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228: Petry V. Hardwood Electric Co.

AUTHOR: REYES
[G.R. No. DATE] NOTES: The case for the dividends owed the
TOPIC: corporation was handled in a separate case.
PONENTE: Justice Schaffer
FACTS:
 Preferred stockholders of Hardwood Electric Co. filed a court proceeding to enjoin its
merger with other corporations.
 The preferred stockholders argue that they are concerned with the value of their shares.
 They claim that the merger should have the effect of a dissolution, this would result in them
being paid in the event of such dissolution.
 However, Defendant Corporation argues that the merger does not result in a dissolution and
that the preferred stockholders should only be paid with the market value of their shares in
accordance with the 1909 Merger Act.
 This was a problem for the preferred stockholders because, by the time of the merger, the
market value of the preferred stock had greatly decreased by then because of failure to pay
dividends on it for the previous years.
 The preferred stockholders argue that this was due to a scheme by those who had control
over the common stock, they diverted funds meant for to pre-preferred dividends while
arranging for a merger. Their end goal was the acquisition of the preferred stock at a much
cheaper price.
 The preferred stockholders argue that Hardwood Electric can still pay them the par value of
the stock, which is $100 per share and the accrued dividends but the corporation insists that
they are only entitled to $20.00, which is the market value, or $26.40 if there was an actual
dissolution. (Kaya they didn’t want the merger, guys, because feeling nila linuto yung
merger so that mag-dedepreciate yung value ng shares and the common stockholders can get
it at a bargain price)
 The trial court refused to enjoin the merger but decreed that the plaintiffs (preferred
stockholders) should be paid the par value of their shares.
 Defendant corporation appealed the decree.

ISSUE(S): Whether or not plaintiffs should be paid the par value of their shares or just the
market value.

HELD: Appellees are entitled to receive the real, actual value of their shares, and that market
value does not measure this real, actual value.

RATIO:
 The preferred stock and from the provisions contained in the certificates, it said that “in
case of dissolution of the company, the preferred stock shall be first paid and redeemed at
its par value in preference to the common stock , out of the property or assests of the
company.”
 Pardee V Hardwood Eelctric Co. held that this stipulation was a contract between the
Pefendant and the holders of the preferred stock. The court also noted that the case of
petry is not one under the Merger act but a simple case for enforcement of contract
provisions.
 The court here said that the case involved shows a valid dissolution of corporate entities.
Why? Because in so far as the operating entity is concerned, its property and goodwill
passed into the control and ownership of the new corporation, thus it ceased to do
business.
 Defendant-appellant corporation argues that there was no real merger and dissolution
because there was no winding up, no sale, no fund raised, no payment of outstanding
debts, and no surplus for distribution among stockholders. Also, that the separate
existence of the company was not terminated.
 The court held that it would be a very unjust rule if the rights of a non-asserting
shareholder to recovery is limited to market value, where the value as measured by assets
is much greater.
 Basically the court wanted to avoid a situation wherein the preferred stock, based on the
dissolution had no value but in reality had value, yet the it would be treated as valueless.
 Hence the court decided to treat the merger as a dissolution as to the preferred
stockholders.
CASE LAW/ DOCTRINE:
Even if there is no actual merger/dissolution, it will be treated as an actual one to preserve the
rights of shareholders.
DISSENTING/CONCURRING OPINION(S):