Business Organizaton II

Lecture Series
University of San Agustin College of Law
Atty. Aloysius Pacelli C. Dela Cruz, II

Corporate Capital Structure

Sources of Funds of a Corporation
1. Equity
2. Debt

 Nature of Equity as an Investment

In Republic Planters Bank vs. Agana,
269 SCRA 1 (1997), the SC held that
"shareholders,
both
common
and
preferred, are considered as risk takers
who invest capital in the business and who
can look only to what is left after the
corporate debts and liabilities are fully
paid.

 In President of the PDIC vs. Reyes, 460

SCRA 473 (2005), the SC held that "an
investment, being in the nature of equity,
and unlike a deposit of money or an loan
that earns interest, cannot be assured of a
dividend or an interest on the amount
invested, for dividends on investment are
granted only after profits or gains are
generated."

 Sourcing fund through equity investment

is advantageous to the corporation
because of the absence of "carrying cost"
since the corporation is not bound to pay
any return on the investment unless there
is profit. The Board of Directors is also
granted under the law the discretion
whether to declare dividends or not.

 Equity investment in a corporate

enterprise is generally non-withdrawable
for so long as the corporation has not be
been dissolved.
This is the legal
implication of the application of the trust
fund doctrine.

 Difference between Equity Source of Funds and

Debt Sourcing:
1. In Equity, the investor or stockholder is a
"risk taker", i.e., his investment succeeds or fails
with the corporation. He is not guaranteed of a
return in his investment; In debt sourcing, the
person who extends a loan to the corporation is
somehow often times secured by collaterals or
other security, thus minimizes his risk;

 2. The equity investors as shareholder is

given a voice in the management of the
corporation; while a person who extends a
loan does not participate in the
management of the corporation unless he
is issued a Voting Trust Agreement.

 3. The expected return between an equity

investor and a debt investor differs in that in a
loan placement, the creditor places no stake in
the results of the operations, and he can only
demand the stipulated fixed return of his
investment, usually in the form of interest
earned, regardless of whether or not the
corporation reap huge profits; while int he case
of an equity investor, since he has placed his
stake in the result of the operations, he generally
participates in all the income earned by the
venture.

 4. A creditor, in case of insolvency, must

be paid first in case of insolvency; while an
equity investor who took the risk of the
venture, they can only receive a return of
their investment only from the remaining
assets of the venture, if any, after the
payment of all liabilities to the creditors;

 Source of Power to Issue Shares for Equity

Investors Section 36 of the Corporation Code expressly
empowers a stock corporation to issue shares of stock.
The power to issue shares of stock is lodged in the
Board of Directors, and no stockholders meeting is
required to consider it because additional issuance of
shares does not need approval of the stockholders,
since the power to approve the opening for
subscription and issuance of shares from the unissued
Authorized Capital Stock is not expressly granted to
the Stockholders of the corporation.

 Capital Stock The term "capital stock" or "outstanding

capital stock" is defined under Section 137 of
the Corporation Code to mean "the total
shares of stock issued to subscribers or
stockholders, whether or not fully or partially
paid (as long as there is a binding subscription
agreement), except treasury shares."

 The SEC has ruled that the term "capital stock"

or "authorized capital stock" is the amount fixed
in the articles of incorporation that may be
subscribed and paid by the stockholders of the
corporation. When shares are subscribed out of
the Authorized Capital Stock, that portion of the
Paid-in Capital arising from the subscriptions
becomes the legal capital of the corporation
which cannot be returned to the stockholders in
any form during the lifetime of the corporation
unless otherwise allowed by law, such in the case
of
the
exercise
of
appraisal
right.

 Capital Stock is composed of two (2) parts,

namely:
1. the portion which have been paid by the
stockholders, represented by the account
"Paid-up Capital"; and
2. the portion which is to be paid on the
subscriptions, represented by the account
"Subscriptions Receivable"

 In PLDT vs. NTC, 539 SCRA 365, the

Supreme Court defined capital as "Capital" refers to the value of the property or assets
of a corporation. The "capital subscribed" is the total
amount of the capital that persons (subscribers or
shareholders" have agreed to take and pay for, which
need not necessarily be, and can be more than, the par
value of the shares. In fine, it is the amount that the
corporation receives, inclusive of the premiums if any,
in consideration of the original issuance of the shares.

 Not all amount received by the corporation

from stockholders can be considered paidup capital. Thus, any amount paid to the
corporation which is in payment for future
subscriptions to anticipated increases in
the authorized capital stock is not deemed
to be part of capital stock until the
corproation's capital is actually increased
with the approval of the SEC.

 In JRS Business Corp. vs. Imperial Insurances,

Inc., 11 SCRA 634, the Supreme Court held that "Capital stock of a corporation represents the interest
and is the property of stockholders in the corporation,
who can only be deprived thereof in the mannter
provided by law, and therefore cannot be levied nor
attached to enforce a judgment debt of the
corporation. The capital stock of a corporation cannot
be subject to levy by corporate creditors as to allow
them to operate the affairs of the corportion. The
capital stock of the corporation represents the interest
and is the property of stockholders in the corprotion,
who can only be deprived thereof in the manner
provided for by law."

 Book value of shares . - the amount that

would be paid on each share to retiring
shareholders or in the event the company
is liquidated.

 Classification of Shares. Three (3) basic policies on share classification under the
Corporation Code:
1. It recognizes the freedom and power of a corporation to
classify shares. Under Section 6, the shares of stock may
be divided into classes of shares, or both, any of which
classes or series of shares may have rights, privileges, or
restrictions as may be stated in the Articles of
Incorporation; however, no share may be deprived of
voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise
provided in the Corporation Code.

 Section 6 also provides that any or all shares may have a par value or
have no par value as may be provided for in the articles of
incorporation; however, banks, trust companies, insurance
companies, public utilities, and building and loan associations shall
not be permitted to issue no-par value shares of stock.
A corporation may furthermore classify its shares for the purpose of
insuring compliance with constitutional or legal requirements.
Hence, shares may be classified to facilitate the requirements of
nationalization laws, for instance, in a realty company where foreign
equity is only up to 40%, the Articles of Incorporation may classify
60% of the shares as Class A shares that can be acquired only by
Filipinos and 40% of the shares as Class B shares that can be
acquired by Non-Filipinos and Filipinos alike. In such a case there
will be an assurance that excess non-filipino participation will be
prevented.

 2. The Corporation Code expressly adopts the

presumption of equality of the rights and
features of shares when nothing is expressly
provided to the contrary. This is what is
known as the "Doctrine of Equality of
Shares". Under this doctrine, all stocks
issued by the corporation are presumed to be
equal with the same privileges and liabilities,
provided that the Articles of Incorporation is
silent on such differences.

 Section 6 expressly provides that "except as otherwise

provided in th articles of incorporation and stated in the
certificate of stock, each share shall be equal in all
respects to every other share."
The mere classification of shares into "preferred shares"
does not necessarily deprive them of voting rights. In the
absence of any restrictions in the articles of
incorporation or by-laws of the corporation, preferred
shares would be voting shares having the same rights as
common shares, since under Section 6, all shares shall
have equal rights except when otherwise provided in the
articles of incorporation and stated in the certificate of
stock.

 3. The Corporation Code provides for

voting rights for all types of shares on
matters it consideers as fundamental
measures. Thus, under Section 6, there
shall always be a class or series of shares
which have complete voting rights. Where
the AOI provide for non-voting shares, the
holders of such shares shall nevertheless
be entitled to vote on the following
matters:

 a. Amendment to the AOI;

b. Adoption and amendment of by-laws;
c. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
d. Incurring, creating or increasing bonded
indebtedness;
e. Increase or decrease of capital stock;
f. Investment of corporate funds in another
corporation or business in accordance with th Code;
g. Merger or consolidation of the corportion with
another corporation or other corporations; and
h. Dissolution of the corporation.

 Kinds of Share/Classification of Shares:

The most common classification of shares is
common and preferred shares.
Common shares. - In Commissioner of Internal
Revenue vs. Court of Appeals, 301 SCRA 152,
the Supreme Court defined common shares or stock
to represent the residual ownership interest in the
corporation. It is a basic class of stock ordinarily and
usually issued without extraordinary rights or
privileges and entitles the shareholder to a pro rta
division of profits."

 Common shares generally represent the

greatest proportion of the corporation's
capital structure and bears the greatest
risk of loss in the event of failure of the
enterprise. The foremost elements of a
common share are:
a. Bearing the risk of loss;
b. participation in corporate assets after all
claims are paid;
c. management of the corporation;
d. participation in profits;

 In Philippine Coconut Producers Federation, Inc.

vs. Republic of the Philippines, G.R. Nos. 17785758, September 17, 2009, the Supreme Court held that
shares of stock that are originally common shares may be
reclassified into preferred shares. Reclassification of
shares is a legitimate exercise of corporate powers under
the Corporation Code.
A holder of shares that are reclassified can exercise the
appraisal right under Section 81 of the Corporation code.
In other words the shareholders retain their right to
dissent and demand payment for the fair value of their
shares.

 - Preferred Shares. - are those shares that

entitle the shareholder to some priority on
dividends and asset distribution. In RPB
vs. Agana, 269 SCRA 1, the SC defined
preferred share of stock as one "which
entitles the holder thereof to certain
preferences over the holders of common
stock, designed to induce persons to
subscribe for shares of a corporation."

 The most common forms of preferred shares

may be classified into:
a. Preferred shares as to assets, which gives the holder
thereof preference in the distribution of the assets of
the corporation in case of liquidation; and
b. Preferred shares as to dividends, which gives the
holder the right to receive dividends on said shares to
the extent agreed upon before any dividends at all are
paid to the holders of common stock;

 -The contractual rights and preferences of an

issue of preferred stock must be provided for in
the articles of incorporation; otherwise, no
preferences can be presumed based on the
nomenclature given to such share.
Sec. 6 provides that preferred shares issued by the
corporation may be given preferences in the
distribution of the assets of the corporation in case of
liquidationand in the distribution of dividends, or
such other preferences as may be stated in the Articles
of Incorporation.

 Cumulative
and
Preferred Shares. -

Non-Cumulative

Cumulative preferred shares entitle the

holders thereof to payment not only of
current dividends but also of back
dividends no previously paid, when and if
dividends are declared, to the extent
agreed upon, before holders of common
shares are paid.

 Non-cumulative preferred shares entitle

the holders thereof merely to the payment
of current dividends that are paid from
unrestricted retained earnings, and lose
whatever agreed rate of return in any year
where there are no available URE.

 Participating and Non-Participating

Participating preferred shares that entitle the
holders to participate with the holders of
common shares in the retained earnings after
the amount of stipulated dividend has been
paid to the preferred shares.
Non-participating preferred shares are those
that entitle holders of preferred shares only to
the stipulated preferred dividends and no
more.

 In Republic Planters Bank vs. Agana,

the SC held that there is no guaranty that
the holder of preferred shares will receive
dividends. This is because the declaration
of dividends is subject to Section 43 of the
Corporation Code and that the same is a
decision of the Board of Directors and
upon the availability of unrestricted
retained earnings.

 Redeemable Shares. - redeemable shares may be

issued by the corporation when expressly so
provided in the Articles of Incorporation. They
may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless
of the existence of unrestricted retained earnings
in the books of the corporation, and upon such
terms and conditions as may be stated in the
AOI, which terms and conditions must also be
stated in the certificate of stock representing said
shares.

 When the certificate of stock recognizes

redemption, but the option to do so is
clearly vested in the corporation, the
redemption is clearly the type known as
"optional" and rest entirely with the
corporation, and the stockholder is
without right to either compel or refuse
the redemption of his shares of stock.

 Redeemable Shares has been defined as shares of

stock issued by the corporation which the
corporation can purchase or take up from their
holders as expressly provided in its articles of
incorporation
and
certificates
of
stock
representing the shares.
If the corporation has issued redeemble shares
with mandatory redemption features, it is
required to set up and maintain a sinking fund,
which shall be depostied with a trustee bank and
not be inveted in risky or speculative ventures.

 Tax Consequences on Redemption of Shares. - In CIR vs.

CA, G.R. No. 108576, January 20, 1999, the SC
recognized that there are cases when redemption of
shares (which were previously issued as stock dividends)
is considered as a scheme to circumvent the tax
consequence of cash dividends. There are case when
redemption is used as veil for the constructive
distribution of cash dividends as they are considered as
additional wealth. However, if the corporation redeems
shares coming from those issued upon the establishment
of the corporation or from initial capital investment, the
redemption to their concurrent value of acquisition
would not be subject to tax because that would consitute
merely a return of investment.

 Founders' Shares - Founders' shares

classified as such in the Articles of
Incorporation may be given certain rights
and privileges not enjoyed by the owners
of other stocks, provided that where the
exclusive right to vote and be voted for in
the election of directors is granted, it must
be for a limited period not to exceed five
years subject to the approval of the SEC.
The 5-year period shall commence from
the date of the aforesaid approval by the
SEC.

 Treasury Shares. - Treasury shares are

shares of stock which have been issued
and fully paid for, but subsequently
reacquired by the issuing corporation by
purchase, redemption, donation or
through some other lawful means. Such
shares may again be disposed of for a
reasonable proce fixed by the board of
directors.

 Limitations on Treasury Shares:

a. They may be re-issued or sold again as long as the corporation
holds them as treasury shares;
b. Treasury shares cannot participate in dividends because
dividends cannot be declared by the corporation to itself;
c. Treasury shares cannot be represented during the
stockholder's meetings for otherwise equal distribution of voting
powers among stockholders will be effectively lost and the
directors will be able to perpetuate their control of the
corportion;
d. the amount of unrestricted retained earnings equivalent to
the cost of treasury shares being held as shall be restricted from
being declared and issued as dividends. The dividend restriction
on retained earnings on account of the treasury shares being
held shall be lifted only after the treasury shares causing the
restriction are reissued.

 Escrow Shares. - are those held by a third

person to be released only upon the
performance of a condition or happening
of a certain event contained in the
agreement. Escrow shares are not reflected
in the AOI. Holders of Escrow shares are
not entitled to the rights of a Stockholder
until the conditions set forth for the
release of such shares are fully met.
Accordingly, holdeers thereof have no
right to vote or to ahve notice of the
shareholders' meeting.

 Trust Fund Doctrine

is a corporate theory developed in the United States
which seeks to protect the interest of corporate
creditors, and is deemed to have been implanted in
Philippine jurisdiction.
In Philippine Trust Co. vs. Rivera, the SC held that - "It
is established doctrine that subscriptions to the capital
of a corporation constitute a fund to which the
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts."

 In CIR vs. CA, the SC held that - "under the trust fund
doctrine, the capital stock, property and other assets of
the corporation are regarded as equity in trust for the
payment of the corporate creditors."
In PLDT vs. NTC, the SC held that the trsut fund doctrine
considers the subscribed capital "as a trust fund for the
payment of the debts of the corproation, to which the
creditors may look for satisfaction. Until the liquidation
of the corporation, no part of the subscribed capital stock
may be returned or released to the stockholder (except in
the redemption of redeemable shares), without violating
this principle."

 Section 122 of the Corporation Code

provides "Except by decrease of capital stock and as
otherwise allowed by this Code, no
corporation shall distribute any of its assets or
property except upon lawful dissolution and
after payment of all its debts and liabilities."

 Instances where the Trust Fund Doctrine

applies:
a. Where there has been a distribution or an attempt
to distribute corporate properties, or a return of the
capital or portion thereof to stockholders without
providing for the payment of creditors;
b. Where the corporation had released the
subscribers to the capital stock from their
subscriptions without valuable consideration;
c. Where the corporation has transferred corporate
property in fraud of its creditors;
d. Where the corporation is insolvent;

 1. The Trust Fund Doctrine was also applied to resolve

controversy involving feuding stockholders, even when there is
no showing that the decrease in capital stock would be
prejudicial to corporate creditors. The SC held that rescission of
a pre-subscription agreement will result in the unauthorized
distribution of capital assets and property of the corportion and
thereby violates the TRust Fund Doctrine. (Ong Yong vs. Tiu,
401 SCRA 1, 2003);
2. The attempt by a withdrawing stockholder to take back
machinery he had contributed to the corporation as part of the
payment of subscription to his shares of stock was held to be
invalid as to be contrary to both the principles of separate
juridical personality and the Trust Fund Doctrine (Yamoto vs.
Nishino Leather Industries, Inc., 551 SCRA 447, 2008)

 What is not covered by the TFD?

In Central Textile Mills, Inc. vs. NWPC, 260 SCRA 368,
the SC held that funds received by the corporation to cover
subscription payment on increase in authorized capital stock
prior to the approval by the SEC would not be covered within the
ambits of the trust fund doctrine. This ruling reiterates the point
that it is not the payment of shares of stock of shares that
constitutes one a stockholder, but rather that act of subscribing
to shares of stock.
In CIR vs. First Express Pawnshop Co., Inc., 589 SCRA
253, the SC reiterated that in a deposit for future subscription,
there is no subscription agreement that is constituted.

 Dividends Dividends can only be declared out of unrestricted

retained earnings .
Dividends cannot be declared out of "paid-in
surplus" , or the premium received from the payment
of a subscriber over the par value of the shares.
The declaration of dividends is within the business
judgment of the Board of Directors. The fact that
profits have accrued does not necessarily impose a
duty on the BOD to declare dividends and the courts
have no power to compel them to make a distribution
in the absence of bad faith or clear abuse of discretion.

 Under Section 43 however, it is expressly

prohibited for stock corporations from retaining
surplus profits in excess of 100% of their paid-up
capital stock, except in the following cases:
a. When justified by definite corporate expansion
projects or programs approved by the BOD;
b. When the corporation is prohibited under any loan
agreement with any financial institution or creditor,
whether local or foreign from declaring dividends
without its/his consent, and such consent has not yet
been secured;
c. When it can be clearly shown that such retention is
necessary under special circumtances obtaining in the
corporation, such as when there is a need for special
reserve for probable contingencies.

 Cash Dividends may be declared by the BOD under a formal

resolution and does not require the approval or
ratification of the stockholders;
Any cash dividend due on delinquent stock shall first
be applied to the unpaid balance on the subscription
plus cost and expenses;
Cash dividends are revocable before announcement to
the shareholders; as soon as cash dividends are
publicly declared, the stockholders have the right to
their pro rata shares;
When cash dividends is duly declared, the amount
due to the stockholder belongs to him and it cannot
without his consent be reverted to the surplus account
of the corporation;

 Stock Dividends a. Requires the prior resolution of the BOD as well as

the approval of stockholders representing not less
than 2/3 of the outstanding capital stock at a regualr
meeting duly called for the purpose;
b. Stock dividends may be issued out of premium
surplus;
c. No stock dividends can be issued to nonstockholders even for services rendered.
d. Stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription
is fully paid.
e. Stock dividend declarations may be revoked prior
to actual issuance thereof.

Property Dividends Guidelines for the issuance of Property Dividends:

a. Within 30 days from declaration thereof, a notice must be sent by the
corporation showing the nature of the property declared as dividends;
b. The property declared as dividends should no longer be intended to be used in
the operation of the business of the corporation and which should be practicable
to be distributed as dividends;
c. The issuance of property dividends shall not result to an inequitable
distribution of property to the stockholders in terms of the book values and
market values, if any, of the property distributed;
d. Where the distribution is made where some of the stockholders will receive
cash and the others receive proeprty, the prevailing market value of the property
as agreed upon by the stockholders shall be considered in determining the
equitable distribution of the total dividends;
e. No dividends in the form of land shall be issued to a foreign individual or
entity not qualified to hold land; and
f. No actual distribution of property dividends shall be made without the
approval of the SEC.

Corporate Acquisitions, Mergers and

Consolidation
Three Types of Corporate Acquisitions and Transfers
under Contract Law:
1. Assets-only Transfer, where 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 through fraud of creditors;
2. Transfer of the Business Enterprise, where the transferee
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
3. The Equity Transfer, where the transferee is not liable for
debts and liabilities of the transferor, except where the
transferee expressly or impliedly agrees to assume such debts;

 Mergers and Consolidation

Under Section 76 of the Corporation Code, 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.
Merger is a union whereby one or more existing corporations are
absorbed by another corporation which survives and continues the
combine business (Mcleod vs. NLRC)
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 of two or more corporations by which their
rights, franchises, privileges and properties are uited and become those
of a single, new corporation composed generally, although not
necessarily, of the stockholders of the original corporations.

 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 corporation.
In merger, all constituent corporations,
except the surviving corporation, are
dissolved.

 In merger or consolidation, 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.

 Plan of Merger or Consolidation

The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following:
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of
carrying the same into effect;
3. A statement of the changes, if any, in the articles of incorporation
of the surviving corporation in case of merger; and, with respect to
the consolidated corporation in case of consolidation, all the
statements required to be set forth in the articles of incorporation
for corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable. (n)

 When the procedures for merger

orconsolidation as prescribed under Title
IX of the Corporation Code are not
followed, there can be no merger or
consolidation, and corporate separateness
between the constituent corporations
reamins, and the liabilities of one entity
cannot be enforced against another entity
(PNB vs. Andrada Electric & Engineering
Co. , 381 SCRA 244)

 Need of Stockholders or Members Approval

of the Merger or Consolidation. 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 Requirement
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.

Voting Requirement and Appraisal Right

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. Any dissenting stockholder in stock
corporations may exercise his appraisal right in
accordance with the Code: Provided, That if after
the approval by the stockholders of such plan,
the board of directors decides to abandon the
plan, the appraisal right shall be extinguished.

 Any amendment to the plan of merger or

consolidation may be made, provided such
amendment is approved by majority vote of the
respective boards of directors or trustees of all
the constituent corporations and ratified by the
affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such plan,
together with any amendment, shall be
considered as the agreement of merger or
consolidation.

Articles of Merger or Consolidation

After the approval by the stockholders or members as
required by the preceding section, articles of merger or
articles of consolidation shall be executed by each of the
constituent corporations, to be signed by the president or
vice-president and certified by the secretary or assistant
secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock corporations, the
number of members; and
3. As to each corporation, the number of shares or
members voting for and against such plan, respectively.

Effectivity of Merger or consolidation

When does the merger or consolidation

become effective?
It shall be effective after the SEC issues a
Certificate of merger or consolidation.

 The articles of merger or of consolidation, signed and

certified as herein above required, shall be submitted to
the Securities and Exchange Commission in
quadruplicate for its approval: Provided, That in the case
of merger or consolidation of banks or banking
institutions, building and loan associations, trust
companies, insurance companies, public utilities,
educational institutions and other special corporations
governed by special laws, the favorable recommendation
of the appropriate government agency shall first be
obtained. If the Commission is satisfied that the merger
or consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and existing
laws, it shall issue a certificate of merger or of
consolidation, at which time the merger or consolidation
shall be effective.

 If, upon investigation, the Securities and

Exchange Commission has reason to believe that
the proposed merger or consolidation is contrary
to or inconsistent with the provisions of this
Code or existing laws, it shall set a hearing to
give the corporations concerned the opportunity
to be heard. Written notice of the date, time and
place of hearing shall be given to each
constituent corporation at least two (2) weeks
before said hearing. The Commission shall
thereafter proceed as provided in this Code.

 Requirements on Submission of Financial

Statements. The applying constituent corporations are required to
submit their respective financial statements which
serve as the basis for fixing the shares to be issued in
favor of the merged corporation vis-a-vis the net
assets to be absorbed by the surviving corporation as
of specific date. The date is important because it
indicates the values of said assets as of that date. It is
required that the articles of merger or consolidtion
should be filed not more than 120 days from the date
of the long form audit report for each of the
constituent corporations.

 Additional Requirements for the processing of

application for merger or consolidation:
1. List of creditors of the absorbed corporations;
2. List of creditors of insolvent surviving corporation;
3. Consent of creditors of insolvent constituent
corporation;
4. List of stockholders or record of the constituent
corporations;
5. Affidavit of Publication; and
6. Company data maintenance form.

Effects of Merger or Consolidation:

Effects of merger or consolidation. The merger or
consolidation shall have the following effects:
1. The constituent corporations shall become a single
corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger;
and, in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations
shall cease, except that of the surviving or the
consolidated corporation;
3. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and powers
and shall be subject to all the duties and liabilities of a
corporation organized under this Code;

 4. The surviving or the consolidated corporation shall thereupon and

thereafter possess all the rights, privileges, immunities and
franchises of each of the constituent corporations; and all property,
real or personal, and all receivables due on whatever account,
including subscriptions to shares and other choses in action, and all
and every other interest of, or belonging to, or due to each
constituent corporation, shall be deemed transferred to and vested in
such surviving or consolidated corporation without further act or
deed; and
5. The surviving or consolidated corporation shall be responsible and
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and
any pending claim, action or proceeding brought by or against any of
such constituent corporations may be prosecuted by or against the
surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not
be impaired by such merger or consolidation.

 May a corporation invoke its merger with

another corporation as a valid ground to
exempt its "absorbed employees" from the
coverage of a union shop clause contained
in its existing Collective Bargaining
Agreement (CBA) with its own certified
labor union?