Mergers & Consolidation
The law allows the re-organization of two or more corporations to either merge into a single corporation which shall be one of the constituent corporations, or consolidate into a single new corporation, which shall be the consolidated corporation. Title IX of the Revised Corporation Code covers the rules on mergers and consolidation in the Philippines.
1. What is a Merger/Consolidation?
A Merger is defined as the re-organization of two or more corporations that results in their consolidating into a single corporation, which is one of the constituent corporations, one disappearing or dissolving and the other surviving.
On the other hand, a Consolidation is the union of two or more existing corporations to form a new corporation called the consolidated corporation.
2. What are the requirements of the SEC for the completion of a merger or consolidation?
The Corporation Code provides the following steps for merger or consolidation:
(1) The board of each corporation draws up a plan of merger or consolidation. Such plan must include any amendment, if necessary, to the articles of incorporation of the surviving corporation, or in case of consolidation, all the statements required in the articles of incorporation of a corporation.
(2) Submission of plan to stockholders or members of each corporation for approval. A meeting must be called and at least two (2) weeks’ notice must be sent to all stockholders or members, personally or by registered mail. A summary of the plan must be attached to the notice. The vote of two-thirds of the members or of stockholders representing two thirds of the outstanding capital stock will be needed. Appraisal rights, when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of merger or consolidation, by the corporate officers of each constituent corporation. These take the place of the articles of incorporation of the consolidated corporation, or amend the articles of incorporation of the surviving corporation.
(4) Submission of said articles of merger or consolidation to the SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.
3. What are the effects of a merger or consolidation?
Section 79 of the Revised Corporation Code, provides for the effects of a merger or consolidation, as follows:
(1) The constituent corporations shall become a single corporation which, in case of merger, shall be the surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated corporation designated in the plan of consolidation;
(2) The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated corporation;
(3) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities, and powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;
(4) The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and franchises of each constituent corporation; and all real or personal property, all receivables due on whatever account, including subscriptions to shares and other choses in action, and every other interest of, belonging to, or due to each constituent corporation, shall be deemed transferred to and vested in such surviving or consolidated corporation without further act or deed; and
(5) The surviving or consolidated corporation shall be responsible for all the liabilities and obligations of each constituent corporation as though such surviving or consolidated corporation had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any constituent corporation may be prosecuted by or against the surviving or consolidated corporation. The rights of creditors or liens upon the property of such constituent corporations shall not be impaired by the merger or consolidation.
4. When is the effectivity of the merger/ consolidation?
The merger/consolidation takes effect upon the issuance of the SEC of a certificate approving the plan of merger/ consolidation.
5. What are the tax implications of a merger/consolidation?
A. On “Tax- Free” Exchanges
As a general rule, the gain or loss on the sale or exchange of property shall be recognized and will be taxable. The rule provides for exceptions such as the “tax-free” exchanges which refer to those instances enumerated in Section 40(C)(2) of the National Internal Revenue Code (NIRC) of 1997 that are not subject to Income Tax, Capital Gains Tax, Documentary Stamp Tax and/or Value-added Tax, as the case may be.
In general, there are two kinds of “tax-free” exchange: (1) transfer to a controlled corporation; and, (2) merger or consolidation.
In the first instance, no gain or loss shall be recognized if property is transferred to a corporation by a person in exchange for stock or unit of participation in such corporation of which as a result of such exchange said person, alone or together with others, not exceeding four persons, gains or maintains control of said corporation.
In the second instance, no gain or loss shall be recognized if in pursuance of a plan of merger or consolidation — (a) a corporation, which is a party to a merger or consolidation, exchanges property solely for stock in a corporation, which is a party to the merger or consolidation; or, (b) a shareholder exchanges stock in a corporation, which is a party to the merger or consolidation, solely for the stock of another corporation also a party to the merger or consolidation; or, (c) a security holder of a corporation, which is a party to the merger or consolidation, exchanges his securities in such corporation, solely for stock or securities in another corporation, a party to the merger or consolidation.
A subsequent sale or disposition of the shares of stock will be taxable based on the historical or original cost or “Substituted basis” of the shares. Thus, to that extent, the said “tax-free” exchange, is not really tax-free, but merely a deferral. In determining the gains or losses in subsequent transfers, the BIR issued guidelines under Revenue Regulation No. 18-2001 provides that the “Substituted Basis” or the original or historical cost of the properties or shares are considered in determining the taxable gains or losses in later transfers.
With the above requirements, the taxpayer must prove in a very clear manner that it is entitled to such exemption, and must obtain a certification or ruling signed by the Commissioner of Internal Revenue on the availment of “tax-free” exchange. The rules provide for penalties in case of non-compliance with the guidelines.
B. Common Taxes imposed on mergers & consolidations not covered under the “tax- free” exchanges
Capital Gains Tax on the purchase of shares
The shares of a target Philippine company may be acquired through a direct purchase. Gains from the sale are considered Philippine-source income and are thus taxable in the Philippines regardless of the place of sale. A Capital gains tax (CGT) of 15% of the gain is imposed on both domestic and foreign sellers.
Value added tax
In asset acquisitions, a 12% Value Added Tax (VAT) is imposed on the gross selling price of the assets purchased in the ordinary course of business or of assets originally intended for use in the ordinary course of business.
Documentary Stamp Tax
In “tax-free” exchanges, no DST is due on the deed transferring the property. However, the shares of stock issued in exchange for the property is subject to DST if it is for the purpose of an original issuance of shares.
6. Are there any Notification Thresholds imposed by the Government for certain Mergers?
Yes. On 11 February 2020, the Philippine Competition Commission (“PCC”) issued its Resolution No. 02-2020 which adjusted the compulsory notification of mergers & acquisitions (“M&As”) pursuant to Memorandum Circular No. 18-001.
In the said resolution, the PCC adjusted the M&As’ notification thresholds, effective on 1 March 2020, as follows:
A. When the Size of Party exceeds Six Billion Pesos (Php 6,000,000,000.00)
The adjusted rate shall also apply to the joint venture transactions under Rule 4, Section 3(b) of the IRR.
Based on the Guidelines on the Computation of Merger Notification Thresholds (the “Guidelines”), issued by the PCC, the Size of Party pertains to the computation of the aggregate value of the assets in the Philippines and revenues from sales in, into, or from, the Philippines of the filing Ultimate Parent Entity (“UPE”), including all entities that it controls, directly or indirectly.
On the other hand, the Size of Transaction pertains to the computation of the value of the assets being acquired or/and gross revenues generated by the assets being acquired, or of the acquired entity and entities it controls, depending on the type of transaction provided under Rule 4, Section 3(b) and (d), as amended. A copy of the Guidelines may be accessed here – https://phcc.gov.ph/wp-content/uploads/2018/05/Guidelines-on-the-Computation-of-Merger-Notification-Thresholds.pdf