In the Philippines, security of tenure is a constitutionally protected right, ensuring that employees can only be terminated for just or authorized causes as defined by the Labor Code. This landmark Supreme Court decision clarifies that a change in the equity composition of a corporation—specifically a stock sale—does not automatically justify the mass dismissal of employees. Employers cannot circumvent labor laws by using corporate restructuring as a guise for illegal terminations, reinforcing the importance of protecting workers’ rights during corporate transitions.

Navigating Corporate Change: Can a Stock Sale Justify Employee Dismissal?

The case of SME Bank Inc. vs. De Guzman (G.R. No. 184517 & 186641) revolves around the tumultuous transition of SME Bank’s ownership and its impact on the bank’s employees. In June 2001, facing financial difficulties, SME Bank’s principal shareholders, Eduardo M. Agustin, Jr. and Peregrin de Guzman, Jr., sought to sell the bank to Abelardo Samson. Negotiations led to a formal agreement where Samson, as a precondition for the sale, demanded the termination or retirement of employees, a term accepted by Agustin and De Guzman.

Following this agreement, the bank’s general manager, Simeon Espiritu, under alleged instruction from Olga Samson, convened a meeting urging employees to resign with promises of reemployment. Relying on these assurances, several employees, including Elicerio Gaspar, Ricardo Gaspar, Jr., Eufemia Rosete, Fidel Espiritu, Simeon Espiritu, Jr., and Liberato Mangoba, tendered their resignations or retirement letters. However, upon the completion of the stock sale, where spouses Abelardo and Olga Samson acquired 86.365% of SME Bank’s shares, most of these employees were not rehired, leading to a legal battle over their dismissal and subsequent claims for separation pay and damages.

The central legal question before the Supreme Court was whether the respondent employees were illegally dismissed and, if so, which parties should be held liable for their claims. The petitioners argued that the employees voluntarily resigned or retired, while the new management was not obligated to retain them due to the change in ownership. The Supreme Court, however, found that the employees’ resignations were not truly voluntary but were induced by false promises of reemployment. As the Court has previously stated, “resignations must be made voluntarily and with the intention of relinquishing the office, coupled with an act of relinquishment.”(Magtoto v. NLRC, 224 Phil. 210, 222-223 (1985)).

Moreover, the Court dismissed the argument that the dismissal was justified by the bank’s financial difficulties, stating that the bank failed to provide the required written notices to the employees and the Department of Labor, nor did they sufficiently prove the alleged financial reverses. The Court emphasized the critical distinction between asset sales and stock sales in corporate acquisitions. Asset sales involve the transfer of a company’s assets to another entity, which may lead to the dismissal of employees, with the seller typically liable for separation pay. In contrast, stock sales involve the transfer of shares at the shareholder level, leaving the corporation intact with its existing obligations, including those to its employees.

In this case, the transaction was a stock sale, meaning that the change in shareholders did not alter the corporation’s identity or its obligations to its employees. The Court addressed and reversed its previous ruling in Manlimos v. NLRC, which had incorrectly applied asset sale principles to a stock sale scenario. The Supreme Court clarified: “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 Supreme Court held that SME Bank, as the employer, was liable for the illegal dismissal of the employees. Additionally, the Court found Eduardo M. Agustin, Jr. and Peregrin de Guzman, Jr., the former directors, solidarily liable due to their bad faith in implementing the termination as a precondition of the sale. However, Abelardo P. Samson, Olga Samson, and Aurelio Villaflor, Jr. were absolved of personal liability, as they were not corporate directors or officers at the time of the illegal terminations. In line with established labor law principles, the illegally dismissed employees were entitled to separation pay, full backwages, moral damages, exemplary damages, and attorney’s fees.

Constructive dismissal was also a key aspect in the case of Simeon Espiritu, Jr. He was rehired after initially being asked to resign but was then given a diminished role, leading to his subsequent resignation. The Court defined constructive dismissal as “an involuntary resignation by the employee due to the harsh, hostile, and unfavorable conditions set by the employer and which arises when a clear discrimination, insensibility, or disdain by an employer exists and has become unbearable to the employee.”(Peñaflor v. Outdoor Clothing Manufacturing Corporation, G.R. No. 177114, 13 April 2010). Because this situation made his continued employment untenable, Simeon, Jr. was also deemed to have been illegally dismissed.

FAQs

What was the key issue in this case?	The primary issue was whether the employees of SME Bank were illegally dismissed following a stock sale and subsequent change in management. The Court also determined who among the involved parties should be held liable for the illegal dismissal.
What is the difference between an asset sale and a stock sale?	In an asset sale, a company sells its assets to another entity, whereas in a stock sale, the shareholders sell their shares to new owners. This case emphasizes that a stock sale does not automatically permit the termination of employees.
Can employees be dismissed due to a change in corporate ownership?	Not automatically. This decision clarifies that unless there is a just or authorized cause as defined by the Labor Code, employees cannot be dismissed solely because of a change in corporate ownership resulting from a stock sale.
What is considered a ‘just cause’ for termination?	Just causes are related to the employee’s conduct or performance, such as serious misconduct, willful disobedience, gross negligence, fraud, or commission of a crime.
What is ‘authorized cause’ for termination?	Authorized causes are economic reasons that allow termination, such as redundancy, retrenchment to prevent losses, or closure of the business.
What is ‘constructive dismissal’?	Constructive dismissal occurs when an employer creates hostile or unfavorable working conditions that force an employee to resign. The Supreme Court ruled that Simeon, Jr. experienced this when he was rehired under diminished conditions, leading to his second resignation.
Who can be held liable for illegal dismissal in a corporation?	The employer-corporation is primarily liable. Corporate directors and officers can be held solidarily liable if they acted with malice or bad faith in the termination.
What compensation are illegally dismissed employees entitled to?	Illegally dismissed employees are entitled to separation pay (if reinstatement is not feasible), full backwages, moral damages, exemplary damages, and attorney’s fees.
How does this ruling affect future corporate acquisitions?	This ruling reinforces the need for careful adherence to labor laws during corporate acquisitions, especially in stock sales, to ensure that employees’ rights are protected. It clarifies that new management cannot simply dismiss employees without just or authorized cause.

This Supreme Court ruling underscores the significance of protecting employees’ security of tenure during corporate restructuring, specifically in cases of stock sales. It clarifies that a change in corporate ownership does not provide an automatic basis for dismissing employees and emphasizes the importance of adhering to labor laws to avoid illegal dismissal. This decision serves as a crucial reminder for corporations to respect employees’ rights and ensure fair treatment during times of transition.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: SME BANK INC. VS. PEREGRIN T. DE GUZMAN, G.R. No. 184517, October 08, 2013