The Difference Between Merger and Consolidation and their Effects

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Published — January 30, 2019

The following post does not create a lawyer-client relationship between Alburo Alburo and Associates Law Offices (or any of its lawyers) and the reader. It is still best for you to engage the services of your own lawyer to address your legal concerns, if any.

Also, the matters contained in the following were written in accordance with the law, rules, and jurisprudence prevailing at the time of writing and posting, and do not include any future developments on the subject matter under discussion.

Merger or consolidation may be resorted to by corporations because of economic reasons. When times are tough, companies ought to merge or consolidate depending on their plan for survival and/or economic growth. Also, this is to create a more competitive, cost-efficient company and to increase value. The following are some basic information regarding merger and consolidation.

Merger Defined

            Section 76 of the Corporation Code of the Philippines provides that there is Merger when two or more corporations may merge into a single corporation which shall be one of the constituent corporations.

            In a merger, a corporation absorbs another corporation and remains in existence while the other is dissolved. It signifies 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 (Aquino, The Philippine Corporate Law Compendium, 2014 Edition).

Consolidation Defined

            Consolidation is also defined in Section 76 of the Corporation Code of the Philippines as two or more corporations may consolidate into a new single corporation which shall be the consolidated corporation.

            In consolidation, a new corporation is created, and the consolidating corporations are extinguished (Aquino, The Philippine Corporate Law Compendium, 2014 Edition).

Effects of Merger or Consolidation

            For merger or consolidation to take effect, the approval of the Securities and Exchange Commission (SEC) is required as stated in Section 79 of the of the Corporation Code of the Philippines. Further, the merger or consolidation shall be effective only upon issuance of a Certificate of Merger or Consolidation by SEC if the Commission is satisfied that the merger or consolidation of the corporations concerned is not inconsistent with the provisions of the Corporation Code of the Philippines and any existing laws thereof.

            Section 80 of the Corporation Code of the Philippines provides for the effects of Merger or Consolidation to wit:

     Sec. 80. Effects or merger or consolidation. – The merger or consolidation shall have the following effects:

1. The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;

• The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;

• The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;

• The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal, and all receivables due on whatever account, including subscriptions to shares and other choses in action, and all and every other interest of, or belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and

• The surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger or consolidation.

In a merger, there is no liquidation or distribution of assets to the stockholders because the assets and liabilities of the absorbed corporation are transferred to and assumed by the surviving corporation.

What is the remedy of a Stockholder if he/she does not agree to the plan of merger or consolidation?

            Article 81 of the Corporation Code of the Philippines provides for appraisal right of a stockholder or the right to dissent and demand payment of the fair value of his shares in case of merger or consolidation. However, in order to exercise this right, the stockholder dissenting must be present in the stockholders’ meeting in which the plan of merger was taken up.

Effect on Employees

            In case of merger, the employees of the absorbed corporations are assumed by the surviving corporation. It is further discussed in the case of Bank of the Philippine Islands (BPI) v. BPI Employees’ Union-Davao Chapter-Federation of Unions in BPI Unibank, G.R. No. 164301, October 19, 2011, wherein the Supreme Court resolved that:

” Not to be forgotten is that the affected employees managed, operated and worked on the transferred assets and properties as their means of livelihood; they constituted a basic component of their corporation during its existence. In a merger and consolidation situation, they cannot be treated without consideration of the applicable constitutional declarations and directives, or, worse, be simply disregarded. If they are so treated, it is up to this Court to read and interpret the law so that they are treated in accordance with the legal requirements of mergers and consolidation, read in light of the social justice, economic and social provisions of our Constitution. Hence, there is a need for the surviving corporation to take responsibility for the affected employees and to absorb them into its workforce where no appropriate provision for the merged corporation’s human resources component is made in the Merger Plan.

By upholding the automatic assumption of the non-surviving corporation’s existing employment contracts by the surviving corporation in a merger, the Court strengthens judicial protection of the right to security of tenure of employees affected by a merger and avoids confusion regarding the status of their various benefits which were among the chief objections of our dissenting colleagues. However, nothing in this Resolution shall impair the right of an employer to terminate the employment of the absorbed employees for a lawful or authorized cause or the right of such an employee to resign, retire or otherwise sever his employment, whether before or after the merger, subject to existing contractual obligations. “ In case of consolidation, the employees of the constituent corporations become the employees of the new corporation.

In case of consolidation, the employees of the constituent corporations become the employees of the new corporation.

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Alburo Alburo and Associates Law Offices specializes in business law and labor law consulting. For inquiries, you may reach us at info@alburolaw.com, or dial us at (02)7745-4391/0917-5772207.

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