Boosted by the country’s strong and steady economic growth in 2019, the Philippines was the fastest growing M&A market in the Asia Pacific (excluding Japan). Philippine M&A transactions were reported as having increased by 398% during the first half of 2019. The Philippine Competition Commission (PCC) reports that in terms of value, the 46 largest M&A transactions in the Philippines in 2019 were valued at PHP811.61 billion (approximately USD16.68 billion).
In 2019, the most active industries for M&A in terms of transaction value were:
However, with the rise of COVID-19 cases in the country, for over half a year, various regions have been placed under community quarantine restrictions that can limit economic activity. In the second quarter of 2020 the Philippine Gross Domestic Product (GDP) contracted by 16.5%. The most active M&A industries in 2019 were not spared from this market contraction, with all three industries posting negative GDP growth for the second quarter of 2020.
During this period, positive GDP growth was only maintained by the following industries:
Historically, the following sectors have led the Philippine M&A market in terms of both value and frequency of transactions:
However, as the Philippines reels from the effects of the COVID-19 pandemic, M&A transactions in industries that have sustained positive growth can be expected to grow in number.
This is especially applicable to the human health and social work industry in light of Philippine laws which support the government response to the COVID-19 pandemic, and the information technology and communications industry, in light of the proposed amendments to the Public Service Act, which may potentially allow full foreign ownership of companies operating in the water, energy and telecommunications industries.
Revised Corporation Code
In 2019, Congress enacted the Revised Corporation Code which introduced certain key revisions to update the then 38-year old law that regulated Philippine Corporations. Among the most salient revisions include:
This modernisation of the Philippine Corporation Code helps facilitate the creation of alternative structures and special purpose vehicles to implement M&A Transactions.
PCC Notification Thresholds
Effective on 30 March 2020, the PCC increased the amount thresholds which trigger the mandatory government review of M&A Transactions. The PCC increased the threshold for the Size of Party Test from PHP5.6 billion to PHP6 billion, while the threshold for the Size of Transaction Test has been increased from PHP2.2 billion to PHP2.4 billion. This marks the third increase in the thresholds since the passage of the Philippine Competition Act in 2015 when the thresholds for both the Size of Party and Size of Transaction Test were originally set at PHP1 billion.
PCC Expedited Review Procedures
The PCC has also adopted expedited merger review procedures which shortens the PCC’s review period to only 15 working days for qualified transactions.
Qualified transactions include mergers where:
PCC Exemptions from Notification
Apart from internal restructurings which the PCC has considered as exempt from notification requirements since 2016, in 2020 the PCC also issued rules to secure an exemption from notification for Unsolicited Projects undertaken by agencies of the national government pursuant to the Build-Operate-Transfer Law and its Implementing Rules and Regulations.
Bureau of Internal Revenue (BIR) Clarification on the determination of the fair market value of shares of stock of companies not listed in the stock exchange
In August 2020, the BIR issued Revenue Regulation No 20-20 which clarified that the determination of the fair market value of shares of stock in companies not listed in the stock exchange shall now be based on the book value of the shares as provided in the Audited Financial Statements (AFS) of the company prior to the date of sale, but not earlier than the immediately preceding taxable year.
This regulation modifies the prior requirement of using the Adjusted Net Asset Method for determining the fair market value of such shares. This development is expected to simplify the negotiations over tax provisions in Philippine M&A transactions.
Under Philippine law, there is no centralised regulatory authority governing all aspects of M&A Transactions. However, depending on the transaction, the Securities and Exchange Commission (SEC), the PCC and the Department of Justice (DOJ) may play a role.
The SEC is the primary regulatory authority for Philippine corporations. The SEC’s prior approval is required for any amendments that may be required by a transaction to the corporation’s articles of incorporation, including the following:
The SEC also oversees the approval of mergers and consolidations and monitors compliance with nationality restrictions in the applicable industries, as provided under the Foreign Investment Negative List.
The PCC is the government authority primarily responsible for maintaining market competition and regulating anti-competitive conduct. It is responsible for overseeing, regulating and reviewing any anti-competitive aspects relating to mergers, acquisitions and the creation of joint ventures.
Specifically, the PCC has jurisdiction over “acquisitions” which refer to the purchase or transfer of securities or assets, through contract or by other means, for the purpose of obtaining control by either:
For such purpose, “control” is defined refers to the ability to substantially influence or direct the actions or decisions of an entity, whether by contract, agency or otherwise. Control is presumed to exist when the acquisition will result in the parent of the acquiring entity owning directly or indirectly, through its subsidiaries, more than half of the voting power of the entity to be acquired. Asset acquisitions which result in an acquiring entity to be in a position to either replace the acquired entity in at least a part of the relevant business, or allow an acquirer to build up a market presence or develop market access within a reasonably short period of time are also regulated by the PCC.
Establishing the need for compulsory notification
To determine whether a merger/acquisition is subject to compulsory notification with the PCC, the following thresholds must be met:
PCC review is conducted in 2 phases. Phase 1 review lasts for a maximum period of 30 days from complete notification and payment and involves an assessment to determine if the acquisition raises any competition concerns that would warrant a more detailed review. If no competition concerns are raised, the acquisition may be cleared within the Phase 1 period of review.
If, after the conduct of a Phase 1 review, the PCC is unable to conclude that the merger/acquisition does not raise competition concerns, the PCC will provide the merger parties a notice and request for additional information for the purpose of commencing a Phase 2 review. The more detailed inquiry into the transaction during the Phase 2 review shall be completed within 60 days.
The DOJ monitors compliance with Philippine nationality restrictions in applicable industries. The breach of such nationality restrictions are penalised under the Philippine Anti-Dummy Law.
In addition, the DOJ also regulates the grant of an authority to employ foreign technical employees in a wholly or partially nationalised trade, business, industry or undertaken, pursuant to the Anti-Dummy Law. It must be noted, however, that foreign employees who seek to work in the Philippines are separately governed by permit and visa requirements as regulated by the Department of Labor and Employment and Bureau of Immigration, respectively.
Other Regulatory Agencies
Other regulatory approvals may also need to be secured from different regulatory agencies depending on the nature of the industry of the target company. This may include approvals from the National Telecommunications Commission, Department of Energy, Civil Aeronautics Board, Department of Environment and Natural Resources, among others.
Approvals may also need to be secured from the appropriate investment promotion agency such as the Board of Investments and the Philippine Economic Zone Authority, if applicable.
Key areas of focus for the preparation of due diligence reports for equity acquisitions are:
Due diligence is commonly conducted through the review of documents provided in a virtual data room and may also involve an independent verification of land titles and cases in litigation. Focus is also given to analysing all prior consents, notifications or approvals that must be complied with prior to the acquisition.
Typically, buyers engage own legal, financial, operations consultants to conduct due diligence. It is uncommon to rely on due diligence provided by the vendor, even if coupled with representations and warranties.
In some cross-border transactions, advisers agree to provide copies of their due diligence report on a reliance basis, but imposing a cap on potential liability. More often, when requested, reports are shared only on a non-reliance basis.
In the Philippines, acquisitions of non-publicly listed companies are most commonly carried out through a private agreement for the purchase and sale of shares of stock negotiated between the seller and the buyer. This private contract allows for the greatest flexibility to negotiate each party’s representations, warranties and any possible indemnity for breach.
However, in case the target of an acquisition is under court rehabilitation the participation of the rehabilitation receiver and the approval of the rehabilitation court is required.
For publicly listed companies, a minimum tender offer is required if any of the requirements detailed in 7.3 Mandatory Offer Thresholds are met.
Acquisitions by privately equity funds are primarily structured through the creation of a special purpose vehicle (SPV). In some instances the private equity fund is typically involved with local counsel in the negotiating the sale documents or the conduct of due diligence, whether directly or through its international counsel.
In the Philippines private equity transactions are commonly financed directly by the private equity investor from its own capital. In larger transactions, the deal may be financed through a combination of the private equity investor’s capital and loans from local or foreign banks. In the event that the private equity investor acquires a majority stake in the target company, the assets of the target company may commonly be offered as security for the loan.
However, in the Philippines, it is more common for a private equity fund to hold only a minority stake in the target company.
Deals involving a consortium of private equity sponsors or club deals are not common in the Philippines.
Various consideration structures are common in the Philippine M&A market. The locked box, completion accounts and fixed price mechanisms have all been used in Philippine M&A Transactions.
Generally, locked box and fixed price mechanisms are more common in the Philippines. However, M&A transactions with a longer duration between the signing date and the closing date occasionally adopt a completion accounts mechanism to ensure a more accurate valuation of the target company by the closing date. While earn-outs and deferred consideration are occasionally adopted in M&A transactions, such provisions may require active negotiations as these are not common in the Philippines.
For locked box transactions, leakage protection commonly includes restrictions imposed on the target company preventing corporate actions outside of the ordinary course of business of the target company such as: the payment of dividends, the grant of bonuses, the pre-payment of loans, or the creation of any liens over corporate assets. These restrictions are commonly included as negative covenants by the target Company under the pertinent transaction agreement.
Protection levels tend to be similar between transactions involving a private equity funded buyer and a purely corporate buyer.
It is not common in Philippine M&A transactions adopting a locked-box consideration mechanism for interest to be charged on leakages. Violations by the target company of its negative covenants designed to prevent leakages are more commonly subject to a specific indemnity provision.
In the Philippines it is common to have dispute resolution mechanisms in place for resolving disputes relating to the transaction, including consideration related disputes. Generally, a typical dispute resolution mechanism would include the following:
In certain cases, an intermediary dispute resolution step is added before reference to arbitration. Particularly, this step involves submitting the dispute for the resolution of an expert independent third party such as an accounting firm mutually selected by both parties.
It is common to have the following matters included as conditions precedent for the completion of an M&A Transaction in the Philippines:
The completion of financing transactions have also be included as a condition precedent in certain transactions, although it is uncommon.
It is common to have a liquidated indemnity and/or breach provision for any material adverse changes affecting the parties to the transaction.
“Hell or high water” undertakings are uncommon in the Philippines. Regulatory approval related risks are commonly mitigated by a covenant to file any submissions required for a government regulatory approval within a specified time, and a liquidated indemnity and/or breach provision for failure to comply with such covenant.
Break fees payable by the seller and reverse break fees payable by the buyer are not common in private equity transactions in the Philippines. Under Philippine law, such break fees may be stipulated as liquidated damages to be paid upon breach of the provisions of the pertinent agreement to the M&A transaction.
While the grounds for termination may vary depending on the transaction, it is common for the pertinent M&A transaction documents to stipulate that the private equity seller or buyer may terminate the acquisition agreement upon occurrence of the following circumstances:
Risk allocation is usually thoroughly negotiated between the seller and the buyer and depends on specific circumstances surrounding a transaction. Risks identified during the course of the legal due diligence commonly lead to an increase in purchase price, or may, in some instances require the inclusion of an indemnity provision, requiring the seller to indemnify the buyer in order to cover the risk if the identified risk event is triggered.
The allocation of risk generally does not differ in transactions covering only purely corporate M&As and transactions involving private equity funds.
Generally, representations and warranties for M&A transactions involving private equity funds do not differ significantly from purely corporate M&As. Common representations and warranties include:
Full disclosure of the data room is not common in the Philippines, with exceptions to representations and warranties being carved out through disclosure schedules, when applicable.
Limitations on liability may include caps on indemnity or the introduction of fixed periods for the expiration of certain indemnity provisions. Materiality thresholds may also be introduced before an indemnity provision is triggered.
Apart from the indemnity protections discussed in items 6.8 Allocation of Risk and 6.9 Warranty Protection, other protections commonly include in acquisition documentation are a separate specific indemnity for pre-completion tax liabilities and tax liability related risks. It is generally not common for an for an escrow account to be in place from which the indemnity may be drawn.
Warranty and indemnity insurance is not commonly used in Philippine M&A transactions.
Litigation is generally not common in private equity M&A transactions in the Philippines given the common dispute resolution mechanism which provides multiple opportunities for the parties to reach an amicable settlement before a recourse to arbitration.
However, the more commonly disputed provisions relate to breaches of covenants, representation and warranties, and indemnification provisions.
While there have been public to private transactions recently, the conversion of publicly listed companies to private companies is not common in the Philippines given the low number of publicly listed corporations.
Foreign Investment Limitations
The Foreign Investments Negative List provides potential investors with guidance on industries with applicable foreign ownership restrictions which may range from 0% foreign ownership and up to 40% foreign equity. Such restrictions include, but are not limited to the following.
No foreign equity
Up to 25% foreign equity
Up to 30% foreign equity
Up to 40% foreign equity
A General Information Sheet which details the shareholding structure of the company is disclosed to the SEC either within seven days from the change in the composition of the board of directors of the company, or within 30 days from the date of the annual meeting of the company.
Publicly Listed Corporations
Disclosure by beneficial owner
Any person who acquires beneficial ownership in 5% of any class of securities of a publicly listed company is required to make a disclosure to the company, the exchange where the security is traded, and the SEC within 5 business days after such acquisition. Such beneficial owner is also required to submit an amendment to his/her disclosure to the company, the exchange and the SEC in the event of any change in the facts set forth in the disclosure.
Disclosures by directors, officers and principal stockholders
Every person who is, directly or indirectly the beneficial owner of 10% or more of any class of any security of a publicly listed company or a director or officer such publicly listed company shall make an appropriate disclosure to the SEC and the exchange where the security is listed within:
Such person shall also be required to notify the SEC when their direct or indirect beneficial ownership falls below 10% or if they ceases to be an officer or director of the Company.
Tender offer-related disclosures
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 12 months must file a declaration to that effect with the SEC.
In the event that such person or group of persons acting in concert intend to acquire 35% of equity securities in a public company in one or more transactions within a period of 12 months, apart from the requirement to file a declaration with the SEC, a mandatory tender offer (see 7.3 Mandatory Offer Thresholds) shall also be required.
Under the Securities Regulation Code and its Implementing Rules and Regulations, any person or group of persons acting in concert is required to make a tender offer if the following thresholds are met:
First, there is an intent to acquire either a) 35% of the outstanding voting shares or b) such outstanding voting shares that are sufficient to gain control of the board in a public company, whether through a single transaction or a series of transactions within a period of 12 months. In such cases, such intent must be disclosed and a tender offer contemporaneously made for the percentage sought to all holders of such securities within the said period.
Second, there is an intent to acquire directly from one or more stockholders either a) 35% of the outstanding voting shares or b) such outstanding voting shares that are sufficient to gain control of the board in a public company. In such cases, a tender offer must be made for all the outstanding voting shares.
Finally, if any acquisition that would result in ownership of over 50% of the total outstanding equity securities of a public company, the acquirer shall be required to make a tender offer under this Rule for all the outstanding equity securities to all remaining stockholders of the said company at a price supported by a fairness opinion provided by an independent financial advisor or equivalent third party. The acquirer in such a tender offer shall be required to accept all securities tendered for.
Private equity M&A transactions in the Philippines commonly require cash as the form of consideration. Shares are typically used as consideration in corporate restructuring or reorganisation preliminary to the main M&A deal.
Philippine law does not specifically impose regulations on closing conditions for takeovers. Such takeovers are treated in the same manner as a regular M&A transaction. The parties have the freedom to stipulate on the offer conditions for the takeover which may involve amendments to the target company’s articles of incorporation and bylaws. The parties are generally free to stipulate on security measures such as break fees, match rights and non-solicitation provisions.
In takeovers of publicly listed corporations, it is common to require as a condition precedent that the tender offer process as required by the applicable regulations must first be completed.
Common deal security measures are exclusivity and non-solicitation provisions, although break fees are possible.
In addition to the voting rights acquired by the private equity investor in the target company, the following additional governance rights may be granted to the private equity investor upon the execution of a Shareholders’ Agreement, and the amendment of the Articles of Incorporation of the target company:
Minority shareholders may be further diluted through the offering of new primary shares subject to compliance with pre-emptive rights where they exist.
In the case of a tender offer required pursuant to an offer to acquire shares directly form one or more shareholders, the execution of a definitive agreement with such shareholders trigger the tender offer process. Such definitive agreements may require that the offer to sell the shares to the purchaser is irrevocable, subject to compliance with the applicable tender offer regulations, if so stipulated.
Philippine law does not regulate or prohibit hostile takeovers of publicly listed companies. Such hostile takeovers are not common in the Philippines.
Ensuring the retention of high-level managers after an acquisition through equity participation incentives is common in the Philippines. Equity ownership of management varies among companies.
These arrangements are more comment in cross-border deals, where retained management are given an option to acquire shares after a vesting period.
Vesting periods vary among transactions.
In the Philippines it is not uncommon to require managers and high level employees to execute agreements with applicable restrictive covenants applicable upon their departure from the company. These include non-compete, non-solicitation, and non-disparagement undertakings.
With regard to non-compete clause, however, case law prohibits a non-compete clause that is unduly harsh or oppressive in curtailing the legitimate efforts of an employee to earn a livelihood. Hence, such non-compete clauses must be found reasonable in its limitations as to time, trade and place.
As to time, case law has upheld the validity of non-compete clauses with a restriction of up to two years. As to trade, the non-compete clause must identify only the specific type of business where the departing management shareholder is to be restricted from joining. As to place, case law requires that a provision on territorial limitation which must be co-extensive with the business of the company is necessary to guide an employee of what constitutes a violation of the restrictive covenant.
Such restrictive covenants may be enforced by demanding the payment of damages or by seeking injunctive relief from the courts.
It is uncommon to grant minority protection to manager shareholders as such. It is more comment to see minority protection for the minority shareholder in an M&A deal. If granted, management shareholders would enjoy the same minority protection rights granted by the Revised Corporation Code to ordinary minority shareholders. These include:
Management shareholders typically enjoy the same minority protection rights granted by the Revised Corporation Code to ordinary minority shareholders. These include:
Apart from these minority protections, management shareholders may also seek the inclusion of tag-along rights in the applicable Shareholders’ Agreement.
The level of shareholder control will usually vary depending on the size of the investment of the private equity fund shareholder. However, it is common for private equity funds to provide for the following control provisions to protect its investments:
As a rule, Philippine law adheres to the doctrine of a separate juridical personality such that the portfolio company is considered as a personality separate and distinct from its shareholders.
However, according to case law, the veil of corporate fiction may be pierced if based on the totality of circumstances, it can be determined that the veil of corporate fiction has been used to shield fraud, defend crime, justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice.
Imposition of compliance policies depends on the existing compliance policies set in place by the portfolio companies. In certain cases, the compliance policies may be updated by the private equity fund shareholder to be aligned with its global policies.
The typical holding period for private equity transactions will vary depending on the company and may range from three to six years. The most common form of private equity exit is through a purchase and sale of shares through a private agreement. The marketability of the offer to sell the shares of the private equity investor is improved through the exercise of a tag-along or drag-along right, if available.
IPOs and “dual track” exit strategies (involving an M&A sale together with an IPO) are not common in the Philippines. Reinvestment by private equity sellers upon exit is also not a common practice in the Philippines.
Shareholders’ agreements involving private equity shareholders and management shareholders will commonly feature drag-along rights as an exit mechanism for the private equity fund. Typically, the threshold for triggering the drag-along right is the sale of a controlling share in the company.
Shareholders’ agreements also grant the private equity shareholder a tag-along right to compel a majority shareholder to sell its shares in the event of the sale of all of the shares held by the private equity fund, improving the marketability of the sale of shares for the private equity fund’s exit from the company.
IPOs as an exit strategy is not common in the Philippines considering that only a small number of Philippine corporations are listed under the Philippine Stock Exchange (PSE) and publicly traded. The greater majority of Philippine corporations are not publicly listed companies.
The PSE’s listing and disclosure rules impose a lock-up period ranging from 180-365 days for shareholders holding at least 10% of the issued and outstanding shares of stock in a company seeking to be listed with the PSE.