Merger and Consolidation

a. Definition and Concept

Merger – a corporation absorbs the other and remains in existence while the others are
dissolved [Sec.75]. Mergers may be horizontal (between competing firms), vertical (if a
corporation acquires another which uses or distributes its products) or conglomerate
(neither competing nor related in the chain of production or distribution). [Campos]
Consolidation – a new corporation is created, and consolidating corporations are
extinguished [Sec.75].

Merger Consolidation
One or more Union of 2 or more
corporations are corporations to form
absorbed by another a new corporation
which survives and
continues the
combined business
One of the All constituents
constituent corporations
corporations remains disappear with the
as an existing emergence of a new
juridical person, corporate entity
whereas the other
corporation shall
cease to exist.
The surviving The new corporate
corporation shall entity shall obtain all
acquire all the assets, the assets of the
rights of action, and disappearing
assuming all the corporations, and
liabilities of the likewise shall assume
disappearing all their liabilities.
corporation/s.
There is no liquidation of the assets of the
dissolved corporation, all rights, properties
and franchises are acquired by the
surviving/new corporation.

Merger and consolidation involve fundamental changes in the corporation, the rights of
stockholders and creditors. There must be an express provision of law that authorizes
them. Otherwise, such combinations are ultra vires. With the approval of the
Corporation Code, such express authority has been granted. [Campos]
b. Distinguish: Constituent and Consolidated Corporation
Constituent Corporations – the parties to a merger or consolidation
Consolidated Corporation - The new single corporation created through consolidation.
Surviving Corporation – one of the constituent corporations which remain in existence
after the merger.

c. Plan of Merger or Consolidation (Sec. 75)

Each of the constituent corporations must draw up a Plan of Merger or Consolidation
which shall set forth:
a. Names of the corporation involved;
b. Terms and mode of carrying it to effect;
c. Statement of changes, if any, in the present articles of the surviving corporation to be
formed in the case of merger; and with respect to the consolidated corporation in case
of consolidation.

The Plan must be approved by the board of directors or trustees of each constituent
corporation by majority vote.

d. Articles of Merger or Consolidation

(Sec. 77)
The Articles of Merger or Consolidation:
a. take the place of the AOI of the consolidated corporation; or
b. amend the Articles of Incorporation of the surviving corporation.

Articles of Merger/Consolidation Requisites:

● Executed by each of the constituent corporations
● Signed by the president/vice-president
● Certified by the secretary/assistant secretary of each corporation

Contents
The Articles must contain the following:
  Plan of the merger/consolidation
 As to stock corporations, the number of shares outstanding, or in the case of
non-stock 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 liabilities 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;
 The provisional or pro-forma values, as merged or consolidated, using the
accounting method; and
 Such other information as may be prescribed by the Commission

e. Procedure
i. Approval of Plan of Merger or Consolidation by BOD and Stockholders of
Constituent Corporations [Sec. 76]
1. Approval by majority vote of each of the board of directors or trustees of the
constituent corporations of the plan of merger or consolidation.
2. Approval by the stockholders or members of each of such corporations at separate
corporate meetings duly called for that purpose.
i. The affirmative vote of stockholders representing at least two-thirds (2/3) of
the outstanding capital stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the members in the case of non-stock
corporations shall be necessary for the approval of such plan.
ii. Holders of non-voting shares are entitled to vote on the plan [Sec. 6, par. 6(6)].
3. Notice of such meetings shall be given to all stockholders or members in the same
manner as giving notice of regular or special meetings under Section 49. The notice
shall state the purpose of the meeting and include a copy or a summary of the plan of
merger or consolidation.

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.

Amendment to the plan of merger or consolidation

An amendment to the Plan may be made by approval of the 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.
ii. Execution of Articles of Merger or Consolidation
Articles of Merger or Articles of Consolidation shall be executed by each of the
constituent corporations.
iii. Submission to SEC of the Articles
Submission of the Articles of Merger or Articles of Consolidation to the SEC for
approval.

Mergers and consolidations of corporations governed by special laws requires a

recommendation from the appropriate government agency [Sec. 78 (1)].
iv. Action by SEC
Conduct hearing or issue certificate. [Sec. 78]
a. If necessary, the SEC shall set a hearing, notifying all corporations concerned at
least 2 weeks before.
b. SEC shall issue a certificate approving the articles and plan of merger or of
consolidation.
v. Effectivity
Upon issuance of the certificate of merger or consolidation, such merger or
consolidation shall become effective [Sec. 78].

Merger or consolidation does not become effective by mere agreement of the

constituent corporations. The approval of the SEC is required [PNB v. Andrada Electric
and Engr. Co., Inc. (2002)].
Notwithstanding Sec. 79 (now, sec. 78), parties may stipulate a specific effective date of
merger (or consolidation) where no 3rd party will be prejudiced [SEC Opinion No. 09-13,
July 1, 2009].
vi. Limitations
Consent of appropriate government agency:
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 [Sec. 78].
vii. Effects (Sec. 79)
As enumerated in the RCC, the following are the legal effects of merger/consolidation:
1. The constituent corporations shall become a single corporation which, in case of
merger, shall be the surviving corporation designated in the plan of merger; and, in case
of consolidation, shall be the consolidated corporation designated in the plan of
consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, and powers and shall be subject to all the duties and liabilities of a
corporation organized under this Code;
4. The surviving or the consolidated corporation shall 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 choses 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
5. 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
creditors or liens upon the property of such constituent corporations shall not be
impaired by the merger or consolidation.
Although in a merger, there is dissolution of the absorbed corporations, there is no
winding up of their affairs, because the surviving corporation automatically acquires all
their rights, privileges, powers and liabilities (Associated Bank v. CA, 291 SCRA 511).
Same goes for the consolidated corporation.

Salient Advantages of Mergers/Consolidation

- Unlike regular transfer/acquisition, it is able to achieve a continuous flow of the
juridical personalities and business enterprises of the constituent corporations.
There is no “legal break” in their juridical personalities and business enterprises.
- Thus, merger/consolidation is not a violation of a non-transfer clause
- Surviving/consolidated corporation is not considered a transferee
- Unlike regular transfer of assets/business enterprise, there is no gain or loss in
the pursuit of merger or consolidation, thus it is not subject to taxable gains under
Section 40(C)(2)(a) of the NIRC, as amended by the Train Law.
AS TO THE CONSTITUENT CORPORATIONS

Corporate existence
The constituent corporations shall become a single corporation.
The separate existence of the constituents shall cease, except that of the surviving or
the consolidated corporation.
The absorbed or constituent corporations are ipso facto dissolved by operation of law
[SEC Opinion, July 16, 1981].

Assets and liabilities

There is no liquidation of the assets of the dissolved corporations [CAMPOS].
The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, powers, and franchises of each constituent corporation and the properties
shall be deemed transferred to and vested in the surviving or consolidated corporation
without further act or deed.
The surviving or the consolidated corporation shall be subject to all the duties and
liabilities of the dissolving corporation(s).

AS TO CREDITORS
The creditors of a corporation cannot prevent its merger or consolidation with another
even if the surviving or new corporation is not as acceptable a debtor as the absorbed
corporation [CAMPOS].
Any claim, action or proceeding pending by or against any of the constituent
corporations may be prosecuted by or against the surviving or consolidated corporation;
and
The rights of the creditors or lien upon the property of any of each constituent
corporation shall not be impaired by such merger or consolidation.

MERGERS/CONSOLIDATION ON EMPLOYEES
 Because there is no legal break by the act of merging, consolidating, it is logical
to expect that the contractual rights of employees and the existing collective
bargaining agreement, if any, would have to be absorbed by the
surviving/consolidated corporation
 However, SC has made contrary rulings.
Rule on automatic assumption/absorption does not impair the right of an employer to
terminate the employment of the absorbed employees for a lawful or authorized cause
or the right of such an employee to resign, retire, or otherwise sever his employment,
whether before or after the merger, subject to existing contractual obligations (The
Philippine Geothermal Inc. Employees Union vs. Unocal Philippines, Inc, September 26,
2016)