Reyes vs. Blouse

A corporation may transfer all its assets and franchises to a new corporation in exchange for stock pursuant to Section 28½ of the Corporation Law when authorized by the affirmative vote of shareholders holding at least two-thirds of the voting power, and such transaction does not constitute a merger requiring unanimous stockholder consent or express legislative authority; where the transferor corporation retains its corporate existence, the transaction is an asset disposal, not a merger.

The plaintiffs are minority stockholders of Laguna Tayabas Bus Co. (LTB Co.), a pre-war corporation organized in 1928 and engaged in land transportation. The defendants compose the Board of Directors of LTB Co., including Max Blouse, who also serves as president of Batangas Transportation Co. (BT Co.), a corporation organized in 1918 and similarly engaged in land transportation. Both companies resumed operations in April 1945 after the war and were jointly operated under a single management, which proved successful enough to prompt a recommendation that the arrangement be made permanent through consolidation of the two companies' properties and franchises under a new corporation.

The plaintiffs are minority stockholders of Laguna Tayabas Bus Co. (LTB Co.), a pre-war corporation organized in 1928 and engaged in land transportation. The defendants compose the Board of Directors of LTB Co., including Max Blouse, who also serves as president of Batangas Transportation Co. (BT Co.), a corporation organized in 1918 and similarly engaged in land transportation. Both companies ceased operations during the war and resumed in April 1945, after which they were jointly operated under a single management pursuant to authority granted by their respective boards. The joint operation proved successful, prompting a recommendation that it be made permanent.

For this purpose, a special meeting of the stockholders of LTB Co. was held on July 30, 1947, at which approximately 92½ per cent of the stockholders approved a resolution authorizing the Board of Directors to take the necessary steps to consolidate the properties and franchises of LTB Co. with those of BT Co. under a single new corporation, either by disposal of all properties and franchises in return for stock of the new corporation, by exchange of stock, or through such other means as the Board deemed advisable. Pursuant to this authority, the Board of Directors decided to transfer LTB Co.'s assets, franchises, and other properties to the new corporation, excluding claims against the United States Army and cash received for wartime use of its buses and equipment. LTB Co. would not transfer any liabilities to the new corporation and would not be dissolved but would continue existing, although not operating, until its stockholders decided otherwise.

The plaintiffs objected to the consolidation, contending that it would be prejudicial to LTB Co. and to the minority stockholders who did not own shares in BT Co. They cited that LTB Co.'s dividends had been increasing over the ten years prior to the war while BT Co.'s were decreasing, that in 1941 LTB Co. shares cost P250 each in the market while BT Co. shares cost only P150, and that LTB Co.'s net gains exceeded BT Co.'s by approximately P67,000 in the first six months of 1947, with LTB Co. shares quoted at P360 against BT Co.'s P200. They also argued that the consolidation was illegal because unanimous stockholder consent was not obtained and that it was contrary to the spirit of Philippine laws.

The plaintiffs filed an action to restrain the Board from carrying out the resolution. After trial, the lower court found that the proposed acts were within the authority granted under Section 28½ of the Corporation Law, dismissed the complaint, and lifted the preliminary injunction. The lower court credited the testimony of Max Blouse—who had founded both companies and had long experience in the transportation business—that the earnings of both companies would be about equal under normal circumstances, and found that the consolidation would yield substantial economies through shared technical staff, reduced spare parts investment, a single machine shop, and reduced personnel.

• Nature of the Transaction: Petitioner contended that the real purpose of the disputed resolution was to effect a merger or consolidation, and that as such there was no law in the Philippines under which it could properly be carried out.
• Prejudice to Minority Stockholders: Petitioner argued that the proposed consolidation would be prejudicial to LTB Co. and to the minority stockholders in particular who did not own shares of BT Co., citing comparative dividend trends, share prices, and net gains showing LTB Co.'s superior financial performance.
• Illegality of the Resolution: Petitioner maintained that the resolution was illegal because unanimous stockholder consent was not secured and that it was contrary to the spirit of Philippine laws.
• Prohibition Under Act No. 2772: Petitioner claimed that the merger or consolidation was prohibited by Act No. 2772.

• Nature of the Transaction: Respondent maintained that the resolution merely sanctioned an exchange of properties under the Corporation Law as amended, and that even if considered a consolidation, it could still be carried out under Section 20(g) of the Public Service Law (Commonwealth Act No. 146).
• No True Merger: Respondent argued that the transaction was not a true merger or consolidation in the sense understood under American authorities, because the corporations would not lose their corporate existence or personality.

• Nature of the Resolution: Whether the real purpose of the disputed resolution is a merger or consolidation of the properties and franchises of LTB Co. with those of BT Co. within the meaning of the law.
• Legality of the Transaction: Whether said merger or consolidation can be carried out under existing Philippine law.
• Prejudice to Minority Stockholders: Whether the proposed consolidation would be prejudicial to LTB Co. and to the minority stockholders.
• Applicability of Act No. 2772: Whether Act No. 2772 prohibits the merger or consolidation of two land transportation companies.

• Nature of the Resolution: No true merger. The resolution authorizes a transfer of assets to a new corporation in exchange for stock, not a merger, because LTB Co. would continue to exist; this falls within Section 28½ of the Corporation Law.
• Legality of the Transaction: Yes. The transaction is sanctioned by Section 28½ of the Corporation Law and, alternatively, by Section 20(g) of the Public Service Law (Commonwealth Act No. 146), which permits merger or consolidation of public service operators with approval of the Public Service Commission.
• Prejudice to Minority Stockholders: No. The lower court's finding that the consolidation would not be prejudicial was supported by evidence of substantial economies and the credibility of Max Blouse's testimony regarding equalized earnings.
• Applicability of Act No. 2772: No. Act No. 2772 regulates only the merger or consolidation of railroad companies or of a railroad company with any other carrier, not two corporations exclusively engaged in land transportation.

• Nature of the Resolution: The resolution's purpose was not to dissolve LTB Co. but merely to transfer its assets to a new corporation in exchange for stock, as evidenced by the provision that LTB Co. would not be dissolved but would continue existing until its stockholders decided otherwise. This falls squarely within Section 28½ of the Corporation Law, which permits a corporation to "sell, exchange, lease or otherwise dispose of all its property and assets, including its good will, upon such terms and conditions as its Board of Directors may deem expedient when authorized by the affirmative vote of the shareholders holding at least 2/3 of the voting power." The phrase "or otherwise disposed of" is broad enough to cover a merger or consolidation of properties. Even under American authorities cited by the appellants, a true merger necessarily implies the termination or cessation of the merged corporations, not merely a merger of their properties and assets. Since LTB Co. retains its corporate existence, the transaction is not a true merger but a consolidation of properties and assets to be managed and operated by a new corporation.
• Legality of the Transaction: Even assuming arguendo that the resolution intended a true merger or consolidation of both the assets and the corporations themselves in the sense understood under American authorities, the transaction could still be carried out under Section 20(g) of Commonwealth Act No. 146 (Public Service Law), which prohibits public service operators, unless with the approval of the Public Service Commission, from selling, alienating, mortgaging, encumbering, or leasing its property, franchises, certificates, privileges, or rights, or any part thereof, or merging or consolidating its property, franchises, privileges, or rights with those of any other public service. This law speaks of merger or consolidation of public service operators engaged in land transportation and imposes no qualification other than Public Service Commission approval. The Corporation Law also contains ample provisions (Sections 17½, 18, and 25½) for effectuating mergers and does not require express legislative authority or unanimous stockholder consent.
• Prejudice to Minority Stockholders: The lower court found, after weighing the evidence, that the consolidation would not be prejudicial, crediting the testimony of Max Blouse—who founded both companies and had long experience in the transportation business—that the earnings of both companies would be about equal under normal circumstances. The stockholders approved the resolution by a two-thirds vote, acting in view of the best interests of both companies, anticipating substantial economies through shared technical staff, reduced spare parts investment, a single machine shop, and reduced personnel. It is not fair to allow a small minority to undo what the majority has done; the minority's remedy is to register their objection in writing and demand payment of their shares under Section 28½ of the Corporation Law.
• Applicability of Act No. 2772: A careful analysis of Act No. 2772 shows that it regulates only the merger or consolidation of railroad companies, or of a railroad company with any other carrier by land or water. It does not apply to the merger or consolidation of two corporations exclusively engaged in land transportation. Extending its scope to land carriers would render nugatory the provisions of the Public Service Law, which, being of more recent enactment (1936 versus 1918), should prevail; the later law cannot be implied to have been rendered ineffective by the earlier.

• Distinction Between Merger and Asset Transfer — A true merger or consolidation, under American authorities, necessarily implies the termination or cessation of the merged corporations and not merely a merger of their properties and assets. Where a corporation transfers its assets to a new corporation in exchange for stock but retains its corporate existence, the transaction is not a merger but an asset disposal under Section 28½ of the Corporation Law. The Court applied this distinction to hold that the resolution did not call for a true merger because LTB Co. would continue to exist.
• Majority Stockholder Authority and Minority Remedy — Where stockholders holding at least two-thirds of the voting power authorize the Board of Directors to dispose of corporate assets, the action is decisive and binding; a small minority may not undo what the majority has done in the best interests of the corporation. The minority's remedy is to register their objection in writing and demand payment of their shares from the corporation as provided in Section 28½ of the Corporation Law, not to enjoin the transaction.
• Broad Scope of "Otherwise Disposed Of" in Section 28½ — The phrase "or otherwise disposed of" in Section 28½ of the Corporation Law is very broad and covers, in a sense, a merger or consolidation of properties and assets, permitting a corporation to transfer all its property and assets, including goodwill, to a new corporation in exchange for stock upon authorization by at least two-thirds of the voting power.

• "The words 'or other wise disposed of' is very broad and in a sense covers a merger or consolidation." — This passage defines the scope of Section 28½ of the Corporation Law, establishing that the statutory language is broad enough to encompass a consolidation of properties even if not a technical merger of corporations.
• "a merger implies necessarily the termination or cessation of the merged corporations and not merely a merger of their properties and assets. This situation does not here obtain." — This passage articulates the distinction between a true merger and an asset transfer, the controlling rationale for holding that the resolution did not require unanimous stockholder consent.
• "It is not fair to allow a small minority to undo or set at naught what they have done. The remedy of the appellants is to register their objection in writing and demand payment of their shares from the corporation as provided for in section 28½ of the corporation law." — This passage states the Court's resolution of the minority stockholders' objection, defining the proper legal remedy available to dissenting stockholders.

• Section 28½, Corporation Law — Permits a corporation to sell, exchange, lease, or otherwise dispose of all its property and assets, including goodwill, upon such terms and conditions as the Board of Directors may deem expedient, when authorized by the affirmative vote of shareholders holding at least two-thirds of the voting power. Applied as the primary legal basis for the resolution, since the transaction was an asset disposal rather than a true merger, and as the source of the minority stockholders' remedy to object and demand payment of their shares.
• Section 20(g), Commonwealth Act No. 146 (Public Service Law) — Prohibits public service operators, unless with the approval of the Public Service Commission, from selling, alienating, mortgaging, encumbering, or leasing its property, franchises, certificates, privileges, or rights, or any part thereof, or merging or consolidating its property, franchises, privileges, or rights with those of any other public service. Applied as an alternative legal basis, holding that even if the transaction were a true merger, it could be carried out under this provision with Public Service Commission approval.
• Sections 17½, 18, and 25½, Corporation Law — Cited as containing ample provisions for effectuating mergers or consolidations, without requiring express legislative authority or unanimous stockholder consent.
• Act No. 2772 — Regulates the merger or consolidation of railroad companies, or of a railroad company with any other carrier by land or water. Held inapplicable to the merger or consolidation of two corporations exclusively engaged in land transportation, and could not be extended to render nugatory the later-enacted Public Service Law.

Paras, C.J., Feria, Pablo, Bengzon, Tuason, Montemayor, and Labrador, JJ., concurred.