Mergers, Consolidations, and Acquisitions under Philippine Corporate Law

Under Philippine law, mergers, consolidations, and acquisitions (M&A) involve the reorganization of corporate structures with varying effects on the corporate entities involved. These processes are governed primarily by the Revised Corporation Code (Republic Act No. 11232) and relevant regulations issued by the Securities and Exchange Commission (SEC). The Philippine Competition Act (Republic Act No. 10667) and tax laws, such as the National Internal Revenue Code (NIRC), also impact M&A transactions.

1. Definitions and Distinctions

Merger: In a merger, two or more corporations combine, with one of the corporations absorbing the others. The absorbed corporations cease to exist as separate entities, and the surviving corporation assumes their rights, assets, liabilities, and obligations.
Consolidation: Consolidation occurs when two or more corporations combine to form an entirely new corporation. The original corporations dissolve and transfer all assets, rights, liabilities, and obligations to the newly formed corporation.
Acquisition: In an acquisition, one corporation takes over the assets or shares of another corporation, often resulting in the acquired corporation becoming a subsidiary or being absorbed entirely. Unlike mergers and consolidations, the acquired company may retain its separate corporate existence.

2. Legal Framework and Process

The Revised Corporation Code, alongside the SEC's rules, outlines the procedures for M&A. The following are the general steps for completing a merger or consolidation:

Board Resolution and Approval: The board of directors of each corporation must approve the plan of merger or consolidation by a majority vote. A resolution reflecting this plan must be duly signed by the board members.
Plan of Merger or Consolidation: This document includes the terms and conditions of the merger or consolidation, including:
- Names of the merging/consolidating corporations
- Details of assets, rights, liabilities, and obligations to be transferred
- Proposed articles of merger or consolidation for the surviving or newly formed entity
- Method for the fair valuation of shares (if necessary)
- Exchange ratio or formula for shares, if applicable
Stockholder Approval: Shareholders must approve the plan at a duly called stockholders’ meeting, requiring a vote of at least two-thirds of the outstanding capital stock for stock corporations, or a two-thirds vote of the members for non-stock corporations.
Submission to the SEC: The approved plan of merger or consolidation, along with other required documents (e.g., articles of merger or consolidation), must be submitted to the SEC for review and approval.
Approval by the SEC: Upon review, the SEC ensures compliance with all legal requirements and, if satisfactory, issues a Certificate of Merger or Consolidation. This certificate serves as formal approval, giving effect to the merger or consolidation.

3. Effects of Merger or Consolidation

Upon issuance of the Certificate of Merger or Consolidation by the SEC:

The surviving or consolidated corporation inherits all assets, rights, and properties of the constituent corporations.
It assumes all liabilities, obligations, and contracts of the merged or consolidated corporations.
The separate existence of all corporations, except the surviving corporation in a merger or all corporations in a consolidation, ceases.
Stockholders who do not agree with the merger or consolidation can exercise their appraisal right (the right to demand payment for their shares at fair value).

4. Acquisition Process

Acquisitions in the Philippines generally fall into two categories: asset purchases and stock purchases. Each approach has distinct legal implications.

Asset Purchase: Involves the buyer acquiring specific assets and liabilities of the target corporation. Unlike mergers or consolidations, an asset acquisition does not result in the transfer of the entire corporate entity.
Stock Purchase: Involves the acquisition of a controlling interest in the target corporation by purchasing a majority of its outstanding shares. This type of acquisition allows the acquirer to gain control of the target without requiring corporate dissolution.
Due Diligence: Due diligence is critical in acquisitions, as it ensures that the buyer is fully informed of the target corporation’s financial, operational, and legal status. This phase typically involves reviewing financial records, legal documents, and other pertinent information to assess liabilities and assets accurately.

5. Regulatory Considerations

Several regulations may affect M&A transactions, including but not limited to:

SEC Oversight: The SEC must approve the merger or consolidation plan to ensure compliance with the Revised Corporation Code and protect shareholder interests.
Philippine Competition Act (PCA): The PCA, enforced by the Philippine Competition Commission (PCC), is relevant in cases where M&A transactions may substantially reduce competition. Transactions that meet certain thresholds are subject to PCC approval, and parties must notify the PCC within 30 days of executing definitive agreements.
Other Sector-Specific Regulations: M&As in regulated industries (e.g., banking, insurance, telecommunications) require additional clearances from respective regulatory bodies (e.g., Bangko Sentral ng Pilipinas, Insurance Commission, National Telecommunications Commission).

6. Tax Implications

M&A transactions have various tax implications under the NIRC, and these differ depending on whether the transaction is a merger, consolidation, or acquisition.

Transfer Taxes: Transfers of property as part of M&A transactions may be subject to documentary stamp tax, capital gains tax, and value-added tax. The Bureau of Internal Revenue (BIR) generally considers the exchange of shares in a merger or consolidation as a taxable event, although certain exemptions or tax-free exchanges may apply under specific conditions.
Capital Gains Tax: In share acquisitions, the seller may be subject to a 15% capital gains tax on the sale of shares.
Documentary Stamp Tax (DST): DST is applicable on various documents executed in the course of the M&A process, including stock and asset transfer documents. For instance, share transfers typically incur a DST at the rate of PHP 1.50 for every PHP 200 of the par value of shares.

7. Appraisal Rights and Protection of Minority Shareholders

Shareholders who dissent from a merger or consolidation have the right to demand payment for their shares at fair value (appraisal rights). This right ensures that minority shareholders are compensated if they do not agree with the terms of the merger or consolidation. For shareholders to exercise this right, they must file a written demand within the stipulated period, and the corporation must pay the fair value determined.

8. Anti-Dilution Protection

In acquisitions, especially those involving publicly listed corporations, anti-dilution clauses may be included to protect existing shareholders from a reduction in their percentage of ownership. This ensures that any issuance of new shares or securities does not disproportionately dilute the value of existing shares.

9. Legal and Contractual Considerations

M&A transactions often involve complex contractual agreements, including representations, warranties, and indemnities. These contracts define the responsibilities and liabilities of each party, covering aspects such as:

Representations and Warranties: Assurances given by the selling party regarding the financial status, assets, and liabilities of the target.
Indemnification Clauses: Protects the buyer by providing a remedy against potential future liabilities arising from breaches of representations or warranties.
Confidentiality and Non-Disclosure Agreements (NDAs): Ensures sensitive information remains protected during negotiations.

10. Conclusion and Practical Insights

Mergers, consolidations, and acquisitions are powerful tools for corporate growth and restructuring, yet they require rigorous compliance with corporate, tax, and regulatory laws in the Philippines. Successful M&A transactions hinge on meticulous planning, careful due diligence, and ensuring regulatory compliance. Additionally, consulting with legal, financial, and tax experts is crucial to navigating the complexities of M&A law and achieving desired outcomes while minimizing risks and protecting shareholder interests.

These elements represent a comprehensive understanding of M&A under Philippine law and serve as the foundation for informed, strategic decision-making in business reorganizations.