RIGHT OF APPRAISAL DISCUSSION OUTLINE

Right of appraisal-

Under Section 80, the right of appraisal is the right of stockholder to demand
payment of the fair value of his shares after dissenting from a proposed
corporate action involving a fundamental change in the corporation in the cases
provided for by law.

It is available when (a) Articles are amended and such has the effect of changing
or restricting the rights of a shareholder or a class of shares or authorizing
preferences in any respect superior to those outstanding shares of any class (b)
extending or shortening the corporate term (c) in cases of sale, lease, exchange
transfer, mortgage, pledge or disposition of all or substantially all of corporate
assets or property (d) in cases of mergers/consolidations (e) investment by the
corporation in another corporation or business other than its primary purpose
(f) a stockholder in a close corporation for any reason may compel the said
corporation to allow the exercise of his appraisal right.

Manner of exercise-

Under Section 81, after voting against the proposed corporate action, the
dissenting stockholder shall make a written demand on the corporation within
30 days after the date on which the vote was taken for payment of the fair value
of his shares.

If no demand is made within 30 days, he is deemed to have waived the exercise

of the right

Under Section 85, the stockholder must also submit his certificate of stock within
10 days for notation that such shares are dissenting shares.

If the certificate is not submitted for notation within 10 days, the corporation
may consider the exercise of the right terminated at its option. If the shares
bearing a notation is transferred and the certificates consequently cancelled, the
rights of the transferor as a dissenting stockholder shall cease and the transferee
shall have all the rights of a regular stockholder, and all dividend distributions
which would have accrued are paid to the transferee.

Under Section 82, upon a demand, all rights accruing to the share are suspended
including voting and dividend rights, only the right to receive the fair value is not
suspended but, if there is no payment within 30 days after the award, he is
restored to all his rights.

However, under Section 83 the exercise of the right after demand is made shall
cease if: (a) stockholder withdraws his demand and the corporation consents (b)
proposed action is abandoned or rescinded (c) SEC disapproves the action, if its
approval is necessary (d) SEC determines that the stockholder is not entitled to
the exercise of the right. The effect is that he is restored to all rights and accrued
dividends are paid to him.

The corporation then pays the stockholder the fair value upon surrender of the
certificate.

The value paid is the value as of the day prior to the date on which the vote is
taken, excluding any depreciation or appreciation in anticipation of the
corporate action.

If the fair value cannot be determined within 60 days from the date corporate
action was approved, it shall be appraised by 3 disinterested persons one chosen
by the stockholder, one chosen by the corporation and one chosen by both
representatives. A decision of a majority shall be final and the award paid within
30 days after such award is made.

Under Section 84, the cost of the valuation shall be shouldered as follows: (a) the
corporation, unless the fair value as ascertained is equal to or approximates that
which it offered, then it will assessed against the shareholder (b) if suit is
brought to recover payment, the corporation shall be liable unless the
shareholder is found to have an unjustifiable reason not to receive payment.

Provided, in all cases (a) no payment can be made if the corporation has no
unrestricted retained earnings, and (b) that the shareholder shall forthwith
transfer his shares to the corporation.

TRANSCRIBED
Q: what is the right of appraisal?

A: The right of appraisal is the right of a stockholder to demand payment of the

fair market value of his shares after dissenting to a proposed corporate action
and this proposed corporate action should involve a fundamental change in the
cooperation.

Under section 80 and other provisions of the revised corporation code they are
available when:

1. The articles are amended and the effect of the amendment is to change or
restrict the rights of a shareholder or a class of shares or authorizing preferences
in any respect superior to those of outstanding shares of any class.

2. When there is an extension or shortening of the corporate term.

3. In cases of sale lease exchange transfer mortgage pledge or disposition of all

or substantially all of corporate property or assets.

4. In cases of mergers or consolidations and

5. In case of an investment by the corporation in another corporation or
business other than its primary purpose.

Some authorities say that what you find in section 104 which is the chapter on
closed corporations where a stockholder in a closed corporation may for any
reason compel the corporation to allow or to compel it to purchase his shares at
its fair market value.

Some authorities say that this is pursuant to the exercise of a right of appraisal.
However if you read the provision closely it says there he may compel or a
stockholder in a closed corporation may compel the purchase of his shares at its
fair market value for any reason.

So going back to the definition of the exercise of the right of appraisal you have a
demand for payment of fair market value after descent to a proposed corporate
action. Section 104 does not contain any condition regarding the need to descend
to a proposed corporate action, although it may be understood to have been
implied from the demand to compel payment of the fair market value of his
shares because why would a stockholder in a closed corporation just demand
payment of the fair market value of his shares. There must be some compelling
reason for him to demand payment of the fair market value of his shares.

Another thing that mitigates against it not being considered the exercise or an
exercise of the right of appraisal is the amount that is to be paid. If one is to
exercise his right of appraisal, he is supposed to be paid the fair market value of
his shares on the day prior to the date on which the vote was taken. So this can
be a situation where if the par value is 100 but because of good management the
value now is 120 pesos then the amount that should be paid will be 120 pesos
because that is the value of the share on the date prior to the date on which the
vote was taken.

On the other hand, let us say that the value has deteriorated or depreciated and it
is now worth 70 pesos on the market. So you have par value at 100 but the actual
or the fair market value is only 70. If that is the value on the day prior to the date
on which the vote was taken then the amount that should be paid is 70 pesos per
share.

Compare with section 104 when a stockholder in a closed corporation compels

the payment of the fair market value of his shares there is a condition that it
should not be less than par or issued value. So that is another reason that
mitigates against considering the provisions of section 104 as a ground for the
exercise of the right of appraisal.

The process to be followed when one wishes to exercise the right of appraisal
under section in 81, there must be a vote first against the proposed corporate
action. For example if the proposed corporate action is to extend there must be a
vote against extension after a vote or a dissenting vote has been registered then
there must be a written demand for payment of fair market value within 30 days
from the day on which the vote was taken.

So for example the vote was taken on march 1 then within 30 days from march 1
there must be a written demand for the payment of the fair market value of the
shares pursuant to the exercise of the right of appraisal.

Under section 85 there must also be a submission of the certificate of stock so

that there can be a notation that they are dissenting shares. If the certificate of
stock is not submitted for notation within 10 days the corporation may now
consider the exercise of the right of appraisal terminated at its option.

So once this has been done upon a demand and submission of the certificate of
stock all rights of the stockholder are now suspended except the right to receive
the fair market value of his shares which amount should be paid within 30 days
after an award.

An award is a determination a determination of fair market value. So once the

fair market value has been determined that would constitute an award, and there
should be payment within 30 days after an award is determined or arrived at.
Sometimes though, an award cannot be determined mutually between the
stockholder and the corporation.

If an award or the fair market value cannot be arrived at mutually, then there can
be a submission to appraisers so they will now appraise the fair market value.

If within 60 days from the date the corporate action was approved it cannot be
determined, these appraisers now, one chosen by the stockholder one chosen by
the corporation and one chosen by both representatives shall make a
determination of fair market value.

A decision of a majority of the appraisers shall be final and the award should be
paid within 30 days after such date.

So if we were to outline the process:

so you have determination of fair market value - so this can happen mutually or
it can happen by way of appraisers.

If it happens mutually and let us say they decide that the fair market value is 100
per share then on the date they decided to on the fair market value within 30
days it should be paid.

If it cannot be decided within 60 days after approval of the corporate action

then we would have to go to appraisers who are now supposed to determine it
by way of a majority vote and once they have so determined it that should also
be paid within 30 days from a determination.
If there is no payment within the 30-day period irrespective of how the fair
market value was arrived at, then the stockholder who is exercising the right of
appraisal is restored to all his rights as a stockholder.

When payment is to be made, do not forget that there should always be

unrestricted retained earnings. Without unrestricted retained earnings, no
payment can be made and once there has been payment there will now be a
transfer of all shares to the corporation.

Other issues for purposes of shouldering the cost of valuation.

Q: who is to shoulder the cost of valuation?

A: If eventually the fair value is equal to or approximates the amount offered by
the corporation, then the fair market valuation or the cost of valuation will be
shouldered by the stockholder.

If it turns out that the offered fair market value by the corporation is much less
than the determined fair market value upon evaluation that is going to be
shouldered by the corporation.

If suit is eventually brought to recover payment, the corporation shall be liable

for the valuation unless it is determined that the stockholder or shareholder is
found to have an unjustifiable reason not to receive payment.

THE LAST ISSUE is the matter of a subscription so let us say stockholder a

subscribed to 100 shares at 100 pesos per share and he has only paid 50 percent
of the value or the amount due under the subscription contract.

Q: Can he exercise the right of appraisal?

A: YES as long as he is not delinquent he can exercise all the rights of a
stockholder which would include the exercise of the right of appraisal.

Q: When he has successfully exercised the right of appraisal, how many shares
are to be bought from him or how many shares are supposed to be paid for?
A: He would have to be paid the fair market value of the 100 shares

Q: why is he supposed to be paid the fair market value of 100 shares when he has
only paid 50?
A: this is based on the doctrine of indivisibility of the subscription

That is why he must be paid the entire value or for 100 shares.

Q: What happens to the balance of the subscription?

A: The balance on the subscription is to be deducted from the amount that is to
be paid.

To illustrate for example the 100 shares would have a determined.

The fair market value of 100 per share. So that would mean the stockholder is
entitled to the payment of 10 000 pesos because he is to be paid the fair
market value of all the shares covered by his subscription.

In the example, he has a balance of 5 000 pesos. When he is to be paid the

amount or the fair market value is determined which is 10000 that is going to
be less the 5 000 that he owes on his subscription and he would receive a net
amount of five thousand.

SUMMARY:

When we are talking of a subscriber or one who was not yet paid for the entire
consideration as provided in his subscription contract, He can exercise the right
of appraisal as long as he is not delinquent.

The entire subscription or the entire number of shares covered in the

subscription will have to be paid for under the doctrine of the indivisibility of a
subscription.

If he has a balance, such balance due on his subscription is deducted from the
determined fair market value.