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XXX Client

1234 Shaw Boulevard, Mandaluyong City


(02) XXXXXXX * (63922) XXXXXXX
askme@gmail.com

Sir XXX,

This is to respond to your legal inquiry regarding whether or not two corporate entities
may merge as a single corporate entity.

FACTS

I understand that there exist two corporate entities: one, a stock corporation, and the
other, a non-stock corporation.

I understand further that the two corporate entities have the same incorporators,
stockholders for the stock corporation, members/trustees for the Non-stock Corporation,
and board of directors all of which are composed of the same individuals.

At present, I understand the intent to merge or consolidate the corporate entities, as the
case may be, into a single corporation or into a new corporate entity. In addition, given
the circumstances, there is also intent to remove one of the member of the board of
directors from his position, as such, in the two corporate entities.

ISSUES

Based on the foregoing facts, you requested a legal opinion on the following:

a) Whether or not the two corporate entities may merge/consolidate?


b) Whether or not the non-stock corporation may create a department that is
income generating?
c) Whether or not the two corporate entities may remove a member of the board
of director?
d) Whether or not the two entities can remove the member of the Board of
Director by amendment?
e) Whether or not the two entities may create a new corporate entity to fast track
the process of the removal of the aforementioned member of the Board of
Director?
f) Whether or not the Articles of Incorporation for a stock corporation may
stipulate for the waiver of the rights of the other stockholders as to the stock
dividends, vesting such to solely one stockholder?

OPINION

On Merger/Consolidation of the
two corporate entities into single entity

The two corporate entities may merge or consolidate, as the case may be, into a single
corporate entity. Section 36, par. 8 of the Corporation Code of the Philippines expressly
empowers a corporation to merge or consolidate with another corporation subject to the
requirements and procedure prescribed in Title IX of the same law.

Merger is a union effected by absorbing one or more existing corporation by another


which survives and continues the combined business. (Ballantine, Law Dictionary, p.
1118) In this case therefore, if B (non-stock) corporation, agreed that it will take over and
acquire all the business, assets, properties, rights, and liabilities of A (stock corporation)
and by virtue of which B will absorb A which is to be dissolved, a merger is effected.
Consolidation on the other hand, is the uniting or amalgamation of two or more existing
corporations to form a new corporation. It denotes a union necessarily resulting to the
new corporation and termination of the old ones.

It is in no case however, that the stock corporation in case of a merger may absorb the
non-stock corporation. Furthermore, the non-stock by virtue of consolidation becomes a
stock corporation. A non-stock corporation cannot be converted into a stock corporation
through mere amendment of its Articles of Incorporation. (SEC Opinion, March 20,
1995) A non-stock corporation can be converted into a stock corporation only if the
members dissolve it first and then organize a stock corporation. (SEC Opinion May 13,
1992)

The Procedure

(a) The Board of each corporation shall draw up a plan of merger or consolidation setting
forth: (1) names of the corporation involved; (2) terms and mode carrying it; (3)
statement of changes, if any, in the present Articles of the Surviving corporation or the
Articles of the new corporation to be formed in case of consolidation.

(b) Plan for merger or consolidation shall be approved by majority vote of each of the
board of the concerned corporations at separate meetings, and approved by 2/3 of the
Outstanding Capital Stock or members for non-stock corporations.

(c) Any amendment to the plan must be approved by the majority vote of the board
members or trustees of the constituent corporations and affirmative vote of 2/3 of the
outstanding capital stock or members.

(d) Articles of Merger or Articles of Consolidation shall be executed by each of the


constituent corporations, signed by the President or Vice President and certified by
secretary or assistant secretary setting forth: (1) Plan of merger or consolidation; (2) for
stock corporation, the number of shares of outstanding; for non-stock, the number of
members; (3) as to each corporation, number of shares or members voting for and against
such plan respectively.

(e) Four copies of the Articles of Merger or Consolidation shall be submitted to the SEC
for approval.

On income generating department


For the non-stock corporation

A non-stock corporation cannot generally, engage in any business undertaking or activity


for profit as it would run counter to its very nature as a non profit entity. However, as
may be allowed and specified in its article of incorporation or as incidental to the objects
and purposes indicated therein, it may engage in certain money-making ventures or
economic activities provided that any profits derived therefrom shall be used for the
furtherance of the purpose for which the corporation was organized or to defray the
operating expenses of the entity. It has thus been said that the fact that a non-profit
corporation earns a profit, gain or income for the corporation or members does not make
it a profit-making corporation where such profit or income is used for the purpose set
forth in the articles of incorporation and is not distributable to its incorporators, members
of officers, since mere intangible or pecuniary benefits to the members do not change the
nature of the corporation. (2A Fletcher, Cyclopedia of Corporation, 1983 Rev.Vol., p.
151)

On the removal of a Board of Director

Philippine jurisprudence citing Section 28 of the Corporation Code of the Philippines


authorizes the stockholders or members to remove or oust the corporate director or
trustee with or without cause, subject only to the limitation that removal without cause
may not be used to deprive minority stockholders or members of the right to
representation which they may be entitled under the law. (Ladia, The Corporation Code
of the Philippines, p. 178)

In case of a corporation whereby A, B, and C stockholders own 200 shares of stocks each
and, D and E with 50 shares of stocks each; A, B, and C, may not vote for the removal of

D or E as a board of director / trustee without cause, removal of either D or E must


always be with cause.

Apparent from the provision as above mentioned, the corporate by-laws may provide for
the causes or grounds for the removal of a director. (2 Fletcher, 184)

There are of course, statutory requirements for the removal of the director or trustee, to
wit: (1) the removal should take place at a general or special meeting called for that
purpose; (2) the removal must be by the vote of the stockholders (in case of the stock
corporation) or members (in case of non-stock corporation) holding or representing 2/3
of the outstanding capital stock or the members of entitled to vote in cases of non-stock
corporation; and (3) there musty be a previous notice to the stockholders or members of
the intention to propose such removal at the meeting either by publication or on written
notice to the stockholders or members. The filling of the vacancy in the Board of Director
or Trustees may be done in the same meeting if a quorum exist after such removal,
Provided that only the stockholders or members are allowed to fill the vacancy in case of
such removal.

On removal of the director or trustee


by amendment of the Articles of Incorporation

This is not a manner of a valid removal of a Board of Director as provided for under the
law. It is only through the previous discussion that a director or trustee may be removed.
However, the subsequent amendment of the Articles of Incorporation is the direct
consequence of the valid removal of the director, as such would necessarily be needed to
change a provision or matter stated in the articles of incorporation, as gleaned from
Section 14[6] of the Corporation Code of the Philippines.

On the creation of a new corporate entity to


Fast track the removal of the director

I am in the opinion that a new corporate entity may always be formed, provided however,
that the two existing corporate entities will go through the process of dissolution. A
corporation may be dissolved in either of three ways: (1) by expiration of term; (2) by
voluntary surrender of its corporate franchise; (3) by the revocation of its corporate
franchise.

Expiration of term (Self-explanatory)

Voluntary Surrender of its corporate franchise: There are three modes in this kind of
dissolution under the code. These are (1) Voluntary dissolution where no creditors are
affected (See. Section 18, Corporation Code); (2) Voluntary dissolution where creditors
are affected (See. Section 119, Corporation Code); (3) Shortening of Corporate Term
(See. Section 120, Corporation Code)

Involuntary Dissolution as provided under Section 121 of the Corporation code states
that A Corporation may be dissolved by the Securities and Exchange Commission upon
filing of a verified complaint and after proper notice and hearing on the grounds provided
by existing laws, rules, and regulations.

During the pendency of the dissolution, the corporation ceases to be a juridical entity and
can no longer pursue the business for which it is incorporated. It will nevertheless
continue as a body corporate for another period of three years from the time it is
dissolved but only for the purpose of winding up its affairs and the liquidation of its
assets. (Section 122, Corporation Code of the Philippines)

The law truly recognizes the corporate entity distinct and separate from the persons
composing it.

The juridical personality of the corporation, as separate and distinct from the persons
composing it is but a legal fiction introduced for the purpose of convenience and to
subserve the ends of justice. (Bayan v. Araneta, Inc. 72 SCRA 347)

This protection may however be disregarded, as the court held in several cases. In Mc
Connel v. Court of Appeals, the court said that when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend a crime, the law will
regard the corporation as a mere association of persons. The same is true where a
corporation is a mere dummy and serves no business purpose and is intended only as a
blind, or an alter ego or business conduit for the sole benefit of the stockholders.
(Emphasis supplied)

Therefore, in such case where, a new entity is created during the corporate existence of
the two subject entities for the same purpose and to justify the means of the removal of
the board of director, one if not all, corporate entities will be considered as mere
association of persons to which, persons composing it will be held personally liable for
any actions that may arise against such association.

On the stipulation of waiver


Of rights by several stockholders

This cannot be validly done under the provisions for stock corporations. The stipulation
for such waiver would defeat the character and nature of a stock corporation. When one
use other individuals as her dummies, constitutes fraud, which renders the corporate
entity being a means to perpetrate and protect fraud. Hence, liability is directed to the
incorporators.

While it has been held that the ownership of all stocks of a corporation by another
corporation does not necessarily breed an identity of corporate interest between the two
companies and be considered as sufficient ground for disregarding the distinct
personalities. (Lidell & Co. v. Collector of Internal Revenue, G.R. No. L-9687) This rule,
however, admits and exception, to wit: When the circumstance presented by the facts of
the case, yields to the conclusion that a corporation is merely an adjunct, business conduit
or alter-ego, of another corporation, and that the fiction of corporate entities, separate and
distinct from each other should be disregarded. (Yutivo & Sons Co. v. Court of Appeals, 1
SCRA 160)

Lastly, in the Marvel Building Corporation v. Bureau of Internal Revenue (94 Phil 376,
24 February 1954) the court held that Maria B. Castro, a stockholder of the petitioner
corporation, is the sole and exclusive owner of all the shares of stock of the Marvel
Building Corporation and that the other partners are her dummies. In general the evidence
offered by the plaintiffs is testimonial and direct evidence, easy of fabrication; that
offered by defendant, documentary and circumstantial, not only difficult of fabrication
but in most cases found in the possession of plaintiffs. There is very little room for choice
as between the two. The circumstantial evidence is not only convincing; it is conclusive.
Maria B. Castro had made enormous profits and, therefore, had a motive to hide them to
evade the payment of taxes.

Hence, the intent to impose such stipulation in the Articles of Incorporation may be
deemed as a fraudulent machination to evade governmental duties in favor of one
stockholder, subscribing to the rulings made by the court. Not only would it be repugnant
to the provisions on stock corporations but also, it may give rise to personal liability
arising from tax claims or any other liability as provided by law.

Let me know if you require further clarifications as to the discussions of the issues. God
Bless!

END OF LEGAL OPINION

Prepared by

BERSAMIRA, Anthony Kay Karl P.


Arellano University School of Law