Under Section 39 of the Revised Corporation Code (RCC), a corporation may, by a majority vote of its board of directors or trustees, sell or otherwise dispose of its property and assets, upon such terms and conditions and for such consideration as its board of directors or trustees may deem expedient. However, if the sale involves a sale of all or substantially all of the corporation’s properties and assets, including its goodwill, the vote of the stockholders representing at least two-thirds of the outstanding capital stock, or at least two-thirds of the members shall also be required.
The RCC considers a sale to cover substantially all the corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. In practice, this is computed based on the corporation’s net asset value, as shown in its latest financial statements.
The Securities and Exchange Commission’s Office of the General Counsel (SEC-OGC) explained in several opinions that in interpreting Section 39, it has been guided not by the number or volume of the assets transferred but by the effect of such a transfer on the corporation’s business. As such, in case of any disposition of assets which does not render the corporation incapable of continuing its business or which is necessary in the ordinary course of business, the sale may not require stockholders’ approval. To determine if the sale consists of all or substantially all of the corporation’s assets, or whether it is made in the ordinary course of business, the test is not the amount involved but rather, the nature of the transaction. This view was recently reiterated in SEC-OGC opinion dated Jan. 31, 2019, stating that “the litmus test to determine the applicability of (Section 39) would be the capacity of the corporation to continue its business after the sale of substantially all its assets.”
However, on April 15, 2020, the SEC issued Memorandum Circular No. 12, Series of 2020 (SEC MC 12-2020) and adopted the following rules for publicly listed companies:
1. The sale or disposal of at least 51% of the corporation’s total assets shall be considered as sale of all or substantially all of corporate property and assets, whether such sale accrued in a single transaction or in several transactions taking place within one year from the date of the first transaction (aggregate sale transactions).
2. In sale of corporate assets falling under the preceding paragraph, the vote of the stockholders representing at least two-thirds of the outstanding capital stock shall be required prior to the execution of the sale transaction.
3. In aggregate sale transactions, shareholder approval shall be required for the sale transaction that breaches the 51% corporate asset threshold.
4. Whether the sale amounts to at least 51% of the corporation’s assets is determined based on its total assets as shown in its latest audited financial statements; the computation may also be based on the latest quarterly financial statement or a special purpose financial statement prepared in connection with the transaction.
Unlike the previous SEC-OGC opinions, SEC MC 12-2020 considers a sale to involve all or substantially all of the corporate assets, based on the amount of assets to be disposed, rather than the nature or effect of such disposition. Under this view, stockholder approval is required for as long as the sale involves at least 51% of the corporate assets, even if such disposition will not render the corporation unable to continue its business. Thus, a quantitative test is now used to determine whether a sale of corporate assets requires stockholder approval, as opposed to the qualitative test supported by previous opinions.
Note that the 51% threshold is imposed by SEC MC 12-2020 only to define a sale of “substantially all the corporate assets” for which stockholder approval is required. This does not seem to restrict the exercise of the right given by the RCC under Section 39 to the directors to nevertheless dispense with stockholder approval if the subject disposition is reasonably necessary in the usual and regular course of business of the corporation or if the proceeds of the disposition of the assets shall be appropriated for the conduct of its remaining business.
As such, it appears that even if a sale of corporate assets exceeds the 51% threshold, the directors may nevertheless exercise discretion, justified by sound business judgment and the consideration of the purposes for which the corporation was established as well as its express and implied powers, in determining whether a disposition is necessary in the ordinary course of business and consequently dispensing with the need for stockholder approval.
Only time and practice will tell if the newly imposed quantitative test on the sale of corporate assets will indeed improve corporate governance and protect minority investors.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes, and not offered as, and does not constitute, legal advice or legal opinion.
Nestor Fernando T. Siazon is an Associate of the Corporate and Special Projects Department of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).