All stockholders of a stock corporation shall enjoy pre-emptive right to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings, unless such right is denied by the articles of incorporation or an amendment thereto: Provided, That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or to shares to be issued in good faith with the approval of the stockholders representing two- thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
A pre-emptive right is the shareholder’s right to subscribe to
all issues or disposition of shares or any class in proportion to
his present stockholdings, the purpose being to enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the retained earnings and also in the net assets in the event of dissolution. (Page 832 of CLV’s CLR, 2007)
Whenever a capital stock of a corporation is increased and new shares of stocks are issued, the new issue must be offered first to the stockholders who are such at the rime the increase was made in proportion to their existing shareholdings and on equal terms with other holders of the original stocks before subscriptions are received from the general public. For example, if a stockholder with pre-emptive right owns 20% of the outstanding shares of the corporation, he may subscribe 20% of any shares of stock issued by the
corporation. This principle is known as the right of pre-
emption or pre-emptive right of stockholders (Page 355 of De
Leon, 2006)
The rule [on pre-emption] aims to safeguard the right of stockholder to preserve unaltered and unimpaired his proportionate influence and interest in the corporation and the relative value of his holdings. (Page 356 of De Leon, 2006)
(e) To sell or otherwise dispose of corporate assets
(Section 40)Sec. 40. Sale or other disposition of assets
Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority vote of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by the vote of at least to two- thirds (2/3) of the members, in a stockholder's or member's meeting duly called for the purpose. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally: Provided, That any dissenting stockholder may exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of directors or trustees may, nevertheless, in its discretion, abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets, subject to the rights of third parties
under any contract relating thereto, without further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its property and assets if the same is necessary in the usual and regular course of business of said corporation or if the proceeds of the sale or other disposition of such property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section. (28 1/2a)
Jack’s Lecture
In non-stock corporations where there are no members with voting rights, the vote of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into any transaction authorized by this section.
In the sale, lease, exchange, mortgage or disposition of all or substantially all of the properties or assets of the corpration, you need approval not only of the majority of the Board but also of at least 2/3 of the stockholders. According to the law, the test of whether the sale covers all or substantially all of the assets of the corporation is this: will the corporation be capable of continuing its business or accomplishing its purpose. For example, Jollibee must have more than 400 stores all over the country. If they sell 5 stores, you don’t have to get stockholder approval.
You have a case where the assets of a corporation were foreclosed and the only remaining asset of the corporation was the right of redemption and they sold it. The Court said you need stockholder approval.
I don’t know whatever happened to this but you have that property in Commonwealth Avenue owned by the Islamic Directorate. The Muslim countries in the Middle East donated money for the Muslims to acquire that property. When Martial Law was declared, the Board of Trustees fled to the Middle East and a bunch of people who were not directors sold that property to Iglesia Ni Cristo. The Supreme Court said the sale was not valid because the people who sold it were not the elected directors and secondly, that was the only property of that corporation and therefore, stockholder approval was required.
A corporation can acquire its own shares but it is required that it should have unrestricted retained earnings, as a rule. Remember that we said the assets of a corporation constitute a trust fund to answer for its obligations to its creditors. If you allow a corporation when it has no retained earnings, in effect, it is returning the investment of its stockholders. Thus, that will prejudice the creditors.
The property of the corporation is not the property of the stockholders or members, and as such, may not be sold without the express authority from the board of directors. (Litonjua v. Eternity Corp, 2006)
Disposition of properties in the regular course of the business does not need approval by or authority of stockholders or members. (Page 819 of CLV’s CLR, 2007)
Any disposition of corporate asset or property, which is not in the usual course of business of the corporate, would be within the covered transactions under Section 40 which would require stockholders’ or members’ approval, even when practically, the corporation is an entity is till capable of pursuing its charter purpose. (Page 250 of CLV’s Textbook)
Catindig Class Notes
Q: (2 Kats were asked here, hehe) ABC Corp is a Property Devt Corp. It sells property (100 lots) to a manufacturing corporation. Tell whether approval of the following will be enough: (a)BoD only‟(b)Stockholders only (c) Both.
A:
(a) BoD only Yes, if the corporation after the sale decides or has the intention to continue its business.
(b) SHs only No, because the corp acts thru its BoD (c) Both Yes, if there is no intention to continue business. Note:
If the sale is in accordance with the primary purpose of the corporation then only BoD approval is needed. Otherwise, SH approval is necessary. Conisder also the intention to continue the corp business. Nature of Power
The exercise of the power to sell or dispose of all or substantially all of the assets of the corporation is deemed to undermine the contractual relationship of the corporation and its stockholders. (Page 246 of CLV’s Textbook)
The exercise of such a power really affects the business enterprise level of corporate set-up. (Page 246 of CLV’s Textbook)
A sale or other disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable if:
(1) Continuing the business;
(2) Accomplishing the purpose for which it was incorporated.
A corporation by the action of its board of directors or trustees supported by the vote of shareholders or members may sell, lease exchange, mortgage, pledge, or otherwise dispose of
all or substantially all of all of its property, and assets
including its good will. The requisites for the validity of such sale, etc. are as follows:
(2) The sale etc. must be approved by the board of directors or trustees;
(3) The action of the board of directors or trustees must be authorized by the vote of stockholding representing 2/3 of the outstanding capital stock including holders of non- voting shares or 2/3 of the members as the case may be; and
(4) The authorization must be done at a stockholders’ or members’ meeting duly called for that purpose after written notice.
Aside form the requirements of Section 40 , the sale of all or substantially all of the corporate assets of property may require compliance with the Bulk Sales Law. (Page 251 of CLV’s Textbook)
Effect of non-compliance. Sale by Board of Trustees of the only corporate property without compliance with Sec. 40 of Corporation Code requiring ratification of members
representing at least two-thirds of the membership, would make the sale null and void. Islamic Directorate v. Court of
Appeals, 272 SCRA 454 (1997); Peña v. CA, 193 SCRA 717
(1991).
The disposition of the assets of a corporation shall be deemed to cover substantially all the corporate property and assets, if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purposes for which it was incorporated. Such a sale or disposition must be understood as valid only if it does not prejudice the creditors of the assignor, which necessarily implies that the assignee assumes the debts of the assignor. (Caltex Inc. v. PNOC, 2006)
Appraisal Right.
Any dissenting stockholder may exercise his appraisal right in case of sale of all or substantially all of the corporate assets or property. (Page 252 of CLV’s Textbook)
The appraisal right is accorded to dissenting stockholders as a matter of equity and fairness since they should be allowed to plough their investments into ventures they feel they could get a better return rather with a corporation that is no longer capable of pursuing the business. (Page 252 of CLV’s Textbook)
It should be noted that the exercise of the appraisal right of any stockholder is predicate on the ―sale or other disposition of all or substantially all‖ of the corporate assets. Any disposition which does not involve all or substantially all of the corporate assets, does not require the approval of the stockholders or members and would not entitle any dissenting stockholder to exercise his appraisal right. (Page 366 of De Leon, 2006)