Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
Acquisitions of privately-owned companies in the Philippines may be structured in several ways. The acquiring entity may acquire shares from the shareholders of the company (‘share acquisition’) or assets directly from the company (asset acquisition). In a share acquisition, the purchaser takes control and ownership of the business by purchasing the controlling shareholdings of the target company. When acquiring a company through an asset acquisition, on the other hand, the purchaser merely acquires either the raw assets or the business enterprise of the acquired entity.
Apart from the negotiation and documentation processes, the share or asset acquisition will require the payment of taxes and can be consummated only upon the issuance of a certificate authorising registration (CAR) by the taxing authorities. The length of time needed for this process is dependent on the complexity of the transfer, if certain exemptions are invoked or if there is a dispute on the computation of the tax. Typically, for an asset acquisition involving land or real property, the CAR may be secured in anywhere between 15 days to one month depending on the complexity and valuation issues.
The acquiring entity may also choose to merge with or absorb the target company (‘merger’), with the acquiring entity as the surviving company, or it may consolidate with the target company to form a new company (‘consolidation’). A merger or consolidation will require the approval of the Philippine Securities and Exchange Commission (SEC). The approval process will take at least two to four weeks for a typical merger or consolidation without any contentious issues.
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
Private mergers and acquisitions in the Philippines are primarily governed by the Corporation Code and the Civil Code, as well as the Securities Regulation Code (SRC) when securities and listed companies are involved.
Laws pertaining to certain transactions are also applicable, such as the Foreign Investments Act, which operates when foreign investments or acquisitions are involved, and correlatively, the Anti-Dummy Law, which imposes criminal and civil penalties on violations of nationalisation laws. The recently promulgated Philippine Competition Act also regulates acquisitions that are seen to be anti-competitive. Similar to other jurisdictions’ competition statutes, the Philippine Competition Act requires prior notice to the Philippine Competition Commission of the covered acquisitions or transactions.
There are also regulatory laws pertaining to certain areas of investments, such as the New Central Banking Act and General Banking Law for bank acquisitions and mergers, and the Public Service Law for telecommunications company transactions. Currently, there are no local (as opposed to national) laws governing M&A transactions, as regulatory compliance is often ensured by national executive agencies.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
When shares are acquired, the buyer acquires a title in fee simple. Such ownership is prescribed by law, although the buyer may lodge the exercise of ownership rights with another person, giving such person the beneficial ownership over the shares in cases where there are nominees and trust arrangements. In the absence of agreement, the ownership of shares transfers to the buyer upon delivery of share certificates. However, the title will not be recognised as valid insofar as the target company and third parties are concerned unless the transfer is recorded in the stock and transfer books of the target company.
A title in fee simple or an absolute ownership provided under the Civil Code is different from ‘legal title’ under Philippine law. A title in fee simple is the title acquired in the absence of agreement otherwise restricting or modifying the extent of the transfer of rights and pertains to the enjoyment of all rights relating to the ownership. ‘Legal title’ on the other hand, denotes registered ownership. Such title is not necessary for an owner to exercise rights over the property. Legal title merely confirms and protects the owner from being deprived of his or her property.
Both the above concepts of ownership are differentiated from ‘beneficial title’, which may be used in two contexts: first, to indicate the interest of a beneficiary in trust property; and second, to refer to the power of a nominee shareholder of a corporation to buy or sell the shares for and on behalf of the beneficial shareholder, though the beneficial shareholder is not registered in the corporation’s books as the owner. In share acquisitions, the absolute owner may lodge the beneficial title in another person, allowing certain exercise of rights over the shares.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Any shareholder is free to sell his or her shares. However, there may be separate agreements or covenants between shareholders that may restrict this right, such as agreements where shareholders agree to sell to any third party only as a block (as in ‘drag along’ arrangements) or providing hold out periods where no transfers are allowed.
In the acquisition of shares in a corporation, the usual target is at least two-thirds of the outstanding capital stock, which will enable the buyer to obtain full control in undertaking all corporate actions, including major acts that require stockholder approval, such as amendment of the articles of incorporation, issuance of bonded indebtedness, sale of all of the assets of the corporation and the like. Naturally, all the registered owners of these target shares must consent to the sale or purchase for there to constitute a valid transfer.
In the case of minority shareholders who refuse to sell, a majority shareholder can dilute the shareholdings of the minority by calling for the issuance of additional shares of stock from the unissued shares of the corporation. This may reduce the shareholding of the minority to negligible amounts. Note, however, that in the issuance of new shares, each shareholder has a pre-emptive right to subscribe to a number of shares sufficient to maintain his or her proportionate ownership of the corporation.
Philippine law also recognises a situation wherein ownership of a share is vested in two or more owners. In such case, each co-owner is the owner of the whole, requiring all co-owners to consent to the sale. Otherwise, the sale is void as to the part pertaining to other co-owners who did not consent. Co-ownership over a share usually arises when a shareholder dies and his or her rights over such share are vested in his or her heirs, subject to regulations on the settlement of the estate of the deceased.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
In a share acquisition, the buyer takes control of the business and necessarily covers its entirety insofar as it is owned and controlled by the corporation. Hence, the buyer necessarily and indirectly acquires all the assets and liabilities of the corporation. If there are assets that are to be excluded upon acquisition, they may be carved out by disposing of such assets first before the equity transfer.
In an assets-only acquisition, the buyer is interested only in the assets of the business; hence, the transferee is not liable for the liabilities of the transferor, unless expressly assumed. The case is different, however, in a business-enterprise transfer where the buyer’s interest goes beyond the assets of the business. A specie of an asset acquisition, it involves the transfer of all or substantially all of the assets of the corporation but holds the buyer liable for the existing liabilities of the transferor. In such a transfer, it becomes necessary that an affirmative vote of shareholders representing two-thirds of the shareholdings is obtained.
In mergers and consolidations, the surviving or consolidated corporation assumes all the liabilities of the constituent corporations. In the same way, all property, real or personal, all receivables due, and interests of the constituent corporations shall be taken and deemed to be transferred into the consolidated or surviving corporation.
Furthermore, in certain corporate acquisitions, notification to the Philippine Competition Commission (PCC) is required. Notification must be given by the parties to an M&A transaction that is indicative of preventing, restricting, or lessening competition in the market, subject to a threshold:
- if the aggregate annual gross revenues or value of the assets of the ultimate parent entity or at least one of the acquiring or acquired entities exceeds 5 billion Philippine pesos (roughly $100 million); and
- the value of the transaction or the value of the assets of the acquired company exceeds 2 billion pesos (roughly $40 million).
If a merger or acquisition satisfies both thresholds as set out above, the transaction will be regarded as a covered acquisition, which is subject to the notification requirements of the PCC (as discussed in further detail in question 7).
A substantial sale of assets in a business-enterprise transfer will also require notification to creditors of the intended sale and registration of a list of the transferor’s creditors with the appropriate government agency under the Bulk Sales Law. In case of violation or non-compliance with the requirements of the law, the sale could be classified as fraudulent and void and no title could be validly transferred.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
While most M&As do not require regulatory consent or approval, certain transactions would have to comply with applicable regulations, for example, nationality requirements under the Philippine Constitution and Foreign Investment Act, in cases of foreign investment activities, and regulatory requirements for banks and telecommunication transactions.
In most enterprises, there is no restriction on the extent of foreign ownership in Philippine enterprises. The 10th Foreign Investments Negative List, however, enumerates some of the more important investment areas that are reserved for Philippine nationals, particularly areas where security, defence, risk to health and morals, are involved. Under the Foreign Investments Act, as a general rule, a domestic market enterprise that is more than 40 per cent foreign-owned must have a paid-in capital of the Philippine peso equivalent of at least US$200,000.
Bank mergers are subject to the approval of the Philippine Central Bank and merging or consolidating banks should consult therewith prior to the finalisation of any merger or consolidation agreement. In the same vein, the approval of the National Telecommunications Commission (NTC) is required if the transfer or sale of shares in a telecommunications company will result in the purchaser owning more than 40 per cent of the subscribed capital stock of the telecommunications company.
Are any other third-party consents commonly required?
In share acquisitions, consent of other shareholders (owners of shares other than those being sold) is generally not necessary for the purchase of shares to proceed, except where there are shareholders’ covenants involved. In asset acquisitions, approval of stockholders representing two-thirds of the shareholdings of the selling corporation is needed where the transfer involves all or substantially all of the assets of the corporation.
Third-party consents from lenders or creditors of the sellers or the corporation may also be required in cases where there are negative covenants in their agreements that require consent before any disposition of shares or assets.
In the case of a merger or consolidation, the Corporation Code requires the majority vote of the board of directors of all the companies that are parties to the transaction, and an affirmative vote of stockholders representing at least two-thirds of the outstanding capital stock of the companies to approve the merger or consolidation.
Notification to the PCC may also be considered as ‘consent’ for the purpose of proceeding with M&A transactions. Parties to a covered merger or acquisition are required to notify the PCC before the execution of the definitive agreements relating to the transaction. The PCC is given the power to prohibit the implementation of the agreement if it is a prohibited or anticompetitive agreement as defined under the law.
For publicly-listed companies, the SRC mandates specific disclosures to shareholders and to the SEC in cases of change in control or substantial acquisition or disposition of assets. The disclosure includes the date and manner of acquisition, the nature and consideration, the purpose, and the parties of the transaction. Likewise, any intention to acquire at least 15 per cent of the shareholdings of a listed corporation, or of a corporation with assets worth at least 50 million pesos, and 200 shareholders with at least 100 shares each or who intends to acquire at least 30 per cent of such equity over a period of 12 months shall make a tender offer to stockholders by filing a declaration to that effect with the SEC and by publishing vital information surrounding the transaction.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Generally, acquisitions will require the payment of taxes in order to be effective and registrable (ie, prior clearance from the tax authorities (CAR) is required to effect such transfer). In an asset acquisition, particularly those involving real property assets, local government fees are paid for the transfer of the registered ownership in the property titles recorded with the Registry of Deeds. Acquisition of shares and assets requires the payment of transactional taxes and local property taxes for the proper issuance of the CAR.
For a share acquisition, the SEC also imposes reporting requirements when there are changes in directors, officers, or shareholders, brought about by an acquisition or merger. The company is required to report these changes by filing a General Information Sheet (GIS). The GIS contains the information of the company required to be publicly available, such as the directors, shareholders, and shareholdings of a company. A corporation that fails to follow the reporting requirements is subject to administrative fines and suspension or revocation of certification.
For mergers and acquisitions to which antitrust laws apply, entities involved are required to pay fees amounting to 50,000 pesos and 1 per cent of the value of the transaction as fees for filing of notification and review, respectively. The failure to pay such fees amounts to an absence of notification on the part of the entities involved.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
Parties will typically appoint financial advisers, management consultants, and accountants to assist with a transaction. The financial adviser provides advice on the structure and financing of the transaction, while the accountants assist with financial aspects of due diligence and tax-related issues.
Foreign counsel may also be hired when the transaction involves cross-border legal issues and assets or parties. In a merger or acquisition involving highly technical or highly regulated industries, technical or industry experts, and environmental experts, are usually appointed as well.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Primarily governed by contractual law, parties in a sale of shares or assets contract are bound to comply with or perform the stipulations of the agreement in good faith. When negotiating an agreement, parties are mandated to act in good faith pursuant to the Civil Code, which implores every person to ‘act with justice, give everyone his due, and observe honesty and good faith’ in the performance of their duties. In situations where a party acts in bad faith, and causes damage to another, there may be liabilities.
Observance of good faith in transactions extends to directors of a buyer or seller in acquisition transactions. Members of the board who purport to act for and on behalf of a corporation must act within the scope of their authority, in good faith, and in compliance with their duties of diligence and loyalty. Otherwise, they may be held liable in their personal capacity when such acts cause damage to creditors or to the corporation.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
In share and asset acquisitions, whether all or some of the shares or assets of the target company are purchased, documentation will normally include a share or asset purchase agreement and a simple deed of assignment for the shares or assets. The latter is made for convenience and ease of presentation of the transfer document to the tax authorities.
In mergers or consolidations, the constituent corporations must prepare and approve a plan of merger. The plan of merger will state the terms of the merger or consolidation, the mode of carrying out the merger or consolidation (ie, whether shares or assets will be exchanged between the constituent corporations) and the changes to be made to the articles of incorporation of the surviving corporation. The plan of merger or consolidation must be submitted to the SEC for approval. In cases where the corporations involved are under regulation by regulatory agencies, the favourable recommendation of the regulatory agency concerned must also be obtained.
With respect to the merger or consolidation of corporations governed by special laws, a favourable recommendation must also be obtained from the appropriate government agency and may require additional documentation.
Are there formalities for executing documents? Are digital signatures enforceable?
The necessary formalities for executing documents are primarily governed by the Civil Code, which provides that, as a general rule, contracts are valid in whatever form they are entered into, as long as the requisites for their validity (ie, consent of parties, valid subject matter, and proper consideration) are present. However, the law also provides that certain contracts must be written and embodied in a public document (ie, acknowledged before a notary public), otherwise the sale will not be binding on third parties or may not be enforceable. In that case, notarisation or consularisation (for documents executed outside the Philippines), is required. In practice, it is advisable to embody share purchase agreements and deeds of assignments in public documents to ensure compliance with requirements of regulatory agencies. As an example, the property registration law mandates the notarisation of instruments of conveyance of real property for registration. While share purchase agreements and deeds of assignment over shares, and other transaction documents are not among those required by law to be notarised or in a public document, it is common practice to notarise them to ensure such documents will be accepted by regulatory agencies and admissible as evidence in court.
Currently, under Philippine laws, digital signatures are enforceable subject to the requirements of the law in proving such signature. An electronic signature is considered an equivalent of a written signature if it can be shown that there is a proper method of identifying the signing party and his or her access to such document, and that the other party in the contract has the means to verify such signature.
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;
- employment matters;
- business and operational matters;
- 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 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 laws.
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 a 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 from 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 on the part of the seller at the time the contract is being executed, no action may lie against the seller for breach of such warranty.
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.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Pricing is a purely subjective and commercial matter between the parties. However, reference may be made to book value (if it is for the sale of shares) in the financial statements or the value of assets as may be assessed by a valuer. The valuer or assessment company may be agreed upon by the parties.
The use of locked-box structure is more common compared to the use of closing accounts. In contrast with a closing account mechanism, where the acquisition value from the signing date continues to be adjusted until the closing date, transactions in the Philippines typically adopt an agreed fixed equity value based on a historic balance sheet of the corporation. Between the pre-signing date when the amount is fixed, and the closing date, little or no adjustments are made.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
The law allows cash and non-cash (eg, shares of stock, other types of property) to be used as consideration. However, in practice, the most common form of consideration in the Philippines is cash. The use of cash as consideration has practical benefits. For example, for primary subscriptions, if the consideration is non-cash, the consideration must undergo a valuation or appraisal process with the SEC to ensure that the prohibition against issuance of watered stock is not violated. The valuation is also necessary for computation of the proper tax.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
In the Philippines, deposits and escrows are usually used during the interim period (between the date of signing and full implementation of the merger or acquisition) to secure the buyer’s investment. Parts of the purchase price may also be ‘held-out’ or placed in escrow for certain periods after closing to address contingent matters (such as contingent liabilities, oftentimes possible taxes).
There may be instances where earn-outs are resorted to but this is not common practice.
How are acquisitions financed? How is assurance provided that financing will be available?
Acquisitions are commonly financed by the acquiring corporation’s own assets. Bank loans, whether from a single bank or a syndicated or arranged loan, and other forms of financing from financial institutions are also commonly used.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
While there is no limitation on giving of financial assistance to a buyer in connection with a transaction, there might be negative implications on tax regulations. In this jurisdiction, when a sale of shares or assets appears to be acquired for less than the adequate consideration, the parties of the sale may be exposed to donor’s tax.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Closing conditions will depend greatly on the circumstances affecting the transaction. In cases where closing conditions are needed, M&A transactions are usually subject to conditions that involve an obligation on the part of the seller to deliver certain types of documents to close the transaction. Aside from the deeds of assignment, stock certificates, and titles to real property required to transfer the ownership, documents that may have to be delivered include:
- the corporation’s certificates of incorporation, articles of incorporation, by-laws;
- copies of all material contracts of the corporation;
- audited financial statements and balance sheet of the corporation;
- a list of all the officers and employees of the corporation;
- a list of all equipment, machineries, vehicles and other items of tangible personal property of the corporation;
- documents relating to the intellectual property of the corporation, if any;
- permits issued by the governmental authorities; and
- list of all pending litigations involving the corporation.
Furthermore, closing conditions may also include obtaining the necessary approvals from regulatory bodies such as the PCC in cases of covered acquisitions (as defined in question 5), the Philippine Central Bank in case of banks, and the NTC in case of telecommunications transactions.
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
Obligations or consequences relating to satisfaction of closing conditions vary according to the needs of the parties. In a usual share purchase agreement, these closing conditions constitute an absolute undertaking of each party to procure or deliver such conditions and the failure to satisfy any of such conditions is a ground for termination of the agreement or for indemnification.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
The need for pre-closing covenants depends on the circumstances surrounding the acquisition. Covenants that cover the period from the date of signing of the agreement until the final step of the transaction (ie, issuance of the tax clearance for purposes of transfer of shares or assets) are common in the Philippines. Such covenants include acts that prohibit the buyer from materially altering or changing the business operations or nature without the consent of the seller. In particular, such covenants may include:
- prompt notification of any circumstance likely to result in a material change in the financial position, operations, profitability of the corporation;
- providing periodic reports and access to financial, legal and corporate records of the corporation as may be requested by the buyers;
- notifications before selling, assigning, mortgaging, or otherwise dealing or transacting in any manner of the shares;
- notifications when creating or issuing any board or shareholders’ resolution altering the articles of incorporation, or other resolutions not relating to the ordinary course of business;
- notifications when acquiring or disposing any assets not in the ordinary course of business; and
- notifications in cases of any amendment, cancellation, or termination of any contract, permit, licence, or other authorisation relating to the business other than in the ordinary course of business.
Usually, a breach of pre-closing covenants by the seller may be a ground for termination of the agreement or indemnification of the buyer by the seller of an amount equivalent to that which may reasonably be incurred by or imposed on the buyer resulting from the breach of such pre-closing covenants.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
In a normal share or asset purchase agreement, termination is subject to the agreement of parties in accordance with their needs. Usually, mutual consent of the seller and the buyer is sufficient ground for termination, aside from involuntary grounds such as breach by parties of the provisions of the agreement, breach by parties as to any representation or warranty, or enjoinment of a governmental authority as to regulatory compliance. A unilateral termination will of course depend on the termination or exit provisions of the transaction agreements.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
There is no regulation or express provision restricting or governing the payment of break-up fees and reverse break-up fees. Break-up fee mechanisms are used from time to time but are not generally common in Philippine M&As.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
In a typical share purchase agreement, representations, warranties and indemnities are usually given, although the need for such provisions depends on the surrounding circumstances. Representations and warranties of the seller may include warranties as to the:
- status of the corporation and the corporation itself, that the corporation is duly organised and existing under the law;
- power and authority of the sellers, and correlatively, their capacity to enforce the agreement;
- existence and ownership of the share capital subject of the agreement;
- proper disclosure of contracts of the corporation; and
- all other matters that may be deemed crucial for the buyer in terms of its conduct of due diligence investigation.
Under Philippine law, the terms ‘representation’ and ‘warranty’ are often used together in sales agreement provisions and no legal distinction is recognised in relation to remedy and quantum of recourse for their breach. Warranties, under Civil Law, is any affirmation of fact or promise by the seller relating to the thing subject of the sale, which induces the buyer to purchase such thing. A buyer may resort to rescission or termination of the contract in cases of breach of warranties or representations in most cases.
Indemnification, on the other hand, involves the agreement of the parties to indemnify, defend and hold harmless the buyers from liabilities imposed upon the buyers. These indemnifications may result from misrepresentation, breach of any warranty or non-performance of the provisions of the agreement. Further, indemnities may cover contingent liabilities or any actual or threatened liabilities arising from dealings or transactions of the target corporation that may occur pre-closing, or take place post-closing (‘contingent liabilities’). The scope of indemnities will also depend on the needs and circumstances of the transaction.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
In a typical M&A transaction, the parties will stipulate that the seller’s liability should not exceed the price received from the transaction. However, in some instances, a contingent liability may lie against the seller. Contingent liability entails liability arising from any dealings or transactions of the seller fully or partially consummated prior to the date of signing of the agreement. In such cases, the seller’s liability is not limited to the price received and may be held accountable on such transactions.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Transaction insurance is commonly agreed upon by parties in an acquisition transaction, although either the buyer or the seller may have indemnity insurance for liabilities that it may incur, and not for breaches of warranties or representations in particular.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Parties to an M&A transaction typically agree to post-closing covenants covering contingent matters, such as tax or operational matters. In a usual share or asset purchase agreement, the sellers may have the obligation to make available to the buyer any information within its possession necessary for tax returns or audits of the taxing authority. After the full operation of the acquisition or merger, the seller may still be obliged to give reasonable assistance in connection with any tax assessment or audit covering those periods before the acquisition. There are sometimes also non-compete clauses prohibiting the seller from engaging in a competing business.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
In the case of an asset acquisition, the income from the sale of capital and non-capital assets, other than land and buildings, is generally taxable as part of ordinary corporate income of the seller at the rate of 35 per cent. Other than the corporate income tax, transfer taxes such as documentary stamp tax (DST), capital gains tax, and local transfer taxes may also apply.
Capital gains tax may be imposed on the sale of shares of stocks or assets of the corporation not used in the ordinary course of the business with a final tax rate of 6 per cent, imposed on the gain presumed to be realised. For shares of stocks, a tax of 15 per cent on the net capital gains is imposed on the sale of shares not listed in the stock exchange.
DST, meanwhile, is imposed on the use of certain documents for transfer of shares or assets. A DST of 1.50 pesos on each 200 pesos, or fractional part thereof, of the par value of shares is imposed on sales, agreements to sell, deliveries or transfer of shares. For asset acquisitions, meanwhile, a DST of 15 pesos for each 1,000 pesos of the consideration or value received is imposed on deeds of sale, conveyances and donations of real property. As a general rule, DST is also payable on the assignment or transfer of any mortgage, pledge, lease or certificate of indebtedness, at the same rate as that imposed on the original instrument. In mergers, the issuance of shares by the surviving corporation is subject to a DST of 1.50 pesos on each 200 pesos of the par value of the shares. In the case of a merger, however, exchanges of property of the absorbed corporation solely for stock of the surviving corporation, or the surrender by shareholders of the absorbed corporation of their shares for shares of the surviving corporation, is tax-free.
In addition, provinces and cities may impose local transfer taxes in cases involving the transfer of real property.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
There is no value-added tax (VAT) on a normal share acquisition. Likewise, the transfer of the assets of absorbed corporations to another corporation pursuant to a merger is not subject to VAT. In mergers or consolidation of corporations, the surviving corporation shall absorb any unused input tax of the absorbed corporation as of the date of merger.
In relation to asset acquisitions, VAT may be due on the sale of goods or properties originally intended for sale or for use in the ordinary course of business that are sold not in the course of normal business. Similarly, a transaction deemed sale not in the course of business is subject to VAT. These types of exposure to VAT usually involves an acquisition of a holding company or a real estate company that holds ordinary assets. However, the sale of properties not primarily held for sale in the ordinary course of trade or business is not subject to VAT.
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
In cases of share acquisitions, the acquirer merely buys the shares of the target company and only the ownership or control of the corporation changes, and the underlying employment relationship between the target company and its employees is not affected. The employees remain with the corporate employer in exactly the same manner as before the equity transfer.
In an asset acquisition, generally, there is no obligation to absorb the employees because the personal nature of employment contracts, under Philippine law, cannot be enforced against a buyer in an acquisition transaction. The purchaser in good faith has no obligation to absorb employees of the vendor or to continue employing them. However, the rule is not absolute. In certain cases, the Philippine Supreme Court has been known to disregard the personal nature of labour contracts and hold either parties, or both, liable in transactions deemed not to have occurred in good faith, or where third parties such as creditors or employees are prejudiced.
For mergers and consolidations, the law mandates the surviving or consolidated corporation to be responsible and liable for all liabilities and obligations of the constituent corporations, including employment contracts. The Philippine Supreme Court has, however, held in some rulings that such assumption of employees is not automatic and is dependent on an express provision in the articles of merger.
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
Labour laws do not provide any rule on obtaining consent from employees in case of acquisitions or mergers. There may be instances when an existing collective bargaining agreement between the corporation and employee unions may specify the participation of employees in discussion of substantial corporate matters. In such cases, however, consent or approval from employees is still not required. When the transaction will result in the termination of the employment of employees, certain notices to the Department of Labour and Employment are required.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
As Philippine labour law does not mandate the assumption of employees in cases of share or asset acquisition, the transferee may, but is not obliged to, assume the obligations of the employer to its employees. However, in cases where the transferee contractually commits itself to retain the employees of the transferor, such contractual commitment must be honoured and all employment-related liabilities that may be imposed upon the now ‘successor-employer’ must be held against it. It is worth noting, that even in the absence of contractual commitment, the transferee may be held liable if there is an exercise of bad faith and unfair labour practice.
In mergers or consolidations, the absorbing corporation has the duty, not only to retain the said employees, but to recognise and provide the benefits promised. In such cases, however, the labour law does not provide that filings be made or that consent be obtained from employees.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
Since the issuance of the Philippine Competition Act in 2015, many regulatory policies have been issued, including the Implementing Rules and Regulations in 2016 and Rules of Procedure of the Philippine Competition Commission in 2017. The promulgation of an anti-competition statute made it relatively more difficult for corporations to proceed with mergers and acquisitions, especially with the coverage threshold provided by law. The threshold for covered transactions was recently increased from 2 billion pesos (pertaining to aggregate assets of the acquiring corporation) and 1 billion pesos (pertaining to the value of the transaction) to 5 billion and 2 billion pesos, respectively.