What were the most important legal developments in the last 12 months and how might they affect businesses?
One of the important legal developments in the last 12 months was the decision of the Supreme Court in the case of Roy vs Herbosa, et al. This decision confirmed the validity of the two-tier test imposed by the Philippine SEC in determining compliance with the Filipino ownership requirement in nationalised Philippine companies. Under the two-tier test, the Filipino ownership requirement should be based on:
a) the total number of outstanding shares of stock entitled to vote in the election of directors; and,
b) the total number of outstanding shares of stock, whether or not entitled to vote in the election of directors.
The Supreme Court denied the petition of petitioner Roy that there should be a third test – the so-called – 'each class' or 'economic benefits' test. This test would require that a 60 to 40 Filipino-foreign ownership requirement would be applied to each class of shares in cases where a partly nationalised company had more than one class of shares, thereby ensuring that at least 60% of the economic benefits or dividends from the company would go to the Filipino stockholders. The Supreme Court ruled that the two-tier test imposed by the SEC was sufficient to comply with the Filipino ownership requirements for nationalised companies.
The Supreme Court decision in effect will continue to allow capital and corporate ownership structures in certain instances. These would include situations where there are different classes of shares with different par values, and layered corporate ownership structures, where the foreign stockholders will be entitled to dividends corresponding to their capital contributions – which may be more than 40% in terms of amount – as long as the two-tier test is complied with and control of the corporation thereby remains with the Filipino stockholders.What are the main restrictions on foreign investment?
The Foreign Investments Act allows foreign nationals to own up to 100% of an enterprise except in areas identified in the Foreign Investments Negative List (FINL). The FINL is divided into Lists A and B.
List A covers the areas of activity where foreign equity participation is prohibited or restricted by the constitution or specific laws. List B covers areas of activity where foreign equity participation is restricted due to concerns regarding national defence or law enforcement, public health and public morals, and for the protection of small and medium-scale industries. There are no ownership restrictions on export industries.
The FINL is issued through an executive order signed by the president, the last being the 10th Negative List which was issued in May 2015. It is updated every two years and the Department of Finance is in the process of reviewing the existing negative list with a view to lifting more administrative restrictions.
What key structuring and other considerations should be highlighted to potential investors/businesses looking to enter this market?
Investors looking to enter the Philippine market should take into account whether or not there are foreign equity restrictions on their proposed activity in the Philippines.
If the proposed activity is partially nationalised, the foreign investor should accept that these restrictions could prohibit them from having management control of the business enterprise. Thus, it is essential that these investors choose their Filipino partner/s carefully and ensure that their business interests and values are aligned.
Foreign investors should likewise look into the appropriate structure to upstream dividends, particularly in those instances where the investors will require financing to make their investments in the Philippines. Tax and foreign currency regulations will have to be carefully studied.
Is there a competition law in place and how strictly does it control M&A or other activity?
Republic Act 10667, also known as the Philippine Competition Act (PCA), is the law which regulates anti-competitive transactions in the Philippines. The PCA prohibits and penalises all forms of anti-competitive agreements, abuses of dominant position and anti-competitive mergers and acquisitions. The PCA applies to any person or entity engaged in any trade, industry or commerce in the Philippines. It also applies to international trade that has direct, substantial, and reasonably foreseeable effects on trade, industry, or commerce in the Philippines, including any effects that result from acts carried out outside the Philippines.
The PCA requires parties to an M&A transaction with a transaction value exceeding 1 billion Philippine Pesos ($19.7 million) to notify the Philippine Competition Commission of their proposed M&A transaction. The parties in such a case are prohibited from consummating their M&A transaction before the expiration of the relevant periods provided in the implementing rules of the PCA. Non-compliance with these requirements renders the M&A transaction void and the parties to the M&A transaction will be liable to pay an administrative fine equivalent to between one and five percent of the value of the M&A transaction.