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49) Mindanao Savings and Loan Asso., vs.

Edward Willkom AUTHOR: GOJAR


G.R. No. 178618 Oct. 11, 2010 FISLAI - First Iligan Savings and Loan Association, Inc.
TOPIC: Merger and consolidation DSLAI - Davao Savings and Loan Association, Inc. (alleged
PONENTE: NACHURA, J. SURVIVING corp)
After the “supposed merger” - DLSAI changed its name to MSLAI
CASE LAW/ DOCTRINE:
 Ordinarily, in the merger of two or more existing corporations, one of the corporations survives and continues the combined
business, while the rest are dissolved and the surviving corporation acquires all their rights, properties, and liabilities.
 The merger does not become effective upon the mere agreement of the constituent corporations since a merger or consolidation
involves fundamental changes in the corporation, as well as in the rights of stockholders and creditors, there must be an express
provision of law authorizing them.
 Where a party to the merger is a special corporation governed by its own charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency should first be obtained. The merger shall only be effective upon the
issuance of a certificate of merger by the SEC, subject to its prior determination that the merger is not inconsistent with the
Corporation Code or existing laws.
 The issuance of the certificate of merger is crucial because not only does it bear out Securities and Exchange Commission’s
(SEC’s) approval but it also marks the moment when the consequences of a merger take place.
 Where there is no merger between two corporations, for third parties, the two corporations shall not be considered as one
but two separate corporations, and being separate entities, the property of one cannot be considered the property of the
other
Emergency Recit:
FISLAI and DSLAI entered into a merger w/ DSLAI as the surviving corp. BUT articles of merger were not registered with the SEC due to
incomplete documentation so no certification was issued (but they still acted as if there was a valid merger b/w them ). The assets of FISLAI was
assigned to DSLAI which assumed the liabilities of FISLAI. DSLAI changed its name to MSLAI. MSLAI closed & was under receivership as
ordered by the Monetary Board of the Central Bank of the Philippines. Before MSLAI closed, creditor of FISLAI filed for a collection of sum of
money against FISLAI and the court ruled in favor of the creditor and the properties of FISLAI were sold in a public auction. Willkom being
the highest bidder, the properties are now in his name. MSLAI then filed for the annulment of the sale & cancellation of title, it alleged that
since it is under receivership, its assets can’t be subjected to any execution. But Willkom alleged that the unofficial merger b/w FISLAI &
DSLAI (now MSLAI) was ineffective because they failed to comply w/ the formalities under the Corp Code so FISLAI is still a separate entity,
which the creditor can go after, and FISLAI could not have been absorbed by MSLAI. ISSUE: Was there a valid merger? HELD: No. The
merger is only effective upon the issuance of the certificate of merger by the SEC. IN THIS CASE, the articles of merger b/w FISLAI &
DSLAI weren’t registered with the SEC due to incomplete documentation. Even if the Monetary Board of the Central Bank of the Philippines
recognized such merger, still there was no certificate issued by the SEC. Since there was no valid merger, the corporation remained as
separate entities. And as to 3rd parties, the assets of FISLAI remain as its assets and cannot be considered as belonging to DSLAI and
MSLAI even if there was an assignment of properties & assumption of liabilities by MSLAI. The law provides such assignment
should be registered in the Registry of Property which the corporations failed to do.
FACTS:
 FISLAI and DSLAI entered into a merger w/ DSLAI as the surviving corp. BUT articles of merger were not registered with the SEC
due to incomplete documentation.
 After which, DSLAI changed its corp name to MSLAI by amending the AOI but the amendment was approved only 2 yrs after.
 The Board of Directors of FISLAI approved the resolution assigning its assets in favor of DLSAI. DLSAI now assumed the liabilities
of FISLAI.
 The business of MSLAI (formerly DSLAI) failed so the Monetary Board of the Central Bank of the Philippines ordered its closure and
placed it under receivership. The Monetary Board ordered the liquidation of MSLAI, with PDIC as its liquidator.
 BEFORE the closure of MSLAI, Uy (creditor of FISLAI) filed for collection of sum of money against FISLAI.
o RTC (collection of sum of money case)- in favor of creditor Uy. A writ of execution was issued. The parcels of land
owned by FISLAI were sold in a public auction wherein respondent Willkom was the highest bidder. The certificates of
title are now in the name of Willkom. Willkom then sold one of the properties to Go.
 MSLAI filed for the annulment of the sheriff’s sale & cancellation of the title of the properties.
o It alleged that since it was under receivership, its assets are deemed in ustodia legis and should be exempt from any order
of garnishment, levy, attachment, or execution.
 Respondents Willkom alleged that:
o MSLAI had no cause of action against them because MSLAI is a separate and distinct entity from FISLAI
o the “unofficial merger” between FISLAI and DSLAI (now MSLAI) did not take effect considering that the merging
companies did not comply with the formalities and procedure for merger or consolidation as prescribed by the
Corporation Code.
o FISLAI is still a SEC registered corporation and could not have been absorbed by MSLAI
 RTC (annulment of sale case) - dismissed the case for lack of jurisdiction. Because it can’t annul the decision of the civil case
(collection of sum of money case) because it was rendered by a court of coordinate jurisdiction.
 CA - No merger b/w FISLAI & MSLAI (formerly DSLAI) because they failed to follow the procedure for a valid merger under the
Corp. Code. Hence, the 2 corporation retained their separate personalities
o the claim against FISLAI is valid
o subsequent sale of the levied properties at public auction is valid
o Also, even if there was a de factor merger, Willkom relied on the clean certificate of title, innocent purchaser for value, has
superior right than MSLAI.
o Also, the alleged assignment of assets & liabilities by FISLAI to MSLAI was not binding on 3rd parties since it was not
registered.
ISSUE(S):
Was there a valid merger b/w FISLAI & DSLAI (now MSLAI)? NO. The merger is only effective upon the issuance of the certificate of
merger by the SEC.
RATIO:
The merger is only effective upon the issuance of the certificate of merger by the SEC. Not by mere agreement of the constituent
corporations.

 IN THIS CASE, the articles of merger b/w FISLAI & DSLAI weren’t registered with the SEC due to incomplete documentation. Even if
the Monetary Board of the Central Bank of the Philippines recognized such merger, still there was no certificate issued by the SEC.
 The certificate bears the SEC approval and it is the only time when the consequences of merger shall take place. Once the merger
becomes effective, the absorbed corporation ceases to exist but its rights and properties, as well as liabilities, shall be taken and
deemed transferred to and vested in the surviving corporation.
 Same rule applies to consolidation. Once the SEC, process & examine the articles of consolidation and is satisfied that such
consolidation is not inconsistent w/ Corp Coee & existing laws, then it issues a certificate of consolidation making the
reorganisation officer. Hence, the new consolidate corp comes into existence and the constituent corporations are dissolved and
cease to exist.

EFFECT of ineffective merger b/w FISLAI & DSLAI

 For 3rd parties, the 2 corporations are not considered as one but remain as separate corporations. Being separate entities, the
property of one cannot be considered the property of the other.
 IN THIS CASE, as far as 3rd parties are concerned, the assets of FISLAI remain as its assets and cannot be considered as belonging
to DSLAI and MSLAI even if there was a Deed of Assignment wherein FISLAI assigned its assets and properties to DSLAI, and the
latter assumed all the liabilities of the former.
 Under the Civil Code, assignment of credit must be recorded in the Registry of Property for real property. Here, the certificate of
title of the subject properties were clean and contained no annotation of the fact of assignment. So Willkom can’t be faulted for
enforcing its claim against FISLAI because the properties were still registered under its name.
 MSLAI as successor-in-interest of DSLAI has no legal standing to annul the execution of the sale over the properties of FISLAI. And
can’t cancel the title of the properties of Wilkom & Go.

Other notes related to merger cited in the case:


Steps necessary to accomplish a merger or consolidation, as provided for in Sections 76, 77, 78, and 79 of the Corporation Code:

(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any amendment, if necessary, to the
articles of incorporation of the surviving corporation, or in case of consolidation, all the statements required in the articles of incorporation
of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at least two (2)
weeks’ notice must be sent to all stockholders or members, personally or by registered mail. A summary of the plan must be attached to the
notice. Vote of two-thirds of the members or of stockholders representing two-thirds of the outstanding capital stock will be needed.
Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger or consolidation, by the corporate officers of each constituent
corporation. These take the place of the articles of incorporation of the consolidated corporation, or amend the articles of incorporation of
the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.

Notes (just in case he asks)

Novation can’t be set up as a defense by MSLAI here. Also, in novation by substitution of debtor must always be made with the
consent of the creditor. Since novation implies a waiver of the right, which the creditor had before the novation, such waiver must
be express.

 Although DSLAI (now MSLAI) assumed all the liabilities of FISLAI, that assumption didn’t result in novation. Hence, it didn’t release
FISLAI from its liability to its creditor & its properties are not exempt from execution.
 Uy (creditor) didn’t give consent to the agreement that DSLAI (now MSLAI) would assume the liabilities of FISLAI. The agreement
can’t prejudice creditor Uy. Hence, the assets that FISLAI transferred to DSLAI remained subject to execution to satisfy the
judgment claim of Uy against FISLAI and the subsequent sale of the properties by Uy to Wilkom then one of the properties to Go
can’t be questions by MSLAI.

Novation - extinguishment of an obligation by the substitution or change of the obligation by a subsequent one which extinguishes or
modifies the first, either by changing the object or principal conditions, by substituting another in place of the debtor, or by subrogating a
third person in the rights of the creditor.