PHILIPPINES: An Introduction to Corporate/M&A
Mergers & Acquisitions (“M&A") in the Philippines declined during the pandemic. Only a few transactions were notified to the Philippine Competition Commission. This may primarily be attributed to the previous implementation of the Bayanihan to Recover as One Act, which exempts from notification requirements transactions below PHP50 billion.
With the easing of the country’s community quarantine guidelines, the Philippines has also slowly opened its economy, notably with the relaxation of several restrictive legislations, including those pertaining to foreign equity ownership in certain industries and markets. These significant changes to the regulatory landscape will drive deal-making in the country and will open several post-pandemic acquisitions and growth opportunities for both private and public companies.
Compulsory Notification of Mergers and Acquisitions
The PCC has the power to review M&A having a direct, substantial and reasonably foreseeable effect on trade, industry or commerce in the Philippines. This power may be exercised by the PCC either upon compulsory notification or motu proprio. Republic Act (“RA”) No. 11469 (“Bayanihan 2”) exempted from compulsory notification mergers and acquisitions with transaction values below PHP50 billion if entered into within two years from 15 September 2020.
Considering that the increased M&A threshold under Bayanihan 2 expired on 15 September 2022, the PCC provisionally set new thresholds, pursuant to the rules on annual threshold adjustment under PCC Memorandum Circular No. 2018-001. Starting 16 September 2022, M&As that reach a Size of Party of PHP6.1 billion and a Size of Transaction of PHP2.5 billion will have to be notified to the PCC for review.
To determine the “transaction value”, a proposed merger or acquisition of assets inside and outside the Philippines is notifiable if (a) the aggregate annual gross revenues in, into or from the Philippines, or value of the assets in the Philippines of the ultimate parent entity (“UPE”) of at least one of the acquiring or acquired entities, including all entities that the UPE controls, directly or indirectly, is PHP6.1 billion or more; and (b) the value of the transaction is PHP2.5 billion or more.
Despite not being subject to compulsory notification, parties may submit a transaction for voluntary notification to avoid any risk that said transaction could be reviewed by the PCC post facto, ensuring completion of the transaction without interruption.
Personal Property as Security
The Personal Property Security Act (“PPSA”), passed in 2018, forms the framework for the establishment of a centralised notice registry and enforcement of security interests in tangible and intangible personal property such as equipment, inventory, intellectual property, furniture, livestock and future property. The law aims to encourage the public, particularly small business owners, fisherfolk and farmers, by increasing access to credit through securing of loans from banks using collateral aside from conventional means.
The Department of Finance has issued Administrative Order No. 001, Series of 2021 prescribing the fees for the various services under the PPSA Registry, to be implemented by the designated administrator of the PPSA Registry, the Land Registration Authority (“LRA”).
On 15 March 2021, the LRA issued LRA Circular No. 11-2021, prescribing the guidelines on the use of the personal property security registry for the creation of user accounts to access the same. However, to date, the registry is still not fully established and operational.
Foreign Investments Act (“FIA”)
On 2 March 2022, Republic Act No. 11647 amended the FIA, which now allows foreign corporations to engage in small and domestic market enterprises, subject to a capitalisation equivalent to at least USD200,000.00. However, if any of the following requirements are met, the foreign-owned domestic market enterprise is only required to have a minimum paid-in capital of the equivalent of USD100,000.00:
1. The entity involves advanced technology as determined by the DOST;
2. The entity is endorsed as start-up or start-up enables by lead host agencies pursuant to RA No. 1137 or the Innovative Start-up Act; or
3. Majority of the direct employees of the entity are Filipino, but in no case shall the number of Filipino employees be less than 15.
Retail Trade Liberalisation Act Amendment
Republic Act No. 11595, or “An Act Amending Republic Act No. 8762, otherwise known as the ‘Retail Trade Liberalisation Act of 2000,’ by Lowering the Required Paid-up Capital for Foreign Retail Enterprises, and For Other Purpose,” was signed into law last 10 December 2021. Under Republic Act No. 11595, the prescribed minimum paid up capital for a 100% foreign-owned retail business has been lowered to PHP25,000,000.00 (approximately USD500,000.00). Moreover, the prescribed minimum investment per store is set at PHP10,000,000.00 (approximately USD200,000.00).
Public Service Act Amendment
The Public Service Act (“PSA”), as amended, eased restrictions on foreign equity ownership. The PSA Amendment now allows full foreign ownership of ventures in telecommunications, domestic shipping, air carriers, railways and subways, canals and irrigations, provided that rules on critical infrastructure are observed. It also gives the President the power to suspend or prohibit a merger or acquisition in a public service that effectively grants control to a foreigner or foreign corporation. The PSA amendment will help improve the country’s openness to foreign equity limitations.
Ease of Bank Mergers, Consolidations and Acquisitions
Pursuant to the memorandum of agreement (“MOA”) entered into by the BSP, SEC, PCC, Philippine Deposit Insurance Corporation, and Cooperative Development Authority, the Implementing Guidelines (“Guidelines”) were issued providing for the guidelines for Mergers, Consolidations and Acquisition of banks. Issued on 27 May 2022, the Guidelines provided the harmonised forms, documentary requirements, and processes among and between the different agencies. Such MOA and Guidelines would streamline banks’ MCAs, making the processes more efficient.
Asset Management During Hard Times
The Financial Institutions Strategic Transfer (“FIST”) Act was enacted to aid financial institutions to dispose of its non-performing assets (“NPAs”) by transferring them to FIST Corporations (“FISTC”). FISTCs are allowed to, among others, engage third parties to manage, operate, collect and dispose of NPAs, spend funds to renovate, improve, complete or alter the NPAs acquired from financial institutions, and issue equity or participation certificates or other forms of investment unit instruments. Since its enactment, only five FISTC have been established. According to the SEC, the low number of FISTC can be attributed to the strong Philippine banking system, which performed well despite the pandemic.
Foreign Renewable Energy Developers
The Implementing Rules and Regulations (“IRR”) of the Renewable Energy (“RE”) Act of 2008 was amended on 15 November 2022 by Department of Energy (“DOE”) Department Circular No. 2022-11-0034, qualifying foreign citizens or foreign-owned entities to engage in the exploration, development, and utilisation (“EDU”) of the Philippines’ RE resources such as solar, wind, or biomass. This issuance effectively lifted the long-standing rule that the participation in the EDU of RE resources is limited to Philippine citizens, or corporations or associations at least 60% of whose capital is owned by Filipinos.
Further, considering that the EDU of the Philippines’ RE resources is now a non-nationalised activity, engaging in the same will cease to be covered by the rules of the Anti-Dummy Law. As such, RE developers are no longer required to have Filipino managing directors, unless they are engaged in other nationalised activities.
The DOE noted, however, that the appropriation of Philippine waters, including power generation directly from such sources, remains covered by foreign ownership restrictions, pursuant to the Water Code of the Philippines.
With this development, the DOE expects a growth of foreign investments in the RE sector, providing a significant boost to the Philippine economy and assisting in the increased integration of RE-based power generation throughout the country.
The amendment to the IRR of the RE Act took effect on 8 December 2022, or 15 days following the publication of the DOE Department Circular.