Appraisal right

Published August 5, 2021, 7:00 AM

by Atty. Jun De Zuñiga


A corporation generally cannot purchase its own shares because to do so would be violative of the “trust funds” doctrine. The capital stocks are deemed “trust funds” to be held unimpaired for the benefit of creditors and such would also mean that a stockholder cannot demand payment of his equity investment. There is no debtor-creditor relationship between the corporation and its stockholders.

     What is then the remedy of a stockholder who desires to exit from the corporation because he disagrees with its decisions? In big corporations whose stocks are actively traded in the exchanges, the stockholder can easily exit by selling his shares. However, this may not be a practical option where the corporation is a small one and there is no ready market for its shares (De Leon, The Corporation Code, p. 656). This is sometimes referred to as the “hold-up problem” (Herbosa and Recalde, The Revised Corporation Code, p. 302).

     Nonetheless, the law, specifically Section 80 of the Revised Corporation Code, grants a narrow corridor for such exit under what is called the “appraisal right,” which can be exercised only under any of the following circumstances: (1) in case of an amendment to the articles which changes or restricts the rights of stockholders or authorizes preferences superior to those of outstanding shares, or extends or shortens the term of corporate existence; (2) in case of disposition of all or substantially all of the corporate assets; (3) in case of merger or consolidation; and (4) in case of investment of corporate funds for any purpose than the primary purpose of the corporation.

     The exercise of the appraisal right should not prejudice creditors. The corporation may not pay and acquire shares, unless it has sufficient unrestricted retained earnings. Thus, its exercise is practically useless in a financially distressed corporation (Herbosa and Recalde, ibid.). The financial capacity of the corporation to pay is therefore a prerequisite for the exercise of the appraisal right.

     As explained by the Supreme Court, the appraisal right is exercised by any stockholder who has voted against the proposed corporate action by making a written demand on the corporation within 30 days after the date on which the vote was taken for the payment of the fair value of his shares. The failure to make the demand within the period is deemed a waiver of the appraisal right. If there can be no agreement on such fair value within 60 days, the fair value shall be appraised by 3 disinterested persons, one of whom shall be named by the stockholder, another by the corporation, and the third by the two thus chosen. The award by the majority of the appraisers shall be final and payment shall be made within 30 days from the award. Upon payment, the stockholder shall forthwith transfer his shares to the corporation.

     All rights accruing to the withdrawing stockholder, including voting and dividend rights, shall be suspended in the meantime until the purchase of the shares by the corporation, except the right of such stockholder to receive payment of the fair value of the shares. Once the stock certificates are cancelled and transferred, the rights of the transferor as a dissenting stockholder shall cease and the transferee shall have all the rights of a regular stockholder, including the right to the dividends which accrued on the shares. The exit of the dissenting stockholder from the corporation is thereby completed.

  *       *     *

The above comments are the personal views of the writer. His email address is [email protected]