Corporation Law: The Revised Corporation Code of the Philippines - Sec 39

THE REVISED CORPORATION CODE  OF THE PHILIPPINES

Republic Act No. 11232 

TITLE IV -  POWERS OF CORPORATIONS

Section 39. Sale or Other Disposition of Assets.

Subject to the provisions of Republic Act No. 10667, otherwise known as the "Philippine Competition Act", and other related laws a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property and assets, upon such terms and conditions and for such consideration, which may be money, stock, bonds, or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient.

A sale of all or substantially all of the corporation's properties and assets, including its goodwill, must be authorized by the vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or at least two-thirds (2/3) of the members, meeting duly called for the purpose.

In nonstock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.

The determination of whether or not the sale involves all or substantially all of the corporation's properties and assets must be computed based on its net asset value, as shown in its latest financial statements. A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose of which it was incorporated.

Written notice of the proposed action and of the time and place for the meeting shall be addressed to stockholders or members at their places of residence as shown in the books of the corporation and deposited to the addressee in the post office with postage prepaid, served personally, or when allowed by the bylaws or done with the consent of the stockholder, sent electronically: Provided, That any dissenting stockholder may exercise the right of appraisal under the conditions provided in this Code.

After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge, or other disposition of property and assets, subject to the rights of third parties under any contract relating thereto, without further action or approval by the stockholders or members.

Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge, or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of the corporation or if the proceeds of the sale or other disposition of such property and assets shall be appropriated for the conduct of its remaining business.

1. Requisites.

• A sale of all or substantially all of the properties and assets of the corporation, including its goodwill, requires the following:

1. It must be approved by the majority of the directors or trustees; 
2. There must be approval/assent of stockholders representing 2/3 of outstanding capital stock or 2/3 of members in a meeting duly called for the purpose after written notice. 

• The sale is void if these requirements are not complied with. 
• There is a problem, however, with respect to lease, exchange, mortgage, pledge or other disposition of all or substantially all of the assets of the corporation because the second paragraph of Section 39 of the RCCP expressly provides that "(a) sale of all or substantially all of the corporation's properties and assets, including its goodwill, must be authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital' stock, or at least two-thirds (2/3) of the members, in a stockholders' or members' meeting duly called for the purpose." 
• The second paragraph mentions only the sale of all or substantially all of the assets of the corporation. 
• This is in contrast with Section 40 of the Corporation Code which states that "a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose."
• The question therefore is whether or not lease, exchange, mortgage, pledge or other disposition of all or substantially all of the assets of the corporation requires the vote of the stockholders or members. 
• A strict interpretation of the second paragraph of Section 39 of the RCCP would limit its application to sale.
• However, it is submitted that this interpretation will defeat the purpose of the provision. 
• In the first place, the term sale should be construed in a general sense to include exchange (barter) and other disposition.
• Barter is, in fact, governed by the law on sale. 
• For lease, mortgage or pledge of all or substantially all of the assets of the corporation, it is believed that the intent is still to include them.
• The effect of these transactions may also be to render the corporation incapable of continuing the business or the purpose for which it was incorporated. 
• The intent to include lease, mortgage, or pledge is evident from the fact that the fourth paragraph of Section 39 refers to "sale or other disposition", while the sixth paragraph refers to the abandonment by the Board of the sale, lease, exchange, mortgage, pledge, or other disposition after the approval by the stockholders of such acts.
• If substantially all of the assets were already previously mortgaged by the corporation with proper board and stockholders' approval under Section 40 of the Corporation Code (now Section 39 of the RCCP) as evidenced by a Mortgage Trust Indenture (MTI), the subsequent appointment of a replacement of a new trustee of the MTI should only be considered a regular business transaction. 
• The appointment needs to be approved only by at least a majority of the directors present at the meeting in which there was a quorum pursuant to Section 25 of the Corporation Code.
• However, the corporation may contractually bind itself to secure the approval of the stockholders for the transfer of assets even if Section 39 does not strictly cover the same. A contractual undertaking to secure the votes required under Section 39 is binding.

1.01. Directors Approval Only. 

• If the transaction does not cover all or substantially all of the assets, the decision of the Board is sufficient and it is not necessary to get the approval of the stockholders. 
• The last paragraph of Section 39 of the RCCP provides that "nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge, or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of the corporation or if the proceeds of the sale or other disposition of such property and assets shall be appropriated for the conduct of its remaining business." 
• Transfer in the regular course of business requires Board approval only. 
• For instance, lease of a portion of the property of the corporation for legitimate business purpose does not require approval of the stockholders if it does not constitute substantially all of the assets of the corporation.
• Similarly, shares that constitute part of the assets of the corporation may be transferred without approval of the stockholders.
• Interestingly, the first paragraph of Section 39 of the RCCP provides that "a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge, or otherwise dispose of its property and assets, upon such terms and conditions and for such consideration, which may be money, stocks, bonds, or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient." 
• The provision seems to indicate that even if the sale or disposition does not involve all or substantially of the assets, the required vote is still majority of the directors or trustees, and not merely majority of the directors or trustees present constituting a quorum.

1.02. Abandonment of the Sale or Disposition. 

• The board of directors or trustees may, in its discretion, abandon the sale, lease, exchange, mortgage, pledge, or other disposition of property and assets, after the authorization or approval by the stockholders or members. 
• It is not necessary to secure the approval of the stockholders or members to abandon the project.
• However, the abandonment is subject to the rights of third parties under any contract relating thereto. 

1.03. Kinds of Corporate Acquisitions. 

• Sale of all or substantially all of the assets of the corporation governed by Section 39 of the RCCP is one of the types of corporate acquisitions. 
• The Supreme Court explained that there are two types of corporate acquisitions: 
• asset sales
• stock sales
• In asset sales, the corporate entity sells all or substantially all of its assets to another entity. 
• In stock sales, the individual or corporate shareholders sell a controlling block of stock to new or existing shareholders.

2. Meaning of "Substantially All." 

• A sale or other disposition shall be deemed to cover "substantially all" corporate property and assets if the corporation would thereby be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. 
• The test is not the amount involved but the nature of the transaction.
• As noted earlier, Section 39 does not apply in these cases: 
• if the sale of the entire property and assets is necessary in the usual and regular course of business of the corporation; or
• if the proceeds of the sale or other disposition of such property and assets will be appropriated for the conduct of its [the corporation's] remaining business.

3. Rationale. 

• Stringent requirements are imposed if the conveyance involves all or substantially all of the properties or the of the corporation because there is an implied contract among stockholders to pursue the business for which the corporation was created for the specified period of its existence and therefore, as a general rule, there should be no disposition of the property used by the corporation in its business until its dissolution.
• However, disposition of all or substantially all of the assets is not absolutely prohibited and may be made under Section 39 of the RCCP because there may be pressing business necessity which requires transfer or sale of property to avoid loss or there is inability of the corporation to make further profits. 
• The power to dispose corporate assets may be exercised where a:
• just and reasonable cause exists
• provided the transaction is not in fraud of the rights of creditors
• made for adequate consideration
• for the best interest of the corporation
• It has to be emphasized that a transfer of all the properties and franchise of the corporation does not necessarily dissolve the corporation or terminate the corporate existence. 
• The corporation, however, may opt to dissolve by any means provided under the RCCP.

4. Effect on Creditors. 

• The transferee-corporation of all or substantially all of the assets (or even shares) of the transferor-corporation will not be liable for the debts of said transferor-corporation.

4.01. The Nell Doctrine. 

• However, by way of exception, the transferee-corporation is liable: 
1. if there is an express or implied assumption of liabilities;
2. the transaction amounts to a consolidation or merger;
3. if the transaction is entered into fraudulently in order to escape liability from debtors or the purchase was in fraud of creditors; and
4. if the purchaser becomes a continuation of the seller.

1. Assumption.

• Assumption of liabilities may be embodied in the agreement between the transferor-corporation and the transferee-corporation. 
• If the agreement is embodied in a written document, the liabilities assumed may also be limited by express stipulation. 
• For instance, the liability of the transferee bank in one case was limited to liabilities that resulted from normal banking o1perations and did not include separation pay of employees.

2. Merger or Consolidation. 

• There is really no sale in case of merger or consolidation or their equivalent. 
• The properties are not sold but "are deemed automatically transferred to and vested in the surviving corporation without further act or deed." 
• As a matter of law, the surviving corporation also automatically absorbs the obligations of the non-surviving corporation. 
• The transaction amounts to merger or consolidation in case of de facto merger; the transferee assumes the liabilities of the transferor of its properties. 
• In a de facto merger, one corporation acquires "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."

3. Transfer in Fraud of Creditors. 

• While the Corporation Code allows the transfer of all or substantially all the properties and assets of a corporation, the transfer should not prejudice the creditors of the assignor. 
• If the creditors did not consent, the only way the transfer can proceed without prejudice to the creditors is to hold the assignee liable for the obligations of the assignor. 
• The acquisition by the assignee of all or substantially all of the assets of the assignor necessarily includes the assumption of the assignor's liabilities, unless the creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud. 
• To allow an assignor to transfer all its business, properties and assets without the consent of its creditors and without requiring the assignee to assume the assignor's obligations will defraud the creditors. The assignment will place the assignor's assets beyond the reach of its creditor.
• Creditors are likewise protected under Articles 1313 and 1381 of the New Civil Code. Article 1313 of the New Civil Code provides that "creditors are protected in cases of contracts intended to defraud them." 
• Further, Article 1381 of the New Civil Code provides that contracts entered into in fraud of creditors may be rescinded when the creditors cannot in any manner collect the claims due them. 
• Article 1381 applied to contract where the creditors are not parties, for such contracts are usually made without their knowledge. 
• Thus, a creditor who is not a party to a contract can sue to rescind the contract to prevent fraud upon him. Or, the same creditor can instead choose to enforce the contract if a specific provision in the contract allows him to collect his claim, and thus protect him from fraud.
• Badges of fraud include the following:

1. The fact that the consideration of the conveyance is fictitious or is inadequate. 
2. A transfer made by a debtor after suit has been begun and while it is pending against him.
3. A sale upon credit by an insolvent debtor.
4. Evidence of large indebtedness or complete insolvency.
5. The transfer of all or nearly all of his property by a debtor, especially when he is insolvent or greatly embarrassed financially.
6. The fact that the transfer is made between father and son, when there are present one or more of the above circumstances.
7. The failure of the vendee to take exclusive possession of all the property.

    Anticipation of Insolvency.

• Section 10 of Republic Act No. 10142 entitled Financial Rehabilitation and Insolvency Act of 2010 (FRIA for short) provides that directors and officers of a debtor shall be liable for double the value of the property sold, embezzled or disposed of or double the amount of the transaction involved, whichever is higher to be recovered for the benefit of the debtor and the creditors, if they, having notice of the commencement of the liquidation proceedings, or having reason to believe that proceedings are about to be commenced, or in contemplation of the proceedings, willfully commit the following acts: 
1. Dispose or cause to be disposed of any property of the debtor other than in the ordinary course of business or authorize or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or 
2. Conceal or authorize or approve the concealment, from the creditors, or embezzles or misappropriates, any property of the debtor.

4. Business-Enterprise Transfer Rule. 

• The buyer is liable if he/she/it (the buyer) is a mere continuation of the seller. Two requisites must concur:
1. the transferor corporation sells all or substantially all of its assets to another entity; and 
2. the transferee corporation continues the business of the transferor corporation.
• This exception is contemplated under Section 39, RCCP "because the purchasing or transferee corporation necessarily continued the business of the selling or transferor corporation."
• In a business-enterprise transfer, the transferee is liable for the debts and liabilities of his transferor arising from the business enterprise conveyed.
• Fraud is not necessary in a business-enterprise transfer before the buyer can be made liable; this rule is separate from the doctrine of piercing the veil of corporate fiction. 

5. Effect of Stoppage of Operation.

• It is not correct to say however that the Business-Enterprise Transfer cases are the only cases covered by Section 39 of the RCCP. 
• It is believed that Section 39 still applies if there is a sale of all or substantially all of the assets of the corporation but the corporation will just cease its operation. 
• Thus, the requirements still apply if all the assets are sold to several buyers even if the buyers are not continuations of the seller corporation. The required approvals under Section 39 still apply.

6. Bulk Sales Law. 

• The sale of all or substantially all of the assets of a corporation is likewise not binding on the creditors if there is violation of the Bulk Sales Law. 
• There is a sale in bulk within the meaning of said special law if there is any sale, transfer, mortgage or assignment of: 
1. stock of goods, wares, merchandize, provisions, or materials otherwise in the ordinary course of trade and the regular prosecution of business of the vendor, mortgagor, transferor or assignor; 
2. the trade or business conducted by the vendor, mortgagor, transferor or assignor; and 
3. all or substantially all of the fixtures and equipment used in and about the business of the vendor, mortgagor, transferor or assignor.
• Section 3 of the Bulk Sales Law provides that "it shall be the duty of every person who shall sell, mortgage, transfer, or assign any stock of goods, wares, merchandise, provisions or materials in bulk, for cash or on credit, before receiving from the vendee, mortgagee, or his, or its agent or representative any part of the purchase price thereof, or any promissory note, memorandum, or other evidence therefor, to deliver to such vendee, mortgagee, or agent, or if the vendee, mortgagee, or agent be a corporation, then to the president, vice-president, treasurer, secretary or manager of said corporation, or, if such vendee or mortgagee be a partnership firm, then to a member thereof, a written statement, sworn to substantially as hereinafter provided, of the names and addresses of all creditors to whom said vendor or mortgagor may be indebted, together with the amount of indebtedness due or owing, or to become due or owing by said vendor or mortgagor to each of said creditors, which statement shall be verified by an oath to the following effect.

7. Anti-Competition Transfers 

• Merger or Acquisition Agreements that substantially prevent, restrict, or lessen competition in the relevant market shall be prohibited.
• Any transfer of all or substantially all of the assets of the corporation that is anti-competition is also prohibited. 

8. Effect on Employees of Corporate Acquisitions

• Dismissal of employees in good faith is justified if the corporate entity sells all or substantially all of its assets. 
• However, the seller in good faith is liable for the payment of separation pay under the law.
• The buyer in good faith is not obliged to absorb the employees affected by the sale, nor is it liable for the payment of their claims.

PROBLEMS:

B corporation is engaged in selling canned goods on wholesale and it merely rents a bodega. 95% of its assets are stocks of goods. Mr. X purchased all the stocks of B corporation. Is this transaction equivalent to a sale of ALL or substantially all the assets of the corporation?

No. The sale in the given problem appears to be a sale in the regular course of business because X Corporation is engaged in wholesale business.

X Corporation is engaged in the business of milling of rice. Around 60% of its assets consist of cash in the bank, 30% rice milling machine and the remaining office equipment and supplies. X Corporation sold its machine. Can it be considered sale of substantially all of the assets of the corporation? 

Yes. The sale is sale of substantially all of the assets of X Corporation. It cannot continue its business without the machine. There is a sale of substantially all of the assets of the corporation if it would be rendered incapable in continuing its milling business. The fact that the machine comprises only 30% of the total assets of the corporation is immaterial.

C Corporation sold its assets to W, Inc., after complying with the requirements of the Bulk Sales Law. Subsequently, one of the creditors of C Corporation tried to collect the amount due and they found out that C Corporation had no more ·assets left. The creditors then sued W, Inc., on the theory that the latter is a mere alter ego of C Corporation. Will the suit prosper? 

The suit will not prosper. The sale by C Corporation of its assets to W, Inc., does not result in the transfer of the liabilities of C Corporation to, or in the assumption of said liabilities by, W, Inc .. The facts given do not indicate that there was transfer of liabilities or that an assumption of liabilities took place or was stipulated upon by the parties in their agreement. Furthermore, the sale by C Corporation of its assets is a sale of its property. It does not involve the sale of the shares of stock of the corporation belonging to its stockholders. There is, therefore, no merger or consolidation that took place. C Corporation continues to exist and remains liable to its creditors. (1996 Bar)

The Board of Directors of "X" Corporation, with the unanimous authority and approval of its stockholders in a meeting called for the purpose, sells to "Y'' Corporation for PIO million, substantially all of the corporation's assets consisting of pieces of machinery, fixtures and equipment used in the business of said corporation. "Z" a creditor, now questions the sale as fraudulent, and, therefore, null and void. Decide the case.

The sale of substantially all of the corporation's assets is valid, applying Section 39 of the Revised Corporation Code. The corporation, through the authority of the Board of Directors and the unanimous vote of its stockholders obtained in the meeting for that purpose, in selling substantially all of its assets complied with the requirements of the law. Hence, the creditor cannot question the validity of the sale because it does not per se constitute fraud under the law. There is no showing that the creditor was defrauded by the sale of substantially all of the debtor's property. The creditor has sufficient remedies provided by law for the recovery of his credit. (1980 Bar) 

In the annual meeting of XYZ Corporation, the stockholders unanimously adopted a resolution proposed by the Board of Directors to sell substantially all the fixtures and the equipment used in and about its business. The President of the Corporation approached you and asked for legal assistance to effect the sale. 

What step should you take so that the sale may be valid? 

The requirements of the Bulk Sales Law must be complied with. The seller should deliver to the purchaser a list of its creditors, with their addresses and the amount owing to each, and the purchaser in turn should notify such creditors of the proposed sale at a stipulated time in advance.

What are the two instances when the sale, transfer, mortgage, or assignment of stock of goods, wares, merchandise, provision or materials otherwise than in the ordinary course of trade and the regular prosecution of the business of the vendor are not deemed to be a sale or transfer in bulk?

If the sale and transfer is made:

1. by a vendor, mortgagor, transferor or assignor who produces and delivers a written waiver of the provisions of the Bulk Sales Law from his creditors as shown by a verified statement; or
2. by a vendor, mortgagor, transferor or assignor who is an executor, administrator, receiver, assignee in insolvency, or public officer acting under judicial process, the sale or transfer is not covered by Bulk Sales Law. (1993 Bar)