Philippines: Mergers & Acquisitions

The key Philippine laws on M&A are: (a) the Corporation Code as the Philippines’ general law on corporations and M&As; (b) the Securities Regulation Code (“SRC”) which imposes additional requirements for M&As involving listed companies for the protection of stockholders; (c) the Foreign Investment Act of 1991 (“FIA”) as well as certain provisions of the Philippine Constitution and other laws which impose foreign ownership limits in certain Philippine industries; and (d) the Philippine Competition Act (“PCA”) which is a relatively recent legislation requiring merger clearances prior to the consummation or implementation of M&As.

The Securities and Exchange Commission (“SEC”) is the national government regulatory agency that implements the Corporation Code, SRC as well as the foreign ownership limits under the FIA through its regulatory power over all corporations. Regulated or nationalized industries under the FIA are defined by the Office of the President through its promulgation of the Foreign Investment Negative Lists. Under the most recent Foreign Investment Negative List (Exec. Order No. 65, S. 2018), internet businesses can now have 100% foreign equity ownership. Contracts for construction and repair of locally funded public works now have a 40% foreign equity cap which was previously set at 25%. Meanwhile, insurance adjustment companies, lending companies, financing companies, and investment houses were delisted.

The Philippine Competition Commission (“PCC”) is the regulatory and quasi-judicial agency tasked to implement the PCA. Its primary function is to review and clear M&As which meet Size of Party and Size of Transaction Thresholds. It also has jurisdiction to hear and decide cases involving the validity of M&As and penalize anti-competitive acts, such as abuse of dominant position, bid rigging and price fixing.

The Bureau of Internal Revenue (“BIR”) also plays a part in M&As through the issuance of tax clearances necessary for the transfer of shares and other assets to the acquirer. M&As involving regulated industries usually require the endorsement or approval of certain government agencies. For example, M&As involving banks require the prior approval of the Bangko Sentral ng Pilipinas (“BSP”) and is subject to the rules and procedures contained in the BSP’s Manual of Regulations for Banks.

Just like the rest of the world, the Philippines had to contend with the challenges brought by the Coronavirus disease (COVID-19) Pandemic. The Philippine Economy regressed by 9.5%, its worst since 1947.

Despite that, the harsh impacts of COVID-19 on the economy were mitigated by the government’s response to expanding public spending amid falling revenues. Public spending increased through the implementation of Republic Act No. 11494, otherwise known as the Bayanihan to Recover as One Act (Bayanihan II Act), which details the measures to stimulate and accelerate the recovery of the Philippine economy from the adverse impact brought by the pandemic.

The Philippine economy rebounded in 2021 posting a growth of 7.7% in the Fourth Quarter of 2021 resulting in a 5.6% full year growth for 2021.

The Philippine Government has also enacted various legislative measures to facilitate the Country’s recovery and take advantage of opportunities in adversity. The Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act No. 11534) was enacted on 11 April 2021 and is expected to provide medium and small private enterprises more than 1 trillion pesos worth of tax relief over the next 10 years. On 16 February 2021, President Rodrigo Roa Duterte signed into law the Financial Institutions Strategic Transfer (“FIST”) Act (Republic Act No. 11523) which allows financial institutions to perform quasi-banking functions and to offload non-performing loans and other bad assets to a Financial Institutions Strategic Transfer Corporation (“FISTC”).

As of 2021, the country retains a “BBB/Stable” ratings from Fitch Ratings, “Baa2/Stable” from Moody’s Investor Service, and a “BBB+/Stable” from Standard & Poor’s.

Most recently on 21 March 2022, President Duterte signed into law Republic Act No. 11659 which opened certain industries such as telecommunications, railways, expressways, airports, and shipping industries to 100% foreign ownership. With this new law, we expect to see a surge of foreign investments in these sectors.

The current administration’s “Build-Build-Build” program has also made a lot of headway in 2021. The National Economic Development Authority reported that at least 14 projects worth P116.1 billion would be finished by end of 2021 with 4 more projects worth P119.8 billion to be completed by June 2022.

2021 also saw a lot of acquisitions in the financial and food sectors. On 23 December 2021, UnionBank of the Philippines (“UnionBank”) and Citigroup Inc. (“Citi”) concluded a deal which saw UnionBank acquiring Citi’s consumer banking presence in the Philippines. The acquisition covers the net assets of iti’s local credit card, unsecured lending, deposit and investment businesses, as well as Citicorp Financial Services and Insurance Brokerage Philippines Inc. (CFSI), which provides insurance and investment products and services to retail customers plus a premium of PHP45.3 billion (approximately US$908 million).

In 2021, Century Pacific Food Inc. (“CNPF”) acquired the Pacific Meat Company (a player on refrigerated and plant-based food products) and Ligo Sardines (a legacy brand known for its range of high quality sardines and other marine products). Also in December 2021, Shakey’s Pizza Asia Ventures Inc. acquired the assets and intellectual property related to the “Potato Corner” franchise of the Cinco Corporation.

The recent enactment of the amendments to the Public Service Act in Republic Act No. 11659 is expected to spur movement in the telecommunications, railways, expressways, airports, and shipping industries which are now open to 100% foreign ownership.

Bayanihan 2, the Philippines’ COVID-19 response and recovery law, exempts mergers with an aggregate value of less than PHP 50 billion and entered into within two (2) years from its effectivity from 15 September 2020 are exempt from the mandatory notification requirement with the PCC. We expect more companies to conclude mergers and acquisitions within the remaining period of the exemption until September 2022.

On 5 October 2020, the PCC enacted rules on Expedited Merger review which aims to conclude the entire review process within fifteen working days from full submission of the Expedited Forms and supporting documents.

There are three general means of acquiring a publicly traded company: (a) share purchase, (b) asset purchase, and (c) statutory mergers and consolidations.

Generally, acquisitions are structured as share purchases for tax efficiency and simplicity. Contracting parties may also choose to utilize an asset purchase when the acquirer seeks to obtain only a portion of the assets of the target company or when there are risks, obligations and accountabilities of the target company which the acquirer does not want to assume.

A publicly traded company can likewise be acquired through statutory mergers and consolidations. A merger involves a business combination whereby two or more corporations merge into a single corporation which shall be one of the constituent corporations. A consolidation, on the other hand, involves a business combination whereby two or more corporations consolidate into a new single corporation which shall be the consolidated corporation.

If a person or group of persons intends to acquire at least 35% of the voting shares of a public company in one or more transactions within a 12-month period, the acquirer is required to disclose such intention and make a tender offer. Further, if a person or group of persons which already holds at least 35% of the voting shares intend to acquire more than 50% of the voting shares of a public company, a similar tender offer requirement is imposed. Under the 2015 Securities Regulation Code (“SRC”) Implementing Rules and Regulations (“SRC IRR”), which the Securities and Exchange Commission (“SEC”) the prospective acquisition of at least 15% of the equity shares of a public company triggers a disclosure action.

A company’s Articles of Incorporation (“AOI”), By-Laws, Audited Financial Statements (“AFS”), and General Information Sheet (“GIS”) are publicly available at the SEC. Under the present SEC rules, the SEC’s template GIS form now requires the disclosure of a company’s beneficial owners or any natural person/s who ultimately owns or controls the corporation, and has ultimate effective control over the corporation. The disclosure of beneficial ownership information, ensures access to adequate, accurate and current information on the beneficiaries and dominant persons behind SEC registered corporations. The disclosure would allow the PCC to promote and maintain market competition and regulate anti-competitive conduct. The SEC also required corporations to disclose its designated electronic mail and cellphone numbers to facilitate transactions with the Commission.

Publicly held companies are obligated to file annual and quarterly reports and other disclosures on material transactions or changes in management in the company with the SEC and the Philippine Stock Exchange (“PSE”) which are also publicly available. As a general rule, a target company has a good faith requirement to disclose material information to a potential acquirer. This obligation gives a potential acquirer the right to demand production of all information pertaining to the target company, except those considered by law as confidential such as proprietary information and trade secrets.

The SRC IRR also requires public disclosures by prospective acquirers or offerors of at least 15% of equity in a publicly listed company. The tender offer must disclose the (1) identity of the offerors; (2) identity of the target; (3) amount of class of securities being sought and the type and amount of consideration being offered; (4) the scheduled expiration date of the tender offer and terms for extension of the expiration date, if any; (5) exact dates when stock or security holders may exercise their right to sell or withdraw their stocks or securities, as the case may be; (6) if the offeror is not obligated to purchase all stock or securities tendered, the exact date when such stocks or securities shall be accepted on a pro rata basis or a plan in case of oversubscription; (7) confirmation by the offeror’s financial adviser that there sufficient resources to fully satisfy accepted offers; and (8) other material information required by the SEC.

The level of detail of a due diligence audit would depend on various factors such as the complexity of the operations of the target company, the trust between the contracting parties and the timeline and cost considerations for the M&A.

M&A would usually involve a legal, financial and technical due diligence audit. The legal due diligence would cover corporate and commercial matters, taxation, regulatory matters, material contracts, properties and assets, labor and litigation, and intellectual property.

As a general rule, the Board of Directors (“BOD”) is the central repository of all corporate powers although certain management powers may be delegated to executive or management committees. The extent of delegated powers of executive or management committees are provided for by the by-laws.

In general, a majority vote by the BOD is all that is required to enable the corporation to transact. Shareholders’ approval is required in extraordinary corporate acts such as: (a) extension or shortening of corporate term, (b) increasing or decreasing authorized capital stock, (c) incurring, creating, or increasing bonded indebtedness, (d) denying pre-emptive rights, (e) selling, disposing, leasing, encumbering all or substantially all of corporate assets, (f) investing in another corporation or business or any purpose other than in the primary purpose, (g) declaring stock dividends, (h) entering into management contracts, (i) amending the AOI, (j) adopting or repealing the by-laws, (k) delegating to the board the power to amend the by-laws, (l) fixing the issued value price of shares, and (m) mergers and consolidations.

Directors of a corporation have a fiduciary duty imposed by law to the stockholders. This includes the duty to exercise utmost good faith in all transactions relating to their functions as directors, the duty to act for the benefit of the corporation and not for their own benefit.

In light of this fiduciary duty, directors of a target company have also the duty not to engage in insider trading as penalized under the SRC. Directors have broad access to non-public and undisclosed information regarding M&As and other material corporate transactions. Their fiduciary duty mandates that they should not take advantage of such information to the detriment of the corporation or to unjustly enrich themselves at the expense of stockholders. Controlling shareholders are also bound by the same prohibition against insider trading.

The rights of a stakeholder will depend on their relationship with the corporation (e.g. whether they are stockholders, employees or otherwise). Generally, the right of a stakeholder is determined by contract with the corporation. In the absence of a contract, stakeholders must invoke a right conferred by law otherwise they have no specific approval, consultation or other similar rights. For publicly-listed companies, stakeholders have their appraisal right (to withdraw or sell their shares or securities). They are also entitled to be given financial statements (audited or interim), information concerning disagreements with accountants, management’s plans of operation, disclosures concerning the company’s directors or executive officers, market price and dividends on the company’s common shares, and compliance with corporate governance policies.

M&A agreements usually contain conditions attached to their execution and/or consummation as may be stipulated by the parties. Binding offers are usually submitted to the target company or selling shareholders after the conduct of due diligence. Proposed actions to rectify or mitigate material adverse findings discovered through a due diligence audit are made conditions precedent to the signing of the definitive agreement or conditions precedent to closing. In addition, the required government approvals for certain transactions are also included as conditions precedent.

If the transactional value of or the size of the parties in a merger or acquisition breaches the notification threshold under the PCA, prior notification to and clearance from the PCC is a statutory condition precedent for the validity of an M&A agreement. Failure to comply with this requirement renders the M&A void. For M&A transactions involving regulated industries such as banks, insurance companies, public utilities and the like, the endorsement or approval of appropriate government regulatory agency is usually a condition before an M&A agreement could be executed or consummated.

Preliminary agreements which impose reciprocal obligations to negotiate in good faith and confidentiality obligations provide a form of lock-up as the acquirer negotiates with the target company. Break-up fees are also becoming more common in M&A agreements as a deal exclusivity-securing feature. The parties may stipulate that if a deal fails to proceed to closing, the party causing the failure will be liable to pay the other party a “break-up fee.” This feature potentially deters parties from conveniently reneging on their deal, especially if the break-up fee involves a substantial amount.

Other than break-up fees, deal protection and cost coverage mechanisms are uncommon features of M&A agreements in the Philippines. There is a perception that deal negotiations entail a measure of risk and that failure to arrive at an agreement is not actionable unless there is bad faith.

While shares of stocks and other non-monetary properties are valid considerations under the law, cash is still the most preferred consideration for simplicity and efficiency. If stocks or non-monetary properties are used as consideration, current SEC rules and regulations require the valuation or appraisal of these assets to guard against the issuance of watered stocks prohibited by the Corporation Code.

If a person or group of persons intends to acquire at least 35% of the voting shares of a public company in one or more transactions within a 12-month period, the acquirer is required to disclose such intention and make a tender offer. Further, if a person or group of persons which already holds at least 35% of the voting shares intend to acquire more than 50% of the voting shares of a public company, a similar tender offer requirement is imposed. Under the 2015 SRC Implementing Rules and Regulations, which the SEC began enforcing in March 2016, the acquisition of at least 15% of the equity shares of a public company or a corporation with assets worth at least PhP 50 million, and 200 shareholders with at least 100 shares each, triggers a disclosure action.

For transactions covered by the mandatory tender offer rule, the public disclosure is made prior to the negotiations since the SRC mandates the acquirer to first publish all initial requests, invitations, or tender offers.

For transactions breaching the Size of Party and Size of Transaction thresholds under the PCA’s implementing rules, the parties to the M&A are required to send a notification of the merger and await clearance or the lapse of the statutory period before the execution of the definitive agreements relating to the transaction. The fact of that a notification had been filed for a proposed M&A will be published by the PCC. The disclosure of specific details on the M&A is prohibited. Further, any confidential business information submitted by the parties to the PCC shall not be disclosed, unless consented to by the parties, or required to be disclosed by law or by a valid order of a competent court.

At present, Philippine laws do not impose any maximum time period for negotiations or due diligence.

Generally, the parties to an M&A transaction involving a private company are free to fix the price for shares in a target company. Nonetheless, it would be prudent to fix the share price at the fair market value (“FMV”) as there have been instances in recent years when the BIR have imposed Donor’s tax on the difference between the FMV and the selling price. We hasten to point out, however, that this risk has been mitigated by recent amendments to the Tax Code.

In the case of a mandatory tender offer, the 2015 SRC Implementing Rules and Regulations provide guidelines for the valuation on shares in order to protect the public.

A survey of the Corporation Code, BSP manuals, PCA, SRC, and respective IRRs would reveal that there is no hard prohibition against target companies providing financial assistance, provided that such is done in the best interest of the company and is performed in accordance with the fiduciary duties of the directors and officers of the company.

Care must be taken, however, that any form of financial assistance will not color the deal as an attempt to form a combination in restriction of trade that will substantially lessen or restrict competition in the relevant market.

Generally, the governing law for acquisitions is the PCA. Nevertheless, Philippine law on contracts (the Civil Code of the Philippines or Republic Act No. 386) and the Revised Corporation Code allows parties broad independence on negotiating and agreeing to acquisitions based on contractual stipulations subject to recognized limitations. For example, for acquisitions of real property, it is customary that the law governing the place where the property is found shall be followed. Parties are generally permitted to stipulate as that governing law shall be the law of the place where the judicial enforcement of the M&A will be sought in case of dispute (e.g., the law governing the target corporation). Nevertheless, Philippine law has a preference for stipulating Philippine law as the governing law for transactions. For example, Section 88 of the Philippine Intellectual Property Code makes it mandatory for acquisitions involving intellectual property rights to stipulate Philippine law as the governing law.

If the transaction is covered by the mandatory tender offer rule under the SRC, the buyer must produce a tender offer report containing the terms of the acquisition, among other information. The agreements between the target company, the buyer, and other stockholders, in relation to the transaction, must also be attached to the tender offer report. The buyer is likewise required to produce a report of its equity holdings in the target company. The buyer, together with the seller, also need to file a compulsory notification with the PCC if the notification thresholds under the PCA are met.

The PCC also publishes merger decisions at the conclusion of compulsory notification and review processes or motu proprio merger reviews under the PCA. The merger decisions are available at the PCC’s website and generally shall limit itself to disclosing the following non-confidential information: (a) the fact of the merger itself; (b) information that relates to the business of any of the merger parties but is not commercially sensitive in the sense that disclosure would cause harm to the business; (c) information that reflects the merger parties’ views of how the competitive effects of the merger could be analyzed; (d) information that is general knowledge within the industry, or is likely to be verified by any diligent market participant or trade, finance or economic expert; and (e) the consequent decision of the PCC on whether to allow or prohibit the merger.

Documentation requirements vary depending on the type of merger and acquisition transactions entered into by the contracting parties. In practice, a definitive agreement is executed to document final terms and conditions of the transaction, including the transaction structure, price, and conditions precedent to closing. Once the parties completely comply with the conditions precedent, an implementing deed or document is executed to consummate the transaction.

A share acquisition typically uses a Share Purchase Agreement which is implemented by a Deed of Absolute Sale of Shares of Stock. For an asset acquisition, parties usually sign an Asset Purchase Agreement which is consummated by the execution of a Deed of Absolute Sale or Deed of Assignment.

Mergers and consolidations require a plan of merger or consolidation which shall be approved by the board of directors and stockholders of each of the constituent corporations. After the approval of the plan of merger or consolidation, articles of merger or consolidation shall be executed by each of the constituent corporations and submitted to the SEC for approval. Banks, building and loan associations, trust companies and other financial intermediaries, insurance companies, public utilities, educational institutions, and other corporations governed by special laws must first obtain the favorable endorsement of the appropriate government agency for the said merger or consolidation.

Taxes are generally imposed on the sale or transfer of shares or assets, and the tax rate depends on the type, utilization and other qualities of these shares or assets. Under Revenue Memorandum Order No. 15-2003 and Revenue Regulations No. 06-08, a Certificate Authorizing Registration (“CAR”) issued by the BIR is required before a Corporate Secretary can register the transfer of shares of stock in the corporate books or before the Registry of Deeds can issue a new title in connection with a transfer of land. Nevertheless, a CAR is not required for the sale or transfer of movable property.

The sale of shares of stock is subject to a capital gains tax. For the sale of assets, the taxes imposed would depend on whether the asset is considered real property and whether such asset is considered an ordinary asset or capital asset.

The sale of real property considered as a capital asset is subject to a capital gains tax. On the other hand, the sale of real and other properties considered as ordinary assets is subject to corporate income tax and value added tax, and other taxes and fees depending on the type of assets sold.

Mergers and consolidations are generally structured as tax-free transactions pursuant to the Philippine Tax Code. Nonetheless, a ruling from the BIR needs to be obtained in order to implement the tax-free transfer of shares.

While hostile bids are permitted in the Philippines, they are not common given that shares in most Philippine companies are held by only a few shareholders who are usually related. In addition, only an extremely small percentage of active Philippine companies are listed on the PSE. Hence, the usual hostile takeover methods of engaging in a proxy fight or making an irresistible tender offer generally do not find application. Nevertheless, there have been instances of high-profile hostile bids in the past decade, such as First Pacific’s takeover of the Manila Electric Company and the SM Group’s takeover of Equitable-PCI Bank and the takeover of the Medical City.

The general rule is that directors of a target company can seek injunctive judicial remedies by filing an intra-corporate case before a commercial court. They can also petition the enforcement of a mandatory tender offer rule and nullify share purchases made in violation of black letter law. They can likewise employ the defense strategies such as the crown jewel defense, the white knight defense, the golden parachute, and the pac-man defense.

As noted under our answer to Question 15, if a person or group of persons intends to acquire at least 35% of the voting shares of a public company in one or more transactions within a 12-month period, the acquirer is required to disclose such intention and make a tender offer. Further, if a person or group of persons which already holds at least 35% of the voting shares intend to acquire more than 50% of the voting shares of a public company, a similar tender offer requirement is imposed. Under the 2015 SRC Implementing Rules and Regulations, which the SEC began enforcing in March 2016, the acquisition of at least 15% of the equity shares of a public company triggers a disclosure action.

Under certain instances, minority shareholders may exercise their appraisal right. It is a right to demand payment from the corporation of the fair value of their shares after dissenting from certain corporate actions involving fundamental changes in corporate structure, e.g. amendments of the AOI; changing or restricting the rights of any stockholder or class of shares; authorizing preferences in any respect superior to those of outstanding shares of any class; extending or shortening the term of corporate existence; sale, lease, exchange, transfer, mortgage, pledge, or other disposition of all or substantially all of the corporate properties; merger or consolidation; and investment of funds in another corporation or business or for any purpose other than its primary purpose.

Minority shareholders also have the right to vote cumulatively and unite their votes in the election of BOD members. If a director is elected due to the cumulative votes of the minority shareholders, he/she cannot be removed from the board without cause.

For listed companies, minority shareholders are protected through the tender offer rules previously discussed which grant minority shareholders the opportunity to sell their shares in the event of a significant change in ownership of the company.

At present, Philippine laws do not have any mechanism for the compulsory acquisition of minority stakes.