11 Appraisal Right Flashcards
When may appraisal rights be exercised?
SEC. 80. When the Right of Appraisal May Be Exercised. – Any stockholder of a corporation shall have the right to dissent and demand payment of the fair value of the shares in the following instances:
(a) In case an 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;
(b) 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 this Code;
(c) In case of merger or consolidation; and
(d) In case of investment of corporate funds for any purpose other than the primary purpose of the corporation.
How is the appraisal right exercised?
**SEC. 81. How Right is Exercised. **– The dissenting stockholder who votes against a proposed corporate action may exercise the right of appraisal by making a written demand on the corporation for the payment of the fair value of shares held within thirty (30) days from the date on which the vote was taken: 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, the corporation shall pay the stockholder, upon surrender of the certificate or certificates of stock representing the stockholder’s shares, the fair value thereof as of the day before the vote was taken, excluding any appreciation or depreciation in anticipation of such corporate action.
If, within sixty (60) days from the approval of the corporate action 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 (2) 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: Provided, further, That upon payment by the corporation of the agreed or awarded price, the stockholder shall forthwith transfer the shares to the corporation.
What is the effect of the demand and termination of right?
SEC. 82. 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 the said shares within thirty (30) days after the award,* the voting and dividend rights shall immediately be restored.
What happens when the exercise of appraisal right is validly withdrawn? or when the corporation rescinds the corporate act? or when the SEC determines that the corporate act is invalid?
SEC. 83. 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 Commission where such approval is necessary, or if the Commission determines that such stockholder is not entitled to the appraisal right, then the right of the stockholder to be paid the fair value of the shares shall cease, the status as the stockholder shall be restored, and all dividend distributions which would have accrued on the shares shall be paid to the stockholder.
When will the corporation bear the costs of appraisal, and when will it be the stockholder?
SEC. 84. 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.
SEC. 85. Notation on Certificates; Rights of Transferee. – Within ten (10) days after demanding payment for shares held, a dissenting stockholder shall submit the certificates of stock representing the shares to the corporation for notation that such shares are dissenting shares. Failure to do so shall, at the option of the corporation, terminate the 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.
May a derivative suit be instituted when the corporate act is subject to the right of appraisal?
No. The basis of a stockholder’s suit is always one of equity. However, it cannot prosper without first complying with the legal requisites for its institution. One of its requisites is the unavailability of appraisal rights. The requisites are:
(a) violation of director’s duties to the prejudice of the corporation;
(b) prior demand to the board to initiate the required action;
(c) unjustifiable refusal of the board to institute such action;
(d) the exercise of appraisal right is not unavailable;
(e) the action is not a nuisance suit [Interim Rules of Procedure Governing Intra-Corporate Controversies, Gule 8, Sec. 1.]
What is the right of appraisal?
A stockholder who dissents from certain corporate actions has the right to demand payment of the fair value of his or her shares. This right, known as the right of appraisal, is expressly recognized in Section 81 of the Corporation Code [now Sec. 80, RCC].
The right of appraisal may be exercised when there is a fundamental change in the charter or articles of incorporation substantially prejudicing the rights of the stockholders. It does not vest unless objectionable corporate action is taken. It serves the purpose of enabling the dissenting stockholder to have his interests purchased and to retire from the corporation.
What is the basis for the corporation having the power to acquire its shares from the dissenting stockholder?
**SEC. 40. Power to Acquire Own Shares. **– Provided that the corporation has unrestricted retained earnings in its books to cover the shares to be purchased or acquired, a stock corporation shall have the power to purchase or acquire its own shares for a legitimate corporate purpose or purposes, including the following cases:
(a) To** eliminate fractional shares **arising out of stock dividends;
(b) To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to **purchase delinquent shares **sold during said sale; and
(c) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code. (appraiasal right)
What if there are no unrestricted retained earnings to pay the dissenting shareholders?
In case the corporation has no available unrestricted retained earnings in its books, Section 83 of the Corporation Code provides 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. [Turner v. Lorenzo]
Why are UREs a requirement before Dissenters may be paid?
**Trust Fund Doctrine.
**
The trust fund doctrine **backstops the requirement of unrestricted retained earnings **to fund the payment of the shares of stocks of the withdrawing stockholders. Under the doctrine, the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors, who are preferred in the distribution of corporate assets.
The creditors of a corporation have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities. **There can be no distribution of assets among the stockholders without first paying corporate debts. **Thus, any disposition of corporate funds and assets to the prejudice of creditors is null and void. [Turner v. Lorenzo]
Doctrine in Villamor v. Umale
Failure to allege in the pleadings that appraisal rights are not available amounts to a lack of cause of action to institute a derivative suit.
