Equity Finance 2024 Comparisons

Over the past few years, investments in fintech companies have dominated early-stage funding transactions in the Philippine market. Typically, these take the form of direct equity investments (such as in the form of common shares or preferred shares), convertible bonds and simple agreement for future equity (SAFE) notes. The latter type of financial instruments are used in venture capital as it potentially gives the holder the upside of a traditional equity instrument at a time when the investee is still in its early stages of operation. Thus, these types of instruments may be preferred by investors for the risk-return considerations in venture capital.

In private equity transactions, investments may come in through different classes of common shares and/or preferred shares, which may contain various features. Under Philippine law, shares of stock may be divided into different classes or series of shares. Although there are indications that the Philippine market for early stage or venture financing is on the upswing (especially compared to other markets in the region), nonetheless, the local market is not fully mature and there are no marked differences in the manner in which such early stage or venture financing transactions are structured. 

It is common to use preferred shares with a combination of features that are tailored to the specific needs and/or commercial objectives of the parties. For example, the economic returns of preferred shares may be fixed (eg, at an agreed dividend rate) or variable. Fixed dividend rates may also contain step-up features where the dividend rates are re-priced on certain future dates based on certain conditions. The infusion of capital through such preferred shares may be staggered through different series of shares to be issued based on certain contractual milestones. Preferred shares may also be redeemable and/or convertible into common shares.

In respect of control rights, preferred shares may be voting or non-voting. However, non-voting preferred shares will nevertheless have the right to vote on certain fundamental corporate matters under the law. Investors also often negotiate for well-defined rights of representation to the company’s board of directors and management, veto rights over certain fundamental matters, exit rights (including the right to piggy-back on future offerings of the company’s shares to the public), share transfer restrictions, and the like.

As of September 2024, there are 284 companies listed in the Philippine Stock Exchange (PSE). However, there has been limited interest in Philippine public offerings in recent years. In 2023 and 2022, for example, there were only three and nine initial public offerings (IPOs), respectively, in the PSE.

Several large conglomerates have companies that are listed on the PSE. In terms of the number of companies listed, the two largest sectors in the PSE are the industrial sector and the services sector. 

Companies which decide to go public benefit from the ability to tap the capital markets for required funding, the additional liquidity of their shares in the secondary trading market, and the extra exposure and reach in media. Other considerations for deciding to go public are regulatory requirements (eg, certain laws require electricity-generation companies and distribution utilities to offer a minimum percentage of their outstanding shares to the public) and estate planning considerations for certain shareholders.

Traditionally, IPOs in the Philippines may only be conducted through an offering of common shares. However, in 2022, the PSE released its rules on initial listing through a preferred share offering, which would then allow companies to conduct an IPO through an offering of preferred shares.

The typical process for conducting an initial public offering in the Philippines is as follows:

• preparatory stage – the relevant parties are engaged, a due diligence is conducted on the issuer, the articles of incorporation are amended and corporate restructurings are undertaken (if necessary), an audit of financial statements is conducted; and the prospectus and transaction documents are drafted;
• regulatory filing and review process – filings are made with the Securities and Exchange Commission and the PSE; the regulators review and evaluate the submissions;
• roadshow and book-building – underwriters present to potential investors; price is determined;
• public offer and settlement – offer period commences, selling materials are distributed, subscription of shares occurs; and
• listing – shares are listed on the PSE and trading commences.

Equity restructurings in the form of issuance of new shares (whether common or preferred shares), share swaps, assets-for-shares swaps, and debt-to-equity conversions are common in the Philippine market as a means to adjust for financial difficulties. Philippine companies (including publicly listed ones) with negative stockholders’ equity also undertake quasi-reorganisations through offsetting of additional paid-in capital (APIC) against a company’s deficit. Such reorganisations may be done without the infusion of additional capital if the company uses its pre-existing APIC, adjusts the par value of its previously issued shares, or converts debt into equity with substantial APIC.

Generally, all powers of a Philippine corporation are exercised through its board of directors. Members of the board are elected by shareholders in accordance with the provisions of the Revised Corporation Code of the Philippines (RCC) and the company’s by-laws.

The RCC provides for certain fundamental corporate matters that will require shareholder approval. In particular, the RCC requires at least two-thirds shareholder vote to, among others:

• amend the articles of incorporation;
• extend or shorten the corporate term;
• increase or decrease capital stock;
• incur, create, or increase bonded indebtedness;
• sell or dispose of all or substantially all corporate property;
• invest corporate funds in another corporation or business for any purpose other than the primary purpose for which it was organised;
• declare stock dividends;
• merge or consolidate; and
• dissolve the corporation where creditors are affected.

The RCC also provides an appraisal right for shareholders, which entitles them to payment of the fair value of their shares if they dissent and vote against certain corporate acts, such as (i) amendments to the articles of incorporation which change or restrict stockholder rights or change the corporate term, (ii) sale or disposition of all or substantially all corporate property, (iii)  merger or consolidation, and (iv) investment of corporate funds in another corporation or business for any purpose other than its primary purpose.

It is also common for shareholders to contractually agree upon certain shareholder rights to supplement what is provided under the law. For example, shareholders’ agreements may provide for higher quorum or voting requirements for certain reserved matters, exit mechanisms such as put options, tag-along or drag-along rights, and other share transfer restrictions such as rights of first refusal.

It is not unusual for shareholders to provide both debt and equity to the same company.

In certain instances, shareholders’ advances or loans provide easier access to financing than providing equity since the latter will typically require sufficient authorised capital stock for the company to be able to issue new shares. If the authorised capital stock is not sufficient to cover the issuance of shares, then the company needs to obtain both board and shareholders’ approvals on the amendment to its Articles of Incorporation and apply for approval for such amendment with the Securities and Exchange Commission. In contrast, unsecured advances or loans will require only approval by the board of directors of the company.

Cost implications of the mode of financing are also considered by a company in determining whether to get additional equity or advances from its shareholders. For example, documentary stamp tax (DST) of 0.75% is payable on any loans or advances, while DST of 1% is payable on the aggregate par value of newly issued shares.

Financial ratios such as the debt-to-equity ratio that a company needs to meet based on contractual undertakings may also be a consideration in determining whether the shareholders will infuse additional equity or provide advances or loans to the company.

The Financial Rehabilitation and Insolvency Act (Republic Act No 10142) (FRIA) (see the discussion in 5.1 Impact of Insolvency Processes on Shareholder Rights) does not provide for requalification of debt provided by a significant shareholder in an insolvency scenario. Subordination of debt provided by a significant shareholder needs to have such shareholders’ consent. Such subordination is typically required by third-party lenders as a condition to any loan to the company and as a contractual undertaking during the life of such third-party loan.

Equity finance in the Philippines generally refers to raising capital through private equity deals or stock exchange listings (eg, through IPOs, follow-on offerings (FOOs), and stock rights offerings). 

In the private equity space, a wide variety of equity instruments (with various features) may be seen (please refer to the discussion in 1.2 Growth and Private Equity Financing). Other hybrid financial instruments such as mezzanine capital may be used, but are not very common in the Philippines.

In public offerings through stock exchange listings, IPOs were traditionally structured as an offering of common shares. However, companies may now conduct IPOs through an offering of preferred shares under the PSE’s Preferred Share IPO Rules (please refer to the discussion in 1.3 Public Equity Markets). For FOOs, these consist of either common shares or preferred shares. Most preferred shares listed on the PSE contain features that simulate the cash flow returns of debt instruments. Thus, most preferred share listings have fixed dividend rates and are redeemable; typically, these preferred shares are redeemed on a defined step-up date.

Some Philippine-based issuers also issue senior (or in certain instances, subordinated) perpetual capital securities. These are typically listed on offshore exchanges.

Locally, large conglomerates often provide equity financing. There are generally no restrictions as to the shareholding percentages that may be owned by entities that are considered as Philippine nationals (as such term is defined under Philippine law, which generally means that 60% of the outstanding capital stock of the corporation is owned by Filipinos). However, banks are subject to certain equity ownership limits depending on, among others, the activities of the investee company.

Equity financing may also come from foreign investors. Foreigners may own the capital stock of Philippine entities, subject to certain foreign equity limitations set out in the 1987 Philippine Constitution and various laws. For example, there is a 40% foreign ownership limit for entities engaged in land ownership, and public utilities, and 30% for advertising entities. Also, no foreign ownership is allowed in mass media.

In recent years, the Philippines has sought to open up more sectors of the economy to foreign ownership by easing foreign equity restrictions in certain industries (see the discussion in 3.5 Noteworthy Regulatory Trends). 

Smaller and younger players will typically raise capital through private equity or debt. It is not typical for these companies to conduct an IPO, since listing regulations require track record of profitable operations (subject to certain exceptions), which would also determine the marketability of the company to investors.

Larger players and those in more capital-intensive industries drive deal activity due to their needs and their greater accessibility to lenders and investors. There has also been plenty of activity in the renewable energy industry as of late.

As of September 2024, there have been three IPOs for the year in the Philippine market. The biggest thus far for 2024 in terms of amount raised was the IPO of OceanaGold Philippines, Inc, which raised PHP6,08 billion.

Private equity deals are more common and may be larger in terms of amount raised. 

Whether 2025 will see more and larger IPOs will depend on the level of interest rates, market conditions, and the quality and size of the IPO applicants.

Private equity deals are more common than public-raised equity deals in the Philippines. Currently, there have not been as many IPOs and other stock exchange listings in the Philippines compared to other more developed markets.

Investment banks typically put together deals in the Philippine market. Investors and companies seeking to raise funds will benefit from sophisticated, well-established and well-connected investment banks (eg, some investment banks are affiliates of large banks which have a wide network of clients).

There are a few local venture capital and private equity firms, and these are not as big and numerous as those in more developed markets.

There are also a number of foreign private equity firms that provide equity financing to Philippine companies. 

Equity investors can exit through M&As, through IPOs, through put options, or where the instrument is appropriate for this mode of exit, full settlement (including any redemption) of the instrument by the investee company. However, M&As are more common in the Philippines.

The value realised through IPOs is dependent on market conditions and the valuation of the company. Equity investors may sell their shares as a selling shareholder during the IPO, or they may sell their shares in the secondary market post-listing. In such case, a stock transaction tax of 6/10 of 1% of the gross selling price will be applicable to the sale of listed shares. Note that a different tax rate applies to sales of unlisted shares in M&A deals, which is the capital gains tax (see the discussion in 4.1 Withholding/Capital Gains Tax). Thus, tax considerations may be relevant in choosing the most appropriate exit options for an equity investor.

Equity investors can also exit through contractual mechanisms such as put options or redemption features. Put options may be exercisable as against a controlling shareholder or, subject to the statutory requirement of unrestricted retained earnings at the point of sale and purchase of the underlying shares, against the issuing company itself. Redemption features in preferred shares may be designed to compel redemption by the issuer. These may come in the form of a mandatory redemption feature or redemption options coupled with a dividend re-pricing mechanism on step-up date. The latter would lead to higher dividend rates, which may be designed to be more unfavourable to the issuer, unless the shares are redeemed.

The choice to raise capital through equity or debt may be influenced by a variety of factors.

Cost of capital and investor sentiment will generally drive the choice between debt and equity for companies in need of funds. Thus, interest rates and the monetary policy of the BSP are important variables that affect the market.

Compliance with contractual requirements such as a prescribed debt-to-equity ratio, or regulatory requirements such as foreign ownership limitations, may also be a primary consideration. Companies that operate in industries that are subject to foreign equity limitations are restricted in terms of the amount of foreign equity that they can obtain.

Philippine banking regulations also prescribe a single borrower’s limit which puts a ceiling on the amount of credit that a local bank may extend to a single borrower. Currently, this is set at 30% of the amount of the net worth of such bank.

The timeline of an IPO may range from three to six months, beginning at the preparatory stage (which may include the need to amend the company’s articles of incorporation and to conduct an audit of its financial statements, etc), and ending with the listing of the company’s shares on the PSE. This timeline likewise includes the conduct of due diligence, drafting of transaction documents, regulatory filings, and book-building, although a longer timeline may be needed if restructuring and other pre-IPO activities will still need to be undertaken to prepare the company to list for the first time.

Private equity deals have a similar timeline of around three to six months. Deals that involve an auction process normally take longer than those where negotiations take place directly with identified investors. This timeline likewise includes the conduct of due diligence and the drafting of transaction documents. Transactions that are subject to mandatory tender offers and/or compulsory merger notification with the Philippine Competition Commission may also have extended timelines.

There are generally no restrictions upon foreign equity investments in a Philippine corporation. However, certain nationalised industries are subject to ceilings on permissible foreign equity.

The 1987 Philippine Constitution and various statutes reserve certain areas of economic activity for Philippine nationals or companies a minimum percentage of whose capital stock is owned by Philippine nationals. For example, only up to 40% foreign equity is allowed for entities engaged in land ownership and public utilities, and 30% for advertising entities. Meanwhile, no foreign equity is allowed in mass media.

The Philippine President regularly releases a Foreign Investment Negative List, which contains a compilation of areas of economic activity that are subject to foreign equity restrictions. However, the Foreign Investment Negative List is not updated each time that there are changes to foreign equity restrictions under the relevant laws or regulations. Thus, recent amendments in law or regulations relating to foreign equity restrictions may not necessarily be reflected yet in the latest Foreign Investment Negative List.

SEC Memorandum Circular No 8 (2013) provides that for purposes of determining compliance with regulations prescribing a minimum Filipino ownership requirement in corporations operating in nationalised activities, the required percentage of Filipino ownership shall be applied to both (i) the total number of outstanding shares of stock entitled to vote in the election of directors; and (ii) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.

Under Philippine jurisprudence, corporations have the flexibility to create shares of different classes and with varying features to enable them to raise the necessary funds from both domestic and foreign capital markets. Thus, a corporation intending to raise foreign capital may calibrate its mix of debt and equity in such a manner that its resulting capital structure would comply with the relevant regulations, including any applicable foreign ownership restrictions. This may entail an analysis of the economic and control rights accorded by different types of financial instruments (eg, debt, equity, hybrids, and derivatives) that may be used, and corporate layering (to the extent allowed by law), among others.

There are generally no restrictions on paying dividends to domestic shareholders, provided that the company has enough unrestricted retained earnings.

However, the remittance of dividends offshore to foreign shareholders and repatriation of capital outside the Philippines are subject to the foreign exchange regulations to the extent that the foreign exchange will be sourced from within the Philippine banking system. Under the Manual of Regulations for Foreign Exchange Transactions, inward foreign investments in equity securities are not required to be registered with the BSP.  However, only BSP-registered investments (whether registration is with BSP itself or through an authorised agent bank) shall be entitled to full and immediate repatriation of capital and remittance of related earnings thereon using foreign exchange resources of authorised agent banks. Thus, for certain types of equity investments that are not registered with the BSP, repatriation of capital and remittance of related earnings must be sourced from outside the banking system.

The Anti Money-Laundering Act, as amended, requires covered persons to, among others, report covered and suspicious transactions to the Anti-Money Laundering Council, and implement customer due diligence measures.

Covered persons include, among others:

• banks, quasi-banks, trust entities, foreign exchange dealers, remittance and transfer companies and other similar entities and all other persons and their subsidiaries and affiliates supervised or regulated by the BSP;
• insurance companies;
• securities dealers, brokers, investment houses and other similar persons managing securities or rendering services as investment agent, adviser, or consultant;
• mutual funds, common trust funds, and other similar persons;
• other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the SEC;
• persons who provide any of the following services: (i) managing of client money, securities or other assets, (ii) management of bank, savings or securities accounts, (iii) organisation of contributions for the creation, operation or management of companies; and (iv) creation, operation or management of juridical persons or arrangements, and buying and selling business entities.

Covered transactions generally refer to transactions involving a total amount in excess of PHP500,000 within one banking day.

Covered persons are required to conduct customer due diligence based on a risk-based approach, which considers the appropriate mitigation measures for the assessed level of risk. The conduct of customer due diligence includes the relevant customer identification and verification processes.

In purely domestic equity deals where the seller and buyer are both in the Philippines and the shares are issued by a Philippine company, Philippine law generally governs. On the other hand, parties to cross-border transactions typically agree upon some widely accepted foreign law to govern their agreement (this is usually English or New York law).

It is also common for contracts to contain arbitration clauses in a neutral seat, as this is preferred by parties who seek a fair and efficient dispute resolution mechanism.

Relaxation of Foreign Equity Restrictions

In recent years, Philippine lawmakers and regulators have relaxed foreign equity restrictions in certain areas of economic activity.

Amendments to the Public Service Act

The Public Service Act was amended in 2022 to limit the definition of public utilities (whose equity must be at least 60% Filipino-owned) to those operating any of the following: distribution of electricity; transmission of electricity; petroleum and petroleum products pipeline transmission systems; water pipeline distribution systems and wastewater pipeline systems, including sewerage pipeline systems; seaports; and public utility vehicles.

In the past, foreign equity restrictions on ownership of public utilities covered a broader list of industries, such as telecommunications. The equity of entities in such industries, which are no longer covered by the new definition of a public utility, may now be fully owned by foreigners.

Amendments to the IRR of the Renewable Energy Act

In 2022, the Department of Energy amended the implementing regulations of the Renewable Energy Act to remove foreign equity restrictions on the award of renewable energy service/operating contracts for the exploration, development and utilisation of renewable energy resources, save for a few exceptions (such as the appropriation of water direct from a natural source, geothermal energy, and utilisation of timber and non-timber forest products, which remain subject to foreign equity restrictions). Thus, these renewable energy service/operating contracts may now be awarded to corporations with up to 100% foreign-owned equity. 

Changes Reflected in the Foreign Investment Negative List

As discussed in 3.1 Investment Restrictions, foreign equity restrictions are scattered across various Philippine laws. The Foreign Investment Negative List, which is updated from time-to-time, is meant to reflect the changes in foreign equity restrictions under Philippine laws and regulations.

Dividends

Payments of dividends, distributions or other form of payments to investors are generally subject to final withholding taxes. However, the rates will vary depending on the taxpayer classifications – whether the investor is an individual or a corporation; if the investor is an individual, whether they are a citizen or an alien; if the investor is a corporation, whether it is a domestic or foreign corporation; whether the investor is a Philippine resident or not; and whether the investor is engaged in trade or business or not.

Resident citizens, non-resident citizens and resident aliens are subject to a 10% final withholding tax on cash and/or property dividends received from a domestic corporation. The dividends received by non-resident aliens engaged in trade or business in the Philippines are subject to a 20% final withholding tax, while those received by non-resident aliens not engaged in trade or business in the Philippines are subject to a 25% final withholding tax.

With respect to corporate investors, dividends declared by a domestic corporation in favour of another domestic corporation or a resident foreign corporation (eg, a foreign corporation with a branch in the Philippines) are exempt from Philippine income tax. In contrast, dividends received by a non-resident foreign corporation from a domestic corporation are subject to a 25% final withholding tax. This 25% final withholding tax on dividends paid to a non-resident foreign corporation may be reduced to a lower rate of 15% based on the tax sparing provision under Philippine tax laws. Tax sparing applies when the country where the non-resident foreign corporation is domiciled imposes no tax on foreign-sourced dividends or the country of domicile of the non-resident foreign corporation allows at least 10% credit equivalent for taxes deemed to have been paid in the Philippines.

Any preferential tax rate or exemption under the relevant tax treaty may also apply in the proper instances (see the discussion in 4.3 (Double) Tax Treaties). 

In cases where a tax needs to be withheld from the dividend, the domestic corporation which declared the dividend will be responsible for withholding the corresponding tax on the dividends and remitting the same to the Bureau of Internal Revenue (BIR) –the Philippines’ tax authority.

Gain on Sale of Equity Securities

As a general rule, capital gains arising from a sale or other disposition of shares in a domestic corporation not traded through the local stock exchange (ie, the PSE) and held as a capital asset is subject to capital gains tax (CGT) at the rate of 15%. Capital assets are properties held by the taxpayer that are not used in the business.

Under regulations issued by the BIR, the gain from the sale or other disposition of shares of stock is the excess of the amount realised therefrom (ie, the selling price) over the basis for determining gain (ie, the cost basis of such shares). The loss is the excess of the basis for determining loss over the amount realised. The cost basis for determining the capital gains or losses for shares of stock acquired through purchase is the actual purchase price plus all costs of acquisition, such as commissions, DST, transfer fees, etc.

The investor must file the CGT return and pay the corresponding CGT within 30 calendar days after each sale or other disposition of shares of stock not traded through the PSE. A final consolidated return of all share sale transactions during the taxable year must be filed on the 15th day of the fourth month following the close of the taxable year. Thus, if the taxable year is a calendar year, the consolidated return must be filed on April 15 of the succeeding year.

Any preferential tax rate or exemption under the relevant tax treaty may also apply in the proper instances (see the discussion in 4.3 (Double) Tax Treaties). 

In addition to the final withholding tax on dividends and the CGT on sale of equity securities, an investor should also consider the following taxes in relation to equity securities: DST, stock transaction tax and donor’s tax.

DST

The sale or transfer of shares of stock in a corporation is subject to DST at the rate of around 0.75% of the par value thereof. The DST return must be filed with the BIR and the corresponding DST paid within five days after the close of the month when the taxable document (eg, deed of assignment of shares of stock) was signed. Either the seller or the buyer may pay the DST. If one party to the sale is exempt from DST, the other party who is not exempt will be directly liable for the payment of the DST due.

If the DST on the share sale is not paid, the taxable document will not be admissible as evidence in a Philippine court unless such DST (and, if such DST is not paid when due, any applicable penalties and interest) is paid.

Stock Transaction Tax

The sale of shares of stock listed and traded through the PSE is subject to a stock transaction tax of 0.6% of the gross selling price (or gross value in money) of the shares of stock sold. The stockbroker who effected the sale is responsible for collecting the tax and remitting the same to the BIR.

Any gain from the sale of shares of stock listed and traded through the PSE is exempt from CGT.

Donor’s Tax

Where the selling price is lower than the fair market value of the shares, the difference will be subject to donor’s tax. The seller (eg, the investor) who transfers the share for less than the fair market value is considered the donor. However, a sale or other transfer of property made in the ordinary course of business (ie, a transaction which is bona fide, at arm’s length, free from any donative intent) will be considered as made for an adequate and full consideration in money or money’s worth. The BIR will evaluate this on a case-by-case basis.

Having said these, the payment of the relevant taxes to the BIR is a precondition to the issuance by the BIR of a Certificate Authorising Registration (CAR). A CAR is required for the stock transfer to be recorded in the corporation’s records. The recording of sales and transfer of shares of stock in the STB without presenting or submitting the CAR from the BIR to the Corporate Secretary or other transfer agent could be assailed, although the transfer remains valid as between the parties.

Currently, the Philippines has tax treaties with the following countries: Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Brunei, Canada, China, Czech Republic, Denmark, Finland, France, Germany, Hungary, India, Indonesia, Israel, Italy, Japan, Korea, Kuwait, Malaysia, Mexico, Netherlands, New Zealand, Nigeria, Norway, Pakistan, Poland, Qatar, Romania, Russia, Singapore, Spain, Sri Lanka, Sweden, Switzerland, Thailand, Turkey, United Arab Emirates, United Kingdom of Great Britain and Northern Ireland, United States of America and Vietnam.

Generally, the tax treaties apply to income tax (eg, final withholding tax on dividends and CGT). Certain tax treaties, such as those between the Philippines and the United Kingdom (ie, Convention between the Government of the Republic of the Philippines and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and Capital Gains), also apply to “identical or substantially similar” taxes.

A non-resident investor may avail itself of the preferential treaty rates by complying with the procedures of the BIR. Under local regulations, when the treaty rates have been applied by the withholding agent on the income earned by the non-resident, the withholding agent must file with the BIR a request for confirmation on the propriety of the withholding tax rates applied on that item of income. On the other hand, if the regular rates have been imposed on the said income, the non-resident itself (and not the withholding agent) must file a Tax Treaty Relief Application with the BIR.

The general law on insolvency applicable to all Philippine corporations is FRIA. Under the FRIA, both rehabilitation proceedings and liquidation proceedings are considered insolvency proceedings.

Rehabilitation

A court-supervised rehabilitation proceeding will result in the issuance of a Commencement Order. The Commencement Order will, among other things:

• prohibit or serve as the legal basis for rendering null and void the results of any extrajudicial attempt to collect on or enforce a claim against the insolvent company after the issuance of the Commencement Order;
• consolidate the resolution of all legal proceedings by and against the insolvent company to the court, except, subject to the court’s discretion, those cases pending or filed before a specialised court that is capable of resolving the claim more quickly, fairly, and efficiently than the court; and
• include a Stay or Suspension Order, which will:
1. suspend all actions or proceedings, in court or otherwise, for the enforcement of claims against the insolvent company;
2. suspend all actions to enforce any judgment, attachment, or other provisional remedies against the insolvent company;
3. prohibit the insolvent company from selling, encumbering, transferring or disposing in any manner any of its properties except in the ordinary course of business; and
4. prohibit the insolvent company from making any payment of its liabilities outstanding as of the commencement date, subject to certain exceptions.

The rehabilitation court will appoint the rehabilitation receiver, who has the principal duty of preserving and maximising the value of the assets of the debtor during the rehabilitation proceedings, determining the viability of the rehabilitation of the debtor, preparing and recommending a Rehabilitation Plan to the court, and implementing the approved Rehabilitation Plan. An equity investor is not eligible to be elected or appointed as a receiver, as an equity investor is considered to be conflicted against the interest of the debtor.

An equity investor does not have the power to vote to remove the rehabilitation receiver, as the latter may only be removed by the rehabilitation court, either motu proprio or upon motion by any creditor or creditors holding more than 50% of the total obligations of the debtor.

The rehabilitation receiver must notify the creditors and stakeholders, including the equity investors, that the Rehabilitation Plan is ready for examination. Accordingly, the equity investors may examine the Rehabilitation Plan. However, only the corporate creditors may vote to approve or reject the Rehabilitation Plan. Stated differently, the equity investors cannot vote to approve or reject the Rehabilitation Plan.

Liquidation

A liquidation proceeding will result in the issuance of a Liquidation Order, which will, among other things, prohibit payments by the insolvent company and the transfer of any property by the insolvent company, including payments or transfers to equity investors.

An equity investor is also not allowed to vote in the election of the liquidator. Only creditors (i) who have filed their claims within the period set by the court, and (ii) whose claims are not barred by the statute of limitations, are allowed to vote in the election of the liquidator.

However, an equity investor may challenge the claims filed for application.

Equity investors are paid last during a company’s insolvency as the Philippines adheres to the trust fund doctrine. Under this doctrine, the capital stock, properties, and other assets of a company are regarded as held in trust for the corporate creditors, who must first be paid before any corporate assets may be distributed among the shareholders. In other words, the corporate creditors are preferred over the company’s equity investors.

Under the RCC, a company’s board of directors may call for the payment of unpaid subscriptions. Further, the trust fund doctrine also considers a company’s subscribed capital as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction.

Financial rehabilitation or liquidation proceedings under the FRIA typically take several years to complete (and may last for at least two and some cases longer than five years). This timeline will largely depend on the number of creditors. This is because the liquidation process includes actions that require the participation or involvement of creditors, such as the election or appointment of receiver or liquidator, preparation and submission of a registry of claims, filing of claims by creditors, resolution of any oppositions to claims, and the approval and implementation of a rehabilitation or liquidation plan (as applicable).

As discussed above, equity investors are the last ones to be paid out of the company’s properties during liquidation. In a financial rehabilitation scenario, it is possible for shareholders to recover upon their equity investment (although this would take place only after an extended period of time and recoveries would usually represent only a percentage of their initial investment). In liquidation proceedings, even the creditors will in all likelihood fail to recover the full amount of their principal, and it is unlikely that shareholders will recover their investment.

Under the FRIA, the only process available for an insolvent company to be rescued from financial distress is rehabilitation. This process refers to the restoration of the debtor to a condition of successful operation and solvency, provided that it is shown that (i) its continuance of operation is economically feasible, and (ii) its creditors can recover by way of the present value of payments projected in the plan, more if the debtor continues as a going concern than if it is immediately liquidated.

Rehabilitation is available to an insolvent company which, even if illiquid, has assets that can generate more cash if used in its daily operations than if they were immediately sold. Its liquidity issues may be addressed by a practicable business plan that will generate enough cash to sustain daily operations, has a definite source of financing for its proper and full implementation, and is anchored on realistic assumptions and goals.

To determine the feasibility of a proposed rehabilitation plan, a thorough examination and analysis of the distressed company’s financial data must be conducted. If the results of such examination and analysis show that there is a real opportunity to rehabilitate the company in view of the assumptions made and financial goals stated in the proposed rehabilitation plan, then it may be said that a rehabilitation is feasible.

Investors should also be aware of other risk areas should the company undergo an insolvency proceeding.

Collection Suit by Creditors Against Unpaid Subscription

Corporate creditors are allowed to maintain an action against any unpaid subscriptions and thereby step into the shoes of the company for the satisfaction of the latter’s claims. To make out a prima facie case in a suit against equity investors of an insolvent company to compel them to contribute to the payment of its debts by making good unpaid balances upon their subscriptions, it is only necessary to establish that the equity investors have not in good faith paid the par value of the stocks of the corporation.

Rescission or Nullity of Pre-commencement Transaction

Contracts and other transactions entered by the company may be rescinded or declared void on the ground that the same were executed with intent to defraud a creditor or creditors or which constitute undue preference of creditors. Under the FRIA, a disputable presumption arises that a transaction was entered into in fraud of creditors, if such transaction:

• provides unreasonably inadequate consideration to the debtor and is executed within 90 days prior to the commencement date (ie, the date on which the petition for voluntary or involuntary insolvency proceedings was filed);
• involves an accelerated payment of a claim to a creditor within 90 days prior to the commencement date;
• provides security or additional security within 90 days prior to the commencement date;
• involves creditors, where a creditor obtained, or received the benefit of, more than its pro rata share in the assets of the debtor, executed at a time when the debtor was insolvent; or
• is intended to defeat, delay or hinder the ability of the creditors to collect claims where the effect of the transaction is to put assets of the debtor beyond the reach of creditors or to otherwise prejudice the interests of creditors.

This applies to both rehabilitation and liquidation proceedings.

Civil Liability of Directors and Officers

Directors and corporate officers who have notice of the commencement of insolvency proceedings or have reason to believe that proceedings are about to be commenced, may be held liable for double the value of the property sold, embezzled or disposed of, or double the amount of the transaction involved, whichever is higher, if they wilfully:

• dispose of any property of the debtor other than in the ordinary course of business or authorise or approve any transaction in fraud of creditors or in a manner grossly disadvantageous to the debtor and/or creditors; or
• conceal, authorise or approve the concealment from the creditors, or embezzle or misappropriate, any property of the debtor.

Any amounts recovered from directors and officers in the foregoing instances will be held for the benefit of the debtor and its creditors.