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CHAPTER 13: APPRAISAL RIGHT

Appraisal Right

Appraisal right and pre-emptive right are different.

A. DEFINITION

Appraisal Right is the method of paying a shareholder for the taking of his property. It is a statutory
means whereby a stockholder can avoid the conversion of this property into another property not of his
own choosing and is given to a shareholder as compensation for the abrogation of the common law rule
that a single stockholder could block a certain corporate act such as merger.

PURPOSE: is to protect the property rights of dissenting stockholders from actions by the majority
shareholders which alters the nature and character of their investment. In effect, 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.

B. WHEN EXERCISED

Sec. 81. Instances of appraisal right.- Any stockholder of a corporation shall have the right to dissent and
demand payment of the fair value of his shares 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, 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;

2. 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 Code; and

3. In case of merger or consolidation.

ENUMERATION NOT EXCLUSIVE: it may also cover:

1. Investment of funds in another corporation or business or for any other purpose other than its
primary purpose as provided in Sec. 42;

2. Likewise, in a close corporation, a stockholder has the unbridled right to compel the corporation “for
any reason” to purchase his shares at their fair value which shall not be less than the par or issued value,
when the corporation has sufficient assets to cover its debts and liabilities, exclusive of capital stock
(Sec. 105).

NOT ALL AMENDMENTS: the right may only be exercised in cases of amendment which “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”.
Accordingly, if the amendment is to increase or decrease the number of directors, or change the
corporate name, or change of principal office, the appraisal right is not available.

Q: A was a stockholder of X Corporation and has been attending meetings for 12 years. X is disabled and
is using a manual wheelchair. The principal office of X Corporation is in Quezon City but the place of
meeting was changed to Manila. A objected. May A exercise his appraisal rights?

A: NO. Although the rights of A are affected, his reason his so flimsy as to guarantee him the exercise of
his appraisal right. For purposes of meetings, cities in Metro Manila are considered one city only.

Q: What if the place of meeting was transferred to Marawi such that X needs to board a plane or a boat

A: YES. A’s concern is justified.

Q: The primary purpose of X Corporation is general construction. The shareholders wanted to change
the primary purpose to realty. Of the 5 shareholders, A, the managing director and a civil engineer
objected. May A exercise his appraisal rights?

A: YES. Section 42

Q: A close corporation with a principal office in Quezon City wanted to change their place of meeting to
Manila. X objected. May X exercise his appraisal rights?

A: YES. Stockholders in close corporations may exercise their appraisal rights for any reason (Section
105).

Q: May a person with unpaid shares exercise his appraisal rights?

A: YES, except delinquent shares (Section 86 in relation to Section 72).

STOCKHOLDER WITH UNPAID SUBSCRIPTION: He MAY exercise the appraisal right, since the subscriber is
entitled to all the rights of a stockholder under Sec. 72 and although Sec. 82 provides for the submission
of certificate of stock, Sec. 86 provides that the notation to such certificate of stock is OPTIONAL at the
instance of the corporation.

C. REQUIREMENTS AND PROCEDURE

Sec. 82. How right is exercised. – The appraisal right may be exercised by any stockholder who shall have
voted against the proposed corporate action, by making a written demand on the corporation within
thirty (30) days after the date on which the vote was taken for payment of the fair value of his shares:
Provided, That failure to make the demand within such period shall be deemed a waiver of the appraisal
right. If the proposed corporate action is implemented or affected, the corporation shall pay to such
stockholder, upon surrender of the certificate or certificates of stock representing his shares, the fair
value thereof 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.
If within a period of sixty (60) days from the date the corporate action was approved by the
stockholders, the withdrawing stockholder and the corporation cannot agree on the fair 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 the appraisers shall be final, and their award shall be paid by the corporation
within thirty (30) days after such award is made: Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained earnings in its books to cover
such payment: and Provided, further, That upon payment by the corporation of the agreed or awarded
price, the stockholder shall forthwith transfer his shares to the corporation.

REQUIREMENTS AND PROCEDURE FOR THE VALID EXERCISE OF THIS RIGHT ARE:

1. The stockholder must have voted against the proposed corporate action in any of the instances
allowed by law for the exercise of the right of appraisal;

2. The written demand for payment must be made by the dissenting stockholder within 30 days after
the date on which the vote was taken. Failure to make the demand within the said period shall be
deemed a waiver on the part of the stockholder concerned to exercise his appraisal right;

3. Surrender of the certificate of stock by the dissenting stockholder for notation in the corporate books
and the payment of the corporation of the fair market value of the said shares as of the day prior to the
date on which the vote was taken. If the stockholder and the corporation cannot agree on the fair
market value thereof, the same shall be determined in accordance with the provisions of par.2 of Sec.
82;

4. The fair value of the shares of the dissenting stockholder must be paid by the corporation only if it has
“unrestricted retained earnings‖ in its books to cover such payment. If the corporation has no
unrestricted retained earnings, the dissenting stockholder may not, therefore, be able to effectively
exercise his appraisal right, EXCEPT in the case of a close corporation under Sec. 105;

5. Upon payment of the shares by the corporation, the dissenting stockholder shall transfer his shares to
the corporation.

Q: When will the Fair Market Value (FMV) of shares be appraised or determined?

A: Day before the meeting (Section 82)

D. EFFECT OF EXERCISE OF APPRAISAL RIGHT

Sec. 83. Effect of demand and termination of right. - From the time of demand for payment of the fair
value of a stockholder's shares until either the abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all rights accruing to such shares, including voting and
dividend rights, shall be suspended in accordance with the provisions of this Code, except the right of
such stockholder to receive payment of the fair value thereof: Provided, That if the dissenting
stockholder is not paid the value of his shares within 30 days after the award, his voting and dividend
rights shall immediately be restored.

SUSPENSION OF STOCKHOLDER RIGHTS: Upon completion of the steps provided in Sec. 82, the
stockholder concerned is regarded as having made an election to withdraw from the corporate
enterprise and take the value of his stock. Such a procedure suspends (for a maximum period of 30
days) certain ownership rights associated with stockholder status, such as the right to receive dividends
or distribution and the right to vote which cannot be restored without compliance with the governing
statutory conditions.

DIRECTOR EXERCISING APPRAISAL RIGHT: may still continue to function as such, prior to payment,
unless there is a contrary provision in the by-laws.

E. WHEN RIGHT TO PAYMENT CEASES

Sec. 84. When right to payment ceases. - No demand for payment under this Title may be withdrawn
unless the corporation consents thereto. If, however, such demand for payment is withdrawn with the
consent of the corporation, or if the proposed corporate action is abandoned or rescinded by the
corporation or disapproved by the Securities and Exchange Commission where such approval is
necessary, or if the Securities and Exchange Commission determines that such stockholder is not
entitled to the appraisal right, then the right of said stockholder to be paid the fair value of his shares
shall cease, his status as a stockholder shall thereupon be restored, and all dividend distributions which
would have accrued on his shares shall be paid to him.

INSTANCES WHEN THE RIGHT OF A DISSENTING STOCKHOLDER TO BE PAID THE FAIR VALUE OF HIS
SHARES CEASES:

1. When he withdraws his demand for payment and the corporation consents thereto;

2. When the proposed action is abandoned or rescinded by the corporation;

3. When the proposed action is disapproved by the SEC where such approval is necessary;

4. When the SEC determines that he is not entitled to exercise his appraisal right;

5. When he fails to submit the stock certificate within ten (10) days from demand to the corporation for
notation that such shares are dissenting shares; and,

6. If the shares are transferred and the certificate subsequently cancelled.

F. COST OF APPRAISAL

If the corporation and the dissenting stockholder do not agree, an appraisal to be made by three
disinterested person may be made.
Sec. 85. Who bears costs of appraisal. - The costs and expenses of appraisal shall be borne by the
corporation, unless the fair value ascertained by the appraisers is approximately the same as the price
which the corporation may have offered to pay the stockholder, in which case they shall be borne by the
latter. In the case of an action to recover such fair value, all costs and expenses shall be assessed against
the corporation, unless the refusal of the stockholder to receive payment was unjustified.

THE CORPORATION BEARS THE COST IF:

a. The price offered by the corporation is lower than the fair value of the shares of the dissenting
stockholder as determined by the appraisers;

b. Where an action is filed by the dissenting stockholder to recover such fair value and the refusal of the
stockholder to receive payment is found by the court to be justified.

DISSENTING STOCKHOLDER WILL BE LIABLE FOR THE COST AND EXPENSES OF APPRAISAL WHEN:

a. When the price offered by the corporation is approximately the same as the fair value ascertained by
the appraisers;

b. Where the action filed by the dissenting stockholder and his refusal to accept payment is found by the
court to be unjustified.

G. NOTATION

Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days after demanding payment
for his shares, a dissenting stockholder shall submit the certificates of stock representing his shares to
the corporation for notation thereon that such shares are dissenting shares. His failure to do so shall, at
the option of the corporation, terminate his rights under this Title. If shares represented by the
certificates bearing such notation are transferred, and the certificates consequently cancelled, the rights
of the transferor as a dissenting stockholder under this Title shall cease and the transferee shall have all
the rights of a regular stockholder; and all dividend distributions which would have accrued on such
shares shall be paid to the transferee.

PURPOSE: to give notice and guide to the corporation to determine the respective rights of stockholder.

SALE: The law does not prohibit the dissenting stockholder to sell, transfer or assign his shares. If such
be the case, the right of the dissenting stockholder to be paid the fair value of his shares shall cease and
the transferee will acquire all the rights of a regular stockholder inclusive of all dividends which would
have accrued on such shares.