Sec. 80. Effects of merger or consolidation. of the merger was the date of execution.

The
agreement itself clearly provides that all contracts,
Legal effects: irrespective of the date of execution, entered into in the
name of CBTC shall be understood as pertaining to AB.
The clause must have been deliberately included in the
(1) (See codals). Note that unlike in sale of assets under agreement in order to protect the interests of the
Section 40, there is automatic assumption of the combining banks, specifically, to avoid giving the
liabilities of the absorbed corporation or constituent merger agreement a farcical interpretation aimed at
corporations which are dissolved. evading fulfillment of a due obligation.
(2) Section 82(2): the absorbed or constituent corporations
are ipso facto dissolved by operation of law, without Merger and consolidation distinguished from sale of assets
necessity of any further act or deed
 There is no winding up of their affairs or Merger & Consolidation Sale of Assets
liquidation of their assets, for the surviving Sale of assets is always Merger and consolidation is
corporation automatically acquires all the involved not always involved
rights and liabilities of the constituent Automatic assumption by the Purchasing corporation is not
corporations. surviving or consolidated generally liable for the debts
corporation of the liabilities of and liabilities of the selling
(3) ADVANTAGE (from the point of view of the selling the constituent corporations corporation
corporation): it permits the transfer of the assets to the there is a continuance of the the selling corporation
purchaser and the distribution of the consideration enterprise and of the ordinarily contemplates a
received in a single operation pursuant to the plan of stockholders therein though liquidation of the enterprise
merger or consolidation in the altered form
the title to the assets of the the transfer of title is by virtue
(4) Involve exchanges of properties, a transfer of the constituent corporations is by of contract
assets of the constituent corporations in exchange for operation of law transferred
securities in the new or surviving corporation to the new corporation
 There is no winding up of the affairs of the the constituent corporations the selling corporation is not
constituent corporations. are automatically dissolved dissolved by the mere
 Their assets are distributed to the transfer of all its property
stockholders. Their tax consequences are
governed by existing law, rules and
regulations, particularly Section 34 of the Reorganization of a corporation – a means whereby those
NIRC. variously interested financially in a distressed business seek,
 Where the exchange of property of a through continuance of that business as a going concern, to
corporation is solely for stock of another work out of the difficulty for themselves and thus gain more than
corporation, neither gain nor loss is they could by a sale of the assets or of the business to others.
recognized as an exception to the general
rule in taxation that gain shall be taxable and (1) Reorganization of a corporation as distinguished from
loss shall be deductible. If in addition to stock, Merger or consolidation
money and/or other property is received, the
gain, if any, but not the loss, shall be It is not ordinarily the combination of several existing
recognized. corporations, but is simply the carrying out by proper
agreements and legal proceedings of a business plan
(5) Dissolution of the constituent corporations which have or scheme for winding up the affairs of, or foreclosing
been consolidated into a new corporation cannot be a mortgage or mortgages upon, the property of
made to retroact to a date prior to the ratification or insolvent corporations, and the organization of a new
approval by their respective stockholders of a corporation to take over the property and business of
Consolidation Agreement previously approved by the the distressed corporation.
respective boards of directors of the constituent
corporations and the new corporation,9 but the transfer (2) Distinguished from sale.
of the assets and liabilities of the constituent - It differs fundamentally from a sale where the vendor
corporations could be made effective retroactively as corporation parts with its interest for cash and receives
of the date the said board of directors so resolved. nothing more. The mere acquisition by one corporation
of the capital stock of two others, without impairment of
(6) The consent of the creditors of a corporation is not the corporate existence or function of any of the three
necessary, it being authorized by law. corporations, is not a reorganization.
 Creditors’ rights nor any lien upon the - Sale – is the transfer of property from one person to
property of any of each constituent another for a consideration of value. A "mere purchase
corporation shall be impaired by such merger by one corporation of the properties of another
or consolidation. corporation" is not included in the term
"reorganization," because the term "imports a
(7) Where, in its articles of incorporation, a new continuity of interest on the part of the transferor or its
corporation expressly acquired the assets and stockholders in the properties transferred."
properties, and assumed the obligations and liabilities
of an old corporation which it succeeded, the former (3) Reorganization vs. reincorporation.
cannot excuse itself from said obligations and liabilities
on the argument that said two corporations are distinct
Reorganization Reincorporation
and separate.
means the creation of a new more closely resembles the
 Dissenting stockholders may exercise their
company to take over the amendment of a charter, and
right of appraisal (Sec. 81 [3].) only after the
assets of a new corporation is usually resorted either to
plan of merger or consolidation is approved
correct errors in the original
by the SEC. If before such approval the plan
incorporation or to obtain the
is abandoned by the board of directors, the
benefits of a statute enacted
appraisal shall be extinguished.
after the original
incorporation or to extend the
(8) Issue: W/N the surviving bank (AB) may enforce the
corporate life.
promissory note made by private respondent in favor
To reincorporate, the
of the absorbed bank (CBTC) after the merger
incorporators must comply
agreement has been signed but prior to the issuance
with the provisions on
of a certificate of merger by the SEC. AB has a valid
cause of action even assuming that the effectivity date
 incorporation under Sections
10 to 15 of the Code.
Both involve the creation of a new corporation in place of
another corporation which ceases to exist.
(4) Distinguished from bankruptcy.
- A “corporate reorganization" is not a bankruptcy
proceeding, but is a special proceeding which has for
its object the rehabilitation of a debtor-corporation.
- Reorganization contemplates conservation of the
corporation and continuity of its business and not a
liquidation of its assets.
Quasi-reorganization of a corporation – a "procedure recognized
in accounting by which the accounts of the corporation may be
restated to the same extent they would be if a new corporation
were created and acquired the business of the existing
corporation; a new basis for accountability of assets, liabilities,
and capital is established."
- A type of capital readjustments
"C. Readjustments of balance sheet valuations resulting in
the revision of the stated value of the capital stock and of
the surplus. — This type of capital readjustment arises when
the management realizes that radical changes have occurred in
the value of a corporation's property — changes in value which
are not reflected in periodic adjustments to the book surplus
accounts. These changes are prompted by the realization on the
part of management that the property of the corporation has
radically increased or radically decreased beyond anything that
is apparent from the book entries in the surplus accounts. These
book entries representing either surplus or deficit must,
therefore, be restated to reflect the fundamental changes that
have affected the substantive values of the corporation. In the
process of revaluation, it may be necessary to read just-stated
values standing against the capital stocks, and these changes
may or may not involve restatement of the surplus accounts.
Quite frequently too, other alterations in the capital structure are
introduced to bring the outstanding security issues in line with
acknowledged changes in the corporation's property values. As
a group, they may be called revaluation readjustments, and
these valuations are indicated by changes in the capital
accounts."
ILLUSTRATION:
The proposed quasi-reorganization of X Corporation as
submitted to the Securities and Exchange Commission involved
the following steps:
(a) Reduction of par value of common stock from P10.00 to
P7.50 per share.
The present authorized capital stock of P20,000,000 divided into
2,000,000 shares of the par value of P10.00 each will
correspondingly be reduced to 15,000,000 divided shares of the
par value of P7.50 each. The amount of issued and outstanding
capital stock will be reduced from about P10,300,000 to
P7,725,000 but the number of issued and outstanding shares
(i.e., 1,030,000) will remain unchanged. The reduction in par
value of issued and outstanding shares will create a reduction
surplus of P2,575,000.
(b) Restatement of assets consisting of. —
(i) Write-off of fixed assets (property plant and equipment) from
original cost of P20,155,000 to the appraised value of
P27,551,000, approximately, thereby reflecting an appraisal
surplus of P7,396,000. (see comments under Sec. 43.) The
great bulk of this surplus (almost P7 million) is attributable to the
appreciation in the value of X's factory site consisting of six (6)
parcels of land with an aggregate area of 177,242 square
meters. The appraisal was made by an independent firm of high
standing.
(ii) Write-off of development and start-up costs of about
P754,000.
(c) Write-offs against surplus. — The accumulated deficit
estimated at P8,978,000 (as of September 30, 1967) and the
development and start-up costs at about P754,000 to be written
off, or a total of P9,732,000 will be charged to the capital surplus
created totalling P9,971,000, consisting of reduction surplus of
P2,575,000 and an appraisal surplus of P7,396,000. The
balance of about P239,000 will be set up as a capital surplus
account.
(d) Conditions for effecting plan. — Disclosure of the quasi-
reorganization will be made by appropriate notations in the
audited financial statements of X.
It appears from the project study made on the matter, that if the
plan is carried out, the company would be able not only to
rehabilitate itself but also realize profits. Conversely, if the
company cannot pursue its plan, it may not be able to solve its
financial difficulties and thus, may result in its total collapse.
Considering all the foregoing, the Commission interposed no
objection subject to the following conditions:
(1) Only the appreciation in the value of the company's six
(6) parcels of land with an aggregate area of 177,242
square meters shall be considered, the increase in
appraisal value of the rest of the company's property
being excluded. This is for the reason that the increase
in value of the parcels of land is, in the opinion of the
Commission, realizable. As to those of the other kinds
of property, the Commission does not feel it necessary
to pass upon this matter at this time;
(2) It is not deemed proper to write-off the development
and start-up costs amounting to approximately
P754,000;
(3) The appraisal surplus created shall be used to write off
deficit, and shall not be utilized for the declaration of
dividends;
(4) The plan shall be submitted to the stockholders in a
special meeting duly called for the purpose and
approved by the vote representing at least two-thirds of
the subscribed capital stock;
(5) Appropriate notice of the plan shall be given to the
creditors of the corporation within a reasonable time
prior to the submission of the papers reducing the
company's authorized capital stock to the Commission;
(6) Proper publication of the plan shall be made in at least
one newspaper of general circulation throughout the
Philippines, twice a week for two consecutive weeks;
and
(7) Appropriate notations in the company's audited
financial statements of the utilization of the appraisal
surplus to write off deficits shall be made for at least
five (5) years after the effectivity of the quasi-
reorganization.
Title X APPRAISAL RIGHT
Sec. 81. Instances of appraisal right. (refer to codals)
Appraisal right - refers SH’s right 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 by law.
 The appraisal right of a stockholder is more
important where the corporation is a small
one and there is no ready market for its stock.
 In big corporations whose stocks are actively
traded in exchanges, the dissatisfied
stockholder can easily sell his stocks.
Instances when appraisal right available
(1) Section 81 lists the three (3) instances when the right
may be exercised as provided in Sections 16,37,40,
and 77.
(2) It is also available to a dissenting stockholder in case
the corporation decides to invest its funds in another
corporation or business for any purpose other than its
primary purpose as provided in Section 42.
(3) Under Section 105, any stockholder of a close
corporation may, for any reason, compel said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital
stock.
Amendment of articles of incorporation changing
stockholders' rights.
- Statutes authorizing amendments of articles of
incorporation upon a vote of a prescribed majority of its
stock are as effectively a part of the certificates of stock
as though printed thereon.
- A stockholder will be deemed to consent in advance to
the making of such changes as the statutes permit and
as are designed to enable the corporation to conduct
its business in a more profitable manner.
- Upon acceptance of his stock, he is bound by prior
amendments as well as subsequent amendments,
provided, of course, there is no abuse of amendatory
power.
- Stockholders dissenting from a particular corporate
change in their rights, though bound by such change,
they may withdraw from the corporation by an
appraisal and payment of their stock.
- If the amendment was made in bad faith, the same may
be questioned by dissenting minority stockholders by
resort to the SEC and ultimately, to the courts.
Limitations on the exercise of appraisal right
(1) Any of the instances provided by law for the exercise
of the right by a dissenting stockholder must be present
(Sees. 81, 42.);
(2) The dissenting stockholder must have voted against
the proposed corporate action. (Sec. 82, par. 1.) So,
the right is not available to a stockholder who was
either absent at the meeting where the corporate action
was approved, or was present at such meeting but
abstained from casting his vote;
(3) A written demand on the corporation for payment of his
shares must be made by him within 30 days after the
date the vote was taken (Ibid.);
(4) The price must be based on the fair value of the shares
as of the day prior to the date on which the vote was
taken (Ibid.);
(5) Such fair value must be determined as provided in
Section 82 (Ibid., par. 2.);
(6) Payment of the shares must be made only out of the
unrestricted earnings of the corporation (Ibid.); and
(7) Upon such payment, the stockholder must transfer his
shares to the corporation. (Ibid.)
Sec. 82. How right is exercised.
Procedure for exercise of right:
(1) The dissenting stockholder shall make a written
demand on the corporation within thirty (30) days after
the date on which the vote was taken for payment of
the fair value of his shares.
 The failure of the stockholder to make the
demand within the thirty (30)-day period shall
be deemed a waiver of his appraisal right;
(2) If the proposed corporate action is implemented or
effected, the corporation shall pay to such stockholder,
upon surrender of the corresponding certificate(s) of
stock within ten (10) days after demanding payment for
his shares (Sec. 86.), the fair value thereof; and
(3) Upon payment of the agreed or awarded price, the
stockholder shall transfer his shares to the corporation.
Determination of fair value of shares
(1) Appraisal of stockholder's shares.
- If there is no agreement as to the fair value of the
shares, it shall be determined and appraised as
provided in the second paragraph of Section 82.
- In such case, either the dissenting stockholder or the
corporation is entitled to demand an appraisal of the
former's shares, and to compel such appraisal, if the
other refuses to have it effected.
(2) Valuation date.
- Determined as of the day prior to the date on which the
vote was taken notwithstanding any appreciation or
depreciation in value of the shares in anticipation of
such corporate action.
 This rule avoids controversy on the valuation
date, and prevents speculation on the shares.
 Payment shall be made only if the corporation
has unrestricted retained earnings in its books
to cover the same, (see Sec. 43.)
(3) Underlying theory of valuation
- Fair value – the intrinsic worth of the stock, which is to
be arrived at after an appraisal of all the elements of
value.
- Theory: one of compensating the owner of the stock for
his property right, and, therefore, no method of
valuation should be relied upon exclusively; and since
the theory of appraisal is to compensate the dissenting
stockholder for the value of his stock as it was originally
constituted, the valuation of his shares should be
determined without regard to the effect of the corporate
action.
Sec. 83. Effect of demand and termination of right.
Effect of exercise of right:
(1) All rights accruing to such shares including voting and
dividend rights shall be suspended; and
(2) He shall be entitled to receive payment of the fair value
of his shares as agreed upon between him and the
corporation or as determined by the appraisers chosen
by them.
Payment of shares
(1) If he is not paid the value of his shares within thirty (30)
days after the award, his voting and dividend rights
shall be immediately restored until payment of his
shares. (Sec. 83.)
 Accordingly, even if his rights as stockholder are
suspended after his demand in writing is made, he
cannot be considered as an ordinary creditor of the
corporation.
(2) Upon such payment, all his rights as stockholder are
terminated, not merely suspended, (see Sec. 82, last
sentence.)
 But if before he is paid the proposed corporate action
is abandoned, his rights and status as a stockholder
shall thereupon be permanently restored. (Sec. 84.)
Sec. 84. When right to payment ceases
Extinguishment of right to payment
- A dissenting stockholder who demands payment of his
shares is no longer allowed to withdraw from his
decision unless the corporation consents thereto.
(1) Such stockholder withdraws his demand for payment and the
corporation consents thereto;

(2) The proposed corporate action is abandoned or rescinded

by the corporation;

(3) The proposed corporate action is disapproved by the SEC

where its approval is necessary; or

(4) The SEC determines that such stockholder is not entitled to

appraisal right.

- If any of the above cases arise, the stockholder shall

not be paid the fair value of his shares, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued on his
shares shall be paid to him.

Sec. 85. Who bears costs of appraisal?

The costs and expenses of appraisal shall be borne as follows:

(1) By the corporation

(a) Where the price which the corporation offered to
pay the dissenting stockholder is lower than the
fair value as determined by the appraisers named
by them;
(b) (b) Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified.

(2) By the dissenting stockholder. —

(a) Where the price offered by the corporation is
approximately the same as the fair value
ascertained by the appraisers;
(b) Where the same action is filed by the dissenting
stockholder and his refusal to accept payment is
found by the court to be unjustified.

Sec. 86. Notation on certificate(s); right of transferee

Notation on certificate(s) of shares of dissenting stockholder

- Dissenting SHs must submit to the corporation within

ten (10) days after demanding payment for his shares,
the corresponding certificate(s) of stock for notation
thereon that such shares are dissenting shares.
 With the notation, the secretary of the corporation
will be guided accordingly, for under Section 83 all
rights accruing to such shares including voting and
dividend rights shall be suspended except as
provided in said section and Section 84.

Transfer of dissenting shares, possible in the following:

(1) The transferee shall become a regular stockholder with

the right to receive all dividend distributions which
would have accrued to such shares; and
(2) The right of the transferor as a dissenting stockholder
to be paid the fair value of the shares shall cease. By
transferring his shares, he ceases to be a stockholder.