilities.

The merger, however, does not become effective upon the mere agreement of the
constituent corporations, but is subject to Section 79 of the Corporation Code which
requires the approval by SEC of the articles of merger which, in turn, must have been duly
approved by a majority of the respective stockholders of the constituent corporations. The
same provision further states that the merger shall be effective only upon the issuance by
the SEC of a certificate of merger. 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.

In this case, the Agreement of Merger provided that its effectivity "shall…be the date when
the necessary papers to carry out this merger shall have been approved by the SEC." As
to the transfer of the properties of CBTC to ABC, the agreement provides: ”upon effective
date of the Merger, all rights…and property of CBTC…as of the effective date of the
merger shall be vested in ABC…”

The records do not show when the SEC approved the merger. Sarmiento’s theory is that it
took effect on the date of the execution of the agreement itself, which was September 16,
1975 and thus CBTC could not have conveyed to AB its interest in the PN, which was not
yet in existence at the time of the merger.

SC disagreed because even assuming that the effectivity date of the merger was the date
of its execution, the merger agreement explicitly says: “Upon the effective date of the
merger, all references to [CBTC] in any deed, documents, or other papers …shall be
deemed for all intents and purposes, references to ABC…as if such references were
 University of the Philippines College of Law | Corporation Law | D2021
direct references to ABC”. The agreement itself clearly provides that all contracts —
irrespective of the date of execution — entered into in the name of CBTC shall be
understood as pertaining to AB . Thus, although the PN names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions of the merger
agreement, as a reference to AB.
Doctrine/s Ordinarily, in the merger of two or more existing corporations, one of the combining
corporations survives and continues the combined business, while the rest are dissolved
and all their rights, properties and liabilities are acquired by the surviving corporation.
Although there is a dissolution of the absorbed corporations, there is no winding up of their
affairs or liquidation of their assets, because the surviving corporation automatically
acquires all their rights, privileges and powers, as well as their liabilities. The merger,
however, does not become effective upon the mere agreement of the constituent
corporations, but is subject to Section 79 of the Corporation Code which requires the
approval by SEC of the articles of merger which, in turn, must have been duly approved by
a majority of the respective stockholders of the constituent corporations. The same
provision further states that the merger shall be effective only upon the issuance by the
SEC of a certificate of merger. 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.

RELEVANT FACTS

ISSUE AND RATIO DECIDENDI

Issue Ratio
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RULING

WHEREFORE, …

NOTES