Shareholders' appraisal and the trust fund doctrine
For Law's Sake

Shareholder’s appraisal right & the Trust Fund Doctrine

/ 02:05 AM January 23, 2024

Stock corporations are artificial beings created by law to conduct business activities. Among the key characteristics and aspects of corporations are ownership of shares of stock (for stock corporations) and a board of directors.

Shareholders in stock corporations possess ownership through shares, which symbolize their stake in the company. Each share of stock has an unit which is the par value. The more shares a stockholder owns, the greater their percentage of ownership of the corporation.

As artificial entities, corporations have a board of directors which exercise the corporate powers, conduct all business, and control all properties of the corporation. (Sec. 22, Revised Corporation Code)


Shares of a corporation may be owned by several entities and individuals, such that it is not uncommon for stockholders and directors to disagree among themselves in how the corporation is to be run.


Accordingly, the Revised Corporation Code (RCC) provides that shareholders who object or “dissent” to decisions and actions approved by the other shareholders may, in certain instances, exercise their Appraisal Right and demand for a buy-out of their ownership and shares of stock where upon payment of their shares they cease to be shareholders of the corporation.

The appraisal right is available in the following instances:

a. In case an amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;

b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets;

c. In case of merger or consolidation, and

d. In case of investment of corporate funds for any purpose other than the primary purpose of the corporation, except when it is reasonably necessary to accomplish the corporation’s primary purpose then approval by stockholders is not necessary. (Secs. 41 & 80, RCC)


The RCC provides the instances when a corporation may acquire its own shares:

a. To eliminate fractional shares arising out of stock dividends;

b. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale, and

c. To pay dissenting or withdrawing stockholders entitled to payment for their shares.

Simply put, the process is that the dissenting stockholder, who votes against a proposed corporate action, makes a written demand on the corporation for the payment of their fair value within thirty days from the date on which the vote was taken.

The acquisition cost by the corporation is the fair value of the shares of stock. In case of disagreement on the fair value, an appraisal committee shall be constituted, composed of three disinterested persons who shall determine the fair value of the shares upon which the corporation shall pay the dissenting shareholder within 30 days from the award by the appraisal committee.

Upon payment, the shareholder transfers their share to the corporation and ceases to be a shareholder. In the event that the value of the shares of stock is not paid within 30 days, the voting and dividend rights of the dissenting shareholder shall be reinstated. (Sec. 82, RCC)

The limitation to such buy-back is that the corporation must have unrestricted retained earnings in its books to cover the shares to be acquired. (Sec. 40, RCC)

In a case decided by the Supreme Court, the Sps. Turner held 1,010,000 shares of stock in Lorenzo Shipping Corp. In June 1999, the corporation decided to amend its articles of incorporation to remove the stockholders’ pre-emptive rights, and this was objected to by the Sps. Turner who exercised their appraisal right and demanded payment of the value of their shares in the amount of P2,298,760. The corporation did not agree to the valuation and formed an appraisal committee. On Oct 27, 2000, the committee valued and awarded P2,565,400 for the shares of Sps. Turner. (Sps. Turner v. Lorenzo Shipping Corp, G.R. No. 157479, Nov 24, 2010)

Sps. Turner then demanded payment from the corporation which refused to pay on the ground that at the time of the demand for appraisal, the corporation did not have any retained earnings as its financial statements at end 1999 showed a deficit of P72,973,114. This prompted the Sps. Turner to file a complaint with the Regional Trial Court (RTC).

The RTC decided in favor of the Sps. Turner, holding that the appraisal committee had determined the value of the shares of stock, and that while it was true that at the time of demand, the corporation had a deficit, the quarterly financial statement submitted by the corporation to the Securities and Exchange Commission as of March 21, 2002 showed it had a surplus of retained earnings in the amount of P11,975,490, thereby it had sufficient funds to cover the acquisition of the shares of the Sps. Turner.

The RTC stated that it would be a very narrow interpretation to hold that the requirement of unrestricted retained earnings must exist at the time of demand. In this case, the corporation later had a surplus and retained earnings such that the corporation could pay for and acquire the appraised shares. The only restriction is that there must be sufficient funds to cover the creditors after the dissenting stockholder is paid.

The Supreme Court, agreeing with the Court of Appeals, reversed the RTC and ruled in favor of the corporation denying the claim for payment by the Sps. Turner.

While the court found that the Sps. Turner had the right to exercise their appraisal right due to their dissent to the amendment of the articles of incorporation of the corporation, the court also explained that the corporation must have unrestricted retained earnings to cover the payment of the shares at the time of demand, or in this case award by the appraisal committee.

This is based on the Trust Fund Doctrine which means the capital stock, property, and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors.

Creditors are preferred over stockholders in the distribution of corporate assets. They have the right to assume that the board of directors will not use the assets of the corporation to purchase its own stock for as long as the corporation has outstanding debts and liabilities and any disposition of corporation funds and assets shall be void.

At the time the Sps. Turner made their demand for payment of their shares in 1999, the corporation did not have unrestricted retained earnings and was at a deficit of P72,973,114. This was also the case on Oct 27, 2000, when the appraisal committee valued and awarded the shares of Sps. Turner in the amount of P2,565,400. Thus, payment of the value of the shares of the Sps. Turner could not be legally made.

When the complaint was filed on Jan 22, 2001, the corporation still had a deficit in its unrestricted retained earnings. It was only on March 21, 2002 when the corporation had retained earnings in the amount of P11,975,490 and on which time Sps. Turner’s appraisal right to the shares accrued or arose. Accordingly, the complaint was filed prematurely when the Sps. Turner did not have a cause of action.

More importantly, the court declared that where the corporation has no available unrestricted retained earnings in its books, the Corporation Code provides that if the dissenting stockholder is not paid the value of his shares within 30 days after the award of the appraisal committee, his voting and dividend rights shall immediately be restored.

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(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco Siao Bello & Associates Law Offices, an Arbitrator of the Construction Industry Arbitration Commission of the Philippines, and teaches law at the De La Salle University Tañada-Diokno School of Law. He may be contacted at [email protected]. The views expressed in this article belong to the author alone.)

TAGS: For Law's sake, trust fund

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