Due diligence and disclosure

Scope of due diligence

What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?

The typical scope of due diligence in the Philippines will depend on many factors, including cost, time and appetite for risk, as well as mutual trust between the principal parties. As a general rule, a typical acquisition will require a legal, financial and technical due diligence. A typical legal due diligence in the Philippines will usually cover:

  • charter documents;
  • corporate organisation and ownership;
  • shareholdings structures;
  • licences and material contracts;
  • foreign investment and government regulations;
  • taxation;
  • employment matters;
  • property;
  • business and operational matters;
  • contracts;
  • intellectual property;
  • legal proceedings,
  • disputes and investigations; and
  • insurance policies.

It is not common for sellers to provide due diligence reports in the Philippines as it is always more advisable to rely on third-party verification and their independent assessment. Sellers are typically expected to provide the necessary documents as part of the due diligence investigation.

Liability for statements

Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?

Under the Philippine civil law, parties are not generally liable for misleading statements that do not amount to fraud or those that does not affect the mutuality of a contract. Misrepresentations made in good faith are not actionable. As an example, non-disclosure of facts is generally not in itself actionable unless there is a duty to reveal such facts. Usual exaggerations in trade are also not in themselves fraudulent if the other party (the purchaser) had an opportunity to know the facts.

A seller becomes liable for misleading statements that amount to fraud - insidious words or statements that led the buyer to consent to such transaction based on such statements. Liability arising from fraud cannot be waived by agreement of the parties because such stipulations will be contrary to public policy under Philippine law.

Publicly available information

What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?

Typically, corporate searches are conducted in the records of the SEC and the relevant regulatory agencies. Publicly available records include the GIS containing the authorised, subscribed and paid up capital and the list of directors, officers and stockholders, incorporation documents, and financial statements submitted for reporting compliance.

In relation to title searches, the Philippines does not have a title registry for personal property. However, the Philippines follows the Torrens system in relation to land registration, and land titles are verifiable with the local Register of Deeds or the Land Registration Authority. Certain agreements creating or transferring real rights over property must also be registered and recorded in certain registries such as the real estate mortgage registry for real estate mortgages and the chattel mortgage registry for chattel mortgages.

For listed companies, a database of all the disclosures of the target company are available in the Philippine Stock Exchange, aside from other information.

Impact of deemed or actual knowledge

What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?

As a general rule, there must be a reliance on the warranty or representation for a claim on breach of warranty or misrepresentation to be valid. In acquisitions, a representation or warranty can be deemed ineffective in certain situations where the other party is shown to have knowledge, at the time the contract was entered into, that such representation or warranty was invalid or wrong. In particular, an action against a representation or warranty requires, to a certain extent, evidence that the other party relied on such representation or warranty. Hence, in cases where the buyer has knowledge or information that results in a breach of the warranty or representation on the part of the seller at the time the contract is executed, no action may lie against the seller for breach of such warranty or representation.

In real property acquisitions, the knowledge of the buyer that the seller has no valid title to such property may be a bar to a claim on such property on the ground of estoppel. In relation to a third-party claim, the buyer in bad faith is not protected against such claim. Also, in the case of a warranty against eviction in relation to sale of properties, knowledge on the part of the buyer of the risk of eviction holds the seller free from liability against such breach.