36.3 Corporations: Mergers, Dissolution, Foreign Corporations, and SEC Powers

Corporations: Mergers, Dissolution, Foreign Corporations, and SEC Powers

This section covers how corporations combine, end, or operate across borders: mergers and consolidations, voluntary and involuntary dissolution and methods of liquidation, foreign corporations and their licenses, deposits, and capacity to sue, and the SEC's powers, sanctions, and penalties under the Revised Corporation Code.

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1. Corporate Combinations: Mergers and Consolidations (Title IX, Sections 75 to 79)

Definitions

• Merger: A statutory combination where one or more existing corporations are absorbed by another single surviving corporation which preserves its corporate identity ($A + B = A$).
• Consolidation: A statutory combination where two or more existing corporations combine to form an entirely new consolidated corporation, with all constituent entities extinguishing their separate legal existence ($A + B = C$).

                               Statutory Procedure for Merger / Consolidation
                                                     │
         ┌─────────────────────────┬─────────────────┴─────────────────┬─────────────────────────┐
         ▼                         ▼                                   ▼                         ▼
Plan of Merger             Stockholder Ratification            Articles of Merger        SEC Approval
(Approved by majority      (Approved by at least 2/3           (Executed by officers     (Becomes legally
 of board of each          of OCS of EACH constituent          of each constituent       effective ONLY upon
 constituent entity)       firm; appraisal right)              firm and filed with SEC)  SEC Certificate)

Legal Effects of Merger or Consolidation (Section 79)

Upon issuance of the Certificate of Merger or Consolidation by the SEC:

1. The constituent corporations become a single corporation (the surviving or consolidated entity);
2. The separate existence of constituent corporations ceases, without the necessity of separate dissolution proceedings;
3. The surviving or consolidated entity possesses all rights, privileges, immunities, and franchises of each constituent corporation;
4. All real and personal property, debts, receivables, and subscription balances are transferred to the surviving or consolidated entity by operation of law (ipso jure), without need of separate deeds of assignment or conveyance;
5. The surviving or consolidated entity is responsible and liable for all debts, liabilities, and obligations of each constituent corporation; creditors are protected by law, and pending lawsuits proceed without abatement.

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2. Corporate Dissolution and Liquidation (Title XIV, Sections 133 to 139)

Modes of Corporate Dissolution

Dissolution is the termination of the corporate franchise and the extinguishment of its legal life.

Grounds for Involuntary Dissolution under RA 11232

• Non-Use of Corporate Charter (Section 21): Failure to formally organize and commence transactions or business within five (5) years from the date of incorporation (under the old BP 68 code, this was 2 years). The certificate of incorporation is deemed revoked automatically.
• Continuous Inoperation (Section 21): A corporation that commenced business but subsequently becomes continuously inoperative for a period of at least five (5) consecutive years is placed under delinquent status by the SEC. It is given a period of two (2) years to resume operations; failure to do so results in charter revocation.

Corporate Liquidation (Section 139)

Upon dissolution, a corporation enters liquidation—the process of settling affairs, collecting assets, paying debts, and distributing net surplus assets to stockholders.

                                  The Three Statutory Methods of Liquidation
                                                      │
         ┌────────────────────────────────────────────┼────────────────────────────────────────────┐
         ▼                                            ▼                                            ▼
Liquidation by the Board                     Conveyance to a Trustee                      Appointment of a Receiver
(Board conducts liquidation                  (Assets transferred to a trustee             (Court or SEC appoints a receiver;
 within the 3-year statutory                 within 3-year period; trustee                receiver is NOT bound by the
 winding-up period)                          can act beyond 3-year period)                3-year statutory winding-up limit)

1. The Three-Year Winding-Up Rule: Every dissolved corporation continues as a body corporate for three (3) years after dissolution for the sole purpose of prosecuting and defending suits, disposing of property, and settling liabilities. It cannot continue regular business for which it was formed.
2. Conveyance to a Trustee: If corporate property is conveyed to a trustee within the 3-year period, the legal title vests in the trustee. The trustee may continue prosecuting claims, defending suits, and distributing assets even after the lapse of the 3-year period.
3. Liquidation through a Receiver: When a receiver is appointed by a court or the SEC, the 3-year statutory limitation does not apply; the receiver manages and liquidates corporate temporalities under judicial supervision until final settlement.

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3. Foreign Corporations (Title XV, Sections 140 to 153)

License to Do Business Requirement

Under Section 140, a foreign corporation formed under foreign laws must obtain a license from the SEC before transacting business in the Philippines. Requirements include:

• Designating a Resident Agent (an individual residing in the Philippines or a domestic corporation lawfully transacting business) upon whom summons and legal notices may be served;
• Within 60 days after the license is issued, depositing acceptable securities with the SEC with an actual market value of at least PHP 500,000 (Section 143), and each year thereafter additional securities equal to 2% of the amount by which gross income exceeds PHP 10,000,000. Foreign banking and insurance corporations are exempt from this deposit.

The "Doing Business" Doctrine

Whether a foreign corporation is "doing business in the Philippines" is governed by the Mentholatum Test (continuity test) and the statutory definition under Republic Act No. 7042 (The Foreign Investments Act of 1991):

• Doing Business: Implies a continuity of commercial dealings and arrangements, and contemplates to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose and object of its organization (e.g., opening a local branch office, soliciting sales orders through local agents, appointing a local distributor who acts under continuous control of the foreign company).
• Isolated Transactions: Occurs when a foreign entity enters into a single, sporadic, or isolated commercial transaction without any intention of continuing commercial operations in the country. Engaging in an isolated transaction does not constitute doing business.

Legal Standing in Philippine Courts

The following master matrix governs whether a foreign corporation can sue or be sued in Philippine courts under Section 150:

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4. SEC Powers, Offenses, and Penalties

Under Section 179, the SEC supervises all corporations and may, among others, impose sanctions, issue opinions, issue cease and desist orders ex parte to prevent imminent fraud or injury to the public, hold corporations in contempt, issue subpoenas, and order the search and seizure of records.

Administrative sanctions (Section 158): after notice and hearing, the SEC may impose a fine from PHP 5,000 to PHP 2,000,000 (plus up to PHP 1,000 per day of continuing violation, capped at PHP 2,000,000), issue a permanent cease and desist order, suspend or revoke the certificate of incorporation, or dissolve the corporation and forfeit its assets. The Code also penalizes specific acts such as the unauthorized use of a corporate name (fine of PHP 10,000 to PHP 200,000) and serving as director despite knowing of a disqualification.

Who is liable: When a corporation commits an offense, the penalty may be imposed on the directors, trustees, officers, or employees responsible for the violation.

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5. Worked Problem: Unlicensed Foreign Corporation Suing on an Isolated Contract

Problem: Zurich Engineering AG, a Swiss corporation without a license to do business from the Philippine SEC, entered into a single contract with Luzon Power Corp to supply specialized turbine replacement parts manufactured in Switzerland for a geothermal facility in Albay. Zurich Engineering has no office, employees, or commercial branch in the Philippines. The turbine parts were delivered, but Luzon Power refused to pay the contract price of $850,000 (PHP 47,600,000). Zurich Engineering filed a collection suit in the Regional Trial Court of Makati. Luzon Power filed a motion to dismiss, alleging that Zurich Engineering is an unlicensed foreign corporation and therefore lacks legal capacity to sue under Section 150 of the Revised Corporation Code. Should the court grant the motion to dismiss?

Analysis and Solution:

1. Statutory Rule under Section 150: Section 150 provides that no foreign corporation transacting business in the Philippines without a license shall be permitted to maintain or intervene in any action in Philippine courts.
2. Application of the Isolated Transaction Doctrine: The statutory disability to sue applies exclusively to foreign corporations doing business in the Philippines without a license. It does not apply to foreign corporations engaging in an isolated transaction or a single sporadic commercial act.
3. Analysis of Zurich's Conduct: Zurich Engineering merely executed a single contract to deliver equipment manufactured abroad. It maintained no ongoing commercial apparatus, local office, or continuous commercial dealings in the Philippines. This constitutes a classic isolated transaction.
4. Doctrine of Estoppel: Furthermore, Luzon Power contracted with Zurich Engineering, received the turbine components, and benefited from the transaction. Under Philippine law, a domestic party who knowingly contracts with an unlicensed foreign firm is estopped from challenging its legal capacity to recover on the contract.
5. Conclusion: The Regional Trial Court must DENY the motion to dismiss. Zurich Engineering AG possesses legal capacity to sue on an isolated commercial transaction.