Philippines

4 Chapter M&A

    • Introduction to the Philippine Setting

       Mergers and Acquisitions of publicly-listed companies in the Philippines are governed by the following laws:

       

      1. Corporation Code
      2. Civil Code of the Philippines
      3. Securities Regulation Code (SRC)
       
      Compliance with the nationality requirements under the 1987 Philippine Constitution, the Foreign Investments Act, and other laws is also required. For some companies engaged in regulated business such as banking, insurance and telecommunications, regulatory consent or approval from the respective government office is also required.

    • Types of Transactions Involved

       a.   Foreign Direct Investments (FDI)

       

                                               i.    Bangko Sentral ng Pilipinas Regulations
       
      Foreign Direct Investments (FDI) are not required to be registered with the Bangko Sentral ng Pilipinas, unless the foreign exchange needed to service the repatriation of capital and the remittance of dividends and earnings will be purchased from the Philippine banking system. FDI may be in cash or in kind, such as machinery and equipment, and raw materials. Foreign exchange funding investments must be remitted into the Philippine banking system to be eligible for registration. There is no need to convert the foreign exchange to pesos for BSP registration purposes.
       
       

       
       
       

      b.   Transfer of Shares
       
       

      The acquiring entity may acquire shares from the shareholders of the target company. In such transactions, the purchaser acquires the target company with all its assets and liabilities including contingent and undisclosed liabilities.
       
       

                                               i.    Securities Regulation Code Rules
       
      The Securities and Exchange Commission (SEC) recently amended the rules implementing the Securities Regulation Code, wherein the rule on mandatory tender offer has revised to provide for two levels of action, depending on the threshold triggered: a disclosure action; and mandatory tender offer action. The rules also provide for a set of guidelines in the conduct of valuation and issuance of fairness opinion.
       
       

      It provides that any person or group of persons acting in concert (acquirer), acquiring 15% of equity securities in a public company in one or more transactions within 12 months, must file a declaration to that effect with the SEC.
       
       

      The threshold to trigger Mandatory Tender Offers is still an acquisition of 35% but it now refers to an acquisition of 35% of the outstanding voting shares or such outstanding voting shares that are sufficient to gain control of the board in a public company.
       
      Presently, the acquirer must undertake a tender offer for the following acquisitions:
       a.     a single acquisition or a creeping acquisition within 12 months: through a disclosure and tender offer for the percentage sought to all holders of such securities within such period; and
       
       

      b.    if directly from one or more stockholders: through a tender offer for all outstanding voting shares
       
       

      Rule 19 on Tender Offer also provides that, if the acquisition leads to ownership above 50% of the total outstanding equity securities of a public company, there will be a tender offer for all the outstanding equity securities to all remaining stockholders at a price supported by a fairness opinion, issued according to the guidelines under the amended rules.
       
       

      However, where the acquisition meeting the threshold is done through the Exchange trading system, no tender offer is required even if the acquirer gets the remainder through a block sale, if after the acquisition through the Exchange trading system, the threshold is not met.
       
      c.   Asset Acquisition
       
      Here, each transfer of a category of assets and liabilities may require different legal treatment and documentation. The vendor retains all assets and liabilities not otherwise acquired or assumed by the purchaser. There is no restriction on how purchase price is allocated but the general rule is that it must not be lower than the fair market value.
       
       
      d.   Merger or Consolidation
       
      An acquiring corporation may absorb the target company, become the surviving entity.
       

    • Corporate Vehicles For Mergers And Acquisitions

       In the Philippines, foreign investors can establish the following forms of business enterprise:

       

      a.   Joint Venture Corporation
       
      A joint venture with Philippine nationals must be established when a foreign investor wants to invest in partially nationalized businesses. Foreign nationals holding a minority of the shares of a domestic company may obtain minority protection. This minority protection is generally contained in shareholders' agreements or joint venture agreements and, to the extent possible, incorporated in the articles of incorporation and bylaws of the joint venture company.
       
      b.   Subsidiary
       
      A subsidiary is a domestic corporation. It is a legal entity separate and distinct from that of its parent company. The requirements to register a domestic corporation under the Corporation Code of the Philippines also apply to a subsidiary.
       
      c.   Branch Office
       
      A foreign investor may likewise register a branch office to engage in a business that is not totally or partially nationalized. A branch is an extension of a foreign company and therefore has no separate and independent legal personality. It carries out the business activities of the head office and earns income in the Philippines. Before a branch may engage in business activities in the Philippines, the parent company must register with the Securities and Exchange Commission (SEC).
       
      d.   Representative Office
       
      A representative office deals with the clients of the parent company in the Philippines through information dissemination, promotion and quality control. A representative office does not derive income in the Philippines and is fully subsidized by its head office. The parent company must likewise register the representative office with the SEC before it can perform these activities in the Philippines.
       

    • Regulations Involving Mergers And Acquisitions

       a.   Corporation Code of the Philippines (Secs. 76-80)

       

      The following rules governing mergers and consolidations are provided for under Sections 76-80 of the Corporation Code of the Philippines:
       
      Procedure
      In a Merger,
      1.    Meeting of the Board of Directors or Trustees of the constituent corporations to approve the plan of merger;
      2.    Notice of meeting of the stockholders or members of the constituent corporations, sent at least two (2) weeks prior to the date of the meeting, either personally or by registered mail at the post office address of the stockholders or members as appearing in the corporate or membership book, stating the purpose of the meeting and including a copy or a summary of the plan of merger;
      3.    Meeting of the stockholder or member of each constituent corporation approving the plan of merger by at least two-thirds (2/3) of the members of non-stock corporations.
      In a consolidation,
      1.    Meeting of the Board of Directors or Trustees of the constituent corporations to approve the plan of consolidation;
      2.    Notice of meeting of stockholders or members of the constituent corporations, sent at least 2 weeks prior to the date of the meeting, either personally or by registered mail at the post office address of the stockholders or members as appearing in the corporate-or-member ship book stating the purpose of the meeting and including a copy or a summary of the plan of consolidation;
      3.    Meeting of the stockholders or members of each constituent corporation approving the plan of consolidation by at least 2/3 of the outstanding capital stock or at least 2/3 of the members of non-stock corporations.
       
      Requirements
      For Merger - Corporations desiring to merge are required to submit to the Commission, in quadruplicate, the following instruments:
      1.    Article of Merger signed by the President or Vice-President and certified under oath by the Secretary or Assistant Secretary of the constituent corporations setting forth the following:
      a.    The plan of merger;
      b.    As to stock corporations, the number of shares outstanding, or in the case of non-stock corporations, the number of members; and
      c.    As to each corporation, the number of outstanding shares or members voting for and the names of stockholders or members voting against such plan, respectively.
      d.    Copies of the minutes of the board of directors meeting and minutes of the stockholders' or members' meeting of the constituent corporations, approving and ratifying the plan of merger, certified under oath by their respective secretaries or assistant secretaries;
      e.    List of creditors of the absorbed corporations, as of the date of approval of the plan of merger with their addresses and the amounts owing to each;
      f.     Audited financial statements (Balance Sheet and related statement of income and expenses) of the constituent corporations as of a date not earlier than 120 days prior to the date of filing of the application with the Commission. The financial statements shall be accompanied by a long form audit report of a certified public accountant;
      g.    Amended Articles of Incorporation and By-Laws of the surviving corporation, whenever necessary in accordance with the term of the plan of merger such as change of name of the surviving corporation, increase of capital stock, etc.
       
      For Consolidation - Corporation desiring to consolidate are required to submit to the Commission in quadruplicate, the following instruments:
      1.    Articles of Consolidation signed by the President or Vice-President and certified under oath by the Secretary
      2.    Assistant Secretary of the constituent corporations setting forth the following:
       
      a.    The plan of consolidation;
      b.    As to stock corporations, the number of shares outstanding of the constituent corporations or in the case of non-stock corporations, the number of members; and
      c.    As to each corporation, the number of outstanding shares or members voting for and the names of stockholders or members voting against such plan respectively.
      d.    Copies of the minutes of the board of directors' meeting and minutes of the stockholders' meeting of each of the constituent corporations, approving and ratifying the plan of consolidation, certified under oath by their respective secretaries or assistant secretaries;
      e.    List of the creditors of the constituent corporations as of the date of approval of the plan of consolidation with their addresses and the amount owing to each;
      f.     Audited Financial Statements (Balance Sheet and related Statement of Income and Expenses) of each of the constituent corporations as of a date not earlier than 120 days prior to the date of filing of the application with the Commission. The financial statements shall be accompanied by a long form audit report of a certified public accountant;
      g.    Articles of Incorporation, By-Laws and supporting documents of the proposed or consolidated corporation.
       
      b.   Anti-Dummy Law
       
      The Anti-Dummy Law prohibits foreign nationals from, inter alia, intervening in the management, operation, administration or control of a company engaged in a nationalized or partially nationalized activity, whether as an officer or an employee (this prohibition excludes technical personnel specifically authorized by the Secretary of Justice). However, foreign nationals may serve as members of the board or governing body of corporations engaged in partially nationalized activities in a number proportionate to their actual and allowable equity in the company.
       
      c.   Tenth Foreign Investment Negative List
       
      Restrictions in nationalized activities and specific percentage of foreign ownership allowed in certain industries are some of the considerations that must be made prior to mergers and acquisitions.
       
      d.   Republic Act No. 10667 or the Philippine Competition Act of 2015
       
      The Philippine Competition Act of 2015 which was passed on July 21, 2015, vests in the Philippine Competition Commission (PCC) the power to:
      1. Review proposed mergers and acquisitions
      2. Determine thresholds for notification
      3. Determine the requirements and procedures for notification
      4. Upon exercise of its powers to review, prohibit mergers and acquisitions that will substantially prevent, restrict or lessen competition in the relevant market
       
                    As provided in Sec. 3, the law is enforceable against any person or entity engaged in any trade, industry and commerce in the Republic of the Philippines. It is likewise applicable to international trade having direct, substantial, and reasonably foreseeable effects in trade, industry, or commerce in the Republic of the Philippines, including those that result from acts done outside the Republic of the Philippines. It does not does not apply to the combinations or activities of workers or employees nor to agreements or arrangements with their employers when such combinations, activities, agreements, or arrangements are designed solely to facilitate collective bargaining in respect of conditions of employment.
       
      Under said law, the following agreements are anti-competitive and are therefore prohibited:
       
      1. Restricting competition as to price, or components thereof, or other terms of trade.
       
      2. Fixing price at an auction or in any form of bidding including cover bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation.
       
      The following agreements, between or among competitors which have the object or effect of substantially preventing, restricting or lessening competition are also prohibited:
       
      1. Setting, Kiting, or controlling production, markets, technical development, or investment
       
      2. Dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means.
       
      Other agreements that are not specified, but which have the object or effect of substantially preventing, restricting or lessening competition shall also be prohibited.
       
      However, as a clarification, those which contribute to improving the production or distribution of goods and services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits, may not necessarily be deemed a violation of the Act.
       
       

    • Specific Industry Regulations

       a.   Banking Sector

       

      The merger or consolidation of banks and other financial intermediaries to meet minimum capital requirements shall be allowed as long as the same is done in compliance with the provisions of applicable law and subject to approval of the Bangko Sentral. As a general rule, the ratio of exchange of shares between or among the participants in a bank merger or consolidation shall be based on mutual agreement of parties concerned. However, any appraisal increment reserve (revaluation reserve) arising from the revaluation of the fixed assets, as may be agreed upon by the parties, shall be limited to premises, improvement, and equipment which are necessary for its immediate accommodation in the transaction of the bank's business. Such revaluation should be based on fair valuation of the property which shall be subject to review and approval by the Bangko Sentral.
       
       
      b.   Telecommunications Sector
       
      Under the Public Service Law, prior approval of the National Telecommunications Commission (NTC) is required for the sale, alienation, mortgage, encumbrance or lease of property, franchises, certificates, privileges or rights; or the merger or consolidation of property, franchises, certificates, privileges or rights; or the merger or consolidation of property, franchises, privileges or rights of a telecommunications company. In case of a share acquisition, the approval of NTC is required if the transfer or sale of shares in a telecommunications company will result in the purchaser owning more than 40% of the subscribed capital stock of the telecommunications company.
       

    • Non-Regulatory Consents And Approvals

       Typical restrictions on transfer or issuance of shares include rights of first refusal over the shares to be purchased, or pre-emptive rights of other shareholders if the shares to be acquired are shares to be issued from unissued authorized capital stock or shares to be issued from an increase in the authorized capital stock of the target company. In this regard, the articles of incorporation and by-laws of the target company and any shareholders' agreement must be reviewed and examined carefully by a prospective purchaser.

       

      a.   Right of first refusal
       
      A right of first refusal is a contractual right of an entity to be given the opportunity to enter into a business transaction with a person or company before anyone else can. Since an entity with the right of first refusal has the right, but not the obligation, to enter into a transaction that generally involves an asset, it is akin to a having a call option on the asset. If the entity with the right of first refusal declines to enter into a transaction, the owner of the asset is free to open the bidding up to other interested parties.
       
      b.   Pre-emptive rights
       
      All stockholders of a stock corporation enjoy pre-emptive right which generally gives them the privilege to subscribe to all issues or disposition of shares of any class, in proportion to their respective shareholdings. However, such right may be denied by the articles of incorporation or an amendment thereto provided:
      ·         That such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; or
      ·         To shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt.
       
      c.   Contractual obligations
       
      Contractual obligations such as those embodied in loan agreements and other contracts relating to material commitments of the target company typically contain change of control provisions. As such, in the event of a merger or acquisition, the consent of the lenders or the appropriate counterpart is required since this will result in a change in control of the target company.
       
      d.   Shareholder vote requirements for M&A in the Corporation Code
       
      Under the Corporation Code of the Philippines, the plan of merger or consolidation must first be approved by a majority vote of each of the board of directors or trustees of the constituent corporation. After which, the same shall be submitted for approval by the stockholders or members of each of such corporations at separate corporate meetings duly called for the purpose.
       
      All stockholders or members of the respective corporations, shall receive notice at least two (2) weeks prior to the date of the meeting, either personally or by registered mail. Said notice shall state the purpose of the meeting and shall include a copy or a summary of the plan of merger or consolidation. The affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock of each corporation in the case of stock corporations or at least two-thirds (2/3) of the members in the case of non-stock corporations shall be necessary for the approval of such plan. Any dissenting stockholder in stock corporations may exercise his appraisal right in accordance with the Code: Provided, that if after the approval by the stockholders of such plan, the board of directors decides to abandon the plan, the appraisal right shall be extinguished.
       
      Any amendment to the plan of merger or consolidation may be made, provided such amendment is approved by majority vote of the respective boards of directors or trustees of all the constituent corporations and ratified by the affirmative vote of stockholders representing at least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3) of the members of each of the constituent corporations. Such plan, together with any amendment, shall be considered as the agreement of merger or consolidation.
       
       

    • Tax On Mergers And Acquisitions

       a.   Transfer of Shares
      i.    Certificate Authorizing Registration (CAR)
      Generally, income tax and other taxes are collected for transfer of shares of stock of a domestic corporation or of real property located in the Philippines.Before the transfer can be recorded in the stock and transfer book of the Philippine company (in case of a sale of shares) and with the registry of properties (in case of a transfer of real property), a certificate authorizing registration (CAR) from the Philippine Bureau of Internal Revenue (BIR) must first be secured. The CAR is a certification that all taxes on the conveyance have been paid.
       
      ii.    When donor’s tax may be imposed
       
      Under the National Internal Revenue Code, individual and corporate shareholders, whether or not citizens or residents of the Philippines, who give or donate shares of stock are liable to pay Philippine donors’ tax on such transfer of shares, ranging from 2% to 15% of the net gifts during the year exceeding P100,000.
       
      Donor’s tax, however, shall not be collected in respect of intangible personal property, such as shares of stock: (a) if the donor at the time of the donation was a citizen and resident of a foreign country which at the time of donation did not impose a transfer tax of any character, in respect of intangible personal property of citizens of the Philippines not residing in that foreign country, or (b) if the laws of the foreign country of which the donor was a citizen and resident at the time of donation allowed a similar exemption from transfer of every character or description in respect of intangible personal property owned by citizens of the Philippines not residing in that foreign country.
       
      iii.    Listed Companies
       
      If the shares transferred are listed and traded through the PSE, the transfer is subject to a percentage tax of 0.5% of the gross selling price. The listed shares must be sold or traded through the facilities of the stock exchange for the stock transaction tax (STT) to apply.
       
      Beginning January 1, 2013, however, the STT will not apply to transfer of shares of listed companies which are not compliant with the minimum public ownership (MPO) requirement prescribed by the Securities and Exchange Commission or the Philippine Stock Exchange (PSE). Under Revenue Regulations (RR) No. 16-2012, the sale of listed shares of noncompliant companies will be subject to the 5%-10% capital gains tax (CGT).
       
      iv.    Not listed Companies
       
      For sale of shares not traded through the PSE, the CGT applies at the rate of 5% on the first P100,000 of net gain, plus 10% in excess thereof. The net gain is the difference between the selling price and the acquisition cost of the shares. The selling price is the consideration agreed in the sale document, while the acquisition cost includes the purchase or subscription price plus all other costs of acquisition such as commission, DST, and transfer fees.
       
      As mentioned earlier, the 5%-10% CGT rates also apply to the sale of listed shares that are not traded through the PSE, as well as the sale of listed shares of companies who are not compliant with the MPO requirement.
       
      In case of share transfers by a non-resident, the gain may be exempted from the CGT under the relevant provisions of the applicable tax treaty, provided a tax treaty relief application (TTRA) is filed in a timely manner with the BIR. For example, any gain derived by a resident of the United Kingdom or the Netherlands from the sale of Philippine company shares is exempt from CGT. On the other hand, any gain derived by a resident of other countries including Japan, Singapore, and China may also be exempt from CGT if the assets of the Philippine company whose shares are being sold do not ‘consist principally of immovable property’ or if its ‘real property interest’ does not exceed 50% of the entire assets of the company in terms of value.
       
      b.   Asset Acquisition
       
      In share acquisitions, the target company will retain the same tax basis for its assets regardless of the purchase price paid for its shares by the purchaser. In asset acquisitions, the purchasers tax basis is generally equivalent to the purchase price of the acquired assets. In a merger, the tax basis of the assets received by the surviving corporation is the tax basis such assets would have had in the hands of the absorbed corporation (i.e. historical cost) increased by the amount of gain recognized by the absorbed corporation on the transfer. However, the tax basis of the shares of the surviving corporation received by the shareholders of the absorbed corporation will be the same as the tax basis of the absorbed corporation’s property, stocks or securities surrendered in exchange for the surviving corporation’s shares
      (a) decreased by:
      (i) the money received and
      (ii) fair market value of the other property received and
       
      (b) increased by:
      (i) the amount treated as dividend of the shareholder and
      (ii) the amount of any gain that was recognized in the exchange.
       
       
      c.   Tax-Free transfers of property by a corporation
       
      The Tax Code recognizes instances of tax-free transfers of properties by a corporation, in exchange for shares of stock of another corporation. Upon compliance with the requirements, a merger or consolidation can qualify as a tax-free exchange or corporate reorganization. Also, under Republic Act No. 10001, a merger or consolidation that meets the requirements of the Tax Code is exempt from documentary stamp tax in respect of any real property transferred pursuant to the merger or consolidation. However, the original issuance of shares of stock pursuant to the merger or consolidation will still be subject to documentary stamp tax. In a merger, if the liabilities transferred to or assumed by the surviving corporation exceed the total of the basis of the property transferred by the absorbed corporation, the excess shall be considered a taxable gain of the absorbed corporation.
       
      d.   Net Operating Loss Carry Over (NOLCO)
       
      The Bureau of Internal Revenue through Revenue Regulation No. 14-2001, laid down the rules on net operating loss carry over. Basically, the net operating loss of a business or enterprise for any taxable year immediately preceding the current taxable year, which has not been previously deducted from gross income, is carried over as deduction from gross income for the next three consecutive taxable years immediately following the year of such loss.  In general, NOLCO shall be allowed as a deduction from the gross income of the same taxpayer who sustained and accumulated the net operating losses regardless of the change in its ownership. Net loss incurred in a taxable year during which the taxpayer was exempt from income tax shall not be allowed as a deduction from gross income of succeeding years.
       
      Net operating loss carryover is not allowed if there has been a substantial change in the ownership of the target company. There is no substantial change in the ownership of the target company if:
      ·         75% or more (in nominal value) of the outstanding issued shares are held by or on behalf of the same persons; or
      ·         75% or more of the paid-up capital of the corporation is held by or on behalf of the same persons.
       
      e.   Documentary Stamp Tax (DST)
       
      Documentary Stamp Tax is a tax on documents, instruments, loan agreements and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto. Republic Act No. 10001 of 2009 which reduced the taxes on life insurance policies, amending Sections 123 and 183 of the National Internal Revenue Code of 1997 as amended, also expanded the number of transactions exempt from DST.
       
      In Mergers and Acquisitions, the following DST rates apply:

      Transaction

      DST

      Mergers

      The issuance of shares by the surviving corporation is subject to a DST of P1.00 on each P200 (or fractional part thereof) of the par value of the shares.

      Share Acquisitions

      P0.75 on each P200 (or fractional part thereof), of the par value of the shares transferred is imposed on the transfer of the shares.

       

      Asset Acquisitions

      On deeds of sale or conveyance of real property DST is P15.00 for:

       (1) Consideration or value received or contracted to be paid for such realty which does not exceed P1,000; and

      (2) Each additional P1,000 in excess of the P1,000, of the consideration or fair market value of the real property (whichever is higher).
       
      Transfers of stock or real property pursuant to the merger are exempt from DST, provided the requirements of the Tax Code are met.
       
      a.   Capital Gains Tax (CGT) and Corporate Income Tax (CIT)
       
      Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.
       
      Corporate Income Tax is a tax payable by domestic companies on all income derived from sources within and outside the Philippines while foreign corporations, whether resident or nonresident, are taxable only on income derived from sources within the Philippines.

      Transaction

      CGT and/or CIT

      Mergers

      Exchanges of property of the absorbed corporation solely for stock of the surviving corporation, and the surrender by shareholders of the absorbed corporation of their shares in the absorbed corporation for shares of the surviving corporation is tax free.

      Share Acquisitions

      (1)  5% on any gain not exceeding P100,000

      (2) 10% on any gain that exceeds P100,000 is imposed on the gain (i.e. selling price or book value, whichever is higher, less acquisition cost) on the sale of shares of domestic corporations that are not sold or disposed of through the Philippine Stock Exchange (PSE)

       

      Asset Acquisitions

      Income from the sale of capital and noncapital assets other than land and buildings is generally taxable as part of ordinary corporate income at the rate of 35%.

       

      A final tax of 6% is imposed on the gain presumed to be realized on the sale of lands and/or buildings which are not actually used in the business of the corporation and are treated as capital assets.

       

      a.   Value-Added Tax (VAT)

       

      Value-Added Tax is a business tax imposed and collected from the seller in the course of trade or business on every sale of properties (real or personal) lease of goods or properties (real or personal) or vendors of services. It is an indirect tax, thus, it can be passed on to the buyer.

      In mergers or consolidation of corporations, the surviving corporation shall absorb any unused input tax of the dissolved corporation as of the date of merger[3].

       

      There is no VAT on a normal share acquisition. The transfer of the assets of absorbed corporations to another corporation pursuant to a merger is not subject to VAT.

      In relation to asset acquisitions, VAT is due on the sale of goods or properties originally intended for sale or for use in the ordinary course of business that are sold not in the course of normal business.

       

      Similarly, a transaction deemed sale not in the course of business is subject to VAT. However, the sale of real properties not primarily held for sale to customers or for lease in the ordinary course of trade or business is not subject to VAT.


      b.   Local Government Unit-imposed taxes

      Depending on the city or municipality where the business is located, additional fees and local taxes may be imposed. In case of transfer of real property ownership, local transfer taxes and registration fees may be collected.

       
       
       
       
       

    • Due Diligence And Documentation

       a.   Due Diligence
       
      Unless the prospective purchaser is an insider and is aware of the business of the target company, a due diligence is imperative in almost all mergers and acquisitions. Because the purchaser assumes all the assets and liabilities of the target company in a share acquisition, the due diligence investigation for a share acquisition is relatively more extensive than in the case of an asset acquisition.
       
      Mergers and Acquisition transactions are among the most complex activities a business can undertake. In today's global market, where not all information is transparent, these transactions present an even greater challenge. Companies include a substantial part of their value creation/synergy targets in the acquisition purchase price.
      Due to expected future defaults and economic issues, management - more than ever before - wants to quantify the risk of not being able to meet those targets. Thus, due diligence is a crucial aspect of any Mergers and Acquisitions deal, as it is the main process that allows to evaluate the health levels of the parties involved, and therefore, of the entire deal. Associate consultants help organizations evaluate the financial, commercial, regulatory and other situations of potential merger candidates and understand the opportunities and challenges that may arise from a Mergers and Acquisitions operation.
       
      i. Legal Due Diligence
      Legal due diligence consists of an examination of the legal affairs of the target company in order to uncover any risks, and to provide detailed information regarding the company's legal situation. A legal due diligence exercise often improves the bargaining power of the buyer.
      The objectives of legal due diligence vary from case to case, but some of the typical objectives are summarized below:
      ·         Gathering of information about the target company
      ·         Uncovering the target company's strengths and weaknesses, risks and advantages in connection with the transaction
      ·         Minimizing the risk of unexpected situations
      ·         Improvement of the seller's bargaining position
      ·         Identification of areas where representations and warranties from the seller should be obtained in the acquisition agreement.
       
       

      Financial Due Diligence refers to the process of investigation into the financial affairs of the target company that has a material impact on the prospects of the business. A Financial Due Diligence review may not only look at the historical financial performance of a business, but can also consider the future financial performance. The initial stage of the Financial Due Diligence process determines the ability of the company to bring a profit and the probability of the success of the project. Within the financial review, Tax Due Diligence is also carried out. The purpose of this is to investigate the possibility of any tax burden, and if possible, effectively and legally exclude it.


      iii. Business Due Diligence

       The business due diligence process includes the gathering, analysis and interpretation of financial, commercial, legal and marketing information. It is divided into two components - external and internal. The purpose of this process is to assess the shape and health of the business with regard to external factors (competitors), in order to rightly assess the potential of a Mergers and Acquisitions deal.


      a.   Preliminary Agreement
       
      A preliminary agreement prior to transactions among parties for acquisition negotiations is not a legal requirement under Philippine laws. However, it is customary for parties to define the parameters of the acquisition, obligations of confidentiality, "no shop" obligations and other stipulations through a letter of intent or a Memorandum of Understanding.
       
       

      The concept of the option contract is recognized under Philippine laws. Under an option contract, for a consideration distinct from the purchase price, the purchaser has the exclusive option to purchase specific assets for a certain price within the period of the option. This may be part of a preliminary agreement between parties.
       
       

      b.   Due Diligence Checklist
       
      Depending on the agreement between the purchaser and its lawyers, a comprehensive legal due diligence checklist must cover the following:
       
       

      1.    Corporate organization and ownership
       
       

      2.    Financial aspects
       
       

      3.    Foreign investment regulations
       
       

      4.    Government regulation
       
       

      5.    Taxation
       
       

      6.    Employment matters
       
       

      7.    Property
       
       

      8.    Business and operational matters
       
       

      9.    Contracts
       
       

      10. Intellectual property
       
       

      11. Legal proceedings, disputes, and investigations
       
       

      12. Insurance policies
       
       

      13. Environmental matters
       
       

    • Documentation

       a.   Share Acquisitions

       

      There is no legal document required for the validity of the transfer of shares of a corporation. However, what is crucial is for the recognition of the transfer with regard to the target company and to third parties. For this to happen, the transfer must be recorded in the stock and transfer book of the target company. For the procedural requirements, the following documents are necessary for said recording of transfer:
       
      1.    Share purchase agreement
      2.    Deed of Assignment for the shares
       
      For partial share acquisition, a joint venture agreement or shareholder’s agreement is also needed.
       
      b.   Asset Acquisition
       
      Asset acquisition involves transfer of different categories of property and as such will require preparation of different transfer documents. To comply with the procedural requirements, the following are the usual documents submitted:
      1.    Asset purchase agreement assigning the assets purchased in broad terms
      2.    Various deeds of assignment for specific property such as shares of stock, real property and motor vehicles
      3.    Employment agreements by key personnel of target company if the assets or business is bought
       
       
       
      c.   Mergers and Consolidations
       
      For mergers and acquisitions, the following are indispensable:
       
      1. Legal documentation for the transfer or exchange of shares and property between or among corporations
      2. Prepare and approve a plan of merger or consolidation which will state:
                    a. terms of the merger or consolidation
                    b. mode of carrying out the merger or consolidation
                    c. changes to be made to the articles of incorporation of the surviving corporation
                     or the consolidated corporation, as the case may be.
      3. Submit the plan for merger or consolidation to the SEC for approval. Secure favorable recommendation of the regulatory agency concerned if needed.
      4. File a formal application with the BIR to confirm if the merger or consolidation is tax-exempt.