Typical due diligence issues

Regulatory noncompliance is a common issue in the Philippines and this can mean additional costs for rectification and operations post-closing. In highly regulated industries, e.g., healthcare and telecommunications, regulatory noncompliance issues are prevalent, particularly in locally owned target companies (as opposed to target companies that are owned by large multinational companies).

Requiring the seller to attend to housekeeping matters before closing is common. Seeking protection via a reduction in the purchase price or a holdback of the purchase price, with either party completing cleanup measures after closing, may also be considered.

Pricing and payment

Foreign exchange controls

Generally, no foreign exchange control regulations or approvals are required in a share sale. However, if the seller has not registered its investment in the target company with the central bank, Bangko Sentral ng Pilipinas (BSP), the buyer will generally not be able to obtain such BSP registration for its acquisition of shares in the target company.

BSP registration is not mandatory but it will be needed if the buyer would like to purchase foreign exchange from the domestic banking system to fund the repatriation of capital and remittance of dividends.

If the foreign investment is not registered with the BSP, the buyer may legally purchase foreign exchange outside the banking system.

In the case of an asset sale, the buyer that registers an acquiring entity with the Securities and Exchange Commission (SEC) may choose to obtain BSP registration for its investment in the acquiring entity.

Signing/closing considerations

Is a deposit required?

A deposit is not commonly seen in share sales and asset sales.

Is simultaneous signing/closing common?

It is common for there to be a gap between signing and closing, as closing is often subject to the condition that all government approvals and nonregulatory consents and approvals have been obtained.

Share sale

The transfer of the shares from the seller to the buyer is only recorded in the stock and transfer book of the target company after the tax clearance process for the share sale is completed.

Asset sale

An asset sale will generally require the buyer to establish a local subsidiary or branch office, and this may have an impact on the timing of the closing of the transaction, unless the buyer has an existing subsidiary or branch that can act as the acquiring entity.

Foreign investment restrictions

Foreign investment screening procedure

The Philippines has a foreign investment screening procedure for transactions involving strategic industries, such as military-related industries, cyber infrastructure, pipeline transportation or such other activities that may threaten territorial integrity and the safety, security and well-being of Filipino citizens. Foreign investment screening procures may also apply to transactions involving entities delivering (or associated with) public services that may effectively result in the grant of control of such entities to foreigners, or foreign corporations. While the foreign investment review procedures are mandatory and suspensory under current Philippine laws and regulations, those laws and regulations have been amended recently and we have yet to see how they will be implemented. For further information, see the more detailed section on "Foreign investment restrictions".

Other foreign investment restrictions

Foreign investors may own up to 100% of a domestic enterprise in the Philippines if the domestic enterprise is not engaged in any of the activities listed in the "negative list" of the Foreign Investments Act (FIA).

Under the FIA, a domestic market enterprise that is more than 40% foreign-owned must have a paid-in or assigned capital of the Philippine peso equivalent of at least USD 200,000. This amount may be reduced to USD 100,000 if: (i) if the activity of the domestic market enterprise involves advanced technology as determined by the Department of Science and Technology; or (ii) it is endorsed as startup or startup enablers by the lead host agencies pursuant to Republic Act No. 11337, otherwise known as the Innovative Startup Act; or (iii) a majority of the direct employees are Filipinos, but in no case shall the number of Filipino employees be less than 15.

An export enterprise is not required to comply with this minimum capitalization requirement. An export enterprise is a manufacturer, processor or service entity that exports 60% or more of its output, or a trader that purchases products domestically and exports 60% or more of such purchases.

A buyer must determine whether foreign equity restrictions apply to the target company or the business. If such restrictions apply, the buyer may need to establish a joint venture with a Philippine partner to comply with foreign equity restrictions.

Foreign investment registration

In respect of a share sale, if the acquisition results in foreign equity in the target company exceeding 40%, it must register under the FIA. An FIA-registered corporation is required to re-register under the FIA in case of further increases in its foreign equity pursuant to, among other things, an additional subscription to its shares of stock.

In respect of an asset sale, yhe buyer must establish and register a Philippine subsidiary or a branch office of a foreign corporation and comply with the foreign investment restrictions discussed above, in addition to any minimum paid-up capital requirements under the FIA and other applicable laws.

Other regulatory or government approvals

Most M&A transactions in the Philippines do not require special statutory or regulatory approval unless the target company operates within certain regulated industries, such as banking, insurance and telecommunications, or is subject to special registrations.

A statutory merger, which involves the transfer of assets, requires approval from the SEC.

If an asset sale involves the sale of all, or substantially all, of the assets of the seller, the sale will need to be approved by the board of directors and stockholders representing at least two-thirds of the outstanding capital stock, and the seller must comply with the Philippine Bulk Sales Law.

Antitrust/merger control

Transactions in the Philippines are subject to mandatory and suspensory merger control if they meet certain thresholds. Certain types of transactions qualify for expedited review, like no horizontal or vertical relationships between the parties, export-oriented operations, negligible Philippine presence, and real estate joint ventures. For further information, see the more detailed section on "Antitrust/merger control".

The Philippines recognizes and guarantees the employees' right to security of tenure and to form organizations for their collective benefit and welfare. Employees' right to security of tenure means that they can be removed from their jobs only for one of the specified just and authorized causes and after the observance of the procedural due process defined by law. In cases of valid removals, severance payments may be required, depending on the cause of the removal.

Share sale

If the acquirer buys the shares of the target company, the underlying employment relationship between the target company and its employees is unlikely to be affected and will not require any action by the buyer.

Asset sale

The general rule is that employee contracts are considered personal contracts and the buyer in good faith has no obligation to absorb employees of the seller or to continue employing them. However, this general rule is not absolute. In certain cases, the Philippine Supreme Court has been known to disregard the personal nature of labor contracts and hold the purchaser, vendor or both liable in transactions where it has been deemed that good faith was lacking.

Capital gains tax (CGT)

CGT is payable at a rate of 15% on the sale or disposition of unlisted shares by nonresident foreign corporations.

If the fair market value of the shares sold exceeds the amount of cash and/or the fair market value of the property received by the seller or transferor, the excess will be considered a "gift" subject to donor's tax.

In the case of an asset sale, corporate income tax is payable at the rate of 20% or 25%, whichever is applicable (except land and/or buildings and shares, which are subject to special tax rates).

There is no tax payable in the case of a merger.

Stamp duty

Stamp duty is payable at a rate of PHP 1.50 on each PHP 200 of the par value or 50% of the Documentary Stamp Tax (DST) paid upon original issuance of no-par shares for a transfer of shares.

Further, in respect of transfers of real property, DST at the rate of 1.5% is payable on deeds of sale, conveyances and donations of real property.

In mergers, the issuance of shares by the surviving corporation is subject to a DST of PHP 2 on each PHP 200 (or fractional part thereof) of the par value of the shares. However, transfers of stock or real property pursuant to the merger are exempt from DST, provided the requirements of the Tax Code are met.

Finally, sales or exchanges of shares of stock listed and traded in the Philippine Stock Exchange (PSE) are exempt from DST.

Value-added tax

The Tax Code imposes value-added tax (VAT) on the sale of goods or properties and the performance of services in the course of business. The VAT is imposed at the rate of 12% of the gross selling price of the goods or properties sold, i.e., the total amount of money that the buyer pays or is obligated to pay to the seller in consideration for the sale.

There is no VAT on a normal share acquisition. The transfer of the assets of absorbed corporations to another corporation pursuant to a merger is not subject to VAT.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has put forward a so-called Two-Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two is intended to introduce a global minimum effective rate of tax of 15% for large businesses in each jurisdiction where they operate and will lead to fundamental changes in the international tax system. It is currently being implemented in a large number of jurisdictions.

Groups will need to consider how the Pillar Two rules could impact on the life cycle of M&A transactions from the pre-acquisition phase (including transaction planning (such as the choice of acquisition structure and financing) and due diligence of the target group), the acquisition phase (such as contractual risk allocation around Pillar Two) to the post-acquisition phase and the impact of Pillar Two on any post-acquisition integration.

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.