SME BANK INC. vs. PEREGRIN T.

DE GUZMAN, ELICERIO GASPAR

FACTS:

In this case, Respondent employees Elicerio Gaspar (Elicerio), Ricardo Gaspar, Jr.
(Ricardo), Eufemia Rosete (Eufemia), Fidel Espiritu (Fidel), Simeon Espiritu, Jr. (Simeon, Jr.),
and Liberato Mangoba (Liberato) were employees of Small and Medium Enterprise Bank,
Incorporated (SME Bank). Originally, the principal shareholders and corporate directors of the
bank were Eduardo M. Agustin, Jr. (Agustin) and Peregrin de Guzman, Jr. (De Guzman). SME
Bank experienced financial difficulties. To remedy the situation, the bank officials proposed its
sale to Abelardo Samson (Samson). Negotiations ensued, and a formal offer was made to
Samson. Through his attorney-in-fact, Tomas S. Gomez IV, Samson then sent formal letters
(Letter Agreements) to Agustin and De Guzman, demanding the following as preconditions for
the sale of SME Bank’s shares of stock:

1. You shall guarantee the peaceful turn-over of all assets as well as the peaceful
transition of management of the bank and shall terminate/retire the employees we mutually
agreed upon, upon transfer of shares in favor of our group’s nominees;

2. All retirement benefits, if any of the above officers/stockholders/board of directors are

Agustin and De Guzman accepted the terms and conditions proposed by Samson and
signed the conforme portion of the Letter Agreements. Simeon Espiritu (Espiritu), then the
general manager of SME Bank, held a meeting with all the employees of the head office and of
the Talavera and Muno branches of SME Bank and persuaded them to tender their
resignations, with the promise that they would be rehired upon reapplication. His directive was
allegedly done at the behest of petitioner Olga Samson. Relying on their representation All of
them tendered their resignation, Eufemia first tendered resignation then after tendered
retirement. Agustin and De Guzman signified their conformity to the Letter Agreements and sold
86.36% of the shares of stock of SME Bank to spouses Abelardo and Olga Samson. Spouses
Samson then became the principal shareholders of SME Bank, while Aurelio Villaflor, Jr. was
appointed bank president. As it turned out, respondent employees, except for Simeon, Jr., were
not rehired. After a month in service, Simeon, Jr. again resigned Respondent-employees
demanded the payment of their respective separation pays, but their requests were denied.
Aggrieved by the loss of their jobs, respondent employees filed a Complaint before the National
Labor Relations Commission (NLRC Regional Arbitration Branch No. III and sued SME Bank,
spouses Abelardo and Olga Samson and Aurelio Villaflor (the Samson Group) for unfair labor
practice; illegal dismissal; illegal deductions; underpayment; and nonpayment of allowances,
separation pay and 13th month pay. Subsequently, they amended their Complaint to include
Agustin and De Guzman as respondents to the case. The labor arbiter ruled that the buyer of an
enterprise is not bound to absorb its employees, unless there is an express stipulation to the
contrary. However, he also found that respondent employees were illegally dismissed, because
they had involuntarily executed their resignation letters after relying on representations that they
would be given their separation benefits and rehired by the new management.
 Accordingly, the labor arbiter decided the case against Agustin and De Guzman, but
dismissed the Complaint against the Samson Group. Thus ordering Agustin and De Guzman to
pay separation pay to the employees. Respondent employees, Agustin and De Guzman brought
separate appeals to the NLRC. Respondent employees questioned the labor arbiter’s failure to
award backwages, while Agustin and De Guzman contended that they should not be held liable
for the payment of the employees’ claims. The NLRC found that there was only a mere transfer
of shares – and therefore, a mere change of management – from Agustin and De Guzman to
the Samson Group. As the change of management was not a valid ground to terminate
respondent bank employees, the NLRC ruled that they had indeed been illegally dismissed. It
further ruled that Agustin, De Guzman and the Samson Group should be held jointly and
severally liable for the employees’ separation pay and backwages, CA affirming NLRC decision.
Hence, this appeal.

ISSUE

Whether or not respondent employees were illegally dismissed and, if so, which of the
parties are liable for the claims of the employees and the extent of the reliefs that may be
awarded to these employees?

RULING:

Petition was partially granted. Petitioner bank also argues that, there being a transfer of
the business establishment, the innocent transferees no longer have any obligation to continue
employing respondent employees, and that the most that they can do is to give preference to
the qualified separated employees; hence, the employees were validly dismissed. The
argument is misleading and unmeritorious. Contrary to petitioner bank’s argument, there was no
transfer of the business establishment to speak of, but merely a change in the new majority
shareholders of the corporation. There are two types of corporate acquisitions: asset sales and
stock sales. In asset sales, the corporate entity sells all or substantially all of its assets to
another entity. In stock sales, the individual or corporate shareholders sell a controlling block of
stock to new or existing shareholders. In asset sales, the rule is that the seller in good faith is
authorized to dismiss the affected employees, but is liable for the payment of separation pay
under the law. The buyer in good faith, on the other hand, is not obliged to absorb the
employees affected by the sale, nor is it liable for the payment of their claims. The most that it
may do, for reasons of public policy and social justice, is to give preference to the qualified
separated personnel of the selling firm.

In contrast with asset sales, in which the assets of the selling corporation are transferred
to another entity, the transaction in stock sales takes place at the shareholder level. Because
the corporation possesses a personality separate and distinct from that of its shareholders, a
shift in the composition of its shareholders will not affect its existence and continuity. Thus,
notwithstanding the stock sale, the corporation continues to be the employer of its people and
continues to be liable for the payment of their just claims. Furthermore, the corporation or its
new majority shareholders are not entitled to lawfully dismiss corporate employees absent a just
or authorized cause. In the case at bar, the Letter Agreements show that their main object is the
acquisition by the Samson Group of 86.36% of the shares of stock of SME Bank. Hence, this
case involves a stock sale, whereby the transferee acquires the controlling shares of stock of
the corporation. Thus, following the rule in stock sales, respondent employees may not be
dismissed except for just or authorized causes under the Labor Code. The rule should be
different in Manlimos, as this case involves a stock sale. It is error to even discuss transfer of
ownership of the business, as the business did not actually change hands.
 The transfer only involved a change in the equity composition of the corporation. To
reiterate, the employees are not transferred to a new employer, but remain with the original
corporate employer, notwithstanding an equity shift in its majority shareholders. This being so,
the employment status of the employees should not have been affected by the stock sale. A
change in the equity composition of the corporate shareholders should not result in the
automatic termination of the employment of the corporation’s employees. Neither should it give
the new majority shareholders the right to legally dismiss the corporation’s employees, absent a
just or authorized cause.
The right to security of tenure guarantees the right of employees to continue in their
employment absent a just or authorized cause for termination. This guarantee proscribes a
situation in which the corporation procures the severance of the employment of its employees –
who patently still desire to work for the corporation – only because new majority stockholders
and a new management have come into the picture. This situation is a clear circumvention of
the employees’ constitutionally guaranteed right to security of tenure, an act that cannot be
countenanced by this Court. We therefore see it fit to expressly reverse our ruling in Manlimos
insofar as it upheld that, in a stock sale, the buyer in good faith has no obligation to retain the
employees of the selling corporation; and that the dismissal of the affected employees is lawful,
even absent a just or authorized cause.