Merger & Consolidation

A Report Summary

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Submitted by:

Aguilar, Kates Jastin | Aguirre, Edrese | Andres, Andrea

|
Ang Tong, Engel | Bagayao, Ivan | Bernardes, Marianne
|
Bucu, Lorelei Joselle | Burgos, Dabuimar | 3G

Submitted to: Atty. Charlene Tapic

2nd Semester, S.Y. 2016-2017

Merger & Consolidation | 3G 1

 TABLE OF CONTENTS
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I. Merger and Consolidation

A. Corporate Code Provisions………………………………

B. Concept ……………………………………………………
C. Distinguished from:
(1) Transfer of Property
(2) Sale of Assets
(3) Combination
(4) Reorganization
(5) Quasi-Reorganization
(6) De Facto Merger and Consolidation
(7) Spin-offs
(8) Merger or Consolidation in Religious Corporations
D. How Transfers or Consolidations Effected
E. Effects of Merger and Consolidation……………
F. Effect on Employees……………………………………..
G. Procedure …………………

II. Philippine Competition Act…………………….....

III. Report on Division of Work………………………………

Merger & Consolidation | 3G 0

 I. MERGER AND CONSOLIDATION

A. Corporate Code Provisions

Section 76. Plan or merger of consolidation. – Two 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:

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, with respect to the consolidated corporation in case of consolidation, all
the statements required to be set forth in the articles of incorporation for corporations organized
under this Code; and

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

Section 77. Stockholder’s or member’s approval. – Upon approval by 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, at least two (2) weeks prior to the date of the meeting, either
personally or by registered mail. Said notice shall state the purpose of the meeting and shall 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 two-thirds (2/3) of the members in the case of non-stock corporations shall
be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may
exercise his appraisal right in accordance with the Code: Provided, That if after the approval by the
stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be
extinguished.

Any amendment to the plan of merger or consolidation may be made, provided such amendment is
approved by 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.

Section 78. 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

Merger & Consolidation | 3G 1

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:

1. The plan of the merger or the plan of consolidation;

2. As to stock corporations, the number of shares outstanding, or in the case of non-stock

corporations, the number of members; and

3. As to each corporation, the number of shares or members voting for and against such plan,
respectively.

Section 79. Effectivity of merger or consolidation. – The articles of merger or of consolidation, signed
and certified as herein above required, shall be submitted to the Securities and Exchange Commission in
quadruplicate for its approval: Provided, That in the case of merger or consolidation of banks or banking
institutions, building and 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 not inconsistent with the
provisions of this Code and existing laws, it shall issue a certificate of merger or of consolidation, at which
time the merger or consolidation shall be effective.

If, upon investigation, the Securities and Exchange 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. (n)

Section 80. Effects of merger or consolidation. – The merger or consolidation shall have the following
effects:

1. 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;

2. The separate existence of the constituent corporations shall cease, except that of the surviving or
the consolidated corporation;

3. 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;

4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including subscriptions to shares and other
choses in action, and all and every other interest of, or 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

5. The surviving or consolidated corporation shall be responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or
consolidated corporation had itself incurred such liabilities or obligations; and any pending claim,
action or proceeding brought by or against any of such constituent corporations may be prosecuted by
or against the surviving or consolidated corporation. The rights of creditors or liens upon the property
of any of such constituent corporations shall not be impaired by such merger or consolidation.

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B. Concept of Merger and Consolidation
1. Merger vs. Consolidation1

Merger
One where a corporation absorbs another
corporation and remains in existence while the
other is dissolved.
Signifies absorption of one corporation by another
which retains its name and corporate identity with
added capital, franchises and powers of a merged
corporation.
Consolidation
One where a new corporation is created, and
consolidating corporations are extinguished.
Signifies a union that necessarily results in the
creation of a new corporation and the termination
of the constituent ones

2. Previous Laws

 Before the enactment of the Corporation Code, there were no laws which expressly permitted
merger and consolidation of business corporations except of railroads and of banks.2

 Authority to merge or consolidate can be derived from Section 28 (now Section 40) of the former
Corporation Law which provides that “a corporation may sell, exchange, lease or otherwise
dispose of all or substantially all of its property and assets”. The words “or otherwise dispose of”
according to the Supreme Court is very broad and in a sense covers mergers and
consolidations.3

3. Can a partnership merge or consolidate with a corporation?

 The present Corporation Code expressly allows merger or consolidation of corporations. Only
stock and non-stock corporations can merge or consolidate into a single corporation but not
partnerships.4

 A partnership can enter into a combination with a corporation but it cannot merge or consolidate
with a corporation. Section 76 distinctively requires the presence of two or more corporations. 5
However, a combination is allowed in a sense that a partnership may transfer all its assets and
liabilities to the Corporation which will issue its shares of stock to be distributed to the partners in
proportions to their respective interest in the partnership, provided such partnership shall be
dissolved in accordance with the Civil Code.6

4. SEC Approval Required

 Merger and consolidation does not become effective by mere agreement of constituent
corporations. Since it involves fundamental changes in the corporation and in the rights of
stockholders and creditors, there must be an express provision of law authorizing them.
Approval of the SEC is required for validity and it shall be effective upon the issuance by SEC
of a certificate of merger or consolidation.7

1
Aquino
2
De Leon
3
De Leon
4
De Leon
5
Aquino
6
De Leon
7
Aquino

Merger & Consolidation | 3G 3

  Since a merger or consolidation affects the juridical personalities of the participating
corporations, neither merger nor consolidation is deemed to be within the inherent powers of
corporations, and the power to merge or consolidate must be expressly granted by law.8

5. Triangular Merger

 One of mergers that is allowed in other jurisdictions is “triangular merger or phantom

merger or reverse phantom merger”.

 It is a process where a purchasing corporation creates a subsidiary corporation and transfer

to the subsidiary shares in the parent company which will be used for the share exchange
that will be provided for in the merger plan. The subsidiary is the “phantom” corporation
because it may exist only long enough to consummate the merger.

 The actual merger is not between the acquiring corporation and the acquired/target
corporation but rather between the newly formed subsidiary and the target corporation.9

6. Rationale

 It is usually made for economic reasons such as:

(a) Economies of Scale - A combination of two production units enlarges the production
output over which the fixed cost of production is spread and thereby reducing the
average fixed cost per unit of the output

(b) Economies of Scope – The costs and even management talent are spread across a
broader range of related activities

(c) Cost Reduction - Costs are reduced through vertical integration, i.e. there is a merger
with a supplier or customer10

7. Salient Advantages of Merger and Consolidation11

 The process of merger or consolidation, unlike the regular transfer and acquisition processes,
are able to achieve a continuous flow of the juridical personalities and business enterprises of
the constituent corporations, and under the clear rules under Section 80, there is no legal
break in such juridical personalities and business enterprises as they end up combined in the

8
Villanueva
9
Aquino
10
Aquino
11
Villanueva

Merger & Consolidation | 3G 4

 surviving or consolidated corporation. In essence, the surviving or consolidated corporation
cannot even be treated as the transferee of the constituent corporation, and that for all intents
and purposes, the surviving or consolidated corporation is every bit exactly the same,
although combined, entity as each of the constituent corporations.

 The salient feature therefore allows corporate planners to achieve certain ends not available
to other forms of transfers and acquisitions. An example would be contractual or statutory
prohibitions on transfers, which do not expressly cover mergers or consolidations, would
allow the surviving or consolidated corporation to automatically assume the same role as the
constituent corporation covered by such prohibition, and the merger or consolidation cannot
be deemed a violation of the non-transfer clause.

 Transfers of assets or business enterprise or even the transfer of controlling shareholdings

are generally subject to taxable gains tax.

C. Distinguished from: (1) Transfer of Property (2) Sale of Assets (3)

Combination (4) Reorganization (5) Quasi-Reorganization (6) De Facto
Merger and Consolidation (7) Spin-offs (8) Merger or Consolidation in
Religious Corporations
1. Transfer of Property

 Unless there is an evident intention, a mere purchase or acquisition of another corporation’s

assets/property does not constitute merger or consolidation even though it is advertised as
such by the parties or there is an assumption of liability on the part of the purchasing
corporation especially where the selling corporation still retains its franchise.12

2. Sale of assets13

Merger & Consolidation Sale of Assets

1. A sale of assets is always involved
2. there is automatic assumption by the
surviving or consolidated corporation of
the liabilities of the constituent
corporations
3. There is a continuance of the enterprise
and of the stockholders therein though in
the altered form
4. The title to the assets of the constituent
corporations is by operation of law
transferred to the new corporation
5. The constituent corporations are
automatically dissolved
1. Merger & Consolidation is not always
involved
2. the purchasing corporation is not
generally liable for the debts and liabilities
of the selling corporation
3. The selling corporation ordinarily
contemplates a liquidation of the
enterprise
4. The transfer of title is by virtue of contract
6. The selling corporation is not dissolved by
the mere transfer of all its property

 Advantages of stock acquisition over asset acquisition

Reasons why sale of stock (merger or consolidation) is preferable than sale of assets

(a) Where assets of corporation to be acquired, not assignable without consent.

12
Aquino
13
De Leon

Merger & Consolidation | 3G 5

 o Sometimes the corporation that is to be acquired possesses valuable franchises,
leases, or contracts which are not assignable without consent.
o In such case, a statutory merger or consolidation does not necessitate or it
eliminated the need for a consent unlike in an asset acquisition.
o Moreover, if assets are to be acquired, the task of attending to all of the details
involved in the transfer, such as the preparation and execution of deeds, would
be simplified if the acquisition were by a statutory merger or consolidation.
o State bulk sales law either would be of no concern or would not apply to an
acquisition by statutory merger or consolidation.

(b) Where restrictions upon a merger or consolidation or transfer of assets exist

o Existing loan indentures or other agreements contain restrictions upon a merger
or consolidation or transfer of assets
o If one or more mortgages are involved, afteracquired-property clauses
o Undesirable leases or contracts including burdensome patent-license
agreements
o Labor union problems like in bringing a union or a different union into the picture
o Problems of reconciling and meshing deferred compensation plans of the
corporations (including pension, profit-sharing, and stock option as well as
individual employment contracts and bonus policies)
o The corporate charter of the corporation to be acquired may itself be important to
preserve, as in the case of a banking corporation; or the preservation of the
organization and its customers or even of an existing stock-exchange listing may
make it desirable that the corporation to be acquired be technically the acquiring
or surviving corporation or that its stock be acquired.

(c) Where asset acquisition will give rise to greater tax liability
i. An asset acquisition, unlike a stock acquisition, will give rise not only to State or
local excise taxes in connection with the transition but will also involve some
duplication of State or local franchise, business, and property taxes, including
sales, use, transfer, or license taxes, and fees applicable to real estate, personal
property, motor vehicles and the like.
ii. Sometimes some of these extra taxes can be avoided entirely when the transfer
is effected by operation of law through statutory merger or consolidation.

3. Combinations

 It is used to designate is an alliance or confederation or sale or other transaction between

two or more corporations, by virtue of which will not necessarily result in the loss of separate
existence of the corporations. This may include:

(a) Execution of a voting trust agreement;

(b) Formation of a holding company; or
(c) Transfer of the assets from one corporation to another.

 In the broad sense, combinations include merger and consolidation.14

 Common forms of corporate combinations:15

(d) Sale of assets

i. Union of Corporations may be effected by one corporation selling all or
substantially all of its assets to another

14
Aquino
15
De Leon

Merger & Consolidation | 3G 6

 ii. Usually made in the course of the dissolution of the vendor corporation
iii. In a strict legal sense, mere sale of all its property and distribution of its assets
do not work a dissolution of the corporation
iv. Generally, upon transfer of all of its assets, the transferee is not liable for the
debts and liabilities of the transferor
v. Except, if the transferee assumed the obligations and liabilities of the olf
Corporation which is succeeded
vi. In a sale of assets, the acquiring corporation – barring fraud of creditors – need
assume only those obligations set forth in the agreement
vii. Sale of the assets followed by dissolution has the effect of merger

(e) Lease of assets

i. A corporation without being dissolved, leases its property to another corporation
for which the lessor merely receives rental paid by the lessee
ii. Lease is similar to sale of assets except that under a lease, nothing passes
except the right to use the property leased

(f) Sale of Stock

i. The purpose of the holding company is to acquire a sufficient amount of the
stock of another corporation for the purpose of acquiring control
ii. The acquiring corporation is called the parent corporation
iii. The corporation whose stocks were acquired are called the subsidiary
corporation
iv. A holding company has been defined as "a super corporation which owns or at
least controls such a dominant interest in one or more other corporations that it is
enabled to dictate their policies through voting power, or which is in position to
control or materially to influence the management of one or more companies by
virtue, in part at least, of its ownership of securities in the other company or
companies."
o A subsidiary corporation may be created by organizing a new corporation out of
the operating division or divisions of an existing corporation which shall continue
its existence after the spin off and act as a holding company of the new
corporation to which shall be transferred the net assets of the operating divisions
in exchange for the shares of stock of the new corporation.
o This method of corporate combination is effected when the corporation to be
acquired refuses to approve a sale of assets, a merger, or a consolidation.

In the three cases, the legal identity of each corporation is retained.

(g) Merger
(h) Consolidation

4. Reorganization

 Generally speaking, reorganization of a corporation is a means whereby those variously

interested financially in a distressed business seek, through continuance of that business as
a going concern, to work out of the difficulty for themselves and thus gain more than they
could by a sale of the assets or of the business to others .16

16
De Leon

Merger & Consolidation | 3G 7

  Merger and consolidation are included in the different forms of corporate reorganizations that
are resorted to by corporations in weak financial conditions. Other developments in
corporation considered included in broad concept of reorganization are as follows:17
(a) Acquisition by one corporation of stock of another corporation, solely in exchange for its
voting stock or the voting stock of its parent, if the acquiring corporation has control of the
acquired corporation immediately after the acquisition
(b) Acquisition by one corporation of substantially all of the assets of another in exchange for
the voting stock of the acquiring corporation or its parent
(c) Transfer by a corporation of all or part of its assets to another corporation if immediately
after the transfer, the transferor or one or more of its shareholders or any combination
thereof is in control of the corporation to which the assets are transferred
(d) Recapitalization
(e) Mere change in identity, form or place of organization however effected, including
reincorporation in another State
(f) Transfer by a corporation of all or part of its assets to another corporation in a bankruptcy
or insolvency case or similar proceeding

Reorganization distinguished from Merger and Consolidation

 It is not ordinarily the combination of several existing corporations, but is simply the carrying out
by proper agreements and legal proceedings of a business plan or scheme for winding up the
affairs of, or foreclosing a mortgage or mortgages upon, the property of insolvent corporations,
and the organization of a new corporation to take over the property and business of the
distressed corporation

Reorganization distinguished from sale

 It differs fundamentally from a sale where the vendor corporation parts with its interest for cash
and receives nothing more.
 The mere acquisition by one corporation of the capital stock of two others, without impairment of
the corporate existence or function of any of the three corporations, is not a reorganization.
 The mere selling of authorized but unissued stock is not, in any sense, a reorganization.
 A "sale" is the transfer of property from one person to another for a consideration of value.
 As a "mere purchase by one corporation of the properties of another corporation,"
 It is not included in the term "reorganization," because the term "imports a continuity of interest
on the part of the transferor or its stockholders in the properties transferred

Reorganization distinguished from reincorporation

 Reorganization, means the creation of a new company to take over the assets of a new
corporation
 Reincorporation, more closely resembles the amendment of a charter, and is usually resorted
either to correct errors in the original incorporation or to obtain the benefits of a statute enacted
after the original incorporation or to extend the corporate life
 Both involve the creation of a new corporation in place of another corporation which ceases to
exist

Reorganization distinguished from bankruptcy

 A "corporate reorganization" is not a bankruptcy proceeding
 It is a special proceeding which has for its object the rehabilitation of a debtor-corporation.
 It differs from a "bankruptcy" in that it contemplates conservation of the corporation and continuity
of its business and not a liquidation of its assets

5. Quasi-Reorganization

17
Aquino

Merger & Consolidation | 3G 8

  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.18

 The accounting procedure or principle whereby: (1) Reappraisal surplus is used to wipe out
the deficit; or (2) The articles of incorporation is amended reducing the capital and the
reduction of the capital stock is used to wipe out the deficit.

 Under SEC Rules, only companies that are financially in distress may be allowed to undergo
quasi-reorganization.19

6. De Facto Merger and Consolidation

 Means a reorganization involving at least two corporations which has the effect of merger
and consolidation and which entitles the dissenting stockholders to an appraisal right. 20

 Bank of Commerce vs. Radio Philippines Network Inc.: When all or substantially all of the
properties of another corporation is acquired by exchange of stock, the acquiring corporation
would acquire the enterprise of the target corporation. The target corporation would then be
left with the shares of stock as its remaining asset. 21

 De Facto Merger:22
o Can be pursued by one corporation acquiring all or substantially all of the properties of
another corporation in exchange of shares of stock of the acquiring corporation.
o The acquiring corporation would end up with the business enterprise of the target
corporation; whereas the target corporation would end up with basically its only
remaining assets being the shares of stock of the acquiring corporation.
o The separate juridical personalities of the constituent corporations would remain, and
consequently, the succession provisions of S80 of the CC would not come into play.
o However, the jurisprudential rules on the succession of liabilities under business
enterprise transfers would apply, such that the acquiring corporation would then be liable
for the liabilities pertaining to the business enterprise it has acquired.
o In order to temper the effects of the effect of the succession issues on liabilities, a
modification may be introduced whereby the acquiring corporation first organizes a
subsidiary, which would be the medium that will acquire the business enterprise of the
target corporation and therefore the liabilities pertaining thereto would be directly
enforceable against the subsidiary and not against the acquiring mother corporation.
o In these cases, liability was imposed under the rubric of piercing the veil of corporate
fiction.

 Statutory Provisions Applicable to De Facto Mergers:

o For the acquiring corporation, a direct de facto merger would not necessarily involve the
provisions of S42 on investment of funds for non0primary purpose, especially when the
business enterprise acquired is in line with the primary purpose of the acquiring
corporation, but more so since the shares of stock used as consideration for the
acquisition do not really involve the use of corporate funds, but actually involve capital
account transactions. Consequently, a de facto merger may be achieved by the BOD of
the acquiring corporation without having to trigger the 2/3’s ratificatory vote of the
stockholders or members.

18
De Leon
19
Aquino
20
Aquino
21
Aquino
22
Villanueva

Merger & Consolidation | 3G 9

 o For the target corporation, the sale or disposition of all or substantially all of the assets
would trigger application of the provisions of S40 of the CC, and consequently, would
require the 2/3ratificatory vote of the outstanding capital stock or membership, as the
case may be; but may likewise trigger the exercise of the appraisal rights of dissenting
stockholders.
o If eventually, the target corporation would dissolve itself in order to effect distribution of
the shares consideration coming from the acquiring corporation, there might not be a
need for the exercise of the appraisal rights by the dissenting stockholders. However, it is
also possible to avoid the triggering of the appraisal rights by structuring the de facto
merger where the target corporation first spin-off of the assets to a wholly-owned
subsidiary and it is the subsidiary that would eventually transfer the assets to the
acquiring corporation. Since the target corporation would be the only stockholder of the
subsidiary, it will not dissent to the transfer of assets and would not thereby trigger the
appraisal rights issue.

7. Spin-offs

 Exists when a parent corporation organizes a subsidiary, to which the parent corporation
transfers parts of its assets to a new corporation and stock of transferee is distributed to
shareholders of transferor without surrender by them of stock in transferor. It is also
described as one where part of assets of corporation is transferred to a new corporation and
stock of transferee is distributed to shareholders of transferor without surrender by them of
stock in the transferor.

 Has the opposite effect of merger or consolidation, whereby a department, division or

portions of the corporate business enterprise is sold-off or assigned into a new corporation
that will arise by the process which may constitute it into a subsidiary of the original
corporation.

 Are NOT regulated specifically under the code. The nearest provision by which spin-offs may
be governed would be S40, involving disposition of property or assets whereby the
corporation would be rendered incapable of continuing the business.

8. Merger or Consolidation in Religious Corporations

 Merger is possible and allowed. This may involve a religious society and a corporation sole.
 For practical reasons, the merged corporations MUST belong to the same religious
denomination, sect, or church.23

D. How Transfers or Consolidations Effected24

 General Rule: Where a corporation sells or otherwise transfers its business assets to another
corporation, the purchaser does not thereby become liable for the liabilities of the transferring
corporation, except:

1. Where the purchaser expressly or impliedly agrees to assume such debts

2. Where the purchaser acted in collusion with the transferring corporation
3. Where the purchasing corporation merely continues the business of the transferring
corporation
4. Where the transaction amounts to consolidation or merger of the corporation

 Three Ways by which Transfers or Consolidations May be Effected

23
Aquino
24
Villanueva

Merger & Consolidation | 3G 10

 1. Assets-Only Level – the transferee shall not be liable for the liabilities of the transferor, except
where the transferee expressly or impliedly agrees to assume such debts or when it is effected in
fraud of creditors

In the assets-only acquisitions and transfers, the purchaser is only interested in the raw materials of
the business, perhaps to be used to establish its own business enterprise or to be used for its on-
going business enterprise. In such an acquisition, the purchaser is not interested in the juridical entity
of the corporate owner of the assets, nor of the goodwill and other factors relating to the business
enterprise of the transferring corporation. These transfers are governed by the Law on Sales and fall
within the general principles of the Law on Contracts.

BASIS OF NON-LIABILITY: NO CONTRACTUAL PRIVITY EXISTING BETWEEN THE

TRANSFEREE AND THE TRANSFEROR’s CREDITORS

If the sale constitutes “bulk sales”, the sale would be void if the requirement under the Bulk Sales Law
has not been complied with even if the purchaser is a purchaser in good faith.

When another corporation takes over the assets of another corporation which is dissolved, the
succeeding corporation is liable for the claims against the dissolved corporation to the extent of the
fair value of the assets assumed.

2. Business-Enterprise Level – where the transferee essentially continues the business enterprise
of the transferor, the transferee shall be liable for the liabilities of the transferor arising from the
business enterprise transferred. The purchaser’s primary interest is to obtain the earning capability of
the venture. However, the purchaser in such a transaction is not interested in obtaining the juridical
entity that owns the business enterprise, and therefore purchases directly the business from the
corporate owner.

A business enterprise has a separate accountability of its own although not in the concept of being a
juridical person. Properly speaking, a business enterprise comprises more than just the properties of
the business, but includes a concern that covers the employee, the goodwill, list of clientele and
suppliers, etc.

Provisions under the Corporation Code which recognize this Level

1. Section 23
2. Section 40
3. Section 44

Free and Harmless Clause - In business enterprise level, it is possible that the transferor and the
transferee may enter into a contractual stipulation stating that either the transferee shall not be liable
for any or all debts arising from the business which were contracted or accrued prior to the time of
transfer, or that the transferor shall hold the transferee free and harmless against all claims which
accrued prior to the transfer. This stipulation, however, is valid and binding only between the
transferor and transferee but not against corporate creditors which can go after the transferee.

3. Equity Level – the transferee is not liable for the debts and liabilities of the transferor except
where the transferee expressly or impliedly agrees to assume such debts

E. Effects of Merger and Consolidation

1. Summary of Effects

 As provided by Section 80, the effects may be summarized as follows:

Merger & Consolidation | 3G 11

 1. The constituent corporation shall become a single corporation;
2. The separate existence of the constituent corporations shall cease, except that of the
surviving corporation (in merger) or the consolidated corporation (in consolidation);
3. The surviving or the consolidated corporation shall possess all the rights, privilege,
immunities, and powers and shall be subject to all duties and liabilities of a corporation;
4. The surviving or the consolidated corporation shall possess all the rights, privileges,
immunities and franchises of each constituent and properties shall be deemed
transferred to the surviving of the consolidated corporation; and
5. All liabilities of the constituents shall pertain to the surviving or consolidated corporation.

2. Other notes

 In merger or consolidation:
o There is automatic assumption of the liabilities of the absorbed corporation or constituent
corporations which are dissolved
o The absorbed or constituent corporations are ipso facto dissolved by operation of law,
without necessity of any further act or deed but there is no winding up of their affairs or
liquidation of their assets, for the surviving corporation automatically acquires all the
rights and liabilities of the constituent corporations
o It permits the transfer of the assets to the purchaser and the distribution of the
consideration received in a single operation pursuant to the plan of merger or
consolidation.
o Dissolution of the constituent corporations which have been consolidated into a new
corporation cannot be made to retroact to a date prior to the ratification or approval by
their respective stockholders of a Consolidation Agreement previously approved by the
respective boards of directors of the constituent corporations and the new corporation.
o But the transfer of the assets and liabilities of the constituent corporations could be made
effective retroactively as of the date the said board of directors so resolved.There is no
prohibition of the merger of the corporation whose term is about to expire with another
corporation where the purpose is merely to continue the operations of the old entity, even
if such other corporation is organized by a group of stockholders as the merged
corporation. 25

 Creditors consent not necessary

o At any rate, neither the rights of the creditors nor any lien upon the property of any of
each constituent corporation shall be impaired by such merger or consolidation
o The consent of the creditors is not necessary in merger or consolidation, it being
authorized by the law.
o Where it involves a foreign corporation licensed to transact business in the Philippines,
Section 132 applies.26

 Appraisal Right of Dissenting Stockholders

o It may be exercised only after the plan of merger or consolidation is approved by the
Securities and Exchange Commission.
o If before such approval the plan is abandoned by the board of directors, the appraisal
shall be extinguished.

F. Effect on Employees

25
De Leon
26
De Leon

Merger & Consolidation | 3G 12

 1. First POV (Filipinias Port Services Inc. vs. NLRC) 27

 The surviving corporation in case of merger shall assume the employees of the dissolved
corporation. The employees of the constituent corporations shall become the employees of
the new corporation in consolidation.

 The tenure of such employees should be treated as having started when they started with the
dissolved/constituent corporation.

 By the fact of merger, a succession of employment rights and obligations has occurred.

 To sustain the theory that the surviving corporation does not have the obligation to absorb
the employees would defeat the Constitutional protection of security of tenure

2. Second POV (Bank of the Philippine Islands vs. BPI Employees Union)28

 The Corporation Code does not mandate the absorption of employees of the non-surviving
corporation by the surviving corporation in case of merger.

 The employees of the non-surviving corporation become the employees of the surviving
corporation BUT subject to the right of the surviving corporation to terminate the services of
the same employees based on authorized causes.

3. Depending on nature of transfers29

3.1 Assets-only Transfers

 In assets-only transfer, the transferee is not bound to retain the employees of the transferor,
since the former does not really step into the shoes of the latter. In addition. The transferee is
not liable for any of the claims against he transferor, even if the sale of the business assets of
the transferor should result into shutting down of the transferor’s operations and the laying-off
of the transferor’s employees.

 Unless expressly assumed, labor contracts such as employment contracts and collective
bargaining agreements are not enforceable against a transferee of an enterprise, labor
contracts being in personam, thus binding only between the parties .5 A labor contract merely
creates an action in personally and does not create any real right which should be respected
by third parties. This conclusion draws its force from the right of an employer to select his
employees and to decide when to engage them as protected under our Constitution, and the
same can only be restricted by law through the exercise of the police power.

 As a general rule, there is no law requiring a bona fide purchaser of assets of an on-going
concern to absorb in its employ the employees of the latter. However, although the purchaser
of the assets or enterprise is not legally bound to absorb in its employ the employers of the
seller of such assets or enterprise, the parties are liable to the employees if the transaction
between the parties is colored or clothed with bad faith.

3. 2 Business-enterprise Transfers

 The current doctrine is that in a bona fide business enterprise transfer, the transferor is liable
to pay separation pay to the employees and the transferee is not liable therefor, much less is
it obliged to retain such employees for the business enterprise bought.

27
Aquino
28
Aquino
29
Villanueva

Merger & Consolidation | 3G 13

  Employees Have No Equity Claims on the Business Enterprise

o Unlike the general rule in a business-enterprise transfer which makes the transferee
liable for the liabilities of the transferor arising from the business enterprise pursuit, when
it comes to labor claims the transferee is not obligated to absorb the employment of the
existing employees in the acquired business enterprise, nor the outstanding claims
against the transferor. The implication is that the doctrinal basis by which creditors of a
business enterprise may rely upon the business enterprise to whomever it should pass
on to as the security for the payment of their claims, has no application in the field of
employment, and that the employees’ contractual relationship is personal and only with
the original employer-transferor.

i. Under the principle of absorption, a bona fide buyer or transferee of all, or

substantially all, the properties of the seller or transferor is not obliged to absorb
the latter’s employees. The most that the purchasing company may do, for
reasons of public policy and social justice, is to give preference of reemployment
to the selling company’s qualified separated employees, who in its judgment are
necessary to the continued operation of the business establishment.

ii. In other words, the liabilities of the previous owner to its employees are not
enforceable against the buyer or transferee, unless (1) the latter unequivocally
assumes them; or (2) the sale or transfer was made in bad faith. Thus, APT
cannot be held responsible for the monetary claims of petitioners who had been
dismissed even before it actually took over BISUDECO’s assets.

 Piercing Doctrine Application - The rule is different when the business enterprise transfer is
done with fraud or when it authorizes the application of the piercing doctrine to treat both
transferor and transferee as one.

i. In the field of Labor Law, the doctrine of business enterprise transfer as to make
the transferee liable for the business obligations of the transferor is really a
species of piercing doctrine and would require a certain degree of continuity of
the same business by the same owners using the corporate fiction as a shield,
and that the transferor has ceased to exist and operate on its own.

 The Need for a Clear Break in Operations - For a new company to take over the business
concerns of another as not to make the new owner or business entity liable for the labor
claims against the predecessor-ininterests, there must be a formal and substantial
termination and break from the operations of the predecessor as to constitute the transferee
a separate business entity.

3.3 Equity Transfers

 In an equity transfer, since the only result of the transaction is a change in the ownership or
control of the corporate employer, the employees remain with the corporate employer in
exactly the same manner as before the equity transfer, and therefore the purchaser does not
assume any personal liability to the employees.

G. Procedure
1. Approval of plan
 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 matters mentioned in Section
76 as follows:

Merger & Consolidation | 3G 14

 a. The names of the constituent corporations proposing top merge or consolidate
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 of the consolidated corporation
d. Such other provisions with respect to the merger or consolidation as are deemed
necessary or desirable.
 The plan of merger or consolidation shall be approved by majority vote of each of the board
of the concerned corporations at separate meetings.
 The plan may still be amended before the same is filed with the SEC. However, any
amendment must be approved by the majority vote of each board and affirmative vote of 2/3
of the outstanding capital stock or members.30

2. Submission to stockholders or members for approval

 The plan shall be submitted for approval by the stockholders or members of each of such
corporations at separate corporate meetings duly called for the purpose with proper notice.
 Notice of such meetings shall be given to all stockholders or members of the respective
corporations at least two weeks prior to the date of the meetings, either personally or by
registered mail. Said notice shall state the purpose of the meeting and shall include a copy or
a summary of the plan of merger or consolidation, as the case may be
 Both voting and non-voting members are entitled to vote.
 Affirmative vote of stockholders (or members) representing at least 2/3 of the outstanding
capital stock of each corporation.
 Any dissenting stockholder in stock corporation may exercise his appraisal right, provided
that if after the approval by the stockholders of such plan, the Board of Directors should
decide to abandon the plan, the appraisal right shall be extinguished.

3. Execution of formal contract

 After approval, a formal contract known as articles of merger or 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 the matters stated in Section 78 as follows:
a. The plan of the merger/plan of the 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 and against such
plan

4. Submission to SEC for approval

 Four copies of the articles (together with favorable recommendation of the pertinent
government agency in certain cases) shall be submitted to the SEC for approval.
 Recommendation is required in:
a. Banks
b. Insurance companies
c. Building and loan associations
d. Trust companies
e. Public utilities
f. Educational institutions
g. Other special corporations

5. Conduct of hearing by SEC

30
Aquino

Merger & Consolidation | 3G 15

  The Securities and Exchange Commission shall conduct a hearing with proper notice if, upon
investigation, it has reason to believe that the proposed merger or consolidation is contrary to
or inconsistent with the provisions of the Code or existing, to give the corporations concerned
the opportunity to be heard.

6. Issuance of certificate by SEC

 The Commission shall issue a certificate of merger or of consolidation which shall be the
effectivity date of the merge or consolidation
 The effectivity date is crucial for determining when the merged or constituent corporations
cease to exist and when their rights, privileges, properties as well as liabilities pass on to the
surviving corporation
 The Commission has opined that notwithstanding Section 79, the parties may stipulate a
specific "effective date of merger (or consolidation)" where no third party will be prejudiced by
such stipulation

Merger & Consolidation | 3G 16

 II. PHILIPPINE COMPETITION ACT (R.A. No. 10667)

The Philippine Competition Act (PCA) was signed into law by President Benigno S. Aquino III on July
21, 2015 and its Implementing Rules and Regulation was signed on May 31, 2016. The act is intended to
ensure efficient and fair market competition among businesses engaged in trade, industry, and all
commercial economic activities.

The Philippine Competition Act defines, prohibits and penalizes three types of anti-competitive conduct:
anti-competitive agreements, abuse of dominant position, and anti-competitive mergers and
acquisitions. The Act seeks to (i) enhance economic efficiency and promote free and fair competition in
trade, industry and all commercial activities; (ii) prevent economic concentration that will control
production, distribution or trade, which will unduly stifle competition or lessen, manipulate or construct the
discipline of free markets; and (iii) penalize all forms of anti-competitive conduct with the object of
protecting consumer welfare and advancing domestic and international trade and economic development.

What it covers
The Act covers any person or entity engaged in trade, industry and commerce in the Philippines. The Act
also applies to international trade having direct, substantial, and reasonably foreseeable effects in the
Philippine trade industry or commerce, including those resulting from acts done outside of the Philippines.
The Act, however, excludes combinations or activities of workers or employees as well as agreements or
arrangements with employers when designed solely to facilitate collective bargaining in respect of
conditions of employment.

Key Features of the PCA

With the key objective of regulating and prohibiting monopolies and combinations in restraint of trade or
unfair competition to improve the overall welfare of consumers by giving them more choices at possibly
lower prices, the key features of the PCA include:

 Prohibition on: (1) anti-competitive agreements, (2) abuse of dominant position, and (3) anti-
competitive mergers and acquisitions
 The creation of the Philippine Competition Commission, the regulatory body tasked with the
enforcement of the PCA
 Establishment of a framework for compulsory notification of mergers and acquisitions
wherein the value of the transaction exceeds PHP 1 billion
 Development of a system of fines and penalties for violations of the provisions of the PCA

Role of the Philippine Competition Commission (PCC)

The PCC is the government entity tasked to implement and enforce the provisions of the PCA and its
implementing rules and regulations. The PCC has the power to conduct inquiries, investigate and hear
and decide cases involving violations of the PCA and other competition laws, including the power to issue
subpoenas for documents or testimonies of persons. 31 Inquiries, investigations and cases may be
undertaken by the PCA on its own, upon the complaint of an interested party or referral of a concerned

31
Section 12, PCA

Merger & Consolidation | 3G 17

government agency. Additionally, The PCC may also issue advisory opinions and guidelines on matters
involving competition.

Distinguished among the powers of the PCC is its authority to review and prohibit proposed mergers
and acquisitions.

Authority to Review and Prohibit Mergers and Acquisitions

Section 9 of the IRR states that merger or acquisition agreements that substantially prevent, restrict, or
lessen competition in the Philippines in the relevant market or in the market for goods or services, as may
be determined by the Commission, shall be prohibited. By way of exception, the PCC may exempt
mergers and acquisitions if the parties are able to prove that (i) the concentration has brought about or is
likely to bring about gains in efficiencies that are greater than the effect of any limitation on competition
that result or likely to result from the merger or acquisition; or (ii) a party thereto is faced with actual or
imminent financial failure and the agreement represents the least anti-competitive alternative among the
known alternative uses for the failing entity’s assets. 32

The Commission, motu proprio or upon notification as provided under these Rules, shall have the power
to review mergers and acquisitions having a direct, substantial and reasonably foreseeable effect on
trade, industry, or commerce in the Philippines, based on factors deemed relevant by the Commission. If
it finds a merger and/or acquisition to be anti-competitive, the PCC may do any of the following:

(a) prohibit the implementation of the agreement contemplating such merger and/or acquisition,
(b) require modifications in the terms of the agreement contemplating such merger and/or acquisition by
specifying such changes; or
(c) require parties thereto enter into otherwise legally enforceable agreement.33

In conducting the review, the Commission shall:

(1) Assess whether a proposed merger or acquisition is likely to substantially prevent, restrict, or lessen
competition in the relevant market or in the market for goods and services as may be determined by the
Commission; and
(2) Take into account any substantiated efficiencies put forward by the parties to the proposed merger or
acquisition, which are likely to arise from the transaction.

In evaluating the competitive effects of a merger or acquisition, the Commission shall endeavor to
compare the competitive conditions that would likely result from the merger or acquisition with the
conditions that likely have prevailed without the merger or acquisition.

In its evaluation, the Commission may consider, on a case-to-case basis, the broad range of possible
factual contexts and the specific competitive effects that may arise in different transactions, such as:
(1) the structure of the relevant markets concerned;
(2) the market position of the entities concerned;
(3) the actual or potential competition from entities within or outside of the relevant market
(4) the alternatives available to suppliers and users, and their access to supplies or markets;
(5) any legal or other barriers to entry.

What types of mergers and/or acquisitions will require compulsory

notification to the PCC?34

32 Section 10, Rule 4, Implementing Rules and Regulations of Republic Act No. 10667
33 Section 18, PCA
34 Karen Kate C. Pascual (October 2016) ANTITRUST LAWS: A GLANCE AT THE PHILIPPINE COMPETITION ACT

Merger & Consolidation | 3G 18

Parties to a merger or acquisition are required to notify the PCC before the execution of agreements
relating to the following transactions:
1. Wherein the aggregate annual gross revenues in, into or from the Philippines, or the value of the
assets in the Philippines of one of the entities, whether directly or indirectly through parent
entities, exceeds One Billion Pesos (Php1,000,000,000.00); and
2. the value of the transaction exceeds One Billion Pesos (Php1,000,000,000.00).35

Thus, there are two (2) requirements for notification. First, one of the entities to the transaction must
possess assets or generate revenues in the aggregate amount exceeding One Billion Pesos
(Php1,000,000,000.00). Second, the value of the proposed merger or acquisition must also exceed One
Billion Pesos (Php1,000,000,000.00).

Each party to a merger or acquisition required to give notification to the Commission shall submit the
Notification Form and others as required by the law and pay such applicable fees as may be determined
by the Commission.

It is important to note that mergers or acquisitions consisting of successive transactions or acquisition of

parts of one or more entities which shall take place within a one- (1) year period between the same
parties or parties controlled by or controlling parties shall be considered as one transaction for purposes
of the compulsory notification rule.

In calculating the notification thresholds, the aggregate value of assets in the Philippines shall be the
amount stated in the last regularly prepared annual balance sheet or the most recent audited
financial statements in which the said assets are accounted for. The gross revenues shall be the
amount stated on the last regularly prepared annual statement of income and expense of that
entity.

Parties covered by the compulsory notification are prohibited from consummating the agreement until
thirty (30) days after giving the PCC the notification. There may be consultations preceding the
submission of notification. 36 During such pre-notification consultations, the parties may seek
nonbinding advice on the specific information that is required to be in the notification.

What are the applicable fines/ penalties that may be imposed for
violations under the PCA?

The PCA imposes administrative, civil and criminal liabilities 37, with all three applying to anti-competitive
agreements. Only administrative and civil liabilities shall be imposed to violations of the abuse of
dominant position and anti-competitive mergers.

Administrative liability consists in the payment of the fines provided under the Act while civil liability
consists in the payment of damages for any direct injury suffered by any person arising from the
commission of the prohibited acts. Such civil liability may be enforced through the institution of an
independent civil action after the PCC shall have completed its preliminary inquiry on the alleged violation
of the Act.

Agreements consummated in violation of the compulsory notice requirement shall be considered void.
The parties to such merger or acquisition shall likewise be subject to pay an administrative fine of one
percent (1%) to five percent (5%) of the value of the transaction.

Administrative liability consists of payment of fines using the schedule provided by the PCA. The fines
range from 100 Million Pesos to 250 Million Pesos, depending on the gravity and duration of the violation.

35 Section 3, Rule 4, Implementing Rules and Regulations of Republic Act No. 10667
36
Section 4, Rule 4, Implementing Rules and Regulations of Republic Act No. 10667
37 Sections 29- 30, PCA.

Merger & Consolidation | 3G 19

Additional administrative penalties include failure to comply with an order of the PCC and intentional or
negligent supplying of incorrect or misleading information.

Remedies

The Act mandates the PCC to develop a Leniency Program where entities that violate the prohibition
against anti-competitive agreements but voluntarily disclose information to the PCC may be granted
immunity from suit or reduction of fines under certain conditions enumerated in the Act.

Case (Globe Telcom, PLDT vs. PCC)

The case of interest is the joint acquisition of Globe Telco and rival Philippine Long Distance Telephone
Co. of San Miguel's P70-billion telecom business on May 30, 2015.38

According to the Philippine Competition Commisssion (PCC), Globe TelCom and PLDT violated the
competition law. According to the PCC, they have failed to comply with the guidelines of the PCA citing
Section 17 of the Philippine Competition Act (PCA). The PCC noted "an agreement consummated in
violation of this requirement to notify the Commission shall be considered void and subject the parties to
an administrative fine of one percent (1%) to five percent (5%) of the value of the transaction."

The companies, however, maintained that the transaction was made final on grounds that the notice sent
to the commission did not contain any false information. Globe and PLDT claimed it was the only premise
for disapproval.

The case went up to the Court of Appeals, wherein CA denies PCC plea to lift TRO on San Miguel buyout
review. 39 The CA's Special 12th Division orders the PCC to remove from its website its preliminary
statement of concern, containing an initial finding that the deal 'is likely to substantially prevent, restrict,
and lessen competition' in the telco industry'. The CA noted that the utilization of the previously unused
700 megahertz (MHz) by PLDT and Globe under a co-use agreement approved by the National
Telecommunications Commission (NTC) will greatly benefit the public.

The main case between the telcos and the antitrust body was whether the acquisition requires PCC
approval.

38
ABS-CBN news, Jun 13 2016, Globe tells govt: P70-B San Miguel deal is legal
39
CA denies PCC plea to lift TRO on San Miguel buyout review, by Rappler.com, Mar 1, 2017 5:19 PM

Merger & Consolidation | 3G 20

III. REPORT ON DIVISION OF WORK

Merger & Consolidation | 3G 21