Mergers Reviewer (Midterm?) Mergers Quiz No. 1 ---------Class 2 ---------Nell v.

Pacific Farms Issue: W/N Pacific Farms can be held liable for the debts of Insular. No. Ruling: General Rule: where one corporation sells or otherwise transfers all of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor Exceptions: o where the purchaser expressly or impliedly agrees to assume such debts o where the transaction amounts to a consolidation or merger of the corporations o where the purchasing corporation is merely a continuation of the selling corporation o where the transaction is entered into fraudulently in order to escape liability for such debts.

o In this case none of the exceptions were present. There was no proof of an express or implied agreement in relation to the assumption of debt. In addition, the price paid for the purchase of the stocks was fair and reasonable. In this case none of the exceptions were present. There was no proof of an express or implied agreement in relation to the assumption of debt. In addition, the price paid for the purchase of the stocks was fair and reasonable. ---------PNB v. Andrada As a rule, a corporation that purchases the assets of another will not be

liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: 1. Where the purchaser expressly or impliedly agrees to assume the debts; 2. Where the transaction amounts to a consolidation or merger of the corporations; 3. Where the purchasing corporation is merely a continuation of the selling corporation and; 4. Where the transaction is fraudulently entered into in order to escape liability for those debts. Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. LOI No. 11 explicitly provided that PNB shall study and submit recommendations on the claims of PASUMILs creditors. Clearly, the corporate separateness between PASUMIL and PNB remained despite respondents insistence to the contrary. Thus, the mere fact that the PNB acquired ownership or management of some assets of the PASUMIL, which had earlier been foreclosed and purchased at the resulting public auction by the DBP, would not make PNB liable for the PASUMIL's contractual debts to AEEC. ---------Mergers and Consolidations; effects Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation. It is a combination by agreement between two or more corporations by which their rights, franchises, and property are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of the original corporations. Merger, on the other hand, is a union whereby one corporation absorbs one or more existing corporations, and the absorbing corporation survives and continues the combined business. The parties to a merger or consolidation are called constituent corporations.

In consolidation, all the constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all constituents, except the surviving corporation, are dissolved. In both cases, however, there is no liquidation of the assets of the dissolved corporations, and the surviving or consolidated corporation acquires all their properties, rights and franchises and their stockholders usually become its stockholders. The surviving or consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of whether the creditors have consented or not to such merger or consolidation. ---------Sale of "substantially all assests" Stiles v. Aluminum Products, Inc. FACTS: Plaintiffs, which were substantial shareholders of the defendant company, filed a claim, under section 73 of the Business Corporation Act, against defendant to recover the reasonable value of 1240 shares of stock of the defendant company. The Circuit Court of Cook County (Illinois) granted defendant's motion to dismiss the complaint. The shareholders appealed. ISSUE: whether the sale in question was one of "substantially all of the assets" of the defendant company, not made in the usual and regular course of its business. Yes. The court held that they were and that the shareholders were entitled to bring their suit. The court reversed the lower court's dismissal, and remanded with directions. RATIO: The mere exclusion from the sale of a second-hand automobile, some shares of stock in a subsidiary building company, accounts receivable, money in bank, and some marketable securities, does not take it out of the operation of the statute governing the sale of "substantially all of the assets" of the company. The hold out from sale of the said properties and assets of the company is a way to prevent the sale from being "substantially all of the assets" of the company, within the meaning of the statute. An effort to circumvent the statute and defeat the rights of a dissenting stockholder under section 73 of the Act.

The sale in question was one of "substantially all of the assets" of the corporation, within the meaning of the statute, and that plaintiffs are entitled to bring their action. ---------Gimbel v. Signal Companies, Inc. 316 A. 2d 599 Doctrine: The oil and gas properties would still constitute less than half the value of Signal's total assets. Thus, from a straight quantative approach, Signal's position that the sale to Burmah does not constitute a sale of "all or substantially all" of Signal's assets. ---------Gonzales v. Sugar Regulatory Administration Juridical persons, whether incorporated or not, whether owned by the government or the private sector, may come to an end at one time or another for a variety of reasons, e.g., the fulfillment or the abandonment of the business purposes for which a corporation was set up. Thus, the Corporation Code provides for termination of corporate life, the dissolution of the corporation, the winding up of its operations, the liquidation of its assets, the payment of its obligations and distribution of any residual assets to its stockholders. The termination of the life of a juridical entity does not by itself imply the diminution or extinction of rights demandable against such juridical entity. Executive Order No. 18, promulgated on 28 May 1986, abolished the Philsucom, created the SRA and authorized the transfer of assets from Philsucom to SRA. Executive Order No. 18 did not provide for universal succession, as it were, of SRA to Philsucom, or more specifically to the assets and liabilities of Philsucom. Under the second paragraph of Section 13 quoted above, the SRA has been authorized to determine which of the assets and records of Philsucom are required for the carrying out of the activities which the SRA is to carry on or undertake. The succession of the SRA to the assets and records of the Philsucom is thus limited in nature; the extent of such succession is left to the discretionary determination of the SRA itself. More importantly, Executive Order No. 18 is silent as to the liabilities of

Philsucom; it does not speak of assumption of such liabilities by the SRA. We must assume that this limited statutory succession was deliberately rather than inadvertently prescribed. Section 13 of Executive Order No. 18 is not to be interpreted as authorizing respondent SRA to disable Philsucom from paying Philsucom's demandable obligations by simply taking over Philsucom's assets and immunizing them from legitimate claims against Philsucom. The right of those who have previously contracted with, or otherwise acquired lawful claims against, Philsucom, to have the assets of Philsucom applied to the satisfaction of those claims, is a substantive right and not merely a procedural remedy. Section 13 cannot be read as permitting the SRA to destroy that substantive right. We think that such an interpretation would result in Section 13 of Executive Order No. 18 colliding with the non impairment of contracts clause of the Constitution insofar as contractual claims are concerned, and with the due process clause insofar as the noncontractual claims are concerned. To avoid such a result, we believe and so hold that should the assets of Philsucom remaining in Philsucom at the time of its abolition not be adequate to pay for all lawful claims against Philsucom, respondent SRA must be held liable for such claims against Philsucom to the extent of the fair value of assets actually taken over by the SRA from Philsucom, if any. ----------Doctrine of piercing the veil of corporate fiction. It is the very essence of incorporation that the acts and conduct of the corporation be carried out in its own corporate name because it has its own personality. The doctrine that a corporation is a legal entity distinct and separate from the members and stockholders who compose it is recognized and respected in all cases which are within reason and the law. When the fiction is urged as a means of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an existing obligation, the circumvention of statutes, the achievement or perfection of a monopoly or generally the perpetration of knavery or crime, the veil with which the law covers and isolates the corporation from the members or stockholders who compose it will be lifted to allow for its consideration merely as an aggregation of individuals.

- The doctrine of piercing the corporate veil is applicable on alter ego cases, where a corporation is merely a farce since it is a mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation. --------Stockholders of F. Guanzon and Sons, Inc. v. Register of Deeds of Manila Doctrine: A corporation is a juridical person distinct from the members composing it. Properties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. While shares of stock constitute personal property they do not represent property of the corporation. The corporation has property of its own which consists chiefly of real estate. It is clear that the act of liquidation made by the stockholders of the F. Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stockholders. Indeed, since the purpose of the liquidation, as well as the distribution of the assets of the corporation, is to transfer their title from the corporation to the stockholders in proportion to their shareholdings, and this is in effect the purpose which they seek to obtain from the Register of Deeds of Manila, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one in the nature of a transfer or conveyance. ---------Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp. Facts: 1. PNOC Shipping and Transport Corporation (PSTC) Luzon Stevedoring Corporation entered into an agreement of Assumption of Obligations. a. Assumes that PSTC shall control the conduct of any litigation pending or which may be filed with respect to claims and annexes. b. Further provides that Luzon Stevedoring shall deliver to PSTC all paper

and records of the claims in the annexes. c. And that Luzon Stevedoring appoints and constitutes PSTC as its attorney in fact to demand and receive any claim out of the countersuits and counterclaims arising from the claims in the annexes. 2. Among the enumerated annexes is Caltex vs. Luzon Stevedoring. a. This case was an appeal from the decision by the CFI directing Luzon to pay Caltex with legal interest 103,658.44 php. 3. Decision of this case above became final and executor 4. Judgment was not satisfied because of the prior foreclosure of LuzonStevedoring properties. 5. Caltex learned of the agreement between PSTC and Luzon Stevedoring. 6. Caltex sent successive demands asking PSTC for the satisfaction of the judgment rendered by CFI. 7. PSTC informed Caltex that it was not a party and tus PSTC would not pay judgment debt. PSTC advised Caltex to demand satisfaction of judgment directly from Luzon Stevedoring. 8. Caltex filed a complaint for sum of money against PSTC. 9. TC: Ordered defendant to pay plaintiff. CA: Caltex has no personality to sue PSTC. Issue: Whether PSTC is bound by the agreement when it assumed all the obligations of Luzon Stevedoring Held: Caltex may Recover from PSTC under the terms of the agreement. o Caltex may recover the judgment from PSTC NOT BECAUSE of a stipulation in Caltexs favor but because the agreement provides that PSTC shall assume all the obligations of Luzon Stevedoring o In this case Luzon Stevedoring transferred and assigned to PSTC all of Luzon Stevedorings business, properties and assets pertaining to its tanker and bulk business together with all the obligations relating to the said business,

properties and assets. o Even without the agreement, PSTC is still liable to Caltex: Disposition of Assets should not prejudice creditors. Though allowed by the corpo Code under Section 40, there arelimitations. The only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignors liabilities unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. ---------RATIO: Section 133 of the Corporation Code prohibits, not merely absence of the prescribed license, but it also bars a foreign corporation "doing business" in the Philippines without such license access to our courts. Doing Business The invoices and delivery receipts covering the period of (sic) from January 17, 1989 to August 16, 1989 cannot be treated to a mean singular and isolated business transaction that is temporary in character. Note that there were 17 orders and deliveries (only sixteen per our count) over a fourmonth period. The appellee (private respondent) made separate orders at various dates. The transactions did not consist of separate deliveries for one single order. Incapacity to maintain suit By securing a license, the foreign entity would be giving assurance that it will abide by the decisions of our courts, even if adverse to it. Remedy The subsequent acquisition of the license will cure the lack of capacity at the time of the execution of the contract. The requirement of a license is not meant to put foreign corporations at a disadvantage. Rather, the doctrine of lack of capacity to sue is based on considerations of sound public policy.

---------Bud Antle case (important) Liabilities General Rule: corporation that purchases or otherwise acquires the assets of a second corporation does not assume the debts and liabilities of the second corporation Exceptions: (1) the buyer expressly or impliedly agreed to assume such debts; (2) the transaction amounts to a de facto merger of the buyer and seller; (3) the buying corporation is a "mere continuation" of the selling corporation; (4) the transaction is entered into fraudulently in order to escape liability for such debts. (5) absence of adequate consideration for the sale or transfer. All four of these exceptions require a transfer of assets in order to hold the acquiring corporation liable.

Elements of a de facto merger: (1) There is continuation of the enterprise of the seller corporation, so that there is a continuity of management, personnel, physical location, assets, and general business operations. (2) There is a continuity of shareholders which results from the purchasing corporation paying for the acquired assets with shares of its own stock, this stock ultimately coming to be held by the shareholders of the seller corporation so that they become a constituent part of the purchasing corporation. (3) The seller corporation ceases its ordinary business operations, liquidates, and dissolves as soon as legally and practically possible; (4) The purchasing corporation assumes those liabilities and obligations of the seller ordinarily necessary for the uninterrupted continuation of normal business operations of the seller corporation.

It is undisputed that one of these four elements was not present in this case: a continuity of shareholders resulting from the acquiring corporation paying for the acquired assets with shares of its own stock.

A consolidation or merger always involves a transfer of the assets and business of one corporation to another in exchange for its securities. At the very least, there must be some sort of continuation of the stockholders' ownership interests. corporate liability adheres not to the nature of the business enterprise but to the corporate entity itself. The corporate entity and its shareholders ultimately are responsible for the disposition of the corporation's assets and the payment of its debts. Even if the corporation sells to another corporation its entire business operation and all its assets, in exchange for some consideration other than stock, the two corporate entities remain distinct and intact. The corporate entities have not merged, and each is liable for its own debts, absent fraud or one of the other exceptions listed above. Where the assets are sold for cash [rather than stock], no basic fundamental change occurs, in the relationship of the stockholders to their respective corporations, and absent continuity of shareholder interest, the two corporations are strangers, both before and after the sale. In the case at bar, the evidence was undisputed that no transfer of stock took place. Therefore, there could not have been a de facto merger to make Eastern liable for B & B's debts.

"Mere Continuation" of old corporation: none.

'Mere continuation' applies when the purchasing corporation is merely a continuation or reincarnation of the selling corporation. the purchasing corporation is merely a "new hat" for the seller, with the same or similar management and ownership. The test is whether there is a continuation of the corporate entity of the seller--not whether there is a continuation of the seller's business operation. 'Continuation' is a common identity of the officers, directors and stockholders in the selling and purchasing corporation. There was no such continuation of management or ownership in the case at bar. None of B & B's officers, directors, or stockholders ever became an officer, director, or stockholder of Eastern. Although some of B & B's officers may have been employed by Eastern, mere employment is insufficient to warrant application of the continuation exception. Therefore,

Eastern was not, as a matter of law, a continuation of B & B, and the district court should have directed a verdict in Eastern's favor on this issue. ---------Issue: W/N the amount paid by Quimzon to the Philippine Engineering Corporation should be considered as part of corporation expenses, thus must not be chargeable to him Held: A full and complete accounting of the expenses must be rendered first. The court still finds it necessary to remand the case to the court of origin for a complete accounting by Quimzon of his management of the business from its organization in 1929 to December 17, 1935. The CFI and the CA are wrong in taking the view that the cost of the rice mill was an obligation of the original partnership Alaminos Rice Mill, with which ACMA has nothing to do. It is true that there is no legal identity between ACMA and the preexisting partnership, and as a general rule, the corporation is not liable on or for the contracts or debts of the preexisting partnership unless it has expressly or impliedly and on sufficient consideration adopted or assumed the same. But "it has been held in many cases that, where a corporation has been formed by the members of a partnership subsequent to the incurring of debts, the former partners being the only members of the corporation, and the assets of the partnership have been transferred to the corporation for the continuance of the business, in exchange for stock and without other consideration, the corporation thereby impliedly assumes the partnership debts and is prima facie liable therefor, since the legal entity of the corporation and the want of identify as between the corporation and the partners may be disregarded and 'the members of the partnership may be said simply put on a new coat. This doctrine of law is applicable in this case. - Quimzon is entitled to be reimbursed all the sums he has paid to the Philippine Engineering Corporation for the purchase price of the rice mill which was transferred by the partnership to the plaintiff corporation, but he is liable to account to ACMA for all the receipts and expenses of the partnership. Without such accounting, full justice cannot be done to both parties.

---------Detective & Protective Bureau, Inc. v. United Employees Welfare Association The court below found that the Defendant corporation is the same as the former Respondent corporation; it therefore held it to have assumed the obligations and liabilities of the former. No fact or circumstance is given on this appeal why this finding of fact by the court a quo is incorrect. On the contrary, it may be added that as the former corporation had not filed insolvency proceedings, its defense of bankruptcy and insolvency cannot be sustained. ---------Class 3 ---------A consolidation is the union of two or more existing entities to form a new entity called the consolidated corporation. A merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation that survives and continues the combined business. The merger, however, does not become effective upon the mere agreement of the constituent corporations. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them. For a valid merger or consolidation, the approval by the Securities and Exchange Commission (SEC) of the articles of merger or consolidation is required. These articles must likewise be duly approved by a majority of the respective stockholders of the constituent corporations. -----------Schidler case Section 496A.70 provides in part that if a class of stock is entitled to vote on a merger, "the plan of merger shall be approved upon receiving the

affirmative vote of the holders of at least two-thirds of the outstanding shares of each class of shares entitled to vote as a class thereon and of the total outstanding shares." It then provides: Any class of shares of any such corporation shall be entitled to vote as a class if the plan of merger or consolidation, as the case may be, contains any provision which, if contained in a proposed amendment to articles of incorporation, would entitle such class of shares to vote as a class. --------A corporation that purchases the assets of another will not be liable for the debts of the selling corporation, provided the former acted in good faith and paid adequate consideration for such assets, except when any of the following circumstances is present: 1. where the purchaser expressly or impliedly agrees to assume the debts, 2. where the transaction amounts to a consolidation or merger of the corporations, 3. where the purchasing corporation is merely a continuation of the selling corporation, and 4. where the selling corporation fraudulently enters into the transaction to escape liability for those debts. ---------Beerly case In a merger of national or state banks into a national bank, a dissenting shareholder who gives the proper notice is entitled to receive the value of his shares. 12 U.S.C.S. 215a(b). Value is determined by a committee of three appraisers of which the dissenters select one, the bank resulting from the merger another, and the two party-designated appraisers the third. 12 U.S.C.S. 215a(c). If any dissenter is dissatisfied with the appraisers' valuation of his shares, or if for some reason one of the appraisers is not appointed, or if the appraisers fail to make an appraisal, then the U.S. Treasury Department's Comptroller of Currency shall on request cause an

appraisal or reappraisal, if the dissenter was dissatisfied with the appraisers' appraisal to be made which shall be final and binding on all parties. 12 U.S.C.S. 215a(c) & (d). --------The fair value of shares is to be determined on the basis of what a reasonable and objective observer would consider to be a price that reflects the intrinsic value of the right of stock ownership, without regard to any subjective mental processes of the dissenting shareholders or any special benefits to be derived by the acquiring corporation. 13-A M.R.S.A. 909(1), says that the value of the dissenters' shares shall be valued without relation to the proposed merger. We cannot read any other way the statutory provision that the fair value of the shares shall be determined as of the day before the merger vote was taken and furthermore shall "exclude any appreciation or depreciation of shares in anticipation of such corporate action." The dissenting shareholders are entitled to receive the full fair value of their shares, but that value must be determined independently of the merger transaction. The appraisal proceeding is not at all concerned with the losses to the particular dissenting shareholders or with the benefits derived by the particular acquiring corporation in the merger, except as those losses and benefits would be reflected in the price that would be bargained out in a completely free market between any willing buyer and any willing seller in absence of the merger. --------Ordinarily, in the merger of two or more existing corporations, one of the combining corporations survives and continues the combined business, while the rest are dissolved and all their rights, properties and liabilities are acquired by the surviving corporation. Although there is a dissolution of the absorbed corporations, there is no winding up of their affairs or liquidation of their assets, because the surviving corporation automatically acquires all their rights, privileges and powers, as well as their liabilities. The merger, however, does not become effective upon the mere agreement of the constituent corporations. The procedure to be followed is

prescribed under the Corporation Code. Section 79 of said Code requires the approval by the Securities and Exchange Commission (SEC) of the articles of merger which, in turn, must have been duly approved by a majority of the respective stockholders of the constituent corporations. The same provision further states that the merger shall be effective only upon the issuance by the SEC of a ceUrtificate of merger. The effectivity date of the merger is crucial for determining when the merged or absorbed corporation ceases to exist; and when its rights, privileges, properties as well as liabilities pass on to the surviving corporation. --------Babst v. Court of Appeals Whether the BPI can institute the complaint for a sum of money. Yes. There was a valid merger between BPI and CBTC. 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. Hence, BPI has a right to institute the present case. Whether BPI, the surviving corporation in a merger with CBTC, consented to the assumption by DBP of the obligations of ELISCON. Yes. Take note: if there is consent, then BPI does not have a cause of action to file a suit against ELSISCON. Due to the failure of BPI to register its objection tio the take-over by DBP of ELISCON's assets, at the creditors' meeting and thereafter, it is deemed to have consented to the substitution of DBP for ELISCON as debtor. The authority granted by BPI to its account officer to attend the creditors' meeting was an authority to represent the bank, such that when he failed to object to the substitution of debtors, he did so on behalf of and for the bank. Even granting arguendo that the said account officer was not so empowered, BPI could have subsequently registered its objection to the substitution, especially after it had already learned that DBP had taken over the assets and assumed the liabilities of ELISCON. Its failure to do so can only mean an acquiescence in the assumption by DBP of ELISCON's obligations.

----------CESAR REYES, ET ALS. vs. MAX BLOUSE, ET ALS. DE FACTO MERGER -- Transaction that is not declared as a merger but effects acquisition of one firm's assets and/or voting stock by another firm. Courts may consider it as a statutory merger for the purposes of the combined firm's appraisal, shareholder voting rights, and other such matters. RATIO: The purpose of the resolution is not to dissolve the Laguna Tayabas Bus Co. but merely to transfer its assets to a new corporation in exchange for its corporation stock. The transaction called for therein cannot be considered, strickly speaking, as a merger or consolidation of the two corporations because, under said authorities, a merger implies necessarily the termination or cessation of the merged corporations and not merely a merger of their properties and assets. This situation does not here obtain. The two corporations will not lose their corporate existence or personality, or at least the Laguna Tayabas Bus Co., but will continue to exist even after the consolidation. In other words, what is intended by the resolution is merely a consolidation of properties and assets, to be managed and operated by a new corporation, and not a merger of the corporations themselves. ---------Paper Industries Corp. of the Philippines (PICOP) v. CA, CIR and CTA Doctrine: Before the approval of the merger agreement by the BOI and before the effectivity of the agreement, the acquiring corporation cannot claim tax deductions based on the losses of the acquired corporation because at that time, the corporations are still separate entities. ---------END Q1 ----------

Sent from my iPad