Structure and process, legal regulation and consentsStructure
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 as well as the 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 normally 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 liability. Typically, for an asset acquisition involving land or real property, the CAR may be secured within 15 days to one month from the submission of complete documentary requirements and 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.Legal regulation
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 (PCC) of the covered acquisitions or transactions.
There are also regulations and 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) regulations or ordinances governing mergers and acquisitions transactions, as regulatory compliance is often ensured by national executive agencies.Legal title
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, which means that the buyer acquires absolute ownership over the shares with the power to dispose. Nevertheless, 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 an agreement, the ownership of the shares is transferred to the buyer upon delivery of share certificates. However, the title will not be recognized as valid insofar as the target company and third parties are concerned unless the transfer is recorded in the stock and transfer book 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 stock and transfer book 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.Multiple sellers
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 including, but not limited to, agreements where shareholders agree to sell to any third party only as a block (as in ‘drag along’ arrangements) or providing hold out periods during which no transfers are allowed.
In the acquisition of shares of 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 stockholders’ approval, including but not limited to 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 the 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 to his or her heirs, subject to regulations on the settlement of the estate of the deceased shareholder.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 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 PCC is required. Notification must be given by the parties to a mergers and acquisition 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 exceed 5.6 billion Philippine pesos; and
- the value of the transaction or the value of the assets of the acquired company exceeds 2.2 billion Philippine pesos.
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 (see 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 the 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.Consents
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?
The SEC handles the approval of M&A transactions. Certain transactions would also 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 11th 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 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 at least 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 requiring prior 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 classified as 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 Philippine 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.Regulatory filings
Must regulatory filings be made or registration (or other official) 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 (such as 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 name of the directors, shareholders, and the equity 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 Philippine 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.