I OVERVIEW OF M&A ACTIVITY
There is no centralised data available on M&A in the Philippines. However, based on the general investment data compiled by the National Statistical Coordination Board (NSCB), foreign investments approved by the country’s seven investment promotion agencies amounted to 138.6 billion Philippine pesos in the last quarter of 2015.
Manufacturing remained the top industry to receive investment pledges. Electricity, gas, steam and air conditioning supply were second, followed by administrative and support service activities.
The NSCB also reported that the approved investments of foreign and Philippine nationals in the fourth quarter of 2015 totalled 332.3 billion Philippine pesos. Pledges from Philippine nationals stood at 193.7 billion Philippine pesos, which accounted for 58.3 per cent of the total approved investments during that quarter.
II GENERAL INTRODUCTION TO THE LEGAL FRAMEWORK FOR M&A
M&A is primarily governed by the Corporation Code and the Civil Code of the Philippines, as well as the Securities Regulation Code (SRC) when listed companies are involved, and the recently enacted Philippine Competition Act. Furthermore, M&A would have to comply with the nationality requirements in the Philippine Constitution, the Foreign Investments Act and other laws as applicable.
Under the Philippine Competition Act, where the value of the transaction in a merger or acquisition agreement exceeds 1 billion Philippine pesos, a notification to the Philippine Competition Commission (Commission) is required. The parties are then prohibited from consummating their agreement until 30 days after providing the notification to the Commission. An agreement consummated in violation of the mandatory notification requirement is considered void, and the parties will be held liable to an administrative fine of 1 to 5 per cent of the value of the transaction. Upon receipt of the notice and before the expiration of the 30-day period, the Commission may request further information on the transaction. This request has the effect of extending the period within which the agreement may not be consummated for an additional 60 days. In no case, however, should the total period for review by the Commission exceed 90 days from the date of the Commission’s receipt of the initial notice by the parties. When the applicable period has expired and no decision has been promulgated by the Commission, the merger or acquisition is deemed approved, and the parties may proceed to implement or consummate it.
Acquisitions in the Philippines are typically structured as share purchases, as these are generally simpler to implement and more tax-efficient. In some instances, however, an asset acquisition may be preferred, where the primary considerations are the ability to cherry-pick attractive assets and the desire to avoid being saddled with pre-existing obligations of the selling entity. A third method of acquisition is through merger or consolidation.
There is a potential need to comply with tender-offer rules if the target is a public company (such as one listed on the Philippine Stock Exchange, or PSE) and the buyer will acquire at least 35 per cent of such company’s capital stock (in one or more transactions within 12 months). It may take at least two months to prepare for and complete the tender offer.
III DEVELOPMENTS IN CORPORATE AND TAKEOVER LAW AND THEIR IMPACT
i Determination of compliance with foreign ownership ceilings
As a general rule, there are no restrictions on the extent of foreign ownership of Philippine enterprises. However, the Constitution and statutes impose ceilings on foreign equity in certain areas of economic activity, such as the ownership of land, the operation of public utilities, and the exploration, development and utilisation of natural resources. The Tenth Regular Foreign Investments Negative List (issued on 29 May 2015) enumerates some of the more important investment areas and activities that are reserved for Philippine nationals.
In this connection, the Philippine Supreme Court ruled in Wilson P Gamboa v. Finance Secretary Margarito B Teves et al 2 that compliance with the constitutional provision restricting the operation of public utilities to corporations at least 60 per cent of whose capital is owned by Philippine citizens, must be determined on the basis of the ownership of outstanding shares that are entitled to vote in the election of directors. According to the Supreme Court, other shares that are owned by Philippine citizens, but that are not entitled to vote for directors, must be disregarded, even if otherwise entitled to dividend and other rights.
The Securities and Exchange Commission (SEC) issued, in SEC Memorandum Circular No. 08-13 dated 20 May 2013, the Guidelines on Compliance with the Filipino–Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalized and Partly Nationalized Activities. These Guidelines state that, for purposes of complying with constitutional or statutory ownership requirements, both the total number of outstanding shares of stock entitled to vote in the election of directors, and the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors, must meet the required percentage of Filipino ownership.
Cases are pending before the Supreme Court in relation to Gamboa v. Teves and SEC Memorandum Circular No. 08-13.
ii Relaxation of local currency conversion requirement
Foreign direct investment (FDI) is not required to be registered with the Philippine Central Bank (BSP), unless the foreign exchange needed to service the repatriation of capital and the remittance of dividends and earnings will be purchased from the Philippine banking system. FDI may be in cash or in kind (such as machinery and equipment, raw materials). Foreign exchange funding investments must be remitted into the Philippine banking system to be eligible for registration. There is no need to convert the foreign exchange to pesos for BSP registration purposes.
iii Minimum public ownership rule
Publicly listed companies are required to maintain a minimum public ownership (MPO) of the higher rate of 10 per cent of their issued and outstanding shares, exclusive of treasury shares, or such percentage as may be prescribed by the SEC or the PSE.
Listed companies that were not MPO-compliant on or after 1 January 2013 were suspended from trading for a period of not more than six months and thereafter delisted if they remained non-compliant. A tax regulation issued in late 2012 lends teeth to this policy by providing that the sale, barter, exchange or other disposition of shares of listed companies that fail to meet the MPO will be subject to capital gains tax on the net gain realised (5 per cent on the first 100,000 Philippine pesos net gain and 10 per cent on the net gain over 100,000 Philippine pesos) and documentary stamp tax of approximately 0.375 per cent of the par value of the shares sold. In contrast, an on-exchange sale of shares in an MPO-compliant listed company is subject to a preferential stock transaction tax of just 0.5 per cent of the selling price of the shares, and is exempt from documentary stamp tax.
iv Proposal to raise threshold for tender offers
Apart from the tender offer rules in the SRC, there are no takeover regulations in the Philippines. Unlike other jurisdictions, the Philippines has not adopted ‘squeeze-out’ regulations that would allow a company (or a new investor) to compel minority shareholders to sell their shares. However, under Section 41 of the Corporation Code, a stock corporation can acquire its own shares for a ‘legitimate corporate purpose’; hence, it is possible for the majority shareholders to cause the purchase of the shares of the minority, assuming that such a purpose exists.
There is a proposal to raise the threshold for a mandatory tender offer, which is currently at 35 per cent of a class of shares in a public company.
IV FOREIGN INVOLVEMENT IN M&A TRANSACTIONS
The Philippines is situated in one of the fastest-growing regions in the world. Business confidence continues to improve based on the quarterly Business Expectations Survey conducted by the BSP.
Interest in the country has been attributed to strong macroeconomic conditions. Economic expansion in the country was 6.3 per cent in the last quarter of 2015 and is expected to continue to improve, especially with the positive outlook assigned to the country by Fitch Ratings and Standard and Poor’s. The World Economic Forum has ranked the Philippines 47th out of 140 economies in its 2015–2016 Global Competitiveness Report.
For the fourth quarter of 2015, the majority of the investments coming into the country were pledged by Japan. Its investment pledges of 39.4 billion Philippine pesos account for 28.5 per cent of the total foreign investments. Investments from Japan targeted mostly manufacturing, followed by electricity, gas, steam and air conditioning supply, and then administrative and support service activities. Second is the Netherlands, which committed 37.0 billion Philippine pesos (26.7 per cent). The United States followed, with 16.5 billion Philippine pesos (11.9 per cent).
The 39.4 billion Philippine pesos commitment of the Japan in the fourth quarter of 2015 is 58.9 per cent higher than the 20.9 billion Philippine pesos it pledged in the same period in 2014.
V SIGNIFICANT TRANSACTIONS, KEY TRENDS AND HOT INDUSTRIES
i Hot industries
The manufacturing industry maintained its edge over other areas of investment in the total amount of investments in 2015. Investment pledges in this area amounted to 134.6 billion Philippine pesos (or 54.9 per cent of the total investment pledges for 2015). Investments for manufacturing grew by 22.9 per cent, from 109.5 billion Philippine pesos in 2014.
The other top performing industries in 2015 were electricity, gas, steam and air conditioning supply, with investments of 46.5 billion Philippine pesos, or 19 per cent of the approved foreign investments, and administrative and support service activities at 22.9 billion pesos or 9.3 per cent of the total. Proposed investments in electricity, gas, steam and air conditioning supply grew sevenfold for 2015.
ii Investment priority areas
Other industries that foreign investors could consider for 2016 are those identified in the Board of Investments’ (BOI) Investment Priorities Plan (IPP). Investors in identified IPP industries are entitled to government incentives.
The eight regular priority investment areas identified in the IPP are manufacturing; agribusiness and fishery; services including creative industries and knowledge-based services; economic and low-cost housing; hospitals; energy; public infrastructure and logistics; and public-private partnership (PPP) projects.
Export activities remain a priority investment area. Other areas and activities included in the IPP are industrial tree plantation; mining; publication or printing of books; refining, storage, marketing and distribution of petroleum products; rehabilitation, self-development and self-reliance of persons with disabilities; renewable energy; and tourism.
Another list of priority projects is available from the regional BOI of the autonomous region in Muslim Mindanao.
iii Key trends
Also expected to see increased M&A activity is the banking sector, as local banks are encouraged by the BSP to merge or consolidate to be more competitive with their much larger regional counterparts. In 2014, a law was passed (namely, Republic Act No. 10641) allowing a qualified foreign bank, with BSP approval, to acquire up to 100 per cent of the voting stock of an existing bank; establish a wholly-owned banking subsidiary; or form a branch with full banking authority.
Another sector that could see increased activity is infrastructure. The government is accelerating the rollout of projects to address the country’s inadequate infrastructure, which has been identified as a constraint to economic growth. These projects include, inter alia, national roads and bridges, airports and seaports, classrooms and other educational facilities, irrigation, and potable water supply systems. According to the Philippine Department of Budget and Management, the massive infrastructure programmes for 2016 make up 5 per cent of the country’s projected gross domestic product (GDP), a figure considered as the international benchmark for infrastructure spending. The government is tapping the private sector for the financing, construction, operation, maintenance and rehabilitation of major infrastructure under its PPP programme. The Public-Private Partnership Center of the Republic of the Philippines has reported in its website that the LRT Line 6 Project, North–South Railway Project, New Bohol (Panglao) Airport, Laguindingan Airport, Davao Airport, Bacalod Airport and Iloilo Airport are some of the major ongoing PPP projects supported by the national government.3
The outsourcing industry is one of the fastest growing in the country. It is projected to reach US$27 billion in revenue by the end of 2016. The Philippines’ US$48 billion projected revenue by 2020 represents 20 per cent of the global industry value.
Within the wide range of outsourcing services available in the country, voice-based BPO services continue to dominate. However, impressive performances have also been seen in higher-value knowledge-based, non-voice services, such as software product development, animation, game development, health information management, and financial and accounting services.
VI FINANCING OF M&A: MAIN SOURCES AND DEVELOPMENTS
Private equity firms appear to be particularly interested in investing in the infrastructure, power and renewable energy sectors in the Philippines. In July 2012, the Asian Development Bank approved an equity investment in the Philippine Investment Alliance for Infrastructure fund alongside commitments from the Government Service Insurance System, which administers the Philippine state-owned pension fund, as well as a Dutch pension fund asset manager and the Macquarie group. The fund has been actively pursuing opportunities in Philippine infrastructure. In 2015, Asian Development Bank reported that its total outstanding balances and commitments to private sector transactions in the country amounted to US$150.39 million.4 It has also committed to providing loan and credit enhancement to the ongoing operations and maintenance at Tiwi and Makiling-Banahaw, the seventh and fourth-largest geothermal facilities in the world.5
Other areas of investment in which private equity groups have expressed interest include BPO and door-to-door freight businesses. Opportunities are also seen to exist in helping local family-owned enterprises either to consolidate or to diversify their business organisations.
VII EMPLOYMENT LAW
The Labour Code of the Philippines is silent on the effect of a merger on the status of the employees of the merging companies. However, under the Corporation Code, there is an automatic succession of employment rights and obligations from the surviving company to the employees of the absorbed company. The absorbed company is deemed substituted as employer, by operation of law, by the surviving company. This was confirmed by the Supreme Court in Bank of the Philippine Islands v. BPI Employees Union – Davao Chapter – Federation of Unions in BPI Unibank (2011). There, it was held that employment contracts of the absorbed company are automatically assumed by the surviving company even in the absence of an express stipulation to that effect in the articles or plan of merger.
It should be noted, however, that in an asset purchase, employment-related obligations and liabilities, as a general rule, do not extend to the acquirer. On the other hand, in a share purchase, there is no concomitant change in the relations between the employer and the employee. Thus, unless specifically carved out in the agreement between the acquirer and the seller, the acquirer generally assumes the liabilities of the corporation with respect to its employees.
VIII TAX LAW
Generally, a transfer of shares of stock in a company incorporated in the Philippines or of real property located in the Philippines is subject to income tax and other taxes. A certificate authorising registration (CAR) from the Philippine Bureau of Internal Revenue (BIR) is required before the transfer can be recorded in the stock and transfer book of the Philippine company (in the case of a sale of shares) and with the registry of properties (in the case of a transfer of real property). The CAR is a certification that all taxes on the conveyance have been paid.
The sale of other moveables within the Philippines is also subject to income tax, among other taxes. However, no CAR is required for the transfer of such assets.
The acquisition of shares in a company listed on the PSE is subject only to a stock transaction tax of 0.5 per cent of the gross selling price and is exempt from documentary stamp tax (in contrast to a capital gains tax of five per cent on the first 100,000 Philippine pesos net gain and 10 per cent on the net gain over 100,000 Philippine pesos realised by the seller, and a documentary stamp tax of approximately 0.375 per cent of the par value of the shares sold, in the case of unlisted shares). If the shares of stock in a Philippine company that are not listed at the PSE are sold at a price lower than their fair market value, the BIR may require the payment of donor’s tax from the seller, at a rate of 30 per cent if the transfer is between corporations (the rate of tax on transfers between related individuals is based on a schedule depending on the value of the donation, but the rate is also 30 per cent if between individuals who are strangers) of the difference between the fair market value of the shares and the selling price, before the BIR issues a CAR.
On the other hand, an asset acquisition from a Philippine-resident corporation may attract corporate income tax (generally at a rate of 30 per cent of the taxable income) and value added tax (generally at a rate of 12 per cent of the gross selling price), and other taxes, depending on the nature of the assets being sold.
The BIR issued Revenue Regulations No. 6-2013 in 2013, which amend the definition, under Revenue Regulations No. 6-2008 (Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets), of the fair market value of shares of stock issued by Philippine companies not listed or traded on the PSE.
The revised definition still makes reference to the book value of the shares under the latest audited financial statements (AFS) of the Philippine company. The adjusted net asset method, which is the prescribed method under Revenue Regulations No. 6-2013 for calculating the fair market value of the shares, requires the assets and liabilities of the investee corporation to be ‘adjusted to fair market values’ by taking into consideration the values under the AFS with other information available such as the report of an independent appraiser. The difference between the total assets (as adjusted) and the total liabilities (as adjusted) of the Philippine company is the fair market value of the shares.
An example set out in Revenue Regulations No. 6-2013 is the computation of the fair market value of real properties owned by the corporation that issued the shares sold. The adjusted net asset method requires the use of the highest figure for the fair market value of each real property by comparing the fair market value:
- a reported as the book value under the AFS of the investee corporation;
- b as determined by the Commissioner of Internal Revenue;
- c as provided in the schedule issued by the assessor of the province or city where the real property is located; and
- d as determined by an independent appraiser. The submission of the report of an independent appraiser may be required by the BIR for the processing of the CAR application.
Based on the sample calculation under Revenue Regulations No. 6-2013, to derive the adjusted net asset value of a real property, the highest fair market value (based on a comparison of amounts from various sources) must be deducted from the book value of the asset. The difference will be added to the book value of the asset. The sum of the adjusted values of all real properties and all other properties will be added to the total assets reported in the AFS. The fair market value of the shares will be the difference between the adjusted total assets and the adjusted total liabilities. The fair market value per share sold is the difference between the adjusted total assets less the adjusted total liabilities divided by the total number of outstanding shares as of the end of the period covered by the AFS.
The sale by a non-resident foreign company of shares in a Philippine company or of moveables within the Philippines may be exempt from income tax or may be subject to a preferential tax rate under an applicable tax treaty.
The BIR requires, under Revenue Memorandum Order No. 72-2010 (Guidelines on the Processing of Tax Treaty Relief Applications (TTRA) Pursuant to Existing Philippine Tax Treaties), as a condition precedent to the availment of the tax exemption or of the lower tax rate, the prior filing of an application for tax treaty relief before the taxable transaction. The favourable ruling of the BIR is required before a CAR is issued on the transfer of shares. Revenue Memorandum Order No. 72-2010 is still being implemented by the BIR, even though the Supreme Court, in its decision dated 19 August 2013 in Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue,6 stated that:
The period of application for the availment of tax treaty relief as required by RMO No. 1-2000 should not operate to divest entitlement to the relief as it would constitute a violation of the duty required by good faith in complying with a tax treaty. The denial of the availment of tax relief for the failure of a taxpayer to apply within the prescribed period under the administrative issuance would impair the value of the tax treaty. At most, the application for a tax treaty relief from the BIR should merely operate to confirm the entitlement of the taxpayer to the relief.
Revenue Memorandum Order No. 72-2010 amended Revenue Memorandum Order No. 01-00 (Procedures for Processing Tax Treaty Relief Application), the regulation discussed in Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue.
The assignment of properties pursuant to a plan of merger or consolidation may also be exempt from income tax if the exchange is made solely for shares of stock in a corporation that is a party to the merger or consolidation, and provided that the requirements under Section 40(C)(2) of the National Internal Revenue Code of 1997 are met. The transfer of property pursuant to Section 40(C)(2) of this Code is also exempt from documentary stamp tax. However, other taxes (such as value added taxes and local transfer taxes) may still be payable depending on the type of property exchanged.
After the execution of documents, the parties to a merger or consolidation have to secure a BIR ruling that confirms the tax-free exchange status of the transfers in order to obtain CARs without having to pay taxes.
IX COMPETITION LAW
Last year, Republic Act No. 10667, otherwise known as Philippine Competition Act (Act), was enacted. The Act espouses the state’s policy to regulate monopolies, and to prohibit unfair competition and combinations in restraint of trade.
Anticompetitive agreements and abuse of dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition are prohibited under the Act. Anticompetitive agreements are either per se prohibited, or prohibited only if determined to have the object or effect of substantially preventing, restricting or lessening competition.
Among the salient features of the law is the creation of the Philippine Competition Commission, which has the power to review proposed M&A and prohibit a transaction if it is determined, upon review, to prevent, restrict or lessen competition in the relevant market. The standards and guidelines for the review of M&A are provided in the Implementing Rules and Regulations, which took effect on 18 June 2016.
Violations of the provisions of the Act result in administrative or criminal liabilities, depending on the particular provision that has been violated.
M&A in the Asia-Pacific region is expected to continue to increase in 2015 and 2016 as GDP in the region is anticipated to expand by 5.7 per cent in both 2016 and 2017, according to Asian Development Bank’s Asian Development Outlook 2016. The Philippine economy was cited to remain strong, with growth predicted to rise from 5.8 per cent in 2015 to 6 per cent in 2016 and 6.1 per cent in 2017.
The Philippines is an attractive market for investors, mainly due to its fast economic growth, relative political stability and rising domestic consumption. According to the NSCB, the Philippines’ GDP grew by 6.9 per cent in the first quarter of 2016. The NSCB attributes this to growth in the services and industrial sectors.
As stated above, Philippine banks are encouraged by the BSP to merge or consolidate to further strengthen the banking sector. To this end, the BSP has announced the grant of temporary rediscounting lines to newly merged or consolidated banks, in addition to the general incentives or relief already granted to them.
1 Philbert E Varona, Maria Jennifer Z Barreto and Hiyasmin H Lapitan are partners and Patricia A Madarang and Javierose M Ramirez are associates at SyCip Salazar Hernandez & Gatmaitan.
2 GR No. 176579, 28 June 2011.
3 Public-Private Partnership Center, Pipeline of Projects: ppp.gov.ph/?page_id=26075, last accessed on 15 June 2016. See also the Department of Transportation and Communications, DOTC Public-Private Partnership Projects: dotc.gov.ph/index.php/2014-09-02-05-02-30, last accessed on 22 June 2016.
4 Asian Development Bank, ADB Private Sector Financing Tops $2.6 Billion in 2015, Up 37% Year-on-Year: www.adb.org/news/adb-private-sector-financing-tops-26-billion-2015-37-year-year, last accessed on 21 June 2016.
5 Asian Development Bank, ADB Backs First Climate Bond in Asia in Landmark $225 million Philippines deal: www.adb.org/news/adb-backs-first-climate-bond-asia-landmark-225-
million-philippines-deal, last accessed on 21 June 2016.
6 GR No. 188550.