PHILIPPINES: An Introduction to Corporate/M&A

Corporate/M&A in the Philippines 

The Philippine economy had seen a steady recovery from the impact of the COVID-19 pandemic. With the easing of the restrictions caused by the pandemic, the Philippines has opened its economy, with the legislative agenda appearing to favour more foreign investments.

Several laws and regulations enacted in recent years have opened several industries to foreign participation and created a business-friendly environment. Some restrictive legislation was relaxed, such as that pertaining to foreign equity ownership of certain industries and markets, with the aim of attracting more foreign investors and making the country more competitive in the global market. These significant changes to the regulatory landscape continue to drive deal-making in the country and opened several post-pandemic acquisition and growth opportunities for private and public companies alike.

Compulsory notification of mergers and acquisitions

The Philippine Competition Commission (PCC) has the power to review M&A that have 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 M&A with transaction values below PHP50 billion from compulsory notification if they were 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 set new thresholds, pursuant to the rules on annual threshold adjustment under PCC Memorandum Circular No 2018-001. Starting on 1 March 2023, M&A that reach a Size of Party of PHP7 billion and a Size of Transaction of PHP2.9 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:

- the aggregate annual gross revenue 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 PHP7 billion or more; and

- the value of the transaction is PHP2.9 billion or more.

However, the revised thresholds do not apply to transactions pending review by the PCC, notifiable transactions consummated before 1 March 2023, or transactions that are already the subject of a decision by the PCC.

Despite not being subject to compulsory notification, parties may submit a transaction for voluntary notification to avoid any risk of said transaction being reviewed by the PCC post-facto, ensuring completion of the transaction without interruption.

Personal property as security   

The Personal Property Security Act (PPSA) was passed in 2018 and forms the framework for the establishment of a centralised notice registry and the 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 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, the registry is still not yet fully established and operational.

Foreign Investments Act (FIA)   

On 2 March 2022, Republic Act No 11647 amended the FIA to allow foreign corporations to engage in small and domestic market enterprises, subject to a capitalisation equivalent to at least USD200,000. 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:

- the entity involves advanced technology as determined by the Department of Science and Technology;

- the entity is endorsed as a start-up or is enabled by lead host agencies pursuant to RA No 1137 or the Innovative Startup Act; or 

- the 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 on 10 December 2021 and lowers the prescribed minimum paid-up capital for a 100% foreign-owned retail business to PHP25 million (approximately USD500,000). Moreover, the prescribed minimum investment per store is set at PHP10 million (approximately USD200,000).

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.

The PSA Amendment also provides that foreign nationals are not allowed to own more than 50% of the capital of entities engaged in the operation and management of critical infrastructure, unless the country of such foreign national accords reciprocity to Philippines nationals, as may be provided by foreign law, treaty or international agreement. 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, in the interest of national security.

Ease of bank mergers, consolidations and acquisitions

Pursuant to the memorandum of agreement (MOA) entered into by the Bangko Sentral ng Pilipinas, the Securities and Exchange Commission, the PCC, the Philippine Deposit Insurance Corporation and the Cooperative Development Authority, the Implementing Guidelines were issued, providing guidance on mergers, consolidations and acquisitions of banks. Issued on 27 May 2022, these Guidelines provided the harmonised forms, documentary requirements and processes among and between the different agencies. Such MOA and Guidelines would streamline banks’ mergers, consolidations and acquisitions, 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 non-performing assets (NPAs) by transferring them to FIST Corporations, which are allowed to:

- 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.

Foreign renewable energy developers  

The Implementing Rules and Regulations (IRR) of the Renewable Energy (RE) Act of 2008 were amended on 15 November 2022 by Department of Energy (DOE) 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 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.

Furthermore, considering that the EDU of the Philippines’ RE resources is now a non-nationalised activity, engaging therein 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, 15 days following the publication of the DOE Department Circular.

Overcoming future challenges   

Although the Philippine economy is expected to grow due to recent foreign investment-driven legislative initiatives, there are still several factors that make M&A transactions more challenging. Foreign investors in the Philippines often encounter challenges such as bureaucratic red tape, inconsistent regulations, land ownership limitations and political instability. Addressing these hurdles requires comprehensive regulatory reforms, including streamlining administrative processes and requirements. To overcome the challenges, investors need to proactively address such issues by adopting strategic measures to mitigate the risks associated with legal, political and economic factors. This includes engaging local legal experts who can assist clients in navigating complex regulations and conducting thorough market research and due diligence to understand local regulations, potential risks and market conditions.