E. Deny Pre-Emptive Right-Sec.

38
Section 38. Power to Deny Preemptive Right. - All stockholders of a stock corporation shall
enjoy preemptive right to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such preemptive right shall not extend to
shares issued in compliance with laws requiring stock offerings or minimum stock ownership by
the public; or to shares issued in good faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock in exchange for property needed for corporate
purposes or in payment of previously contracted debt.
1. Preemptive Right
-Preemptive right is the right of shareholders to subscribe to all issues or disposition of
shares of any class in proportion to their shareholdings.
-Preemptive right is the right granted to the stockholders to have the first option to
subscribe to any issuance or disposition of shares from the capital stock in proportion to
the stockholdings of the shareholders.

a. Rationale
-The basis of this right is to maintain the relative and proportionate voting strength and
control of existing shareholders
-aimed to maintain the existing ratio of the shareholder’s interest and voting power in the
corporation
b. All stockholders whose names appear in the stock and transfer book at the time of the meeting
approving the issuance of shares are entitled to preemptive right
-Stockholders must be given “reasonable time within which to exercise their preemptive right.
-Upon the expiration of the said period, any stockholder who has not exercised such right will be
deemed to have waived it.
2. Issue or Disposition
-the Preemptive right covers all issues and disposition.
-It includes issuance of the unsubscribed shares that are part of the original capital stock and the
increase of capital stock
a. the preemptive right is available in case the corporation decides to dispose of its treasury
shares
-“all issues or disposition of shares of any class” is construed to include new shares issued in
pursuance of an increase of capital stock or shares from the unissued portion of the capital stock
-Treasury shares likewise come under the term “disposition”
b. Section 38 does not distinguish between newly-issued shares and previously unsunscribed
shares, hence, the preemptive right is available to existing shareholders with respect to
unsubscribed but previously issued shares.
c. The preemptive right is not available when shares are issued in exchange for shares in another
corporation if the same is the result of a merger to which the corporations are parties.
3. Waiver
-A stockholder who neither desires nor intends to buy any of the stocks being offered may waive
such right.
-the shares then may be offered to any interested persons acceptable to the corporation.
a. the right to receive preemptive right is a personal right so the SH concerned should give such
waiver individually or he can authorize somebody to execute the same for and in his behalf by
way of SPA
4. Transfer
-GR: The right to subscribe to new issues and disposition may be transferred by the shareholder.
XPN: unless there is an express restriction in the AOI.
5. When not Available
-preemptive right is not available in the following:
(1) When the right is denied in the Articles of Incorporation;
(2) When shares are issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public; and
(3) When shares are issued in good faith with the approval of the stockholders representing 2/3
of the outstanding capital stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.
6. Denial and Restriction.
-Preemptive right may be restricted or denied under the Articles of Incorporation, and subject to
certain exceptions and limitations.
a. It should be noted in this connection that "even if the preemptive right does not exist, either
because the issue comes within the exceptions in Section 38 or because it is denied or limited in
the Articles of Incorporation, an issue may still be objectionable if the directors acted in breach
of trust and their primary purpose is to perpetuate or shift control of the corporation, or to 'free
out' the minority interest."
6.01. Not Against Public Policy.
The power to deny preemptive right is not contrary to public policy. It was explained that "there
is no inequity, there is no unfairness because a shareholder who feels that he does not desire to
invest because he does not have the right of pre-emption simply should not invest. On the other
hand, he must remember that perhaps because he is denied the right of pre-emption, he is given
certain preferences on other matters, most likely the holder of the shares will be a holder of the
preferred shares.
Note: Pre-emptive right is not available when shares are issued in exchange for shares in another
corporation if the same is the result of a merger to which the corporations are parties
GR: Stockholders are entitled to preemptive right
XPNs:
1. When denied in the Articles of Incorporation
2. Shares are issued in compliance with laws requiring stock offerings or minimum stock
ownership by the public
3. Shares are to be issued in good faith with the approval of stockholders representing 2/3 of the
OCS in exchange of property needed for corporate purposes or in payment of previously
contracted debt

G. Sale or Other Disposition of Assets –Sec. 39, Par. 7, sec. 39 in relation to sec. 35 (g); MC
NO. 12-2020
A sale or other disposition shall be deemed to cover substantially all the corporate property and
assets if thereby the corporation would be rendered incapable of continuing the business or
accomplishing the purpose of which it was incorporated.
SEC MC 12-2020
The sale or disposal of corporate property and assets amounting to at least 51% of the
corporation’s total assets shall be considered as a sale of all or substantially all of corporate
property and assets, whether such sale accrued in a single transaction or in several transactions
taking place within 1 yr from the date of the first transaction (aggregate sale transactions) which
must be computed based on its total assets as shown in its latest audited financial statements.
▪ Sale of all or substantially all of the corporation’s properties and assets
Requisites:
1. Approval of the majority of the directors or trustees
2. Assent of stockholders representing 2/3 of OCS or 2/3 of members in a meeting duly called for
the purpose after written notice
▪ Does not cover all or substantially all of the assets

✓ Decision of the board is sufficient.

There is an implied contract among the stockholders to pursue the business for which the
corporation was created and therefore, as a general rule, there should be no disposition of the
property used by the corporation in its business until dissolution
▪ Section 39 of the RCC does not apply in these cases :

✓ Sale of the entire property and assets is necessary in the usual and regular course of business
of the corporation

✓ Proceeds of the sale will be appropriated for the conduct of its remaining business

Nell Doctrine
- states the general rule that the transfer of all the assets of a corporation to another shall not
render the latter liable to the liabilities of the transferor. If any of the above-cited exceptions are
present, then the transferee corporation shall assume the liabilities of the transferor.
The transferee-corporation of all or substantially all of the assets of the transferor-corporation
will not be liable for the debts of said transferor-corporation. However, by way of exception, the
transferee-corporation is liable:
1. If there is an express or implied assumption of liabilities
2. The transaction amounts to a consolidation or merger
3. If the transaction is entered into fraudulently in order to escape liability from debtors or
the purchase was in fraud of creditors
4. If the purchaser becomes a continuation of the seller
NOTES:
1. Requisites:
A sale of all or substantially all of the properties and assets of the corporation, including its
goodwill, requires the following:
(1) It must be approved by the majority of the directors or trustees;
(2) There must be approval/assent of stockholders representing 2/3 of outstanding capital
stock or two thirds of members in a meeting duly called for the purpose after written
notice. The sale is void if these requirements are not complied with.

a. There is a problem, however, with respect to lease, exchange, mortgage, pledge or

other disposition of all or substantially all of the assets of the corporation because
 the second paragraph of Section 39 of the RCCP expressly provides that “(a) sale
of all or substantially all of the corporation’s properties and assets, including its
goodwill, must be authorized by the vote of the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or at least two-thirds (2/3) of the
members, in a stockholders’ or members’ meeting duly called for the purpose.”

b. A strict interpretation of the second paragraph of Section 39 of the RCCP would

limit its application to sale. However, it is submitted that this interpretation will
defeat the purpose of the provision. In the first place, the term sale should be
construed in a general sense to include exchange (barter) and other disposition.
Barter is, in fact, governed by the law on sale.
C. If substantially all of the assets were already previously mortgaged by the corporation
with proper board and stockholders’ approval under Section 40 of the Corporation Code
(now Section 39 of the RCCP) as evidenced by a Mortgage Trust Indenture (MTI), the
subsequent appointment of a replacement of a new trustee of
The MTI should only be considered a regular business transaction. The appointment
needs to be approved only by at least a majority of the directors present at the meeting in
which there was a quorum pursuant to Section 25 of the Corporation Code.
1.1. Directors Approval Only.

 -If the transaction does not cover all or substantially all of the assets, the decision of
the Board is sufficient and it is not necessary to get the approval of the stockholders.
 -The last paragraph of Section 39 of the RCCP provides that “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 the corporation or if the proceeds of the sale or other
disposition of such property and assets shall be appropriated for the conduct of its
remaining business.”
 -Transfer in the regular course of business requires Board approval only.

a. For instance, lease of a portion of the property of the corporation for legitimate business
purpose does not require approval of the stockholders if it does not constitute
substantially all of the assets of the corporation.

1.2. Abandonment of the Sale or Disposition.

-The board. Of directors or trustees may, in its discretion, abandon the sale, lease, exchange,
mortgage, pledge, or other disposition of property and assets, after the authorization or
approval by the stockholders or members.
-It is not necessary to secure the approval of the stockholders or members to abandon the
project.
 -However, the abandonment is subject to the rights of third parties under any contract
relating thereto.

1.3. Kinds of Corporate Acquisitions.

-Sale of all or substantially all of the assets of the corporation governed by Section 39 of the
RCCP is one of the types of corporate acquisitions.
Two types of corporate acquisitions:
1. asset sales and
2. stock sales.
Asset sales-the corporate entity sells all or substantially all of its assets to another entity.
Stock sales- the individual or corporate shareholders sell a controlling block of stock to new or
existing shareholders.

2. Meaning of “Substantially All.”

-A sale or other disposition shall be deemed to cover “substantially all” corporate property
and assets if the corporation would thereby be rendered incapable of continuing the
business or accomplishing the purpose for which it was incorporated.
-The test is not the amount involved but the nature of the transaction, 140

a. Section 39 does not apply in these cases:

(1) if the sale of the entire property and assets is necessary in the usual and regular course
of business of the corporation; or
(2) if the proceeds of the sale or other disposition of such property and assets will be
appropriated for the conduct of its [the corporation’s] remaining business.
3. Rationale.
-Stringent requirements are imposed if the conveyance involves all or substantially all of the
properties or assets of the corporation because there is an implied contract among the
stockholders to pursue the business.

a. However, disposition of all or substantially all of the assets is not absolutely prohibited
and may be made under Section 39 of the RCCP because there may be pressing business
necessity which requires transfer or sale of property to avoid loss or there is inability of
the corporation to make further profits.
-The power to dispose corporate assets may be exercised where a just and reasonable
cause exists, provided the transaction is not in fraud of the rights of creditors, is made for
adequate consideration and for the best interest of the corporation.
 b. It has to be emphasized that a transfer of all the properties and franchise of the
corporation does not necessarily dissolve the corporation or terminate the corporate
existence. The corporation, however, may opt to dissolve by any means provided under
the RCCP.

4. Effect on Creditors.
-The transferee-corporation of all or substantially all of the assets (or even shares) of the
transferor corporation will not be liable for the debts of said transferor corporation.

4.1. The Nell Doctrine.

However, by way of exception, the transferee-corporation is liable:
(1) if there is an express or implied assumption of liabilities;
(2) the transaction amounts to a consolidation or merger;
(3) if the transaction is entered into fraudulently in order to escape liability from debtors or
the purchase was in fraud of creditors; and
(4) if the purchaser becomes a continuation of the seller.
a.Assumption.
-Assumption of liabilities may be embodied in the agreement between the transferor-corporation
and the transferee-corporation.
-If the agreement is embodied in a written document, the liabilities assumed may also be limited
by express stipulation.
-For instance, the liability of the transferee bank in one case was limited to liabilities that
resulted from normal banking operations and did not include separation pay of employees.
c. Merger or Consolidation.
-There is really no sale in case of merger or consolidation or their equivalent.
-The properties are not sold but “are deemed automatically transferred to and vested in
the surviving corporation without further act or deed.”
-The transaction amounts to merger or consolidation in case of de facto merger; the
transferee assumes the liabilities of the transferor of its properties.
-In a de facto merger, one corporation acquires “all or substantially all of the properties of
another corporation in exchange of shares of stock of the acquiring corporation. The
acquiring corporation would end up with the business enterprise of the target corporation;
whereas, the target corporation would end up with basically its only remaining assets
being the shares of stock of the acquiring corporation.”

C. Transfer in Fraud of Creditors.

-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.
-If the creditors did not consent, the only way the transfer can proceed without prejudice to the
creditors is to hold the assignee liable for the obligations of the assignor.
-The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily
includes the assumption of the assignor’s liabilities, unless the creditors who did not consent to
the transfer choose to rescind the transfer on the ground of fraud.

(1) A creditor who is not a party to a contract can sue to rescind the contract to
prevent fraud upon him. Or, the same creditor can instead choose to enforce the
contract if a specific provision in the contract allows him to collect his claim, and
thus protect him from fraud.

Badges of fraud include the following:

(1) The fact that the consideration of the Conveyance is fictitious or is inadequate.
(2) A transfer made by a debtor after suit has been begun and while it is pending
against him.
(3) A sale upon credit by an insolvent debtor..
(4) Evidence of large indebtedness or complete Insolvency.
(5) The transfer of all or nearly all of his property by a debtor, especially when he is
insolvent or greatly embarrassed financially.
(6) The fact that the transfer is made between Father and son, when there are present
one or more of The above circumstances.
(7) The failure of the vendee to take exclusive possession of all the property.

b. Anticipation of Insolvency.

-Section 10 of Republic Act No. 10142 entitled Financial Rehabilitation and Insolvency
Act of 2010 (FRIA for short) provides that directors and officers of a debtor shall be
liable for double the value of the property sold, embezzled or disposed of or double the
amount of the transaction involved, whichever is higher to be recovered for the benefit of
the debtor and the creditors, if they, having notice of the commencement of the
liquidation proceedings, or having reason to believe that proceedings are about to be
commenced, or in contemplation of the proceedings, willfully commit the following acts:
 (1) Dispose or cause to be disposed of any property of the debtor other than in the
ordinary course of business or authorize or approve any transaction in fraud of creditors
or in a manner grossly disadvantageous to the debtor and/or creditors; or

(2) Conceal or authorize or approve the concealment, from the creditors, or embezzles or
misappropriates, any property of the debtor.

c. Business-Enterprise Transfer Rule.

The buyer is liable if he/she/it (the buyer) is a mere continuation of the seller.
Two requisites must concur:
(1) the transferor corporation sells all or substantially all of its assets to another entity;
and
(2) the transferee corporation continues the business of the transferor corporation.

(1) This exception is contemplated under Section 39, RCCP “because the purchasing
or transferee corporation necessarily continued the business of the selling or
transferor corporation.”
-In a business-enterprise transfer, the transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise conveyed.156
Fraud is not
5. Effect of Stoppage of Operation.
-Section 39 still applies if there is a sale of all or substantially all of the assets of the
corporation but the corporation will just cease its operation.
-the requirements still apply if all the assets are sold to several buyers even if the buyers are
not continuations of the seller corporation. The required approvals under Section 39 still
apply.

6. Bulk Sales Law.

The sale of all or substantially all of the assets of a corporation is likewise not binding on the
creditors if there is violation of the Bulk Sales Law.
-There is a sale in bulk within the meaning of said special law if there is any sale, transfer,
mortgage or assignment of:
(1) stock of goods, wares, merchandize, provisions, or materials otherwise in the ordinary
course of trade and the regular prosecution of business of the vendor, mortgagor, transferor
or assignor;
(2) the trade or business conducted by the vendor, mortgagor, transferor or assignor; and
(3) all or substantially all of the fixtures and equipment used in and about the business of the
vendor, mortgagor, transferor or assignor.

7. Anti-Competition Transfers.
 -Section 20 of Republic Act No. 10667 known as the Philippine Competition Act provides
that Merger or Acquisition Agreements that substantially prevent, restrict or lessen
competition in the relevant market or in the market for goods or services as may be
determined by the Commission shall be prohibited.
-any transfer of all or substantially all of the assets of the corporation that is anti-competition
is also prohibited. The transfer may even be in the nature of a combination that falls under
the cases that are subject to mandatory notice to and review by the Philippine Competition
Commission where the assets, revenues, and the value of the transaction involved exceed P2
billion.

8. Effect on Employees of Corporate Acquisitions.

- the rule that dismissal of employees in good faith is justified if the corporate entity sells all
or substantially all of its assets. The Court distinguished asset sales from stock sale. With
respect to the right to dismiss employees, the High Court ruled:
In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected
employees, but is liable for the payment of separation pay under the law. The buyer in good
faith, on the other hand, is not obliged to absorb the employees affected by the sale, nor is it
liable for the payment of their claims. The most that it may do, for reasons of public policy and
social justice, is to give preference to the qualified separated personnel of the selling firm.
In stock sales takes place at the shareholder level. Because the corporation possesses a
personality separate and distinct from that of its shareholders, a shift in the composition of its
shareholders will not affect its existence and continuity. Thus, notwithstanding the stock sale, the
corporation continues to be the employer of its people and continues to be liable for the payment
of their just claims. Furthermore, the corporation or the corporation’s new majority
 Shareholders are not entitled to lawfully dismiss corporate employees absent a just or
authorized cause.”
a. It is submitted, however, that there should be no difference between assets sale and stock
sale in relation to the rules on the right to dismiss employees.
-There is continuity of corporate existence in both assets sale and stock sales. A
corporation without any property retains its corporate personality.
-The controlling law is still the Labor Code of the Philippines with respect to the
dismissal of employees particularly its Article 283. The question is still whether or not
there is an authorized cause under Article 283 of the Labor Code and not whether
substantially all of the properties of the corporation were sold.

g. Acquisition of Corporate Shares-Sec. 40

Provided that the corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired, a stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate purpose or purposes, including the
following cases:

(a) To eliminate fractional shares arising out of stock dividends;

(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said
sale; and

(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares
under the provisions of this Code.

General Rule:
Corporation cannot acquire its own shares if there is no funds from the unrestricted retained
earnings. Corporation cannot declare dividends in the absence of unrestricted retained earnings
Exceptions:

✓ To purchase of take up redeemable shares (S8)

✓ When SEC orders a close corporation to purchase the shares of stockholders in case of
deadlock in its management (S104)(even without unrestricted retained earnings)
Requirements:
1. The corporation has unrestricted retained earnings
2. For legitimate corporate purposes

✓ To eliminate fractional shares arising out of stock dividends

✓ To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale

✓ To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code

✓ To acquire treasury shares(S9)

✓ To effect a decrease in capital stock (S37)

✓ To purchase of take up redeemable shares (S8)

✓ When SEC orders a close corporation to purchase the shares of stockholders in case of
deadlock in its management (S104)
Conditions:
1. The capital of the corporation must not be impaired
2. A legitimate and proper corporate objective is advanced
3. The condition of corporate affairs warrants it 4. The transaction is designed and carried out in
good faith

BOOOOOK
1. Requirements for acquisition.
-Section 40 of the RCCP authorizes corporations to acquire their own shares, provided that:
(1) the acquisition is for a legitimate corporate purpose or purposes, and
(2) the corporation has unrestricted retained earnings in its books to cover the shares to be
purchased or acquired.
-The SEC adopted the following enumeration of requirements for the exercise of the power to
acquire the corporation's own shares:
(1) The capital is not impaired;
(2) A legitimate and proper corporate purpose or objective is advanced;
(3) The corporate affairs warrant it;
(4) The transaction is designed and carried out in good faith;
(5) There is no intention and there is no resulting undue advantage to favored stockholders at the
expense of the remainder;
(6) The creditors are not prejudiced;
(7) The corporation acts in good faith and without prejudice to the rights of creditors and
stockholders; and
(8) There must be unrestricted retained earnings to purchase the shares, 166
a. Section 40 of the RCCP provides a non-exclusive list of examples of cases when the
corporation can acquire its own shares.
-The RCCP considers the three purposes mentioned therein as legitimate corporate
purposes. Acquisition by the corporation of its own share is allowed for other legitimate
purposes in addition to the three purposes expressly provided for. However, it is still
 necessary under any of these legitimate purposes that there are unrestricted retained
earnings.

The three legitimate purposes expressly provided for under the RCCP are:
(1) To eliminate fractional shares arising out of stock Dividends;
(2) To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold
during said sale; and
(3) To pay dissenting or withdrawing stockholders Entitled to payment for their
shares under the provisions of the Code.

b. The power of the corporation to acquire its own shares is applicable even if the mode of
acquisition is through donation.
-However, the sponsor of the then Corporation Code believed that unrestricted retained
earnings would no longer be necessary if the acquisition is through donation.

2. Rationale.
-GR: in the absence of statutory authority, the corporation cannot acquire its own shares.
The investments of the shareholders are generally locked-in until the liquidation. The
view that a corporation cannot buy its own stocks unless there is an express grant of such
power is based on the following reasons:
(1) the corporation cannot increase or diminish its capital without the sanction of the
legislature;
(2) the transaction is a fraud upon creditors; and
(3) it is foreign to the purposes for which the corporation is created.

3. Express Power.
-The power to acquire its own shares is now an express power.
-However, in order to avoid the dangers that accompany the exercise of this express
power, the SEC has always imposed the following conditions on its exercise:
(1) the capital of the corporation must not be impaired;
(2) a legitimate and proper corporate objective is advanced;
(3) the condition of corporate affairs warrants it; and
(4) the transaction is designed and carried out in good faith.