M&A

Legal Practice Guide

Corporate M&A 2013

Philippines

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Philippines - Law & Practice

Contributor(s)

   

SyCip Salazar Hernandez & Gatmaitan (SyCipLaw), founded in 1945, is the largest law firm in the Philippines. Although its work centres on business activity, the firm has offered a broad and integrated range of legal services that cover such areas as family relations, constitutional issues, and other matters of law unrelated to commerce. SyCipLaw's practice is diversified, as reflected in its seven principal departments: banking, finance and securities; corporate services; intellectual property; labour; litigation; special projects; and tax. Within this structure, some of the firm's lawyers are involved in additional fields of specialisation, such as power, immigration, shipping, and maritime law. For more information, please visit www.syciplaw.com.

The authors

Rafael A. Morales is the managing partner in SyCip Salazar Hernandez & Gatmaitan. Prior to his appointment, he was head of the firm's banking, finance & securities department. His areas of expertise include corporation and commercial law, contract law, banking and financial law (including project financing), securities, joint ventures, mergers and acquisitions, and international law. Mr. Morales was president of the Inter-Pacific Bar Association, an organisation of lawyers from more than 65 jurisdictions and with interests in the Asia-Pacific region. In addition, he is a member of the Philippine Bar Association, the Financial Executives Institute of the Philippines, the New York State Bar Association and the American Bar Association.

John Paul V. de Leon is a senior associate of SyCipLaw and a member of the firm's special projects and banking finance & securities groups. His practice areas include real estate development, infrastructure, mergers and acquisitions, finance and securities and investments (both foreign and local) in highly regulated areas such as information technology, food and drugs, health care, media, advertising, gaming and retail trade. Mr. de Leon has significant experience in real estate and advises advertising, media, technology and business process outsourcing companies. Mr. de Leon also regularly advises banks and financial institutions in connection with loans, bonds and debt securities.

Trends

   

Market developments

The Philippines' strong economy continues to attract foreign direct investments, with the country's credit rating upgraded to an "investment grade" by both Fitch Ratings and Standard & Poor's. While official figures from the regulators are not yet available, 1Q2013 probably saw a more buoyant M&A market than 1Q2012.

Significant M&A deals in 2012 included (i) the Philippine Long Distance and Telephone Company's acquisition of a controlling equity stake in DIGITEL; (ii) the acquisition of the equity interest in Raffles Residences & Fairmont Hotel in Makati City by Ayala Land from a subsidiary of Dubai property firm Kingdom Hotel Investments; and (iii) the acquisition of Redondo Peninsula Energy, Inc by Meralco PowerGen Corporation.

In 1Q2013, Coca-Cola FEMSA, SAB de CV acquired a 51% share of Coca-Cola Bottlers Philippines, Inc. from the Coca-Cola Company. The much-awaited merger of the Allied Banking Corporation and the Philippine National Bank also became effective in 1Q2013.

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Key industries

Banking, real estate, and the food and beverage sectors continue to attract significant M&A activity. The Bangko Sentral ng Pilipinas ("BSP") has encouraged mergers and consolidations between domestic banks.

Overview of the regulatory field

   

Acquiring a company

Acquisitions of companies in the Philippines are made primarily through (i) share purchase; (ii) asset purchase; or (iii) merger and consolidation.

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Regulatory bodies

The Securities and Exchange Commission ("SEC") is the primary regulator for M&A activities of corporations, partnerships and associations. For banks and other financial institutions, the two other regulators are the BSP and the Philippine Deposit Insurance Corporation. The Philippine Stock Exchange also exercises regulatory powers over the M&A activities of listed companies.

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Foreign investment

There are some restrictions placed on foreign investments. While, as a general rule, foreign ownership in a Philippine corporation may extend to cover 100% of its capital stock, certain areas of investment are subject to foreign-ownership limitations under both the Philippine Constitution and general law. Pursuant to the Foreign Investments Act of 1991, these limitations are contained in a "negative list" that is periodically issued by the President of the Philippines. The Ninth Foreign Investment Negative List was promulgated, through Executive Order No. 98, on October 29, 2012.

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Anti-trust regulations

At present, there is no general antitrust or anti-monopoly law in the Philippines. However, there are pending bills on the subject in the Congress of the Philippines.

The Philippine Constitution adopts a general policy against monopolies and combinations in restraint of trade. In general, the Constitution mandates the regulation and prohibition of monopolies when the public interest so requires.

Monopolies and other combinations in restraint of trade are declared unlawful and penalised under the Revised Penal Code. Specifically, it penalises:

(i) any person who seeks restraint of trade or commerce or who wishes to prevent free competition in the market by artificial means, whether it is through contract or agreement or the engagement in a conspiracy or combination in the form of a trust or otherwise;

(ii) any person who will monopolise any merchandise or object of trade or commerce, or will combine with any other person or persons to monopolise and merchandise or object in order to alter the price by spreading false rumours or by making use of any other article to restrain free competition in the market; and

(iii) a manufacturer, producer, processor or importer, wholesaler or retailer who will combine, conspire or agree in any manner with any person likewise or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines of any such merchandise or any article where such merchandise is used.

There is a bill pending before the Philippine Congress that seeks to increase the penalties imposable for the foregoing unlawful activities.

On the other hand, the Civil Code provides for the recovery of damages in case of unfair competition in agricultural, commercial or industrial enterprises.

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Labour law

The chosen mode of acquisition affects which labour law requirements are of primary concern to the acquirer.

As a general rule, in an asset purchase, any employment-related obligations or liabilities do not extend to the acquirer. However, in a share purchase, there is no concomitant change in the relations between the employer and the employee; therefore, unless the agreement between the acquirer and the seller specifically states otherwise, the acquirer will generally assume the liabilities of the corporation with respect to its employees.

In mergers or consolidations, any employment-related liability is transferred to the surviving corporation or to the consolidated corporation as if the surviving or consolidated corporation itself incurred such liabilities. Any pending claim, action or proceeding brought by or against any constituent corporations may be prosecuted by or against the surviving or consolidated corporation.

Recent legal developments

   

The Supreme Court of the Philippines recently promulgated its decision in Gamboa vs. Teves (GR. No. 176579) which interpreted, for the first time, the term "capital" as used in the Philippine Constitution. The Supreme Court ruled that "capital" refers only to "shares of stock entitled to vote in the election of directors" and not necessarily to the outstanding capital stock of a corporation.

In compliance with Gamboa vs. Teves, the SEC has released a draft of the "Guidelines on Compliance with Filipino-Foreign Ownership Requirements Prescribed in the Constitution and/or Existing Laws by Corporations Engaged in Nationalised and Partly Nationalised Activities" in March 2013. The SEC intends to conduct a series of public consultations before promulgating the guidelines pursuant to its rule-making powers.

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Takeover legislation

There is no specific takeover legislation in the Philippines, with the exception being the tender-offer rules in the Securities Regulation Code ("SRC").

There is a proposal to raise the threshold for a mandatory tender offer, which is currently set at 35% of a class of shares in a public company.

Stakebuilding

   

In the Philippines it is not customary for a bidder to build a stake in the target prior to launching an offer.

Dealings in derivatives are allowed but are subject to the provisions of the SRC and other SEC issuances, as well as to BSP regulation in the case of banks and other financial institutions. Disclosure is required where the derivatives would (either by conversion, exercise of an option or otherwise) result in a person acquiring beneficial ownership of shares in a public company at the threshold specified Disclosure thresholds.

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Disclosure thresholds

Changes in company shareholdings are reported to the SEC through the filing of a General Information Sheet ("GIS") within seven days of their occurrence. The top 20 shareholders of a company are also reported in the GIS and, accordingly, an acquisition that would make an acquirer one of the top 20 shareholders needs to be reported in the GIS.

In the case of a public company, the following are required to make disclosures to the SEC and the Philippine Stock Exchange (if the pubic company is listed):

(a) An acquirer of the beneficial ownership of more than 5% of the outstanding capital stock in a public company must disclose their ownership within five business days from acquisition of the shares.

(b) An acquirer of the beneficial ownership of 10% of the outstanding capital stock in a public company must also disclose their ownership within ten days from acquisition.

Reporting thresholds are legally prescribed and cannot be changed by a corporation even if the change is incorporated into its articles of incorporation or bylaws.

It is typical that some significant shareholders are parties to shareholders' agreements that grant certain rights (such as right of first refusal or drag-along right) that may possibly pose a challenge to stake building.     

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Obligations of acquiring shareholders

As a general rule, shareholders have to make known the purpose of their acquisition and their intention regarding control of the company.  Where a shareholder's acquisition of shares triggers a reporting requirement under the SRC, they are also required to disclose the purpose of their acquisition and their intentions regarding their control of the corporation. Information on any of their plans or proposals that will effect a major change in company business or structure must also be disclosed.

The negotiation phase

   

Disclosure requirements

Any activity that will result in a change in the control of the corporation should be disclosed immediately. This includes the acquisition or disposition of any assets, or the merger, consolidation, entry into a joint venture consolidation or other similar arrangement.

Existing rules do not identify a specific stage in the negotiations when disclosure must be made. As a general rule, a target listed company is required to disclose material information within ten minutes of the receipt of such information. In practice, the target corporation typically discloses once the board of directors has approved the deal.

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Due diligence

A comprehensive due diligence is typically undertaken. This due diligence covers the examination and review of the financial and accounting aspects of the company, as well as its tax, administrative and technical operations and legal matters.

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Standstills and exclusivity

Both standstill and exclusivity provisions are usually demanded.

The SRC specifically prevents the target from engaging in certain transactions during the course of a tender offer, or before the commencement thereof if its board of directors has reason to believe that an offer might be imminent.

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Tender offers

A tender offer can be documented in the definitive agreement. However, the terms and conditions of a tender offer are usually set out in a separate tender offer document in order to shield the other provisions of a definitive acquisition agreement from the public.

The SEC actually requires a specific form for the tender offer. Typically, the tender offer report is accompanied by tender offer documents, which, taken together, embody the definitive agreement between the acquirer and the shareholders of the target. These tender offer documents include the terms and conditions of the tender offer; the application to tender shares; the form of the deed of assignment; a corporate secretary's certificate (for corporate board approvals); and irrevocable powers of attorney for the tender offer agents.

Structuring

   

There is no hard-and-fast rule regarding the length of the process for acquiring or selling a business, and typically the length of an acquisition will depend upon the complexity of the corporate structure of the company being acquired and the acquisition structure adopted by the acquirer. Due diligence examination of the target and negotiations with the sellers will usually take anywhere between three to six months.

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Mandatory offer thresholds

The Philippines has a mandatory offer threshold. A mandatory tender offer is required for the (i) acquisition of at least 35% of the capital stock of a public company (whether acquired in a single acquisition or a series of transactions within a 12-month period), and (ii) acquisition of less than 35% but that results in ownership of more than 51% of the total outstanding capital stock of the public company.

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Consideration

Cash is more commonly used as consideration for shares as it dispenses with the requirement of valuation.

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Use of offer conditions

The acquirer in a tender offer may impose legitimate conditions to the tender offer, provided that the terms thereof remain basically the same as that of a private sale.

The agreement between the acquirer or bidder and the sellers may be conditional on the bidder obtaining financing. In a tender offer, the financial adviser of the bidder must confirm that resources available to the bidder are sufficient to satisfy the full acceptance of the offer.

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Minimum acceptance conditions

There is no minimum acceptance condition applicable to tender offers in the Philippines.

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Deal security measures

Deal security measures are mutually agreed upon by the parties and may take any form as long as they are acceptable to the parties. Typically, a period of exclusivity is stipulated.

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Additional governance rights

A bidder needs only 2/3 of the total outstanding capital stock of the company to have control, as major corporate actions require only the approval of shareholders representing 2/3 of the total outstanding capital stock. The bidder may also exercise governance rights outside its direct shareholding by entering into voting trust agreements under which the voting rights of other shareholders may be transferred to it. The bidder can also solicit proxies.

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Mechanisms employed to buy-out shareholders

There are no squeeze-out mechanisms in the Philippines. A shareholder who refuses to sell to a tender offer cannot be forced to sell their shares. Only where a private agreement which allows for an option to call on the shares of a shareholder or an option to drag a shareholder into a proposed sale has been made between the shareholders may a shareholder be compelled to sell their shares. Short-form mergers are not allowed in the Philippines.

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Irrevocable commitments

Typically, commitments from principal shareholders are obtained through a private agreement which binds the parties after due diligence and negotiations. In the case of a private sale, an exit clause on the basis of a better third-party offer is not typical. However, such a clause is not illegal and parties may agree to be bound by an exit clause.

With respect to the mandatory tender offer, the shareholders who are the target of the tender offer may either accept or reject the offer. There is no commitment to accept the offer.

Disclosure

   

Making bids public

As discussed above, any activity that will result in a change in the control of the corporation (the acquisition or disposition or assets, or the merger or consolidation, or other similar arrangement) is considered as a material information that should be disclosed immediately. The decision to make a bid public depends on both the parties and the circumstances. Typically, parties prefer to delay any public announcement of a proposed acquisition.

Existing rules do not identify a specific stage in the negotiations when disclosure must be made. In practice, the target company typically discloses once its board of directors has approved the deal.

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Types of disclosure

For all corporations, share issuances that require an increase in the authorised capital stock require both board and shareholder approval and, thereafter, the approval of the SEC.

Listed companies are required to file an information statement with the SEC prior to the special or annual meeting of shareholders. The approval of an increase in the authorised capital stock is considered to be material information that must be disclosed.

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Disclosure of financial statements

Bidders do not need to produce financial statements in their disclosure documents.

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Disclosure of transaction documents

There is no need to disclose the transaction documents in full.

Duties of directors

   

Principal directors' duties

Directors must consult with the shareholders. Business combinations via merger or consolidation not only require board approval but must also be authorised by the shareholders representing 2/3 of the outstanding capital stock. The sale of all or substantially all of the assets of the company also requires a similar approval from the shareholders. Directors cannot prevent shareholders selling their shares to an acquirer in the absence of provisions in the articles of incorporation or bylaws that will be breached by such a sale. For example, a bylaw provision may prohibit shareholders from selling their shares to a third person engaged in a competing business and the shareholders may want to sell to a competitor.

As a general rule, directors are expected to use their own business judgement with respect to actions that require their approval. They are to perform their duties for company shareholders only.

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Special or ad hoc committees

Boards of directors may establish special or ad hoc committees in a business combination, but it is not common to do so.

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The business judgement rule

There is a similar rule to the US business judgement rule in the Philippines. The courts will respect the decisions of the board of directors in corporate matters, unless it can be shown that the board acted in bad faith or with gross negligence.

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Independent advice

Directors must recognise the fact that shareholders are involved in the approval of business combinations, as explained in Principal directors' duties.

 

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Shareholder activism

Shareholder activism is not currently considered to be an important force in the Philippines. In a share sale, unless there is an existing shareholders agreement between the selling shareholders and the non-selling shareholders, the role of the non-selling shareholders is limited to a right to participate in a tender offer and, in some instances, an appraisal right to require the company to buy their shares. In an asset sale and in a merger or consolidation, the shareholders' approval would be required; hence, in these cases, there is built-in structure for shareholder activism.

Defensive measures

   

Hostile tender offers

A tender offer can be launched provided that the requirements under the SRC are present. A hostile tender offer is possible but not yet common in the Philippines. Typically, prior to the launch of the tender offer, an acquirer will have already entered into private agreements with the significant shareholders of the target company.

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Directors' use of defensive measures

Defensive measures are allowed within the lawful limits but are not commonly used in the Philippines.

Defensive measures are not common in the Philippines. However, certain defences used in other jurisdictions can be implemented in the Philippines under appropriate circumstances. Such defences include the super-majority (ie, requiring 70% or 80% of the shareholders to approve an acquisition) and the crown-jewel defence (ie, selling or spinning off a very valuable component of the target company).

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Directors' duties

Directors are expected to act based upon their independent business judgement in all instances, and are expected to act within the legal parameters.

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Preventing a business combination

Theoretically, directors could 'just say no' and prevent a business combination. However, the non-consenting directors can be replaced by the shareholders at an annual shareholders' meeting.

Litigation

   

Litigation is not common in relation to M&A deals in the Philippines. Our experience is that parties to an M&A transaction usually work within the terms and conditions of their private agreement in resolving issues that arise post-signing or after the tender offer.

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Transactional stage

If at all, litigation will most likely arise in relation to M&A deals, after the transaction or acquisition.

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