Case Digest My share

1) YI lesuire vs Yu

Mass sale of corporate

assets
By: Raul J. Palabrica - @inquirerdotnet
Philippine Daily Inquirer / 12:22 AM November 23, 2015

UNDER ordinary circumstances, the sale of all or substantially all of the assets of a
corporation does not make its buyer automatically liable for its outstanding debts or
obligations.

However, if what were sold are shares of stocks, the sale carries with it the obligation of
the buyer to be responsible for the satisfaction of the corporation’s liabilities.
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The change in ownership does not alter the corporation’s juridical personality, so all
unpaid or unsatisfied obligations remain in force.

In a recent case, “Y-I Leisure Philippines Inc., et al. vs. James Yu, G.R. No. 207161,
dated Sept. 8, 2015,” the Supreme Court fine-tuned the consequences of the mass
transfer or sale of a corporation’s assets in relation to its creditors.

Sometime in 1997, Mt. Arayat Development Co. Inc. (Madci), a real estate
development company, sold shares of a golf and country club to the public. James Yu
bought and fully paid 500 golf and 150 country club shares for P650,000.
Three years later, he found out the supposed site of the club was non-existent. He
demanded the return of his money from Madci. The latter acknowledged his investment
but claimed Madci’s president then, Rogelio Sangil, should be held personally liable for
the return of Yu’s money.

Development

Yu sued in court to recover his money. He included Y-1 Leisure Phils. Inc., Yats
International Ltd. and Y-I Clubs and Resorts Inc. (YIL) in his complaint because, in
1999, Madci sold substantially all of its assets, consisting of 120 hectares of land in
Pampanga, to them.

It turned out Sangil, then 60 percent owner of the capital stock of Madci, invited YIL to
invest in the remaining 40 percent (worth P31 million) on condition, among others, that
if he fails to get the necessary government approvals for the construction of the club, he
will return YIL’s subscription plus interest.

Additionally, in case Sangil reneges on the repayment of that amount, YIL would be
authorized to sell the 120 hectares of land to cover the obligation. Sangil also agreed to
redeem the proprietary shares that Madci had sold or settle all the claims for their
refund.

Sangil failed to live up to his commitment. As a result, the land was sold to YIL for
P9.3 million, which was way below its true market value.
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The president of YIL testified his company was engaged in the development of real
estate projects for leisure and tourism purposes and that it bought into Madci because of
the latter’s golf development project in Pampanga.

The lower court ruled in Yu’s favor. It ordered Madci to return his money and Sangil to
be solidarily liable for such payment because he used Madci as a business conduit.

The parties appealed the decision to the Court of Appeals for different reasons. The
appellate court ruled in Yu’s favor and held YIL jointly and severally liable for the
payment of his claim. YIL elevated the case to the Supreme Court for final resolution.
Consequence

The issue before the tribunal was “whether the transfer of all or substantially all the
assets of a corporation under Section 40 of the Corporation Code carries with it the
assumption of corporate liabilities.”

In a 1965 decision, the high court stated that, as a rule, if a corporation sells or
otherwise transfers all of its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor.

This rule does not apply if (a) the purchaser expressly or impliedly agrees to assume
such debts, (b) the transaction amounts to a consolidation or merger of the corporations,
(c) the purchasing corporation is merely a continuation of the selling corporation, and
(d) the transaction is entered into fraudulently in order to escape liability for such debts.

The tribunal said exception (c), which it described as “business-enterprise transfer,”

envisions a situation where the transferee corporation’s interest is not limited to the
assets acquired but covers its business operations, including its goodwill.

As a consequence of the transfer, the selling corporation is “merely left with its judicial
existence, devoid of its industry and earning capacity.” In effect, the corporation is
rendered incapable of continuing its operation or accomplishing its corporate purpose.

The justices stated the rule applies when the transferor corporation sells all or
substantially all of its assets to another corporation, and the latter continues the business
of the transferor corporation.
Objective

In the instant case, the 120 hectares of land that Madci sold to YIL was all that Madci
had for purposes of accomplishing its objective to operate a golf and country club.

By selling the property to YIL, Madci rendered itself incapable or unable to continue
the business for which it was incorporated. YIL, which was in the business of
developing real estate properties for leisure and tourism purposes, continued the
business of Madci and undertook the development of the golf course.
Thus, according to the justice, YIL inherited the liabilities of Madci because it acquired
all of the assets of the latter.

The tribunal said the business-enterprise transfer rule aims “to protect the creditors of
the business by allowing them a remedy against the new owner of the assets and
business enterprise.

“Otherwise, creditors would be left ‘holding the bag’ because they may not be able to
recover from the transferor who has ‘disappeared with the loot’ or against the transferee
who can claim that he is a purchaser in good faith and for value.”

For these reasons, the high court held YIL jointly and severally liable with Madci in
satisfying Yu’s demand for payment.

Read more: https://business.inquirer.net/203027/mass-sale-of-corporate-

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De la Rama vs. Ma-Ao Sugar Central Co., Inc.

February 28, 1969
Capistrano, J.
Digest by Clark Uytico

Topic and Relevant Provision: Control and Management of Corporation – Investment in another
corporation or business

Both under the Corporation Law

SEC. 17-½:
No corporation organized under this act shall invest its funds in any other corporation or business,
or for any purpose other than the main purpose for which it was organized, unless its board of
directors has been so authorized in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of the voting power on such
proposal at a stockholders' meeting called for the purpose

SEC. 13. — Every corporation has the power:

(9) To enter into any obligation or contract essential to the proper administration of its corporate
affairs or necessary for the proper transaction of the business or accomplishment of the purpose for
which the corporation was organized;

(10) Except as in this section otherwise provided, and in order to accomplish its purpose as stated
in the articles of incorporation, to acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities and other evidences of indebtedness of any domestic or foreign corporation.

FACTS
Representative or derivative suit by 4 minority stockholders against the Ma-Ao Sugar, and Amado
Araneta and 3 other directors of the corporation.

The complaint comprising the period November, 1946 to October, 1952, stated five causes of action,
the most relevant being:
1) for alleged illegal and ultra-vires acts consisting of self-dealing irregular loans, and unauthorized
investments

In 1950 the Ma-ao Sugar Central Co., Inc., through its President, J. Amado Araneta,, subscribed for
P300,000.00 worth of capital stock of the Philippine Fiber Processing Co. Inc. Payments on the
subscription were made on September 20, 1950, for P150,000.00; on April 30, 1951, for
P50,000.00; and on March 6, 1952, for P100,000.00. At the time the first two payments were made
there was no board resolution authorizing the investment; and that it was only on November 26,
1951, that the President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board of
Directors.

Additionally, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc., owned by
Luzon Industrial, corporation were transferred on May 31, 1952, to Ma-ao Sugar Central Co., Inc.,
with a valuation of P355,000.00 on the basis of P1.00 par value per share. Again the "investment"
was made without prior board resolution, the authorizing resolution having been subsequentIy
approved only on June 4, 1952.

De la Rama et. al. contend that even assuming, arguendo, that the said Board Resolutions are valid,
the transaction, is still wanting in legality, because no resolution has been approved by the
affirmative vote of 2/3 of the stockholders holding shares in the corporation as required in Sec. 17-
½ of the Corporation Law.

ISSUE
WON the affirmative vote of 2/3 of the stockholders is needed for the “investment” made by Ma-Ao?

HELD
NO. We therefore agree with the finding of the Lower Court that the investment in question does
not fall under the purview of Sec. 17- ½ of the Corporation Law.

Dispositive: IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao
Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing, and
any other: company whose purpose is not connected with the sugar central business," is reversed.
The other parts of the judgment are, affirmed. No special pronouncement as to costs.

RATIO
The Court cited a book entitled “The Philippine Corporation Law” by Prof. Sulpicio Guevara of the
UP College of Law.

“A private corporation, in order to accomplish its purpose as stated in its articles of incorporation,
and subject to the limitations imposed by the Corporation Law, has the power to acquire, hold,
mortgage, pledge or dispose of shares, bonds, securities, and other evidences of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of the corporate purpose,
does not need the approval of the stockholders; but when the purchase of shares of another
corporation is done solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary. In any case, the purchase
of such shares or securities must be subject to the limitations established by the Corporation Law;
namely, (a) that no agricultural or mining corporation shall in anywise be interested in any other
agricultural or mining corporation; or (b) that a non-agricultural or non-mining corporation shall
be restricted to own not more than 15% of the voting stock of any agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not for the purpose of
bringing about a monopoly in any line of commerce or combination in restraint of trade.”

“A private corporation has the power to invest its corporate funds in any other corporation or
business, or for any purpose other than the main purpose for which it was organized, provided that
'its board of directors has been so authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least two-thirds of the voting power
on such a proposal at a stockholders' meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in any other agricultural or mining
corporation. When the investment is necessary to accomplish its purpose or purposes as
stated in it articles of incorporation, the approval of the stockholders is not necessary.”