Corporate M&A 2019 Comparisons

Last Updated April 16, 2019

Law and Practice

Authors



SyCip Salazar Hernandez & Gatmaitan was founded in 1945 and is one of the largest law firms in the Philippines, with offices in Makati City, Cebu, Davao and the Subic Freeport. Its corporate/M&A team has acted as counsel in many of the country’s largest investments and M&A deals, from initial structuring and due diligence through to the preparation of shareholder agreements and the requisite regulatory processes. During the past decade’s wave of foreign investor interest in the telecommunications industry, the team has represented major companies including First Pacific in its acquisition of a significant interest in its principal local carrier, the Philippine Long Distance Telephone Company. It has also acted on the local investments of most of the world’s largest cement manufacturers. In the banking industry, the team has worked on deals including the merger of The Bank of the Philippine Islands and Far East Bank & Trust Company, the PCIBank-IBAA merger, and the series of mergers among Manufacturers Hanover Trust, Chemical Bank, Chase Manhattan and J.P. Morgan, with JPMorgan Chase Bank as the surviving bank.

M&A activity in the Philippines in 2019 should continue the positive arc seen in 2018, when foreign and Filipino investments underwent a significant increase over 2017 levels, based on the statistics of Government investment promotion agencies. Areas of interest should be the same: IT-based enterprises, eg, fintech services and retail, energy (as companies continue to look for opportunities in renewables), plus businesses that may flow from the increased Government spending on major infrastructure projects, eg, property and construction. Elections tend to slow down decision making, so the May 2019 elections for various government officials, including members of Congress, could impact business activity, but 2019 should be at least as busy as 2018.

A slew of laws intended to have a direct impact on business have been recently enacted and a few more are in the pipeline. These include the Revised Corporation Code (enacted in 2019), which seeks to update a four-decade-old statute, and the Personal Property Security Act that has changed established processes for creating liens on chattel. These and other laws purport to ‘ease the doing of business’ and there even has been enacted a law called Ease of Doing Business and Efficient Government Service Delivery Act of 2018 (Republic Act No 11032). Existing and potential investors and stakeholders will need to grapple with these new laws, their actual, practical impact, and some of the unavoidable uncertainties that new laws create.

The express policy push for less red tape and ‘ease in doing business’, has been partnered with broader focus and more regulation on payment systems (previously unregulated) and anti-money laundering act compliance. Congress enacted the National Payments Systems Act (Republic Act No 11127) in October 2018. The Bangko Sentral ng Pilipinas (the Philippines’ central monetary authority) issued Circular No 1033 Series of 2019 (Amendments to Regulations on Electronic Banking Services and Other Electronic Operations), which requires banks and other financial institutions that intend to offer electronic payment and financial services to obtain the appropriate authority/licence. The Securities and Exchange Commission has also amended its annual report form for all local entities, requiring them now to divulge more information about beneficial ownership. The effectiveness of this new requirement has been pushed back to the middle of 2019.

The current administration has expressed a desire to end certain contractual practices in respect of manpower, but the direction of actual policy implementation has been unclear. This will be an on-going concern for labour-intensive businesses and may see more movement after the May 2019 elections.

The Department of Finance plans to pursue rationalisation of tax incentives being given to new and expanding businesses in particular areas. Certain tax incentive regimes may no longer be available or may be restricted.

Areas for M&A activity in 2019 will include IT-based enterprises such as fintech services and retail, energy (as companies continue to look for opportunities in renewables), and businesses that may flow from the increased Government spending on major infrastructure projects, eg, real estate and construction. If the common tower policy of the Government is finally issued and takes off, this will be a significant area of M&A activity. There is some resurgence of interest in REIT but there will likely be no real movement until after the May 2019 elections.

The acquisition of local businesses or companies is typically effected through:

  • a purchase of, or investment in, shares in a Philippine company; or
  • the purchase of the assets or property comprising a local business.

The primary Philippine regulators that are most relevant for local M&A activity would be the Securities and Exchange Commission that generally administers laws on doing business, establishing and running corporates, public companies, and foreign ownership requirements; the Philippine Competition Commission that implements laws requiring merger notifications; and the Bureau of Internal Revenue. M&A projects in particular businesses (eg, telecoms and banking) could require approvals from or notices to industry-specific agencies.

While foreign investment in local business is generally allowed and even encouraged, certain activities are partially or wholly reserved for Philippine nationals. Foreign ownership limitations are set out in the Philippine Constitution and other statutes. Examples of these limitations are a 40% foreign ownership limit for public utilities such as telecoms and transportation, and land ownership; 30% foreign ownership limit for advertising; and 100% Filipino ownership requirement (no foreign equity is permitted) for mass media.

Assuming certain Philippine revenue and asset value thresholds are met, mergers and acquisitions and joint ventures are subject to compulsory merger notification under the Philippine Competition Act and its Implementing Rules and Regulations. Where subject to such compulsory notification, the merger notices must be filed with the Philippine Competition Commission within 30 days from the signing of the definitive agreements, and securing a merger clearance from the Commission is a suspensory condition, ie, the transaction cannot be consummated prior to the issue of such clearance (unless the relevant review period lapses without the Commission having taken any action over the merger filing).

From a human resources/employment law perspective, acquirers should be concerned with:

  • security-of-tenure rules that prohibit termination of employment except for just and lawful causes and only in accordance with specific procedures, and do not allow transfer of employees from one business entity to another without, effectively, the employee’s consent;
  • bottom-line costs for personnel by reason of salaries and mandatory benefits; and
  • liabilities or business stability issues affecting acquisition targets by reason of employee claims, including claims for regularisation, and labour relations history, especially where a target is unionised.

There is generally no specific national security review of acquisitions in the Philippines.

The Philippine Supreme Court has issued at least three significant decisions relating to the interpretation of Filipino ownership requirements in partly nationalised industries.

In Gamboa v Teves (GR No 176579; Decision: 28 June 2011; Resolution: 9 October 2012), the Supreme Court clarified that when the Constitution or the statute imposes requirements that the ‘capital’ of a corporation be at least 60% Filipino-owned, the word ‘capital’ in such provisions refer ‘only to shares of stock entitled to vote in the election of directors.’

Further, the Securities and Exchange Commission, following the pronouncement of the Decision and Resolution in Gamboa, issued Memorandum Circular No 8, series of 2013, which provides that in determining compliance with constitutional and statutory requirements on nationality, “the required percentage of Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the election of directors; AND (b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.”

In Roy v Herbosa (GR No 207246; Decision: 22 November 2016; Resolution: 18 April 2017), the Supreme Court upheld the validity of SEC Memorandum Circular No 8, series of 2013, and clarified that a 60% Filipino ownership requirement does not apply to each and every class of shares.

In Narra Nickel Mining and Development Corp v Redmont Consolidated Mines Corp (GR No. 195580; Decision: 21 April 2014; Resolution: 28 January 2015), the Supreme Court was faced with the question of whether the control test or the grandfather rule should be applied to determine compliance with nationality restrictions.  The determination of the correct test to apply is important in layered structures: under the control test, a shareholder of a corporation that is subject to the 60% minimum Filipino ownership requirement is considered a Philippine national, and therefore able to hold the 60%, even if that shareholder itself is partially foreign-owned, for as long as foreign ownership in that shareholding is also limited to 40%.  However, under the grandfather rule, to determine compliance with Filipino ownership, actual Filipino shareholdings at each corporate tier up to the ultimate individual shareholders will be considered. Thus, if a 60/40 corporation owns 60% of the shares of a corporation subject to the 60/40 rule, that 60% will not be considered as entirely Filipino-held; it will be considered Filipino only to the extent of 36%, which is 60% of 60%.

The Supreme Court held in Narra that while corporate layering is allowed under the Foreign Investments Act, the grandfather rule must be applied when the 60/40 Filipino-foreign equity ownership is in doubt.  The Supreme Court further held that, among other things, an arrangement where most of the paid-in capital was contributed by the foreign shareholder creates doubt on the Filipino shareholder’s ownership of 60% of the corporation.  This prompted the Supreme Court to apply the grandfather rule (instead of the control test), resulting in a finding that the corporations’ subject of the Narra Nickel case are non-compliant with the nationality restriction, that is, that they are not 60% Filipino-owned.

No significant change to takeover law is anticipated in 2019. However, it should be noted that takeovers or tender offers are subject to compulsory merger notification provided certain Philippine revenue or asset-value thresholds are met.

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

The Securities Regulation Code and its implementing regulations require the disclosure of beneficial and legal ownership of shares in a reporting company, eg, a public company.

Any person who acquires, directly or indirectly, the beneficial ownership of 5% or more of any class of equity securities of a public company is required to disclose it to the issuer of the shares, the Philippine Stock Exchange (if listed) and the Securities and Exchange Commission, by filing a sworn statement using SEC Form 18-A within five working days of the acquisition. If the equity securities under the name of the legal owner are beneficially owned by another person/s, the legal owner and beneficial owner must file individually or jointly. If any change occurs in the facts set forth in the statements, an amendment must be transmitted to the issuer, the Philippine Stock Exchange and the Securities and Exchange Commission.

Any person who is, directly or indirectly, the beneficial owner of 10% or more of any class of any security of a public company must disclose:

  • beneficial ownership, by filing SEC Form 23-A within ten calendar days of the effective date of the registration statement for that security, or within ten calendar days after he or she becomes the beneficial owner subsequent to the effective date of the registration statement, whichever is earlier; and
  • if there has been any change in ownership during the month, at the close of the calendar month and the changes in ownership that have occurred during that calendar month, by filing SEC Form 23-B within ten calendar days of the close of each calendar month thereafter.

Each disclosure must be made to the Philippine Stock Exchange (if listed) and the Securities and Exchange Commission. The person is also required to notify the Securities and Exchange Commission if the direct or indirect beneficial ownership of the securities falls below 10%.

The same disclosure obligations apply when a director or officer of the issuer of the security is elected or appointed or ceases to hold that position.

There is a separate set of procedure and conditions laid out in the regulation by which the following entities may comply with the disclosure obligation: a broker or dealer registered under the SRC, a bank authorised to operate as such by the Bangko Sentral ng Pilipinas, an insurance company subject to the supervision of the Insurance Commission, an investment house registered under the Investment Houses Law, an investment company registered under the Investment Company Act, a pension plan subject to the regulation and supervision by the Bureau of Internal Revenue and/or the Insurance Commission, or a group where all its members are persons specified above.

There do not appear to be any laws or regulations prohibiting the introduction in the articles of incorporation or by-laws of a listed company of rules that are different from those set out in the statutes or regulations of regulatory bodies. However, a company is limited in that it cannot introduce rules that are inconsistent with, or will result in the violation of, statutes or regulations of regulatory bodies.

For instance, in respect of reporting thresholds such as those enumerated in 4.2 Material Shareholding Disclosure Threshold, above, any such company-imposed rules cannot supplant or substitute the reporting thresholds set out in the statutes and regulations of regulatory bodies, eg, the Securities and Exchange Commission and the Philippine stock exchange. Any rules on reporting thresholds should merely be supplementary to those that are already provided in the laws and regulations. Hence, the person on whom the obligation rests will still be obliged to comply with the reporting thresholds set out in the statutes and regulations of regulatory bodies, in addition to any additional reporting obligations that are required by the articles of incorporation or bylaws of the company.

Dealings in derivatives are generally allowed. However, the validity of any onshore offer, sale, dealing or entry into commodity futures contracts is not free from doubt, given that there is a prohibition in the regulations disallowing any transaction in commodity futures contracts except those of the regulations issued by the Securities and Exchange Commission, and taking into account that the government agency has yet to lift the suspension of the rules on futures trading. The Securities and Exchange Commission clarified, however, that “it would only be regulating the public trading of commodities futures contracts in contrast to privately negotiated transactions.” (The Philippine Securities Regulation Code, Rafael A Morales, (Annotated) (2005), at 115, citing History/Background of the Securities Regulation Code (15 September 2001) at 21-22.)

In addition, there are also certain derivative transactions that may be considered as games of chance than on skill or ability, such as when the derivative transaction is entered into to speculate on interest or exchange rate movements. A Philippine court, in case of doubt as to the nature of a gaming contract before it, will apply the presumption that the transaction is one of chance. While a game of chance is not illegal per se, the Civil Code provides that no action can be maintained by the winner to collect what he has won, at the same time that it permits the loser to recover his losses, with legal interest from the time of payment of the amount lost. If it can be shown, nevertheless, that a Philippine party to a derivative transaction has an actual economic interest in the fluctuation of the relevant index or reference price (eg, as a hedge against movements in an interest rate, currency rates, a commodity price or an equity index), it should be sufficient to establish that such a transaction is valid and enforceable against the Philippine party.

The Securities Regulation Code and the regulations implementing the law provide for disclosure of beneficial and legal ownership of shares in a reporting company, eg, a public company. Under the regulations, a person shall be deemed to be the beneficial owner of a security if he or she has the right to acquire beneficial ownership within 30 days from the exercise of any option, warrant or right, or conversion of any security; or pursuant to the power to revoke a trust, discretionary account or similar arrangement; or pursuant to the automatic termination of a trust, discretionary account or similar arrangement.

Thus, to the extent that the terms of the derivative instrument give the holder the right to convert or otherwise acquire its underlying equity securities within 30 days, the holder is required to make a beneficial ownership disclosure where the conversion or acquisition will reach the trigger thresholds of either 5% or 10% of the equity securities.

SEC Form 18-A and SEC Form 23-A, which are the SEC-prescribed forms for beneficial ownership disclosure of 5% and 10% shareholdings respectively, require the disclosure of the purpose or purposes of the acquisition securities of the issuer, and a description of any plans or proposals that the reporting persons may have which relate to or would result in, among other things, an extraordinary corporate transaction, eg a merger, reorganisation or liquidation, involving the issuer or any of its subsidiaries, and any change in the present board of directors or management of the issuer, including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the board.

Moreover, the forms require a description of any contract, arrangement, understanding or relationship among the reporting persons and between those persons and anyone with respect to any securities of the issuer. This includes but is not limited to the transfer or voting of any of the securities, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies, naming the person with whom the contracts, arrangements, understandings or relationships have been agreed. 

The forms also require information for any of the securities that are pledged or otherwise subject to a contingency that would give another person voting power or investment power over the securities. The disclosure of standard default and similar provisions contained in loan agreements need not be included, however.

In addition, the forms require the submission of copies of all written agreements, contracts, arrangements, understandings, plans or proposals relating to the acquisition of issuer control, liquidation, sale of assets, merger, or change in business or corporate structure or any other matter as disclosed in the report, as well as the transfer or voting of the securities, finder's fees, joint ventures, options, puts, calls, guarantees of loans, guarantees against losses or the giving or withholding of any proxy.

A target entity is required to disclose a deal when the information ceases to be soft information. Soft information is information that is indefinite in nature. It may, depending on certain facts and circumstances, include uncertainties and developments in process, incomplete proposals or preliminary negotiations, or corporate transactions in the planning stage or bid submissions. A listed company will typically take the position that information ceases to be soft information only when the board of directors of the listed company has approved the transaction (to the extent it is a party to the transaction), or if it acquires verifiable information of the corporate approval of the contemplated transaction or signing of the definitive agreements, whichever is earlier.

In most instances, market practice does not differ from legal requirements, although whether an actual disclosure is compliant with the requirements will depend on facts and circumstances.

Where a potential investor or buyer is seeking to acquire a controlling stake or a significant majority in a local enterprise, full due diligence is usually carried out. This covers all key legal areas, eg, corporate ownership and governance, licenses and regulatory matters, material contracts, debts and liens, financing and property and insurance, tax, material litigation and employment matters. The investor or buyer would also conduct a financial due diligence.

It is more typical for the potential buyer to require exclusivity than standstills. However, the purchase agreement will usually provide for standstill provisions from signing until closing.

There is nothing in the law or regulations preventing parties from documenting the tender offer terms and conditions in the definitive agreement for the private sale that will trigger the requirement to make the mandatory tender offer. The definitive agreement (eg, a share sale and purchase agreement between a principal stockholder and acquirer) will typically make a general reference to the completion of the tender offer as a condition precedent to the closing of the (private) share sale and purchase transaction. The terms and conditions of the offer are set out in SEC Form 19-1, which is the SEC-prescribed form for the tender offer report. The terms and conditions may be subject to the comments of the SEC.

The period for completing an M&A transaction depends on the project and the industry involved. Apart from time needed to complete negotiation and documentation, some time may be spent on due diligence. Local targets are not all typically ready for a diligence exercise. Where the target entity is in a sector that is heavily regulated, parties need to take into account more diligence time as well as possibly time to seek approvals from government agencies for the transaction.

On average, simple M&A transactions with few closing conditions could be completed in two months. Acquisitions that involve public companies and the triggering of a mandatory tender offer requirement may need three-four months to complete. Those that require merger notification to the Philippine Competition Commission would require at least 45 days, as this is the minimum merger review period and assumes that the Commission will not issue any requests for information. Typically, and provided the Commission does not proceed to a Phase 2 review, securing a merger clearance with the Commission takes around 60-80 days from filing the merger notices.

The rules on mandatory tender offers are set out in the Securities Regulation Code and its implementing regulations. Under the regulations:

  • any person or group of persons acting in concert, who intends to acquire 35% of the outstanding voting shares or sufficient outstanding voting shares to gain control of the board in a public company in one or more transactions within a period of twelve months, is required to disclose his or her intention and contemporaneously make a tender offer for the percentage sought to all holders of securities within the that period;
  • any person or group of persons acting in concert, who intends to acquire 35% of the outstanding voting shares or sufficient outstanding voting shares to gain control of the board in a public company directly from one or more stockholders is required to make a tender offer for all the outstanding voting shares. The sale of shares pursuant to the private transaction or block sale will not be completed prior to the closing and completion of the tender offer; and
  • if any acquisition would result in ownership of over 50% of the total outstanding equity securities of a public company, the acquirer will be required to make a tender offer, under the regulations, for all the outstanding equity securities to all remaining stockholders of the company at a price supported by a fairness opinion of an independent financial adviser or equivalent third party. The acquirer in such a tender offer will be required to accept all securities tendered.

Any person or group of persons acting in concert that intends to acquire 15% of equity securities in a public company in one or more transactions within a period of twelve months must file a declaration to that effect with the Securities and Exchange Commission.

Cash consideration for M&A transactions is more common than shares or other property.

The terms and conditions of a mandatory tender offer should be compliant and not inconsistent with the regulations. Among the regulatory requirements is that no tender offer shall be made unless it is open to all security holders of the class of securities subject to the offer, and the consideration paid to any security holder within the offer must be the highest paid to any other security holder during a tender offer. Moreover, the offeror is compelled to offer the highest price paid by him for the securities during the preceding six months. If the offer involves payment by transfer or allotment of securities, they must be valued on an equitable basis.

The regulator will not allow the imposition of certain conditions in the tender offer if these conditions are inconsistent or will result in the violation of the regulations of the offer.

Regarding any person or group of persons acting in concert that intends to acquire 35% of the outstanding voting shares or sufficient outstanding voting shares to gain control of the board in a public company in one or more transactions within a period of twelve months, that person or group of persons is required to make a tender offer for the percentage sought to all holders of the securities within that period.

If the tender offer is oversubscribed, the aggregate amount of securities to be acquired at the close of the offer must be proportionately distributed across selling shareholders, with whom the acquirer may have been in private negotiations, and other shareholders. The last sale that meets the threshold will not be consummated until the closing and completion of the tender.

Regarding any person or group of persons acting in concert that intends to acquire 35% of the outstanding voting shares or sufficient outstanding voting shares to gain control of the board in a public company directly from one or more stockholders, that person or group of persons is required make a tender offer for all the outstanding voting shares. The sale of shares from the private transaction or block sale will not be completed prior to the closing and completion of the tender.

Any acquisition that will result in ownership of over 50% of the total outstanding equity securities of a public company requires the acquirer to make a tender offer for all the outstanding equity securities to all remaining stockholders of the company at a price supported by a fairness opinion of an independent financial adviser or equivalent third party. The acquirer in such a tender shall be required to accept all securities tendered.

A tender offer is conditional on the bidder obtaining financing. The regulations on mandatory tender offers require the tender report to include a confirmation by the offeror's financial adviser or another appropriate third party that the resources available to the offeror are sufficient to satisfy full acceptance of the offer. Moreover, the regulations require that before any announcement of an intention to tender is made, the offeror should have the resources to implement the offer in full.

A bidder typically seeks any or a combination of these security measures: break-up fees, match rights, force-the-vote provisions, non-solicitation provisions and exclusivity.

A party acquiring shares in a local company would have the rights that correspond to those shares, including voting rights (one share, one vote) on matters that require shareholder approval. These voting rights also permit shareholders to vote for the directors who will sit on the board of the company. The board of directors appoints officers, as well as tackling and approving most key corporate acts. A shareholder that holds at least two thirds of the outstanding capital stock of a company would have effective control of the company, subject to minority rights.

Shareholders of a company may agree to higher quorum and approval requirements. This could allow a minority shareholder to possess a power of veto. The shareholders could also agree that specific shareholders, regardless of stock ownership, could nominate certain number of directors or particular officers.

Flexibility in governance provisions, however, is subject to nationality restrictions that apply to a local company. If the local company must be partially Filipino-owned, then generally, the ability of a foreign owner to exercise governance rights would be limited to its allowable shareholding.

Shareholders in a Philippine company can vote by proxy.

A company may consider undergoing a reverse stock split to eliminate minority interests and to cease being a public company.  This can be done at a duly convened special stockholders’ meeting, by the stockholders owning at least two thirds of the outstanding capital stock present in person or by proxy, unanimously approving the following amendments to such company’s Articles of Incorporation:

  • increasing the par value per share and correspondingly decreasing the authorised shares of the company; and
  • providing that the company will not issue fractional shares and that fractional shares resulting from any increase or decrease in par value or any corporate action will be paid for in cash based on an amount to be determined by the board of directors.

The Securities and Exchange Commission has said that a reverse stock split is legally feasible, provided that the transaction is carried out in good faith on the strength of a legitimate and proper corporate objective, duly warranted by its corporate affairs, and subject to:

  • the facts being fully disclosed and formally approved;
  • the corresponding taxes and fees legally imposable being paid;
  • non-impairment of legal capital and that no prejudice shall be caused to the stockholders and creditors; and
  • filing by the corporation of an application for amendment of articles of incorporation and/or certificate of increase/decrease of capital stock, if any, to reflect the changes in the capital structure.

Tender offers in the Philippines are usually triggered by the signing of definitive agreements between or among the target company’s principal shareholders and the acquirer for the sale and purchase of shares meeting or exceeding the thresholds for mandatory tender offers. Although the definitive agreement typically provides for conditions precedent to closing (eg, the completion of the tender offer process as required by the law and regulations), it does not usually provide a way out for the principal shareholder if a better offer is made.

However, it also possible to launch the mandatory tender offer on the basis of creeping acquisitions (ie, without any prior definitive agreement with a principal shareholder), eg, acquisitions that will result in 35% of the outstanding voting shares or sufficient outstanding voting shares to gain control of the board in a public company in one or more transactions within a period of twelve months, or acquisitions that will result in ownership of over 50% of the total outstanding equity securities of a public company.

A bid is made public by delivery of a tender offer report in the form prescribed by the SEC to the Securities and Exchange Commission, the Philippine Stock Exchange and the target company, and by publication of the terms and conditions of the offer in two national newspapers of general circulation within the period required by the regulations. The offeror may also send the tender offer materials to each of the shareholders.

The listed company will disclose board approval for the issue of shares relating to a business combination in the same manner as the disclosure of other material events.

Bidders are not required to produce financial statements (pro-forma or otherwise) in the tender offer documents.

The guidelines for completing SEC Form 19-1 require the filing as an exhibit to the tender offer of any document setting forth the terms of contracts, arrangements, understandings or relationships among the offerors and between these persons and any person with respect to any securities of the issuer. This includes but is not limited to the transfer or voting of any of the securities, finder's fees, joint ventures, loan or option arrangements, puts or calls, guarantees of profits, division of profits or loss, or the giving or withholding of proxies, naming the person with whom such contracts, arrangements, understandings or relationships have been entered into. In many instances, the parties opt to provide only a summary of the terms and conditions of the transaction documents in question.

The general directors’ duties of obedience (that directors must control the corporation’s affairs only in accordance with the purposes with which it was organised and must perform the duties laid down on them by law and by the bylaws of the corporation), diligence (that directors must not wilfully and knowingly vote for or assent to patently unlawful acts or act in bad faith or with gross negligence in directing the corporation’s affairs) and loyalty (that directors must not acquire any personal or pecuniary interest in conflict with their duty as directors) apply to business combinations.

Directors’ duties are owed principally to the corporation and to its shareholders. However, the Securities and Exchange Commission in its Code of Corporate Governance for Publicly Listed Companies enshrines the principle that the board of directors should consider the long-term interests of a corporation’s stakeholders.

In the Philippines, it is quite common for business combinations to be handled first by a management team that will present its findings and recommendations in relation to the combination to the board for its’ evaluation and approval.

As a rule, directors cannot be held liable for mistakes or errors in the exercise of their business judgement if they acted in good faith, with due care and prudence. Contracts intra vires (within the authority of a corporation) entered into by the board of directors are binding upon the corporation, and courts will not interfere unless the contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.

As a consequence of the business judgment rule, the resolution, contracts and transactions of the board of directors cannot be overturned or set aside by the stockholders (where these acts do not require stockholder approval) or even by the courts. Directors and duly authorised officers cannot be held personally liable for acts or contracts done with the exercise of their business judgement.

The following actions are exceptions to the business judgement rule:

  • a director voting for or assenting to patently unlawful acts of the corporation;
  • a director acting in bad faith or with gross negligence in directing the corporate affairs;
  • a director who is guilty of conflict of interest to the prejudice of the corporation, its stockholders or members, and other persons;
  • a director consenting to the issue of watered stocks or who, having knowledge of it, does not file his or her written objection to it with the corporate secretary;
  • a director agreeing to hold him or herself personally liable to the corporation; and
  • a director being made, by a specific provision of law, to personally answer for his or her corporate action.

The management would typically engage the services of external financial and legal advisers whose reports and recommendations would be given to the board and which will be considered by the board in evaluating the business combination.

In pertinent cases, the courts and the regulators would highlight and emphasise the duties of a corporation’s directors, corporate officers and advisers to avoid conflict of interest situations.

There is nothing in the law that prohibits hostile tender offers, although these are not common in the Philippines.

There is nothing in the law that prevents directors from using defensive measures.

As hostile tender offers are not common in the Philippines, it is likewise not usual for directors of listed companies to adopt defensive measures in anticipation of future hostile tender offers. However, it is also not unheard of for a listed company in the Philippines to prepare itself for a possible hostile tender offer.

For instance, in 1998, a locally listed company announced its adoption of a Shareholders Rights Plan that it deemed would protect the company and its shareholders from hostile and potentially abusive takeover attempts. The Plan involved the right of a common shareholder to subscribe to 1/100th of a preferred share at a pre-determined exercise price (subject to adjustment by the board of directors).  According to the disclosure by the said company: “The rights become exercisable (and rights certificates are distributed and become transferable) ten days after a person or group (Acquiring Person) acquires 10% or more of the common stock, or ten days (or such later date as may be determined by the Board) after a person or group announces an offer the consummation of which would result in such person or group owning 10% or more of the common shares. From and after the occurrence of such event, any rights that are or were acquired by any Acquiring Person shall be void and shall not be exercisable [...] the objective of the plan is to induce the Acquiring Person to negotiate with the Board so as not to trigger the rights. Once the rights are activated, the Acquiring Person would be diluted and the value of his holdings would correspondingly decline.”

The directors owe the same fiduciary duties whether they are enacting defensive measures against hostile tender offers or in the regular performance of their responsibilities as a director of the company. Among other things, the Revised Corporation Code makes directors liable jointly and severally for all damages suffered by the corporation, its stockholders or members and other persons if they wilfully and knowingly vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad faith in directing its’ affairs or acquire any personal or pecuniary interest in conflict with their duty as directors or trustees.

The law also prohibits directors from attempting to acquire, or acquiring any interest adverse to the corporation in respect of any matter that has been divulged to them in confidence, and upon which equity imposes a disability upon themselves to deal in their own behalf; otherwise, the director, trustee or officer will be liable as a trustee for the corporation and must account for the profits that otherwise would have accrued to the corporation.

The directors cannot ‘just say no’ and take action that prevent a business combination, without any clear justification. The fiduciary duty of a director imposes on him or her the obligation to consider whether the business combination will be for the best interest of the company and its shareholders. Such fiduciary duty requires that the director should act in the interest of the company and its shareholders, not just a particular group.

Litigation is not common in M&A deals in the Philippines. Joint venture partners in larger projects will generally rely on existing agreements to disengage or negotiate a termination of arrangements.

Since litigation is not common in the Philippines, the stage at which is brought is not relevant.

Shareholder activism is not a particularly significant force in the Philippines. The market is a small one, and where shareholders are active, this is typically when there are principal shareholders that are competing for management.

However, the Philippine Stock Exchange has required listed companies to establish an investor relations programme that should include providing information on investor contact such as email address for feedback or comments, and shareholder assistance and service. The institution of the investor programme, along with the proliferation of social media, has facilitated the feedback process between the company and the minority shareholders and the exchange of information among such shareholders. 

These activists’ concerns focus mostly on information or explanation for any fall in share price.

There are no real examples of shareholder activism in the Philippines.

See 11.2 Aims of Activists, above.

SyCip Salazar Hernandez & Gatmaitan

SyCipLaw Center
105 Paseo de Roxas
Makati City 1226
Metro Manila, Philippines

+632 982 3500

+632 817 3896

sshg@syciplaw.com www.syciplaw.com
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Law and Practice

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SyCip Salazar Hernandez & Gatmaitan was founded in 1945 and is one of the largest law firms in the Philippines, with offices in Makati City, Cebu, Davao and the Subic Freeport. Its corporate/M&A team has acted as counsel in many of the country’s largest investments and M&A deals, from initial structuring and due diligence through to the preparation of shareholder agreements and the requisite regulatory processes. During the past decade’s wave of foreign investor interest in the telecommunications industry, the team has represented major companies including First Pacific in its acquisition of a significant interest in its principal local carrier, the Philippine Long Distance Telephone Company. It has also acted on the local investments of most of the world’s largest cement manufacturers. In the banking industry, the team has worked on deals including the merger of The Bank of the Philippine Islands and Far East Bank & Trust Company, the PCIBank-IBAA merger, and the series of mergers among Manufacturers Hanover Trust, Chemical Bank, Chase Manhattan and J.P. Morgan, with JPMorgan Chase Bank as the surviving bank.

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