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Philippines: preparing for a wave of M&A

Market players will have to keep abreast of changes as the country ushers in a flurry of corporate legal updates. Francisco Lim, senior partner of ACCRA Law, reviews the developments.

Market players will have to keep abreast of changes as the Philippines ushers in a flurry of corporate legal updates. Francisco Lim, senior partner of ACCRA Law, reviews the developments.

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In the past year, M&A in the Philippines has been robust. Among the notable and substantial M&A transactions approved by the Philippine Competition Commission (PCC) – the main antitrust authority – we have seen: the acquisition by Chelsea Logistics Holdings Corporation of shares in Trans-Asia Shipping Lines; Wipro Enterprises Singapore's acquisition of shares in Splash Corporation; the acquisition by Aboitiz Power Corporation of shares in AA Thermal; AC Energy's acquisition of shares in PHINMA Energy Corporation; the purchase by GlaxoSmithKline Consumer Healthcare Holdings of Pfizer's consumer healthcare business; and the iPeople and AC Education merger.

The strong growth of the Philippine economy is one of the key factors behind the increase in M&A. The nation's GDP posted a growth of 5.6% in the first quarter of 2019, according to the Philippine Statistics Authority. The Philippines' GDP is expected to grow by a further 6.4% in 2019 and 2020, according to the Asian Development Bank. Continued economic growth is expected to bolster M&A in the country as businesses look to scale up and grow their operations.

In line with the growing M&A transaction pipeline, stakeholders and advisers should stay abreast of the latest developments on the relevant laws, rules and regulations impacting M&A.

Revised Corporation Code

On February 20 2019, Republic Act 11232, otherwise known as the Revised Corporation Code (RCC), was signed into law. It took effect on February 23 2019. The RCC updated the 38-year old Corporation Code of the Philippines.

The provisions of the RCC primarily govern M&A transactions in the Philippines. The Philippine Securities and Exchange Commission (SEC) is the national government regulatory agency charged with the supervision of the corporate sector, capital market participants and the securities and investments market (including M&A transactions) and with protecting the public. Under the RCC, a merger becomes effective upon the issuance by the SEC of a certificate approving the articles and plan of merger or consolidation (Section 78, RCC).

Among the updates in the RCC is a requirement for further information from each of the constituent parties in the articles of merger or articles of consolidation in addition to the information already required by the old Corporation Code. Specifically:

  • The carrying amounts and fair values of the assets and liabilities of the respective companies as of the agreed cut-off date;
  • The method to be used in the merger or consolidation of accounts of the companies;
  • The provisional or pro forma values, as merged or consolidated, using the accounting method; and
  • Such other information as may be prescribed by the SEC (Section 77, RCC).

Noteworthy is the fact that the SEC recently interpreted paragraph 1 of Section 132 of the old Corporation Code (now Section 149 of the RCC) in answering a query on whether a domestic corporation may merge with a foreign corporation licensed to do business in the Philippines. This paragraph concerns mergers or consolidations involving a foreign corporation licensed in the Philippines and states that: one or more foreign corporations authorised to transact business in the Philippines may merge or consolidate with any domestic corporation or corporations if permitted under Philippine laws and by the law of its incorporation, provided that the requirements on merger or consolidation as provided in the Code are followed.

In its opinion dated November 16 2018 (SEC-OGC Opinion No. 18-18: 'Merger of a Domestic Corporation with a Foreign Corporation Licensed to do Business in the Philippines'), the SEC held that the correct interpretation of paragraph 1 of Section 132 is that it authorises a foreign corporation licensed to do business in the Philippines to merge with a domestic corporation, provided that the former can prove that there is a similar authorising law in its home jurisdiction. Such a merger will be governed by the Corporation Code (now RCC) and other relevant laws.

Philippine Competition Act

The PCC has been active in coming out and updating the rules implementing the Philippine Competition Act (PCA). For example, the PCC recently issued the Rules on Expedited Merger Review, which took effect on July 2 2019 in line with the government's move to ease the process of doing business in the country. The expedited merger review will take 15 working days instead of 30 calendar days under the regular phase 1 merger assessment.

The mergers qualified for expedited review are transactions that are less likely to substantially prevent, restrict or lessen competition in their relevant markets. Examples of these transactions are global mergers where the acquiring and acquired entities have negligible or limited presence in the Philippines, and joint-ventures, whether incorporated or not, formed purely for the construction and development of a residential and/or commercial real estate development project.


The expedited merger review will take 15 working days instead of 30 calendar days


The PCC also adjusted the thresholds for compulsory notification of an M&A effective March 1 2019. It raised the thresholds from PHP5 billion (approximately $98 million) to PHP5.6 billion for the Size of Person (SoP) and from PHP2 billion to PHP2.2 billion for the Size of Transaction (SoT). SoP refers to the value of assets or revenues of the ultimate parent entity of at least one of the parties, while SoT refers to the value of assets or revenues of the acquired entity. This marks the second threshold adjustment since the PCA was passed in 2015 that started with a baseline threshold of PHP1 billion for both SoP and SoT.

Parties to the M&A that meet both the new thresholds are prohibited from consummating their agreement without going through the notification process mandated by the PCA. An agreement consummated in violation of this requirement is considered void and subjects the parties to an administrative fine of 1% to 5% of the value of the transaction.

In addition to its rule-making powers, the PCC recently bared its teeth in exercising its authority under the law when for the first time since its establishment, it prohibited the proposed acquisition by Universal Robina Corporation (URC) of the assets of Central Azucarera Don Pedro and Roxas Holdings. The PCC found that the transaction would create or enhance URC's ability to exercise market power because of the total elimination of competition. Accordingly, the PCC considered the transaction to substantially prevent, restrict or lessen competition in the market for the provision of sugar milling services in the provinces of Batangas, Laguna, Cavite and Quezon.

Tax Reform for Acceleration and Inclusion Law

On December 19 2017, President Rodrigo Duterte signed into law the Tax Reform for Acceleration and Inclusion (TRAIN) Law, which took effect on January 1 2018. The TRAIN Law amended provisions in the National Internal Revenue Code (NIRC) relating to taxes on personal income, estate, donation, passive incomes, documents, excise taxes, etc.

The provisions on tax-free exchanges (for example, share swap and property for share swap) were retained in the NIRC. Noteworthy is the fact that Section 34 of the TRAIN Law enumerates the transactions that are exempt from valued added tax (VAT), which includes the 'transfer of property pursuant to Section 40(c)(2) of the NIRC, as amended' (Section 34, TRAIN Law). The provision was reproduced verbatim in the implementing rules of the TRAIN Law. The express exemption has put to rest any argument against the exemption from VAT of tax-free exchanges under Section 40(c)(2) of the NIRC, including Real Estate Investment Trust (REIT) transactions.

Real Estate Investment Trust Act of 2009

After almost a decade since its enactment, the Real Estate Investment Trust Act (REITA) has yet to be implemented. No REIT company has been established in the country. A REIT is a stock corporation established principally for the purpose of owning income-generating real assets. It must conduct a public offering of its shares and be listed on a stock exchange to enjoy the incentives granted by the REITA.

Based on recent developments, the law may soon be implemented. For example, the initial transfer of property from the sponsor through a tax-free exchange under Section 40(c)(2) of the NIRC is now expressly exempt from VAT. The Secretary of Finance and the SEC have also expressed willingness to lower the minimum public ownership requirement for a REIT (currently set at 40% of the outstanding capital stock of the REIT at the initial year and increasing to 67% within three years from its listing) to 33%. The SEC has also requested public comments on the proposed amendments to the rules governing the requirements for a REIT Fund Manager and a REIT Property Manager.

The implementation of REITA and the growth of REITs are expected to spur M&A and capital markets transactions in the country and is much awaited by the real estate industry and investors.

Personal Property Security Act

Republic Act 11057, otherwise known as Personal Property Security Act (PPSA), was signed into law on August 17 2018 and took effect on September 7 2018.

This landmark legislation simplified and harmonised the Chattel Mortgage Law of 1906 and other fragmented and outdated financing regulations in the country. It enables borrowers to secure financing using non-traditional collateral such as account receivables, inventory, warehouse receipts, crops, livestock, machinery and equipment. It allows the creation of security interest in a future property, but the security interest in that property is created only when the grantor acquires rights in it or the power to encumber it.


The new law also establishes a unified, centralised online notice-based collateral registry


The new law also establishes a unified, centralised online notice-based collateral registry that will be held by the Land Registration Authority. This will provide protection and confidence to banks and financial institutions in lending to the agriculture sector and micro, small, and medium enterprises (MSMEs).

The new law contains rules governing not only the creation and perfection of security interest but also provides for priority among secured creditors, as well as enforcement of the security interest.

The PPSA applies to all transactions of any form that secure an obligation with movable collateral, except interests in aircrafts subject to Republic Act 9497, or 'Civil Aviation Authority Act of 2008', and interests in ships subject to Presidential Decree 1521, or the 'Ship Mortgage Decree of 1978'.

The PPSA is expected to spur financing transactions in the Philippines especially those involving MSMEs. MSMEs comprise 99.6% of total businesses in the country, of which 96% are micro businesses.

With the continued acceleration and positive forecast for the economy, M&A transactions in the Philippines will continue to flourish. Along with this, it should be expected that the concerned regulators will accordingly continue to review, update and formulate rules to address whatever concerns may arise. To avoid any problems or penalties from these regulators due to ignorance of new laws and rules, stakeholders must always be vigilant and on the look-out.

About the author

Francisco Lim
Senior partner, Angara Abello Concepcion Regala & Cruz Law Offices (ACCRA Law)

Metro Manila, Philippines
T: +632 830 8000
F: +632 403 7007; +632 403 7009
E: felim@accralaw.com
W: www.accralaw.com

Francisco Lim is a former president of the Philippine Stock Exchange (PSE) and director of several public companies and non-governmental institutions, including the Financial Executives Institute (FINEX), Management Association of the Philippines (MAP) and Shareholders' Association of the Philippines (SharePHIL).

He has been involved in high-profile litigation cases and projects, such as the Bank of Bangladesh's cyber heist Senate investigation, the PEACe Bonds case and the Rappler cases and has worked on large capital market-related transactions, including equity offerings by: Ayala Corporation; Ayala Land; BDO Unibank; Bloomberry Resorts Corporation; Century Group Properties; Lucio Tan Group of Companies. Francisco also advised on the first-ever exchange traded fund listed on the PSE.

Francisco has assisted in the enactment of several Philippine laws, including the: Financial Rehabilitation and Insolvency Act (FRIA); Credit Investment System Act (CISA); Real Estate Investment Trust Act (REITA); Personal Equity Retirement Account Act (PERAA); and Philippine Competition Act. His own practice covers alternative dispute resolution, antitrust and trade regulation, insolvency, capital markets and securities, M&A and white-collar crime.

He obtained his master of laws (LLM) from University of Pennsylvania, USA, and bachelor of laws (LLB) from Ateneo de Manila University Law School, Philippines. He is a member of the Philippine Bar and the New York State Bar.


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