Law : Corporate Take-over

I – Nature and Definitions

  

Assumption of control of another (usually smaller) firm through purchase of 51% or more of its voting shares or stock. (www.businessdictionary.com)

A corporate takeover is when a corporation takes ownership of another company without negotiation but rather by just trying to buy up controlling interests. Through takeovers, corporations can consolidate their market share and reduce competition. (www.ehow.com)

The acquisition of a corporation through the purchase or exchange of stock. (www.freedictionary.com)

A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the acquiring company will make an offer for the outstanding shares. (www.investopedia.com)

There is no tangible difference between an acquisition and a takeover; both words can be used interchangeably - the only difference is that each word carries a slightly different connotation. Typically, takeover is used to reference a hostile takeover where the company being acquired is resisting. In contrast, acquisition is frequently used to describe more friendly acquisitions, or used in conjunction with the word merger, where both companies are willing to join together.

An acquisition or takeover occurs when one company purchases another. Companies perform acquisitions for various reasons: they may be seeking to achieve economies of scale, greater market share, increased synergy, cost reductions or for many other reasons. The acquiring company would usually proceed with the corporate action by offering to purchase the shares from the shareholders of the target company. Often, a cash offer is made but sometimes the acquiring company may offer to trade its own shares in exchange for the target company's shares. Also, the difference between mergers and takeovers/acquisitions are that mergers involve two companies of roughly equal size that have decided to combine together to take advantage of expected advantages of a being larger company.

Kinds of take-over:

1.      Friendly Takeover – one where the target firm’s management and board of directors are in favor of the takeover. There are different ways to achieve friendly takeovers in the Philippines. These include (a) merger), (b) consolidation, (c) sale of substantially all corporate assets and purchase thereof by another corporation, (d) equity acquisition or the acquisition of all or substantially all of the stock of one corporation from its stockholders in exchange for the stock of the acquiring corporation, and (e) acquisition of a business enterprise.

2.      Hostile Takeover – the taking control of a corporation against the will of its management and/or directors. One of the ways to effect a hostile takeover is through making a tender offer or takeover bid.

II- Philippine Laws and Regulations with regards to Corporate Take-Over

1. Acquisition of a substantial shareholdings – Section 18 of the Philippine Securities Regulation Code (SRC) provides that any person who acquires directly or indirectly the beneficial ownership of more than 5% of any class of equity of a public company is required to disclose the acquisition to SEC and/or Philippine Stock Exchange. Subsection 18.1 (b) requires information as to whether or not “the purpose of the purchases or prospective purchases is to acquire control of the issuer of the securities. This disclosure shall be made within 5 business days after the date of acquisition of direct or indirect beneficial ownership. Thereafter, Section 18.2 requires the purchaser to file regular reports in prescribed forms with the issuer, the SEC and/or the PSE indicating any change in the beneficial ownership of the equity security.

2. Tender offers - Section 19 of the SRC provides rules on making a tender offer. In a Memorandum Circular issued in 2013, SEC provided guidelines on the conduct of valuation and issuance of a fairness opinion on mandatory tender offers and required that the acquirer to have the offered price supported by a fairness opinion provided by an independent financial advisor or equivalent third party.

3. Business Judgment Rule – questions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and that the courts are without authority to substitute its judgment for the judgment of the board of directors; the board is the business manager of the corporation, and as long as it acts in good faith, its orders are not reviewable by the courts. This principle finds support in Sec 23 of the Corporation Code of the Philippines (CCP).

III - Recent corporate takeover in the Philippines

Takeovers are not common in the Philippines because most company shares are not publicly listed and controlling interest tends to remain with a small group of parties. Cross-ownership and interlocking directorates among listed companies also lessen the likelihood of takeovers.

However, in recent years, here are some takeovers that transpired in the Philippines:

1. PLDT takeover of Digitel – In 2011, PLDT acquired 51.55% interest in Digitel. This was done by PLDT’s acquisition of Digital Telecommunications Philippines, Inc. (Digitel) from JG Summit amounting to Php74.1 billion in exchange of new PLDT assets worth 2,500 per share.

2. San Miguel Corporation takeover Philippine Airlines, Inc. - On 2012, San Miguel Corporation bought a 49-percent stake in Philippine Airlines for $500 million. This is part of SMB’s strategy to move away from its beer and food businesses and to help modernize PAL's aging fleet and rejuvenate Asia's oldest commercial airline which has lost its status as the nation's top carrier in recent years.  

3. Japanese trading giant Itochu Corporation takeover of Dole Philippines Inc. – In 2012,  Dole Philippines Inc. , chaired by David Murdock, announced that it has signed a definitive agreement with Itochu for the sale of Dole’s worldwide packaged foods and Asia fresh produce businesses for $1.685 billion in cash. Cash proceeds from the transaction will be used by Dole for debt reduction, to pay deal-related expenses, and for restructuring and other corporate purpose. 

4. PLDT takeover of Business World – In 2013, Business World increased its authorized capital stock and PLDT purchased shares to increase ownership from 30% to more than 50%.

5. Banco de Oro takeover of Equitable PCI Bank - The takeover was done thru Banco de Oro-Equitable PCI Bank merger in 2004. The merger was part of a long-term goal of Banco de Oro to become one of the largest names in the Philippine banking industry. It was finalized on 2006 with the formation of Banco de Oro Unibank, Inc.

IV - Consequences of takeover 

While advantages and disadvantages of a takeover differ from case to case, there are a few reoccurring ones: 

Advantages:

1. Increase in sales/revenues
2. Venture into new businesses and markets
3. Profitability of target company
4. Increase market share
5. Decreased competition (from the perspective of the acquiring company)
6. Reduction of overcapacity in the industry
7. Enlarge brand portfolio
8. Increase in economies of scale
9. Increased efficiency as a result of corporate synergies/redundancies (jobs with overlapping responsibilities can be eliminated, decreasing operating costs)

Disadvantages:

1. Goodwill, often paid in excess for the acquisition
2. Culture clashes within the two companies causes employees to be less-efficient or despondent
3. Reduced competition and choice for consumers in oligopoly markets. (Bad for consumers, although this is good for the companies involved in the takeover)
4. Likelihood of job cuts
5. Cultural integration/conflict with new management
6. Hidden liabilities of target entity
7. The monetary cost to the company
8. Lack of motivation for employees in the company being bought.

Finally, as a result of the takeover, the acquiring corporation will assume control over the acquired corporation which is usually through acquiring majority of its voting shares. It then follows that the majority of the board of directors shall be elected by the acquiring corporation.