TITLE VIII

CORPORATE BOOKS AND RECORDS

I. Limitations:
a. The right must be exercised during reasonable hours on business days;
b. The person demanding the right has not improperly used nay information obtained through any
previous examination of the books and records of the corporation; and
c. The demand is made in good faith or for a legitimate purpose. (Sec. 74)
The right extends, in consonance with equity, good faith, and fair dealing, to a foreign subsidiary wholly-
owned by the corporation.

II. Books to Kept: Stock Transfer Agent (Sec. 74)

1. Corporate books and records to be kept by the corporation.
a. Records of business transactions. – which include, among others, journals, ledgers, contracts,
vouchers and receipts, financial statements and other books of accounts, income tax returns, and voting
trust agreement which must be kept and carefully preserved at its principal office.

b. Minutes of stockholders' meetings and directors' meetings. – setting forth in detail the time and place
of holding the meeting, how authorized, the notice given, whether the meeting was regular or special, if
special its object, those present and absent, and every act done or ordered done thereat which must
likewise be kept at the principal office of the corporation.

d. Stock and transfer book. – showing the names of the stockholders, the amount paid or unpaid on all
stock for which subscription has been made, a statement of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom made which must be kept either in the principal office of the
corporation or in the office of its stock transfer agent.

e. Optional and subsidiary books.

f. Books required by special laws.
g. Books for the names of stockholders.

Note: These corporate books and records, inclusive of all business transactions and minutes of meetings,
are subject to inspection by any director, trustee, stockholder or member of the corporation at reasonable
hours on business days and a copy of excerpts of said records may be demanded.

2. Stockholder's right of inspection.

a. Nature - At common law as well as under statutory and constitutional provisions, stockholders
ordinarily are entitled to inspect corporate books and records at a proper time and place and for a proper
purpose (18 C.J.S. 1176). The motive of the shareholder exercising the right is immaterial. Thus, the right
is not to be denied even if the purpose of the stockholder is to obtain evidence preparatory to the
institution of an action which he means to bring against the corporation by reason of a contract of
employment which once existed between the corporation and himself (Pardo vs. Hercules Lumber Co., 47
Phil. 964). The right of inspection is not to be denied on the ground that the director or shareholder is on
unfriendly terms with the officers of the corporation whose records are sought to be inspected (Veraguth
vs. Isabela Sugar Co., 57 Phil. 266). However, the right of inspection will not be granted when the
stockholder has made no effort to prove or even allege that the information he desired to obtain was
necessary to protect his interests as a stockholder, or that it was for a specific and honest purpose, and not
to gratify curiosity, nor for speculative or vexatious purposes (Grey vs. Insular Lumber Co., 40 O. G. I.).
Neither can secret formulas be examined by stockholders. (Philpotts vs. Phil. Mfg. Co., 40 Phil. 471)
b. Place of examination - At the place where the books are ordinarily kept and a director or stockholder
cannot, without an order of a court, be permitted to take books from the office of the corporation.
(Veraguth vs. Isabela Sugar Co., supra)
c. Right to make copies - A director or stockholder can make copies, abstracts, and memoranda of
documents, books, and papers as an incident to the right of inspection. However, he has no absolute right
to secure certified copies of the minutes of the corporation until these minutes have been written up and
approved by the directors. (Veraguth vs. Isabela Sugar Co., supra)
d. By whom - Stockholders of record on the books of the company, or their personal representatives
(18C.J.S. 1183-1184), and either with or without the presence of the stockholder. (Philpotts vs. Phil. Mfg.
Co., supra)
e. Time of examination - At reasonable hours. This means at reasonable hours on business days
throughout the year, and not merely during some arbitrary period of a few days chosen by the directors.
(Pardo vs. Hercules Lumber Co., supra)
3. Ownership of stock gives the right of examination.
The right of inspection and examination of a stockholder is based on the fact of ownership. The
books and records of corporation belong to the stockholders and cannot be defeated by the fiction of law
that a corporation is separate and distinct from the stockholders. The officers in charge of these books and
records are only agents of the corporation and the stockholders. In one case decided by the Supreme
Court, the court has this to say: "the stockholders' right of examination and inspection is based upon their
ownership of the assets and property of the corporation. This right therefore is predicated upon the
necessity of self-protection".
Example:
Petitioner who is a stockholder of X Corporation wanted to examine the books and records of a
foreign subsidiary wholly-owned by X Corporation. The books and records of the foreign subsidiary were
in the possession of X Corporation. The latter's Board of Directors refused to allow petitioner to examine
said books and records contending that the foreign subsidiary is a separate and distinct corporation
domiciled in another country, hence, petitioner was not within the class of persons having an interest in
the operations of the foreign subsidiary.
Q: May a stockholder be allowed to examine the books and records of a wholly-owned subsidiary
of the corporation in which he is a stockholder?
Ans. Yes. In a famous case, the Supreme Court ruled that since the books and records of the
foreign subsidiary were in the possession of X Corporation, the right of inspection and examination of a
stockholder cannot be denied and this shall extend to the books and records in the possession and control
of the parent corporation.
4. Directors' right of inspection.
 Directors of a corporation have the unqualified right to inspect the books and records of the
corporation at all reasonable time. (Veraguth vs. Isabela Sugar Co., supra)
5. Liability of officer for refusal to allow examination of books and records.
Any officer or agent of the corporation who shall refuse to allow any director, trustee, stockholder
or member of the corporation to examine and copy excerpts from its records or minutes shall be liable for
damages, and in addition, shall be guilty of an offense punishable under Section 144 of this Code.
However, if such refusal is pursuant to a board resolution, the liability for such action shall be imposed
upon the directors who voted for such refusal.
6. Right of examination and inspection is not absolute.
In the following cases, our courts denied the right of inspection and examination
1. The person had no legitimate purpose in making his demand.
2. The plaintiff was not acting in good faith.
3. The purpose of examination is to satisfy curiosity or for a speculative or vicious purpose.

7. Rights of a stockholder.
1. Right to attend and vote at stockholders' meeting.
2. Right to elect and remove directors.
3. Right to adopt and amend by-laws.
4. Right to pre-emption in the issuance of new shares.
5. Right to enter into a voting trust agreement.
6. Right to withdraw from the corporation in certain cases.
7. Right to inspect books and records.
8. Right to bring representative and derivative suits.
9. Right to transfer their shares of stock.
10. Right to have the corporation voluntarily dissolved.

8. Some of stockholders' liability.

1. Liability for unpaid subscription.
2. Liability to the corporation for the interest on unpaid subscription.
3. Liability for watered stock.
4. Liability for failure to create corporation.
5. Liability for dividends unlawfully paid.

III. Right to Financial Statements (Sec. 75)

1. Annual financial report.

A financial report of the operations of the corporation for the preceding year, which shall include
financial statements duly signed and certified by an independent certified public accountant. must be
presented to stockholders or members at the regular meeting of stockholders or members. However, if the
paid-up capital of the corporation is less than P50,000.00, the financial statements may be certified under
oath by the treasurer or any responsible officer of the corporation.

2. Financial statement.
 a. When given to stockholders - Within 10 days from receipt of a written request of any
stockholder or member, the corporation shall furnish to him the most recent financial statement.

b. What to include - the financial statement shall include:

1) A balance sheet as of the end of the last taxable year, and

2) A profit and loss statement for said taxable year, showing in reasonable detail its assets and liabilities
and the result of the operations.
 TITLE IX
MERGER AND CONSOLIDATION
I. Plan of Merger or Consolidation (Sec. 76)
The following terms shall have the respective meaning when used in these Rules:
A. Merger - is the absorption of one or more corporations by another existing corporation, which
retains its identity and takes over the rights, privileges, franchises, and properties 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.
B. Consolidation - is the union of two or more corporations to form a new corporation, having the
combined rights, privileges, franchises and properties of the constituent companies, all combining
to lose their corporate existence. Briefly, it is described as the union of two or more corporations
into a single new corporation, all the constituent corporations thereby ceasing to exist as separate
entities.
C. Articles of Merger or Consolidation - refers to the instrument executed by the constituent
corporations embodying the following: (1) plan of merger or consolidation; (2) the number of
shares outstanding in case of stock corporations, or of members, in case of non-stock
corporations; and (3) as to each corporation, the number of shares outstanding or members voting
for and the names of stockholders or members voting against such plans, respectively.
D. Constituent Corporations - refers to the absorbed and absorbing corporations in case of merger;
and to two or more corporate bodies desiring to unite into a new corporation in the case of
consolidation.

II. Stockholders’ or Members’ Approval (Sec. 77)

1. Corporate combination (amalgamation).
a. Consolidation- the union which results in the creation of a new corporation, and the termination
of the existence of the old one. In short, two corporations uniting giving rise to another corporation.
(A+B=C)
b. Merger – the absorption of one corporation by another, which retains its name and corporate
identity with the added capital, franchises and powers of a merged corporation (15 Fletcher 6).
Equation: A Corporation plus B Corporation equals A or B Corporation. (A + B = A or B)
c. Transfer or sale by one company to another of its entire property, assets and business in
consideration of shares of stock of the latter company. (15 Fletcher 20)
d. Formation of a holding company.
e. Lease of property to another corporation.
2. Statements in the plan of merger or consolidation:
1. The names of corporations proposing to merge or consolidate;
2. Terms of merger and consolidation and the mode of carrying the same into effect;
3. A statement of changes, if any;
4. Such other provisions which are deemed necessary or desirable.

3. Voting requirements for consolidation or merger.

Approval by a majority vote of each of the board of directors or trustees of the constituent
corporations of the plans of consolidation or merger and consented to by the stockholders representing at
least 2/3 of the outstanding capital stock or 2/3 of the members of each corporation.

Note: A stockholder may exercise his withdrawal or appraisal right unless the board of directors
abandons the plan. Any amendment of this plan may be carried by the same vote requirement above
stated.

4. What is a holding company?

It is a corporation more than 50% of whose stock is owned, directly or indirectly, by not more
than five persons, and 80% or more of whose gross income is derived from investment or other passive
income.
The use of holding companies to effect corporate income is the acquisition of a controlling
interest in the stock of one corporation by another. The corporation remains the same. The acquiring
corporation is known as the parent or holding company; while the corporation whose stock is acquired for
the purpose of control is called the subsidiary corporation.

5. Distinguish sale of assets from merger and consolidation.

1. In sale, merger and consolidation is not always invalid; while in merger and consolidation, sale of
assets is involved.
2. In sale, the purchasing corporation does not assume the liabilities of the selling corporation; while in
merger and consolidation, there is an assumption of all debts and liabilities of the absorbed corporation.
3. In sale, the dissolution or liquidation of the selling company is not required; while in merger and
consolidation, the dissolution of the absorbed corporation is required.

III. Articles of Merger or Consolidation (Sec. 78)

1. Signatories to merger or consolidation.
The articles of merger and consolidation executed by each of the constituent corporation should
shall be signed by the president or vice-president and certified by the secretary or assistant secretary.

IV. Securities and Exchange Commission’s Approval and Effectivity of Merger or

Consolidation (Sec. 79)

1. Effectivity of merger and consolidation

The consolidation or merger shall be effective from and after the issuance by the SEC of the
certificate of consolidation and merger.

V. Effects of Merger or Consolidation. (Sec. 80)

1. Rights and Liabilities.
a. In merger and consolidation - A new corporation created by consolidation or merger succeeds
to all the rights, powers, and privileges of the original corporations and is vested with title to the property
of the corporations.
In merger and consolidation, a non-conforming stockholder may withdraw from the corporation
and cease to be liable on his subscription (19C.J.S. 1391). But a corporation formed by consolidation or
merger is answerable for the debts and liabilities of the constituent corporation. (19C.J.S. 1392)

b. In sale - In sale of assets the corporate existence is not terminated (19C.J.S. 667). The
transferee is not liable for the debts and liabilities of the transferor, except:
1. When the buyer agrees to assume such debt.
2. When the purchasing corporation is merely a continuation of the selling corporation.
3. When the transaction is fraudulent and purposedly to escape payment of debt.
4. When the transaction amounts to merger and consolidation.

2. Merger distinguished from consolidation.

Merger is the uniting of two or more corporations by the transfer of property to one of them,
which continues in existence, the other being merged therein, while consolidation signifies such a union
as necessarily results in the creation of a new corporation, and the termination of the existence of the old
ones.

V. De facto Merger
One corporation acquiring all or substantially all of the properties of another corporation in exchange for
shares of stock of the acquiring corporation. The acquiring corporation would end-up with the business
enterprise of the selling corporation whereas the latter would end up with basically its remaining assets
being the shares of stock of the acquiring corporation and may then distribute it as liquidating dividend to
its stockholders. (Philippine Corporate Law, Cesar Villanueva, 2001 ed.)
 TITLE X
APPRAISAL RIGHT
I. Appraisal right- the method of paying a shareholder for the taking of his property; the statutory means
whereby a stockholder can avoid the conversion of his property into another property not of his own
choosing. The purpose of the right is to protect the property rights of dissenting stockholders from actions
by the majority shareholders which alters the nature and character of their investment. It is a right granted
to dissenting stockholders on certain corporate or business decisions to demand payment of the fair
market value of their shares.

II. Instances of Appraisal Right (Sec. 81)

1. Instances of appraisal's right (the right to withdraw from the corporation).
In the following instances, a stockholder who did not vote for any proposed action of the Board
may withdraw from the corporation.

a. Amendment of the Articles of Incorporation:

1. Which changes the rights of any stockholder.
2. Restricts the right of any stockholder.
3. Authorizes preferences in any respect superior to those of outstanding shares of any class.
4. Extend or shorten the life of the corporation.

b. In case of corporate property disposition, such as, sale, lease, exchange, mortgage, pledge or
other disposition of all or substantially all of the corporate assets.
c. In case of merger or consolidation.
d. Investment of corporate funds in another corporation or business or for any purpose other than
its primary purpose.

In these instances, a stockholder shall have the right to dissent and demand the fair value of his
shares.

III. How right is exercised (Sec. 82)

1. How the appraisal's right is exercised.
 Any stockholder who voted against the proposed action may within thirty (30) days after the vote
was taken, demand the fair value of his shares. If the proposal is implemented, the corporation shall pay
such stockholder, upon surrender of the certificate of stock, the fair value as of the day prior to the date on
which the vote was taken.
If within sixty (60) days from the date the corporate action was approved by the stockholders, the
stockholders and the corporation cannot agree on the 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 thus chosen. The findings of the majority of three is final, and the
same shall be paid by the corporation within thirty (30) days after the award is made.

Note: No award shall be made by the corporation unless there are unrestricted retained earnings
to cover such payment. Upon payment the certificate shall be surrendered to the corporation.
2. Time when demand is made.
The written demand on the corporation for payment of the fair value of his shares is required to
be made within thirty (30) days after the date on which the vote was taken. Failure to make demand is
considered waiver of right.
3. Amount to be paid.
The dissenting stockholder shall be paid the fair value of his shares as of the day prior to the date
on which the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate
action.
4. Source and time for payment.
No payment shall be made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its book to cover such payment. The payment shall be made within thirty (30) days
after determination.

IV. Limitations on the exercise of appraisal right

1. Any of the instances provided for by law for the exercise of the right must be present.
2. The dissenting stockholder must have voted against the proposed corporate action.
3. The stockholder must make a written demand within 30 days from the date that the vote was taken.
4. The price must be based on the fair value of the shares as of the day prior to the date in which the vote
was taken.
5. Payment of the shares must be made only out of the unrestricted retained earnings of the corporation.
6. Upon payment, the stockholder must transfer his shares to the corporation.
V. Effect of demand and termination of right (Sec. 83)
1. Effects of demand for the payment of shares:
a. Stockholder shall be entitled to receive payment of the fair value of his shares, if funds are
available.
b. Stockholder’s voting and dividend right shall be suspended.
2. Effect of non-payment within thirty (30) days.
If the dissenting stockholder is not paid for the fair value of his shares within thirty (30) days
after
the award, his voting and dividend rights shall immediately be restored.

VI. When right to payment ceases (Sec. 84)

1. Withdrawal of demand for payment.
No demand for payment of the fair value of his share may be withdrawn by the dissenting
stockholder unless the corporation consents thereto.

2. When the right to payment ceases:

a. Withdrawal of the demand for payment consented to by the corporation.
b. When the proposed corporate action is abandoned or rescinded by the corporation.
c. When the proposed corporate action is disapproved by the SEC where such approval is
necessary.
d. When the SEC finds that such stockholder is not entitled to the appraisal's right.

VII. Who bears cost of appraisal (Sec. 85)

1. Cost of appraisal.
The costs and expenses of appraisal shall be borne by the corporation. However, the dissenting
stockholder shall pay for them:

a. If the fair value ascertained by the appraisers is approximately the same as the price offered by
the corporation to the stockholder.
b. If an action is filed by the stockholder against the corporation for the recovery of the fair value
of his shares, but his refusal to receive payment from the corporation is found to be unjustified.

VIII. Notation on certificate(s); Right of transferee (Sec. 86)

1. Dissenting stockholder's certificate must be noted.
 Within ten (10) days after demanding payment for his share, a dissenting stockholder is required
to submit the certificate of stock representing his shares to the corporation for notation thereon that such
shares are dissenting shares. Failure to present the certificate for notation within ten (10) days shall, at the
option of the corporation, terminate his appraisal's right
2. Transfer of dissenting shares.
Dissenting shares bearing notation can be sold or transferred, and the right of the transferor to
recover payment of the fair value of his shares shall cease and the transferee shall acquire all the rights of
a regular stockholder, including the right to receive all dividend distributions which would have accrued
on such shares.