Guide to Mergers and Acquisitions in Philippines

Guide to Mergers & Acquisitions

Philippines

2005/2006

Quisumbing Torres is a member of Baker & McKenzie International, a Swiss Verein with member law firms around the world. Inaccordance with the common terminology used in professional service organizations, reference to a �partner� means a person who is apartner, or equivalent, in such a law firm. Similarly, reference to an �office� means an office of any such law firm.

© 2005 Quisumbing TorresAll rights reserved.

DISCLAIMERIt should be noted that the material in this book is designed to provide general information only. It is not offered as advice on anyparticular matter, whether it be legal, procedural or other, and should not be taken as such.The authors expressly disclaim all liabilityto any person in respect of the consequences of anything done or omitted to be done wholly or partly in reliance upon the whole or anypart of the contents of this book. No reader should act or refrain from acting on the basis of any matter contained in it without seekingspecific professional advice on the particular facts and circumstances at issue

CONTENTS

Introduction...................................................................................1

Types oof TTransaction ....................................................................2Share Purchase versus Asset Purchase .........................................2Acquisitions versus Mergers and Consolidations...........................2Foreign versus Domestic Investment Considerations....................2

Statutory CConsents aand AApprovals..............................................3Foreign Investment Restrictions ......................................................3Anti-Dummy Law ...............................................................................4Competition Law ...............................................................................4Exchange Controls ............................................................................5

Inbound Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Outbound Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Emergency Powers of the Monetary Board. . . . . . . . . . . . . . . . . . . . . 5

Securities Law Issues ......................................................................5Sale, Offer and Distribution in the Philippines . . . . . . . . . . . . . . . . . . 6Issuance or Sale of Securities Abroad. . . . . . . . . . . . . . . . . . . . . . . . . 7

Specific Industry Regulation ............................................................7Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Telecommunications Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Non-rregulatory CConsents aand AApprovals ....................................8

Taxation IIssues.............................................................................9Jurisdictional Tax...............................................................................9

Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Branch Profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Tax Treaties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Share Acquisitions versus Asset Acquisitions versus Mergers . . . . 10Net Operating Loss Carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Transactional Tax ............................................................................11Documentary Stamp Tax (�DST�). . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Capital Gains Tax and Corporate Income Tax . . . . . . . . . . . . . . . . . . 11Value-Added Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Others . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Employment IIssues....................................................................13Share Acquisitions..........................................................................13Asset Acquisitions...........................................................................13Mergers and Consolidations..........................................................13

Documentation aand DDue DDiligence...........................................14Preliminary Agreement - Memorandum of Understanding/Letter of Intent......................................................14Due Diligence..................................................................................14Documentation and Agreements ..................................................15

Share Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Asset Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Mergers and Consolidations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Representations and Warranties...................................................16Provisions in an Acquisition Agreement........................................16Completion ......................................................................................17

Considerations rrelating tto PPublic CCompanies..........................18Acquisition of a Substantial Shareholding....................................18

Insider Dealing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Takeovers Code. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Mandatory Tender Offers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Announcements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Listing Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Timetable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Acquisitions aand DDisclosures bby PPublic CCompanies ................23General Disclosure Obligation .......................................................23Specific Disclosure Obligation .......................................................23

Change in Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Acquisition or Disposition of Significant Assets . . . . . . . . . . . . . . . . 24Tender Offers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Types of Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Connected Transactions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Timetable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Conclusion ..................................................................................27

Appendix AA2005 IINVESTMENTS PPRIORITIES PPLAN ...................................28

Appendix BBTHE SSIXTH RREGULAR FFOREIGN IINVESTMENT NEGATIVE LLIST............................................................................37

Mergers and Acquisitions: Philippines

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INTRODUCTION

The Philippines is a constitutional democracy with three co-equal branches ofgovernment, namely, the executive, the legislative and the judicial branches. ThePhilippines is also a civil law jurisdiction with codified bodies of law. Notableamongst these are the Corporation Code of the Philippines (�CorporationCode�), which deals with domestic corporations in general, and the Civil Codeof the Philippines (�Civil Code�), which embodies general laws relating toobligations and contracts. Decisions of the Supreme Court of the Philippinesalso have the force and effect of law.

Acquisitions are the most common form of mergers and acquisitions (�M&A�)transaction in the Philippines. These acquisitions are generally done through fullor partial acquisition of shares or assets of the target company. The Philippinesalso recognizes the concept of a �merger� or �consolidation.� In a merger, thesurviving company absorbs a target company. In a consolidation, two or morecompanies consolidate to form a new corporation.The Philippines does not havespecific M&A legislation. Generally, the provisions of the Corporation Code, theSecurities Regulation Code and the Civil Code will govern M&A transactions.

The Foreign Investments Act generally governs foreign investments in thePhilippines. There are also several pieces of special investment legislation thatcomplement the Foreign Investments Act and demonstrate government efforts tocreate an investment climate conducive to foreign investment. A new bankinglaw liberalized the entry of foreign banks into the Philippines, enabling foreignbanks to operate full branch operations; a new independent central monetaryauthority, the Bangko Sentral ng Pilipinas (�Central Bank�), has replaced the oldCentral Bank; 40-year old foreign exchange controls on virtually all foreignexchange transactions have been lifted; a comprehensive build-operate-transferlaw has been enacted, allowing private sector participation in infrastructureprojects traditionally undertaken only by the public sector; an investors lease actwas issued that allows foreign investors to obtain 50-year land leases in manycases; importation has been liberalized by the removal of quantitativerestrictions and a reduction in tariffs for raw materials, intermediate goods, andcapital equipment; the retail industry has been liberalized allowing foreignretailers to own equity in retail enterprises under specified cases; a newamendment of the Tax Code has, in general, reduced the rates of documentarystamp tax on, among others, transfers and issuances of shares, and increased thenumber of transactions exempt from this tax; and special economic zones thatoffer attractive fiscal and non-fiscal incentives to investors have been createdpursuant to the Special Economic Zone Act of 1995 in many parts of the country.

The Board of Investments, an agency attached to the Department of Trade andIndustry, is the lead agency of the Philippine government in investmentpromotions. The Board of Investments has a comprehensive promotion programthat aims to minimize investment barriers and facilitate the establishment ofbusiness ventures throughout the country. The Board of Investments is mandatedto draw up an Investment Priorities Plan that, among other things, includes a listof investment areas or activities that are eligible for fiscal and non-fiscalincentives. On 26 April 2005, President Gloria Macapagal Arroyo signedMemorandum Order No. 169 approving the 2005 Investment Priorities Plan (a copy is attached as appendix A).


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TYPES OF TRANSACTION

Acquisitions in the Philippines may be structured in one of two ways.The acquiring entity may acquire shares from the shareholders of the targetcompany (�share acquisition�) or acquire assets directly from the target company (�asset acquisition�).

The acquiring entity may also proceed to �merge� with or absorb the targetcompany (�merger�), with the acquiring entity as the surviving company,or it may consolidate with the target company to form a new company (a �consolidation�). In a merger, one corporation (�surviving corporation�)absorbs another corporation (�absorbed corporation�). In a consolidation,two or more corporations consolidate to form a new single corporation(�consolidated corporation�).

Share Purchase versus Asset Purchase

A share acquisition is procedurally simpler and tends to be more widely utilizedthan an asset acquisition. A share acquisition basically involves the transfer ofshares from the shareholders of the target company to the purchaser. In suchtransactions, the purchaser acquires the target company with all its assets andliabilities (including contingent and undisclosed liabilities).

An asset acquisition tends to be more complex because the transaction involvesthe transfer of various categories of assets and liabilities to the purchaser.Each transfer of a category of assets and liabilities may require different legaltreatment and documentation. However, unlike a share acquisition, in an assetacquisition the vendor retains all assets and liabilities not otherwise acquired orassumed by the purchaser.

In asset acquisitions, there is generally no restriction on how the purchase priceis allocated among the assets acquired. However, it is prudent to have some basisor justification for the allocation of the purchase price. As a general rule, thepurchase price, especially for real property, must not be lower than the fairmarket value.

Acquisitions versus Mergers and Consolidations

Mergers and consolidations are procedurally more complicated to effect thaneither type of acquisition. In a merger or consolidation, all the assets andliabilities of the absorbed corporation or the consolidating corporations aretransferred to the surviving corporation, or the consolidated corporation, as thecase may be. In the case of a merger, the shareholders of the absorbedcorporation receive shares of the surviving corporation in exchange for theirshares in the absorbed corporation. In a consolidation, the shareholders of theconsolidating corporations receive shares in the newly consolidated corporationin exchange for their shares in the consolidating corporations. Thus, bothtransactions basically involve both the transfer of shares and the transfer ofcategories of assets and liabilities among the various participants.

Foreign versus Domestic Investment Considerations

Three forms of business vehicles are recognized in the Philippines - the soleproprietorship, the partnership, and the corporation. Of the three, thecorporation is generally the most appropriate and the most widely utilized for


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business purposes. Unlike a sole proprietor and a general partner, who haveunlimited liability, the liability of shareholders of a corporation is generallylimited to their investment in the corporation.

Foreign investors in the Philippines may utilize any of the following corporatevehicles:

� Joint venture corporation

� Subsidiary

� Branch

� Representative office

A joint venture with Philippine nationals is utilized when a foreign investorwants to invest in partially nationalized businesses. Foreign nationals holding aminority of the shares of a domestic company may negotiate and obtain minorityprotection. This minority protection is generally contained in shareholders�agreements or joint venture agreements and, to the extent possible, incorporatedin the articles of incorporation and bylaws of the joint venture company.

A foreign investor may incorporate a wholly owned subsidiary to engage inbusiness that is not totally or partially nationalized. A subsidiary is a domesticcorporation. It is a legal entity that is separate and distinct from that of itsparent company. The requirements to register a domestic corporation also applyto a subsidiary.

A foreign investor may likewise register a branch office to engage in business thatis not totally or partially nationalized. A branch is an extension of a foreigncompany and therefore has no separate and independent legal personality. Itcarries out the business activities of the head office and earns income in thePhilippines. Before a branch may engage in business in the Philippines, theparent company must register the branch with the Securities and ExchangeCommission (�SEC�).

A representative office deals with the clients of the parent company in thePhilippines through information dissemination, promotion and quality control.A representative office does not derive income in the Philippines and is fullysubsidized by its head office. The parent company must likewise register therepresentative office with the SEC before it performs these activities in thePhilippines.

STATUTORY CONSENTS AND APPROVALS

Foreign Investment Restrictions

As a general rule, foreign investors may own up to 100% of a domesticenterprise in the Philippines provided that the domestic enterprise is notengaged in any of the activities listed in the Negative Lists of the ForeignInvestments Act, as amended (see appendix B:The Sixth Negative Lists forforeign investment in the Philippines issued on 30 November 2004).

There are two Negative Lists - List A and List B. List A contains areas ofinvestment where foreign ownership is limited by mandate of the PhilippineConstitution and/or by specific laws. List B contains areas of investment where


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foreign ownership is limited for reasons of security, defense, risk to health andmorals, or protection of local small and medium-size enterprises. The NegativeLists continue to be further revised. However, amendments to List B cannot bemade more often than once every two (2) years.

Under the Foreign Investments Act, as a general rule, a domestic marketenterprise that is more than 40% foreign-owned must have a paid-in or assignedcapital of the Philippine peso equivalent of at least US$200,000. A domesticmarket enterprise is an enterprise that produces goods for sale, or rendersservice or otherwise engages in any business in the Philippines. The minimumcapitalization requirement of US$200,000 may be reduced to US$100,000 (i) if the activity of the domestic market enterprise involves advanced technologyas determined and certified by the Department of Science and Technology, or (ii) if it employs at least fifty (50) direct employees as certified by theappropriate regional office of the Department of Labor and Employment.

On the other hand, an export enterprise is not required to comply with thisminimum capitalization requirement. An export enterprise is a manufacturer,processor or service entity that exports 60% or more of its output, or a trader thatpurchases products domestically and exports 60% or more of such purchases.

Anti-Dummy Law

The Philippines has an Anti-Dummy Law that imposes criminal and civilpenalties on those violating nationalization laws. The Anti-Dummy Law prohibitsforeign nationals from, inter alia, intervening in the management, operation,administration or control of a company engaged in a nationalized or partiallynationalized activity, whether as an officer or an employee (this prohibitionexcludes technical personnel specifically authorized by the Secretary of Justice).However, foreign nationals may serve as members of the board or governingbody of corporations engaged in partially nationalized activities in a numberproportionate to their actual and allowable equity in the company.

Competition Law

There are bills pending in Congress relating to anti-trust and monopoly activitiesbut, as of the current time, the Philippines does not have a comprehensive anddeveloped legislation with respect to such activities.There are, however, generallaws that are relevant.

The Philippine Constitution outlines the State policy of regulating or prohibitingmonopolies when the public interest so requires. No combinations in restraintof trade or unfair competition are to be allowed. In relation to this policy, theRevised Penal Code of the Philippines penalizes parties entering into anycontract or agreement or taking part in any conspiracy or combination in theform of a trust or otherwise, in restraint of trade or commerce, as well aspenalizing those who prevent, by artificial means, free competition in themarket. It also imposes penalties on parties who monopolize any merchandiseor object of trade or commerce, or who combine with any other person orpersons to monopolize said merchandise or object in order to alter the pricesthereof or who spread false rumors or make use of any other artifice to restrainfree competition in the market.

The Civil Code allows the recovery of damages in cases of unfair competition inagricultural, commercial or industrial enterprises. The Price Act identifies illegalacts of price manipulation such as hoarding, profiteering, and cartels, while the


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Consumer Act of the Philippines provides for consumer product quality andsafety standards. There are also other laws on unfair competition pertaining tothe protection of intellectual property rights.

Exchange Controls

Inbound Investments

As a general rule, foreign exchange may be legally sold and purchased outsidethe banking system. Generally, authorized agent banks may sell foreign exchangeto service payments on any foreign exchange transaction without need ofregistration with, or prior approval by, the Central Bank, except in cases ofpayments for foreign loans (or payments for arrangements that take the form of aforeign loan) and for the remittance of dividends or profits and repatriation ofcapital relating to foreign investments.

Foreign investment may be registered with the Central Bank if the foreignexchange funding the investment is inwardly remitted through the Philippinebanking system and converted into Philippine pesos. If the foreign investment isnot registered with the Central Bank for any reason, foreign exchange to fundthe remittance of dividends or profits or the repatriation of capital may be legallysold and purchased outside the banking system.

Outbound Investments

In cases of outbound investment by Philippine residents, foreign exchange up tothe amount of US$ 6,000,000 in any single year may be purchased fromauthorized agent banks without prior Central Bank approval and registration.However, prior Central Bank approval is required for outbound investmentsexceeding US$ 6,000,000 in any single year.

In cases where outbound investment by a resident of the Philippines is funded byforeign exchange purchased from authorized agent banks, the Philippine residentis required to inwardly remit and to sell for pesos to authorized agent banks, thedividends, earnings or divestment proceeds of such outbound investments.

Emergency Powers of the Monetary Board

Foreign exchange transactions are subject to the emergency powers of theMonetary Board of the Central Bank. In the imminence or actual case of anexchange crisis or national emergency, the Monetary Board, with the approval of the President of the Philippines, may impose restrictions on foreign exchangetransactions.

Securities Law Issues

The passage of the Securities Regulation Code (�SRC�) in August 2000 broughtabout significant changes in securities law in the Philippines. For instance, thenew law strengthens the full disclosure approach in public offerings, veeringaway from the merit system of securities registration. Also, the SRC strengthensthe role of the SEC as a market regulator and innovator. The SEC has also issuednew Implementing Rules for the SRC (�SRC Rules�). The SRC Rules took effecton 28 February 2004. The new SRC Rules liberalize the requirements for tenderoffers, and enhance corporate governance through expanded disclosure rules andindependent director requirements.


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Sale, Offer and Distribution in the Philippines

Generally, corporations desiring to sell, offer for sale or distribute securities inthe Philippines must first register such securities with the SEC and obtain thecorresponding permit to sell.

The term �securities� covers a wide range of contracts which include, amongothers, investment contracts, certificates of interest or participation in a profit-sharing agreement, certificates of deposit for a future subscription, proprietaryor non-proprietary membership certificates, fractional undivided interests in oil,gas or other mineral rights, derivatives like options and warrants and otherinstruments as may be determined in the future by the SEC.

However, there are �exempt securities,� which as a general rule do not requireregistration. In addition, there are securities sold under �exempt transactions�which are not required to be registered.

�Exempt securities� generally include securities issued by corporations subject tothe supervision and regulation of governmental entities such as the Central Bank,the Insurance Commission or the Housing and Land Use Regulatory Board.Securities issued or guaranteed by a foreign government or by any of its politicalsubdivisions and securities issued by a bank are also generally considered exemptsecurities.

�Exempt transactions� include one corporation transferring or exchanging itsown securities to/with another corporation in connection with a merger orconsolidation, and an isolated sale transaction by the owner of securities, wherethe owner is not the underwriter of the securities. It also includes the sale tofewer than twenty (20) persons in the Philippines as well as a sale to anyqualified buyer as enumerated under the SRC.

Under the SRC Rules, in case of �exempt securities�, it is not necessary toprovide a written disclosure to the person to whom the securities are offered, orto notify the SEC of the offering.

With regard to �exempt transactions� the person claiming exemption mustprovide to all persons to whom the securities are offered, a written disclosurecontaining specified information. However, it is not necessary to notify the SEC of the offering, except in two kinds of �exempt transactions,� specifically (i) sale to not more than nineteen (19) persons, and (ii) sale to qualified buyers.

In case of (i) sale to not more than nineteen (19) persons, and (ii) sale toqualified buyers, formal notice to the SEC is required. Failure to file this noticewill subject the person claiming exemption to sanctions under the SRC, and maygive rise to the presumption that the exemption is not available.

The SEC may add to the class of exempt securities and exempt transactions if itfinds that the enforcement of the SRC with respect to such securities andtransactions is not necessary in the public interest and for the protection ofinvestors.

The Philippines allows the use of �uncertificated securities� for corporations withregistered securities or those listed in a securities exchange. Uncertificatedsecurities are securities evidenced by electronic or similar records. These aretransferred and pledged in the same manner as ordinary securities. For atransfer of an uncertificated share to be valid on the part of the corporation, thetransfer must be recorded in the corporation�s books to show the names of theparties and the number of shares transferred.


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Issuance or Sale of Securities Abroad

Corporations with registered securities which plan to issue, sell, or offer to sellsecurities outside the Philippines must obtain a certificate of exemption from theSEC prior to initiating efforts to carry out such transactions.

At a minimum, the request for exemption should contain the followinginformation:

� The number, issue price and value of the securities;

� The type of securities;

� The date and place of issuance or sale;

� A summary of terms and conditions of issuance;

� Details of the underwriters and/or selling agents;

� A sample of the securities; and

� A prospectus and/or brochure.

Specific Industry Regulation

Most mergers and acquisitions in the Philippines do not require special statutoryor regulatory consent or approval. General laws, including the Corporation Codeand the Civil Code, largely govern such activities. In most cases, the parties onlyneed to obtain corporate approvals to authorize the merger or acquisition andcomply with rules and regulations to administratively and procedurally executeand implement the transaction.

However, special regulations do apply in cases of mergers and acquisitions incertain regulated industries such as banking and telecommunications.

Banking Sector

Bank mergers and consolidations are subject to the approval of the Central Bankand merging or consolidating banks should consult with the Central Bank priorto the finalization of any merger or consolidation agreement.

Central Bank policies tend to encourage and promote mergers and consolidationsin the banking sector. Most notable of these policies is the grant of fiscal and non-fiscal incentives to merging or consolidating banks. These incentives includethe allowance of revaluation of bank premises, improvements and bankequipment, and the restructuring of payment of past due obligations of theconstituent banks with the Central Bank over a period not exceeding ten years.

Subject to the approval of the Central Bank, the incentives may also be grantedin cases of share acquisitions.

Foreign banks may now own up to 100% of the voting stock in a domestic bankthrough the purchase of the domestic bank�s stock under the General BankingLaw of 2000. Up to June 2007 and subject to certain guidelines, the MonetaryBoard may authorize a foreign bank to acquire up to 100% of the voting stock ofone bank organized under the laws of the Philippines. Within the same period,the Monetary Board may authorize any foreign bank which, prior to theeffectivity of the General Banking Law, availed of the privilege to acquire up to60% of the voting stock of a bank under the Foreign Banks Liberalization Act andthe Thrift Banks Act, to further acquire voting shares of such bank to the extent


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necessary for it to own 100% of the voting stock thereon. The citizenship of thecorporation that owns shares in a bank will follow the citizenship of thecontrolling stockholders of said corporation, irrespective of the place of itsincorporation.

Telecommunications Sector

In the telecommunications sector, the requirements of the Public Service Laware relevant. In the case of a share acquisition, the approval of the NationalTelecommunications Commission (�NTC�) is required if the transfer or sale ofshares in a telecommunications company will result in the purchaser owningmore than 40 percent of the subscribed capital stock of the telecommunicationscompany.

In relation to mergers and asset acquisitions, the Public Service Law requires theprior approval of the NTC for the sale, alienation, mortgage, encumbrance orlease of property, franchises, certificates, privileges or rights; or the merger orconsolidation of property, franchises, privileges or rights of atelecommunications company.

NON-REGULATORY CONSENTS AND APPROVALS

In addition to the relevant regulatory consents and approvals, corporateauthorizations, contractual consents and contractual approvals should also be noted.

Typical restrictions on transfer or issuance of shares include rights of first refusalover the shares to be purchased, or pre-emptive rights of other shareholders ifthe shares to be acquired are shares to be issued from unissued authorized capitalstock or shares to be issued from an increase in the authorized capital stock ofthe target company. In this regard, the articles of incorporation and by-laws ofthe target company and any shareholders� agreement must be reviewed andexamined carefully by a prospective purchaser.

Loan agreements and other contracts relating to material commitments of thetarget company will also typically contain change of control provisions, in whichcase either the consent of the lenders or the appropriate counterpart is requiredfor a merger or acquisition that will result in a change in control of the targetcompany.

The Corporation Code also has specific shareholders� vote requirements toauthorize mergers and consolidations. In the case of a merger or consolidation,once the transaction has received majority vote consent from the boards ofdirectors or trustees of all the companies that are party to the transaction, suchtransaction then has to be approved by the shareholders or members.

The shareholders of all of the involved companies shall be given at least twoweeks� notice of a general meeting of shareholders. This notice should alsoinform them as to the purpose of the general meeting of shareholders andinclude a summary of the plan for the merger or consolidation. An affirmativevote of stockholders representing at least two-thirds of the outstanding capitalstock of the company (or at least two-thirds of the members in cases involvingnon-stock companies) is needed to approve the plan.


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Any amendment to the plan for the merger or consolidation must similarly beapproved by a majority vote from the board of directors and an affirmative votefrom stockholders representing at least two-thirds of the company�s outstandingcapital stock.

The articles of incorporation and by-laws of certain companies may imposehigher voting requirements in the board of directors� and/or shareholders� levelfor mergers and consolidations as against those imposed by the CorporationCode. As these higher voting requirements are generally recognized as valid, aprospective party to a merger or consolidation must likewise review thesedocuments carefully.

TAXATION ISSUES

Jurisdictional Tax

A recently-enacted law increased the rate of applicable tax on the net income fromall sources (i.e. within or without the Philippines) of a domestic corporation from32% to 35%. However, effective 1 January 2009, the rate of corporate income taxwill be 30%.1 Certain classes of income of a domestic corporation are subject todifferent tax treatments. For example, interest on Philippine peso deposits, yieldfrom peso deposit substitutes and trust funds, as well as royalties from Philippinesources received by a domestic corporation, are subject to a final withholding taxof 20% while dividend income from another domestic corporation is exempt fromincome tax. However, interest income derived by a domestic corporation from adepositary bank under the expanded foreign currency deposit system is subject to afinal income tax of 7.5% of such interest income.

Dividends

Dividends received by a resident foreign corporation from a domesticcorporation are not subject to tax. Dividends from a domestic corporation to anon-resident foreign corporation are generally subject to a withholding tax of15% subject to the condition that the country in which the non-resident foreigncorporation is domiciled allows a credit against the tax due from the non-resident foreign corporation deemed to have been paid in the Philippinesequivalent to 20%, which represents the difference between the regular incometax of 35% and the 15% tax on dividends. Philippine tax treaties may alsoprovide for a lower tax rate on dividends.2

Effective 1 January 2009, the credit against the tax due shall be equivalent to15%, which represents the difference between the regular income tax of 30%and the 15% tax on dividends.

___________________1 Republic Act No. 9337, which amended provisions of the Philippine Tax Code to increase the

corporate income tax rate, among others, took effect on 1 July 2005. However, the validity ofRepublic Act No. 9337 is currently being disputed before the Philippine Supreme Court.Consequently, the effectivity of Republic Act No. 9337 has been suspended during the pendency ofproceedings at the Supreme Court.

2 This is also an amendment introduced by Republic Act No. 9337. Prior to the amendment, thereduction of the withholding tax rate on dividends derived by a non-resident foreign corporationfrom Philippine sources to 15% was prescribed, provided that the country in which the non-resident foreign corporation is domiciled allows a credit against the tax due from the non-residentforeign corporation deemed to have been paid in the Philippines equivalent to at least 17%.


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Branch Profits

Generally, branch profit remittances by a resident foreign corporation are subjectto a 15% final withholding tax. The tax is based on the total profits applied orearmarked for remittance without any deduction for the tax component.

Tax Treaties

The tax on interest, royalties, and dividends, among others, may be reducedpursuant to applicable tax treaties. To date, the Philippines has existing taxtreaties with: Australia, Austria, Bahrain, Bangladesh, Belgium, Brazil, Canada,China, the Czech Republic, Denmark, Finland, France, Germany, Hungary,India, Indonesia, Israel, Italy, Japan, South Korea, Malaysia, Netherlands, NewZealand, Norway, Pakistan, Romania, Russia, Singapore, Spain, Sweden,Switzerland,Thailand, United Kingdom, United States, and Vietnam.

Share Acquisitions versus Asset Acquisitions versus Mergers

In share acquisitions, the target company will retain the same tax basis for itsassets regardless of the purchase price paid for its shares by the purchaser.

In asset acquisitions, the purchaser�s tax basis is generally equivalent to thepurchase price of the acquired assets.

In a merger, the tax basis of the assets received by the surviving corporation isthe tax basis such assets would have had in the hands of the absorbed corporation(i.e. historical cost) increased by the amount of gain recognized by the absorbedcorporation on the transfer. However, the tax basis of the shares of the survivingcorporation received by the shareholders of the absorbed corporation will be thesame as the tax basis of the absorbed corporation�s property, stocks or securitiessurrendered in exchange for the surviving corporation�s shares (a) decreased by(i) the money received and (ii) fair market value of the other property receivedand (b) increased by (i) the amount treated as dividend of the shareholder and(ii) the amount of any gain that was recognized in the exchange.

The Tax Code recognizes instances of tax-free transfers of properties by acorporation, in exchange for shares of stock of another corporation. Uponcompliance with the requirements, a merger or consolidation can qualify as a tax-free exchange or corporate reorganization. Further, under a recent law, a merger orconsolidation that meets the requirements of the Tax Code is exempt fromdocumentary stamp tax in respect of any real property transferred pursuant to themerger or consolidation. However, the original issuance of shares of stock pursuantto the merger or consolidation will still be subject to documentary stamp tax.

In a merger, if the liabilities transferred to or assumed by the survivingcorporation exceed the total of the basis of the property transferred by theabsorbed corporation, the excess shall be considered a taxable gain of theabsorbed corporation.

Net Operating Loss Carryover

The net operating loss of a business or enterprise for any taxable yearimmediately preceding the current taxable year, which has not been previouslydeducted from gross income, is carried over as deduction from gross income forthe next three consecutive taxable years immediately following the year of suchloss. Net loss incurred in a taxable year during which the taxpayer was exemptfrom income tax shall not be allowed as a deduction from gross income ofsucceeding years.


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Net operating loss carryover is not allowed if there has been a substantial changein the ownership of the target company. There is no substantial change in theownership of the target company if:

� 75% or more (in nominal value) of the outstanding issued shares are held byor on behalf of the same persons; or

� 75% or more of the paid-up capital of the corporation is held by or on behalfof the same persons.

Transactional Tax

Documentary Stamp Tax (�DST�)

A recent law amended the Tax Code to reduce DST rates on certain commercialtransactions. The same law also expanded the number of transactions exemptfrom DST.

In share acquisitions, a DST of P=0.75 on each P=200 (or fractional part thereof),of the par value of the shares transferred is imposed on the transfer of the shares.

In asset acquisitions, the applicable DST on deeds of sale or conveyance of realproperty is: P=15.00 for

(1) Consideration or value received or contracted to be paid for such realtywhich does not exceed P=1,000; and

(2) Each additional P=1,000 in excess of the P=1,000, of the consideration or fairmarket value of the real property (whichever is higher).

The DST imposed on mortgages and pledges is P=20 for the initial P=5,000 of theamount secured and an additional tax of P=10 on each P=5,000 (or fractional partthereof), in excess of the first P=5,000.

The DST on leases of real properties is P= 3 for the first P=2,000 (or fractionalpart thereof) and an additional P=1 for every P=1,000 (or fractional part thereof)in excess of the first P=2,000 of the rent for each year of the term of the lease.

The DST on the issuance of certificates of indebtedness is P=1.00 on each P=200(or fractional part thereof), of the face value of such documents.

As a general rule, DST is also payable on the assignment or transfer of anymortgage, pledge, lease or certificate of indebtedness, at the same rate as thatimposed on the original instrument. However, if there is no change in thematurity date or remaining period of coverage from that of the originalinstrument, the assignment or transfer of the mortgage, pledge, lease orcertificate of indebtedness is exempt from DST.

In mergers, the issuance of shares by the surviving corporation is subject to aDST of P=1.00 on each P=200 (or fractional part thereof) of the par value of theshares. However, transfers of stock or real property pursuant to the merger areexempt from DST, provided the requirements of the Tax Code are met.

Capital Gains Tax and Corporate Income Tax

In share acquisitions, a capital gains tax (�CGT�) of 5% on any gain notexceeding P=100,000 and 10% on any gain that exceeds P=100,000 is imposed onthe gain (i.e. selling price or book value, whichever is higher, less acquisitioncost) on the sale of shares of domestic corporations that are not sold or disposedof through the Philippine Stock Exchange (�PSE�).


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CGT on the transfer of shares may be avoided under applicable treaty provisions.A Bureau of Internal Revenue (�BIR�) ruling is required to confirm tax treatyrelief. If the shares transferred are listed and traded through the PSE, thetransfer is subject to a percentage tax of 0.5% of the gross selling price.

In the case of an asset acquisition, the income from the sale of capital and non-capital assets other than land and buildings is generally taxable as part of ordinarycorporate income at the rate of 35%.3 A final tax of 6% is imposed on the gainpresumed to be realized on the sale of lands and/or buildings which are notactually used in the business of the corporation and are treated as capital assets.

In the case of a merger, exchanges of property of the absorbed corporation solelyfor stock of the surviving corporation, and the surrender by shareholders of theabsorbed corporation of their shares in the absorbed corporation for shares ofthe surviving corporation is tax free.

Value-Added Tax

The value-added tax (�VAT�) is a form of sales tax that is imposed on the sale ofgoods and rendition of services in the Philippines, or the importation of goodsinto the Philippines.The VAT is incorporated in the prices of the goods,properties or services sold and is computed by multiplying the total amountindicated in the official receipt by one-eleventh. The VAT is based on the grossselling price of the goods or properties sold. It is an indirect tax, which may bepassed on to the purchaser. However, the VAT-registered purchaser may apply ordeduct the VAT passed on to it by the VAT-registered seller (input VAT), againstthe VAT liability of the purchaser (output VAT).

VAT is usually collected through the tax credit method: each firm applies the taxrate to its taxable sales, but is allowed a credit for VAT paid on its purchases ofgoods and services for business use, including the tax paid on purchases of capitalequipment. However, under current law, the amount of VAT paid on purchasesthat may be claimed as a credit is subject to certain limitations.

There is no VAT on a normal share acquisition. The transfer of the assets ofabsorbed corporations to another corporation pursuant to a merger is notsubject to VAT. In mergers or consolidation of corporations, the survivingcorporation shall absorb any unused input tax of the dissolved corporation as ofthe date of merger.

In relation to asset acquisitions,VAT is due on the sale of goods or propertiesoriginally intended for sale or for use in the ordinary course of business that aresold not in the course of normal business. Similarly, a transaction deemed salenot in the course of business is subject to VAT. However, the sale of realproperties not primarily held for sale to customers or for lease in the ordinarycourse of trade or business is not subject to VAT.

Others

In relation to asset acquisitions, provinces and cities may impose local transfertaxes and registration fees (with the register of deeds) in cases involving thetransfer of real property ownership.

___________________3 Increased from 32% under Republic Act No. 9337.


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EMPLOYMENT ISSUES

In the Philippines, employment issues tend to be policy sensitive. The Philippinesrecognizes and guarantees the employees� right of security of tenure and to formorganizations for their collective benefit and welfare. Employees� right to securityof tenure means that they can only be removed from their jobs for one of thespecified just and authorized causes and only after the observance of proceduraldue process defined by law. In cases of valid removals, severance payments maybe required, depending on the cause of the removal.

Share Acquisitions

In cases of share acquisitions, there are no associated employment-related issues.The acquirer merely buys the shares of the target company and the underlyingemployment relationship between the target company and its employees isunlikely to be affected.

Asset Acquisitions

In an asset acquisition, the legal consequences under Philippine labor laws aremore complex and uncertain. Although there are no defined statutes governingemployment matters in asset acquisitions, case law provides certain guidelinesthat illustrate the judicial treatment of employment-related conflict that mayarise out of an asset acquisition.

Under Philippine case law, the general rule is that labor contracts are consideredpersonal contracts (i.e. enforceable only against the parties to the contract).Because of this personal nature, unless expressly assumed, labor contracts are notenforceable against a purchaser of a business or assets. The purchaser in goodfaith has no obligation to absorb employees of the vendor or to continueemploying them. However, this general rule is not absolute. In certain cases,the Philippine Supreme Court has been known to disregard the personal natureof labor contracts and hold either the purchaser, the vendor, or both, liable intransactions deemed not to have occurred in good faith.

Mergers and Consolidations

In cases of mergers and consolidations, the rules on transfer of general liabilitiesand obligations to the surviving corporation or the consolidated corporation, asthe case may be, are applied to employment-related obligations and liabilities.The surviving or consolidated corporation is made responsible and liable for allthe liabilities and obligations of each of the constituent corporations in the samemanner as if such surviving or consolidated corporation had itself incurred suchliabilities or obligations. Any claim, action or proceeding pending by or againstany such constituent corporations may be prosecuted by or against the survivingor consolidated corporation, as the case may be.


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DOCUMENTATION AND DUE DILIGENCE

Preliminary Agreement - Memorandum ofUnderstanding/Letter of Intent

There is no legal requirement for a preliminary agreement, memorandum ofunderstanding (�MOU�) or a letter of intent prior to commencing preliminarytransactions among parties to a negotiated acquisition. The need for suchpreliminary agreement largely depends upon the requirements and theconvenience of the parties. However, it is not unusual for the parties to anegotiated acquisition to enter into an MOU or a letter of intent covering thebroad parameters of the acquisition, obligations of confidentiality, as well as �no-shop� obligations on the part of the prospective vendor. Such preliminaryagreements may be made non-binding, partially binding or totally binding.

Philippine law recognizes the contract of option. A contract of option is a bindingand enforceable contract. In a contract of option, the seller, for a considerationdistinct from the purchase price, grants the purchaser the exclusive option topurchase specific assets for a certain price within the period of the option.

Due Diligence

The general rule in the Philippines is caveat emptor or buyer beware (see box:A due diligence checklist for the Philippines). Because of this, due diligenceinvestigations remain a critical part of mergers and acquisitions in the Philippines.Additionally, Philippine law imposes the duty of diligence on directors ofcorporations. Pursuant to this duty of diligence towards the corporation, directorsare duty bound to properly inform themselves as regards the target company and itsassets and liabilities. As a general rule, Philippine law will not protect a personagainst his or her own negligence regardless of whether such negligence was merelya contributory or the proximate cause of its own injury.

A due diligence checklist for the Philippines

At the outset, the purchaser and its lawyers will have to agree on the scope of the legal due diligence. A comprehensivelegal due diligence in the Philippines will cover:

� Corporate organization and ownership;

� Financial aspects (normally in coordination with the purchaser�s accountants or financial consultants);

� Foreign investment regulations;

� Government regulation;

� Taxation (normally in coordination with the purchaser�s accountants);

� Employment matters;

� Property;

� Business and operational matters;

� Contracts;

� Intellectual property;

� Legal proceedings, disputes and investigations;

� Insurance policies; and

� Environmental matters.


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Unless the prospective purchaser is an insider and is aware of the business of thetarget company, a due diligence is imperative in almost all mergers andacquisitions. However, to a certain degree, a prospective purchaser of shares of apublic company will have a degree of awareness of the operations of the issuerand its assets and liabilities because public companies have continuing disclosureobligations to the public.

Because the purchaser assumes all the assets and liabilities of the target companyin a share acquisition, the due diligence investigation for a share acquisition isrelatively more extensive than in the case of an asset acquisition. Due diligenceinvestigation in a merger or consolidation is also necessarily extensive.

To substantiate matters represented by the seller to the purchaser, due diligenceinvestigations will typically involve searches of public records. Typically,corporate searches are conducted in the records of the SEC and the relevantregulatory agencies.

In relation to title searches, the Philippines does not have title registry forpersonal property. However, the Philippines follows the Torrens system inrelation to land registration and land titles are normally easily verifiable with theregister of deeds. Certain agreements creating or transferring real rights overproperty must also be registered and recorded in certain registries such as thereal estate mortgage registry for real estate mortgages and the chattel mortgageregistry for chattel mortgages.

Documentation and Agreements

Should the prospective purchaser decide to continue with the acquisition afterdue diligence investigations, the legal documentation will have to be drafted.Typically, the purchaser�s lawyers prepare the initial drafts.

Share Acquisitions

There is no legal document required for the validity of the transfer of shares of acorporation. The vendor�s delivery of the duly endorsed share certificates issufficient to transfer the ownership of the shares from the vendor to thepurchaser. However, the transfer of shares will not be recognized or valid as faras the target company and third parties are concerned unless the transfer isrecorded in the stock and transfer book of the target company. Certaindocumentation will be required to comply with this procedural requirement.

The documentation, whether all or some of the shares of the target company arepurchased, will normally include a share purchase agreement and a simple deedof assignment for the shares. The latter is made for convenience and ease ofpresentation of the transfer document to the tax authorities.

If the share acquisition is only partial, the legal documentation will also normallyinclude a joint venture agreement or a shareholders� agreement. If the purchaserwill provide technical or other services to the target company, a technicalservices agreement or similar agreement may also be executed.

Asset Acquisitions

Legal documentation for an asset acquisition tends to be more complicated thandocumentation for a share acquisition because the former involves the transfer ofdifferent categories of property. Different categories of property will oftenrequire the preparation of different transfer documents.


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In an asset acquisition, there is typically an asset purchase agreement assigningthe assets purchased in broad terms. However, there are also various deeds ofassignments for specific property such as shares of stock, real property andmotor vehicles. Key personnel of the target company may also executeemployment agreements with the purchaser if the assets or business is bought asa going concern.

Mergers and Consolidations

In merger or consolidation transactions, in addition to the legal documentationfor the transfer or exchange of shares and property between or among thecorporations, the constituent corporations must prepare and approve a plan ofmerger or consolidation. The plan of merger or consolidation will state theterms of the merger or consolidation, the mode of carrying out the merger orconsolidation and the changes to be made to the articles of incorporation of thesurviving corporation or the consolidated corporation, as the case may be.The plan of merger or consolidation must be submitted to the SEC for approval.In cases where the corporations involved are under regulation or supervision byspecific regulatory agencies, the favorable recommendation of the regulatoryagency concerned must also be obtained.

To confirm that the merger or consolidation is tax-exempt, a formal applicationmust also be filed with the BIR.

Representations and Warranties

Representations and warranties in share acquisitions tend to be more extensivethan in asset acquisitions because in the former, the purchaser generally assumesall the assets and liabilities of the target company whether known or unknown,actual, accrued or contingent.The vendor, if asked to make representations andwarranties, will more often than not either disclose information or want to limitits liabilities in case of breach.

Under Philippine law, non-disclosure of facts is generally not in itself fraudulentunless there is a duty to reveal such facts. Usual exaggerations in trade are alsonot in themselves fraudulent if the other party (the purchaser) had anopportunity to know the facts. Misrepresentation made in good faith is notnecessarily fraudulent but may constitute error.

Provisions in an Acquisition Agreement

The box �Provisions for inclusion in an acquisition agreement� details some ofthe important issues that should be covered in a typical acquisition agreement.

Provisions for inclusion in an acquisition agreement

A typical acquisition agreement will normally cover the following matters:

� Object of the purchase and sale

� Agreement to buy and sell

� Purchase price

� Representations and warranties

� Closing conditions and procedures

(Continued on the next page)


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Completion

The completion or closing requirements will depend on the mode of acquisitionutilized. However, completion is, almost without exception, subject to thecondition that all government approvals and non-regulatory consents andapprovals have been obtained.

In cases of share acquisitions, typical completion or closing requirements includethe delivery of the duly endorsed share certificates representing the sharespurchased and the recording of the transfer of the shares from the vendor to thepurchaser in the stock and transfer book of the target company. The latterclosing requirement means the purchaser is recognized as a shareholder of thetarget company. However, the recording may pose some timing problemsbecause the corporate secretary of the target company will not record thetransfer of the shares unless all taxes on the transfer of shares are paid and a BIRclearance is obtained. The vendor will not normally be willing to advance theamount of taxes and will normally prefer to apply part of the purchase price tothe payment of the taxes. The payment of taxes and the issuance of the BIRclearance may take one to two weeks. However, if the transaction will involvethe filing of an application for tax treaty relief from the BIR to confirm that thesale of shares of stock is exempt from capital gains tax under the relevantPhilippine tax treaty, the duration of the application process may take around one totwo months to complete. This invariably becomes a negotiated closing condition.

In cases of asset acquisitions, closing conditions will typically include delivery ofthe evidence of title of the asset purchased and various deeds of assignments forspecific property such as shares of stock, real property and motor vehicles.Employment agreements may also be executed for key personnel of the targetcompany if the assets or business is bought as a going concern. In cases involvingacquisition of real property, a certificate of authority to register from the BIR isnormally required. If the transaction will be accomplished by means of a mergeror consolidation, an application for a ruling or certification to confirm that theasset transfer is tax-exempt will also have to be filed with the BIR. Theapplication process normally takes around three to six months to complete.

(Continued from the previous page)

� Post-closing procedures

� Covenants and undertakings

� Confidentiality and non-competition

� Costs and expenses

� Indemnity

� Further assurances

� Dispute resolution

� Governing law and venue

� Schedules - which may include the forms of the specific transfer documents required


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CONSIDERATIONS RELATING TO PUBLICCOMPANIES

Acquisition of a Substantial Shareholding

Generally, a purchaser who acquires directly or indirectly the beneficialownership of more than 5% of any class of equity security of a public company isrequired to disclose the acquisition to the:

� Public company;

� SEC; and

� PSE, if the equity security is listed.

This disclosure should take place within five (5) business days after the date ofacquisition of direct or indirect beneficial ownership.

Thereafter, the purchaser is required to file regular reports in prescribed formswith the SEC and the PSE (if the equity security is listed) indicating any changein the beneficial ownership of the equity security.

A public company under this section pertains to any of the following:

� An issuer whose securities are registered with the SEC;

� An issuer whose securities are listed for trading in the PSE; and

� An issuer with assets of at least P=50 million or such other amount as the SECshall prescribe, and which has 200 or more holders, each holding at least 100 shares.

The coverage of what is considered beneficial ownership for purposes of theforegoing rules on disclosure is quite broad. Under the SRC Rules, a beneficialowner includes:

� Any person who, directly or indirectly, through any contract, arrangement,understanding, or relationship or otherwise has or shares:

� Voting power, including the power to direct the voting of the security;and/or

� Investment power, including the power to dispose or to direct thedisposition of the security.

� Any person who has the right to acquire beneficial ownership within thirty(30) days including the right to acquire:

� Through the exercise of any option, warrant or right;

� Through conversion of any security;

� Pursuant to a power to revoke a trust, discretionary account or similararrangement;

� Pursuant to an automatic termination of a trust, discretionary account orsimilar arrangement.


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A person shall be deemed to have an indirect beneficial ownership in anysecurity that is:

� Held by members of his immediate family sharing the same household;

� Held by a partnership to which he is a general partner;

� Held by a corporation of which he is a controlling shareholder; or

� Subject to any contract, arrangement or understanding which gives himvoting or investment power with respect to such securities. However abroker dealer, investment house, bank, insurance company, investmentcompany or a pension plan shall not be deemed to be beneficial owners ofsecurities held by them for the benefit of third parties or in customer orfiduciary accounts in the course of business, so long as the shares wereacquired by such persons or institutions without the purpose or effect ofchanging or influencing the control of the Issuer.

Insider Dealing

A purchaser should also be generally aware of insider trading issues relating tothe acquisition of securities of public companies.

Under the SRC, it is unlawful for an �insider� to sell or buy the securities of thepublic company, if he is in possession of material information that is notgenerally available to the public (see box: Definitions of insider dealing) withrespect to the public company or the security, unless:

� The insider proves that the information was not gained from suchrelationship; or

� If the other party selling to or buying from the insider (or his agent) isidentified, the insider proves that:

� He disclosed the information to the other party, or

� He had reason to believe that the other party is in possession of theinformation.

Definitions of insider dealing

Insiders can be classified in three categories. The first category is �corporate insiders� such as:

� The public company; and

� The directors of, officers of, or persons controlling, controlled by or under common control with, the public company.

The second is �temporary insiders� such as:

� A person whose relationship or former relationship to the public company gives or gave him or her access to materialinformation, about the public company or the security, that is generally not available to the public. This categoryincludes underwriters, lawyers, accountants and consultants.

The third category is �tippers� and �tippees� such as:

� A person who learns such information by a communication from any of the foregoing insiders.

� A government employee, director, or officer of an exchange, clearing agency and/or self-regulatory organization whohas access to material information about an issuer or a security that is not generally available to the public.

Under the SRC, information is �material non-public� information if (i) it has not been generally disclosed to the publicand would likely affect the market price of the security after being made known to the public and the lapse of areasonable time for the market to absorb the information; or (ii) a reasonable person would consider the informationimportant under the circumstances in determining whether to buy, sell or hold on to a security.


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It is presumed that a purchase or sale of a security by an insider or his spouse orrelatives by affinity or consanguinity, legitimate or common-law, shall have beeneffected while in possession of material non-public information if transacted aftersuch information came into existence prior to the dissemination of suchinformation to the public and the lapse of a reasonable time for the market toabsorb such information.

Takeovers Code

The Philippines does not have a takeovers code dealing with takeovers of publiccompanies. However, the SRC provides for stringent rules for tender offers toprotect minority shareholders whose shares are often not taken up by a take-overgroup. Moreover, the SEC promulgated implementing rules and regulationsregarding tender offers for any class of equity securities (except non-votingshares) of public companies.

The term �tender offer� means a publicly announced intention by a person acting alone or in concert with other persons to acquire equity securities of apublic company.

The tender offer rules seek to establish standards for the dissemination of atender offer and for the pro-rating of an acquisition in the event that thesecurities tendered are more than the number desired by the purchaser. Thetender offer rules also seek to protect the shareholders of public companies byensuring equal access to the tender offer and fair treatment of all shareholderswho wish to tender their securities.

This pro-rating takes effect should the tender offer be for less than all thesecurities of a class and if the number of securities tendered is greater than the number the purchaser is bound or willing to take up and pay for. In thiscase, the securities tendered shall be taken up and paid for by the purchaser on a pro rata basis, according to the number of securities tendered by eachsecurity holder.

Mandatory Tender Offers

Under the SRC Rules, a purchaser is required to make a tender offer for equityof shares of a public company in an amount equal to the number of shares thatthe person intends to acquire in the following circumstances:

� Purchaser intends to acquire 35% or more of the equity shares within aperiod of twelve (12) months; or

� If the acquisition would result in ownership of more than 50% of the equityshares of a public company.

A purchaser is exempted from the requirement to make a mandatory tenderoffer in the following circumstances:

� Purchase of newly issued shares from unissued capital stock, provided theacquisition will not result to a 50% or more ownership of the shares by the purchaser;

� Any purchase of shares from an increase in authorized capital stock;

� In connection with foreclosure proceeding involving a duly constitutedpledge or security arrangement where the acquisition is made by the debtoror creditor;


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� Purchases in connection with privatization undertaken by the Government ofthe Philippines;

� Purchases in connection with corporate rehabilitation under courtsupervision;

� Purchases through the open market at the prevailing market price; or

� Merger or consolidation.

Purchasers exempt from mandatory tender offer are nonetheless required tocomply with disclosure requirements and other obligations imposed by the SRC.

Announcements

A purchaser making a tender offer shall make a public announcement of hisintention, prior to the commencement of the offer. However, suchannouncement shall not be made until the purchaser has the resources toimplement the offer in full.

A purchaser wishing to make a tender offer for a class of securities of a publiccompany is required to file a tender offer statement together with the tenderoffer materials with the SEC, the public company, and the PSE (if the equitysecurities are listed), at least two (2) business days prior to the commencementof the tender offer.

The tender offer report contains, among other items, the purpose of the tenderoffer and the plans or proposals of the purchaser relating to extraordinarycorporate transactions such as a merger, reorganization or liquidation involvingthe public company or any of its subsidiaries.

On the commencement date of the tender offer and for two (2) consecutive daysthereafter, the purchaser is also required to publish, send or give the tender offerto the security holders by complying fully with either of two methods ofdissemination of the tender offer: long form publication or summary publication(see box: Methods for publicizing a tender offer).

If a person becomes aware of a potential tender offer before such offer has beenpublicly announced, that person may not buy or sell, directly or indirectly, thesecurities of the public company that is the target of the potential tender offeruntil the tender offer is publicly announced. Such buying or selling constitutesinsider trading under the SRC.

Listing Rules

Generally, an issuer may apply for listing in the First Board if it meets any of thefollowing criteria:

� It has a track record of profitable operations for three years; or

� It has a market capitalization of P=500 million, and a five-year operatinghistory; or

� It has net tangible assets of P=500 million, provided that it has a five-yearoperating history.

An issuer that fails to comply with the capital and profitability requirements ofthe First Board may apply for listing in the Second Board. Said issuer mustdemonstrate its potential for superior growth, have an operating history of at


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least one year, an authorized capital stock of at least P=100 million, 25% of whichmust be subscribed and fully paid; and at listing, have a minimum marketcapitalization of P=250 million.

The PSE has withdrawn the List of Preferred Industries. Hence, an issuer that isclassified under any industry may now apply for listing.

A company applying for listing in the First or Second Board shall cause itsshareholders who own an equivalent of at least 10% of the issued andoutstanding shares of stock of the company not to sell, assign or dispose of theirshares for at least 180 days after the listing of the shares.

Furthermore, companies applying for listing in either the First or the SecondBoard must submit to the PSE a detailed report on active business pursuits andoperational targets shall be required.

The PSE will generally not consider the application of a subsidiary or parentcompany of an existing listed issuer if the assets and operation of the applicantare substantially the same as those of the existing listed issuer. However, the PSEwill take into consideration the applicant�s business or commercial reasons forlisting in arriving at a decision.

Timetable

Unless withdrawn, a tender offer must remain open for at least twenty (20)business days from its commencement. In case of an amendment in thepercentage of the securities or in the tender offer price, the tender offer mustremain open for at least ten (10) business days from the date of notice of theamendment.

The purchaser may extend the length of the tender offer by issuing a notice ofextension by press release or by other public announcement no later than thescheduled original expiration date of the offer. The notice of extension mustdisclose the approximate number of securities tendered to date.

Any security tendered may be withdrawn by the security holder at any timeduring the period when the tender offer remains open or at any time after sixty(60) business days from the commencement of the tender offer if the securitiesare not yet accepted for payment.

Except with the consent of the SEC, where an offer has been withdrawn, thepurchaser or any person who acted in concert with him in the course of the offercannot announce a new offer for the public company within six (6) months fromthe time the initial offer was withdrawn. Neither can they acquire any of its equitysecurities that will obligate the purchasers to make a mandatory tender offer.

The purchaser is required to pay the tender offer price not later than ten (10)business days after the termination of the tender offer.

Methods for publicizing a tender offer

On the commencement date of a tender offer, and for two (2) consecutive days thereafter, the purchaser must publicizein two newspapers of general circulation in the Philippines, the offer to security holders through one of the following twomethods:

LLoonngg ffoorrmm ppuubblliiccaattiioonn:: The purchaser publishes all the information required in the tender offer report filed with the SEC.

SSuummmmaarryy ppuubblliiccaattiioonn:: The purchaser publishes certain information included in the tender offer report filed with the SEC,and furnishes any security holder, upon request, a copy of the tender offer report filed with the SEC.


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ACQUISITIONS AND DISCLOSURES BY PUBLICCOMPANIES

General Disclosure Obligation

Public companies are required to make ongoing structured and unstructureddisclosures.

Ongoing structured disclosures include periodic reports filed regularly with theSEC and the PSE, such as the annual and quarterly reports. These structuredcontinuing reports are generally intended to keep the information anddocuments filed with the SEC and/or the PSE for the registration or listing ofthe securities reasonably current.

Ongoing unstructured disclosures are disclosures to the investing public ofmaterial corporate developments or events, or conditions in the market forsecurities, as and when they occur. Not all corporate or market developmentsrequire disclosure. However, information which meets any of the followingstandards generally requires immediate disclosure:

� Where the information is necessary to enable the public company and thepublic to appraise their position or standing, i.e. material information with asignificant impact on the public company�s operations, including informationconcerning a significant change in ownership of the public company�ssecurities owned by insiders or representing control of the public company;

� Where the information is necessary to avoid the creation of a false market forits securities, such as rumors or reports, whether true or false, notoriginating from the public company; or

� Where the information may reasonably be expected to materially affectmarket activity, investor�s decisions and the price of securities.

Specific Disclosure Obligation

The nature and extent of the disclosure depends on the kind of materialinformation disclosed.

Change in Control

In case of a �change in control� of a public company, the disclosure generallyincludes the:

� Names of the person(s) who acquired control;

� Amount and the source of the consideration used by such person(s);

� Basis of the control;

� Date and description of the transactions resulting in the change in control;

� Percentage and actual number of voting shares directly or indirectlybeneficially owned by the new control group and the identity of the personsfrom whom control was assumed;

� Terms of any loans or pledges obtained by the new control group for thepurpose of acquiring control and, generally, the names of the lenders and thepledgees; and


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� Any arrangements known to the public company, including any pledge by any person of securities of the public company or any of its parents, theoperation of which may at a subsequent date result in a change in control of the public company.

There is a �change in control� if there is a change in the person(s) who possesses,directly or indirectly, the power to direct or control the direction of themanagement and policies of the public company, whether through the ownershipof voting securities, by contract, or otherwise.

Acquisition or Disposition of Significant Assets

In cases of �acquisition or disposition of a significant amount of assets� by thepublic company other than in the ordinary course of business, the disclosuregenerally includes:

� The date and manner of acquisition and description of the assets involved;

� The nature and amount of consideration including the principle followed indetermining consideration;

� The persons from whom the assets were acquired or to whom they weresold, including the nature of any material relationship between such personsand the public company or any of its affiliates;

� (Generally) the sources of the funds used for the acquisition; and

� If the assets acquired constitute plant, equipment or other physical property,the nature of the vendor�s business, how the assets were used and if the publiccompany intends to continue such use or devote the assets to other purposes.

An acquisition or disposition is deemed to involve a �significant amount of assets� if:

� The public company�s and its other subsidiaries� equity in the net book valueof such assets or the amount paid or received therefor upon such acquisitionor disposition exceeded 10% of the total assets of the public company and itsconsolidated subsidiaries, or

� It involves a business which is significant.

Tender Offers

In a case of tender offers, the following are required to be disclosed:

� Identity of the bidder;

� Identity of the target company;

� Amount of class of securities being sought and the type and amount ofconsideration offered;

� Scheduled expiration date of the tender offer;

� Exact dates that security holders who deposit their securities will have theright to withdraw their securities and the manner in which shares will beaccepted for payment and in which withdrawal may be effected;

� If the tender offer is for less than all of the securities of the class and thebidder is not obligated to purchase all of the securities tendered, the exactdate of the period during which securities will be accepted on a pro rata basis and the plan of the bidder in the event of an over-subscription bysecurity holders;


25

� Confirmation by the bidder�s financial adviser; and

� Information included in SEC Form 19-1.

Types of Transactions

The SEC rules and regulations do not provide an all-inclusive enumeration of thekinds of events or transactions requiring disclosure. However, the current SECdisclosure form provides an illustrative, non-exhaustive list of events requiringdisclosure (see box: Material information requiring disclosure in an acquisitionor disposition by an Issuer).

The continuing structured and unstructured disclosures by public companies are required to be made within the periods specified by the relevant SEC or PSE regulations.

Connected Transactions

Related-party transactions are generally governed by the Corporation Code ofthe Philippines and apply to all corporations including public companies.Related-party transactions under the Corporation Code, include:

� Contracts between the corporation and any of its directors or officers; and

� Contracts between corporations with interlocking directors whereby theinterest of the interlocking director in one corporation is substantial and hisinterest in the other is merely nominal.

Such related-party contracts generally require shareholder approval orratification. The presence and vote of the related person should not be necessaryfor a quorum or for the approval of the contract in the meeting of the board ofdirectors. The related-party contract must in any case be fair and reasonable.

In cases involving public companies, certain relationships and related transactionsrequire disclosure. Transactions where any of the following persons have a director indirect material interest generally require disclosure:

� Any director or officer of the public company;

� Any nominee for election as director;

� Any person who acquires directly or indirectly the beneficial ownership of morethan five percent of a class of the public company�s equity securities; and/or

� Any immediate family member (including spouse, parents, children, siblingsand in-laws) of any of the persons listed above.

Timetable

The rules and regulations under the SRC provide the specific due dates for theperiodic and other reporting requirements of public companies. The continuingunstructured disclosure of corporate developments must be made:

� Promptly to the public through the news media;

� If the public company has securities listed with the PSE, to the PSE withinten (10) minutes after occurrence of the event and prior to its release to thepublic through the news media;

� To the SEC within five (5) days after occurrence of the event being reportedunless substantially similar information as required has been previouslyreported to the SEC by the registrant.


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Material information requiring Disclosure in an acquisition or disposition by a Public Company

The following items are considered material information requiring disclosure:

� Changes in control;

� Acquisition or disposition of assets;

� Changes in certifying accountant;

� Resignation, removal or election of registrant�s directors or officers;

� Legal proceedings;

� Changes in securities;

� Defaults upon senior securities;

� Change in fiscal year; and

� Other events:

� Changes in corporate purpose and material alterations in activities or operations or initiation of new ones;

� Resignation or removal of officers or senior management and their replacements;

� Decisions to carry out extraordinary investments or financial or commercial transactions that might have materialimpact on the public company�s situation;

� Significant losses;

� Dissolution;

� Serious obstructions in the development of corporate activities;

� Any licensing or franchising agreement or its cancellation materially affecting operations;

� Any delay in the payment of debentures, negotiable obligations, bonds, etc;

� Creation of mortgages or pledges on assets exceeding a significant part of net worth;

� Any purchase or sale of stock or convertible debt securities of other companies when the amount exceeds asignificant part of the public company�s or purchaser�s net worth;

� Contracts that limit profit distribution;

� Any fact that materially affects or might materially affect the economic, financial or equity situation of thosecompanies controlling, or controlled by the public company including sale or pledge of an important part of suchcompanies� assets;

� Authorization, suspension, retirement or cancellation of the listing of securities on an exchange;

� Fines of more than P=50,000 and/or penalties by regulatory authorities; and

� Merger, consolidation or spin-off.


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CONCLUSION

In the Philippines, share acquisitions and asset acquisitions continue to be themethod of choice for most purchasers. Mergers and consolidations are thrivingin the banking and telecommunications sector. In the banking sector, the activityhas been triggered by Central Bank regulations increasing the capitalrequirements for banks already in operation as well as those yet to beestablished. Banks failing to meet the minimum capital requirements facepossible suspension of some of their functions and privileges. In thetelecommunications sector, the activity appears to have been triggered by theaggressive competition among telecommunications companies, particularly thoseengaged in wireless communications.The Philippine M&A market is developing.Although basic legislation relating to or affecting mergers and acquisitions exists,the SEC continues to issue new rules and regulations to keep pace with thedevelopments in the Philippine M&A market.


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Appendix A2005 INVESTMENTS PRIORITIES PLAN

The 2005 Investments Priorities Plan (�IPP�) presents a list of PriorityInvestment Areas under the following:

� Preferred Activities;

� Other Preferred Activities;

� Mandatory Inclusions; and

� The ARMM List.

All activities under these lists are eligible for incentives prescribed underExecutive Order (�E.O.�) No. 226, as amended, subject to the General Policiesand Guidelines of the Board of Investments (�BOI�).

The Preferred Activities covers the Medium Term Philippines Development Planidentified 11 investment areas.

Other Preferred Activities covers other export activities, Industry Cluster, andmodernization activities.

Mandatory Inclusions covers all areas/activities where the inclusion in the IPPand/or the grant of incentives under E.O. No. 226 is mandated by law. For2005, Clean Water Act (R.A. 9275) and Rehabilitation, Self-Development and Self-Reliance of Disabled Persons (R.A. 7277) are included.

For the 2005 IPP, the Industry Cluster will serve to enhance industrialcompetitiveness, promote investments in the countryside, develop small andmedium enterprises (�SMEs�), and support the One Town, One Product(�OTOP�) Program as these apply to the activities listed in the IPP.

Finally, the ARMM List covers priority areas that have been independentlydetermined by the Regional Board of Investments (�RBOI�) of the ARMM inaccordance with E.O. No. 458.The BOI-ARMM can administer incentivesgranted to activities located in the ARMM subject to General and SpecificGuidelines. Economic activities listed in the ARMM shall be entitled toincentives only when said activities are undertaken within the ARMM region.Economic activities listed in the Preferred Activities, Other Preferred Activities,and Mandatory Inclusions may also be undertaken within the ARMM.

PRIORITY INVESTMENT AREASThe descriptions/coverage and the entitlement of incentives of the followinglisted activities shall be defined and clarified in the General Policies andGuidelines to be issued by the BOI. All projects with sovereign guarantee and/orguaranteed rate of return shall not be entitled to income tax holiday (�ITH�).

I. PREFERRED ACTIVITIES

A. Agribusiness

This covers commercial production and commercial processing of agriculturaland fishery products including their by-products and wastes.


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B. Healthcare and Wellness Products and Services

This covers hospital services, medical and dental services, other human healthand wellness services (including services in the field of nursing care,rehabilitation and recuperation, spas), retirement villages and related serviceslocated either in identified medical zones or outside Metro Manila when cateringmainly to foreigners and non-residents.This also covers the manufacture of drugsand medicines in accordance with the Philippine Drug Formulary of theDepartment of Health (�DOH�), supplements limited to Vitamin A, iron andiodine for use in the Food Fortification Law, and herbal medicines.

C. Information and Communications Technology

This covers IT and IT-enabled services and ICT support services located eitheroutside Metro Manila or in identified IT hubs.

D. Electronics

This covers all segments within the value-chain structure of the industry such asOriginal Design Manufacturing (�ODM�), electronics manufacturing services(�EMS�), the manufacture of electronic products (except home appliances),IC design, the manufacture of parts and components of electronic productsincluding the inputs for the manufacture of such components, and themanufacture of production supplies (e.g., molds and dies, precision tools, etc.)used by the electronics industry.This also covers the establishment and operationof Centers of Excellence, test and other service facilities catering to theelectronic industry.

E. Motor Vehicle Products

This covers the production and/or manufacture of motor vehicle parts andcomponents, and the manufacture or assembly of motor vehicles provided thatthe activity includes a program for the development of motor vehicle parts andcomponents.This also covers the establishment and operation of Centers ofExcellence that support the development of the motor vehicle industry.

F. Energy

This covers the exploration, development, and/or utilization of energy sources.This also covers activities using energy technologies leading to energy efficiencyand conservation in accordance with the program of the Department of Energy(�DOE�).

G. Infrastructure

This covers the establishment of infrastructures such as business parks, masshousing, mass transport involving rail system, physical infrastructure such asroads and bridges, telecommunications involving at least 3rd generation cellularmobile telephone system (�CMTS�) and rural telephony system located in lessdeveloped areas (�LDA�), and logistics. Logistics covers: agricultural servicesinvolving post harvest facilities, grains-highway facilities, cold storage, blastfreezing, vapor heat treatment (�VHT�), and ice plants in LDAs; air and landtransport; multi-modal passenger and/or cargo terminals; pipeline operations;toxic and hazardous waste (�THW�) management; and, water supply, treatment,and distribution.This also covers infrastructure projects under the Build-Operate-and-Transfer (�BOT�) Law.


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H. Tourism

This covers the establishment of tourism economic zones, touristaccommodation facilities, tourist estates, and eco-agri tourism facilities.This also covers historico-cultural heritage projects and services provided by touristoperators as endorsed by the Department of Tourism (�DOT�).

I. Shipbuilding/Shipping

This covers shipbuilding, ship repair, shipyard operations (excludingshipbreaking), and overseas, domestic and Roll-On/Roll-Off (�RORO�) shipping and terminal operations.

J. Jewelry

This covers the manufacture of fine jewelry and costume jewelry.

K. Fashion Garments

This covers the production of fashion garments as endorsed by the Department ofTrade and Industry (�DTI�). Fashion garments essentially refers to wearing apparelfor a specific season with a distinct style and color based on international trends.

II. OTHER PREFERRED ACTIVITIESThis covers the following:

A. Other Export Activities not identified under Part I (I).

B. Industry Clusters supporting activities under Part I (I) and (III).

C. Modernization activities under Part I (I) and (III) and Part I (II) (B).

However, Other Export Activities shall be entitled only to limited incentives.

Industry Cluster covers horizontal and vertical linkages. Horizontal and vertical-backward linkages are limited to first-tier activities only. Raw Materials forvertical-forward linkages under �Agribusiness� and �Mining� should be whollyobtained.

III. MANDATORY INCLUSIONSAll areas/activities, which as provided for under existing laws, specificallyrequire their inclusion in the IPP. These include the following:

� Presidential Decree No. 705 Industrial Tree Plantation

� Republic Act (�R.A.�) No. 7103 Iron & Steel

� R.A. No. 7942 Exploration, mining, quarrying, and processing of minerals

� R.A. No. 8047 Publication or printing of books or textbooks

� R.A. No. 8479 Refining, storage, marketing and distribution of petroleumproducts

� R.A. No. 9003 Ecological Solid Waste Management

� R.A. No. 9275 Clean Water Act

� R.A. No. 7277 Rehabilitation, Self-Development and Self-Reliance ofDisabled Persons

� Activities covered under Bilateral Agreements


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IV. ARMM ListThe ARMM List covers priority activities, which have been independentlyidentified by the Regional Board of Investments of the ARMM in accordancewith E.O. No. 458.The BOI-ARMM can grant registration and administerincentives to activities listed in the IPP, provided these are located in ARMM andsubject to the General and Specific Guidelines.

1. Export Activities

a. Export Trader and Service Exporters

b. Support Activities for Exporters

2. Agriculture, Food and Forestry-Based Industries

a. Processed Food

� Production and processing of halal meat and halal foods

� Leguminous and other vegetable-based protein (textured, pelletizedor liquid)

� Spices processing (e.g. hot pepper, black pepper, ginger, etc.)

� Vegetable oils (e.g. peanut oil, rice bran oil, sunflower and soybean oil)and production of food crops

� Integrated coconut processing and plantation

� Seaweeds production and processing

� Cassava processing and root crops

� Fruit processing (e.g. durian, mangosteen, jackfruit, marang, banana,mango, passion guava, calamansi, and guyabano) and plantation

� Aquaculture (Fish Production and Processing) such as, but not limited to:

� Frozen fish

� Chilled fish

� Canned fish

� Abalone

� Crab fattening

� Eel production

� Squid processing

� Carp and tilapia production and processing

� Tropical fish production and processing

� Shrimps/prawn

� Lapu-lapu (Grouper) and other marine products

� Corn flour mill (integrated with plantation)

� Young corn production


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� Mushrooms culture and processing

� Sweet potato plantation and processing

� Crocodile farming and processing

b. Cutflower Production

c. Pearl Culture and Processing

d. Industrial Tree Plantation (include Mangrove, Rattan, Bamboo, etc.) and wood processing (cement wood board and fiberboard) reconstructedveneer.

e. Shipbuilding / Ship Breaking / Ship Repair and Watercraft

f. Abaca Pulp Production and Processing

g. Palm Oil Plantation, Processing, Refining and Germinated Oil Palm Seeds

h. Coffee Processing (maybe integrated with plantation)

i. Particle Board (use of agri-based waste material such as rice straw,wood waste, etc.)

j. Activated Carbon Manufacturing (use of coconut shell, wood based, etc.)

k. Feeds Production (animal feeds and feeds for aquaculture)

l. Tobacco Plantation and Processing

m. Production of Beverage Crops, but not limited to:

� Cacao beans

� Coffee beans (Arabica variety)

n. Production of Plantation Crops and Other Medical Herbs/Essential OilPlants (including flower extracts)

n. Production of Livestock and Poultry (including Dairy products)

� Beef (including cow-calf and feedlot operations)

� Carabao (water buffalo) production

� Goats and sheep

� Frozen semen and embryos

p. Bricks and Roofing Tiles Production

q. Quality Seeds and Seedlings of Fruit Trees and Other Planting MaterialsPropagated Asexually or by Tissue Culture

r. Sugar Cane Plantation, Processing and Refineries

s. Sericulture

t. Mosquito Coil Processing

3. Basic Industries

a. Pharmaceuticals

� Antibiotics


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� Penicillin

� Streptomycin

� Tetracycline

� Soft gelatin capsules

� Medical Devices

� Prosthetics

� Diagnosis

� Other pharmaceuticals, herbal medicines

b. Textile and Textile Products

� Yarns and fabrics

� Hand-woven textiles

� Specialty fabrics

� Tire cord fabrics

� Ramie (degumed, staple fiber, combed tops, noels and slivers)

� Fish nets

� Fabrics made of indigenous raw materials

� Silk reeling

c. Fertilizers (organic and inorganic)

� Solid Waste Materials

d. Mining (Exploration and Development of Mineral Resources)

� Mining and Quarrying of Metallic and Non-Metallic Minerals(including small scale as defined under P.D. 1899, but to exclude riverbeds in operations)

� Processing of minerals (such as beneficiation and other metallurgicalmethods)

e. Cement - at least 1.0 million MTPY Capacity (clinker based)

4. Consumer Manufactures

a. Rubber Products such as:

� High pressure and hydraulic rubber hoses

� Rubber bolts

� Industrial rubber rollers

� Rubber tires

b. Leather Products


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5. Infrastructure and Services

a. Public Utilities (with developmental route of the five provinces and onecity of the ARMM and other adjacent Cities and Provinces)

� Common carriers (land, air and water transport facilities)

� Electric transmission/distribution

� Water supply facilities/waterways and sewerage systems

� Buses/cargo trucks

� Other specialized mass transport systems

� Power generation like Hydro Power, and Geothermal

b. Telecommunications with International Gateways

c. Tourism

� Tourism estates - subject to guidelines developed jointly by the BOI - ARMM and Department of Tourism (DOT)

� Tourist accommodation facilities

� Hotels

� Resorts

� Other tourist accommodation facilities such as appartels, pensionhouses, tourist inns, and others

� Tourist transport facilities

� Air

� Water

� Tourist buses and taxi/van

d. Industrial Service Facilities

This will cover the following activities:

� Common centers:

� Testing and quality control laboratories

� Training and demonstration centers

� Tool shops and similar facilities

� Metal working

� Electroplating

� Foundry

� Forging

� Machining

� Heat treatment

� Brass making


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� Furniture

� Kiln drying

� Treatment and processing facilities

� Ceramics

� Kiln

� Glazing

� Food Processing

� Bottling and Canning of Water

� Industrial Salt

� Vapor heat treatment

� Slaughterhouse/abattoir

� Automotive battery plate manufacturing

� Development of Retirement Villages

� Shall include health and medical facilities including amenities requiredby the Philippine Leisure and Retirement Authority (PLRA).

� Subject to the guidelines to be approved by BOI-ARMM inconsultation with the PRA, the Department of Health (DOH), theRegional Planning and Development Office (RPDO) and otherconcerned agencies.

e. Petrochemical Complex

f. Industrial Gases (such as oxygen and nitrogen)

g. Miscellaneous Chemical Products

� Biotechnological/biosynthetic chemicals

� Essential oils

� Fine chemicals

6. Engineering Industries

a. Engineering Products

� Motor vehicle parts and components

� Automobile parts and assembly

� Modern offset printing

b. Electronics and Telecommunication Products

7. ARMM Priority and Tourism Areas

Listed below are potential tourist destinations, which need further exploration,and evaluation for intensified promotions, development and marketing.


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NUCLEUS GATEWAY SATELLITE

DESTINATION

Area I - Sulu Jolo Sulu ProvinceArea II - Tawi-Tawi Bongao Tawi-Tawi ProvinceArea III - Lanao del Sur Marawi City Lanao del Sur ProvinceArea IV - Maguindanao Cotabato City Maguindanao ProvinceArea V - Basilan Isabela Basilan Province


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Appendix BTHE SIXTH REGULAR FOREIGN INVESTMENTNEGATIVE LIST

Only the investment areas or activities listed shall be reserved to Philippinenationals, and hereafter shall be referred to as the Sixth Regular ForeignInvestment Negative List (�List�).The extent of foreign equity participation inthese areas shall be limited to the percentages indicated in the List.

LIST A: FOREIGN OWNERSHIP IS LIMITED BY MANDATE OFTHE CONSTITUTION AND SPECIFIC LAWS

No Foreign Equity1. Mass media except recording (Art. XVI, Sec. 11 of the Constitution;

Presidential Memorandum dated 04 May 1994)

2. Practice of all professions (limited to Filipino citizens save in casesprescribed by law):

a. Engineering

i. Aeronautical engineering

ii. Agricultural engineering

iii. Chemical engineering

iv. Civil engineering

v. Electrical engineering

vi. Electronics and communication engineering

vii. Geodetic engineering

viii. Mechanical engineering

ix. Metallurgical engineering

x. Mining engineering

xi. Naval architecture and marine engineering

xii. Sanitary engineering

b. Medicine and allied professions

i. Medicine

ii. Medical technology

iii. Dentistry

iv. Midwifery

v. Nursing

vi. Nutrition and dietetics

vii. Optometry


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viii. Pharmacy

ix. Physical and occupational therapy

x. Radiologic and x-ray technology

xi. Veterinary medicine

c. Accountancy

d. Architecture

e. Criminology

f. Chemistry

g. Customs brokerage

h. Environmental planning

i. Forestry

j. Geology

k. Interior design

l. Landscape architecture

m. Law

n. Librarianship

o. Marine deck officers

p. Marine engine officers

q. Master plumbing

r. Sugar technology

s. Social work

t. Teaching

u. Agriculture

v. Fisheries

3. Retail trade enterprises with paid-up capital of less than US$2,500,000 (Sec. 5 of RA 8762).

However, full foreign participation is allowed for retail trade enterprises:(a) with paid-up capital of US$2,500,000 or more provided that investmentsfor establishing a store is not less than US$830,000; or (b) specializing inhigh end or luxury products, provided that the paid-up capital per store isnot less than US$250,000 (Sec. 5 of RA 8762).

4. Cooperatives (Ch. III, Art. 26 of RA 6938)

5. Private security agencies (Sec. 4 of RA 5487)

6. Small-scale mining (Sec. 3 of RA 7076)


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7. Utilization of marine resources in archipelagic waters, territorial sea, andexclusive economic zone as well as small-scale utilization of naturalresources in rivers, lakes, bays, and lagoons (Art. XII, Sec. 2 of theConstitution)

8. Ownership, operation and management of cockpits (Sec. 5 of PD 449)

9. Manufacture, repair, stockpiling and/or distribution of nuclear weapons(Art. II, Sec. 8 of the Constitution)

10. Manufacture, repair, stockpiling and/or distribution of biological, chemicaland radiological weapons and anti-personnel mines (various treaties to whichthe Philippines is a signatory and conventions supported by the Philippines)

11. Manufacture of firecrackers and other pyrotechnic devices (Sec. 5 of RA 7183)

Up to Twenty-Percent (20%) Foreign Equity

12. Private radio communications network (RA 3846)

Up to Twenty-Five Percent (25%) Foreign Equity

13. Private recruitment, whether for local or overseas employment (Art. 27 ofPD 442)

14. Contracts for the construction and repair of locally-funded public works(Sec. 1 of Commonwealth Act No. 541, Letter of Instruction No. 630)except:

a. Infrastructure/development projects covered in RA 7718; and

b. Projects which are foreign funded or assisted and required to undergointernational competitive bidding (Sec. 2(a) of RA 7718)

15. Contracts for the construction of defense-related structures (Sec. 1 of CA 541)

Up to Thirty Percent (30%) Foreign Equity

16. Advertising (Art. XVI, Sec. 11 of the Constitution)

Up to Forty Percent (40%) Foreign Equity

17. Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution)

Full foreign participation is allowed through financial or technical assistanceagreement with the President (Art. XII, Sec. 2 of the Constitution)

18. Ownership of private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5,Sec. 22 of CA 141; Sec. 4 of RA 9182)

19. Operation and management of public utilities (Art. XII, Sec. 11 of theConstitution; Sec. 16 of CA 146)

20. Ownership/establishment and administration of educational institutions(Art. XIV, Sec. 4 of the Constitution)

21. Culture, production, milling, processing, trading excepting retailing, of riceand corn and acquiring, by barter, purchase or otherwise, rice and corn andthe by-products thereof5 (Sec. 5 of PD 194; Sec. 15 of RA 8762)5


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Full foreign participation is allowed provided that within the 30-year periodfrom start of operation, the foreign investor shall divest a minimum of 60percent of their equity to Filipino citizens (Sec. 5 of PD 194; NFA CouncilResolution No. 193 s. 1998)

22. Contracts for the supply of materials, goods and commodities togovernment-owned or controlled corporation, company, agency ormunicipal corporation (Sec. 1 of RA 5183)

23. Project proponent and facility operator of a BOT Project requiring a public utilities franchise (Art. XII, Sec. 11 of the Constitution;Sec. 2(a) of RA 7718)

24. Operation of deep sea commercial fishing vessels (Sec. 27 of RA 8550)

25. Adjustment companies (Sec. 323 of PD 612 as amended by PD 1814)

26. Ownership of condominium units where the common areas in thecondominium project are co-owned by the owners of the separate units orowned by a corporation (Sec. 5 of RA 4726)

Up to Sixty Percent (60%) Foreign Equity

27. Financing companies regulated by the Securities and Exchange Commission(SEC) (Sec. 6 of RA 5980 as amended by RA 8556)6

No foreign national may be allowed to own stock in financing companies orinvestment houses unless the country of which he is a national accords thesame reciprocal rights to Filipinos (Sec. 6 of RA 5980 as amended by RA8556; PD 129 as amended by RA 8366)

28. Investment houses regulated by the SEC (Sec. 5 of PD 129 as amended by RA 8366)6

LIST B: FOREIGN OWNERSHIP IS LIMITED FOR REASONS OFSECURITY, DEFENSE, RISK TO HEALTH AND MORALS ANDPROTECTION OF SMALL- AND MEDIUM-SCALE ENTERPRISES

Up to Forty Percent (40 %) Foreign Equity

1. Manufacture, repair, storage, and/or distribution of products and/oringredients requiring Philippine National Police (PNP) clearance:

a. Firearms (handguns to shotguns), parts of firearms and ammunitiontherefor, instruments or implements used or intended to be used in themanufacture of firearms

b. Gunpowder

c. Dynamite

d. Blasting supplies

e. Ingredients used in making explosives:

i. Chlorates of potassium and sodium

ii. Nitrates of ammonium, potassium, sodium barium, copper (11),lead (11), calcium and cuprite

iii. Nitric acid


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iv. Nitrocellulose

v. Perchlorates of ammonium, potassium and sodium

vi. Dinitrocellulose

vii. Glycerol

viii. Amorphous phosphorus

ix. Hydrogen peroxide

x. Strontium nitrate powder

xi. Toluene

f. Telescopic sights, sniper scope and other similar devices

However, the manufacture or repair of these items may be authorized bythe Chief of the PNP to non-Philippine nationals; Provided that asubstantial percentage of output, as determined by the said agency, isexported. Provided further that the extent of foreign equity ownershipallowed shall be specified in the said authority/clearance.

2. Manufacture, repair, storage and/or distribution of products requiringDepartment of National Defense (DND) clearance:

a. Guns and ammunition for warfare

b. Military ordnance and parts thereof (e.g., torpedoes, depth charges,bombs, grenades, missiles)

c. Gunnery, bombing and fire control systems and components

d. Guided missiles/missile systems and components

e. Tactical aircraft (fixed and rotary-winged), parts and components thereof

f. Space vehicles and component systems

g. Combat vessels (air, land and naval) and auxiliaries

h. Weapons repair and maintenance equipment

i. Military communications equipment

j. Night vision equipment

k. Stimulated coherent radiation devices, components and accessories

l. Armament training devices

m. Other as may be determined by the Secretary of the DND

However, the manufacture or repair of these items may be authorized bythe Secretary of National Defense to non-Philippine nationals; Providedthat a substantial percentage of output, as determined by the saidagency, is exported. Provided further that the extent of foreign equityownership allowed shall be specified in the said authority/clearance (RA 7042 as amended by RA 8179).


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3. Manufacture and distribution of dangerous drugs (RA 7042 as amended by RA 8179)

4. Sauna and steam bathhouses, massage clinics and other like activitiesregulated by law because of risks posed to public health and morals (RA 7042 as amended by RA 8179)

5. All forms of gambling, e.g. race track operation (RA 7042 as amended by RA. 8179)

6. Domestic market enterprises with paid-in equity capital of less than theequivalent of US$200,000 (RA 7042 as amended by RA 8179)

7. Domestic market enterprises which involve advanced technology or employat least fifty (50) direct employees with paid-in-equity capital of less than theequivalent of US$100,000 (RA 7042 as amended by RA 8179)

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©2005 Quisumbing TorresAll rights reserved.

Documents

Guide to Mergers and Acquisitions in Philippines