Corporation Law, Mercantile Law

BANK OF COMMERCE vs. RADIO PHILIPPINES  G.R. No. 195615 April 21, 2014 Merger and De Facto Merger, Corporation Code

FACTS:

Traders Royal Bank (TRB) proposed to sell to petitioner Bank of Commerce (Bancommerce) for its banking business consisting of specified assets and liabilities. Bancommerce agreed subject to prior BSP’s approval of their Purchase and Assumption (P & A) Agreement.

The BSP approved that agreement subject to the condition that Bancommerce and TRB would set up an escrow fund of P5O million with another bank to cover TRB liabilities for contingent claims that may subsequently be adjudged against it, which liabilities were excluded from the purchase.

Bancommerce acquired TRB’s specified assets and liabilities, excluding liabilities arising from judicial actions which were to be covered by the BSP-mandated escrow of ₱50 million, which shall be kept for 15 years in the trust department of any other bank acceptable to the BSP.

The BSP finally approved such agreement.

Shortly after, in Traders Royal Bank v. Radio Philippines Network (TRB v. RPN), this Court ordered TRB to pay respondents RPN, et al. actual damages plus 12% legal interest and some amounts.

RPN, et al.filed a motion for execution against TRB before the RTC, and a Supplemental Motion for Execution where they described TRB as “now Bank of Commerce” based on the assumption that TRB had been merged into Bancommerce.

Bancommerce questioned the jurisdiction of the RTC over it and denied that there was a merger between TRB and Bancommerce.

The RTC issued an Order granting and issuing the writ of execution to cover any and all assets of TRB, “including those subject of the merger/consolidation in the guise of a Purchase and Sale Agreement with Bank of Commerce, and/or against the Escrow Fund established by TRB and Bank of Commerce with the MetroBank.”

This prompted Bancommerce to file a petition for certiorari with the CA assailing the RTC’s Order. The CA denied the petition. The CA pointed out that the Decision of the RTC was clear in that Bancommerce was not being made to answer for the liabilities of TRB, but rather the assets or properties of TRB under its possession and custody.

The RTC granted RPN’s motion for alias writ of execution against Bancommerce based on the CA Decision.

The RTC issued the alias writ, hence, Bancommerce filed on a motion to quash the same.

The  RTC issued the assailed Order denying Bancommerce’s pleas. It ordered the release to the Sheriff of Bancommerce’s “garnished monies and shares of stock or their monetary equivalent” and for the sheriff to pay to the respondents’ attorney’s fees, appearance fees and litigation expenses.

Aggrieved, Bancommerce immediately assailed the RTC Orders to the CA via a petition for certiorari under Rule 65. The CA dismissed the petition outright and denied Bancommerce’s motion for reconsideration prompting it to come to this Court.

 

ISSUE:

Whether or not the CA gravely erred in failing to rule that the RTC’s Order of execution against Bancommerce was a nullity because TRB v. RPN held that TRB had not been merged into Bancommerce as to make the latter liable for TRB’s judgment debts.

 

RULING:

Merger is a re-organization of two or more corporations that results in their consolidating into a single corporation, which is one of the constituent corporations, one disappearing or dissolving and the other surviving.

To put it another way, merger is the absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the life or lives of the other corporation(s) is or are terminated.

The Corporation Code requires the following steps for merger or consolidation:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation, all the statements required in the articles of incorporation of a corporation.

(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders or members, personally or by registered mail. A summary of the plan must be attached to the notice. Vote of two-thirds of the members or of stockholders representing two thirds of the outstanding capital stock will be needed. Appraisal rights, when proper, must be respected.

(3) Execution of the formal agreement, referred to as the articles of merger o[r] consolidation, by the corporate officers of each constituent corporation. These take the place of the articles of incorporation of the consolidated corporation, or amend the articles of incorporation of the surviving corporation.

(4) Submission of said articles of merger or consolidation to the SEC for approval.

(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before.

(6) Issuance of certificate of merger or consolidation.

Indubitably, it is clear that no merger took place between Bancommerce and TRB as the requirements and procedures for a merger were absent. A merger does not become effective upon the mere agreement of the constituent corporations. All the requirements specified in the law must be complied with in order for merger to take effect. Section 79 of the Corporation Code further provides that the merger shall be effective only upon the issuance by the Securities and Exchange Commission (SEC) of a certificate of merger.

Here, Bancommerce and TRB remained separate corporations with distinct corporate personalities. What happened is that TRB sold and Bancommerce purchased identified recorded assets of TRB in consideration of Bancommerce’s assumption of identified recorded liabilities of TRB including booked contingent accounts. There is no law that prohibits this kind of transaction especially when it is done openly and with appropriate government approval.

In strict sense, no merger or consolidation took place as the records do not show any plan or articles of merger or consolidation. More importantly, the SEC did not issue any certificate of merger or consolidation.

On the other hand, the idea of a de facto merger came about because, prior to the present Corporation Code, no law authorized the merger or consolidation of Philippine Corporations, except insurance companies, railway corporations, and public utilities. And, except in the case of insurance corporations, no procedure existed for bringing about a merger.

In his book, Philippine Corporate Law, Dean Cesar Villanueva explained that under the Corporation Code, “a de facto merger can be pursued by one corporation acquiring all or substantially all of the properties of another corporation in exchange of shares of stock of the acquiring corporation. The acquiring corporation would end up with the business enterprise of the target corporation; whereas, the target corporation would end up with basically its only remaining assets being the shares of stock of the acquiring corporation.”

No de facto merger took place in the present case simply because the TRB owners did not get in exchange for the bank’s assets and liabilities an equivalent value in Bancommerce shares of stock. Bancommerce and TRB agreed with BSP approval to exclude from the sale the TRB’s contingent judicial liabilities, including those owing to RPN, et al.

Herein petition is granted.

The enforcement, therefore, of the decision in the main case should not include the assets and properties that Bancommerce acquired from TRB. These have ceased to be assets and properties of TRB under the terms of the BSP-approved P & A Agreement between them. They are not TRB assets and properties in the possession of Bancommerce.

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