SECTION 74 – RIGHT TO FINANCIAL STATEMENTS Illustration.

Corporation A – owns 100 trucks

SECTION 74. Right to Financial Statements. — A
corporation shall furnish a stockholder or member, within ten
(10) days from receipt of their written request, its most
recent financial statement, in the form and substance of the
financial reporting required by the Commission.
At the regular meeting of stockholders or members, the
board of directors or trustees shall present to such
stockholders or members a financial report of the operations
of the corporation for the preceding year, which shall include
financial statements, duly signed and certified in accordance
with this Code, and the rules the Commission may prescribe.
However, if the total assets or total liabilities of the
corporation are less than Six hundred thousand pesos
(P600,000.00), or such other amount as may be determined
appropriate by the Department of Finance, the financial
statements may be certified under oath by the treasurer and
the president.
When will it be required to be signed by a certified
public accountant (CPA)?
When the total assets or liabilities of the corporation is
600K or more.
Corporation B (buyer corporation) – buys 80 units
Situation. Corporation A owns 100 units of trucks and
Corporation B buys 80 units.
What is the effect?
A has sold substantially all of its assets. It is possible
that A can no longer continue its operations. However,
Corporation A may continue its business if it still has
assets.
What is there relationship?
There is no relationship between Corporation A and B.
Corporation B merely bought the assets of
Corporation A – it simply acquired its assets.
Continuation. Corporation B bought ALL of the
ASSETS of Corporation A
Corporation B may even buy ALL of the assets of
Corporation A. Once Corporation B buys ALL of the
assets, does it become a stockholder of
Corporation A?
No. B merely bought the assets for 10M.

Corporation A acquires 10M proceeds and it may buy

MERGER vs ACQUISITION new units or engage in another business, because it may
Atty. Espedido: Merger is marriage. In the business be fed up with the transportation business. There is no
world, they call these “mergers and acquisitions”. relationship formed.

Merger Acquisition
Dissolution of one Both corporations continue SUMMARY OF EFFECTS IN SALE OF ASSETS
corporation to exist The selling corporation (Corporation A) does
not necessarily cease operations or dissolve
Assets and liabilities are Liability is only up to the its corporation because it may still continue to
merged together extent of what they agreed operate its business from the proceeds received or
upon it may engage in another business.

The buyer corporation (Corporation B) does

This includes:
(1) Sale of Assets not become a stockholder of Corporation A
because it merely bought the assets of the selling
(2) Sale of Stocks
Corporation. There is no relationship
(3) Stock-Asset Swap
established.

2 SALE OF STOCKS
CORPORATE COMBINATIONS
SALE OF STOCKS – one corporation buys the majority
We have different kinds of corporate combinations,
stocks of another corporation to effect control.
namely:
(1) Sale of Assets
Illustration.
(2) Sale of Stocks
Corporation A – 10 M shares (10M capital)
(3) Stock-Asset Swap
Corporation B – buys 60M shares (60% shares)
(4) Lease of Assets
(5) Merger
If Corporation B buys 60%, it will now own 6M shares or
(6) Consolidation
an equivalent to 60% of the shares of Corporation A. B
has invested 6M to Corporation A.
1 SALE OF ASSETS
Situation. In a meeting for example, there are decisions
SALE OF ASSETS – contemplates a situation where one
to be made based on the number of votes that he would
corporation buys ALL or SUBSTANTIALLY ALL of the
have, what will now be the effect?
assets of another corporation
Answer: Since Corporation B owns the majority shares
Effect: It does not necessarily mean that there is
(60% shares), it now controls the corporation; unlike
cessation of the corporation. The corporation selling may
in the sale of assets wherein the buyer does not become
or may not be dissolved. It may continue if it still has
a stockholder or a controlling stockholder since there is
assets or may choose to engage in another business.
no relationship between the two.
In Sale of Stocks, a relationship is created between SUMMARY OF EFFECTS
the selling corporation and the buying
corporation. In this case, Corporation B becomes a Situation Effect
stockholder of Corporation A. Depending on the shares 1. Corporation B buys (a) Corporation B
acquired by the buyer corporation, it may or may not some shares of - becomes a stockholder
become a controlling stockholder. Corporation A in
exchange of 10
Continuation. Corporation B buys ALL of the parcels of land (b) Corporation A
STOCKS of Corporation A - owns the 10 parcels of
It may even buy 100% of Corporation A, in which case, land
Corporation B now completely owns the shares of
Corporation A. What happens to Corporation A? 2. Corporation B (a) Corporation B
exchanges 10 parcels - becomes a MAJORITY
Answer: Since Corporation A has 10M cash – it will not of land for 60M shares SHAREHOLDER.
necessarily dissolve. It may instead engage in another Corporation B now
business. CONTROLS Corporation
A. It will now control the
corporation by giving its
SUMMARY OF EFFECTS IN SALE OF STOCKS 10 parcels of land for 60M
(a) A relationship between selling corporation shares.
(Corporation A) and buying corporation
(Corporation B) is created. In the illustration,
Corporation B becomes a stockholder of (b) Corporation A
Corporation A. Depending on the shares - owns the 10 parcels of
acquired by Corporation B, it may or may not land
become a controlling stockholder.
3. Corporation B bought (a) Corporation B
(b) The selling corporation (Corporation A) does ALL THE SHARES - becomes the SOLE
not necessarily dissolve. It retains its corporate with 10 parcels of STOCKHOLDER of
existence and may instead engage in another land Corporation A
business using the proceeds received (it has liquid
assets in the form of cash). IOW, if the 10 parcels of
land were given to
Corporation A in
3 STOCK-ASSET SWAP exchange for the 10M
STOCK-ASSET SWAP – One corporation sells its shares, ALL THE
assets in exchange of stocks in another SHARES WILL BE
corporation. There is a swapping of cash from one OWNED BY
corporation on one hand, and assets of the other CORPORATION B. It
corporation on the other hand. now owns the 10M
shares.
Illustration.
Corporation A – 10M shares Note:
Corporation B – 10 parcels of land Who owns the 10 parcels
A offered 10M shares to Corporation B in exchange of of land?
the 10 parcels of land.
What happens to the SH
What happens to Corporation B? of Corporation A?
Effect: Corporation B becomes a stockholder of
Corporation A. See discussion below.

If Corporation B exchanges 10 parcels of land for

60M shares?
Effect: Corporation B will become a majority shareholder
– it will now control the corporation by giving his 10
parcels of land for 60M shares. Corporation B now
controls Corporation A.
If Corporation B bought ALL the shares with 10
parcels of land?
Corporation B becomes the sole stockholder of
Corporation A.
Atty. Espedido: IOW, if the 10 parcels of land were
given to Corporation A in exchange for the 10M
shares, all the shares of Corporation A will be
owned by Corporation B. Corporation B now owns
the 10M shares.
Question: What happens to the stockholders of
Corporation A? Can Corporation B not
simultaneously own 10 parcels of land and the
10M shares? What happens to the stockholders of
Corporation A now? No more shares?
Answer: Corporation A should have increased to
another 10M shares in order to acquire the 10
parcels of land. (So, Corporation A should increase its
authorized capital stock).
Corporation A cannot sell the shares of the stockholders
– Corporation A must use the corporation’s own
shares. In this scenario, Corporation A will buy the 10
parcels of land out of the 10M stocks it owns – while the
stockholders retain their original 10M shares. So in
exchange, Corporation B will get 10M shares
[Corporation B becomes a 50% shareholder], while the SUMMARY OF THE 3 ILLUSTRATIONS
stockholders of Corporation A will get the other 50%
[10M shares originally owned by the SH]. Situation Effect
Situation 1. Corporation A Corporation B
Atty. Espedido: If Corporation A sold ALL of its sold ALL of the 10M becomes:
shares – it will have zero shares. Thus, the land shares of its stockholders (a) the SOLE
should have been given to the individual in exchange of Corporation STOCKHOLDER of
stockholders. B’s 10 parcels of land Corporation A
(b) Owns and controls
If Corporation A wants to purchase the 10 parcels Corporation A
of land, it should look for another 10M [example: by
increasing its ACS], and not sell the shares of the Stockholders of
stockholders. Corporation A
Becomes the owner of the
What should be sold are the STOCKS OF THE 10 parcels of land
CORPORATION and NOT the STOCKS OF THE
SHAREHOLDERS. Atty. Espedido: Because
if Corporation A sold
Important: In Stock-Asset Swap, the Corporation ALL of its shares to
sells its stocks and NOT that of their shareholders. Corporation B – it will
The selling Corporation should look for another have zero shares. Thus,
10M and not the one owned by the Stockholders. the land should have
been given to the
Illustration. individual stockholders.
What Corporation A should have done in order to
acquire the 10 parcels of land of Corporation B: Situation 2. Corporation A Corporation B
Corporation A looked for another 10M stocks – looked for another 10M becomes a
Thus, total became 20M stocks: stocks [example: by stockholder of
increasing its Authorized Corporation A
1. Original 10M shares – owned by the SH of Capital Stock to another holding 50%
Corporation A 10M]. Thus, it has now a shares of
2. Other 10M stocks – owned by Corporation A total of 20M stocks. Corporation A
itself which is now owned by Corporation B
(through the stock-swap) [10M stocks of the Corporation A
corporation + 10M shares owns the 10
EFFECT: In this scenario, Corporation B who owns of its stockholders] parcels of land
10M shares (10M shares of the Corporation sold) holds
50% of the shares of Corporation A (which is paid Stockholders of
through its properties swapped). Corporation A
[owner of 10M
On the other hand, Corporation A owns 10 parcels of shares] owns the
land. other 50% shares
of Corporation A
The stockholders of Corporation A owns/retains the
original 10M stocks of Corporation A and thus owns the Situation 3. Stockholders (a) Stockholders of
other 50% of shares. of Corporation A intends to Corporation A
dispose of their shares in becomes the
exchange of the parcels of OWNER OF THE 10
Question: If it was the intention of the land PARCELS OF LAND
Stockholders to dispose of their shares (original
10M shares) in exchange of the parcels of land, (b) Corporation B
who now owns the land? becomes the SOLE
The original shareholders of Corporation A. STOCKHOLDER OF
CORPORATION A
In this scenario, who owns the corporation? and now owns
Corporation B becomes the owner of the Corporation A. Corporation A
It owns 100% of the corporation.
[Note: Same effect sa
scenario 1]
Situation. Corporation B becomes a stockholder of
Corporation A – Corporation A not held liable for
Corporation B’s debts
Corporation B is now a stockholder of Corporation A.
Corporation B had a debt amounting to 5M owed from
the bank and Corporation B failed to pay. Can the bank
go against Corporation A and collect the 5M owed
by Corporation B?
No. The debts and liabilities of Corporation B is not
passed on to Corporation A because Corporation B
only sold its parcels of land. Corporation B did not
bring in its liabilities to Corporation A.
LIABILITIES OF CORPORATION B WILL BE B’S
ALONE. CORPORATION A WILL NOT BE AFFECTED
BY THE LIABILITY OF B.
4 LEASE OF ASSETS
LEASE OF ASSETS – Instead of selling assets, a
corporation simply leases its assets to another
corporation.
Example: If Corporation A does not want to part of its
property, it may then just lease it to Corporation B.
Illustration. Corporation B leases its 10 buses to
Corporation A
Corporation B owns 10 buses but it does not have the
organization to run and operate 10 buses. What could
be its best option?
Lease the 10 buses to Corporation A.
If it leases the 10 buses, what happens if ALL the
10 buses is leased by Corporation A? What
happens to B?
Effect: Corporation B still continues to exist because in
exchange of leasing, it will still receive profits.
Corporation B retains the ownership and in
addition, it will continue to earn rentals.
Assets are being leased and at the same time it is
earning monthly rentals. It continues to operate, maybe
no longer as a bus operator, but as a lessor of buses.
5 MERGER
SECTION 75. Plan of Merger or Consolidation. — Two
(2) 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.
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:
(a) The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent
corporations;
(b) The terms of the merger or consolidation and the mode
of carrying the same into effect;
(c) A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of merger;
and, in case of consolidation, all the statements required to
be set forth in the articles of incorporation for
corporations organized under this Code; and
(d) Such other provisions with respect to the proposed
merger or consolidation as are deemed necessary or
desirable.
SECTION 79. Effects of Merger or Consolidation. —
The merger or consolidation shall have the following effects:
(a) 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;
(b) The separate existence of the constituent corporations
shall cease, except that of the surviving or the consolidated
corporation;
(c) 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;
(d) The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and franchises
of each constituent corporation; and all real or personal
property, all receivables due on whatever account, including
subscriptions to shares and other choses in action, and every
other interest of, 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
(e) The surviving or consolidated corporation shall be
responsible for all the liabilities and obligations of each
constituent corporation as though such surviving or
consolidated corporation had itself incurred such liabilities or
obligations; and any pending claim, action or proceeding
brought by or against any constituent corporation may be
prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the
property of such constituent corporations shall not be
impaired by the merger or consolidation.
MERGER – two corporations decide to combine and
only one of them survives
Illustration.
Corporation A – engaged in bus operation
Corporation B – engaged in tire dealership
business
ASSETS DEBTS
Corporation (1) Buses (1) Loans
A (2) Land [garage] (2) Unpaid
(3) Warehouse salaries
(4) Canteen (3) Pending
cases
(torts)
Corporation (1) Repair Shop (1) Loans
B (2) Tire dealership (2) Unpaid
business supplier
(3) Equipments (3) Loans for
for repair the
acquisition
of
equipments
Note: It is important to know the assets and liabilities of
the other corporation because in a merger, the assets
and liabilities of one corporation is subsumed by
the surviving corporation.
Like marriage, what is yours is mine, what is mine
is yours.
EFFECT OF MERGER
What happens if they decide to enter into a
merger?
Effect: All the assets and liabilities will be subsumed by
the surviving corporation. Meaning, the liabilities and
assets will be added to the surviving corporation.

Who will now be liable to pay the unpaid tires?

The surviving Corporation A will now be liable for the
unpaid tires, loans, etc.

Can Corporation A argue that it cannot be liable

because the loan papers indicate that it was
Corporation B that loaned. Can it be done?
No, by operation of law, Corporation A shall be
held liable.

If Corporation B was the surviving corporation?

Corporation B will be liable to the liabilities of A.

TRANSFER OF OWNERSHIP
Remember, the buses where registered in the
name of A. Who is now the owner of the buses?
Answer: B becomes the owner even if the
certificate of registration was issued to A.
However, to avoid complications, the registration
issued to Corporation A must be transferred to the
name of Corporation B.

Corporation B should show the Articles of Merger

indicating that Corporation B is now the owner of
the buses.

ARTICLES OF MERGER SUFFICIENT TO ESTABLISH

TRANSFER OF OWNERSHIP
The LTO asked about the Deed of Sale (DOS). Is it
proper?
Answer: No need for the Deed of Sale because the
Articles of Merger (Agreement) is already
sufficient. By operation of law, they do not need
anymore to present a DOS to effect transfer of
ownership – again, it is by operation of law.

COVERAGE FOR NEXT MEETING –

FINISH MERGER