Corporation Law: The Revised Corporation Code of the Philippines - Sec 80

THE REVISED CORPORATION CODE  OF THE PHILIPPINES 

Republic Act No. 11232 

TITLE X - APPRAISAL RIGHT

Section 80. When the Right of Appraisal May Be Exercised.

Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of the shares in the following instances:

(a) In case an amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;

(b) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in this Code;

(c) In case of merger or consolidation; and

(d) In case of investment of corporate funds for any purpose other than the primary purpose of the corporation.

1. Appraisal Right.

• Based on Section 80 of the RCCP, an appraisal right may be defined as the right of a shareholder to dissent and demand payment of the fair value of his shares in the instances provided for under the RCCP.
•  Th appraisal right i mor extensive when it comes to close corporations. 
• Section 104 of the RCCP allows the exercise of the appraisal right for any reason provided only that the corporation has sufficient assets to cover its debts and liabilities, exclusive of capital. 

2. Rationale. 

• The appraisal right originated from the desire to remove doubt regarding the constitutionality of statutes authorizing fundamental changes as to existing corporations and the contract rights of shareholders. 
• The intent was to remove doubt regarding the constitutionality of permitting changes in the corporation over the objection of any single shareholder. 
• Appraisal right "gives dissenters a simple and direct remedy not only where there is a harmful change in the share contract but also where they simply do not desire to accept shares in a different corporation or shares different from those they purchased."
• The Supreme Court explained the raison d'etre for the grant of appraisal rights to minority stockholders as follows: 
•  "x x x [Appraisal right] means that a stockholder who dissented and voted against the proposed corporate action, may choose to get out of the corporation by demanding payment of the fair market value of his shares. When a person invests in the stocks of a corporation, he subjects his investment to all the risks of the business and cannot just pull out such investment should the business not come out as he expected. He will have to wait until the corporation is finally dissolved before he can get back his investment, and even then, only if sufficient assets are left after paying all corporate creditors. His only way out before dissolution is to sell his shares should he find a willing buyer. If there is no buyer, then he has no recourse but to stay with the corporation. However, in certain specified instances, the Code grants the stockholder the right to get out of the corporation even before its dissolution because there has been a major change in his contract of investment with which he does not agree and which the law presumes he did not foresee when he bought his shares. Since the will of two-thirds of the stocks will have to prevail over his objections, the law considers it only fair to allow him to get back his investment and withdraw from the corporation. xxx."
• The Supreme Court further explained in Turner v. Lorenzo Shipping, Inc.:
• "Clearly, the right of appraisal may be exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting stockholder to have his interests purchased and to retire from the corporation. 
•  "Under the common law, there were originally conflicting views on whether a corporation had the power to acquire or purchase its own stocks. In England, it was held invalid for a corporation to purchase its issued stocks because such purchase was an indirect method of reducing capital (which was statutorily restricted), aside from being inconsistent with the privilege of limited liability to creditors. Only a few American jurisdictions adopted by decision or statute the strict English rule forbidding a corporation from purchasing its own shares. In some American states where the English rule used to be adopted, statutes granting authority to purchase out of surplus funds were enacted, while in others, shares might be purchased even out of capital provided the rights of creditors were not prejudiced. The reason underlying the limitation of share purchases sprang from the necessity of imposing safeguards against the depletion by a corporation of its assets and against the impairment of its capital needed for the protection of creditors. 
• "Now, however, a corporation can purchase its own shares, provided payment is made out of surplus profits and the acquisition is for a legitimate corporate purpose. In the Philippines, this new rule is embodied in Section 41 of the Corporation Code [now Section 40, RCCP] xxx."
• The exercise of appraisal right may also redound to the benefit of majority shareholders. 
• In a sense, appraisal right likewise protects the majority shareholders. 
• The presence of appraisal right prevents delay of the completion of projects that would otherwise be impeded by the dissent of minority shareholders

3. When Available. 

• Appraisal right is available in the following instances:

1. In case any amendment to the Articles of Incorporation has the effect of changing or restricting the rights of any stockholder or class of shares;
2. In case of any amendment to the Articles of Incorporation authorizing preferences in any respect superior to those of outstanding shares of any class;
3. In case of amendment to the Articles of Incorporation extending the corporate term;
4. In case of amendment to the Articles of Incorporation shortening the term of corporate existence;
5. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the RCCP;
6. In case of merger or consolidation;
7. In case of investment of corporate funds in another corporation or business or for any purpose other than the corporation's primary purpose; and
8. In a close corporation under Section 104 of the RCCP.

• The availability or unavailability of appraisal rights should be objectively based on the subject matter of the complaint, i.e., the specific act or acts performed by the Board of Directors, without regard to the subjective conclusion of the minority stockholder instituting the derivative suit that such act constituted mismanagement, misrepresentation, fraud, or bad faith.

3.01. Exclusivity of Grounds. 

• With respect to the grounds relied upon in the exercise of the appraisal right, there are SEC opinions to the effect that the right is available only in the cases expressly provided for under the Corporation Code (now RCCP). 
• There is no appraisal right in the absence of an express provision because there may be a violation of the Trust Fund Doctrine.
• As explained by the SEC, an appraisal right is neither an inherent right of a stockholder nor a matter of absolute right, otherwise a stockholder can easily withdraw from the corporation at anytime he desires by returning his shares and getting back his capital. 
• Such would constitute a violation of the Trust Fund Doctrine
• Appraisal right is allowed only under the instances provided in the RCCP particularly Sections 11, 15, 41, 76, 80, and 104 thereof, the exercise of which is subject to the conditions prescribed therein. 
• The remedy of the stockholder in case appraisal right is not allowed is to transfer his share as provided for under Section 62 of the RCCP. 
• The contrary view was expressed in another SEC Opinion citing former SEC Chairman Rosario N. Lopez who said that the list of instances provided for under Section 81 of the Corporation Code (now Section 80 of the RCCP) is not exclusive.
• Thus, in one case, the SEC allowed the exercise of appraisal right where there is a substantial change in the corporate purpose or line of activity of the subject corporation - that is from operation and maintenance of hospitals and/or clinics to establishment and operation of educational institution.
• It is believed, however, that the earlier SEC opinions are more convincing. 
• There should be no appraisal right if there is no express provision under the Corporation Code/RCCP. This is consistent with the general rule that stockholders cannot withdraw their investments until liquidation; the earlier SEC view is consistent with the Trust Fund Doctrine. 
• It is true that the enumeration in Section 80 is not exclusive, but this is so only in the sense that there are other provisions of the RCCP that provide for the appraisal right, particularly Sections 41 and 104.
• This view is justified by the observations made during the deliberations in the legislature when Section 81 of the previous law, the Corporation Code, was discussed. 
•  The legislator who sponsored the passage of the Corporation Code in the defunct Batasang Pambansa commented that even the By-Laws cannot provide for an appraisal right, thus:
• "MR. MENDOZA. Mr. Speaker, I do not think it would be appropriate for the by-laws to authorize the withdrawal of a stockholder under certain circumstances. In point of fact, when a stockholder acquires the right to withdraw from the corporation under certain situations that would be giving to the shareholder a certain privilege. If at all, there will be an explicit definition of that privilege that would appear in the articles of incorporation rather than in the by-laws. Now, appraisal right is, however, granted by law in certain instances."

3.02. Extension and Shortening. 

• Section 80 of the RCCP provides for the appraisal right for both extension and shortening of the corporate term. 
• On the other hand, Section 36 of the RCCP (previously Section 37 of the Corporation Code) provides for the appraisal right only with respect to the extension of corporate term. 
• The conflict was pointed out during the deliberations of the Batasang Pambansa and the sponsor of the Corporation Code promised to look into this. 
• However, for reasons not reflected in the records, the legislator was not able to correct the disparity between the provisions. 
• Under the RCCP, the same seeming conflict exists between Section 80 and Section 36. a. 
• It is believed that Section 80 prevails, that is, there is an appraisal right even for shortening of corporate term. 
• While Section 36 deals specifically with the power of the corporation to extend or shorten its corporate term, Section 80 specifically deals with appraisal right. 
• Moreover, it is not within the power of courts to disregard a clear and unmistakable conferment of right of appraisal if the corporate term is shortened.
•  We can hardly close our eyes to the unequivocal provisions of Section 80 that grant appraisal right in case of shortening of term.