13. acquisitions mergers and consolidations

CORPORATION LAW REVIEWER (2013-‐2014) ATTY. JOSE MARIA G. HOFILEÑA

NOTES BY RACHELLE ANNE GUTIERREZ (UPDATED APRIL 3, 2014)

ACQUISITIONS, MERGERS AND CONSOLIDATIONS I. ACQUISITIONS AND TRANSFERS A. Concept of “Business Enterprise”, “Economic Unit” or “Going Concern” (Section 40)

Section 40. Sale or other disposition of assets. Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-‐thirds (2/3) of the outstanding capital stock, or in case of non-‐stock corporation, by the vote of at least to two-‐thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code. A sale or other disposition shall be deemed to cover substantially all

the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members. Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business. In non-‐stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. (28 1/2a)

• Business enterprise constitutes the goodwill, the customer lists and all factors that make a business profitable. Villa Rey Transit, Inc. v. Ferrer, 25 SCRA 845 (1968).

Villa Rey Transit, Inc. v. Ferrer



Facts: Villarama entered into a Contract of Sale with PANTRANCO for 2 certificates of public convenience (first set) which authorizes the owner to operate 32 units of buses along the Pangasinan to Manila route. The contract contains a stipulation that prohibits Villarama from applying for new TPUs for 10 years identical or competing with the buyer’s. 3 months alter, a corporation called Villa Rey Transit Inc. was organized with a capital stock of P500,000. The incorporators are Natividad Villarama (wife) and other relatives. After registering with the SEC, Villa Rey bought five TPUs (second set) from Fernando along with 49 buses, tools and other equipment. Villa Rey prayed for the Public Service Commission (PSC) to grant it provisional authority to operate. Before the PSC could take action on the application, two of the five TPUs were levied in favor of Ferrer in cases against Fernando. Ferrer then sold these two TPUs to PANTRANCO. Subsequently, the PSC ordered that PANTRANCO would have the authority to operate on the two TPUs acquired from Ferrer. Villa Rey now questioned this order and initiated an action in the CFI of Manila to annul these two TPUs. PANTRANCO on the other hand initiated a third-‐party complaint alleging that Villarama/Villa Rey Inc. was disqualified from operating on the two TPUs by virtue of their original contract of Sale. Issue: Whether or not the stipulation on the original contract between PANTRANCO and Villarama binds Villa Rey Inc. as well. Held: YES. Evidence discloses that for someone claiming he is only a part-‐time manager, the evidence on record shows Villarama practically controlled the corporation because he used the corporation funds to

pay for his own obligations, and that he also bought money into the corporation’s coffers. Evidence further shows that the initial cash capitalization of the corporation of P105,000 was mostly financed by Villarama. Further, the evidence shows that when the Corporation was in its initial months of operation, Villarama purchased and paid with his personal checks Ford trucks for the Corporation. Villarama had co-‐mingled his personal funds and transactions with those made in the name of the Corporation. The clear intention of the parties was to prevent the seller from conducting any competitive line for 10 years since, anyway, he has bound himself not to apply for authorization to operate along such lines for the duration of such period. If the prohibition is to be applied only to the acquisition of new certificates of public convenience thru an application with the Public Service Commission, this would, in effect, allow the seller just the same to compete with the buyer as long as his authority to operate is only acquired thru transfer or sale from a previous operator, thus defeating the intention of the parties. Doctrine:

• As a rule “Personal Liabilities” remain with the company even where assets are disposed. But those liabilities that attach to the object disposed of follow that object and become the liability of the purchaser/transferee.

B. Types of Acquisitions\Transfers

• 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 purchasers expressly or impliedly agrees to assume the debts; (2) where the selling corporation fraudulently enters into the transactions to escape liability for those debts (3) where the purchasing corporation is merely a continuation of the selling corporation, and (4) where the transaction amounts to a consolidation or merger of the corporations. Edward J. Nell Co. v. Pacific, 15 SCRA 415 (1965).1

Edward J. Nell Co. v. Pacific Facts: Edward J. Nell Company (EJNC) secured a judgment against Insular Farms, Inc. representing unpaid balance of the price of a pump sold by EJNC to the former. The writ of execution was returned stating that Insular Farms had no leviable property. A few months later, EJNC filed this present action against Pacific Farms, Inc. for the collection of the judgment against Insular Farms, upon the theory that Pacific Farms is the alter ego of Insular Farms. Issue: Whether or not Pacific Farms is liable for the unpaid obligation of Insular Farms. Held: NO. The theory of EJNC that Pacific Farms is an alter ego of Insular Farms, arose because the former purchased all or substantially all of the shares of stock, as well as the real and personal properties of the latter,

1 Philippines National Bank v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002); McLeod v. NLRC, 512 SCRA 222 (2007); Jiao v. NLRC, 670 SCRA 184 (2012).

including the pumping equipment it sold to Insular Farms. The sale transaction was not entered into fraudulently. The sale between Insular and Pacific took place nearly 6 months before the rendition of the judgment sought to be collected. In addition, Pacific purchased the shares of stock of Insular as the highest bidder at an action sale at the instance of a bank. The claim that the amount paid (P10,000) is grossly inadequate cannot be assailed because the sale was submitted to and approved by the SEC and as such, presumed fair and reasonable. Doctrine: See above.

• Even under the provisions of the Civil Code, a creditor has a real interest to go after any person to whom the debtor fraudulently transferred its assets. Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp., 498 SCRA 400 (2006). Caltex (Phils.), Inc. v. PNOC Shipping and Transport Corp.

Facts: The PNOC Shipping and Transport Corporation (PSTC) and the Luzon Stevedoring Corporation (LUSTEVECO) entered into an Agreement of Assumption of Obligations, which provides that PSTC shall assume all obligations of LUSTEVECO with respect to certain claims enumerated in the Annexes of the Agreement. This Agreement also provides that PSTC shall control the conduct of any litigation pending which may be filed with respect to such claims, and that LUSTEVECO appoints and constitutes PSTC as its attorney-‐in-‐fact to demand and receive any claim out of the countersuits and counterclaims arising from said claims. Among the actions mentioned is Caltex (Phils) v. Luzon Stevedoring Corporation, which was then pending appeal. Caltex won



the case and a writ of execution was issued in its favor but was not satisfied. When it learned about the agreement between PSTC and LUSTEVECO, it sued PSTC and brought an action. Issue: Whether or not Caltex may recover from PTSC. Held: YES. The Agreement provides that PSTC shall assume all the obligations of LUSTEVECO. LUSTEVECO transferred, conveyed and assigned to PSTC all of LUSTEVECO’s business, properties and assets pertaining to its tanker and bulk business “together with all the obligations relating to the said business, properties and assets.” The assumption of obligations was stipulated not only in the Agreement of Assumption of Obligations but also in the Agreement of Transfer. Even without the Agreement, PSTC is still liable. While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor by holding the assignee liable for the former’s obligations. Doctrine: To allow an assignor to make a transfer without the consent of its creditors and without requiring the assignee to assume the former’s obligations will defraud creditors.

• PSALM took ownership over most of NPC’s assets by operation of law—these properties may be used to satisfy the Court’s judgment, and such being the case, the employees may go after such properties. NPC Drivers and Mechanics Association (NPC DAMA) v. NPC, 606 SCRA 409 (2009).

1. "Assets-‐Only" Level.1 • In the "assets-‐only" acquisition, the purchaser is only interested

in the "raw" assets and properties of the business, perhaps to be used to establish his own business enterprise or to be used for his on-‐going business enterprise. In such an acquisition, the purchaser is not interested in the entity of the corporate owner of the assets, nor of the goodwill and other factors relating to the business itself.

• In other instances, the purchaser is interested only in purchasing the assets to ensure that he would not be embroiled in issues relating to the liabilities and other contractual commitments of the business enterprise or those pertaining to the transferor.

2. "Business-‐Enterprise" Level. 2 • In the "business-‐enterprise" level, the purchaser's interest goes

beyond the assets or properties of the business enterprise. The purchaser’s primary interest is essentially to obtain the “earning capability” of the venture. However, the purchaser in such is not interested in obtaining the juridical entity that owns the business enterprise, and therefore purchases directly the business from the corporate entity.

• As will be shown in the discussions hereunder, the essence of the "business-‐enterprise" transfer is that the effect is that the transferee merely continues the same business of the transferor.

1 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.



3. "Equity" Level. 1 • The "equity" level constitutes looking at the entirety of the

business enterprise as it is owned and operated by the corporation. The purchaser takes control and ownership of the business by purchasing the shareholdings of the corporate owner. The control of the business enterprise is therefore indirect, since the corporate owner remains the direct owner of the business, and what the purchaser has actually purchased is the ability to elect the members of the board of the corporation who run the business.

C. Assets Only Transfers

1. Rationale for Non-‐Assumption of Liability.2 • In an assets-‐only transfer, 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.

2. Coverage of the Bulk Sales Law.3 • An assets-‐only transfer if constituting "bulk sale" under the Bulk

Sales Law,4 would affect the transferee in the sense that if the sale has not complied with the requirements of the Law, the sale could be classified as fraudulent and void, and therefore

1 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 3 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 4 Act No. 3952, as amended by Rep. Act No. 111.

title of the transferee over the assets would be void, even if he were a purchaser in good faith.5

3. Special Rule in Corporate Dissolution.6 • 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.

4. Voluntary Assumption of Liabilities.7 • The other instance in an assets-‐only transfer when the

transferee becomes liable for the obligations of the transferor is when by contract, express or implied, the transferee voluntarily assumes such obligations of the transferor.

D. Business Enterprise Transfers:

1. Nature of Business-‐Enterprise.8 • A business enterprise, apart from the juridical personality under

which is operates, has a "separate being" of its own. Properly speaking, a business enterprise comprises more than just the properties of the business, but includes a "concern" that covers the employees, the goodwill, list of clientele and suppliers, etc., which give it value separate and distinct from its owners or the

5 The Court of Appeals in People v. Wong, 50 O.G. 4867, has held that the Bulk Sales Law applies only to merchandising business or establishments, and has no application to other forms of activities such as in that case the sale of the equipment, tools and machineries of a foundry shop. 6 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 7 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 8 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.



juridical entity under which it operates. This is what is termed as the "economic unit", "the enterprise", "the going concern", or the "financial unit", recognized in other disciplines, such as Economics and Accounting.

• Although, jurisprudence refuses to recognize a separate existence of the business enterprise apart from the juridical personality which the State grants in corporations, 1 and partnerships, 2 such separate existence of the business enterprise does exist and is recognized in the business world.

2. Statement of Doctrine. 3 • Jurisprudence has held that in a business-‐enterprise transfer,

the transferee is liable for the debts and liabilities of his transferor.

• The purpose of the jurisprudential doctrine is to protect the creditors of the business by allowing them a remedy against the new controller or owner of the business enterprise.

3. Application of Doctrine • A.D. Santos v. Vasquez, 22 SCRA 1156 (1968)

A.D. Santos v. Vasquez

1 Tayag v. Benguet Consolidated Inc., 26 SCRA 242 (1968). It rejected the genossenchaft theory of Friedman that would recognize the corporate entity as "the reality of the group as a social and legal entity independent of state recognition and concession." 2 Ang Pue & Co. v. Section of Commerce and Industry, 5 SCRA 645 (1962). The formation of a corporate entity or a partnership is not a matter of right, but rather of a privilege. 3 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

Facts: A.D. Santos, Inc. operates taxicabs. Ventura Vasquez was one of his taxi drivers. While driving A.D. Santos, Inc.’s taxi cab, Vasquez vomited blood. The company’s physician, Dr. Roman, treated him. He was sent to and confined in Santo Tomas Hospital. Afterwards, he was admitted at the Quezon Institute where he was diagnosed with pulmonary tuberculosis. He did not resume work. Vasquez filed a claim with the Workmen’s Compensation Commission. A.D. Santos, Inc. was ordered to pay compensation and reimburse Vasquez the amount he spent for his treatment. Issue: Whether or not A.D. Santos is liable for the expenses of Vasquez Held: YES. Vasquez’ cause of action against A.D. Santos, Inc. is complete. In its answer to Vasquez’s claim, A.D. Santos, Inc. categorically admitted that Vasquez was its taxi driver. Further, Vasquez contracted pulmonary tuberculosis by reason of his employment. Vasquez cited in his testimony that he worked for City Cab, a company operated by a certain Amador Santos. This does not detract the validity of Vasquez’ right to compensation. Amador Santos was the sole owner and operator of City Cab (sole proprietorship). It was subsequently transferred to A.D. Santos, Inc. in which Amador Santos was a majority stockholder. In business enterprise transfers, the transferee is liable for the liabilities of his transferor arising from the business enterprise transferred. Mentioning Amador Santos as his employer should not confuse the facts relating to the employer-‐employee relationship. In this case, the veil of the corporate fiction is used as a shield to perpetrate a fraud or confuse legitimate issues.



Doctrine: In business enterprise transfers, the transferee is liable for the liabilities of his transferor arising from the business enterprise transferred.

• Where a corporation is formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable therefore. Laguna Trans. Co., Inc. v. SSS, 107 Phil. 833 (1960).

Laguna Trans. Co., Inc. v. SSS

Facts: In 1940 the Biñan Transportation Co., a corporation duly registered with the SEC, sold part of the lines and equipment it operates to G. Mercado, A. Mercado, Mata and Vera Cruz. After this, the vendees formed an unregistered partnership under the name of Laguna Transportation Company which continued to operate the lines and equipment bought from Biñan Transportation Co. Later on, the original partners forming Laguna Transport Company along with 2 new members organized a corporation known as the Laguna Transportation Co., Inc. and the corporation was registered in the SEC on June 20, 1956, which continued the same transportation business of the unregistered partnership. Laguna Trans. Co. Inc. requested for exemption from coverage by the System on the ground that it started operation only on June 20, 1956, when it was registered with the Securities and Exchange Commission but on November 11, 1957, the Social Security System notified plaintiff that it was covered.

Issue: Whether or not Laguna Trans Co. Inc. was bound by the compulsory coverage of the Social Security Act Held: YES. While it is true that a corporation once formed is conferred a juridical personality separate and district from the persons composing it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. To adopt Laguna Trans. Co. Inc.’s argument would defeat, rather than promote, the ends for which the Social Security Act was enacted. An employer could easily circumvent the statute by simply changing his form of organization every other year, and then claim exemption from contribution to the System as required, on the theory that, as a new entity, it has not been in operation for a period of at least 2 years. In this case, it can be said that there was only a change in the form of organization of the entity in the common carrier business. This is said to be so because when the unregistered partnership was turned into a corporation, the firm name was not altered save for the fact that Inc. was added to show that it was duly incorporated under existing laws. Doctrine: The law provides that the Commission may not compel any employer to become a member of the System unless he shall have been in operation for at least two years, such is not applicable to a corporation that merely changed its form of organization.

• A business enterprise operated under a partnership and later incorporated, or where a corporation assumed all the assets and liabilities of the partnership, then the corporation cannot be regarded, for purposes of the SSS Law, as having come into



being only on the date of its incorporation but from the date the partnership started the business. Oromeca Lumber Co. v. SSS, 4 SCRA 1188 (1962); San Teodoro Dev. v. SSS, 8 SCRA 96 (1963).

• When a corporation transferred all its assets to another corporation “to settle its obligations” that would not amount to a fraudulent transfer. McLeod v. NLRC, 512 SCRA 222 (2007).

McLeod v. NLRC Facts: John F. McLeod filed a complaint for unpaid benefits and damages, against Filipinas Synthetic Corporation (Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu (respondents). McLeod said that he is an expert in textile manufacturing process, and was hired as the Manager of Universal Textiles, Inc. (UTEX) under its President, Patricio Lim. Lim later formed Peggy Mills, Inc. (with Filsyn having controlling interest), and it absorbed McLeod. Filsyn then sold Peggy Mills to Far Eastern Textile Mills with Lim as the chairman and president. Peggy Mills was renamed Sta. Rosa Textile. When McLeod reached retirement age, he was only given a reduced 13 month pay. Lim offered McLeod a compromise settlement but was rejected.

UTEX à Peggy Mills à Far Eastern Textile Mills à Sta. Rosa Textile Respondents allege that Filsyn and Far Eastern Textiles are separate legal entities and have no employer relationship with McLeod. Sta. Rosa only acquired the assets and NOT the liabilities of Peggy Mills. In McLeod’s reply, he alleged that all the respondents are solidarily liable for all salaries and benefits he is entitled to, being one and the same entity. McLeod said that their offices were all in the same building, their

counsel holds office in the same address, and that all respondents have the same key personnel such as Lim. Issue: Whether or not an employer-‐employee relationship exists between private respondents and McLeod Held: YES BUT he was an employee of Peggy Mills ONLY. What happened between Peggy Mills and Sta. Rosa textile was dation in payment with lease. Peggy Mills had ceded, conveyed and transferred all of its rights, title and interests in and to the assets to Sta. Rosa Textile to settle its obligations. Doctrine: See above.

• When the bus operations belonging to the estate of the deceased spouses is duly incorporated by the administratrix with the intention to make the corporation liable for past and pending obligations of the estate as the transportation business itself, then that liability on the part of the corporation, vis-‐à-‐vis the estate, should continue to remain with it even after the percentage of the estate’s shares of stock in the corporation should have been diluted. Buan v. Alcantara, 127 SCRA 845 (1984).

• Settled now is the rule that where one corporation sells or otherwise transfers all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities of the transferor. Pantranco Employees Association (PEA-‐PTGWO) v. NLRC, 581 SCRA 598 (2009).



Pantranco Employees Association (PEA-‐PTGWO) v. NLRC Facts: The Gonzales family owned two corporations, PANTRANCO North Express Inc. (PNEI) and Macris Realty Corporation (Macris). PNEI provided transportation services and its terminals were on the Pantranco properties registered under the name of Macris. Due to financial losses, creditors took over both corporations and later transferred to the National Investment Development Corporation (NIDC), a subsidiary of the Philippine National Bank. Macris was later renamed and merged to another corporation to form the new PNB subsidiary, the PNB-‐Madecor. NIDC sold PNEI to North Express Transport, Inc. (NETI), PNEI was later placed under sequestration by the PCGG. Eventually PNEI ceased its operation which came with the various labor claims commenced by the former employees of PNEI where the employees won. The employees now seek to attach on the properties registered to PNB-‐Madecor to satisfy their claim. Issue: Whether or not the former PNEI employees can attach the properties (specifically the Pantranco properties) of PNB, PNB-‐Madecor and Mega Prime to satisfy their unpaid labor claims against PNEI Held: NO. First, the subject property is not owned by the judgment debtor, PNEI. The properties were owned by Macris, the predecessor of PNB-‐Madecor. Hence, they cannot be pursued against by the creditors of PNEI. It is a settled rule that the court in executing judgments extends only to properties unquestionably belonging to the judgment debtor alone. Second, the general rule is that a corporation has a personality separate and distinct from those of its stockholders and other corporations to which it may be connected. Obviously, PNB, PNB-‐

Madecor, Mega Prime, and PNEI are corporations with their own personalities. PNB was only a stockholder of PNB-‐Madecor which later sold its shares to Mega Prime; and that PNB-‐Madecor was the owner of the Pantranco properties. Neither can we merge the personality of PNEI with PNB simply because the latter acquired the former. Doctrine: See above.

4. Rationale of Doctrine in Business Enterprise Transfers • The doctrine in business-‐enterprise transfers recognizes the

reality in the business world that although no formal mortgage contract is executed, creditors and suppliers extend credit to the business enterprise because they see the business's earning capacity and assets as a "security" to the undertaking that they will eventually be paid back.1 The doctrine therefore puts the burden on the shoulder of the person who is in the best position to protect himself, namely the transferee, by obtaining certain guarantees and protection from his transferor.

1 It would be instructive to see the judicial attitude to the extension of credit as underpinning a clear intention to establish a long-‐term business. On the issue of whether a foreign corporation intended to engage in business in the Philippines, in Eriks Pte. Ltd. v. Court of Appeals, 267 SCRA 567 (1997), the Supreme Court found that the extension of credit terms to be indicative of intent to do business in the Philippines for an indefinite period, thus: "More than the sheer number of transactions entered into, a clear and unmistakable intention on the part of petitioner to continue the body of its business in the Philippines is more than apparent. . . Further, its grant and extension of 90-‐day credit terms to private respondent for every purchase made, unarguably shows an intention to continue transaction with private respondent, since in the usual course of commercial transactions, credit is extended only to customers in good standing or to those on whom there is an intention to maintain long-‐term relationship.”



E. Equity Transfers

1. Rationale of Doctrine. 1 • In an equity transfers, the transferee is not liable for the debts

and liabilities of the transferor, except where the transferee expressly or impliedly agreed to assume such debts.

• The logic of the doctrine in equity transfer finds support in the main doctrine of separate juridical personality, that by purchasing the shares in a corporation that owns a business, the stockholder does not by that reason alone become the owner directly of the business assets and does not become personally liable for the debts and liabilities of the business.

2. Application of the Doctrine • The transfer by the controlling shareholder of all of its equity in

the corporation warrants the application of the alter ego piercing doctrine since it shows that the transferor had complete control of the corporation. Phividec v. Court of Appeals, 181 SCRA 669 (1990).

Phividec v. Court of Appeals Facts: On March 29, Violeta M. Borres was injured in an accident which the trial court ruled was due to the negligence of PHIVIDEC Railways, Inc. (PRI). Prior, on May 25, PHIVIDEC sold all its rights and interests in the PRI to the PHILSUCOM. Two days later, PHILSUCOM caused the creation of a wholly-‐owned subsidiary, the Panay Railways Inc. to

1 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store.

operate the railway assets of PHIVIDEC. Borres sued PRI and Panay, and Panay disclaimed liability on the ground that in the Agreement concluded between PHIVIDEC and PHILSUCOM, it was provided that PHIVIDEC holds PHILSUCOM free from any action that might arise from any act of omission prior to the turn-‐over. Issue: Whether or not PHIVIDEC should be held liable. Held: YES. It is clear from the evidence of record that by virtue of the agreement between PHIVIDEC and PHILSUCOM, particularly the stipulation exempting the latter from any “claim or liability arising out of any act or transaction” prior to the turn-‐over, PHIVIDEC had expressly assumed liability for any claim against PRI. Since the accident happened before that agreement and PRI ceased to exist after the turn-‐over, it should follow that PHIVIDEC cannot evade its liability for the injuries sustained by the private respondent. In the interest of justice and equity, and to prevent the veil of corporate fiction from denying her the reparation to which she is entitled, that veil must be pierced and PHIVIDEC and PRI regarded as one and the same entity. Doctrine: See above.

o The general rule therefore is that in an equity transfer, the transferee does not become personally liable for the obligations of the corporate enterprise under the main doctrine of separate juridical personality, unless either



the transferee by contract assumes such obligations, or there is basis for piercing the veil of corporate fiction. 1

• Proper Doctrine: The mere fact that a stockholder sells his shares of stock in the corporation during the pendency of a collection case against the corporation, does not make such stockholder personally liable for the corporate debt, since the disposing stockholder has no personal obligation to the creditor, and it is the inherent right of the stockholder to dispose of his shares of stock anytime he so desires. Remo, Jr. v. IAC, 172 SCRA 405 (1989).2

II. MERGER AND CONSOLIDATIONS A. Concepts (McLeod v. NLRC, 512 SCRA 222 [2007]).

• 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. 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. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).

B. Procedure:

1 Villanueva, C. L., & Villanueva-‐Tiansay, T. S. (2013). Philippine Corporate Law. (2013 ed.). Manila, Philippines: Rex Book Store. 2 PNB v. Ritratto Group, Inc., 362 SCRA 216 (2001).

1. Plan of Merger or Consolidation (Section 76) 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. (n)

2. Stockholders’ or Members’ Approvals (Section 77) 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. (n)

3. Articles of Merger or Consolidation (Section 78)

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 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. (n)

4. Submission of Financial Statements Requirements: For applications of merger, the audited financial statements of the constituent corporations (surviving and absorbed) as of the date not earlier than 120 days prior to the date of filing of the application and the long-‐form audit report for absorbed corporation(s) are always required. Long form audit report for the surviving corporation is required if it is insolvent. (SEC Opinion 14, s. of 2002, 15 November 2002).

5. Approval by SEC (Section 79) 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)

• The issuance by the SEC of the certificate of merger is crucial because not only does it bear out SEC’s approval but also marks the moment whereupon the consequences of a merger take place. By operation of law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights, and properties as well as liabilities shall be taken and deemed

transferred to and vested in the surviving corporation. Poliand Industrial Ltd. V. NDC, 467 SCRA 500 (2005).1

• When the procedure for merger/consolidation prescribed under the Corporation Code are not followed, there can be no merger or consolidation, and corporate separateness between the constituent corporations remains, and the liabilities of one entity cannot be enforced against another entity. PNB v. Andrada Electric & Engineering Co., 381 SCRA 244 (2002).

C. Effects of Merger or Consolidation (Section 80): Associated Bank v. CA, 291 SCRA 511 (1998). 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;

1 Mindanao Savings and Loan Asso. V. Willkom, 634 SCRA 291 (2010).



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. (n)

Associated Bank v. CA Facts: Associated Banking Corporation (ABC) and Citizens Bank and Trust Company (CBTC) merged to form just one banking corporation known as Associated Citizens Bank (ACB), which changed its name to Associated Bank (AB). Lorenzo Sarmiento Jr. executed in favor of AB a promissory note whereby the former undertook to pay on or before March 6, 1978. Sarmiento still owes AB today despite repeated demands. He alleges that AB is not the proper party in interest because the promissory note was executed in favor of Citizens Bank and Trust Company.

Issue: Whether or not Associated Bank, the surviving corporation, may enforce the promissory note made by private respondent in favor of CBTC, the absorbed company. Held: YES. 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. Assuming that the effectivity date of the merger was the date of its execution, we still cannot agree that petitioner no longer has any interest in the promissory note. The agreement itself clearly provides that all contracts — irrespective of the date of execution — entered into in the name of CBTC shall be understood as pertaining to the surviving bank, herein petitioner. Clause have been deliberately included in the agreement in order to protect the interests of the combining banks; specifically, to avoid giving the merger agreement a farcical interpretation aimed at evading fulfillment of a due obligation. Doctrine: The merger, however, does not become effective upon the mere agreement of the constituent corporations Section 79 requires:

1. Approval by the SEC of the articles of merger 2. Must have been duly approved by a majority of the respective



stockholders of the constituent corporations. 3. Merger shall be effective only upon the issuance by the SEC of a

certificate of merger. 4. 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.

• Atty. Hofileña à The assumption of rights is a matter of law. • Global is bound by the terms of the contract entered into by its

predecessor-‐in-‐interest, Asian Bank. Due to Global’s merger with Asian Bank and because it is the surviving corporation, it is as if it was the one which entered into contract with Surecomp. In the merger of two existing corporation, one of the corporations survives and continues the business, while the other is dissolved, and all its rights, properties, and liabilities are acquired by the surviving corporation. In the same way, Global also has the right to exercise all defenses, rights, privileges, and counter-‐claims of every kind and nature which Asian Bank may have or invoke under the law. Global Business Holdings Inc. v. Surecompsoftware, B.V., 633 SCRA 94 (2010)

• It is settled that in the merger of two existing corporations, one of the corporations survives and continues the business, while the other is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. The surviving corporation therefore has a right to institute a collection suit on accounts of one of one of the constituent corporations. Babst v. CA, 350 SCRA 341 (2001).

III. EFFECTS ON EMPLOYEES OF CORPORATION A. Assets Only Transfers: Sundowner Dev. Corp. v. Drilon, 180 SCRA 14 (1989).

Sundowner Dev. Corp. v. Drilon

Facts: Hotel Mabuhay, Inc. (Mabuhay) leased the premises belonging to Santiago Syjuco, Inc. (Syjuco) but failed to pay their rentals, and so Syjuco instituted and ejectment case. They settled the case with the surrender of the premises to Syjuco. The assets of Mabuhay within it were sold to Sundowner who also leased the property from Syjuco. The National Union of Workers in Hotel, Restaurant and Allied Services (NUWHRAIN) picketed the leased premises, barricaded the entrance and denied Sundowner’s officers, employees and guests access. The Secretary of Labor ordered the workers to return and for Mabuhay to accept them pending final determination of the issue of the absorption of the former employees of Mabuhay. Mabuhay argues that such is impossible because it has ceased operations. NUWHRAIN alleged that Mabuhay and Sundownder connived to sell the assets and close the hotel to escape its obligations to the employees and asked that Sundowner accept the workforce of Mabuhay and pay backwages. Issue: Whether or not the purchaser of the assets of an employer corporation can be considered a successor employer of the latter’s employees. Held: NO. It was only when Mabuhay offered to sell its assets and personal properties in the premises to Sundowner that they came to



deal with each other. Thus, the absorption of the employees of Mabuhay may not be imposed on Sundowner. In a tripartite agreement that was entered into by Sundowner with NUWHRAIN and Mabuhay, it is clear that Sundowner has no liability whatsoever to the employees of Mabuhay and its responsibility if at all, is only to consider them for re-‐employment in the operation of the business in the same premises. There is no implied acceptance of the employees of Mabuhay by Sundowner and no commitment or duty to absorb them. Doctrine: Also, while it is true that Sundowner is using the leased property for the same type of business as that of Mabuhay, there can be no continuity of the business operations from Mabuhay to Sundowner because Mabuhay had not retained control of the business. Sundowner is a corporation entirely different from Mabuhay and has no controlling interest whatever in the same. What is obvious is that the Sundowner, by purchasing the assets in the hotel premises, enabled Mabuhay to pay its obligations to its employees. There being no employer-‐employee relationship between the Sundowner and the Mabuhay employees, it cannot be compelled to absorb the latter and to pay them backwages.

• “There is no law requiring that the purchaser of MDII’s assets should absorb its employees . . . the most that the NLRC could do, for reasons of public policy and social justice, was to direct [the buyer] to give preference to the qualified separated employees of MDII in the filling up of vacancies in the facilities. MDII Supervisors & Confidential Employees Asso. v. Pres. Assistance on Legal Affairs, 79 SCRA 40.

B. Business-‐Enterprise Transfers: Central Azucarera del Danao v. CA, 137 SCRA 295 (1985); Complex Electronics Employees Assn. v. NLRC, 310 SCRA 403 (1999).1

Central Azucarera del Danao v. CA

Facts: Bana-‐ay, Cosculluela, and Palma were among the regular and permanent employees of Central Danao, the owner and operator of a sugar mill. Central Danao later sold its sugar mill to DADECO. DADECO actually took over operations of the mill pursuant to the Deed of Sale. Although the Deed made no mention of currently employed employees, DADECO did hire regular and permanent employees pursuant to its own hiring and selection processes, including Bana-‐Ay, Cosculluela, and Palma. During the period of their employment, they were terminated by DADECO. Bana-‐Ay, Cosculluela, and Palma filed a complaint against Central Danao and DADECO. Central Danao claimed that DADECO was the employer during that time since the former had already transferred its assets to DADECO at the time of termination. DADECO claims that it was Central Danao who was liable since the termination happened during the time that Central Danao was there employer. Issue: Whether or not Central Danao is liable

1 Yu v. NLRC, 245 SCRA 134 (1995); Sunio v. NLRC, 127 SCRA 390 (1984); San Felipe Neri School of Mandaluyong, Inc. v. NLRC, 201 SCRA 478 (1991).



Held: YES, CENTRAL DANAO IS LIABLE. The Deed reveals no express stipulation whatsoever relative to the continued employment by Dadeco of the former employees of Central Danao. There was in fact, an interruption of the employment of the private respondents in the sugar central. In reality then, they were rehired anew by Dadeco, their new employer. The records also reveal that negotiations for the sale were made behind the back of the employees who were taken by surprise upon its consummation. Technically then, the employees were terminated on the date of the sale. Worse, they were not even given the required notice of termination. Doctrine: The sale or disposition must be motivated by good faith. Indeed, an innocent transferee of a business establishment has no liability to the employees of the transferor to continue employing them. Nor is the transferee liable for past unfair labor practices of the previous owner, except, when the liability therefor is assumed by the new employer under the contract of sale.

Complex Electronics Employees Assn. v. NLRC Facts: Complex was engaged in the manufacture of electronic products. There were different lines, including Ionics and Lite-‐On. The rank and file workers of Complex were organized into the Complex Electronics Employees Association (“Union”). Complex received a fax message from Lite-‐On, requiring it to lower its price by 10%. Complex informed its Lite-‐On personnel that such request of lowering their selling price was not feasible as they were already incurring losses at the present prices of their products. Complex regretfully informed

the employees that it was left with no alternative but to close down the operations of Lite-‐On. The Union pushed for a retrenchment pay equivalent to 1 month salary for every year of service, which Complex refused. The machinery, equipment and materials being used for production at Complex were pulled-‐out from the company premises and transferred to Ionics Circuit, Inc. (Ionics) at Cabuyao, Laguna. The following day, a total closure of company operation was effected. A complaint was filed with the Labor Arbitration Branch of the NLRC. Ionics was impleaded as a party because the officers and management personnel were also holding office there. Ionics contended that it was an entity separate and distinct from Complex and had been in existence 8 years before the labor dispute arose. Ionics further argued that the hiring of some displaced workers of Complex was an exercise of management prerogatives. Issue: Whether or not there was transfer of business from Complex to Ionics Held: NO. There was no transfer of business. A “runaway shop” is defined as an industrial plant moved by its owners from one location to another to escape union labor regulations or state laws, but the term is also used to describe a plant removed to a new location in order to discriminate against employees at the old plant because of their union activities. A “runaway shop” in this sense, is a relocation motivated by anti-‐union animus rather than for business reasons.



In this case, however, Ionics was not set up merely for the purpose of transferring the business of Complex. At the time the labor dispute arose at Complex, Ionics was already existing as an independent company. It cannot, therefore, be said that the temporary closure in Complex and its subsequent transfer of business to Ionics was for anti-‐union purposes. The Union failed to show that the primary reason for the closure of the establishment was due to the union activities. Doctrine: The mere fact that one or more corporations are owned or controlled by the same or single stockholder is not a sufficient ground for disregarding separate corporate personalities. Ionics may be engaged in the same business as that of Complex, but this fact alone is not enough reason to pierce the veil of corporate fiction of the corporation. Well-‐settled is the rule that a corporation has a personality separate and distinct from that of its officers and stockholders.

• Furthermore, 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. Barayoga v. Asset Privation Trust, 473 SCRA 690 (2005).

• Although a corporation may have ceased business operations and an entirely new company has been organized to take over the same type of operations, it does not necessarily follow that no one may now be held liable for illegal acts committed by the

earlier firm. Pepsi-‐Cola Bottling Co., v. NLRC, 210 SCRA 277 (1992).

Pepsi-‐Cola Bottling Co., v. NLRC Facts: Private respondent Encabo was employed as a maintenance manager in Pepsi Cola Distributors (PCD). His employment was terminated because of his negligence in repairing the beverage plant’s CEM-‐72 soaker machine which needed rehabilitation. According to PCD, his delays in repairing the machine caused the company to incur significant losses. Encabo filed a complaint for illegal dismissal and unfair labor practice claiming that he was denied due process. The NLRC found in favor of Encabo and issued a writ of execution addressed to Pepsi Cola Bottling Corp (PBC) ordering PCD to reinstate him. The writ was delivered to Pepsi-‐Cola Products Philippines (PCPPI). PCCPI alleged that reinstatement is no longer possible since PCD had closed down its business on the ground of serious business losses and the new franchise holder, PCPPI, is a new entity. Issue: Whether or not PCPPI is liable Held: YES. PCPPI is liable and must reinstate Encabo. PCD may have ceased business operations and PCPPI may be a new company but it does necessarily follow that one may now be held liable for illegal acts committed by the earlier firm. The complaint was filed when PCD was still in existence. Pepsi-‐Cola never stopped doing business in the Philippines. The same soft drink products sold in 1988 when the



complaint was initiated continue to be sold now. The sale of products did not stop at the time PCD bowed out and PCPPI came into being. There is no evidence presented showing that PCCPI, as the new entity or purchasing company is free from any liabilities incurred by the former company. In fact, in the surety bond put up by petitioners, both PCD and PCPPI bound themselves to answer for monetary awards which clearly implies that the PCPPI as a result of the transfer of the franchise bound itself to answer for the liability of PCD to its employees. Doctrine: See above.

• Where a corporation is closed for alleged losses and its equipment are transferred to another company which engaged in the same operations, the separate juridical personality of the latter can be pierced to make it liable for the labor claims of the employees of the closed company. National Federation of Labor Union v. Ople, 143 SCRA 124 (1986).

• In the case of a transfer of all or substantially all of the assets of a corporation (i.e., business enterprise transfers), the liabilities of the previous owners to its employees are not enforceable against the buyer or transferee, unless (a) the latter unequivocally assumes them; or (b) the sale or transfer was made in bad faith. Barayoga v. Asset Privatization Trust, 473 SCRA 690 (2005).

• Where the change of ownership is done in bad faith, or is used to defeat the rights of labor, the successor-‐employer is deemed to have absorbed the employees and is held liable for the

transgressions of his or her precedessor. Peñafrancia Tours and Travel Transport v. Sarmiento, 634 SCRA 279 (2010).

C. Equity Transfers: Pepsi Cola Distributors v. NLRC, 247 SCRA 386 (1995); Manlimos v. NLRC, 242 SCRA 145 (1995).1

Pepsi Cola Distributors v. NLRC

Facts: Private respondent Yute started working with Pepsi-‐Cola Bottling Company (PCBCP) as contractual maintenance electrician and when Pepsi Cola Distributors (PCD) took over the company’s manufacturing operations, he was absorbed as a regular employee. PCD terminated Yute for alleged abandonment of work and/or absence without leave so he filed a complaint for illegal dismissal before the NLRC wherein the labor arbiter declared the dismissal illegal and ordered PCD to reinstate him. However, 33 days after his reinstatement, PCD stopped payment of Yute’s salary on the ground that it allegedly sold its business interest with Pepsi Cola Products Philippines, Inc. (PCPPI) NLRC issued a writ of execution ordering PCD to pay the salaries. PCPPI filed in the case a motion praying that the change of ownership of the company be taken cognizance of by the NLRC saying that PCPPI has a separate personality from PCD and therefore, not a party to the cases filed. Not being a party, they cannot be subjected to the issue writ of execution. NLRC in resolving the MR modified its decision by ordering both PCD and PCPPI to reinstate Yute. PCD was further ordered to pay

1 Robledo v. NLRC, 238 SCRA 52 (1994); Pepsi-‐Cola Bottling Co. v. NLRC, 210 SCRA 277 (1992); DBP v. NLRC, 186 SCRA 841 (1990); Coral v. NLRC, 258 SCRA 704 (1996); Avon Dale Garments, Inc. v. NLRC, 246 SCRA 733 (1995).



Yute’s separation pay. Issue: Whether or not the dismissal of Yute on the ground that the company already sold its business interest to PCCPI was proper Held: NO. The contention that the second dismissal of private respondent presents an issue separate and distinct from the issue of the earlier dismissal on December 15, 1988 is nothing but an attempt of PCD to evade liability. Pepsi Cola Distributors of the Philippines may have ceased business operations and Pepsi-‐Cola Products Philippines, Inc. may be a new company but it does not necessarily follow that no one may now be held liable for illegal acts committed by the earlier firm. The complaint was filed when PCD was still in existence. Pepsi-‐Cola never stopped doing business in the Philippines. The same soft drinks products sold in 1988 when the complaint was initiated continue to be sold now. Doctrine: The sale of products, purchases of materials, payment of obligations, and other business acts did not stop at the time PCD bowed out and PCPPI came into being. There is no evidence presented showing that PCPPI, as the new entity or purchasing company is free from any liabilities incurred by the former corporation.

Manlimos v. NLRC Facts: Manlimos along with 15 others were employees of Mahogany Plywood Corporation. A new owner/management group headed by Alfredo Roxas acquired complete ownership of the corporation. The petitioners were advised of such change of ownership; however, the

petitioners continued to work for the new owner and were considered terminated, with their conformity much later when they received their separation pay and all other benefits due them. Each of them then executed a Release and Waiver which they acknowledged before Atty. Nolasco Discipulo, Hearing Officer of the Butuan City District Office of DOLE. The new owner caused the publication of a notice for the hiring of workers, indicating therein who of the separated employees could be accepted on probationary basis. The petitioners were hired on probationary basis for six months as patchers or tapers, but were compensated on piece-‐rate or task basis. For their alleged absence without leave, Perla Cumpay and Virginia Etic were considered to have abandoned their work. The rest were dismissed later because they allegedly committed acts prejudicial to the interest of the new management which consisted of their "including unrepaired veneers in their reported productions on output as well as untaped corestock or whole sheets in their supposed taped veneers/corestock." The employee-‐petitioners allege that they remained regular employees of the corporation because the change in ownership and management of Super Mahogany left its separate juridical personality unaffected. In their defense, the corporation claims that it was within their management prerogative to terminate the employee-‐petitioners, as they were re-‐ hired by the new management under probationary status. Issue: Whether or not an innocent transferee of a business



establishment has liability to the employees of the transfer or to continue employing them. Held: NO. The change in ownership of the management was done bona fide and the petitioners did not for any moment before the filing of their complaints raise any doubt on the motive for the change. On the contrary, upon being informed thereof and of their eventual termination from employment, they freely and voluntarily accepted their separation pay and other benefits and individually executed the Release or Waiver which they acknowledged before no less than a hearing officer of the DOLE. Since the petitioners were effectively separated from work due to a bona fide change of ownership and they were accordingly paid their separation pay, which they freely and voluntarily accepted, the private respondent corporation was under no obligation to employ them; it may, however, give them preference in the hiring. The private respondent in fact hired, but on probationary basis, was legally permissible. The hiring of employees on a probationary basis is an exclusive management prerogative. The employer has the right or privilege to choose who will be hired and who will be denied employment. Doctrine: Where such transfer of ownership is in good faith, the transferee is under no legal duty to absorb the transferor employees as there is no law compelling such absorption. The most that the transferee may do, for reasons of public policy and social justice, is to give preference to the qualified separated employees in the filling of

vacancies in the facilities of the purchaser. D. Mergers and Consolidations: Filipinas Port Services v. NLRC, 177 SCRA 203 (1989).1

Filipinas Port Services v. NLRC

Facts: On Feb. 16, 1977, the government adopted a policy in Davao that only one company can operate stevedoring and arrastre services in the ports of Davao. Because of this, the companies providing such services consolidated together and formed a corporation named Davao Dockhandlers, Inc. which was later renamed Filipinas Port Services. Among the corporations in the consolidation agreement was Davao Maritime Stevedoring Corporation (DAMASTICOR). In the articles of incorporation of the new corporation, it provided that “all labor force together with its necessary personnel complement, of the merging operators shall be absorbed by the merged or integrated organization to constitute its labor force.” Private respondent, an employee of DAMASTICOR, upon retirement from Filipinas, was paid his retirement fee from 1977-‐1987. He however contends that his employment from DAMASTICOR should be counted in computing his retirement fee. Issue: Whether or not the successor-‐in-‐interest of an employer is liable

1 Reiterated in Filipinas Port Services v. NLRC, 200 SCRA 773 (1991); National Union Bank Employees v. Lazaro, 156 SCRA 123 (1988); First Gen. Marketing Corp. v. NLRC, 223 SCRA 337 (1993).��



for the differential retirement pay of an employee earned by him when he was still under the employment of the predecessor-‐in-‐interest. Held: NO. Petitioner cannot be held liable for the payment of the retirement pay of private respondent while in the employ of DAMASTICOR. It is the latter who is responsible for the same as the labor contract of private respondent with DAMASTICOR is in personam and cannot be passed on to the petitioner. Doctrine: Unless expressly assumed, labor contracts are not enforceable against a transferee of an enterprise, labor contracts being in personam.

• It is more in keeping with the dictates of social justice and the State policy of according full protection to labor to deem employment contracts as automatically assumed by the surviving corporation in a merger, even in the absence of an express stipulation in the articles of merger or the merger plan. By upholding the automatic assumption of the non-‐surviving corporation’s existing employment contracts by the surviving corporation in a merger, the Court strengthens judicial protection of the right to security of tenure of employees affected by a merger and avoids confusion regarding the status of their various benefits. Bank of P.I. v. BPI Employees Union-‐Davao Chapter, etc., 658 SCRA 828 (2011).

o Atty. Hofileña à the surviving corporation, in a merger situation, is absorbing everything including employees. As such, there is no interruption. This case seems to suggest that the employees have a choice whether to join the new company or not. However, the rule still is

that employment, because they are obligations, are carried over.

E. Spin-‐Offs: SMC Employees Union-‐PTGWO v. Confessor, 262 SCRA 81 (1996).

SMC Employees Union-‐PTGWO v. Confessor

Facts: SMC-‐Union entered into a Collective Bargaining Agreement with SMC. SMC management informed its employees in a letter that the company -‐ which was composed of 4 operating divisions (1) beer, (2) packaging, (3) feed and livestocks and (4) Magnolia and Agri-‐business -‐ would undergo a restructuring. Magnolia and Feeds and Livestock divisions were spun-‐off and became 2 separate and distinct corporations: Magnolia Corp. (Magnolia) and San Miguel Foods (SMFI). Because of this, the CBA was renegotiated. During the negotiations, SMC-‐Union insisted that the bargaining unit of SMC should still include the employees of the spun-‐off corporation and the CBA shall be effective for 2 years. SMC, on the other hand, contended that the members/employees who had moved to Magnolia and SMFI, automatically ceased to be part of the bargaining unit at the SMC. Issue: Whether or not the bargaining unit of SMC includes also the employees of Magnolia and SMFI. Held: NO. Magnolia and SMFI were spun-‐off to operate as distinct companies. Undeniably, the transformation of the companies was a management prerogative and business judgment which the courts cannot look into unless it is contrary to law, public policy or morals.



Neither can we impute any bad faith on the part of SMC so as to justify the application of the doctrine of piercing the corporate veil. Magnolia and SMFI became distinct entities with separate juridical personalities. Thus, they cannot belong to a single bargaining unit. Doctrine: In determining an appropriate bargaining unit, the test of grouping is mutuality or commonality of interests. Considering the spin-‐offs, the companies would consequently have their respective and distinctive concerns in terms of the nature of work, wages, hours of work and other conditions of employment.

13. acquisitions mergers and consolidations

Documents

disposition of property

disposition of assets

case of nonstock corporation

remaining business

business profitable

corporate property

concept of business

board of directors