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, thus allowing 100% foreign ownership in these types of companies.

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.

According to the World Bank, the Philippines remains as one of the most dynamic economies in the East Asia and the Pacific region.  Although the adverse impact of global developments, including weak global manufacturing activity and trade, and heightened uncertainty from escalating trade tensions have hampered the growth of the Philippines’ Gross Domestic Product (GDP) by 5.9% in 2019, analysts remain optimistic that it can exponentially accelerate in early 2020. Moderate inflation, reduced interest rates, and a stable economy have been indicators of sound economic fundamentals underlying the growth of the Philippine Economy.

The expansion of fiscal and monetary policies are also expected to further GDP growth in 2020. The expected passage of the Corporate Income Tax and Incentives Rationalization Act (“CITIRA”) and revisions to the Anti-Money Laundering Act (“AMLA”) of 2001, the Human Security Act (“HSA”) of 2007, the Agri-Agra Reform Act of 2009, and the Financial Consumer Protection Bill are expected to fast-track the Philippines to achieving its first “A” credit rating in 2020.

Currently, the country has a “BBB/Stable” rating from Fitch Ratings, “Baa2/Stable” from Moody’s Investor Service, and a “BBB+/Stable” from Standard & Poor’s.

With the current administration’s “Build-Build-Build” program, the construction and infrastructure industry became the main drivers of growth in 2019. In 2020, the Government has lined-up eight infrastructure projects across the country worth Php547.6 Billion. The improvement in infrastructure has contributed to the rise of the manufacturing industry in late 2019. Manufacturing remains to be the largest industry reaching an all-time high of Php1.1 trillion by the end of 2019. The transport and logistics sector which is crucial to manufacturing growth also experienced a significant rise in activity with the completion of Asian Terminals Inc.’s Php2.5 billion expansion of the Batangas Container Terminal (“BCT”). The service industry remains to be another significant sector and posted the fastest growth in 2019, with online hiring in the Philippines registering a double-digit growth in the final three months of 2019. The Philippines remains to have an established business process outsourcing industry across South East Asia.

Energy projects and public-private partnerships in the water sector across the country have also seen a lot of spending and provides impetus to the growth of the Philippine economy. AC Energy (of the Ayala group) completed its acquisition of a 51.48% stake in Phinma Energy Corp. and is looking to expand its biomass capacity by another 200 megawatts (MW) in 2020. Further, state-led National Transmission Corp. (TransCo) expects renewable energy power plants to generate a total of 4,098,632 megawatt-hours (MWh) in 2020, 20% more than the 3,413,468 MWh projected for 2019. Of the forecast power generation, biomass plants and wind farms are expected to account for the biggest share with 1,465,170 MWh and 1,086,589 MWh, respectively.

In 2019 alone, the PCC received 44 M&A transactions, altogether worth PHP 758 billion, 22 percent higher than in 2018. The sectors with the most transactions in 2019 were manufacturing (10), real estate (8), electricity and gas (8), and finance and insurance (4).

A relatively strong macroeconomic performance and positive rankings from international credit-rating agencies shall make the Philippines more attractive to foreign investors that are keen on merging with or acquiring Philippine companies and vice-versa. The Philippine market’s attractiveness to foreign investors is expected to be bolstered by improved regulatory measures that foster business growth.

The Revised Corporation Code which took effect on February 2019 has relaxed the rules and procedure in corporate registration. This engages companies and startups to apply as a corporation, and therefore be open to and be capable of M&A. The law also introduced the concept of a One Person Corporation which removed the minimum requirement of 5 directors. The enactment of the Ease of Doing Business Act in 2018 has simplified and expedited the setting up of businesses in the Philippines by ensuring an efficient turnaround in the delivery of government services. Moreover, the expected passage of the CITIRA aims to attract greater foreign direct investment (“FDI”) and stimulate business growth. The new law, which will reduce corporate income tax  and expand incentives for investors, will help micro, small and medium enterprises (“MSMEs”) in the country as well as make the investment climate more competitive.

The present regulatory environment will continue to influence M&A in the next two (2) years. In March of 2019, the PCC has adjusted their notification thresholds by raising the value of Size of Party threshold from PHP 5 billion to PHP 5.6 billion, and the value of Size of Transaction threshold from PHP 2 billion to PHP 2.2 billion. The increase in the thresholds for M&As needing clearance from the PCC would encourage corporations to engage in M&As without PCC regulatory approval.

The PCC also undertook a number of notable decisions and actions regarding M&As in 2019. First, the PCC issued its first ever merger prohibition in January 2019, by blocking Universal Robina Corporation’s proposed acquisition of Central Azucarera Don Pedro as it would substantially lessen competition in the market for sugarcane milling services in Southern Luzon (In re: Proposed Acquisition by Universal Robina Corporation (“URC”) of Assets of Central Azucarera Don Pedro Inc. (“CADPI”) and Roxas Holdings Inc. (“RHI”), PCC Case No. M-2018-006, Comm Decision No. 03-M-021/2019). Second, the PCC continued monitoring Grab’s compliance with its commitments pursuant to Grab’s acquisition of Uber in 2018 imposing multimillion fines and ordering a refund to consumers (In re: Acquisition by Grab Holdings, Inc. and MyTaxi.PH, Inc. of the Assets of Uber B.V. and Uber Systems, Inc., PCC Case No. M-2018-001, Comm. Decision No. 33-M-012-2019).  Finally, the PCC also decided on the country’s first abuse of dominance case by the imposition of a fine and the approval of a settlement between the parties. This landmark case involved Urban Deca Homes (“UDH”), a property developer that imposed a sole internet service provider on its residents, preventing them from availing of alternative and cheaper internet service (Commission v. Urban Deca Homes Manila Condominium Corporation, PCC Case No. E-2019-001, Comm. Decision No. E-001-2019).

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 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.

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 SEC Memorandum Circular No. 17, Series of 2018 which took effect last 2019, 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.

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 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 also have 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 example, employees have the right to security of tenure under the Philippine Labor Code. Thus, the Philippine Supreme Court has ruled that employees of the constituent or acquired corporations should consent to being absorbed by the new corporation, otherwise their employment is deemed terminated and the acquiring corporation will be required to settle statutory benefits such as separation pay or retirement pay.

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 has 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.

Philippine law on contracts (the Civil Code of the Philippines or Republic Act No. 386) 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.

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.