BusinessHow to Manage Your Business Merger in the Philippines

A business merger has to be properly planned and followed, along with strict legal requirements and extensive financial analysis, to ensure long-term profit. Corporate leaders looking to merge businesses in the Philippines have to comply with many legal requirements from the Revised Corporation Code, tax laws, and competition law from the Philippine Competition Commission. This guide outlines the different stages you’ll need to consider when getting your organization ready to merge.

Planning Strategy

Prior to starting any deal, you need to identify how it will help your long-term business objectives, increase your market share, and improve efficiency. A successful business merger requires full clarity between both businesses on the expected financial outcomes, brand, leadership and governance. Having a solid reason for merging two balance sheets, distribution networks, supply chains, and leadership teams will create significantly more value for your business.

Having a clear plan for the different stages of your merger will ensure that all key deliverables get delivered on time. You should plan the key milestones for drafting non-disclosure agreements, letters of intent, due diligence, board resolutions, special shareholders’ meetings, and submitting to the regulatory authorities. This will ensure all leadership teams are fully aligned and that your business keeps moving forward with the correct amount of resources being put in place to complete all stages.

• Identify how the merger will improve your efficiency. This could be through financial efficiencies, cost savings and improvements within the business from combining your assets, premises, infrastructure, systems, software and nationwide reach.

• Work out how much your assets could be worth. Use financial criteria to work out how much you would expect to get for your assets. Consider discounted cash flow, adjusted net asset value and comparing your assets with others in the same sector.

• Decide whether you want to do a statutory merger or statutory consolidation. A statutory merger means only one company will survive, whereas a statutory consolidation means a new company will be created.

• Ensure your executive teams, stakeholders, and major shareholders are fully aligned and have the same vision for the business going forward.

• Carefully planning your merger will help to reduce any administration and friction between the companies and will leave you with a clear plan going forward.

Conducting Due Diligence

Conducting due diligence on all aspects of your business is an essential part of any successful merger. By carrying out extensive due diligence, you can uncover any hidden liabilities within the business and ensure that your assets are valued correctly. This includes analyzing the quality of earnings, working capital requirements, general ledger, debtors book, and debt covenants to ensure your balance sheet is being represented correctly.

Legal and tax due diligence will ensure that your shareholding is verified, board approval is valid, there aren’t any outstanding lawsuits, tax investigations, land title issues, and that you’re compliant with municipal taxes. Reviewing minute books, previous filings, share register, and permits will ensure the target company is clean. Finding any potential issues will give your negotiation team the upper hand when negotiating the price of the purchase, indemnities and escrow.

• Reviewing Full Financial Statements: Look through previous balance sheets, tax returns, debts, cash flow, forecasts, and audited statements to ensure everything is fully in order.
• Reviewing Legal Issues and Contracts: Review any contracts, outstanding litigation, IP registrations, licenses, property leases, and land titles to ensure there aren’t any unexpected liabilities.
• Reviewing Legal Compliance: Ensure that they are fully compliant with all national regulations in their sector, municipal permits, environmental compliance certificates, sanitation permits, and company registration.
• Reviewing Operational Systems: Analyze their technology, supply chain, long-term contracts, stock control, and premises to see if there are any issues that may cause problems when merging.

By carrying out due diligence, you will reduce any financial risk, unexpected legal issues, protect your shareholders, and ensure you have a good base to negotiate the value of the deal, price, and structure.

Meeting Legal Requirements

Mergers and acquisitions in the Philippines have strict requirements that must be met by various government bodies. You must ensure you meet all the deadlines and requirements that are given by the regulatory bodies. The Plan of Merger is a legal document that must be created under Section 75 of the Revised Corporation Code of the Philippines. This should include the share exchange ratio, governance, asset transfers, and amending the articles of incorporation for the surviving company.

Sending these documents and audited statements by a Certified Public Accountant will allow the Securities and Exchange Commission (SEC) to review your merger. You should also consider the antitrust issues. If the merger meets or exceeds the compulsory notification thresholds, then it needs to be notified to the Philippine Competition Commission (PCC). This will go through Phase 1 and potentially Phase 2.

• Creating the Plan of Merger: Create a detailed document that covers the details of your merger, including the share exchange ratio, governance, board, and amending the articles of incorporation.
• Obtain Shareholder Approval: Secure approval from your board of directors and shareholders (at least 2/3 of the outstanding capital stock in each company).
• Submit to the SEC: Submit the necessary documents, audited statements, articles of merger, and board resolutions to the Securities and Exchange Commission.
• Competition Law: If the merger meets or exceeds the compulsory notification thresholds, then you must notify the Philippine Competition Commission.

Failing to obtain the correct approvals can cause delays, large penalties, disruption to your business, and could make the merger invalid.

Tax Planning

When merging and consolidating in the Philippines, you want to ensure you are reducing your tax liability whilst also complying with the rules set by the Bureau of Internal Revenue (BIR). By planning your finances, you can ensure you keep your working capital, keep your business liquid, and protect your shareholder value. Under section 40(C)(2) of the National Internal Revenue Code (as amended), no gain or loss shall be recognized on the exchange of shares or property pursuant to a plan of merger or consolidation.

By obtaining a ruling from the BIR or a tax verification certificate, you can ensure your assets and shares aren’t liable to capital gains tax, corporation tax, or VAT. However, you do need to be aware of any other taxes that may be applicable to your deal. Documentary stamp tax (DST) will apply to your share issue, property transfer, and financial instruments. You should also calculate local transfer tax and deed registry fees to ensure you have an accurate budget for your closing and your assets can be transferred smoothly.

• Obtain Tax-Free Exchange Rulings from the BIR: Plan your share swap and asset transfer under section 40(C)(2) of the Tax Code so you can legally avoid paying capital gains tax, income tax, and VAT.
• Consider any tax implications: Consider the tax implications of transferring real property, revaluing capital assets, calculating goodwill, and any potential DST on share transfers.
• Clear any outstanding tax liabilities: Ensure you clear any outstanding tax liabilities, tax investigations and BIR assessment notices.
• Standardize your accounting: Ensure your financial reporting, chart of accounts, banking, and accounting processes are standardized.

By planning your tax, you can avoid any unexpected liabilities, keep your business liquid, and ensure your new merged business is financially stable and compliant from day 1.

Managing the Process

Merging two separate businesses will require strong leadership, alignment, clear management, and synchronized processes. Having a plan in place will ensure your business can run smoothly without causing any disruption. Modern businesses now rely heavily on merging their IT systems, ERP, centralized databases and cybersecurity systems to ensure accurate reporting.

You can also review your suppliers and vendors to help you consolidate your buying power, remove any duplicate vendors, standardize your contracts and get better deals. Ensuring your management processes, governance, and reporting are aligned will ensure your decision-making is efficient. Being transparent with your key clients, partners, banks and industry will reassure the market that your business is stable.

• Align your processes: Ensure your processes, software, procurement, logistics and IT are aligned.
• Consolidate your vendors and suppliers: Renegotiate your supplier, service provider, software vendor and logistics contracts to take advantage of your increased buying power.
• Align your governance: Ensure your board, management committees, reporting, compliance and operations are aligned.
• Be transparent with your stakeholders and partners: Ensure your investors, key clients, banks and partners are kept informed.

Having an organized plan in place will ensure you can quickly take advantage of any synergies, protect your revenue, reduce costs, and keep your business stable.

Using Professional Advisors

There are many complex legal, tax, statutory and regulatory issues when merging businesses. Getting expert advice will help you overcome any legal issues, create the correct statutory documents, complete complex financial audits and deal with the government bodies. You will need to submit documents to several different government bodies, including local offices, the land registry, IP, and your main regulator (SEC/BIR). Having a structured and expert process will ensure you don’t miss anything.

Using professional advisors will ensure your deal is looked at objectively, documents are created accurately, due diligence is carried out thoroughly, and you are fully compliant with all regulations. Due to the complexity involved, having an expert corporate advisory team will ensure your deal runs smoothly. BusinessRegistrationPhilippines.com is a trusted expert in providing full legal and consultancy services to help your business through all stages of the reorganization.

• Prepare SEC Documents: Prepare statutory documents, board resolutions, shareholder notifications, articles of merger, and legal certificates. These must be completed to the exact standards required under corporate law.
• Obtain BIR Confirmations: Apply for tax exemptions, prepare share valuations, complete DST returns, and manage your BIR requirements. This requires expert tax advice.
• Deal with Government Bodies: Deal with any queries, compliance, reviews, and clearance from government bodies. This requires expert relationships and experience.
• Use an expert corporate advisory team: Using an expert corporate advisory team will reduce any risk and ensure your leadership team is not in breach of any processes. It will also speed up your time to approval.

Final Thoughts

To successfully complete a business merger in the Philippines, you must plan thoroughly, carry out extensive financial audits, and ensure all departments are aligned. By having a structured approach to your due diligence, tax planning, statutory requirements, and post-merger, you will reduce any risk and will position your new merged business for long-term growth. As regulations continue to change in the Philippines, having expert corporate legal and financial professionals will ensure your merger runs smoothly, and your business will gain maximum value.

Is Assistance Available?

BusinessRegistrationPhilippines.com can provide you with full legal, financial, and administrative support to help your business through the merger process. Our expert corporate advisors will ensure you are compliant with all regulations, prepare your SEC documents, plan your taxes, and carry out due diligence. Get in touch today to book your initial consultation.

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