FISLAI - First Iligan Savings and Loan Association, Inc. (Merged Entity)
DSLAI - Davao Savings and Loan Association, Inc. (Surviving entity)
MSLAI - Mindanao Savings Loan Association, Inc. (Renamed DSLAI & Petitioner in this case)
FISLAI and DSLAI are entities duly registered with the - SEC primarily engaged in the business of granting loans and receiving deposits from the general public, and treated as banks.
FISLAI and DSLAI entered into a merger, with DSLAI as the surviving corporation but their articles of merger were not registered with the SEC due to incomplete documentation.
DSLAI changed its corporate name to MSLAI by way of an amendment to its Articles of Incorporation and it was approved by the SEC. However, the Board of Directors of FISLAI passed and approved Board Resolution assigning its assets in favor of DSLAI which in turn assumed the former’s liabilities.
Here’s the thing, MSLAI got bankrupt and failed. Hence, the Monetary Board of the Central Bank of the Philippines declared its insolvency, had it undergone dissolution and ordered its liquidation with PDIC as its liquidator.
But prior to the closure of MSLAI, A certain Uy filed with the RTC of Iligan City, an action for collection of sum of money against FISLAI. RTC issued a summary decision in favor of Uy and directing FISLAI to pay. So as a consequence, 6 parcels of land owned by FISLAI were levied and sold to Willkom in order to pay Uy.
This prompted MSLAI (represented by PDIC), to file before the RTC a complaint for the annulment of the Sheriff’s Sale alleging that the sale on execution of the subject properties was conducted without notice to it and to PDIC.
Respondent Willkom in its answer, averred that MSLAI had no cause of action because MSLAI is a separate and distinct entity from FISLAI on the ground that the “unofficial merger” between FISLAI and DSLAI (now MSLAI) did not take effect considering that the merging companies did not comply with the formalities and procedure for merger or consolidation as prescribed by the Corporation Code of the Philippines.
RTC dismissed the case for lack of jurisdiction. CA affirmed but ruled that there was no merger between FISLAI and MSLAI (formerly DSLAI) for their failure to follow the procedure laid down by the Corporation Code for a valid merger or consolidation.
ISSUE
Question? Was the merger between FISLAI and DSLAI (now MSLAI) valid and effective?
HELD
Court held NO.
In merger, one of the corporations survives while the rest are dissolved and all their rights, properties, and liabilities are acquired by the surviving corporation.
Although there is a dissolution of the absorbed or merged corporations, there is no winding up of their affairs or liquidation of their assets because the surviving corporation automatically acquires all their rights, privileges, and powers, as well as their liabilities.
The merger, however, does not become effective upon the mere agreement of the constituent corporations. Since a merger or consolidation involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express provision of law authorizing them.
The steps necessary to accomplish a merger or consolidation, as provided for in Sections 76,[24] 77,[25] 78,[26] and 79[27] of the Corporation Code, are:
(1) PLAN OF MERGER/CONSOLIDATION. 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/MEMBERS. 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. Execution of the formal agreement, referred to as the articles of merger or 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 ARTICLES OF MERGER TO SEC. Submission of said articles of merger or consolidation to the SEC for approval;
(5) SEC HEARING. If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before;
(6) SEC ISSUANCE OF CERTIFICATE OF MERGER. Issuance of certificate of merger or consolidation.
Clearly, the merger shall only be effective upon the issuance of a certificate of merger by the SEC, subject to its prior determination that the merger is not inconsistent with the Corporation Code or existing laws. In this case, it is undisputed that the articles of merger between FISLAI and DSLAI were not registered with the SEC due to incomplete documentation.
Consequently, the SEC did not issue the required certificate of merger. Even if it is true that the Monetary Board of the Central Bank of the Philippines recognized such merger, the fact remains that no certificate was issued by the SEC. Such merger is still incomplete without the certification.
The issuance of the certificate of merger is crucial because not only does it bear out SEC’s approval but it also marks the moment when the consequences of a merger take place.
So in effect BSP dissolved and liquidated an entity that practically does not exist.
