Santiago, Arnel A.

JD4203

1. Discuss the procedure in issuing a new stock certificate in lieu of the original stock certificate which has
been lost or destroyed.

Section 73 of the Corporation Code provided the procedure in lost or destroyed certificates. - The following
procedure shall be followed for the issuance by a corporation of new certificates of stock in lieu of those
which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the
corporation an affidavit in triplicate setting forth, if possible, the circumstances as to how the certificate
was lost, stolen or destroyed, the number of shares represented by such certificate, the serial number of
the certificate and the name of the corporation which issued the same. He shall also submit such other
information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the corporation, said
corporation shall publish a notice in a newspaper of general circulation published in the place where the
corporation has its principal office, once a week for three (3) consecutive weeks at the expense of the
registered owner of the certificate of stock which has been lost, stolen or destroyed. The notice shall state
the name of said corporation, the name of the registered owner and the serial number of said certificate,
and the number of shares represented by such certificate, and that after the expiration of one (1) year
from the date of the last publication, if no contest has been presented to said corporation regarding said
certificate of stock, the right to make such contest shall be barred and said corporation shall cancel in its
books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new
certificate of stock, unless the registered owner files a bond or other security in lieu thereof as may be
required, effective for a period of one (1) year, for such amount and in such form and with such sureties
as may be satisfactory to the board of directors, in which case a new certificate may be issued even
before the expiration of the one (1) year period provided herein: Provided, That if a contest has been
presented to said corporation or if an action is pending in court regarding the ownership of said certificate
of stock which has been lost, stolen or destroyed, the issuance of the new certificate of stock in lieu thereof
shall be suspended until the final decision by the court regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed. Except in case of fraud, bad faith, or negligence on the part of
the corporation and its officers, no action may be brought against any corporation which shall have issued
certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.

2. Sam owns 1,000 shares of stock of ABC Co. as evidenced by ABC Co. Stock Certificate No. 234. Due to
financial constraints Sam decided to sell half of the said shares of stock to his friend Gary for an amount less
than the par value of the shares. If you are Gary's lawyer, what are the necessary steps to undertake for the
sale and transfer of the shares to be valid?

“Sec. 63. Certificate of stock and transfer of shares. – The capital stock of stock corporations shall be divided
into shares for which certificates signed by the president or vice president, countersigned by the secretary or
assistant secretary, and sealed with the seal of the corporation shall be issued in accordance with the by-
laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate or
certificates endorsed by the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is recorded in
the books of the corporation showing the names of the parties to the transaction, the date of the transfer,
the number of the certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books
of the corporation.“

Being intangible personalty, the Corporation Code requires that, before a share of capital stock is validly
sold, transferred, assigned or in any manner conveyed, it must be covered by a stock certificate. This
requirement is borne out of practical considerations. It is a fundamental principle of contract law (be it of
sale, assignment or any other conveyance) in the Philippines and probably in any jurisdiction, that the parties
to any contract must be aware of the subject matter – what is being sold, transferred or otherwise conveyed.
On the other hand, shares of stock in a corporation do not have physical form, unlike ordinary chattel such
as goods or vehicles, where a person has a clear notion of what is being sold or conveyed.

In the case of De los Santos, et al. vs. MacGrath, et al., G.R. No. L-4818, 28 February 1955, the Supreme Court
interpreted the provisions of Section 63 of the Corporation Code. The Supreme Court held that any voluntary
transfer of shares of stock in a corporation that is represented by a certificate of stock must strictly comply
with the following conditions:
a. There must be delivery of the certificate;
b. The share must be indorsed by the owner or his agent; and
c. To be valid to the corporation and third parties, the transfer must be recorded in the books of the
corporation.

One of the requirements to effect a valid transfer of shares of stock is that the certificate of stock must be endorsed by
the owner or his agent. Mere delivery or handing over of the stock certificate is insufficient, and does not produce the effects of
a transfer or conveyance to another. Endorsement of the stock certificate is one of the operative acts which validates the transfer.
Without the act of endorsement by the stockholder, the sale or disposition will not be binding upon the corporation. Of course,
there are remedies under the law to compel the owner to endorse the stock certificate which he or she has already conveyed to
another. But before endorsement of the stock certificate, the corporation can refuse recognize the transferee stockholder.

Moreover, as between the corporation on one hand, and its shareholders and third persons on the other, the corporation looks
only to its books for the purpose of determining who its shareholders are. Thus, as between the “real” owner of a stock certificate
and the registered owner or the person actually registered in the Stock and Transfer Book of a corporation, it is the person
registered in the Stock and Transfer Book who must sign or endorse the certificate of stock to allow its sale or transfer.

As Gary’s lawyer, I would advise him to take the aforementioned for the sale and transfer of the shares. The stock certificates
must be delivered to him and endorsed by Sam or his agent and the transfer must be recorded in the books of the corporation
to bind the corporation and third parties.

3. Compare and contrast the different types of corporate acquisitions and transfers?
Merger is a reorganization of two or more corporations that results in their consolidating into a single
corporation, which is one of the constituent corporations, one disappearing or dissolving and the other
surviving. To put it another way, merger is the absorption of one or more corporations by another existing
corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims,
liabilities and obligations of the absorbed corporation. The absorbing corporation continues its existence
while the life or lives of the other corporation is or are terminated
In Consolidation, there will be disappearance of both the constituent corporations with the emergence of a new corporate entity,
called the consolidated corporation, which shall obtain all the assets of the disappearing corporations, and likewise shall assume
all their liabilities.

In Edward J. Nell Company v. Pacific Farms Inc. (15 SCRA 415), the different types of corporate acquisitions and transfers may be
categorized into three according to the Philippine Corporate Law Book of Dean Villanueva, to wit, asset-only transfer, transfer of
the business enterprise, and equity transfer.
As to rules on liability succession, in a pure assets-only transfer, the transferee shall not be liable for the liabilities of the transferor,
except where the transferee expressly or impliedly agrees to assume such debts or when it is effected in fraud of creditors; in a
transfer of the business enterprise, where the transferee expressly essentially continues the business enterprise of the transferor,
the transferee shall be liable for the liabilities of the transferor arising from the business enterprise transferred; and in an equity
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.

In assets-only acquisitions and transfer, the buyer corporation purchases the assets of the seller corporation without assuming
the liabilities of the latter. The transaction is only limited with the transfer of the assets and properties without involving any
assumption of liabilities.

In the ‘’business-enterprise’’ level, the buyer corporation purchases directly the business from the seller corporation. In contrast
to assets only acquisition, the business enterprise level transfer goes beyond the assets or properties used in the company’s
business. This transfer carries with it the assumption of the liabilities of the transferor because of the continuance of the business
enterprise.

In equity transfer, the transferee gets 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 controlling 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 Directors of the corporation which
runs the business. It other words, this type of transfer and acquisition is characterized primarily of the transfer of control of the
underlying business enterprise.

As provided in Section 76, 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.

Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation.
It is a combination by agreement between two or more corporations by which their rights, franchises, privileges and properties
are united and become those of a single, new corporation, composed generally, although not necessarily, of the stockholders of
the original corporations.

Merger, on the other hand, is a union whereby one or more existing corporations are absorbed by another corporation which
survives and continues the combined business.

The parties to a merger or consolidation are called constituent corporations. In consolidation, all the constituent corporations
are dissolved and absorbed by the new consolidated enterprise. In merger, all constituent corporations, except the surviving
corporation, are dissolved. In both cases, there is no liquidation of the assets of the dissolved corporations, and the surviving or
consolidated corporation assumes ipso jure the liabilities of the dissolved corporations, regardless of whether the creditors have
consented or not to such merger or consolidation.

[a] Was there a merger and consolidation of the two banks in point of the Corporation Code? Explain.
There was none. In the point of the Corporation Code neither merger nor consolidation took place. A merger does not become
effective upon the mere agreement of the constituent corporations. All the requirements specified in the law must be complied
with in order for merger to take effect. Section 79 of the Corporation Code further provides that the merger shall be effective
only upon the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger. In the case, the requirements
as provided for by law are not satisfied yet, hence, no merger has taken place.

[b] What is meant by a de facto merger? Discuss.

In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that under the Corporation Code, "a de facto merger can
be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of
stock of the acquiring corporation. The acquiring corporation would end up with the business enterprise of the target corporation;
whereas, the target corporation would end up with basically its only remaining assets being the shares of stock of the acquiring
corporation."
No de facto merger took place in this case simply because the Total Bank owners did not get in exchange for the bank’s assets
and liabilities an equivalent value in Royal Bank shares of stock.

5. Santorini Corporation (Santorini) was in dire straits. In order to firm up its financial standing, it agreed to
entertain the merger and takeover offer of Proficient Corporation (Proficient), the leading company in their
line of business. Erica, the major stockholder of Santorini, strongly opposed the merger and takeover. The
matter of the merger and takeover by Proficient was included in the agenda of the next meeting of Santorini's
Board of Directors. However, owing to Erica's serious illness that required her to seek urgent medical treatment
and care in Singapore, she failed to attend the meeting and was consequently unable to cast her vote. The
Board of Directors approved the merger and takeover. At the time of the meeting, Santorini had been in the
red for a number of years owing to its recurring business losses and reverses.
Erica seeks your legal advice regarding her right as a stockholder opposed to the corporate action. Explain
your answer.

I will advise Erica that a stockholder who dissents from certain corporate actions has the right to demand payment of the fair
value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code.
In accordance with this, a corporation can purchase its own shares, provided payment is made out of surplus profits and the
acquisition is for a legitimate corporate purpose. In the Philippines, this new rule is embodied in Section 41 of the Corporation
Code.

Also, Section 77 of the Corporation Code provides the 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.

Notwithstanding the foregoing, no payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment. It is also instructive in case the corporation has no available unrestricted
retained earnings in its books, Section 83 of the Corporation Code provides that if the dissenting stockholder is not paid the value
of his shares within 30 days after the award, his voting and dividend rights shall immediately be restored. The trust fund doctrine
backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing
stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for
the payment of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have
the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as
the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without first
paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void.