M&A activity in the Philippines has seen significant growth in 2022 compared to the past two years. Total deal value in the Philippines nearly doubled from 2021 to 2022. Industries affected by the amendment to the Public Service Act (PSA) including telecommunications, specifically towers and data centres, have gained traction. Key areas of interest in the country are in fintech, technology and telecommunications, as well as in green investments and renewable energy. M&A activity in the Philippines is expected to remain strong in 2023. 

Adjustment of Merger Notification Thresholds

With effect from 1 March 2023, the Philippine Competition Commission (PCC) has adjusted the compulsory merger notification thresholds through Commission Resolution No 04-2023. The party threshold is now set at PHP7 billion, while the transaction threshold is PHP2.9 billion.

These compulsory merger notification thresholds are annually adjusted based on official estimates by the Philippine Statistics Authority of the nominal GDP growth for the previous calendar year rounded up to the nearest hundred million. This ensures that the thresholds maintain their real value over time and relative to the size of the economy.

Amendments to the Public Service Act

An amendment to the 85-year-old Public Service Act, which essentially removes nationality restrictions over long-protected industries such as telecommunications, was enacted into law.

The amendment, Republic Act No 11659, seeks to liberalise the Philippine economy by classifying only the following industries as public utilities (which are subject to a minimum 60% ownership restriction by Philippine nationals):

• distribution of electricity;
• transmission of electricity;
• petroleum and petroleum products pipeline transmission systems;
• water pipeline distribution systems and waste water pipeline systems, including sewerage pipeline systems;
• seaports; and
• public utility vehicles.

All other industries previously considered as public utilities, including telecommunications, are now considered only as “public services” and are no longer subject to a minimum 60% ownership restriction by Philippine nationals.

On March 20, 2023, the National Economic Development Authority (NEDA) issued the Rules and Regulations Implementing the amended Public Service Act (PSA IRR), effective April 4, 2023.

The rules set out the procedure for national security review for M&A of entities engaged in public utilities and public services, especially those owning critical infrastructure, such as telecommunications. 

Emphasis on Environmental, Social, and Governance (ESG) Principles

The Philippines is expected to see an expansion in green and sustainable investments.

Green bond issuances from the public and private sector during the first half of 2022 amounted to USD2.8 billion, which already exceeded the USD2.7 billion issued for years 2020 and 2021 combined.

Moreover, on 20 December 2022, the Securities and Exchange Commission (SEC) issued Rules on Sustainable and Responsible Investment Funds, which pushes forward sustainability principles and sustainable investment strategies for investment companies. This is in addition to other previously issued SEC circulars supporting sustainability principles such as the circular on sustainability reporting guidelines for publicly listed companies and guidelines on the issuance of sustainability bonds under the ASEAN Sustainability Bonds Standards.

Of particular interest is the electric vehicle industry, currently regulated under Republic Act No 11697 of the Electric Vehicle Industry Development Act, which seeks to “[p]rovide an enabling environment for the development of electric vehicles”, among other things.

The Department of Environment and Natural Resources (DENR) has also established “a carbon accounting, verification, and certification system for forest carbon projects to encourage and support investments in activities that sequester carbon dioxide and avoid emissions from deforestation and forest degradation” under DENR Administrative Order No 2021-43. Interest in carbon sequestration and carbon trading activities is also expected to grow over the next couple of years.

Technology

The COVID-19 pandemic triggered an accelerated shift from traditional bricks-and-mortar retail to IT-based retail, and this has led to more M&A activity in the Philippines, especially with the recent amendments to the retail law that have relaxed and simplified certain entry requirements. This has also continued to push growth and interest in payment and related financial services. IT-based businesses – whether in health, media or other areas of commerce – continue to be an active source of deals.

The tower sector remains active. In the past year, two of the largest telecommunications companies in the Philippines, Smart Communications, Inc. and Globe Telecommunications, Inc., sold close to 13,000 towers combined to various independent tower companies in back-to-back, multi-billion Peso acquisition and financing deals.

Increased interest in the data centre sector remains, with the current estimated capacity of 96 megawatts to triple by 2032 or earlier, due in large part to the ongoing and proposed construction of data centres in Mandaue City, Pasig City, Batangas Province and Cainta, Rizal.

Fintech

While the Fintech industry gained traction during the COVID-19 pandemic, the Central Bank of the Philippines (Bangko Sentral ng Pilipinas or BSP) has adopted a test-and-learn approach and imposed moratoria on the licensing of digital banks, electronic money issuers (EMI), and virtual asset service providers (VASP). The BSP justifies the moratoria by citing the need to assess overall performance, risk management systems, the impact on financial services and financial inclusion, and contribution towards achieving the objectives of the digital payments transformation roadmap.

The BSP has also introduced its regulatory sandbox framework, aimed at incentivising both existing and new players to venture into innovative solutions while minimising the risks to participants and the consumers. The regulatory sandbox allows for controlled exploration of potential new technologies and products under the supervision of the regulatory authority.

Business Process Outsourcing

The year 2022 saw the continued growth of the business process outsourcing (BPO) and shared services industry in the Philippines. The next challenge, particularly for players registered with the Philippine Economic Zone Authority (PEZA) and other Investment Promotion Agencies (IPAs), is transitioning from the new normal to the old normal, as many BPO service providers have experienced the benefits and savings of work-from-home arrangements permitted during the height of the pandemic. While the law and regulations of PEZA/IPAs (other than the Board of Investments (BOI)) currently do not allow registered BPO service providers to adopt a full work-from-home arrangement, recent regulations from the Fiscal Incentives Review Board allowed BPOs from PEZA and other IPAs to apply for concurrent registration with the BOI until 31 January 2023.  Hence, BPOs with a concurrent registration with the BOI will be allowed to continue full work-from-home arrangements on a permanent basis without loss of incentives. However, the monitoring of these dual-registered BPO service providers’ compliance and availment of incentives remain with PEZA or the IPA administering the ecozone or freeport zone.

Renewable Energy

In 2022, the Philippine government took steps to open up the renewable energy industry to foreign capital. The Department of Energy amended the implementing regulations of the Renewable Energy Act to remove nationality restrictions on the exploration, development and utilisation of solar, wind, hydropower and ocean energy. This move, which seeks to allow the entry of foreign capital into the renewable energy industry, is aimed at achieving the government’s targeted 35% share of renewable energy in the country’s power generation mix by 2030 and 50% share by 2040.

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:

• SEC, which generally administers laws on doing business, establishing and running corporations, public companies and foreign ownership requirements;
• the PCC, which 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 land ownership;
• a 30% foreign ownership limit for advertising; and

• a minimum 100% Philippine 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 compulsory notification, the merger notices must be filed with the PCC within 30 days from the signing of the definitive agreements, and securing a merger clearance from the PCC is a suspensory condition; ie, the transaction cannot be consummated prior to the issuance of such clearance (unless the relevant review period lapses without the PCC having taken any action over the merger filing).

However, if the 30th day of the period to file falls on a day on which the local government unit where the PCC's offices are located (specifically, Quezon City) is still under quarantine, the requirement to file within 30 days from signing is waived. If the community quarantine is subsequently lifted, the notifying parties shall have the remaining balance of the 30-day notification period to submit their notification forms to the PCC.

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

• security-of-tenure rules that prohibit the termination of employment except for just and lawful causes, and required adherence to specific procedures; additionally, they do not allow the transfer of employees from one business entity to another without 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.

Under the PSA amendment and the new PSA IRR (see 1.2 Key Trends), the relevant government department or administrative agency may review and evaluate any investment in a public service that effectively results in the granting of direct or indirect control to a foreigner or a foreign corporation. Investments in any public service satisfying both of the following conditions shall be subject to national security review:

• the proposed merger or acquisition transaction, or any investment in a public service entity, that will effectively result in the grant of control, whether direct or indirect, to a foreigner or a foreign corporation, or a foreign government; and
• the proposed merger or acquisition transaction, or investment in a public service has national security implications.

National security review may be undertaken upon voluntary declaration of the parties to the transaction or upon initiation of the relevant government department or administrative agency.

Based on the recommendation from the results of the comprehensive national security review, the President may suspend or prohibit any proposed merger or acquisition transaction, or any investment in a public service that effectively results in the grant of control, whether direct or indirect, to a foreigner or a foreign corporation.

Under Republic Act No 11647 (see 3.1 Significant Court Decisions or Legal Developments), upon the order of the President, the Inter-Agency Investment Promotion Coordination Committee, in co-ordination with the National Security Council and the NEDA, shall review foreign investments in “military-related industries, cyber infrastructure, pipeline transportation, or such other activities which may threaten territorial integrity and the safety, security and well-being of Philippine citizens” if:

• such investments are made by foreign government-controlled entities or state-owned enterprises, except independent pension funds, sovereign wealth funds and multinational banks; or
• are located in geographical areas critical to national security.

The recommendations that the NEDA may make include suspension, prohibition and limitation.

Amendments to the Retail Trade Liberalisation Act

On 25 January 2022, Republic Act No 11595, which amends Republic Act No 8762, entitled the Retail Trade Liberalisation Act of 2000, became effective. The new law further liberalises the Philippine retail industry by, among other things, lowering the minimum paid-up capital for a corporate vehicle with foreign ownership that will engage in retail from USD2.5 million to PHP25 million, and lowering the investment per store requirement from USD830,000 to PHP10 million. The implementing rules and regulations of Republic Act No 8762, as amended by the said law, were likewise subsequently issued.

Amendments to the Foreign Investments Act

On 20 March 2022, Republic Act No 11647, which amends Republic Act No 7042, otherwise known as the Foreign Investments Act of 1991, became effective.

The new law aims to attract more foreign investments through, among other things:

• allowing non-Philippine nationals (meaning corporations with more than 40% foreign ownership) to engage in domestic market enterprises (except for micro and small domestic market enterprises) unless subject to foreign ownership limitations, regardless of capitalisation (but subject to registration requirements);
• allowing non-Philippine nationals to engage in small and domestic market enterprises provided they have a paid-in equity capital of at least USD200,000;
• allowing non-Philippine nationals to engage in small and domestic market enterprises with a paid-in equity capital of at least USD100,000 if:
1. they involve advanced technology, as determined by the Department of Science and Technology;
2. they are endorsed as a start-up or a start-up enabler by the lead host agencies pursuant to Republic Act No 11337 (or the Innovative Startup Act); or
3. a majority of their direct employees are Filipinos, where the number of Philippine employees is at least 15.

On 27 June 2022, the Twelfth Regular Foreign Investment Negative List (FINL), which is a compilation of the investment areas and activities that are subject to foreign ownership restrictions, was promulgated. The Twelfth FINL reflects the revisions to RA 11647, as mentioned above.

NEDA has also issued the rules and regulations to implement the new law.

Easing of Nationality Restrictions on Renewable Energy

On 29 September 2022, the Department of Justice rendered DOJ Opinion No 21 (2022), stating that the exploration, development, and utilisation of solar, wind, hydro, and ocean or tidal energy should not be subject to the 40% foreign equity limitation under the 1987 Philippine Constitution. Following this opinion, the Department of Energy amended the Implementing Rules and Regulations of the Renewable Energy Act, removing nationality restrictions on the award of renewable energy service/operating contractsfor the exploration, development and utilisation of renewable energy resources, save for a few exceptions. This amendment took effect on 8 December 2022.

Regulatory Sandbox Framework

In September 2022, the BSP issued a circular adopting a Regulatory Sandbox Framework allowing existing BSP-supervised or BSP-registered institutions and new players to offer or use emerging or innovative technology for delivering financial products or services within the BSP's jurisdiction, upon receiving a certificate of authority from the BSP.

To participate in the regulatory sandbox, applicants must meet specific criteria. The proposed financial solution should employ new or emerging technology or utilise existing technology in an innovative manner while addressing a market gap in financial products or services delivery. Applicants must demonstrate their ability to deploy the proposed solution through a roll-out plan or strategy, provide an initial test plan (including test case scenarios and expected experiment outcomes), and identify significant risks, such as money laundering, terrorist financing, IT and cybersecurity, and data privacy, among others. Additionally, applicants must identify key performance indicators or other metrics to monitor the pilot implementation's progress and provide an acceptable exit and transition strategy, regardless of the pilot's outcome.

Moratoriums for Digital Bank, EMI and VASP Licences

Digital banks

In August 2021, the BSP imposed a three-year moratorium on new applications for digital banking licenses, effective from 31 August 2021. While this moratorium continues to be in effect, the BSP issued Circular No 1154 on 14 September 2022 to clarify prudential requirements for digital banks and amend documentation and licensing requirements. The circular stipulates that the moratorium also covers applications for the establishment of other types of banks that primarily offer financial products and services processed end-to-end via digital platforms or electronic channels.

EMIs

In November 2021, the BSP issued a memorandum announcing the closure of the regular application window for new electronic money issuer-others (EMI Others) licenses for non-bank financial institutions. This closure will be in effect for two years starting from 16 December 2021. However, interested new non-bank EMI applicants with proposals that involve new business models, unserved or targeted niches, and/or new technologies can still apply for an exception under the Test-and-Learn/Regulatory Sandbox Framework. This framework is now governed by a separate memorandum issued by the BSP.

VASPs

In August 2022, the BSP issued a memorandum announcing the closure of the regular application window for new Virtual Asset Service Provider (VASP) licenses. This closure will be in effect for three years starting from 1 September 2022, subject to re-assessment based on market developments. Virtual assets (VA) are defined by the BSP as “any digital unit that can be traded, transferred, and used for payment or investment purposes. It can be defined as ‘property’, ‘proceeds’, ‘funds’, ‘funds or other assets’, and other ‘corresponding value’. It is used as a medium of exchange or a form of digitally stored value created by agreement within the community of VA users.”

Existing BSP-supervised financial institutions (BSFIs) wanting to expand operations by offering VASP services, including non-custodial VASPs seeking to provide safekeeping or custodial services, may still apply for VASP licenses if they meet specific conditions.

Moratorium on New Online Lending Platforms

In November 2021, SEC issued a circular imposing a moratorium on the registration of new online lending platforms, including existing financing companies and lending companies that will engage in online lending platforms. The moratorium is in effect until the same is formally lifted by SEC.

Initial Listing Through a Preferred Shares Offering

On 24 May 2022, The Philippine Stock Exchange, Inc. (PSE) issued a memorandum allowing an initial listing (IPO) of preferred shares without listing of common shares. Under the said memorandum, the minimum offering to the public for initial listing on the PSE shall be PHP1 billion or 20% of the market capitalisation of the preferred shares, whichever is higher.

2022 Strategic Investment Priority Plan (SIPP)

On 24 May 2022, the President approved the 2022 SIPP, which identifies activities that qualify for investment incentives under the Corporate Recovery and Tax Incentives for Enterprises Act. The SIPP retained all investment activities that were set out in the 2020 Investment Priorities Plan. In addition, the SIPP includes green ecosystems, advanced digital production technologies (such as robotics and artificial intelligence), and highly technical manufacturing, and production of innovative products and services as priority investment activities, among others.

No significant change to takeover law is anticipated in 2023. 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.

Disclosure Rules under the Securities Regulation Code (SRC)

The SRC and its implementing regulations require the disclosure of beneficial and legal ownership of shares in a reporting company; eg, a public company. These requirements are also reflected in the disclosure rules of the PSE.

Reports by 5% Beneficial Owners

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 Exchange (if listed, such as the PSE) and SEC, 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 Exchange and SEC.

Reports by 10% Beneficial Owners

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 they become 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, 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.

The person is also required to file a notice 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.

Special Entities

There is a separate set of procedures 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 BSP;
• 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 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.

Disclosure of Beneficial Owners in the General Information Sheet (GIS) and of Nominee Arrangements

SEC Memorandum Circular No 15 (2019) (as further amended by SEC Memorandum Circular No 10 (2022) requires corporations to disclose their beneficial owners in the GIS. For purposes of complying with this memorandum circular, a natural person who owns directly or indirectly at least 25% of the voting rights of a corporation shall be deemed to be a beneficial owner.

Moreover, under SEC Memorandum Circular No 1 (2021), nominee shareholders as well as nominee directors/trustees of registered corporations are generally required to disclose to SEC their nominators and principals or persons on whose behalf they act as such shareholders/directors/trustees. SEC Memorandum Circular No 10 (2022) increased penalties and additional non-financial penalties for non-compliance with the beneficial ownership disclosure requirements.

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, any such company-imposed rules cannot supplant or substitute the reporting thresholds set out in the statutes and regulations of regulatory bodies; eg, SEC and the PSE.

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 by-laws 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 made in accordance with the regulations that may be issued by SEC, and taking into account that the government agency has yet to lift the suspension of the rules on futures trading.

SEC 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 (Annotated), Rafael A Morales, (2005), at 115, citing history/background of the SRC (15 September 2001) at 21–22).

Doubt as to Use for Speculation

Additionally, certain derivative transactions may be viewed as games of chance rather than being based on skill or ability, such as those entered into for speculating on interest or exchange rate movements. In cases of uncertainty regarding the nature of a gaming contract, a Philippine court will presume that the transaction involves chance. The Civil Code stipulates that the winner cannot initiate action to collect what they have won, while it allows the loser to recover their losses, including legal interest from the time of payment of the amount lost.

Furthermore, the Civil Code states that “if a contract which purports to be for the delivery of goods, securities or shares of stock is entered into with the intention that the difference between the price stipulated and the exchange or market price at the time of the pretended delivery shall be paid by the loser to the winner, the transaction is null and void. The loser may recover what he has paid.”

Validity of Hedging Transactions

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.

Reporting Obligations under the SRC

The SRC 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, there is beneficial ownership when any person who, directly or indirectly – through any contract, arrangement, understanding, relationship or otherwise – has or shares voting power (which includes the power to vote or direct the voting of such security) and/or investment returns or power (which includes the power to dispose of, or direct the disposition of, such security). Moreover, a person shall be deemed an indirect beneficial owner of any security that is held by a corporation in which they are a controlling shareholder, among other instances.

In addition, a person shall be deemed to be the beneficial owner of a security if they have 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.

Applicability to Derivatives

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 5% or 10% of the equity securities.

Requirement to Disclose the Purpose of the Acquisition

The SEC-prescribed forms for beneficial ownership disclosure of 5% and 10% shareholdings, which are SEC Form 18-A, SEC Form 23-A (in respect of  those who previously owned 5% or more but less than 10%), and SEC Form 23-B (in respect of material changes in beneficial ownership), respectively require the disclosure of the purpose or purposes of the acquisition of securities of the issuer, and a description of any plans or proposals that the reporting persons may have that 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.

Other Required Disclosures

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 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, the sale of assets, a merger, or a 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, which is indefinite in nature. Under PSE rules, soft information 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, licences and regulatory matters, material contracts, debts and liens, financing, property (including intellectual property) and insurance, tax, material litigation and employment matters. The investor or buyer would also conduct financial due diligence.

During the pandemic, certain situations called for greater emphasis on employment matters, scope of insurance coverage, and force majeure clauses.

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 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 and 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 to four months to complete. Those that require merger notification to the PCC 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 and does not proceed to a Phase 2 review.

Typically, and provided the PCC does not proceed to a Phase 2 review, securing a merger clearance with the Commission takes around 60 to 90 days from filing the merger notices.

The rules on mandatory tender offers are set out in the SRC 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 12 months is required to disclose their intention and contemporaneously make a tender offer for the percentage sought to all holders of securities within 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, who intends to acquire 15% of equity securities in a public company in one or more transactions within 12 months must file a declaration to that effect with SEC.

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

If there is a valuation gap between the parties, they may agree to tie a portion of the consideration to certain performance-based conditions (eg, hitting EBITDA targets or other financial metrics). The portion of the consideration that is initially withheld can be placed in escrow pending the fulfilment of certain conditions or can be paid in tranches once the conditions are met. However, parties may need to deal with issues relating to overpayment of taxes if the withheld amount is not released to the vendee due to conditions for its release not being satisfied.

Another tool that can be used to bridge valuation gaps is to do a partial acquisition upfront and agree on put options or call options for the remainder of the shares, the exercise of such options also being dependent on the fulfilment of performance-based conditions.

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 them 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.

Unless a special exemptive relief is obtained, 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.

Voluntary Tender Offer

In a voluntary tender offer, the tender offer documents may contain a condition that a minimum number of shares must be tendered in order for the bidder to accept the tender offer shares. The minimum number varies and would depend on the goals of the bidder and the amount of shares held by the bidder prior to the tender offer.

35% Mandatory Tender Offer Threshold

Regarding 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 12 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, 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, 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.

50% Mandatory Tender Offer Threshold

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 offer 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.

In the midst of the COVID-19 pandemic, a material adverse change (MAC) clause is also an important tool in managing risk. Structuring the scope of the MAC clause and any related carve-outs is of particular importance.

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. Where the shares are voting shares, 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; it is also responsible for tackling and approving most key corporate acts. A shareholder who 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 their percentage of voting stock ownership, could nominate a 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 Philippine-owned, then the ability of a foreign owner to exercise governance rights would generally be limited to its allowable shareholding and other applicable restrictions.

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.

SEC 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 the organisation's 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 the articles of incorporation and/or a 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 is also possible to launch a mandatory tender offer on the basis of creeping acquisitions; 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 12 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 regulations, which is SEC Form 19-1, to SEC, the PSE 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 receipt of a tender offer document from a bidder in the same manner as the disclosure of other material events.

Philippine financial statements are prepared in accordance with Philippine Financial Reporting Standards, which are largely based on International Financial Reporting Standards. However, 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 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.

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 by-laws 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, SEC, 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 of directors 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 judgement rule, the resolutions, contracts and transactions of the board of directors cannot be overturned or set aside by the stockholders (where these acts do not require stockholders’ approval) or even by the courts. Directors and duly authorised officers cannot be held personally liable for acts or contracts performed 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 their written objection to it with the corporate secretary;
• a director agreeing to hold themselves personally liable to the corporation; and
• a director being made, by a specific provision of law, to personally answer for their corporate action.

The management would typically engage the services of external financial, tax and legal advisers whose reports and recommendations would be given to the board and that 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 specifically 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 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 present implementing regulations of the SRC provide for certain standstill provisions that may limit the anti-takeover defensive measures that a listed company may make, unless applicable exceptions apply. The regulations provide that in the case of a tender offer (other than by an issuer), the target company shall not engage in certain transactions during a tender offer, or before its commencement if its board has reason to believe that an offer might be imminent, except if such transaction is pursuant to a contract entered into earlier, or with the approval of the shareholders in a general meeting, or, where special circumstances exist, the approval of SEC has been obtained. The prohibited transactions are:

• the issuance of any authorised but unissued shares;
• the issuance or granting of options with respect to any unissued shares;
• the creation or issuance of, or permitting the creation or issuance of, any securities carrying rights of conversion into, or subscription to, shares;
• the sale, disposition of or acquisition, or agreement to acquire, any asset whose value amounts to 5% or more of the total value of the assets prior to acquisition; and
• entering into contracts that are not in the ordinary course of business.

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; 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 on 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 prevents a business combination without any clear justification. The fiduciary duty of a director imposes on them 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 in M&A deals is not common in the Philippines, the stage at which it is brought is not relevant.

See 10.1 Frequency of Litigation. There have been no significant changes or no new lessons learned as regards the manner by which parties deal with disputes.

Shareholder activism is not a particularly significant force in the Philippines. The market is a small one, and where shareholders are active, these activists’ concerns focus mostly on information or an explanation for any fall in share price. Lately, shareholder activism has been visible in instances when a public company decides to pursue voluntary delisting from the exchange and the tender offer price in connection with such delisting not being satisfactory to the minority shareholders.

The PSE has required listed companies to establish an investor relations programme that should include providing information on investor contacts, such as an 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 companies and minority shareholders, and the exchange of information among such shareholders.

The PSE has also tightened the voluntary delisting rules by introducing changes meant to protect the minority shareholders in instances where the listed company seeks voluntary delisting. Among the changes are the requirements to obtain approval of at least two thirds of the entire membership of the board of directors, including approval of the majority (but not less than two) of the independent directors, and approval of stockholders owning at least two thirds of the total outstanding and listed shares of the listed company. Moreover, the number of votes cast against the delisting proposal should not be more than 10% of the total outstanding and listed shares of the listed company. The amended rules also set certain criteria in determining the tender offer price.

There are reported cases of minority shareholders objecting to offer prices in tender offers that are not triggered by a private sale, such as a tender offer initiated by a majority shareholder in connection with a petition for voluntary delisting.

See 11.2 Aims of Activists. Where minority shareholders object to offer prices in tender offers described in 11.2 Aims of Activists, the usual goal is to compel the offeror to increase the tender offer price or stop the tender offer.