TITLE IX

MERGER AND CONSOLIDATION

SEC. 75. Plan of Merger or Consolidation. – Two (2) or more corporations may merge into a
single corporation which shall be one of the constituent corporations or may consolidate into a
new single corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation setting forth the following:
(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;
(c) 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
(d) Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable.

DISCUSSION:

Definition of terms:
Merger - is the absorption of one or more corporations by another existing corporation, which retains
its identity and takes over the rights, privileges, franchises, and properties of the absorbed (non-
surviving) corporation/s. The absorbing corporation continues its existence while the life or lives of
the other corporation/s)is/or are terminated.
Consolidation - is the union of two or more corporations to form a new corporation, having the
combined rights, privileges, franchises and properties of the constituent companies, all combining to
lose their corporate existence. Briefly, it is described as the union of two or more corporations into a
single new corporation, all the constituent corporations thereby ceasing to exist as separate entities.
Articles of merger or consolidation - refers to the instrument executed by the constituent
corporations embodying the following: (1) plan of merger or consolidation; (2) the number of shares
outstanding in case of stock corporations, or of members, in case of non-stock corporations; and (3)
as to each corporation, the number of shares outstanding or members voting for and the names of
stockholders or members voting against such plans, respectively.
Constituent corporation - refers to the absorbed and absorbing corporations in case of merger;
and to two or more corporate bodies desiring to unite into a new corporation in the case of
consolidation.

Plan of Merger
The first step in any merger or consolidation is the plan of merger or consolidation which must be
approved by a majority vote of each of the Board of directors or trustees of all the constituent
corporations who are party to the said merger or consolidation. Under the RCC the plan should
contain the following:
1) The names of the corporations proposing to merge or consolidate, hereinafter referred to as the
constituent corporations;

2) The terms of the merger or consolidation and the mode of carrying the same into effect;

3) 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 the Revised corporation code; and

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 4) Such other provisions with respect to the proposed merger or consolidation as are deemed
necessary or desirable.

Example of a Plan of Merger

The document below is an actual plan of merger of RFM, a PSE listed corporation:

On the first page of the document, you will find the constituent corporations, and, in this case, there are
four.

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The whereas clause found on page 1 and 2 provide basic information regarding the constituent
corporations such as the authorized capital stock and the par value of each stock. Likewise, the reason
behind the planned merger is provided. The surviving entity is also indicated, which is in this case RFM
corporation

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 On pages 3 and 4 you will find the terms of the merger and the mode of carrying the same into effect.
Basically, the terms of the merger are found on pages 3 and 4. All of the terms can be summarized
as follows:
1. RFM shall be the surviving entity and its corporate existence shall continue
2. All the rights, businesses, assets, and other properties of the absorbed corporations shall be
transferred to RFM
3. RFM shall assume all the liabilities of the absorbed corporations.
4. RFM shall issue shares to the stockholders of the absorbed corporations.

In our example, there is no statement of the changes in the articles of incorporation (AOI) of the
surviving corporation (RFM). It is not mandatory that there should be changes in the AOI of the
surviving entity. The changes in the AOI will only be stated in the merger plan if there are changes
at all. Such as the need to increase the authorized capital stock in order to accommodate the
stockholders of the absorbed corporations or there is a need to amend the purposes of the surviving
corporation if the line of business of the absorbed corporations are unrelated to the purposes of the
surviving corporation.

Lastly, the plan of merger shall also provide such other provisions with respect to the proposed
merger or consolidation which the parties deemed necessary or desirable. In the above-example, it
is provided in their plan of merger that the parties (constituent corporations) shall immediately take
all necessary corporate acts to implement their merger and shall cooperate with each other in
obtaining all necessary regulatory filing consents and approval as well as complying with all
applicable regulatory rules and regulations. The parties shall likewise comply with the provisions of
the BIR revenue Regulations No. 16-2001 with respect to guidelines on the proper monitoring of the
basis of properties transferred and shares received pursuant to a tax-free exchange.

SEC. 76. Stockholders’ or Members’ Approval. – Upon approval by a majority vote of each of
the 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 to all stockholders or members of the respective corporations
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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 (2/3) of the outstanding
capital stock of each corporation in the case of stock corporations or at least twothirds (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 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.

Discussion:
Procedure in the approval or disapproval of the merger or consolidation plan

1. Meeting of the Board of Directors or Trustees of the constituent corporations to approve the plan
of merger. A majority vote of the Board is needed to approve the plan;

2. Sending of the notice of meeting to the stockholders or members of the constituent corporations:

a) For regular meeting, at least 21 days prior to the scheduled meeting, unless a longer time is
provided in the bylaws.
b) For special meetings, at least 1 week prior to the scheduled meeting, unless a longer time is
provided in the bylaws
The notice should state the date, time and place, and purpose of the meeting which is the
planned merger or consolidation.
The notice can be sent either personally or registered mail, and it may also be sent to all
stockholders or members of record through electronic mail or such other manner as the SEC
shall allow under its guidelines.

3. During the meeting, an 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 nonstock corporations shall be necessary for the
approval of such plan

If there are any stockholder who disapproves of the plan, he or she may exercise his/her
appraisal right. However, if the board of directors decides to abandon the plan, the appraisal
right is extinguished for the simple reason that the proposed corporate act that he/or she
dissented did not materialize.
After the merger or consolidation plan is approved, the plan may still be amended and the
amended plan is also required to be voted upon by an affirmative votes of the Board and
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 twothirds (2/3) of the
members in the case of nonstock corporation.
Note that the plan for merger or consolidation must be approved by the respective Board and
the stockholders/members of all the constituent corporations. So the approval and voting
procedure is separate and distinct for each of the constituent corporation.

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SEC. 77. Articles of Merger or Consolidation. – After the approval by the stockholders or
members as required by the preceding section, 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 corporation setting forth:
(a) The plan of the merger or the plan of consolidation;
(b) As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members;
(c) As to each corporation, the number of shares or members voting for or against such plan,
respectively;
(d) The carrying amounts and fair values of the assets and liabilities of the respective companies
as of the agreed cut-off date;
(e) The method to be used in the merger or consolidation of accounts of the companies;
(f) 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.

Discussion:
After the plan of merger or consolidation is approved, what comes next is the execution of the
Articles of Merger or Consolidation. The Articles must be executed by each of the constituent
stockholders and signed by their respective president or vice president and certified by the
secretary or assistant secretary of each corporation.
Under the old corporation code, what you will find in the Articles of merger or consolidation are
only Items (a) to (c). That is why in the articles of merger pictured below, you will only see three
articles containing the information required under items (a) to (c):

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On the first page of the Articles of Merger pcitured above, you will find Article 1 Plan of Merger. This
already complies with the requirement of item (a) of Section 77 . Note that Article 1 is only a summary
of the actual plan of merger because apart from providing a summary of the Plan of Merger in Article
1, a copy of the entire Plan of Merger is likewise attached to the Articles of Merger since both documents
are required to be submitted to the SEC.

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On page 2 of the Articles of Merger, you will find the information required under intem (b) of Section 78
in Article 2 Outstanding shares. Likewise, you will find the information required under intem (c) of
Section 78 in Article 3 Number of votes.

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On page 3, you will find the respective names and signature of the presidents or in the vice president
of the constituent corporations. In this case, the other party is representedby a Director and a an
attorney in fact presumably of the president. So it appears that the Articles of Merger need not be
signed personally by the President or Vice President. A person other than the president or vice
president may sign on his/her heir behalf provided that a Special Power of Attorney is executed in
his/her favor. I think in this case, there is already substantial complaince otherwise this would not be
approved by SEC.

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On page 4 of the Articles of Merger, you will find the Certification issued by the respective corporate secretaries
of the constituent corporations.

With the enactment of the RCC, there are three additional information that must be stated in the articles of merger
or consolidation. In our illustration, there are only three Articles provided in the Articles of Merger because the
merger occurred prior to the enactment of the RCC. If the merger happened today, the Articles of Merger must
contain three or more articles which must provide for the information required under items (d) to (g) of Section
78.
Items (d) to (f) talks about accounting matters to which your CPA classmates are very familiar with. Carrying is
the value of an asset that is found on the balance sheet of the corporation. In simple terms, carrying value takes
the acquisition cost of the asset and subtracts its depreciation over time. On the other hand, the fair value of an
asset is quite volatile and fluctuates very often. It is generally determined by the market and agreed upon by
buyer who is willing to buy and a seller who is willing to sell. Since item (e) talks about accounting methods in
the merger or consolidation of accounts of the companies it could only mean either the use of consolidated
method or equity method in merging or consolidating the accounts of the constituent corporations. Item (f) talks
about the provisional values using the accounting method utilized in item (e). Lastly, under item (g) the SEC may
require additional information to be included in the Articles of Merger or Consolidation.
Merger or consolidation had always been a tedious and technically demanding undertaking. You have lawyers,
accountants and other professional who are employed in the process.

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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,
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. 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
approving the articles and plan of merger or of consolidation, at which time the merger or
consolidation shall be effective.
If, upon investigation, the Commission has reason to believe that the proposed merger or
consolidation is contrary to or inconsistent with the provisions of this Code or existing laws, it
shall set a hearing to give the corporations concerned the opportunity to be heard. Written
notice of 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.

Discussion:
Note that the parties will not only submit the Articles of Merger / Consolidation and the Plan of
Merger/Consolidation to the SEC. In fact the parties have to secure the following:

1. Articles of Merger/Consolidation
2. Plan of Merger/Consolidation
3. List of stockholders/members of record of the constituent corporations indicating their
nationalities and respective subscribed and paid -up capital/contribution as of date of the
meeting approving the merger/consolidation certified under oath by the Corporate
Secretary
4. Certification by the Corporate Secretary on the meeting of the Board of Directors and
stockholders/Board of Trustees and members of the constituent corporations approving
the merger/consolidation
5. Audited financial statements of the constituent corporations as of a date not earlier than
120 days prior to the date of filing of the application in accordance with PFRS 3
(Accounting Standard on Business Combination)
6. Long-form audit report of item no . 5 for absorbed corporation(s) (not required if the
surviving company will not issue shares of stock or create additional paid -in capital)
7. Certification under oath by President, Finance Officer or Treasurer of the constituent
corporations stating that all creditors as of cut -off date were informed regarding the
merger/consolidation
8. Publisher’s Affidavit on publication of the merger or consolidation, if one or more of the
constituent corporation(s) is/are insolvent
9. Notarized Secretary’s Certificate on no pending case of intra -corporate dispute
10. Certified Secretary’s list of stockholders/members of record of the surviving corporation
after the merger
11. Notarized Secretary’s Certificate certifying that on the basis of the computation of the
Finance Officer, the allocation of shares to be received by the stockholders
of the absorbed company/ies (in case of (merger) and consolidating companies (in case
of consolidation) as indicated in the supporting documents in exchange fo r the net assets
transferred to the surviving company/consolidated corporation
is in proportion to the shareholdings of the stockholders of record and the treatment of
fractional shares resulting from the distribution of shares, are true and correct.
12. Compliance Monitoring Division (CMD) Clearance and/or clearance from other
Department of the Commission or government agencies
13. Notification letter by the parties to a merger addressed to the Philippine Competition
Commission, if the value of the t ransaction exceeds One Billion (P1,000,000,000)
Notes:
a. If the merger is accompanied by application for increase of capital stock, comply with
the requirements for Increase of Capital Stock
b. For consolidation comply with the requirements for registration of corporation

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After submitting to SEC the the Articles of Merger/Consolidation, Plan of Merger/Consolidation and other relevant
supporting documents, the SEC will conduct an investigation and if the SEC has a reason to believe that the
proposed merger/consolidation is contrary to existing laws, the SEC will of course observe due process. The
SEC will then send a written notice to each constituent corporation of the date, time, and place of hearing at
least 2 weeks before the scheduled.
Once all the documentary requirements are submitted/secured and the SEC finds that everything is in order, a
Certification will then be issued by the SEC, such as the one pictured below.

For banks or banking institutions, 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. That is why you have there in item no. 12 of the
list of documents required by SEC clearance from other Department of the Commission or government
agencies

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;

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(d) 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
(e) 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.

Discussion:
Effects of Merger or Consolidation
(a). The constituent corporations becomes a single corporation.
This is one of the obvious effects of merger or consolidation, and that is all the merged or
consolidated corporations becomes a single entity.
(b) Separate existence of the constituent corporations shall cease.
If it is a consolidation, then the separate existence of all the constituent corporations will cease to
exist because in a consolidation an entirely new corporation is created as a result. If it is a merger,
then not all the constituent corporations will cease to exist. There will still be one surviving entity
which will continue to exist and carry out the business operations of all the absorbed corporations.
©. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities, and powers and all the duties and liabilities
The surviving corporation in the case of merger or consolidated corporation in the case of
consolidation will not only acquire all the rights, privileges, immunities, and powers of the
absorbed corporations but it will also acquire all the latter’s duties and liabilities

Items (d) and (e ) are actually just extensions or further emphasis on the effects of item (c ). The
possession of all the rights, privileges, immunities and franchises of each constituent corporations
necessarily includes the possession of the property rights , receivables, subscriptions to shares
and other chooses in action and interest belonging to all the constituent corporations.
It is further emphasized in item (d) that the transfer to the surviving or consolidated corporation
does not require further act or deed. If you remember your lessons in the subject OBLICON there
are six modes of acquiring ownership. Occupation, intellectual creation, by law, by donation,
succession and by tradition (certain contracts).

The effects of merger on the transfer of ownership of properties to the surviving or consolidated
corporation is an example of the mode of acquiring ownership over properties by law. So the
transfer of ownership of the properties from the absorbed corporation to the surviving corporation
is be operation of law. For example if a parcel of land is registered in the name of the absorbed
(non-surviving) corporation, there is no need to execute any act or deed to effect the transfer of
ownership over said parcel of land from the absorbed corporation to the surviving or consolidated
corporation.
Another example, if Mr. X owes A corporation a certain sum of money and if later A corporation
is merged with B corporation, the latter being the surviving corporation. If B corporation tries to
collect payment from Mr. X once his debt to A corporation becomes due and demandable, Mr. X
cannot avoid liability by raising the defense that B corporation is not his creditor and there is no
deed of assignment issued by A corporation in favor of B corporation. The law says that there is
no need to perform further act or deed to effect transfer of the right to collect payment.

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 Item (e ) emphasizes that the surviving or consolidated corporation shall assume responsibility to
all the liabilities and obligations of each constituents corporation as though such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending clam,
action or proceeding brought by or against any of the constituent corporations.
If in our previous example, A corporation owes Mr. X a certain sum of money prior to the merger,
Mr. X can still collect payment from B corporation after A corporation is merged with B
Corporation.
Likewise, If A corporation fails to pay Mr. X when its debt becomes due and demandable, Mr. X
can still sue B Corporation later on because B corporation assumes the liabilities of A corporation
as though it had itself incurred such debt. Item (e ) is very clear that the rights of creditors of
constituent corporations shall not be impaired by the merger or consolidation.

Item (e) also emphasizes the non-impairment of liens upon the property of constituent corporation.
To illustrate, if A corporation acquired a loan from Mr. X which is secured by a mortgage over a
parcel of land owned by A corporation. That lien (mortgage) will continue to attach to the parcel
of land even if such property is transferred to B corporation after the merger or consolidation. B
corporation will still be bound to the prior mortgage and its consequences.

TITLE X
APPRAISAL RIGHT
SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a corporation
shall have the right to dissent and demand payment of the fair value of the shares in the
following instances:
(a) In case 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 to those of outstanding shares of any class, or of extending or shortening the
term of corporate existence;
(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or
substantially all of the corporate property and assets as provided in this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than the primary purpose of
the corporation.

Discussion:
Appraisal Right
Appraisal right is the right of any stockholder of a corporation (obviously a stock corporation) to
dissent and demand payment of the fair value of the shares in instances allowed under the RCC.
The right of appraisal may be exercised when there is a fundamental change in the charter or
articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest
unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting
stockholder to have his interests purchased and to retire from the corporation. Not all corporate
acts are subject to the exercise of appraisal right. Under Section 80 there are only four (4)
instances when a stockholder may exercise his/her appraisal right and one of these instances is
of course merger or consolidation.

SEC. 81. How Right is Exercised. – The dissenting stockholder who votes against a proposed
corporate action may exercise 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,

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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 approval of the corporate action 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, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith transfer the shares
to the corporation.
Discussion:
How Appraisal right is exercised
After raising his/her dissent against a proposed corporate action enumerated under Section 80,
the dissenting stockholder must make a written demand on the corporation for payment within
(30) days from the date on which the vote was taken.
If the dissenting stockholder fails to make a written demand within that period, then he is deemed
to have waived his appraisal right.

How payment is made

After the dissenting stockholder had sent his/her written demand for payment within the 30 day
period, the proposed corporate action he/she objected to must of course be implemented. After
which, the dissenting stockholder will have to surrender the certificate of stock and only upon
surrendering the stock certificate will he/she be paid by the corporation the fair value of his stocks
based on the value of the stock a day before the vote on the corporation action was taken,
excluding any appreciation or depreciation in anticipation of such corporate action.
Fair value is quite subjective. It depends on the willingness of both the corporation and the
dissenting stockholder to come to a mutually acceptable valuation. If they both come to an
agreement as to the amount to be paid, then well and good. That would now be considered as
fair value.

How fair value is resolved in case of disagreement

If the dissenting 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.
The procedure of determining the fair value of the shares is quite similar to the procedure in the
determination of just compensation. You have three appraisers. Each party gets to choose one
appraiser and the third one is chosen by both parties.

Payment can only be made if there are unrestricted retained earnings

Section 81 is clear that no payment shall be made to any dissenting stockholder unless the
corporation has unrestricted retained earnings in its books to cover such payment. And once
payment is made, the stockholder is obliged to transfer the shares to the corporation because as
discussed earlier no transfer of shares is valid unless and until it is recorded in the corporation’s
stock and transfer book.
It is essential that the corporation has unrestricted retained earnings at the time the dissenting
stockholders demand for payment. In in one case decided by the Supreme Court, two
stockholders (husband and wife) have dissented to a corporate act which they believe would

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 impair their rights as a stockholders. The dissenting stockholders demanded the payment
of ₱2.276/share based on the book value of the shares. This was rejected by the corporation and
found the fair value of the shares demanded by the stockholders unacceptable. The corporation
insisted that the market value on the date before the action to remove the pre-emptive right was
taken should be the value, or ₱0.41/share considering that its shares were listed in the Philippine
Stock Exchange, and that the payment could be made only if the corporation had unrestricted
retained earnings in its books to cover the value of the shares, which according to the corporation
it had a negative retained earnings at the time the demand was made.
Because of the corporation’s refusal, the dissenting stockholders sought a fair valuation from the
appraisal committee, the latter in turn pegged the fair value of the shares at ₱2.54/share. The
dissenting stockholders demanded payment from the corporation based on the fair value issued
by the appraisal committee.
Because the corporation still refused to pay insisting it had no unrestricted retained earnings, the
dissenting stockholders were compelled to sue the corporation before the RTC. While the case
was pending before the RTC, the dissenting stockholders obtained a copy of the latest quarterly
report of the corporation which shows that it now has unrestricted retained earnings. The
dissenting stockholders then filed a motion for partial summary judgment and argued that the
corporation now has sufficient unrestricted retained earnings to pay their demands.
The RTC rendered a decision in favor of the dissenting stockholder.
When the case was elevated to the CA, the CA reversed the decision of the RTC because it was
established that the corporation had no unrestricted retained earnings when the dissenting
stockholders filed their Complaint.
The case ultimately reached the Supreme Court.
In explaining the reason behind why a corporation can only pay the dissenting stockholder only
if there is unrestricted retained earnings, the SC held that the trust fund doctrine backstops the
requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the
withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors, who are
preferred in the distribution of corporate assets. The creditors of a corporation have the right to
assume that the board of directors will not use the assets of the corporation to purchase its own
stock for as long as the corporation has outstanding debts and liabilities. There can be no
distribution of assets among the stockholders without first paying corporate debts. Thus, any
disposition of corporate funds and assets to the prejudice of creditors is null and void.
The SC also affirmed the ruling of the CA and held that the corporation had indisputably no
unrestricted retained earnings in its books at the time the petitioners commenced its complaint
proved that the corporation’s legal obligation to pay the value of the dissenting stockholders’
shares did not yet arise. Thus, the CA did not err in holding that the dissenting stockholders had
no cause of action, and in ruling that the RTC did not validly render the partial summary judgment.

SEC. 82. Effect of Demand and Termination of Right. – From the time of demand for payment of
the fair value of a stockholder’s shares until either the abandonment of the corporate action
involved or the purchase of the said shares by the corporation, all rights accruing to such
shares, including voting and dividend rights, shall be suspended in accordance with the
provisions of this Code, except the right of such stockholder to receive payment of the fair value
thereof: Provided, That if the dissenting stockholder is not paid the value of the said shares
within thirty (30) days after the award, the voting and dividend rights shall immediately be
restored.
Discussion:
Effect of Demand
Once the stockholder has made his/her written demand for payment of the fair value of his
shares , all rights (except the right to receive payment of the fair value) pertaining to such shares
including voting and dividend rights shall be suspended. The suspended rights will last until
either the corporate action so dissented is abandoned.

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 If the dissenting stockholder is not paid the value of the said shares within thirty (30) days after
the award, the voting and dividend rights shall immediately be restored. This proviso deals with
a situation where the majority of the appraisal committee renders an award under Section 81.
Note that 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. So, if the corporation
does not pay within that period, his voting and dividend rights is automatically restored.
So in the Supreme Court case mentioned since the corporation did not pay at all the dissenting
stockholders’ after an award was made by the appraisal committee, their voting rights and
dividend rights are automatically restored after the lapse of the 30 days period.

SEC. 83. When Right to Payment Ceases. – No demand for payment under this Title may be
withdrawn unless the corporation consents thereto. If, however, such demand for payment is
withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned
or rescinded by the corporation or disapproved by the Commission where such approval is
necessary, or if the Commission determines that such stockholder is not entitled to the
appraisal right, then the right of the stockholder to be paid the fair value of the shares shall
cease, the status as the stockholder shall be restored, and all dividend distributions which
would have accrued on the shares shall be paid to the stockholder.
Discussion:
Once the demand for payment is made by the dissenting stockholder, he/she can no longer
unilaterally withdraw the same, unless and until the withdrawal of his demand for payment is
consented to by the corporation.
The payment of the fair value of the shares ceases or stops under the following instances:
1. The demand for payment is with the consent of the corporation.
2. the proposed corporate action is abandoned or rescinded by the corporation.
3. the proposed corporate action disapproved by the SEC where such approval is necessary.
4. if the SEC determines that such stockholder is not entitled to the appraisal right.
If the stockholder is not paid the fair value of his/her shares then of course his status as a
stockholder shall be restored, and all dividend distributions which would have accrued on the
shares shall be paid to the stockholder. So if the corporation declares dividends after the
stockholder exercises his appraisal right but later of the four instances mentioned occurred then
the stockholder is entitled to such dividends which had already accrued.

SEC. 84. Who Bears Costs of Appraisal. – The costs and expenses of appraisal shall be borne
by the corporation, unless the fair value ascertained by the appraisers is approximately the
same as the price which the corporation may have offered to pay the stockholder, in which case
they shall be borne by the latter. In the case of an action to recover such fair value, all costs and
expenses shall be assessed against the corporation, unless the refusal of the stockholder to
receive payment was unjustified.
Discussion:
Costs and expenses of appraisal refers to the payment of professional fees to the appraisers as
well as all other costs and expenses that were incurred because of such.
Who bears Costs of Appraisal (At the appraisal committee)
General Rule: costs and expenses shall be borne by the corporation
Exception: The stockholder, if the fair value ascertained by the appraisers is approximately the
same as the price which the corporation may have offered to pay the stockholder

Who bears Costs of Appraisal (At the court)

General Rule: Costs and expenses shall be borne by the corporation

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 Exception: The stockholder if the refusal of the stockholder to receive payment was unjustified.

SEC. 85. Notation on Certificates; Rights of Transferee. – Within ten (10) days after demanding
payment for shares held, a dissenting stockholder shall submit the certificates of stock
representing the shares to the corporation for notation that such shares are dissenting shares.
Failure to do so shall, at the option of the corporation, terminate the rights under this Title. If
shares represented by the certificates bearing such notation are transferred, and the certificates
consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title
shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend
distributions which would have accrued on such shares shall be paid to the transferee.

Discussion:
It is not enough that a dissenting stockholder already made a written demand for payment to the
corporation. He is required within 10 days from demanding payment to submit the certificates of
stock to the corporation for notation that such shares are dissenting shares. If the dissenting
stockholders fails to do such, the corporation has the option to terminate his appraisal right.

After the notation is made on the certificate of stock representing the shares of the dissenting
stockholder, he/she can of course immediately sell the shares represented by the certificate of
stocks that had been previously notated as dissenting shares. But once the certificate of stocks
with notation is cancelled, the rights of the transferor as a dissenting stockholder ceases and the
transferee is not bound by the exercise of the transferor stockholder of his/her appraisal right and
instead the transferee shall have all the rights of a regular stockholder; and all dividend
distributions which would have accrued on such shares shall be paid to the transferee.

------END-----

Case:
G.R. No. 157479

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