CORPORATE MERGER &

CONSOLIDATION
CORPORATE MANAGEMENT JURISPRUDENCE
 ORGANIZATIONAL CONSOLIDATION
SCENARIO

• A small business owner typically needs a diverse set

of skills to succeed, including deep market
knowledge, effective management of business
operations and hard work.
• One way to increase sales and profits is through a
process called business consolidation.
• This process is designed to lower overhead and
production costs, create additional revenue streams,
attract skilled managers and achieve economies of
scale.
 ORGANIZATIONAL CONSOLIDATION
SCENARIO

• The business environment is in a constant state of flux.

• Businesses start every day, close due to failed operations
and consolidate or merge with other businesses for a
variety of reasons.
• Business consolidations occur internally or externally,
depending if the company is reducing facilities or being
sold to another business.
• Organizations usually spend copious amounts of time
reviewing business operations and deciding whether or
not to consolidate or merge operations.
 BENEFITS

•Reduce costs
•Increase revenue
•Attract partnerships
•Increase economies of scale
 REDUCE COSTS

• The consolidation of business activities reduces

operational redundancies and eliminates superfluous
staff and administrative functions.
• As a result, operating and capital costs decline, which
helps improve the bottom line.
• For example, airline mergers lead to the consolidation
of maintenance facilities, which improves the
utilization of both the facility square footage and the
maintenance staff.
 INCREASE REVENUE

• Businesses expand through either organic growth or

acquisition. When a company buys another company,
it might become sufficiently large to serve customers
on a national or international basis.
• This type of organizational consolidation increases the
size of a company's market, which in turn can lead to
higher sales and profits.
• An increase in market size also provides an
opportunity to expand a company's business line,
which can lead to increased sales and profits as well.
 ATTRACT PARTNERSHIPS

• Business consolidation is one means by which a

company can become an industry leader.
• With greater size, the business can establish a
regional or national brand and gain greater
purchasing power.
• When a company buys out a rival company, it reduces
its number of competitors. It also reduces the number
of customers for industry suppliers.
• This in turn gives the merged company more
negotiating power to get better deals with suppliers.
 INCREASE ECONOMIES OF SCALE

• A business consolidation leads to the elimination of

duplicate assets, which equals financial savings.
• By reducing the number of facilities in a business, it can save
money and operate more efficiently.
• This consolidation can also improve communication
between business functions, such as production and
marketing, and achieve savings by decreasing head count
and consolidating systems and processes.
• For example, a jet engine manufacturer might close one
under-utilized manufacturing plant and install additional
production lines at another plant. By closing one plant, the
company decreases its labor and overhead costs as well as its
capital expenditures.
 BUSINESS CONSOLIDATION

• Business consolidations are usually the process of

combining multiple business departments or two
organizations (merger) into a single business
operation.
• Consolidations may result in a completely new entity
being created, or an increase in the size of current
business facilities.
• Organizations may also go through a merger and
acquisition process, which is a different form of
business consolidation.
 REASONS WHY BUSINESSES
CONSOLIDATE

•Synergy
•Diversification/Sharpening Business
Focus
•Growth
•Increase Supply-Chain Pricing Power
•Eliminate Competition
 SYNERGY

• The most used word in Mergers & Acquisition (M&A)

is synergy, which is the idea that by
combining business activities, performance will
increase and costs will decrease.
• Essentially, a business will attempt to merge with
another business that has complementary strengths
and weaknesses.
 DIVERSIFICATION / SHARPENING BUSINESS
FOCUS

• These two conflicting goals have been used to

describe thousands of M&A transactions.
• A company that merges to diversify may acquire
another company in a seemingly unrelated industry in
order to reduce the impact of a particular industry's
performance on its profitability.
• Companies seeking to sharpen focus often merge
with companies that have deeper market
penetration in a key area of operations.
 GROWTH

• Mergers can give the acquiring company an

opportunity to grow market share without having to
really earn it by doing the work themselves - instead,
they buy a competitor's business for a price.
• Usually, these are called horizontal mergers. For
example, a beer company may choose to buy out a
smaller competing brewery, enabling the smaller
company to make more beer and sell more to its
brand-loyal customers.
 INCREASE SUPPLY-CHAIN PRICING POWER

• By buying out one of its suppliers or one of the

distributors, a business can eliminate a level of costs.
• If a company buys out one of its suppliers, it is able to
save on the margins that the supplier was previously
adding to its costs; this is known as a vertical merger.
• If a company buys out a distributor, it may be able to
ship its products at a lower cost.
 ELIMINATE COMPETITION

• Many business consolidation deals allow

the acquirer to eliminate future competition and gain
a larger market share in its product's market.
• The downside of this is that a large premium is
usually required to convince the target company's
shareholders to accept the offer.
• It is not uncommon for the acquiring company's
shareholders to sell their shares and push the price
lower in response to the company paying too much
for the target company.
 ACQUISITION

• When one company takes over another and clearly

establishes itself as the new owner, the purchase is called an
acquisition
• For example when a big investment group, private equity
fund, leveraged buyout fund, etc., simply acquires most or all
of the stock of an existing company without combining it
with another, or when a company buys a subsidiary without
changing the operations at all.
• Business enterprise constitutes the goodwill, the customer
lists, and all the factors that makes a business profitable.
 ACQUISITION
LEGAL BASIS

A corporation may sell, lease, exchange, pledge, mortgage

or otherwise dispose of all or substantially all of its
property and assets including its goodwill... as the Board
may deem expedient , when authorized by the vote of
stockholders representing 2/3 of the outstanding capital
stock or, in case of non-stock corporation, by the vote of at
least 2/3 of its members in a meeting called for that
purpose. (Sec. 40, BL Blg 68)
 MERGER

• Merger is the legal combination of two or more corporations

after which only one corporation remains.
• A’s articles of incorporation are amended to include articles of
merger.
• After merger, A continues as the surviving corporation with all of B’s rights
and obligations.
• A union effected by absorbing one or more
existing corporations by another which survives
and continues the combined business.
• It is the uniting of two or more corporations by the
transfer of property to one of them which continue in
existence, the other or the others being dissolved and merged
therein.
 CONSOLIDATION

• Two or more corporations combine such that both cease to

exist and a new corporation emerges which has all the rights
and obligations previously held by A and B.
• The articles of consolidation take the place of the original articles of
A and B.
• The uniting or amalgamation of two or more
existing corporations to form a new corporation.
• In merger there is a surviving corporation, the
others are dissolved, while in consolidation, all
constituent are dissolved and a new one organized.
 HOW A MERGER OR CONSOLIDATION
TAKES PLACE

1. Each corporation party to the merger or consolidation

should draw up a plan. (Sec. 76, BP Blg. 68)
The boards of each corporation will draw up a
merger/consolidation plan that includes the names of
the corporations involved, the terms and mode of
carrying out the merger/consolidation and a statement of
changes, if any, in the articles of the new corporation
(consolidation) or absorbing one (merger.)
2. Board of Directors of each corporation involved must
approve the plan of merger or consolidation.
 HOW A MERGER OR CONSOLIDATION
TAKES PLACE

3. Stockholders of each corporation must approve. (Sec. 77,

BP Blg. 68)
 The plan must be approved by a majority vote of each board at
separate meetings AND by the stockholders representing 2/3 of
the outstanding capital stock or, in case of non-stock corporations,
2/3 of the members of each corporation.
 Dissenting stockholders can exercise their appraisal rights.
 Amendments to the plan itself must be made with the approval of
the majority of the board members of each corporation and by
the stockholders representing 2/3 of the outstanding capital stock
or 2/3 of members for non-stock corporations.
 HOW A MERGER OR CONSOLIDATION
TAKES PLACE

4. Each corporation shall execute the articles of

merger/consolidation. (Sec. 78, BP Blg. 68)
 signed by each president and vice-president and certified by the
secretary/assistant secretary
 set forth the plan of merger/consolidation, the number of outstanding
shares (stock corporation) or number of members (non-stock corporation)
and, for each corporation, the number of shares/members who voted for
or against the plan.
5. The corporations must submit 4 copies of the articles of merger/
consolidation to the SEC & other requirements.
6. The SEC will conduct a hearing, if necessary. After the hearing, it
will issue a certificate of merger/consolidation. The date of
issuance of the certificate will be the date of the merger. (Sec.
79, BP Blg. 68)
 EFFECTIVITY OF
MERGER/CONSOLIDATION

• The issuance by the SEC of the certificate of merger is crucial

because not only does it bear out SEC’s approval but also marks
the moment whereupon the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the
absorbed corporation ceases to exist but its rights, and
properties as well as liabilities shall be taken and deemed
transferred to and vested in the surviving corporation. (Poliand
Industrial Ltd. V. NDC, 467 SCRA 500 [2005])
• When the procedure for merger/consolidation prescribed under
the Corporation Code are not followed, there can be no merger
or consolidation, and corporate separateness between the
constituent corporations remains, and the liabilities of one entity
cannot be enforced against another entity. (PNB v. Andrada
Electric & Engineering Co., 381 SCRA 244 [2002])
 EFFECTS OF
MERGER/CONSOLIDATION
SEC. 80, BP BLG. 68

1. Constituent corporations shall become a single corporation.

2. Separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation.
3. Surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers.
4. Surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and
franchises of each of the constituent corporations and all property,
real or personal, and all receivables due on whatever account shall
be deemed transferred to such surviving or consolidated
corporation.
5. Surviving or consolidated corporation shall be responsible and liable
for all the liabilities and obligations of each of the constituent
corporations.
 EFFECTS OF
MERGER/CONSOLIDATION

• In the merger of two existing corporation, one of the

corporations survives and continues the business, while the
other is dissolved, and all its rights, properties, and liabilities are
acquired by the surviving corporation. In the same way, Global
also has the right to exercise all defenses, rights, privileges, and
counter-claims of every kind and nature which Asian Bank may
have or invoke under the law. (Global Business Holdings Inc. v.
Surecompsoftware, B.V., 633 SCRA 94 [2010])
• It is settled that in the merger of two existing corporations, one
of the corporations survives and continues the business, while
the other is dissolved and all its rights, properties and liabilities
are acquired by the surviving corporation. (Babst v. CA, 350 SCRA
341 [2001])
 EFFECTS ON EMPLOYEES OF THE
CORPORATION
IN ASSETS ONLY TRANSFERS

• In assets only transfers, the two corporations (selling &

purchasing) survives and are separate and distinct from one
another.
• The absorption of employees of selling corporation may not be
imposed on purchasing corporation.
• The purchasing corporation has no liability whatsoever to the
employees of the selling corporation.
• There being no employer-employee relationship between the
two corporations (selling & purchasing), the purchasing
corporation cannot be compelled to absorb the latter and to
pay backwages to the employees of the selling
corporation.(Sundowner Dev. Corp. v. Drilon, 180 SCRA 14
[1989])
 EFFECTS ON EMPLOYEES OF THE
CORPORATION
IN BUSINESS ENTERPRISE TRANSFERS

• A bona fide buyer or transferee of all, or substantially all, the

properties of the seller or transferor is not obliged to absorb
the latter’s employees.
• The most that the purchasing company may do, for reasons
of public policy and social justice, is to give preference of
reemployment to the selling company’s qualified separated
employees, who in its judgment are necessary to the
continued operation of the business establishment.
(Barayoga v. Asset Privation Trust, 473 SCRA 690 [2005])
 EFFECTS ON EMPLOYEES OF THE
CORPORATION
IN BUSINESS ENTERPRISE TRANSFERS

• Where a corporation is closed for alleged losses and its

equipment are transferred to another company which engaged
in the same operations, the separate juridical personality of the
latter can be pierced to make it liable for the labor claims of the
employees of the closed company. (National Federation of Labor
Union v. Ople, 143 SCRA 124 [1986])
• In the case of a transfer of all or substantially all of the assets of a
corporation (i.e., business enterprise transfers), the liabilities of
the previous owners to its employees are not enforceable
against the buyer or transferee, UNLESS (a) the latter
unequivocally assumes them; or (b) the sale or transfer was
made in bad faith. (Barayoga v. Asset Privatization Trust, 473
• SCRA 690 [2005])
 EFFECTS ON EMPLOYEES OF THE
CORPORATION
IN BUSINESS ENTERPRISE TRANSFERS

• Where the change of ownership is done in bad faith, or is used

to defeat the rights of labor, the successor-employer is deemed
to have absorbed the employees and is held liable for the
transgressions of his or her precedessor. (Peñafrancia Tours and
Travel Transport v. Sarmiento, 634 SCRA 279 [2010])
• Although a corporation may have ceased business operations
and an entirely new company has been organized to take over
the same type of operations, it does not necessarily follow that
no one may now be held liable for illegal acts committed by
the earlier firm. (Pepsi-Cola Bottling Co., v. NLRC, 210 SCRA 277
[1992])
 EFFECTS ON EMPLOYEES OF THE
CORPORATION
IN EQUITY TRANSFERS

• Where such transfer of ownership is in good faith, the

transferee is under no legal duty to absorb the transferor
employees as there is no law compelling such absorption.
• The most that the transferee may do, for reasons of public
policy and social justice, is to give preference to the qualified
separated employees in the filling of vacancies in the
facilities of the purchaser. (Manlimos v. NLRC, 242 SCRA 145
[1995])
 EFFECTS ON EMPLOYEES OF THE
CORPORATION
ON MERGERS & CONSOLIDATIONS

• It is more in keeping with the dictates of social justice and the State
policy of according full protection to labor to deem employment
contracts as automatically assumed by the surviving corporation
even in the absence of an express stipulation in the articles of
merger or the merger plan.
• By upholding the automatic assumption of the non-surviving
corporation’s existing employment contracts by the surviving
corporation in a merger, the Court strengthens judicial protection of
the right to security of tenure of employees affected by a merger and
avoids confusion regarding the status of their various benefits. (Bank
of P.I. v. BPI Employees Union-Davao Chapter, etc., 658 SCRA 828
[2011])
• The surviving corporation is absorbing everything including
employees. The rule is that employment, because they are
obligations, are carried over.
 EFFECTS ON EMPLOYEES OF THE
CORPORATION
ON MERGERS & CONSOLIDATIONS

• The surviving corporation, in a merger situation, is absorbing

everything including employees. As such, there is no
interruption. the rule is that employment, because they are
obligations, are carried over.