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TITLE 10: Appraisal Right
Guide Questions:
1. What is the only instance when the corporation permits dissenting
stockholders to exercise appraisal right whereby the prescribed vote for
the corporate act is only majority of the capital stock?
Section 11 of this code provides the only instance when the corporation
permits dissenting stockholders to exercise appraisal right whereby the
prescribed vote for the corporate act is only majority of the capital stock.
The instance is when an existing corporation is permitted to opt out from
the perpetual corporate term regime. The law only requires approval of
shareholders representing majority of its outstanding capital stock.
2. Why does the increase of capital stock not warrant the remedy of
appraisal right?
Increase in capital stock is foreseeable. It is demanded by the
exigencies of the business. The dissenting shareholder may typically
exercise his pre-emptive right to maintain his equity interest in the
company, thus this do not warrant the return if investment of such
dissenting shareholder.
3. Why is the fair value reckoned of the day before the vote on the
proposed corporate action was taken?
The fair value of the shares of a dissenting shareholder is reckoned as
of the day before the vote was taken in order that he will not benefit or
be prejudiced by the subsequent rise or fall in value by reason of the
subject corporate action.
4. What are the effects of a demand for payment by a dissenting
stockholder?
Section 82 of the Code provides the effects of a demand for payment by
a dissenting stockholder:
a. From the stockholder’s demand for payment of his shares until
either the abandonment of the corporate action or the purchase of
his shares by the corporation,
 All his rights accruing to such shares including the right to
vote and to dividends shall be SUSPENDED; and
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 The stockholder shall be entitled only to the payment of the
fair value of his shares.
 If the dissenting stockholder is not paid of the fair value of
his shares within 30 days after the award, he shall
immediately be restored to his voting and dividend rights.
b. The exercise of such rights will not prejudice his demand for
payment.
c. The dissenting stockholder may file action to pursue payment and
hold the corporation liable for costs of litigation.
5. Is the dissenting stockholder who already demanded from the
corporation the payment of the fair value of his shares in exercise of his
appraisal right prohibited from transferring such shares to a third party?
What if the status of such shares as dissenting shares has already been
annotated in the stock certificates?
There is no express prohibition provided in Section 85 of this Code
regarding the transfer of shares of a dissenting stockholder to a third
party. The provision only requires immediate notation on the
corresponding stock certificates within 10 days from demand of payment
for his shares. Otherwise, the corporation may opt to validly deny the
exercise of appraisal right.
If the status of such shares as dissenting shares has already been
annotated in the stock certificate, then the notation will serve as a
protection for third parties from buying the dissenting shares without
knowledge of the proposed corporate action.
However, if third parties later on acquire such shares, it is presumed that
they have agreed with the proposed corporate action. They assume all
rights of a regular shareholder, including the right to receive accrued
dividends if any. The rights of the transferor as a dissenting shareholder
shall cease. He already achieved the goal of withdrawing from the
corporation and receiving from the transferee the fair value of his
investment.
6. What is the reason why a stockholder cannot file if he can avail of an
appraisal right in connection with the subject corporate action in dispute?
According to the case of Villamor, Jr. v. Umale, a stockholder cannot file
a derivative suit when he can avail of an appraisal right because this will
result to a case of a nuisance or harassment suit. In the said case, the
respondent herein did not bring the action for the benefit of the
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corporation but instead was detrimental to his individual interest as a
stockholder. The respondent herein filed a derivative suit to vindicate his
individual interest and not the corporation’s. The essence of a derivative
suit is that it must be filed on behalf of the corporation because the
cause of action belongs to the corporation. A stockholder who sues on
behalf of a corporation is merely a nominal party.
A dissenting shareholder cannot resort to filing a derivative suit each
time he disagrees with the majority because of the expense and effort
required. According to Cua, Jr. v. Tan, the availability or unavailability of
appraisal rights should be objectively based on the subject matter of the
complaint,  i.e., the specific act or acts performed by the board of
directors, without regard to the subjective conclusion of the minority
stockholder instituting the derivative suit that such act constituted
mismanagement, misrepresentation, fraud, or bad faith.
7. Does an unpaid subscriber have an appraisal right?
must be noted that the corporation’s declaration of the fact of
delinquency is not necessary because the phrase “unless the board of
directors orders otherwise” refers to the authority of the board to lift the
delinquency status of the shares. Even without the declaration, the
delinquency of the share remains.
On the other hand, the exercise of appraisal right prevails because
Section 82 provides that all rights accruing to the withdrawing
stockholders shares shall be suspended from the time of demand for the
payment of the fair value of the shares until either the abandonment of
the corporate action involved or the purchase of the shares by the
corporation, except the right of such stockholder to receive payment of
the fair value of the shares.
Hence, the Board is wrong for postponing the action on his appraisal
right because even before his shares were declared delinquent, his
rights over the shares were already suspended.

A minority stockholder dissented from the proposed mortgage of

corporate property. In the exercise of his appraisal right, he sent to the
corporation a demand for payment of the fair value of his shares. In
response, the corporate secretary informed him that a majority of Board
of Directors had approved the exercise of his appraisal right. However,
the Board indefinitely postponed action on his appraisal right to which he
protested. Subsequently, the corporate secretary denied his protest and
informed him that his shares were declared delinquent due to his unpaid
subscription and were to be sold on auction.

How will you resolve this? Which prevails – the exercise of appraisal
right by a stockholder or the corporation’s declaration of delinquency due
to unpaid subscription?

Yes, an unpaid subscriber have an appraisal right. Section 71 of the

Code provides that holders of subscribed share not fully paid which are
not delinquent shall have the rights of a stockholder. His political and
economic rights are not impaired by the fact that he has unpaid
subscription. Since a subscriber acquires all the rights of a shareholder
at the point of subscription, thus the existence of an appraisal right.

The exercise of appraisal right by a stockholder prevails over the

corporation’s declaration of delinquency due to unpaid subscription.
According to Section 66 of the Code, the law gives the subscriber a
grace period of 30 days to pay the unpaid amounts. Failure to pay within
the grace period, all the subscribed shares shall become delinquent. It

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Lecture Notes:
HISTORICAL BACKGROUND
“Under the common law, there were originally conflicting views on whether a
corporation had the power to acquire or purchase its own stocks. In England, it
was held invalid for a corporation to purchase its issued stocks because such
purchase was an indirect method of reducing capital (which was statutorily
restricted), aside from being inconsistent with the privilege of limited liability to
creditors.  Only a few American jurisdictions adopted by decision or statute the
strict English rule forbidding a corporation from purchasing its own shares. In
some American states where the English rule used to be adopted, statutes
granting authority to purchase out of surplus funds were enacted, while in others,
shares might be purchased even out of capital provided the rights of creditors
were not prejudiced.  The reason underlying the limitation of share purchases
sprang from the necessity of imposing safeguards against the depletion by a
corporation of its assets and against the impairment of its capital needed for the
protection of creditors.”   
(Turner v. Lorenzo Shipping Corp., G.R. No. 157479, [November 24, 2010], 650
PHIL 372-392)
GENERAL RULE SUBJECT TO EXCEPTIONS
A shareholder may not compel the corporation to acquire his shares and to pay
fair value of his shares subject to the following exceptions:
a. In case of an amendment to the articles of incorporation that
has the effect of:
• changing or restricting the rights of any stockholder or
class of shares,
• authorizing preferences in any respect superior to
those of outstanding shares of any class, or
• extending or shortening the term of corporate existence
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b. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets as provided in the Code
c. In case of merger or consolidation
d. In case of investment of corporate funds for any purpose other
than the primary purpose of the corporation
RATIONALE FOR THE APPRAISAL RIGHT
• A shareholder may suffer a negative impact on the fundamental
assumptions (material and not foreseeable) of his investment for which
he may have no remedy;
• A shareholder who is adversely affected by the decision of the majority
cannot simply sell his shares to the public (hold up problem);
• A dissenting shareholder cannot resort to filing a derivative suit each
time he disagrees with the majority because of the expense and effort
required; and/or
• The rift between the shareholder and the other shareholders and/or the
corporation itself can no longer be resolved or may result in a bigger
intra-corporate dispute affecting the operations of the corporation or
resulting in a deadlock.
“The availability or unavailability of appraisal rights should be objectively based
on the subject matter of the complaint,  i.e., the specific act or acts performed by
the board of directors, without regard to the subjective conclusion of the minority
stockholder instituting the derivative suit that such act constituted
mismanagement, misrepresentation, fraud, or bad faith.
The raison d'etre for the grant of appraisal rights to minority stockholders has
been explained thus:
. . . [Appraisal  right] means that a stockholder who dissented and voted against
the proposed corporate action, may choose to get out of the corporation by
demanding payment of the fair market value of his shares. When a person
invests in the stocks of a corporation, he subjects his investment to all the risks
of the business and cannot just pull out such investment should the business not
come out as he expected. He will have to wait until the corporation is finally
dissolved before he can get back his investment, and even then, only if sufficient
assets are left after paying all corporate creditors. His only way out before
dissolution is to sell his shares should he find a willing buyer. If there is no buyer,
then he has no recourse but to stay with the corporation. However, in certain
specified instances, the Code grants the stockholder the right to get out of
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the corporation even before its dissolution because there has been a major • Extending means the shareholder may ot recover his capital
change in his contract of investment with which he does not agree and during the original term
which the law presumes he did not foresee when he bought his shares. • Shortening means he has to deal with and find alternative
Since the will of two-thirds of the stocks will have to prevail over his investments
objections, the law considers it only fair to allow him to get back his
investment and withdraw from the corporation. . . . ,   (Emphasis ours.)” NON-MATERIAL AMENDMENTS
(Cua, Jr. v. Tan, G.R. Nos. 181455-56 & 182008, [December 4, 2009], 622 PHIL
661-737) 1. Examples of non-material amendments of the AOI not warranting
exercise of appraisal right:
“Stockholder's  Right  of  Appraisal, In General • Change of corporate name
A stockholder who dissents from certain corporate actions has the right to • Change of principal place of business
demand payment of the fair value of his or her shares. This right, known as • Change in the number of directors
the  right of appraisal, is expressly recognized in Section 81 of the Corporation • Increase in capital stock; why not material or unforseable?
Code, to wit: • Demanded by exigencies of business
• Availability of preemptive right maintains his equity
“xxx interest
• Decrease in capital stock
“Clearly, the  right of appraisal may be exercised when there is a fundamental • Return of investment is the same objective as appraisal
change in the charter or articles of incorporation substantially prejudicing the right
rights of the stockholders. It does not vest unless objectionable corporate action • Creation of bonded indebtedness
is taken. It serves the purpose of enabling the dissenting stockholder to have his • Does not give its holders rights or status of a
interests purchased and to retire from the corporation.  ” shareholder; at most only a restriction on use of
business assets
(Turner v. Lorenzo Shipping Corp., G.R. No. 157479, [November 24, 2010], 650
PHIL 372-392) 2. Adoption or amendment of by-laws (no amendment of AOI involved)

MATERIAL AMENDMENTS 3. Execution of management contract (no amendment of AOI involved)

1. “effect of changing or restricting the rights of any stockholder or class of IN CASE OF MERGER OR CONSOLIDATION
action or class of shares”
• Change in the par value of shares with preference as to “Subject to limited exceptions, a merger requires not only approval by the board
dividends and/or assets, of directors of each of the merging companies, but also the approval of the
• Withdrawal or modification of their redeeable or convertifble shareholders. A single shareholder’s vote against a merger will not prevent the
feature, merger from happening. While state corporation statutes vary as to what level of
• Restriction of voting rights to certain corporate actions approval is required, no state requires unanimous approval of the shareholders
• Denial of a shareholder’s pre-emptive right for a merger. Instead of providing a veto to shareholders who oppose the
merger, state corporations statutes provide shareholders with ‘appraisal rights’. X
2. “authorizing preferences in any respect superior to those of outstanding xx
shares of any class” “A shareholder who opposes a merger and complies with the detailed statutory
• Creation of new set of preferred shares, with superior features requirements in x x x has more than the right to have her shares ‘appraised’ or
to those of outstanding shares valued. Rather, a shareholder who properly asserts her dissenting shareholder’s
right of appraisal can compel corporation to pay her in cash the ‘fair value’ of her
3. “extending or shortening the term of corporate existence” shares as determined by the judicial appraisal process”.

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Joseph Shade, “Business Associations in a Nutshell” , Thomson West, p 363
HOW IS APPRAISAL RIGHT EXERCISED
1. Dissenting stockholder must attend the meeting where the proposed
corporate action shall be taken up
2. He must vote against the subject action (he cannot abstain or be a fence
sitter; neither can he change his decision)
3. He shall make a written demand on the corporation
• For the fair value of his shares
• Within 30 days from date on which vote was taken; otherwise,
his appraisal right is deemed waived
4. The corporation shall pay the shareholder
• If the proposed corporate action is implemented
• Upon surrender of the certificate or certificates of stock
representing shareholder’s stocks
• The fair value of shares as of the day before the vote on the
proposed corporate action was taken, excluding any
appreciation or depreciation in anticipation of such corporate
action
PAYMENT OF THE FAIR VALUE OF THE SHARES
• The fair value is reckoned as of the day before the vote was taken,
excluding any appreciation or depreciation in anticipation of such
corporate action
• The fair value may also be such as may be mutually agreed upon the
withdrawing stockholder and the corporation
• PROVIDED no payment shall be made unless the corporation has
unrestricted retained earnings
• Provided further that upon payment of the fair value or agreed price, the
stockholder shall forthwith transfer the shares to the corporation
REQUIREMENT OF UNRESTRICTED RETAINED EARNINGS
“Now, however, 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, to wit:
“xxx
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“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. ”
“That the respondent had indisputably no unrestricted retained earnings in its
books at the time the petitioners commenced Civil Case No. 01-086 on January
22, 2001 proved that the respondent's legal obligation to pay the value of the
petitioners' shares did not yet arise. Thus, the CA did not err in holding that the
petitioners had no cause of action, and in ruling that the RTC did not validly
render the partial summary judgment.” 
“The RTC's construal of the Corporation Code was unsustainable, because it did
not take into account the petitioners' lack of a cause of action against the
respondent. In order to give rise to any obligation to pay on the part of the
respondent, the petitioners should first make a valid demand that the respondent
refused to pay despite having unrestricted retained earnings. Otherwise, the
respondent could not be said to be guilty of any actionable omission that could
sustain their action to collect.
Neither did the subsequent existence of unrestricted retained earnings after the
filing of the complaint cure the lack of cause of action in Civil Case No. 01-086.
The petitioners' right of action could only spring from an existing  cause of action.
Thus, a complaint whose cause of action has not yet accrued cannot be cured by
an amended or supplemental pleading alleging the existence or accrual of a
cause of action during the pendency of the action.  For, only when there is an
invasion of primary rights, not before, does the adjective or remedial law become
operative. Verily, a premature invocation of the court's intervention renders the
complaint without a cause of action and dismissible on such ground.   In short,
Civil Case No. 01-086, being a groundless suit, should be dismissed.
Even the fact that the respondent already had unrestricted retained earnings
more than sufficient to cover the petitioners' claims on June 26, 2002 (when they
filed their  motion for partial summary judgment) did not rectify the absence of the
cause of action at the time of the commencement of Civil Case No. 01-086.
The motion for partial summary judgment, being a mere application for relief
other than by a pleading,   was not the same as the complaint in Civil Case No.
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01-086. Thereby, the petitioners did not meet the requirement of the  Rules of
Court that a cause of action must exist at the commencement of an action, which
is "commenced by the filing of the original complaint in court." 
SUMMARY OF TURNER V. LORENZO SHIPPING:
The amendment of the articles of incorporation to remove the stockholders’
preemptive right to newly issued shares of stock, was not acceptable to the
Turner spouses who thus voted against it. They demanded the fair value of their
shares in exercise of their appraisal right. At the time, however, the corporation
did not have unrestricted retained earnings to cover the fair value of the shares.
Nevertheless, a panel of appraisers was formed to determine the fair value and
thereafter, the Turner spouses demanded payment of the fair value as
determined by the panel but the corporation persisted in not paying hence the
spouses brought suit.
 
The SC upheld the CA in that there was no unrestricted retained earnings when
the Turners filed their Complaint since the corporation’s FS showed a deficit of
P72 M ++. Hence, the Turner’s right to payment had not yet accrued when they
filed their Complaint albeit their appraisal right already existed. The SC
distinguished right of action from cause of action (which consists of the operative
facts giving rise to such right of action). The right of action to presently enforce a
cause of action arises only after the performance of all conditions precedent to
the action and may be taken away by the running of prescription, estoppel or
other circumstances not affecting cause of action. The SC said the Turners’ right
of action arose only when the corporation on Mar 21, 2002, had already retained
earnings in the amount of P11M ++. In other words, the Turners’ right of action
was inexistent on Jan 22, 2001 when they filed their Complaint.
(Turner v. Lorenzo Shipping Corp., G.R. No. 157479, [November 24, 2010], 650
PHIL 372-392)
PANEL OF APPRAISERS
 Where within 60 days from approval of the corporate action by the
stockholders, withdrawing stockholder and corporation cannot agree:
o A panel of disinterested appraiser shall be formed; the
withdrawing stockholder and corporation shall name one
disinterested person each, these two disinterested persons shall
choose the third disinterested person;
o Majority of the appraisers shall determine the fair value;
o The appraisers’ fair value shall be deemed the final award; and
o Such fair value shall be paid by the corporation within 30 days
after the award is made
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COSTS AND EXPENSES OF THE APPRAISAL
• The corporation shall bear the costs and expenses of the appraisal BUT
• The withdrawing stockholder shall bear such costs and expenses where
the fair value set by the appraisers is approximately the same as the
price offered by the corporation
• In an action to recover the fair value, the corporation shall be assessed
such costs and expenses BUT
• The withdrawing stockholder shall be assessed the same where his
refusal to receive payment was unjustified.
EFFECT OF DEMAND AND TERMINATION OF RIGHT
1. From the stockholder’s demand for payment of his shares until either the
abandonment of the corporate action or the purchase of his shares by
the corporation,
• All his rights accruing to such shares including the right to vote
and to dividends shall be suspended; and
• The stockholder shall be entitled only to the payment of the fair
value of his shares.
• However, if the dissenting stockholder is not paid the fair value
of his shares within 30 days after the award, he shall
immediately be restored to his voting and dividend rights.
2. The exercise of such rights will not prejudice his demand for payment.
3. The dissenting stockholder may file action to pursue payment and hold
the corporation liable for costs of litigation.
WHEN RIGHT TO PAYMENT CEASES
1. No demand for payment may be withdrawn unless the corporation
consents
2. The right to payment by the dissenting stockholder shall cease when:
• Such demand is withdrawn with the consent of the corporation;
• If the proposed corporate action is abandoned or rescinded by
the corporation; or disapproval by the SEC where such approval
is necessary; or,
• The SEC determines such stockholder is not entitled to
appraisal right.
3. The stockholder concerned shall be restored to his status as such and
all dividend distribution which would have accrued on the shares shall be
paid to the stockholders.
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NOTATION OF STOCK CERTIFICATES
1. The dissenting stockholder shall
• Within 10 days after demand, submit his stock certificate(s) to
the corporation
• For notation that the shares represented by the stock
certificate(s) are dissenting shares
2. If the dissenting stockholder fails to do so, the corporation may opt to
terminate his rights under Title X
3. If the dissenting shares covered by the stock certificate(s) with notation,
are transferred, and such certificate(s) cancelled:
• The rights of the transferor as dissenting stockholder under Title
X shall cease
• While the transferee shall have all the rights of a regular
stockholder and shall be paid all dividend distributions which
would have accrued on such shares
RIGHTS OF A THIRD PARTY TRANSFEREE
• An innocent third party transferee who purchases the dissenting shares
whose stock certificates bear a notation is presumed to have known of
its status.
• The notation is intended to inform the third party transferee of the
proposed corporate action and that his purchase of the dissenting
shares signify his assent to such action.
• The third party transferee assumes all the rights of a regular
shareholder.
AVAILABILITY OF APPRAISAL RIGHT PRECLUDES A DERIVATIVE SUIT
“An allegation that appraisal rights were not available for the acts complained of
is another requisite for filing derivative suits under Rule 8, Section 1 (3) of
the  Interim Rules.”
(Villamor, Jr. v. Umale, G.R. Nos. 172843 & 172881, [September 24, 2014], 744
PHIL 31-59)
QUESTION: What is the reason why a stockholder cannot file if he can avail of
an appraisal right in connection with the subject corporate action in dispute?
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According to the case of Villamor, Jr. v. Umale, a stockholder cannot file
a derivative suit when he can avail of an appraisal right because this will
result to a case of a nuisance or harassment suit. In the said case, the
respondent herein did not bring the action for the benefit of the
corporation but instead was detrimental to his individual interest as a
stockholder. The respondent herein filed a derivative suit to vindicate his
individual interest and not the corporation’s. The essence of a derivative
suit is that it must be filed on behalf of the corporation because the
cause of action belongs to the corporation. A stockholder who sues on
behalf of a corporation is merely a nominal party.
DOES AN UNPAID SUBSCRIBER HAVE AN APPRAISAL RIGHT?
A minority stockholder dissented from the proposed mortgage of corporate
property. In the exercise of his appraisal right, he sent to the corporation a
demand for payment of the fair value of his shares. In response, the corporate
secretary informed him that a majority of Board of Directors had approved the
exercise of his appraisal right. However, the Board indefinitely postponed action
on his appraisal right to which he protested. Subsequently, the corporate
secretary denied his protest and informed him that his shares were declared
delinquent due to his unpaid subscription and were to be sold on auction.
QUESTION: How will you resolve this? Which prevails – the exercise of appraisal
right by a stockholder or the corporation’s declaration of delinquency due to
unpaid subscription?
Yes, an unpaid subscriber have an appraisal right. Section 71 of the
Code provides that holders of subscribed share not fully paid which are
not delinquent shall have the rights of a stockholder. His political and
economic rights are not impaired by the fact that he has unpaid
subscription. Since a subscriber acquires all the rights of a shareholder
at the point of subscription, thus the existence of an appraisal right.
The exercise of appraisal right by a stockholder prevails over the
corporation’s declaration of delinquency due to unpaid subscription.
According to Section 66 of the Code, the law gives the subscriber a
grace period of 30 days to pay the unpaid amounts. Failure to pay within
the grace period, all the subscribed shares shall become delinquent. It
must be noted that the corporation’s declaration of the fact of
delinquency is not necessary because the phrase “unless the board of
directors orders otherwise” refers to the authority of the board to lift the
delinquency status of the shares. Even without the declaration, the
delinquency of the share remains.
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On the other hand, the exercise of appraisal right prevails because
Section 82 provides that all rights accruing to the withdrawing
stockholders shares shall be suspended from the time of demand for the
payment of the fair value of the shares until either the abandonment of
the corporate action involved or the purchase of the shares by the
corporation, except the right of such stockholder to receive payment of
the fair value of the shares.

Hence, the Board is wrong for postponing the action on his appraisal
right because even before his shares were declared delinquent, his
rights over the shares were already suspended.