The legal landscape for mergers and acquisitions in the Philippines has been developing at an unprecedented pace over the last few years. In July 2015, Congress passed RA 10667 or the Philippine Competition Act, and in June 2016, the Philippine Competition Commission promulgated the Implementing Rules and Regulations of the said law. While it is inaccurate to say that antitrust laws never existed in the Philippines prior to 2015, RA 10667 is the first comprehensive competition legislation in the country. It is also the first time the Philippines created a specialized antitrust body to enforce antitrust laws and prevent anti-competitive agreements.
With the recent passage of the implementing rules, now is the perfect time to provide a general overview on share acquisition procedures for corporations in the Philippines, it being the most common method for acquisition in the country.
The first step is often the negotiation and due diligence studies conducted by both parties. At this stage if the corporation is engaged in a nationalized activity, the primary concern is compliance with the nationality requirements in the Constitution, Foreign Investments Negative List and other industry-specific laws. If the target company is a public company as defined under the Securities Regulation Code, there may likewise be a need to comply with tender offer rules.
The second step is compliance with antitrust regulations. Under RA 10667 and its IRR, parties to a merger or acquisition that satisfy the thresholds in the law are required to notify the Commission before the execution of the definitive agreements relating to the transaction. The threshold is generally a transaction value exceeding P1 billion as determined under the specific provisions of the IRR. Prior to the submission of the notification form to the Commission, the parties are prohibited from consummating the transactions, but may request for a pre-notification consultation with the Commission. After submission of the notification, the Commission is given under the IRR a maximum total period for review of 90 days from the time the initial notification by the parties is deemed complete. When the periods expire without any decision, the merger or acquisition shall be deemed approved.
Determining whether or not a transaction is subject to compulsory notification is crucial because noncompliance with the notification requirement may subject the parties to a fine of 1% to 5% of the transaction value. In addition, the agreement entered into shall be considered void.
RA 10667 is a game-changing regulation because the Commission is given the power to prohibit the implementation of the agreement if it is a prohibited or anti-competitive agreement as defined under the law and it is not an exempted transaction. Because of a potential deal-breaking risk, which an unfavorable decision may bring to the transaction, antitrust studies are highly recommended to be regular part of due diligence reports by parties in M&A transactions.
Once approved, the parties may proceed to the execution of a deed of assignment between the transferor and the transferee of the shares.
The third step is payment of taxes. Generally, the sale of shares of stock in a Philippine corporation is subject to taxes. In order to transfer the shares from the transferor to a transferee, a Certificate Authorizing Registration which is proof that all taxes on the conveyance have been paid is required.
If the shares to be transferred are shares of a company listed and traded through the stock exchange, the transfer is only subject to a stock transaction tax of 0.5% of the gross selling price and is not subject to documentary stamp tax. On the other hand, for unlisted as well as listed shares not traded through the local stock exchange, the transferor must pay a capital gains tax of 5% on the first P100,000 net gain and 10% on the net gain over P100,000 realized plus documentary stamp taxes. Note that if the selling price is lower than the fair market value, donor’s tax must be paid at the rate of 30% of the difference between the FMV and the selling price if between corporations. If the seller is a non-resident foreign corporation, it may need to file a Tax Treaty Relief Application to avail of preferential rates under the applicable tax treaties.
Once a Certificate Authorizing Registration is secured, the Corporate Secretary may proceed with formally transferring the shares in the stock and transfer book.
It is a misconception that the Philippine Competition Act is only a concern of investors investing in large enterprises. Under the enforcement powers of the Commission, the Commission, motu proprio, or upon the filing of a verified complaint by an interested party or upon referral by a regulatory agency, shall have the sole and exclusive authority to initiate and conduct a fact-finding or preliminary inquiry for the enforcement of the law based on reasonable grounds. This general power covers transactions regardless of the transaction value. If it determines that the continued performance would result in a material and adverse effect on consumers or competition in the relevant market, it may issue an order for the temporary cessation or desistance from the performance of certain acts or even file a criminal complaint with the DoJ. Commonly known as antitrust litigation in other jurisdictions, it is noteworthy that this provision even allows private parties such as competitor enterprises to file verified complaints with the Commission for violations of the law.
As a final reminder, given the law’s impact on transactions, it would be prudent for all investors to seek professional advice before entering into a merger or acquisition in the Philippines.
Jantzen Joe C. Chua is a tax associate of the Tax Advisory and Compliance division of Punongbayan & Araullo.
As published in Business World, dated 20 September 2016