Mr. Manuel T. Ibañez

March 5, 1986 Mr. Manuel T. Ibaez 8th Flr.,Quad Alpha Centrum Bldg. 125 Pioneer St.,Mandaluyong Metro Manila IN RE : Vulcan Chemical Corporation Sir : This relates to your letter, dated July 3, 1985, requesting that Vulcan Chemical Corporation, (VCC) be classified as dormant, except for purposes of pursuing its claims against its debtors, and enclosing therewith the minutes of the special meetings of the board of directors and stockholders held on May 31 and June 13, 1984, respectively, as well as a xerox copy of a Deed of Sale of Entire Business and Goodwill, dated June 30, 1984. cdlex It appears that the Deed of Sale of the Entire Business and Goodwill of Vulcan Chemical Corporation (VCC) in favor of Vulcan Industrial & Mining Corporation (VIMC) was executed on June 30, 1984. Among the terms and conditions of said Deed of Sale are as follows: 1. That for and in consideration of the amount of P3,817,724.00, VCC sells, cedes, transfers and conveys by way of absolute sale, its entire business, including all stock of goods, wares, merchandise, provisions or materials and all of its assets, including its goodwill, in favor of VIMC; 2. That VIMC shall assume the payment of all liabilities of VCC, amounting to P21,584,024.00 more or less; 3. That VIMC will take over and absorb the employees of VCC; 4. That VIMC shall secure the transfer of government permits with due assistance from VCC; VIMC shall itself apply for the necessary government permits as will allow it to continue with the business of VCC. The pertinent provision of the Corporation Code of the Philippines provides in part thus: "SECTION 40. Sale or other disposition of assets . Subject to the provisions of existing laws on illegal combinations and monopolies, a corporation may, by a majority of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise dispose of all or substantially all of its property and assets, including its goodwill, upon such terms and conditions and for such consideration, which may be money, stocks, bonds or other instruments for the payment of money or other property or consideration, as its board of directors or trustees may deem expedient, when authorized by the vote of the stockholders representing at least two-thirds (2/3) of the outstanding capital stock, ..." The sell-out statutes in literal term give the directors acting with the requisite percentage of shareholders an absolute power to dispose of the corporate assets in their discretion . The courts, however, have imposed some equitable limitations against abuse of powers. Thus, it has been held that the majority cannot use a sale of assets as a device to freeze out a minority or exercise their power in a way to buy in the property for themselves and exclude the minority from a fair participation in the fruits of the sale. (Ballantine on Corporations, sec. 285, pp. 672-673). In like manner, certain limitations are embodied in Section 40 of the Corporation Code, such that the sale or disposition of assets of a corporation shall be subject to the provisions of existing laws on illegal combinations and monopolies. From the minutes of the meeting of the board of directors and stockholders earlier mentioned, it appears that the sale or disposition of the entire assets of VCC has been approved by the majority of its directors and at least two-thirds (2/3) of its outstanding capital stock. The assumption of liabilities of VCC by VIMC clearly involves a novation of obligation, that is, substituting the person of the debtor (Article 1291, New Civil Code). Anent thereto, novation which consists in substituting a new debtor in the place of the original one, may be made only with the consent of the creditor. (Art. 1293, NCC). Hence, the consent of creditors of VCC to the assumption of liabilities by the VIMC is mandatory. The rights of the creditors must not be overlooked or disregarded when a corporation sells its entire assets and turns over its business to another. (Ballantine on Corporations, sec. 287, p. 676). Records of this Commission also show that VIMC owns 99.998% of the outstanding capital stock of VCC. In this connection, "a majority shareholder or parent corporation which dominates and controls another corporation is not as a matter of law precluded from purchasing the entire property and assets of the controlled corporation, either when the assets of a going concern are sold or when the corporation is being wound up. But such a purchase by a majority acting under adverse interest calls for 'close' or 'rigorous' scrutiny ." (Ballantine, sec. 285, p. 674, citing Natural Gas Pipeline Co. v. Slattery, 302 US 300, 308, 58 Sup. Ct.,199, 82 L. Ed. 276; Pepper v. Litton, 305 US 295, 306, 60 Sup.,Ct. 238, 84 L. Ed. 281). On your request that Vulcan Chemical Corporation be declared dormant, there seems to be unanimity of authority to the following effect: "A transfer of all the property and franchise of a corporation does not necessarily dissolve the corporation or terminate the corporate existence." 6A Fletcher (1968 Rev. Vol.),sec. 2953, pp. 678-679. "If one corporation sells all of its assets to another corporation and there is no intent to combine, the considerations for the sale could be in cash or other property, and the selling corporation may continue in a state of suspended animation." (Campos Campos, the Corporation Code, "Notes and Selected Cases," p. 959, citing Ballantine on Corporation, 666). Considering the foregoing, the following conditions must first be complied before this Commission grants your request that Vulcan Chemical Corporation be declared dormant: 1. The consent of creditors of VCC to the assumption of liabilities by VNC must be secured; 2. The disposition of the entire business and goodwill of VCC in favor of VICM is subject to the provision of Section 33 of the Corporation Code to the effect that except in case of fraud, and provided the contract is fair and reasonable under the circumstances, a contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. Provided that if the interest of the interlocking directors in one corporation is substantial and his interest in the other corporation or corporations is merely nominal, he shall be subject to the provisions of Section 32 of the Code (Dealings of directors, trustees or officers with the corporation) insofar as the latter corporation or corporations are concerned. 3. Inasmuch as VIMC is the controlling stockholder of VCC, a close scrutiny of subject transaction must be effected. Finally, please be informed that "if a corporation has commenced the transaction of its business but subsequently becomes inoperative for a period of at least five (5) years, the same shall be a ground for the suspension of its corporate franchise or certificate of incorporation. (Sec. 22, Corporation Code). LexLib Please be advised accordingly. Very truly yours, (SGD.) JULIO A. SULIT, JR. Associate Commissioner