Corporation Law: The Revised Corporation Code of the Philippines - Secs 81, 82, 83, 84, & 85

 THE REVISED CORPORATION CODE  OF THE PHILIPPINES 

Republic Act No. 11232 

TITLE X - APPRAISAL RIGHT

Section 81. How Right is Exercised. 

The dissenting stockholder who votes against a proposed corporate action may exercise the right of appraisal by making a written demand on the corporation for the payment of the fair value of shares held within thirty (30) days from the date on which the vote was taken: Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal right. If the proposed corporate action is implemented, the corporation shall pay the stockholder, upon surrender of the certificate or certificates of stock representing the stockholder's shares, the fair value thereof as of the day before the vote was taken excluding any appreciation or depreciation in anticipation of such corporate action.

If, within sixty (60) days form the approval of the corporate action by the stockholders, the withdrawing stockholder and the corporation cannot agree on the fair value of the shares, it shall be determined and appraised by three (3) disinterested persons, one of whom shall be named by the stockholder, another by the corporation and the third by the two (2) thus chosen. The findings of the majority of the appraisers shall be final, and their award shall be paid by the corporation within thirty (30) days after such award is made: Provided, That no payment shall be made to any dissenting stockholder or unless the corporation has unrestricted retained earnings in its books to cover such payment: Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer the shares to the corporation.

Section 82. Effect of Demand and Termination of Right. 

From the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights shall immediately be restored.

Section 83. When Right to Payment Ceases. 

No demand for payment under this Title may be withdrawn unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the corporation or disapproved by the Commission where such approval is necessary, or if the Commission where such stockholder is not entitled to the appraisal right, then the right of the stockholder to be paid the fair value of the shares shall cease, the status as the stockholder shall be restored, and all dividend distributions which would have accrued on the shares shall be paid to the stockholder.

Section 84. Who Bears Costs of Appraisal.

The costs and expenses of appraisal shall be borne by the corporation, unless the fair value ascertained by appraisers is approximately the same as the price which the corporation may have offered to pay the stockholder, in which the corporation may have offered to pay the stockholder, in which case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against the corporation, unless the refusal of the stockholder or receive payment was unjustified.

Section 85. Notation on Certificates; Rights of Transferee.

Within ten (10) days after demanding payment for shares held, a dissenting stockholder shall submit the certificates of stock representing the shares to the corporation for notation that such representing the shares to the corporation for notation that such shares are dissenting shares. Failure to do so shall, at the option of the corporation, terminate the rights under this Title. If shares represented by the certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions which would have accrued on such shares shall be paid to the transferee.

1. Conditions for Exercise.

• The following enumeration of the conditions for the valid exercise of the stockholder's right of appraisal was adopted by the SEC:

1. Any of the instances set forth by law for the exercise of the appraisal right by a dissenting stockholder must be present;
2. The dissenting stockholder must have voted against the proposed corporate action;
3. The written demand for payment of the fair value of shares must be made by the dissenting stockholder within 30 days from the date the vote on the proposed corporate action was taken. Failure to make such demand within such period shall be deemed waiver of the appraisal right;
4. The price of the shares must be based on the fair value thereof as of the day prior to the date on which the vote was taken, excluding any appreciation or depreciation in anticipation of the corporate action, as determined under Section 81 of the RCCP;
5. Within 10 days from written demand for payment for his/her shares, the dissenting shareholder should submit his/her share certificates to the corporation for notation that the same are dissenting shares;
6. Payment of shares shall be made only when the corporation has unrestricted retained earnings in its books to cover such payment; and 
7.  The stockholder must transfer his shares to the corporation upon payment by the latter of the agreed or awarded price to the former.

1.01. Shares Covered. 

• Section 81 of the RCCP states that the shares covered are the "shares held" by the shareholder. 
• It is submitted that the shares that should be sold are all the shares held by the dissenting shareholder. 
• It is believed that the demand for appraisal should cover all the shares to prevent abuse by shareholders who, though not opposed to the transaction may speculate on the appraisal process as to some of his shares.

1.02. Fair Value.

• The law does not prescribe the method of determining fair value. 
• However, it is clear from Section 81 of the RCCP that the effects in "anticipation" of the corporate actions should not be considered in the determination of the fair value of the dissenting shares.
• Section 81 provides that the dissenting shareholder is entitled to the fair value of the shares "as of the day before the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action." '
• For example, if the appraisal right was exercised because of merger, the effects in "anticipation" of the merger should not be considered because fair value excludes appreciation or depreciation in anticipation of the corporate action. 
• However, it does not mean that future income or performance of the corporation should not be taken into consideration. 
• In the United States, the High Court in Delaware adopted a liberal approach in determining fair value which includes proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.
• Under this view, the determination of fair value requires consideration of all relevant factors involving the value of a company. 
• It was explained that "the basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. 
• By value of the stockholder's proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents this true or intrinsic value, the appraiser and the courts must take into consideration all factors and elements which reasonably might enter into the fixing of value. 
• Thus, market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of merger and which throw any light on future prospects of the merged corporation are not only pertinent to an inquiry as to the value of the dissenting stockholders' interest, but must be considered by the agency fixing the value."
• If the corporate action is merger, the dissenting shareholders must be fully compensated for whatever their loss may be and even the effect of merger may be taken into account, subject only to the narrow limitation that one cannot take speculative effects of the merger into account.
• It is believed that the speculative effect of the corporate action on the price of the shares is what contemplated under Section 81 of the RCCP that should excluded in the determination of the fair price.

2. Remedy. 

• If the corporation unjustifiably refuses to pay the dissenting stockholder despite the full compliance with all the  requirements for the valid exercise of appraisal right and despite  the fact that the corporation has sufficient unrestricted retained earnings, the aggrieved stockholder may file the appropriate action before the proper Regional Trial Court to compel the corporation to allow him to exercise his appraisal right.

3. Rights of Dissenting Shareholder. 

• The shareholder is still a shareholder even if he or she remanded payment of the fair value of his shares in the exercise of his or her appraisal right. \He/ she does not become a mere creditor; he/she becomes a creditor only in the sense that he is entitled to be paid the value of his shares. 

b Suspension of Rights.

• However, Section 82 of RCCP provides that "from the time of demand for payment of the fair value of a stockholder's shares until either the abandonment of the corporate action involved or the purchase of the said shares by the corporation, all rights accruing to such shares, including voting and dividend rights, shall be suspended" except the right of such stockholder to receive payment of the fair value thereof. 
• The rights are automatically restored if the dissenting stockholder is not paid the value of the said shares within thirty (30) days after the award. 

4. Cases When Payment Should Not be Made. 

• The right to payment ceases and/or the right of appraisal is lost in any of the following cases:

1. Where the demand for payment is withdrawn with the consent of the corporation;
2. If the proposed corporate action is abandoned or rescinded by the corporation;
3.  If the proposed corporate action is disapproved by the Securities and Exchange Commission where approval is necessary; and 
4. If the Securities and Exchange Commission determines that such stockholder is not entitled to the appraisal right;
5. Failure to make a demand with the 30-day period provided for in Section 81 of the RCCP; 
6. The shares are transferred by the dissenting shareholder; and
7. The dissenting shareholder failed to submit the stock certificate/s within 10 days from his written demand for payment of the value of his shares.

• The stockholder is not allowed by law to unilaterally withdraw his demand for payment. 
• Consent of the corporation is indispensable.
• When the right of the dissenting stockholder to be paid the fair value of his shares ceases in the cases enumerated above, his status as a stockholder shall thereupon be restored, and all dividend distributions which would have accrued on his shares shall be paid to him.

5. Unrestricted Retained Earnings.

• No payment shall be made to any dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover such payment. 
•  This requirement is designed to protect creditors who may be disadvantaged if a stockholder will withdraw his investment from the corporation.
•  ''The trust fund doctrine backstops the requirement of unrestricted retained earnings to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets. The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. There can be no distribution of assets among the stockholders without first paying corporate debts. Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void."
• Payment cannot be made if the corporation has funds but those funds represent amounts necessary to pay indebtedness; payment using those funds is contrary to fundamental corporate policy. 
• The corporation cannot borrow money to pay the dissenting stockholder. 
• Hence, even if the other requirements for an appraisal right are present, the complaint to recover the fair value of the shares of the dissenting stockholder will be dismissed upon motion for lack of cause of action if there were no unrestricted retained earnings at the time of the filing of the complaint. 
• The fact that there were already unrestricted retained earnings at the time the motion was filed will not matter because the cause of action has not yet accrued at the time of the filing of the complaint. In order to give rise to any obligation to pay on the part of the corporation, the dissenting stockholder should first make a valid demand that the corporation refused to pay despite having unrestricted retained earnings.

6. Effect of Transfer. 

• Transfer of the shares of a dissenting shareholder will result in the abandonment of the appraisal right.
• The appraisal right is not transferred to the transferee or assignee of the shares. 
• Section 85 provides that if shares represented by the certificates bearing a notation that they are dissenting shares are transferred, and the certificates are consequently canceled, the rights of the transferor as a dissenting stockholder shall cease and the transferee shall have all the rights of a regular stockholder; and all dividend distributions that would have accrued on such shares shall be paid to the transferee. 

PROBLEMS: 

Q: The Articles of Incorporation of X Corporation provides that preferred shares shall earn cumulative dividends of 6% to 16% as the Board may determine. Assume that the delegation of power to the Board is valid. Can a shareholder exercise an appraisal right every time the Board declares dividends and fixes the rate thereof within the limitations provided for in said By-Laws provision? 

No, the appraisal right does not arise each time that the Board of Directors fixes the terms and conditions of the preferred shares considering that such authority was given to them at the outset and such delegation is not unlimited (if and when revised) and would not change or restrict the rights of the stockholders or class of shares or create preferences in any respect superior to those of the outstanding shares of any class. (SEC Opinion, January 11, 1982)

Q: The Board of Directors of P Corporation approved a resolution authorizing the acquisition of up to 100% of the common stocks of J Corporation. The Board specifically appointed one of its Directors, Mr. S, to act as attorney-in-fact and proxy who could vote all the shares of P Corporation in J Corporation. The Board likewise approved that the payment of the shares shall be made by transferring the real property of P Corporation. The property to be transferred constitutes substantially all of the assets of the corporation. The decision of the Board was later ratified by the stockholders representing 74% of the outstanding capital. However, before the stockholder's meeting where such ratification was made, the minority stockholders filed a derivative suit asking the Court to declare null and void the resolution of the Board. 

Was appraisal right available? 

Yes, appraisal right was available. The decision of the Board is in the nature of investment of corporate property in another corporation. Section 42 of the Corporation Code (now Section 41 of the RCCP) expressly provides an appraisal right to all dissenting stockholders in actions of such nature. In addition, the existence of an appraisal right is provided for under paragraph (2) of Section 81 of the Corporation Code (now Section 80 of the RCCP) because P Corporation decided to transfer substantially all of the properties of the corporation. 

The minority shareholders claimed that the appraisal right was not available because appraisal right may be exercised only by stockholders who had voted against the proposed action. Is the contention tenable? 

No the contention is not tenable. The minority stockholders themselves caused the unavailability of the appraisal right by filing their complaint even before the Resolution of the Board could be presented to the stockholders of P Corporation for approval or rejection. (Cua, Jr. v. Ocampo Tan, G.R. Nos. 181455-56 and 182008, December 4, 2009) 

In a stockholders' meeting, S dissented from the corporate act converting preferred voting shares to non-voting shares. Thereafter, S submitted his certificates of stock for notation that his shares are dissenting. The next day, S transferred his shares to T to whom new certificates were issued. Now, T demands from the corporation the payment of the value of his shares. Can T exercise the right of appraisal? Reason briefly. 

No, T cannot exercise the right of appraisal. Appraisal right ceased. Section 85 of the RCCP provides that if the shares represented by the certificates bearing a notation that they are d1ssentmg shares are transferred, and the certificates are consequently canceled, the rights of the transferor like S as a dissenting stockholder shall cease and the transferee, like T, shall have all the rights of a regular stockholder· and all dividend distributions that would have accrued on such shares shall be paid to the transferee. In addition, it is also required that the appraisal right is exercised by any stockholder who voted against the proposed corporate action. T was not the one who voted for the action. (2007 Bar)