i. Asset-only and Business Enterprise Transfers

7. Mergers, Consolidations, and Acquisitions

• Asset Only Transfer
• Business Enterprise Transfer

Assets-Only Level.

General Rule: A corporation that purchases the assets of another will not be liable for the debts and liabilities of the selling corporation provided the former acted in good faith.

Except, when the following circumstances are present:

• where the purchasers expressly or impliedly agrees to assume the debts
• where the selling corporation fraudulently enters into the transactions to escape liability for those debts
• where the purchasing corporation is merely a continuation of the selling corporation
• where the transaction amounts to a consolidation or merger of the corporations (Edward J. Nell Company v. Pacific Farms, Inc., G.R. No. L-20850, 29 November 1965)¹

Business Enterprise Level. Under the business-enterprise transfer rule, a transferee may be held jointly and severally liable for the transferor’s obligations when it acquires all or substantially all of the transferor’s assets and continues the transferor’s business; proof of fraud is not required. A transfer of substantially all assets alone does not establish liability under this rule. A “free and harmless clause” holding the transferee free from the liabilities of the transferor is binding only between them and cannot prejudice creditors who are not parties thereto. (Y-I Leisure Philippines, Inc. v. Yu, G.R. No. 207161, 8 September 2015)²

Note: The sale under [Sec. 39]³ does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its business or its corporate purpose. (Y-I Leisure Philippines, Inc. et al. v James Yu, G.R. No. 207161, 2015)

However, stockholder approval under Section [39] is not required in the following circumstances; the board-authorization rule still applies:

• if the sale of the entire property and assets is necessary in the usual and regular course of business of corporation, or
• if the proceeds of the sale or other disposition of such property and assets will be appropriated for the conduct of its remaining business.

Thus, the litmus test to determine the applicability of Section [39] would be the capacity of the corporation to continue its business after the sale of all or substantially all its assets.(Y-I Leisure Philippines, Inc. et al. v James Yu, G.R. No. 207161, 2015)

Equity Level. Purchaser takes control of the business by purchasing the shareholdings. Purchasing corporation is still protected by the limited liability feature but the same can be pierced.

In order to transfer ownership of shares of stock not traded in the Stock Exchange, it is necessary to secure a Certificate of Authorizing Registration (CAR) pursuant to the process laid down in RMO No. 15-03⁴. The receipts of the payment of the tax should also be filed with and recorded by the secretary of the corporation pursuant to Section 11 of RR. No. 06-08⁵.

ASSETS-ONLY LEVEL

General Rule: A corporation that purchases the assets of another will not be liable for the debts and liabilities of the selling corporation provided the former acted in good faith.

Except, when the following circumstances are present:

• where the purchasers expressly or impliedly agrees to assume the debts
• where the selling corporation fraudulently enters into the transactions to escape liability for those debts
• where the purchasing corporation is merely a continuation of the selling corporation
• where the transaction amounts to a consolidation or merger of the corporations (Edward J. Nell Company)⁶

Business Enterprise Transfer

BUSINESS ENTERPRISE LEVEL

Under the business-enterprise transfer rule, a transferee that acquires all or substantially all of the transferor’s assets and continues the transferor’s business may be held jointly and severally liable for the transferor’s obligations, without proof of fraud. A “free and harmless clause” holding the transferee free from the liabilities of the transferor is binding only between them and cannot prejudice creditors who are not parties thereto. (Y-I Leisure Philippines, Inc. v. Yu)⁷

NOTE: The sale under [Sec. 39]⁸ does not contemplate an ordinary sale of all corporate assets; the transfer must be of such degree that the transferor corporation is rendered incapable of continuing its business or its corporate purpose. (Y-I Leisure Philippines, Inc. et al. v James Yu, G.R. No. 207161, 2015)

However, stockholder approval under Section [39]⁹ is not required in either of these circumstances; board authorization remains governed by Section 39:

• If the sale of the entire property and assets is necessary in the usual and regular course of business of corporation, or
• If the proceeds of the sale or other disposition of such property and assets will be appropriated for the conduct of its remaining business.

Thus, the litmus test to determine the applicability of the stockholder-approval requirement under Section [39] would be the capacity of the corporation to continue its business after the sale of all or substantially all its assets.(Y-I Leisure Philippines, Inc. et al. v James Yu, G.R. No. 207161, 2015)