Published 3 June 2019, The Daily Tribune

The counterpart of civil marriage in corporate parlance is corporate merger. Merger is a form of corporate corporation whereby two corporations become a single corporation. The corporation that acquires the rights and liabilities of the other corporation while retaining its own juridical existence is called the surviving corporation. The other party is referred to as the absorbed or acquired corporation. What if the acquired corporation, prior to the merger, incurred an obligation beyond the contemplation of the surviving corporation, is the latter, despite its good faith and lack of participation in the transaction, bound to assume such obligation? Is it similar to a civil marriage which imposes certain moral and legal obligation to accept the defects and limitations of one’s spouse?

Spouses Francis and Betty are engaged in printing business. BSA Bank managers visited the Spouses’ office and discussed various loan and credit facilities offered by their bank. In view of the Spouses’ business expansion plans and the assurances made by BSA’s managers, they applied for the bank-offered credit facilities. Thereafter, they executed a real estate mortgage (REM) over their property in favor of BSA as security for the credit line.

With regard to the term loan, only part of the credit was released by BSA. The Spouses  then refused to pay the amortizations due on their term loan. BSA cancelled the credit line.  Later on, BF Savings Bank (BF Bank) merged with BSA and thus, acquired all the latter’s rights and assumed its obligations. BF Bank filed a petition for extrajudicial foreclosure of the REM for the Spouses’ default in the payment of their term loan.

The Spouses instituted an action for damages against BF Bank with prayer for injunctive relief to enjoin the foreclosure. RTC rendered a decision  directing BF Bank to pay damages to the Spouses.

BF Bank thereafter appealed the decision.  Is BF Bank liable for the damages caused by BSA previous to the merger?  BF Bank insists that it acted in good faith when it sought the extrajudicial foreclosure of the mortgage and that it was not responsible for acts committed by its predecessor, BSA.

The Supreme Court ruled that good faith is not an excuse to exempt BF Bank from the effects of a merger. Under the law, the surviving corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving corporation had itself incurred such liabilities or obligations; and any pending claim, action, or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving corporation. The rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired by such merger.  ( Section 80 of the Corporation Code and retained under the Revised Corporation Code)

Applying the pertinent provision of the Corporation Code, BF Bank did not only acquire all the rights, privileges and assets of BSA but likewise acquired the liabilities and obligations of the latter as if BF Bank itself incurred it. Moreover, the Supreme Court observed that Section 1(e) of the Articles of Merger mirrors the same statutory provision. Since BSA incurred delay in the performance of its obligations and subsequently cancelled the omnibus line without the Spouses’ consent, its successor BF Bank cannot be permitted to foreclose the loan for the reason that its successor BSA violated the terms of the contract even prior to the  Spouses’ justified refusal to continue paying the amortizations. As such, BF Bank is liable for BSA, its predecessor.

In civil marriage, there is a period of courtship to enable potential couple to know each other, determine compatibilities and forge a decision on the willingness or capacity to accept the other despite character defects because they are trumped anyway, objectively or subjectively, by overwhelming positive traits.  But sometimes, other defects surface only or become more pronounced during the marriage. The love and affection between the spouses spur them to overlook these defects and accentuate the positive traits of the other. The same principle applies to corporate merger. Despite the due diligence to determine the extent of liabilities of the absorbed corporation, other obligations arise or are discovered only after the merger. The surviving corporation should  simply accept them, as statutory or contractual imposition, but, in the same breath, learn to maximize the positive synergies.

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