CHAPTER VII 7 CORPORATE BOOKS AND RECORDS * them to grant Ms Proxy for his purpose. Typically, a passive shareholder will grant proxy if he is Convinced that the corporate raider can turn around the corporation and make it yield better results to its shareholders. The SRC regulates proxy solicitation."® " In Yujuico v. Quiambao,” the Supreme Court explained that the penal sanction extends to the unjustified refusal to allow the inspection and/or reproduction of stock and transfer book. The law “contemplates a situation wherein a corporation, acting thru one of its officers or agents, denies the right of any of its stockholders to inspect the records, minutes and the stock and transfer book of such corporation. xxx” It does not extend to outgoing officers who withheld and refused to tum-over corporate records. Stock transfer agent — _ Corporations with widely dispersed shareholdings typically appoint a stock transfer agent for convenience. Under the Code, the Commission may require its appointment in certain cases. This complements the Commission’s authority under the SRC, specifically: _ “36.4, The Commission, having due regard to the public interest, ’ the protection of investors, the safeguarding of securities and funds, and maintenance of fair competition among . brokers, dealers, clearing agencies, and transfer agents, shall promulgate rules and regulations for the prompt and accurate clearance and settlement of securities transac- tions.” (underscoring supplied) Except in cases where the Commission may require the appointment of an independent stock transfer agent, the corporation through the corporate secretary may perform or make share transfers. The corporation must comply with the relevant rules and regulations imposed on stock transfer agent, except ‘the payment of a license fee. SEC. 74, Right to Financial Statements. — A corporation shall furnish a stockholder or member, within ten (10) days from receipt of their written request, its most recent financial statement, in the form and substance of the financial reporting required by the Commission. At the regular meeting of stockholders or members, the board of directors or trustees shall present to such stockholders or members a "SRC, See. 20, GR. No. 180416, June 2, 2014, A Scanned with CamScanneroN E REVISED CORPORATION CODE OF THE PHILIPPINES ' THE (ITS THEORIES AND APPLICATIONS) is i f the corporation for the Precegi, cial report of the operations o| : van which shal include financial statements, duly signed and certifeg : iat with this Code, and the rules the Commission may preserip, e, i liabilities of the corporatig However, if the total assets or total n da Jess than Six hundred thousand pesos (P600,000.00), or such other ay as may be determined appropriate by the Department of Finan financial statements may be certified under oath by the treasurer president. ‘mount ee, the And the “A weak disclosure and non-transparent practices can contribute to unethical behaviour and to a loss of market integrity at great co: t, Not just to the JI not apply to small corporations, i.e, t six hundred thousand Pesos (P600,0 set a different threshold to exempt Tequirement. considering the needs of of business, unt. This requirement does those with total assets or liabilities below 100.00). The Department of Finance may 4 corporation from the independent audit f third parties, and to facilitate the conduct (compared to the o id Code where such certification ‘must be made by “the t reasurer or any res onsible officer of the ci yration”). There appears tobe an inconsistency allie of the corporation mn the co-signatory of the treasurer, since 9; = Philippine Co SRC, Sec, 68, See. 177(a), Sec, 74, "Porate Govemance Blueprint 2015, P.26, Scanned with CamScannerCHAPTER VIII ect 169 CORPORATE BOOKS AND RECORDS, : the president is not mean the uti N any case, th should be able to co-sign the financial states t the same as the chief financi ‘ments, he corporation Independent of the rules on access to basic corporate record Atthe regular meeting of shareholders or members, the board must present to shareholders or members the audited financial statements. Shareholders or members need not make a request for the board to make such presentation. A regular meeting is typically held after April 15,2 when the corporation is expected to have prepared and submitted its financial reports to the concerned ‘government agencies. ; Scanned with CamScanner1m 4 wea monte we nud tp ape fev new Ao) NX ho ince Ay tec Chapter Ix P MERGER AND CONSOLIDATION Pooling of resources and businesses of two or more co redundancy, and eventually © dissolution of a c lead to efficiency, eliminate benefits to shareholders. This may or may not invol concemed corporations. tial ane - a Srporation: The law emits comin’ to make these transfers or management arrangements, in the exercise Of their special powers! consolidation.” Title IX of the Code Provides measures, rights and tue of partis, and consequences of statutory merger or consolidation, namely the execution of a plan, the approval of the concemed shareholders, and the execution of the articles of merger or consolidation, called « Changes introduced by the Code — (ory), ind articles 0 ror con This is meant to afford parties to the exchange understand the effects of reorganization, especially onthe faTmess Ot the exchange of shares and properties, 'Secs.39, 41, and 43. *Secs. 39, 41, and 78. pa tion Commi Sec. 58, See discussions under Sec, 39 onthe need for a Philippine Competition Cé Sion clearance, and on the tax consequences, ofthe merger or consolidation. 290 Scanned with CamScannerCHAPTER 1x ™ MERGER AND CONSOLIDATION SEC. 75, Plan of Merger or Consotidation. — corporations may merge into a sin I constituent corporations or may snhich shall be the consolidated Two (2) or more gle corporation which shall be one of the Consolidate into a new single corporation corporation. sr aad’ ft tse ofeach corporation, party tothe merge! salons sed setting forth the following: 4 plan of merger or consolidation (a) The names of the corporations proposing to merge or consolidate, hereinafter referred to as the constituent corporations; (b) The terms of the merger or consolidation and the mode of carrying the same into effect; (©), ..A.statement. of. the. changes, if any, .in,.the. articles of incorporation of the surviving corporation in case of merger; and, in case of consolidation, all the statements required to be set forth in the articles of incorporation for corporations organized under this Code; and (@ Such other provisions with respect to the proposed merger or consolidation as are deemed necessary or desirable. ‘ The corporations corporations.” A merger or consolidation is initiated with the execution of a plan of The law prescribes the basic contents of the plan. Among others, it must provide the basic terms of the merger or consolidation, themode of implementing them, and in case of merger the amendments to, or in case of consolidation the ‘matters that need to be reflected in, the articles of incorporation. Basic terms of, and mode of implementing, the merger or consolidation — ‘The Tax Code illustrates examples on how the merger or consolidation may be implemented, specifically: aloainied, car pdodion VS. Curaving arp anon Scanned with CamScanner‘THE REVISED CORPORATION CODE OF THE PHIL| 292 IPPINES (ITS THEORIES AND APPLICATIONS) a. Property for share exchange,‘ where the transferor ‘is the cong corporation and the transferee of property and issuer of shane te surviving corporation. The issued shares are eventually disp to the shareholders of the constituent corporation, eg b, Share for share exchange,* where the transferor is ofa constituent corporation and the transferee of constituent corporation) and issuer of shares js the Surv corporation. The properties of the constituent Corporation - eventually transferred to the surviving corporation, ud th shah Shares (of s c. Security for share or security exchange ¢ where the trans the security holder of a constituent corpor tor ig : fees ) and issuer of sane The. securities of ferred to the sung ation and the tan of securities (of such constituent corporatio or securities is the surviving corporation, constituent corporation are eventually trans corporation. The such ease, the Code requires Values ofthe assets and liabilities ofthe respe cut-off date” must be reflected i i “the carrying amounts and fp tive companies as ofthe agreed ° ‘The Commission expressed the vi in team merger, specifically in « lew that the Code does not prohibit in-@ merger (opts) not to i se where an “absorbing corporation 'Ssue shares to itself (being) a stockholder of the NRG See a0 2¥, {14 See. (0,24, 1 Se ACNAY6, €. 4O(e\A(0) eee LEA Scanned with CamScanner_. CHAPTER IX » MERGER AND CONSOLIDATION Absorb en The Commission clarified “the investment account of theabsorbing corporation will be closed against the net assets acquired and any excess shall be treated as additional paid-in capital.” What differentiates a x. Rufino,” the Supreme Court provided as an example the subsequent dissolution of the transferee corporation as a scheme to evade the tax on the transfer of properties. It quoted the United States Supreme Court in Gregory vs. Helvering,” illustrating the continuity-of-business enterprise doctrine. This doctrine required that the transferee, in a tax-free reorganization, should take onthe transferor’s business activities. Specifically, the transferee must continue a significant historic business of the transferor or use a significant portion of the transferor’s business assets. Such business or assets may be transferred to the related entities of the transferee corporation."* Hence, if the surviving corporation will continue the business of the subsidiary, then the liquidation or upstream merger should be tax-free. Without the continuity of business, there is no reason to defer recognition of gain or loss. As described in Helvering, the upstream merger would be “a disguise for concealing its real character, and the sole object and accomplishment of which ‘was the consummation of a preconceived plan, not to reorganize a business or any part of a business.” Changes in the articles of incorporation of the surviving or consolidated corporation — ‘The articles of incorporation of the surviving or consolidated corporation may reflect the business activities of the constituent corporation, assuming the former will continue to pursue such business activities. It may also reflect the change in business address, the increase in the number of directors, the increase in capital of the merged or consolidated corporation, and the other material stipulations of the parties. Other requirements — ‘The Code requires the articles of merger or consolidation must reflect: the “carrying amounts and fair values of the assets and liabilities of the respective °SEC Opinion dated May 24, 1999. "°G.R. Nos. L-33665-68, February 27, 1987. 293 US. 465, fanuary 7, 1935, "Us Treasury Department Regulation 8760(B), January 28, 1998, Scanned with CamScanner‘THEREVISED CORPORATION CODE OF THE PHILIPPINES m (TS THEORIES AND APPLICATIONS) anies as ofthe agreed cut-off date;” “the method to be used in the me, ‘on of accounts of the companies;” and “the provisional o Pra as merged or consolidated, using the accounting method,"» comp: A or consolidatic forma values, This will aid the Commission and the parties in understanding whether the exchange of values i fir, as described earlier Further, this will show the historical costs ofthe properties transferred. Such costs must be caried ove, and used in the subsequent tax reporting when the transaction is Presented as q tax-free merger. Specifically: “the basis of the property transferred in the hands of the transfere shall be the same as it would bein the hands ofthe transferor sxx.” Further, the cost basis of the treasury shares shall also be the historical costs of the properties subject of the exchange.'* SEC. 76. Stockholders’ or Members’ Approval. — Upon approval by a majority vote ofeach ofthe 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 fo all stockholders or members of the respective corporations in the same manner as giving notice of regular or special meetings under Section 49 of this Code. The notice shall state the purpose of the meeting and include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (213) 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 nonstock corporations shall be necessary for the approval of such plan, Any dissenting stockholder may exercise the right of appraisal in accordance with this Code: Provided, That if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the right of appraisal shall be extinguished. Any amendment to the plan of ‘merger or consolidation may be made: Provided, That such amendment is approved by a majority vote of the respective boards of directors or trustees of all the constituent corporations fal iad by the affirmative vote of stockholders representing at least frethiras 28) of the outstanding capital stock or of two-thirds (2/3) of members of each of the constituent corporations, Such plan, together "Sec. 7, IIRC, Sex. 40(0\5)6), "Id, See. 445), Scanned with CamScannerCHAPTER 1X MERGi c AND CONSOLIDATION 295 any amendment, shalt he sider ¢ agreemer I be conside ed as the agreement of merge =. - -— The merger or consolida Nn, 'Solidation j i e tion is a special action of th corporation, needing the approval by: (a) a ‘am : or trustees of the constituent cor ‘Vority vote of each of the board of directors at least two-thirds (2/3) of the quot’ 24 (b) “stockholders representing right of appraisal, However, .” Any dissenting stockholder may exercise his “ifafter the ap i proval by the stockholders of such plan, the board of directors decides to abandon the san she renee Penal shall be extinguished.” plan, the right of appraisal Once approved, the correspondi 5 ond i “agreement of merger or consoldation” © i" Sill Be considered a5 the SEC. 71. Articles of Merger or Consolidation. — by the stockholders or members as required by the 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 ct i “orporation setting forth: a After the approval preceding section, (@) The plan of the merger or the plan of consolidation; () As to stock corporations, the number of shares outstanding, or in the case of nonstock corporations, the number of members; (© As to each corporation, the number of shares or members voting for or against such plan, respectively; (@) The carrying amounts and fair values of the assets and abilities of the respective companies as of the agreed cut-off date; (©) The method to be used in the merger or consolidation of accounts of the companies; (Q The provisional or pro forma values, as merged or consolidated, Using the accounting method; and (g) Such other information as may be prescribed by the Commission. ee Each constituent corporation must execute the articles of merger or consolidation, The same reflects the proposed contract between the corporation Scanned with CamScanner>. ‘THE REVISED CORPORATION CODE OF THE PHILIPPINES m6 (ITS THEORIES AND APPLICATIONS) andthe State. Itincorporates the agreement (or plan) of merge, Ot Consolidation ‘a statement of the votes for or against the plan, the carrying Amounts ang respective fair values of assets and liabilities as of cut-off date, the tec0Unn method tobe used, and the provisional or pro forma values ofthe account ofthe merged or consolidated corporations. The Commission may presse additional information that must be reflected in the articles, Fairness and reasonableness of the exchange — The Code additionally requites the articles to reflect items (tg above, This will permit the concemed shareholders or members, and th, Commission to ascertain ifthe exchange is fair and reasonable, considering the pre- and post- merger or consolidation information. The aggregate fair value of shares that will be issued by the surviving or consolidated corporation should generally approximate the adjusted net asset value ofthe constituent corporation/s. The same will be established using “ihe carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date,” vis-d-vis “the method to be used in the merger or consolidation of accounts of the companies.” In particular, the shareholders, the members and/or the Commission will: a, Determine the adjusted fair value of the shareholders’ equity (taking into account appraisal increments) of the surviving corporation and divide the same by the outstanding capital stock, to arive atthe fair value per share of such corporation, In case of consolidated (or new) corporation, the fair value per share is the par value per share. Divide the: (f) adjusted net asset value (or adjusted fair value of the shareholders’ equity, taking into account appraisal increments) of the constituent corporation/s by the Gi) fair value per share of the surviving corporation, as ‘computed in par. a (or par value per share of the consolidated Corporation), to arrive at the number of new shares that the surviving corporation (or the consolidated corporation) will issue for the exchange, “The provisional or pro forma values, the acc *unting method” will give the sharehi if the additional issued shares on account ‘approximates the fair net asset value of asset Surviving or consotidated corporation, as merged or consolidated, using olders (or members) an overview of the merger or consolidation ‘ts merged or consolidated into the Scanned with CamScannerCHAPTER MERGE ERIX : ERGER AND CONSOLIDATION ” nesting officers — As a rule, the presi : ing off attest to the resolution passed ane and/or the corporate secretary must It presidii g the meeting." A: i earli ie a ae was changed ey the Caiman on in ripen maa not to oe. provide otherwise" The Code, however, the articles of merger anged the default corporate officers who must execute and certified by the secretary a ie, “the president or vice president issistant secretary of ” This ot changed ry of each corporation.” This 7 ena pees Pte that the president, rather than the Chairman, of merger or consolidation Ta na reparation and finalization of the articles : . Thus, he is the proper si i arti A : igatory to said articles, while the person attesting to the approval ofthe same by the stockholders or members is the secretary or assistant secretary. SEC. 78. Effectivity of Merger or Consolidation. — The articles of merger or of consolidation, signed and certified as required by this Code, shall be submitted to the Commission for its approval: Provided, That in the case of merger or consolidation of banks or banking institutions, Joan associations, trust companies, insurance companies, public utilities, educational institutions, and other special corporations governed by special laws, the favorable recommendation ofthe appropriate government agency shall first be obtained. If the Commission is satisfied that the merger or consolidation of the corporations concerned is consistent with the provisions of this Code and existing laws, it shall issue a certificate ing the articles and plan of merger or of consolidation, at which merger or consolidation shall be effective. approvil time the the Commission has reason to believe that jlidation is contrary to or inconsistent with the provisions of this Code or existing laws, it shall set 8 hearing to give the corporations concerned the opportunity to be heard. Written notice af 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 as provided in this Code. If, upon investigation, the proposed merger or consol ee fect pon the Commission’s issuance dation takes e before it approves the ‘The merger or consoli 'r consolidation. However, of a certificate of merger 0 cedure,” Oxford, TeKoamin and Roberts, “Company Meeting’ Law, Practice and Proc 325, Msec. 83. Scanned with CamScanneray 298, THE REVISED CORPORATION CODE OF THE PHILIPPINES (ITS THEORIES AND APPLICATIONS) corresponding certificate, the Commission plicable clearances from the concerned age Must cies transaction and issues the require the presentation of ap} a. Favorable recommendation from the special regulator The Commission shall consider the recommendation of the concer ulator, if the transaction involves corporations subject tg a It should be noted while the Code has deleted “pubje utilities, educational institutions, and other corporations governed by specja} ~ from the list of corporations covered by the favourable recommendation e to their application with the Commission for incorporation Jed to remove such requirement if they are parties to mergers or consolidations. Thus, “banks or banking institutions, loan associations, trust insurance companies, public utilities, educational institutions, governed by special laws” must submit to the f their respective regulator. government re} special regulation. laws’ requirement relativ oramendment, it fail companies, and other special corporations Commission the endorsement o} b. BlR clearance. Under the Tax Code, a corporation that is a party to a corporate reorganization must file the corresponding tax return “within thirty (30) days after the adoption by the corporation of a resolution or plan xxx for its reorganization.” “The xxx reorganizing corporation shall, prior to the issuance by the Securities and Exchange Commission of the Certificate of xxx Reorganization, as may be defined by rules and regulations prescribed by the Secretary of Finance, upon recommendation of the ‘Commissioner, secure a certificate of tax clearance from the Bureau of Internal Revenue which certificate shall be submitted to the Securities and Exchange Commission.”” ‘Themergerorconsolidationmay ormay not qualify foratax-free corporate reorganization. The Tax Code requires that the corporate reorganization iness purpose and not solely for the “must be undertaken for a bona fide busi purpose of escaping the burden of taxation.” “(In) determining whether a Bona {fide business purpose exists, each and every step of the transaction shall be considered and the whole transaction or series of transaction shall be treated as a single unit: x20." A corporate reorganization that does not meet the above requirement shall be subject to typical taxes on dissolution. Scanned with CamScannerCHAPTER IX 29 AND CONSOLIDATION MERGER ¢ PCCelearance. The PCA grants the Phifi authority to review mergers and a for transactions that may significa, market, specifically those which Ppine Competition Commission (PCC) the “duisitions.”' The law requires PCC clearance ntly affect existing competition in the relevant Meet the notification thresholds. Procedure when there is adverse finding — be ayer Bive the concerned corporations the opportunity to , ‘Ommission find the proposed merger or consolidation to be contrary to or inconsistent with law. {f SEC. 79. Effects of Merger or Consolidation. — The merger or consolidation shall have the following effects: (a) The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation; (b) The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation; (c) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code; (@) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and franchises of each constituent corporation; and all real or personal property, all receivables due on whatever account, including subscriptions to shares and other chases in action, and every other interest of, belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and (©) The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each constituent corporation as though such surviving or consolidated corporation had itself incurred such liabilities or obligations: and any pending claim, action or proceeding brought by or against any constituent corporation may be prosecuted by or against the surviving or consolidated corporation. The rights of —___ *PCA, Sec. 16. Ud, See. 17. Scanned with CamScannerREVISED CORPORATION CODE OF THE PHILIPPINES a oe (ITS THEORIES AND APPLICATIONS) creditors or liens upon the property of such constituent corporations shay not be impaired by the merger or consolidation, The effectivity of a merger or consolidation results in the automatic dissolution of the constituent corporations. The surviving or Consolidated corporation shall immediately possess all the rights, privileges, immunities, powers, and assume all the duties and liabilities of the constituent corporations. The law does not require a separate subscription contract, and consent from corporate creditors. There is novation of contract by operation of law, Limitation under the Tax Code — The Tax Code qualifies the effect of a merger or consolidation with respect to the tax benefit of operating losses of the corporation that is a party 19 a merger or consolidation. -Specitialy, the “net operating loss of the business or enterprise for any taxable year immediately preceding the current taxable year, which had not been previously offset as deduction from gross income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years immediately following the year of such loss, xxx (provided) xxx there has been no substantial change in the ownership of the business or enterprise in that — (Not ess than seventy-five percent (75%) in nominal value of outstanding issued shares, if the business is in the name ofa corporation, is held by or on behalf of the same persons; or (ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of a corporation, is held by or on behalf of the same persons.” AA change in the ownership of the business or enterprise may result or arise from a merger, consolidation or business combination. In any of these cases, the consequent change in ownership shall not be treated “substantial” for as long as the stockholders of the corporate taxpayer which sustained and accumulated the net operating losses gain or retain 75% or more intrest in the surviving or consolidated corporation or business, after such merger, sentation, or combination. The substantial change in the ownership ofthe business or enterprise shall be determined as of the end of the taxable year ‘hen NOLCO is to be claimed as deduction» PRRNo, 14.01, See, 5.1 Scanned with CamScannerCHAPTER 1x MERGgy ER AND CONSOLIDATION 7 This rule prevents : One corporati operating losses accumu ‘ation or enterpri ir jroduced this mle to rene — copraton renin, Conse : e Su . rat prem ing j ; Carer ite Phitornes Picop) . on ee Paper indies rages of another sony arn tax deduction aising from i oe supreme Court: ad acquired via merger. According to the “In the instant case, to al would beto permit one sane low the deduction claimed by Picop ration or enterprise, Picop, to benefit ; i 1m the tax incentive granted by the BOT statute, in fact gave up the struggle and went it of exi i = = Spee ee a former Stockholders joined the much larger P's stockholders. To grant Picop’s claimed deduction would be to permit Picop to shelter its otherwise taxable income (an objective which Picop had from the very beginning) which had not been earned by the registered enterprise which had suffered the accumulated losses. In effect, to grant Picop’s claimed deduction would be to permit Picop to purchase a tax deduction and RPPM to peddle its accumulated operating losses. xxx Conversely, the income that would be shielded from taxation is not income that was, after much effort, eventually generated by the same registered operations which earlier had sustained losses.” Period to file judicial claim for refund arising from erroneous tax payment of a constituent corporation — Where the constituent corporation made erroneous tax payments immediately prior to the merger, the surviving corporation may claim for their refund and file judicial action, if necessary, within two years from the date of filing of the short-period return following the approval of the Articles of Merger, and not the date when the constituent corporation ordinarily files its Final Adjustment Return. ‘According to the Supreme Court, “it would be absurd to wait until the fifteenth day of April, or months after it ceased its operations, before filing its income tax return. 11,195. TGR Now 1950, Dene 8 os, qu, 2 Bank ofthe Philippine Islands v Scanned with CamScannereee Chapter X APPRAISAL RIGHT disagrees, he may sell his shares to third parties, ener this may not be a practical option, especially when there is limited demand for the shares of the corporation. This is sometimes referred to as hold-up problem: The law seeks to address this 2 giving investor the right to compel the corporation a shareholder to institute a derivative action against corporate controllers? It is regarded as sufficient to redress a perceived wrong committed to the corporation. The exercise of appraisal right should not prejudice creditors. The corporation may not pay and acquire shares, unless it has sufficient unrestricted retained earings. Thus, its exercise is practically useless in a financially distressed corporation. Pending full payment, the dissenting shareholder may exercise certain rights, specifically the right to vote and receive dividends. As will be explained in this Chapter, Title X covers how the right of appraisal is exercised, as well as the implications of the right of appraisal, which the Supreme Court summarized as follows: 1. “The appraisal right is exercised by any stockholder who has voted against the proposed corporate action by making a ‘Hold up problem isa situation where a party ina contractual relationshi ‘brought about by unforeseeable and non-contractible changes. ‘This isa risk normally factored in ‘making investment decision, andi not addressed results in under investment. “Interim Rules of Procedure Governing Intra-Corporate Controversies, Rule 8, Sev. I. 302 Scanned with CamScannerCHAPTER X APPRAISAL RIGHT. writen demand on the corporation within 30 days after the late on which the vote was taken for the payment of the fair value of his shares. The failure to make the demand within the period is deemed a waiver of the appraisal right. If the withdrawing stockholder and the corporation cannot agree on the fair value of the shares within a period of 60 days from the date the stockholders approved the corporate action, the fair value shall be determined and appraised by three disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The findings and award of the majority of the appraisers shall be final, and the corporation shall pay their award within 30 days after the award is made. Upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer his or her shares to the corporation. All rights aceruing to the withdrawing stockholders shares, including voting and dividend rights, shall be suspended from the time of demand for the payment of the fair value of the shares until either the abandonment of the corporate action involved or the purchase of the shares by the corporation, except the right of such stockholder to receive payment of the fair value of the shares. Within 10 days after demanding payment forhis orher shares, a dissenting stockholder shail submit to the corporation the certificates of stock representing his shares for notation thereon that such shares are dissenting shares. A failure to do so shall, at the option of the corporation, terminate his rights under this Title X of the Corporation Code. If shares represented by the certificates bearing such notation are transferred, and the certificates are consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights ofa regular stockholder; and all. dividend distributions that would have accrued on such shares shall be paid to the transferee. If the proposed corporate action is implemented or effected, the corporation shall pay to such stockholder, upon the suvrender of the certificates of stock representing his shares, the fair value thereof as of the day prior to the date on Scanned with 303 CamScannery ‘TIE REVISED CORPORATION CO! THE PHILIPPINES am “(ITS THEORIES AND APPLICATIONS) which the vote was taken, excluding any appreciation op depreciation in anticipation of such corporate action,”: Change introduced by the Code — The law reflected the express grant of appraisal right toa dissenting shareholder under Section 41, when the corporation invests its fun Ids or properties for any purpose other than its primary purpose, The Code completes the enumeration of instances when a dissenting shareholder may exercise his appraisal right, by including the fourth instance” when the corporation invests its funds or properties for any purpose other than its primary purpose under Section 41. SEC. 80. When the Right of Appraisal May Be Exercised, — stockholder of a corporation shall have the right to dissent and de payment of the fair value of the shares in the following instances: Any ‘mand (@) Incase an amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior fo those of outstanding shares of any class, or of extending or shortening the term of corporate existence; (©) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition ofall or substantially all of the corporate property and assets as provided in this Codes (© Incase of merger or consolidation; and (@) "Incase of investment of corporate funds for any purpose other than the primary purpose of the corporation, ee Scanned with CamScannerCHAPTER X 305 APPRAISAL RIGHT Material amendments ~ Not all amendments in the articles of incorporation permit dissenting shareholders to exercise their appraisal right. The law limits its exercise when an amendment has “the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior fo those of outstanding shares of any class, ot of extending or shortening the term of corporate existence.” The first includes the change in the par value of shares with preference as to dividends and/or assets, withdrawal or modification of their redeemable or convertible feature, restriction of voting rights to certain corporate actions. As discussed earlier, an amendment denying a shareholder's pre-emptive right may give rise to the exercise of appraisal right when the company controllers ini iated (and not compelled to make) the questioned amendment. If pre- emptive right is not made available to him, he will have no other remedy except to initiate an action to enjoin the amendment. As a rule, a shareholder should be given all available intra-corporate remedies in order to avoid intra- corporate controversies.' The second includes the ereation of a new set of preferred shares, with superior features to those of outstanding shares. ‘The extension of corporate term means thata shareholder may not recover his capital during the originally contemplated period. On the other hand, its shortening means he may have to deal with and find alternative placements for his pre-terminated investment. It should be recalled the Code permits an existing corporation to opt out from the perpetual corporate term regime, as provided in Section 11. For this purpose, the law only requires approval of sharcholders representing majority fis outstanding capital stock, This isthe only instance when the corporation permits dissenting stockholders to exercise appraisal right whereby the prescribed vote forthe corporate act is only majority of the capita stock. Other amendments, such as the change of corporate name, principal place of business, change in the number of directors, increase or decrease in capital stock, and creation of bonded indebtedness, are not material and/or not unforeseeable and, therefore, do not warrant the return of investment of a dissenting shareholder. Appraisal right is also not available when there is a mere adoption of or amendment to the bylaws. Increase in capital stock is foreseeable, Its demanded by the exigencies of the business. Further, the shareholder may typically exercise his pre- ‘See discussion in Sec. 38. Scanned with CamScanneroS tive right to maintain his equity interest in the company. On the other han Gerease in eaptal stock resuls in what the appraisal right seeks to achieve erin the investment ofa shareholder. Bonded indebtedness deg no ie its holders the rights of shareholders. At most, iLonly pus somerestgign giv ti on the use of business assets. ‘THE REVISED CORPORATION CODE OF THE PHILIPPIN| 306 E : {ITS THEORIES AND APPLICATIONS) Mergers and acquisitions — Mergers and acquisitions falling under the second category may take different forms, ic., statutory or de facto mergers or consolidations, acquisitions by way of investment of corporate funds, either in another corporation ¢¢ through joint ventures. The execution of a management contract does not involve amendment of the corporate charter. While there is a pooling of management, the same ig not material to warrant the exercise of appraisal right. SEC. 81. How Right is Exercised, — The dissenting stockholder who votes against a proposed corporate action may exer the right of appraisal by making a written demand on the corporation for the payment of the fair value of shares held within thirty (30) days from the date on which the vote was taken: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right, If the proposed corporate action is implemented, the corporation shall pay the stockholder, upon surrender of the certificate or certificates of stock representing the stockholder’s shares, the fair value thereof as of the day before the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action. If, within sixty (60) days from the by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two (2) thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be Paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover Such payment: Provided, further, a "pon payment by the corporation of the agreed or awarded price, stockholder shall forthwith transfer the shares to the corporation. approval of the corporate action eee Scanned with CamScanner