POWERS OF CORPORATION dividends.

A stock dividend really adds nothing to the interest of

TITLE IV the stockholder; the proportional interest of each stockholder
Doctrines: remains the same (Towne v. Eisner, 62 L. Ed. 372). If a
stockholder is deprived of his stock dividends—and this happens
Nielson & Company, Inc. vs. Lepanto Consolidated Mining if the shares of stock f orming part of the stock dividends are
Company issued to a nonstockholder—then the proportion of the
stockholder's interest changes radically. Stock dividends are civil
Corporation law; Shares of stock; Consideration for which
fruits of the original investment, and to the owners of the shares
shares of stock may be issued; A share of stock coming from
belong the civil fruits (Art. 441, Civil Code). The term "dividend"
stock dividends declared cannot be issued to one who is not a
both in the technical sense and its ordinary acceptation, is that
stockholder of a corporation.—From the provision of Section 16
part or portion of the profits of the enterprise which the
of the Corporation Law, the consideration for which shares of
stock may be issued are: (1) cash; (2) property; and (3) corporation, by its governing agents, sets apart for ratable
undistributed profits. Shares of stock are given the special name division among the holders of the capital stock. It means the
"stock dividends" only if they are issued in lieu of undistributed fund actually set aside, and declared by the directors of the
profits. If shares of stocks are issued in exchange of cash or corporation as a dividend, and duly ordered by the directory, or
property then those shares do not fall under the category of by the stockholders, at a corporate meeting, to be divided or
"stock dividends". A corporation may legally issue shares of distributed among the stockholders according to their respective
stock in consideration of services rendered to it by a person not interests (7 Thompson on Corporations 134135).
a stockholder, or in payment of its indebtedness. It is the
sharesof stock ,that are originally issued by the corporation and
forming part of the capital that can be exchanged for cash or Islamic Directorate of the Phils. vs. Court of Appeals
services rendered, or property; that is, if the corporation has
original shares of stock unsold or unsubscribed, either coming Same; Same; Same; Same; Same; Corporation Law; A juridical
from the original capitalization or f rom the increased person can not be considered essentially a formal party to a
capitalization. Those shares of stock may be issued to a person case where it was not duly represented by its legitimate
who is not a stockholder, or to a person already a stockholder in
governing board.—In this connection, although it is true that Civil
exchange for services rendered or for cash or property. But a
Case No. Q-90-6937, which gave rise to G.R. No. 107751, was
share of stock coming from stock dividends declared cannot be
entitled, “Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the
issued to one who is not a stockholder of a corporation.
Philippines, Defendant,” the IDP can not be considered
Under Section 16 of the Corporation Law stock dividends can
essentially a formal party thereto for the simple reason that it
not be issued to a person who is not a stockholder in payment of
was not duly represented by a legitimate Board of Trustees in
services rendered.
that case. As a necessary consequence, Civil Case No. Q-90-
Same; "Stock dividend"; "Dividend"; Concept and nature.—A
6937, a case for Specific Performance with Damages, a mere
"stock dividend" is any dividend payable in shares of stock of the
action in personam , did not become final and executory insofar
corporation declaring or authorizing such dividend. It is, as what
as the true IDP is concerned since petitioner corporation, for
the term itself implies, a distribution of the shares of stock of the
want of legitimate representation, was effectively deprived of its
corporation among the stockholders as dividends. A stock
day in court in said case. Res inter alios judicatae nullum aliis
dividend of a corporation is a dividend paid in shares of stock
praejudicium faciunt. Matters adjudged in a cause do not
instead of cash, and is properly payable only out of surplus
prejudice those who were not parties to it. Elsewise put, no
profits (Sec. 16, Corporation Law). So, a stock dividend is
person (natural or juridical) shall be affected by a proceeding to
actually two things: (1) a dividend, and (2) the enforced use of
which he is a stranger.
the dividend money to purchase additional shares of stock at
Same; Same; Same; Same; Same; While it is true that the
par. (Words and Phrases, p. 270). When a corporation issues
principle of res judicata is a fundamental component of our
stock dividends, it shows that the corporation's accumulated
judicial system, it should be disregarded if its rigid application
profits have been capitalized instead of distributed to the
would involve the sacrifice of justice to technicality.—In any
stockholders or retained as surplus available f or distribution, in
case, while it is true that the principle of res judicata is a
money or kind, should opportunity offer. Far from being a
fundamental component of our judicial system, it should be
realization of profits for the stockholder, it tends rather ,to
disregarded if its rigid application would involve the sacrifice of
postpone said realization, in ,that the fund represented by the
justice to technicality.
new stock has been transferred from surplus to assets and no
longer available for actual distribution (Fisher v. Trinidad, 43 Phil.
Corporation Law; Jurisdiction; Securities and Exchange
973). Thus, it is apparent that stock dividends are issued only to
Commission; The SEC has the unquestionable authority to pass
stockholders. This is so because only stockholders are entitled
upon the issue as to who among the different contending groups
to dividends. They are the only ones who have a right to a
is the legitimate governing board of a corporate body.—There
proportional share in that part of the surplus which is declared as
can be no question as to the authority of the SEC to pass upon
the issue as to who among the different contending groups is the
legitimate Board of Trustees of the IDP since this is a matter
properly falling within the original and exclusive jurisdiction of the
SEC by virtue of Sections 3 and 5(c) of Presidential Decree No.
902-A: “Section 3. The Commission shall have absolute
jurisdiction, supervision and control over all corporations,
partnerships or associations , who are the grantees of primary
franchises and/or a license or permit issued by the government
to operate in the Philippines x x x x x x.” x x x x x x x x x Section
5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corpora ti ons ,
partnerships and other forms of associations registered with it as
expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases
involving: x x x x x x x x x c) Controversies in the selection or
appointment of directors, trustees, officers, or managers of such
corporations, partnerships or associations. x x x.”
Dee vs. Securities and Exchange Commission
Corporation Law; Securities and Exchange Commission: The
jurisdiction of the SEC is limited to matters intrinsically
connected with the regulation of corporations, partnership and
associations and those dealing with internal affairs of such
entities.—In other words, in order that the SEC can take
cognizance of a case, the controversy must pertain to any of the
following relationships: (a) between corporation, partnership or
association and the public; (b) between the corporation,
partnership, or association and its stockholders, partners,
members or officers; (c) between the corporation, partnership or
association and the state insofar as its franchise, permit or
license to operate is concerned; and (d) among the
stockholders, partners, or associates themselves (Union Glass
& Container Corp. vs. SEC, 126 SCRA 31 [1983]). The
jurisdiction of the SEC is limited to matters intrinsically
connected with the regulation of corporations, partnerships and
associations and those dealing with internal affairs of such
entities; P.D. 902-A does not confer jurisdiction to SEC over all
matters affecting corporations (Pereyra vs. IAC, 181 SCRA 244
[1990]; Sales v. SEC, 169 SCRA 121 [1989]). The jurisdiction of
the SEC in SEC Case No. 1748 is limited to deciding the
controversy in the election of the directors and officers of
Natelco. Thus, the SEC was correct when it refused to rule on
whether the issuance of the shares of Natelco stocks to CSI
violated Sec. 20 (h) of the Public Service Act. The SEC ruling as
to the issue involving the Public Service Act, Section 20 (h),
asserts that the Commission En Banc is not empowered to grant
much less cancel franchise for telephone and communications,
and therefore has no authority to rule that the issuance and sale
of shares would in effect constitute a violation of Natelco’s
secondary franchise. It would be in excess of jurisdiction on our
part to decide that a violation of our public service laws has
been committed. The matter is better brought to the attention of
the appropriate body for determination. Neither can the
SECprovisionally decide the issue because it is only vested with
the power to grant or revoke the primary corporate franchise.
The SEC is empowered by P.D. 902-A to decide intra-corporate
controversies and that is precisely the only issue in this case.
Same; Shares of Stocks; Stockholders, Rights of; The pre-
emptive right of stockholders is recognized only with respect to
new issue of shares, and not with respect to additional issues of
originally authorized shares.—While the group of Luciano
Maggay was in control of Natelco by virtue of the restraining
order issued in G.R. No. 50885, the Maggay Board issued
113,800 shares of stock to CSI. Petitioner said that the Maggay
Board, in issuing said shares without notifying Natelco
stockholders, violated their right of pre-emption to the unissued
shares. This Court in Benito vs. SEC, et al., has ruled that:
“Petitioner bewails the fact that in view of the lack of notice to
him of such subsequent issuance, he was not able to exercise
his right of preemption over the unissued shares. However, the
general rule is that pre-emptive right is recognized only with
respect to new issues of shares, and not with respect to
additional issues of originally authorized shares. This is on the
theory that when a corporation at its inception offers its first
shares, it is presumed to have offered all of those which it is
authorized to issue. An original subscriber is deemed to have
taken his shares knowing that they form a definite proportionate
part of the whole number of authorized shares. When the shares
left unsubscribed are later reoffered, he cannot therefore (sic)
claim a dilution of interest (Benito vs. SEC, et al., 123 SCRA
722).” The questioned issuance of the 113,800 stocks is not
invalid even assuming that it was made without notice to the
stockholders as claimed by the petitioner. The power to issue
shares of stocks in a corporation is lodged in the board of
directors and no stockholders’ meeting is required to consider it
because additional issuance of shares of stocks does not need
approval of the stockholders. Consequently, no preemptive right
of Natelco stockholders was violated by the issuance of the
113,800 shares to CSI.
Courts; Contempt of Court; The court has no authority to punish
for disobedience of an order issued without authority.—
Accordingly, it is clear that since the trial judge in the lower court
(CFI of Camarines Sur) did not have jurisdiction in issuing the
questioned restraining order, disobedience thereto did not
constitute contempt, as it is necessary that the order be a valid
and legal one. It is an established rule that the court has no
authority to punish for disobedience of an order issued without
authority (Chanco v. Madrilejos, 9 Phil. 356; Angel Jose Realty
Corp. v. Galao, et al., 76 Phil. 201). Finally, it is wellsettled that
the power to punish for contempt of court should be exercised
on the preservative and not on the vindictive principle. Only
occasionally should the court invoke its inherent power in order
to retain that respect without which the administration of justice
must falter or fail (Rivera v. Florendo, 144 SCRA 643, 662-663
[1986]; Lipata v. Tutaan, 124 SCRA 880 [1983]).
Philippine National Bank vs. Andrada Electric & Engineering
Company
Corporate Law|Piercing the Corporate Veil|Consolidation|Merger
Corporate Law; 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; Exceptions.—As a rule, a
corporation that purchases the assets of another will not be
liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such
assets, except when any of the following circumstances is
present: (1) where the purchaser expressly or impliedly agrees
to assume the debts, (2) where the transaction amounts to a
consolidation or merger of the corporations, (3) where the
purchasing corporation is merely a continuation of the selling
corporation, and (4) where the transaction is fraudulently
entered into in order to escape liability for those debts.
Same; A corporation is an artificial being created by operation of
law; It has a personality separate and distinct from the persons
composing it, as well as from any other legal entity to which it
may be related.—A corporation is an artificial being created by
operation of law. It possesses the right of succession and such
powers, attributes, and properties expressly authorized by law or
incident to its existence. It has a personality separate and
distinct from the persons composing it, as well as from any other
legal entity to which it may be related. This is basic.
Same; Piercing the Corporate Veil; The corporate mask may be
removed or the corporate veil pierced when the corporation is
just an alter ego of a person or of another corporation; The
corporate veil will justifiably be impaled only when it becomes a
shield for fraud, illegality or inequity committed against third
persons.—Equally well-settled is the principle that the corporate
mask may be removed or the corporate veil pierced when the
corporation is just an alter ego of a person or of another
corporation. For reasons of public policy and in the interest of
justice, the corporate veil will justifiably be impaled only when it
becomes a shield for fraud, illegality or inequity committed
against third persons.
Same; Same; Same; Court must be certain that the corporate
fiction was misused to such an extent that injustice, fraud, or
crime was committed against another, in disregard of its rights;
Wrongdoings must be clearly and convincingly established.—
Hence, any application of the doctrine of piercing the corporate
veil should be done with caution. A court should be mindful of
the milieu where it is to be applied. It must be certain that the
corporate fiction was misused to such an extent that injustice,
fraud, or crime was committed against another, in disregard of
its rights. The wrongdoing must be clearly and convincingly
established; it cannot be presumed. Otherwise, an injustice that
was never unintended may result from an erroneous application.
Same; Same; Same; Elements before piercing the veil of
corporate fiction may be allowed.—Piercing the veil of corporate
fiction may be allowed only if the following elements concur: (1)
control—not mere stock control, but complete domination—not
only of finances, but of policy and business practice in respect to
the transaction attacked, must have been such that the
corporate entity as to this transaction had at the time no
separate mind, will or existence of its own; (2) such control must
have been used by the defendant to commit a fraud or a wrong
to perpetuate the violation of a statutory or other positive legal
duty, or a dishonest and an unjust act in contravention of plaintiff
’s legal right; and (3) the said control and breach of duty must
have proximately caused the injury or unjust loss complained of.
Same; Consolidation; Merger; Consolidation and Merger
Distinguished.—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.
Same; Same; Same; Same; Merger does not become effective
upon the mere agreement of the constituent corporations; There
must be an express provision of law authorizing them; For a
valid merger or consolidation, the approval by the Securities and
Exchange Commission of the article of merger or consolidation
is required.—The merger, however, does not become effective
upon the mere agreement of the constituent corporations. Since
a merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law authorizing
them. For a valid merger or consolidation, the approval by the
Securities and Exchange Commission (SEC) of the articles of
merger or consolidation is required. These articles must likewise
be duly approved by a majority of the respective stockholders of
the constituent corporations.
Loyola Grand Villas Homeowners (South) Association, Inc. vs.
Court of Appeals
Corporation Law|Statutory Construction|Words and Phrases|By-
Laws|Due Process|Presidential Decree 902-A|Statutes in
Materia|Securities and Exchange Commission
Corporation Law; Statutory Construction; Words and
Phrases;Ordinarily, the word “must” connotes an imperative act
or operates to impose a duty which may be enforced—it is
synonymous with “ought” which connotes compulsion or
mandatoriness though the word “must” in a statute, like “shall,”
is not always imperative and may be consistent with an exercise
of discretion.—As correctly postulated by the petitioner,
interpretation of this provision of law begins with the
determination of the meaning and import of the word “must” in
this section. Ordinarily, the word “must” connotes an imperative
act or operates to impose a duty which may be enforced. It is
synonymous with “ought” which connotes compulsion or
mandatoriness. However, the word “must” in a statute, like
“shall,” is not always imperative. It may be consistent with an
exercise of discretion. In this jurisdiction, the tendency has been
to interpret “shall” as the context or a reasonable construction of
the statute in which it is used demands or requires. This is
equally true as regards the word “must.” Thus, if the language of
a statute considered as a whole and with due regard to its
nature and object reveals that the legislature intended to use the
words “shall” and “must” to be directory, they should be given
that meaning.
Same; Same; By-Laws; The legislative deliberations
demonstrate that automatic corporate dissolution for failure to
file the bylaws on time was never the intention of the legislature.
—This exchange of views demonstrates clearly that automatic
corporate dissolution for failure to file the by-laws on time was
never the intention of the legislature. Moreover, even without
resorting to the records of deliberations of the Batasang
Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
Same; Same; Same; Taken as a whole and under the principle
that the best interpreter of a statute is the statute itself (optima
statuli interpretatix est ipsum statutum), Section 46 of the
Corporation Code reveals the legislative intent to attach a
directory, and not mandatory, meaning for the word “must” in the
first sentence thereof.—Taken as a whole and under the
principle that the best interpreter of a statute is the statute itself
(optima statuti interpretatix est ipsum statutum), Section 46
aforequoted reveals the legislative intent to attach a directory,
and not mandatory, meaning for the word “must” in the first
sentence thereof. Note should be taken of the second paragraph
of the law which allows the filing of the by-laws evenprior to
incorporation. This provision in the same section of the Code
rules out mandatory compliance with the requirement of filing the
by-laws “within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the Securities and
Exchange Commission.” It necessarily follows that failure to file
the by-laws within that period does not imply the “demise” of the
corporation.
Same; Same; Same; By-laws may be necessary for the
“government” of the corporation but these are subordinate to the
articles of incorporation as well as to the Corporation Code and
related statutes.—By-laws may be necessary for the
“government” of the corporation but these are subordinate to the
articles of incorporation as well as to the Corporation Code and
related statutes. There are in fact cases where by-laws are
unnecessary to corporate existence or to the valid exercise of
corporate powers, thus: “In the absence of charter or statutory
provisions to the contrary, by-laws are not necessary either to
the existence of a corporation or to the valid exercise of the
powers conferred upon it, certainly in all cases where the charter
sufficiently provides for the government of the body; and even
where the governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure to exercise
the power will be ascribed to mere nonaction which will not
render void any acts of the corporation which would otherwise
be valid.”
Same; Same; Same; Due Process; There can be no automatic
corporate dissolution simply because the incorporators failed to
abide by the required filing of by-laws—the incorporators must
be given the chance to explain their neglect or omission and to
remedy the same.—Even under the foregoing express grant of
power and authority, there can be noautomatic corporate
dissolution simply because the incorporators failed to abide by
the required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright “demise” of corporate
existence. Proper notice and hearing are cardinal components of
due process in any democratic institution, agency or society. In
other words, the incorporators must be given the chance to
explain their neglect or omission and remedy the same.
Same; Same; Same; Presidential Decree 902-A; Statutes in
Materia;Securities and Exchange Commission; The failure of the
Corporation Code to provide for the consequences of the non-
filing of by-laws on time has been rectified by P.D. No. 902-A;
Every statute must be so construed and harmonized with other
statutes as to form a uniform system of jurisprudence.—
Although the Corporation Code requires the filing of by-laws, it
does not expressly provide for the consequences of the non-
filing of the same within the period provided for in Section 46.
However, such omission has been rectified by Presidential
Decree No. 902-A, the pertinent provisions on the jurisdiction of
the Securities and Exchange Commission of which state: * * *
That the failure to file by-laws is not provided for by the
Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on
March 11, 1976, is very much apposite to the Code. Accordingly,
the provisions abovequoted supply the law governing the
situation in the case at bar, inasmuch as the Corporation Code
and P.D. No. 902-A are statutes in pari materia. Interpretare et
concordare legibus est optimus interpretandi. Every statute must
be so construed and harmonized with other statutes as to form a
uniform system of jurisprudence.
Same; By-Laws; Failure to file the by-laws within the period
required by law by no means tolls the automatic dissolution of a
corporation.—As the “rules and regulations or private laws
enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and
among themselves in their relation to it,” by-laws are
indispensable to corporations in this jurisdiction. These may not
be essential to corporate birth but certainly, these are required
by law for an orderly governance and management of
corporations. Nonetheless, failure to file them within the period
required by law by no means tolls the automatic dissolution of a
corporation.

China Banking Corporation vs. Court of Appeals
Securities and Exchange Commission|Appeals|Loans|
Corporation Law|Actions|Jurisdiction|Corporation Law|By-Laws|
Estoppel|Procedural Rules|Remand of Cases
Securities and Exchange Commission; Actions; Jurisdiction; The
better policy in determining which body has jurisdiction over a
case would be to consider not only the status of relationship of
the parties but also the nature of the question that is the subject
of their controversy.—The basic issue we must first hurdle is
which body has jurisdiction over the controversy, the regular
courts or the SEC. P.D. No. 902-A conferred upon the SEC the
following pertinent powers: * * * The aforecited law was
expounded upon in Viray v. CA and in the recent cases
of Mainland Construction Co., Inc. v. Movilla and Bernardo v.
CA, thus: . . . . The better policy in determining which body has
jurisdiction over a case would be to consider not only the status
or relationship of the parties but also the nature of the question
that is the subject of their controversy.
Same; Same; Same; Corporation Law; The purchase of a share
or membership certificate at public auction by a party (and the
issuance to it of the corresponding Certificate of Sale) transfers
ownership of the same to the latter and thus entitle it to have the
said share registered in its name as a member.—As to the first
query, there is no question that the purchase of the subject
share or membership certificate at public auction by petitioner
(and the issuance to it of the corresponding Certificate of Sale)
transferred ownership of the same to the latter and thus entitled
petitioner to have the said share registered in its name as a
member of VGCCI. It is readily observed that VGCCI did not
assail the transfer directly and has in fact, in its letter of 27
September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner
and has even noted said agreement in its corporate books. In
addition, Calapatia, the original owner of the subject share, has
not contested the said transfer. By virtue of the afore-mentioned
sale, petitioner became a bona fidestockholder of VGCCI and,
therefore, the conflict that arose between petitioner and VGCCI
aptly exemplifies an intra-corporate controversy between a
corporation and its stockholder under Sec. 5(b) of P.D. 902-A.
Same; Same; Same; Same; By-Laws; The proper interpretation
and application of a corporation’s by-laws is a subject which
irrefutably calls for the special competence of the SEC.—An
important consideration, moreover, is the nature of the
controversy between petitioner and private respondent
corporation. VGCCI claims a prior right over the subject share
anchored mainly on Sec. 3, Art. VIII of its by-laws which provides
that “after a member shall have been posted as delinquent, the
Board may order his/her/its share sold to satisfy the claims of
the Club . . .” It is pursuant to this provision that VGCCI also sold
the subject share at public auction, of which it was the highest
bidder. VGCCI caps its argument by asserting that its corporate
by-laws should prevail. The bone of contention, thus, is the
proper interpretation and application of VGCCI’s aforequoted
bylaws, a subject which irrefutably calls for the special
competence of the SEC.
Same; Same; Same; Estoppel; The plaintiff who files a
complaint with one court which has no jurisdiction over it is not
estopped from filing the same complaint later with the
competent court.—In Zamora v. Court of Appeals, this Court,
through Mr. Justice Isagani A. Cruz, declared that: It follows that
as a rule the filing of a complaint with one court which has no
jurisdiction over it does not prevent the plaintiff from filing the
same complaint later with the competent court. The plaintiff is
not estopped from doing so simply because it made a mistake
before in the choice of the proper forum. . . .
Appeals; Procedural Rules; Remand of Cases; The remand of
the case or of an issue to the lower court for further reception of
evidence is not necessary where the Supreme Court is in
position to resolve the dispute based on the records before it
and particularly where the ends of justice would not be
subserved by the remand thereof.—Applicable to this case is the
principle succinctly enunciated in the case of Heirs of Crisanta
Y. Gabriel-Almoradie v. Court of Appeals, citing Escudero v.
Dulay and The Roman Catholic Archbishop of Manila v. Court of
Appeals: In the interest of the public and for the expeditious
administration of justice the issue on infringement shall be
resolved by the court considering that this case has dragged on
for years and has gone from one forum to another. It is a rule of
procedure for the Supreme Court to strive to settle the entire
controversy in a single proceeding leaving no root or branch to
bear the seeds of future litigation. No useful purpose will be
served if a case or the determination of an issue in a case is
remanded to the trial court only to have its decision raised again
to the Court of Appeals and from there to the Supreme Court.
We have laid down the rule that the remand of the case or of an
issue to the lower court for further reception of evidence is not
necessary where the Court is in position to resolve the dispute
based on the records before it and particularly where the ends of
justice would not be subserved by the remand thereof.
Moreover, the Supreme Court is clothed with ample authority to
review matters, even those not raised on appeal if it finds that
their consideration is necessary in arriving at a just disposition of
the case.
Associated Bank vs. Court of Appeals
Corporation Law|Contracts|Mergers|Promissory Notes|
Prescription|Laches|Stipulations Pour Autrui|Requisites|
Estoppel
Corporation Law; Mergers; The merger does not become
effective upon the mere agreement of the constituent
corporations—the merger shall be effective only upon the
issuance by the SEC of a certificate of merger.—Ordinarily, in
the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights,
properties and liabilities are acquired by the surviving
corporation. Although there is a dissolution of the absorbed
corporations, there is no winding up of their affairs or liquidation
of their assets, because the surviving corporation automatically
acquires all their rights, privileges and powers, as well as their
liabilities. The merger, however, does not become effective upon
the mere agreement of the constituent corporations. The
procedure to be followed is prescribed under the Corporation
Code. Section 79 of said Code requires the approval by the
Securities and Exchange Commission (SEC) of the articles of
merger which, in turn, must have been duly approved by a
majority of the respective stockholders of the constituent
corporations. The same provision further states that the merger
shall be effective only upon the issuance by the SEC of a
certificate of merger. The effectivity date of the merger is crucial
for determining when the merged or absorbed corporation
ceases to exist; and when its rights, privileges, properties as
well as liabilities pass on to the surviving corporation.
Same; Same; Promissory Notes; The fact that a promissory
note was executed after the effectivity date of the merger does
not militate against the surviving bank where the agreement
itself clearly provides that all contracts—irrespective of the date
of execution—entered into in the name of the other bank shall
be understood as pertaining to the surviving bank.—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. A closer perusal of the merger
agreement leads to a different conclusion. The provision quoted
earlier has this other clause: “Upon the effective date of the
[m]erger, all references to [CBTC] in any deed, documents, or
other papers of whatever kind or nature and wherever found
shall be deemed for all intents and purposes, references to
[ABC], the SURVIVING BANK, as if such references were direct
references to [ABC]. x x x” (Italics supplied) Thus, the fact that
the promissory note was executed after the effectivity date of the
merger does not militate against petitioner. 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.
Since, in contrast to the earlier aforequoted provision, the latter
clause no longer specifically refers only to contracts existing at
the time of the merger, no distinction should be made. The
clause must 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.
Contracts; Prescription; A suit for collection of money based on
a written contract prescribes after ten years from the time its
right of action arose.—Private respondent’s claim that the action
has prescribed, pursuant to Article 1149 of the Civil Code, is
legally untenable. Petitioner’s suit for collection of a sum of
money was based on a written contract and prescribes after ten
years from the time its right of action arose. Sarmiento’s
obligation under the promissory note became due and
demandable on March 6, 1978. Petitioner’s complaint was
instituted on August 22, 1985, before the lapse of the ten-year
prescriptive period. Definitely, petitioner still had every right to
commence suit against the payor/obligor, the private respondent
herein.
Same; Same; Laches; The doctrine of laches is inapplicable
where the claim was filed within the prescriptive period set forth
under the law.—Neither is petitioner’s action barred by laches.
The principle of laches is a creation of equity, which is applied
not to penalize neglect or failure to assert a right within a
reasonable time, but rather to avoid recognizing a right when to
do so would result in a clearly inequitable situation or in an
injustice. To require private respondent to pay the remaining
balance of his loan is certainly not inequitable or unjust. What
would be manifestly unjust and inequitable is his contention that
CBTC is the proper party to proceed against him despite the
fact, which he himself asserts, that CBTC’s corporate personality
has been dissolved by virtue of its merger with petitioner. To hold
that no payee/obligee exists and to let private respondent enjoy
the fruits of his loan without liability is surely most unfair and
unconscionable, amounting to unjust enrichment at the expense
of petitioner. Besides, this Court has held that the doctrine of
laches is inapplicable where the claim was filed within the
prescriptive period set forth under the law.
Same; Stipulations Pour Autrui; Requisites; The “fairest test” in
determining whether the third person’s interest in a contract is a
stipulation pour autrui or merely an incidental interest is to
examine the intention of the parties as disclosed by their
contract.—A stipulation pour autrui is one in favor of a third
person who may demand its fulfillment, provided he
communicated his acceptance to the obligor before its
revocation. An incidental benefit or interest, which another
person gains, is not sufficient. The contracting parties must have
clearly and deliberately conferred a favor upon a third
person. Florentino vs. Encarnacion, Sr. enumerates the
requisites for such contract: (1) the stipulation in favor of a third
person must be a part of the contract, and not the contract itself;
(2) the favorable stipulation should not be conditioned or
compensated by any kind of obligation; and (3) neither of the
contracting parties bears the legal representation or
authorization of the third party. The “fairest test” in determining
whether the third person’s interest in a contract is a
stipulationpour autrui or merely an incidental interest is to
examine the intention of the parties as disclosed by their
contract.
Same; Estoppel; A person cannot accept and reject the same
instrument.—Private respondent also claims that he received no
consideration for the promissory note and, in support thereof,
cites petitioner’s failure to submit any proof of his loan
application and of his actual receipt of the amount loaned. These
arguments deserve no merit. Res ipsa loquitur. The instrument,
bearing the signature of private respondent, speaks for itself.
Respondent Sarmiento has not questioned the genuineness and
due execution thereof. No further proof is necessary to show
that he undertook to pay P2,500,000, plus interest, to petitioner
bank on or before March 6, 1978. This he failed to do, as
testified to by petitioner’s accountant. The latter presented
before the trial court private respondent’s statement of account
as of September 30, 1986, showing an outstanding balance of
P4,689,413.63 after deducting P1,000,000.00 paid seven
months earlier. Furthermore, such partial payment is equivalent
to an express acknowledgment of his obligation. Private
respondent can no longer backtrack and deny his liability to
petitioner bank. “A person cannot accept and reject the same
instrument.”
Babst vs. Court of Appeals
Merger
Corporation Law; 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; BPI has a right to institute the case a
quo.—At the outset, the preliminary issue of BPI’s right of action
must first be addressed. ELISCON and MULTI assail BPI’s legal
capacity to recover their obligation to CBTC. However, there is
no question that there was a valid merger between BPI and
CBTC. It is settled that in the merger of two existing
corporations, one of the corporations survives and continues the
business, while the other is dissolved and all its rights,
properties and liabilities are acquired by the surviving
corporation. Hence, BPI has a right to institute the case a quo.
Mindanao Savings vs. Willkom
Corporation Law|Mergers|Novation
Corporation Law; Mergers; Ordinarily, in the merger of two or
more existing corporations, one of the 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.—Ordinarily, in the merger of two or more
existing corporations, one of the 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 or merged 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.
Same; Same; The merger does not become effective upon the
mere agreement of the constituent corporations—since a
merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law authorizing
them.—The merger, however, does not become effective upon
the mere agreement of the constituent corporations. Since a
merger or consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders and
creditors, there must be an express provision of law authorizing
them. The steps necessary to accomplish a merger or
consolidation, as provided for in Sections 76, 77, 78, and 79 of
the Corporation Code, are: (1) The board of each corporation
draws up a plan of merger or consolidation. Such plan must
include any amendment, if necessary, to the articles of
incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles of
incorporation of a corporation. (2) Submission of plan to
stockholders or members of each corporation for approval. A
meeting must be called and at least two (2) weeks’ notice must
be sent to all stockholders or members, personally or by
registered mail. A summary of the plan must be attached to the
notice. Vote of two-thirds of the members or of stockholders
representing two-thirds of the outstanding capital stock will be
needed. Appraisal rights, when proper, must be respected. (3)
Execution of the formal agreement, referred to as the articles of
merger o[r] consolidation, by the corporate officers of each
constituent corporation. These take the place of the articles of
incorporation of the consolidated corporation, or amend the
articles of incorporation of the surviving corporation. (4)
Submission of said articles of merger or consolidation to the
SEC for approval. (5) If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.
Same; Same; Where a party to the merger is a special
corporation governed by its own charter, the Code particularly
mandates that a favorable recommendation of the appropriate
government agency shouldfirst be obtained.—The merger shall
only be effective upon the issuance of a certificate of merger by
the SEC, subject to its prior determination that the merger is not
inconsistent with the Corporation Code or existing laws. Where a
party to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency should
first be obtained.
Same; Same; The issuance of the certificate of merger is crucial
because not only does it bear out Securities and Exchange
Commission’s (SEC’s) approval but it also marks the moment
when the consequences of a merger take place.—In this case, it
is undisputed that the articles of merger between FISLAI and
DSLAI were not registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue the
required certificate of merger. Even if it is true that the Monetary
Board of the Central Bank of the Philippines recognized such
merger, the fact remains that no certificate was issued by the
SEC. Such merger is still incomplete without the certification.
The issuance of the certificate of merger is crucial because not
only does it bear out SEC’s approval but it also marks the
moment when 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.
Same; Same; Where there is no merger between two
corporations, for third parties, the two corporations shall not be
considered as one but two separate corporations, and being
separate entities, the property of onecannot be considered the
property of the other.—There being no merger between FISLAI
and DSLAI (now MSLAI), for third parties such as respondents,
the two corporations shall not be considered as one but two
separate corporations. A corporation is an artificial being created
by operation of law. It possesses the right of succession and
such powers, attributes, and properties expressly authorized by
law or incident to its existence. It has a personality separate and
distinct from the persons composing it, as well as from any other
legal entity to which it may be related. Being separate entities,
the property of one cannot be considered the property of the
other.

Same; Same; Novation; It is a rule that novation by substitution

of debtor must always be made with the consent of the creditor.
—Petitioner cannot also anchor its right to annul the execution
sale on the principle of novation. While it is true that DSLAI (now
MSLAI) assumed all the liabilities of FISLAI, such assumption
did not result in novation as would release the latter from liability,
thereby exempting its properties from execution. Novation is the
extinguishment of an obligation by the substitution or change of
the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal
conditions, by substituting another in place of the debtor, or by
subrogating a third person in the rights of the creditor. It is a rule
that novation by substitution of debtor must always be made with
the consent of the creditor. Article 1293 of the Civil Code is
explicit, thus: Art. 1293. Novation which consists in substituting a
new debtor in the place of the original one, may be made even
without the knowledge or against the will of the latter, but not
without the consent of the creditor. Payment by the new debtor
gives him the rights mentioned in Articles 1236 and 1237.

Same; Same; Same; Since novation implies a waiver of the right

which the creditor had before the novation, such waiver must be
express.—The consent of the creditor to a novation by change
of debtor is as indispensable as the creditor’s consent in
conventional subrogation in order that a novation shall legally
take place. Since novation implies a waiver of the right which the
creditor had before the novation, such waiver must be express.