Briefing On

Merger and Consolidation

Merger/consolidation
Section 76 of the Corporation Code (Code) authorizes two or more
corporations to merge into a single corporation which shall be one of the
constituent corporations or to 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 combined
business.
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.

12/27/16

Sec.76 of the Code: Plan of merger/consolidation

Sec. 76. Plan of merger or consolidation. 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. 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.

12/27/16

Articles of
Merger/Consolidation
Shall be executed by each of the constituent
corporations, to be signed by the president or vicepresident 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 corporation, the number of shares outstanding,
or in the case of non-stock corporation, the number of
members; and
3. As to each corporation, the number of shares or members
voting for and against such plan, respectively.
For Consolidation: the articles of incorporation and by-laws of
the consolidated corporation

Basis for Rejections of Plan and Articles of

Merger/Consolidation
1.
2.
3.
4.
5.

12/27/16

Exchange of shares will result to watered stocks.

Plan of merger or consolidation was not approved
by the required votes under the Code.
Signatories in the articles of merger or
consolidation were not the officers required under
the Code.
Insolvencies adversely affect the interest of the
creditors.
Violation of Nationalization laws.

Illustrative examples of provisions in Plan of Merger/consolidation

rejected by SEC :
That SEC approval of merger agreement shall be rendered void and of no
effect in the event Bureau of Internal Revenue (BIR) has ruled that the
exchange of net assets is not a tax free exchange of property under Sec.
40(C)2 of National Internal Revenue Code (NIRC).
That the absorbed corporation shall apply for its dissolution under the
provisions
of
the
Corporation
Code
after
the
approval
of
merger/consolidation.
That the absorbed corporation shall undergo winding up or liquidation of its
assets after the approval of the merger/consolidation (Associated Bank vs.
Court of Appeals G.R. No. 123793 June 29,1998)
That specific assets of the absorbed corporation/s are exempted from the
coverage of transfer to the surviving/consolidated corporation.
That the Outstanding capital stock of the absorbed shall form part of the
outstanding capital stock of the surviving.

12/27/16

Effectivity of Merger and Consolidation

Sec. 79. Effectivity 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.

12/27/16

Effectivity ..
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.
Poliand Industrial Ltd. vs. National Development Co., et al., G.R. Nos.
143866 & 143877, August 22, 2005 A merger does not become effective
upon the mere agreement of the constituent corporations. The merger shall
only be effective upon the issuance of a certificate of merger by the Securities
and Exchange Commission, subject to its prior determination that the merger is
not inconsistent with the Code or existing laws. The issuance of the certificate
of merger is crucial because not only does it bear out SECs approval but also
marks the moment whereupon the consequences of the merger take place

12/27/16

Sec. 80 provides in part: The rights of creditors or liens upon the

property of any of such constituent corporations shall not be
impaired by such merger or consolidation.
Excerpt from the Minutes of the Commission Meeting
held on May 4, 2006
There is no exception to the general rule that consent of the creditors
of the constituent corporations is not required for the approval
by the Commission of a Plan of Merger.
The policies on applications for merger are:
1. Where both or all the constituent corporations are solvent a
sworn certification that creditors have been properly notified of
the proposed merger shall be required;
2. Where at least one of the constituent corporations is insolvent
an affidavit of publication in a newspaper of general circulation
shall be required

12/27/16

Rights of creditors
a. In one instance, although the merger adversely affected the
financial condition of the surviving corporation since the absorbed
corporation has a negative net worth, it was allowed by SEC as
98% of the total liabilities of the absorbed constituted Deposits for
Future Subscriptions and Advances from the stockholders and
such were converted into equity after the merger. And as fully
disclosed and on file with SEC, the stockholders of the absorbed
were also stockholders of the surviving.
b. In another instance, the merger was also allowed by the
Commission although the surviving corporation was insolvent when the debts of the surviving were converted by its creditors
into equity simultaneous with the merger. The merger application
was accompanied by an application for debt to equity conversion.

12/27/16

10

Merger with non-issuance of shares:

Downstream merger - the absorbed corporation is subsidiary to

the surviving corporation. The surviving corporation shall close
the investments account in its books.
Not in Upstream Merger -the subsidiary swallows the parent
corporation. The shareholders of the parent receive in exchange
for new shares of the former subsidiary except when the
subsidiary reacquires its shares subject to availability of
retained earnings. Also not applicable when a subsidiary enters
into merger and absorbed by non-subsidiary. The surviving may
become subsidiary of the parent company

12/27/16

Absorbed corporation has negative net worth.

Absorbed is wholly owned by another absorbed entity, where
the latter is having a capital deficiency.
Surviving and absorbed are owned by common stockholders.
Entire conversion of absorbed net worth to APIC of the
surviving. (see SEC opinions next slides)

11

SEC Opinion - Conversion of the entire assets of the absorbed corporations into
additional Paid-In capital of the surviving corporation without the corresponding
issuance of shares to the stockholders of the absorbed corporations:
It is a general principle in Corporation law that in case of merger of two or
more corporations, the surviving corporation assumes all the rights,
property, liabilities and obligations of each of the constituent corporations
without further act or deed in the same manner as if such surviving
corporation had itself incurred such liabilities or obligations. Further, the
Commission opined that for the purpose of merger/consolidation,
the approval of the SEC is not necessary for the issuance of shares
by one corporation to the other in the acquisition of assets
thereby.
The issuance of shares is not indispensable in case of mergers or
consolidation; that there could be transfer of assets and liabilities
without the corresponding issuance of shares by the surviving
corporation.
What the law seeks to ensure in case of merger is that there shall be no
impairment of legal capital and that no prejudice shall be caused to
the stockholders and creditors.

12/27/16

12

Conversion of the entire assets of the

absorbed into APIC for the surviving.
It could be said that there is no provision in the Corporation Code
in cases of mergers, which provides the conversion of all the
assets of the absorbed corporations into additional paid-in
capital of the surviving corporation without the issuance of
shares provided there is consent of all the creditors and
stockholders of both the surviving and absorbed
corporations.
There is no danger that such conversion would cause the
impairment of capital to the prejudice of the stockholders of
the merged corporations considering that the paid-in capital
surplus of a corporation is generally considered as part
of the capital and may not be declared as dividends. In
any case, the situation does not result in capital
impairment because the corporation parts with nothing
in issuing the same.

12/27/16

13

Sec. 132 of the Code:

Sec. 132. Merger or consolidation involving a foreign corporation licensed
in the Philippines. One or more foreign corporations authorized to
transact business in the Philippines may merge or consolidate with
any domestic corporation or corporations if such is permitted under
Philippine laws and by the law of its incorporation: Provided, That the
requirements on merger or consolidation as provided in this Code are
followed.
xxx
Notes:
1. Not the case of mergers of domestic subsidiary/affiliate of foreign
corporations .
2. Not the merger of the branch office with a domestic corporation.
3. Branch/representative offices are not subject of mergers. However
conversions are allowed.

12/27/16

14

Merger of a domestic and foreign Corporation

(Nickel Asia Corporation and Nickel Asia Corp.
British Virgin Islands)
Surviving was the domestic corporation.
Assets of the absorbed foreign corporation were in the form of
shares of stocks in the Philippines per authenticated
audited financial statements.
Surviving (domestic corporation) and absorbed (foreign
corporation) were under common stockholders per
documents submitted.
Absorbed foreign corporation has a duly licensed and active
representative office in the Philippines.
Note: Merger of a domestic corporation with licensee (branch
and representative) is not allowed

12/27/16

15

I. Merger of non-stock corporation with stock corporation;

II. Whether a partnership may be allowed to merge with a corporation
III. Merger between a church and a school

I. Surviving corporation is the non-stock (NS) corporation.

Stockholders of the absorbed stock corporation (SC) become
members of the surviving NS.
Income generating activities of the absorbed SC may be continued by
the surviving NS provided that the continuance will not defeat its
nature as non-stock and non profit and the activities are necessary
or incidental to NS operation.
II. Only corporations can merge into a single entity under section 76 of
the Code. Since merger is not possible, the SEC, however, allows
partnership to transfer all its assets and liabilities to the corporation
for the latter to issue its shares of stock for the net assets which will
in turn be distributed or issued to the partners of the partnership in
proportion to their respective interest in said partnership, provided
that the partnership shall be dissolved in accordance with law.
III. As to whether a church and school can be integrated to one entity,
the SEC ruled that integration may not be feasible because they
have different purposes alien to each other.
IV. Travel Agency and Overseas Recruitment

12/27/16

16

Merger of Foreign Corporations:

Sec. 132 xxx Whenever a foreign corporation authorized to transact

business in the Philippines shall be a party to a merger or

consolidation in its home country or state as permitted by the law
of its incorporation, such foreign corporation shall, within sixty
(60) days after such merger or consolidation becomes effective,
file with the Securities and Exchange Commission, and in proper
cases with the appropriate government agency, a copy of the
articles of merger or consolidation duly authenticated by the
proper official or officials of the country or state under the laws of
which or consolidation was effected: provided, however, That if the
absorbed corporation is the foreign corporation doing business in
the Philippines, the latter shall at the same time file a petition for
withdrawal of its license in accordance with this Title.

Note : Foreign corporations branch offices are not subject of mergers

and consolidations under the Code.

12/27/16

17

Philippine Competition Act

Securities and Exchange
Commission

Philippine Competition
Commission

To transmit records on file

Since August 2015

To require notification

Once IRR is in place

Sector regulators favorable

endorsement remains

Letter transmittal on the approval

similar with the transmittal for
BIR

You ask a question because the

answer is important to
you
- Finding Forrester