The regulatory framework for capital markets in the Philippines for both the debt and equity sides are principally governed by the Revised Corporation Code (“RCC”), the Securities Regulation Code and its implementing rules and regulations (the “SRC”), and the various rules and regulations issued by the Securities and Exchange Commission (“SEC”). The main regulatory agency for capital markets in the Philippines is the SEC.

In addition, self-regulatory organizations such as: The Philippine Stock Exchange, Inc. (“PSE”) and the Philippine Dealing and Exchange Corporation (“PDEX”) have promulgated regulations governing their respective markets. The PSE has issued, among others, the Revised Listing and Disclosure Rules (“PSE Rules”) for its equity market and the PDEX has its listing and enrolment rules (“PDEX Rules”) for debt issuances.

There are two categories of exemptions when the offer of securities need not be registered with the SEC. One is exempt securities which include (i) securities issued or guaranteed by the Philippine Government or by a foreign country with which the Philippines maintain diplomatic relations; (ii) certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body; (iii) security or its derivatives the sale of which is under the regulation of government agencies (Office of the Insurance Commission, Department of Human Settlements and Urban Development [previously known as the Housing and Land Use Regulatory Board], or the Bureau of Internal Revenue ) and (iv) any security issued by a bank except its own shares of stock.

On the other hand, the SRC lists 12 exempt transactions including judicial sale; distribution of stock dividends; sale for the account of a pledge holder or mortgagee; sale of capital stock of a corporation to its own stockholders exclusively, where no commission or other remuneration is paid or given in connection with such sale; among others. However, the common exemptions used in the Philippine markets are the following:

1. An isolated transaction in which any security is sold, offered for sale, subscription or delivery by the owner thereof, or by his representative for the owner’s account, such sale or offer for sale, subscription or delivery not being made in the course of repeated and successive transactions of a like character by such owner, or on his account by such representative and such owner or representative not being the underwriter of such security
2. Subscriptions for shares of the capital stock of a corporation prior to the incorporation thereof or in pursuance of an increase in its authorized capital stock under the RCC, when no expense is incurred, or no commission, compensation or remuneration is paid or given in connection with the sale or disposition of such securities, and only when the purpose for soliciting, giving or taking of such subscriptions is to comply with the requirements of such law as to the percentage of the capital stock of a corporation which should be subscribed before it can be registered and duly incorporated, or its authorized capital increased;
3. The sale of securities by an issuer to fewer than 20 persons in the Philippines during any 12-month period which is also known as private placement.
4. The sale of securities to any number of qualified buyers.

Finally, the SEC may exempt other transactions if it finds that is not necessary in the public interest or for the protection of the investors such as by reason of the small amount involved or the limited character of the public offering, such as employee stock option plans.

Generally, a confirmation of exemption citing the ground for exemption must first be secured from the SEC before such securities can be issued.

Section 27 of the SRC prohibits an insider to trade, sell or buy a security while in the possession of material non- public information. Hence, liability for insider trading under the SRC requires three elements: (i) the person must be an insider (ii) said insider buys or sells the security, (iii) while said insider is in possession of material non-public information.

An insider is defined as:  (i) the issuer; (ii) a director or officer (or any person performing similar functions) of, or a person controlling the issuer; (iii) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (iv) a government employee, director, or office of an exchange, clearing agency and/or self-regulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (v) a person who learns such information by a communication from any of the foregoing insiders.

Information is deemed material non-public if: (a) It has not been generally disclosed to the public and would likely affect the market price of the security after being disseminated to the public and the lapse of a reasonable time for the market to absorb the information; or (b) would be considered by a reasonable person important under the circumstances in determining his course of action whether to buy, sell or hold a security.

To prevent insider-trading, insiders are prohibited from communicating material non-public information to third persons if the insider has reason to believe that such third person will buy or sell a security of the issuer based on such information. Moreover, the PSE imposes the so-called “Black-out Rule”, whereby a director or principal officer of an issuer is prohibited from dealing in the securities of said issuer during the period within which material non-public information is obtained and up to 2 full trading days after the price sensitive information is disclosed.

The RCC grants a stockholder an “appraisal right” or the right to dissent and demand payment of the market value of shares in the following instances:

1. In case an amendment to the articles of incorporation has the effect of changing or restricting the rights of any stockholder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets;
3. In case of merger or consolidation; and
4. In case of investment of corporate funds for any purpose other than the primary purpose of the corporation.

The dissenting stockholder who voted against the corporate action may, within 30 days from which the vote was taken, make a written demand on the corporation for the payment of the fair value of his shares. Failure to make a written demand within such period shall be deemed a waiver of the appraisal right.

In addition to the appraisal rights, the SRC requires that a mandatory tender offer (“MTO”) be conducted under certain circumstances that will result  in a change of controlling interest in a public company.  This gives minority shareholders an opportunity to exit the company under the same terms and conditions as that of the controlling shareholders. In general, any person or group persons acting concert intending to purchase 35% or more of the outstanding voting shares or such outstanding voting shares that is sufficient to gain control of the board in a public company in one or more transactions within a period of 12 months, shall disclose such intention and contemporaneously make a tender offer for the percentage sought to all holders of such securities within the said period. If the acquisition would result in the ownership of over 50% of the total outstanding equity securities of a public company, then the acquirer is required to tender for all of the remaining outstanding equity securities in the public company.

The procedure and documents needed to be submitted for an MTO are described in the implementing rules and regulations of the SRC.

Coming off a challenging 2023, the outlook for fund raising activities in the Philippines for 2024 is one of cautious optimism. On the equity side, we see some signs of revival as there have been 2 initial public offerings (IPO) and 2  rights offering as of end May. The SEC has also just greenlighted the IPO of another renewable energy company, 1 direct public offer, and we are aware of some companies who intend to file their applications for initial public offering this year.  This is an improvement from the number of public offerings conducted in 2023, but much hinges on the economic sentiment for the remainder of the year.

Meanwhile, on debt issuances, PDEx has had 3 listings thus far, a slight dip from the 7 listings at around the same time last year.

Apart from registering the securities with the SEC, every company seeking to list its shares in the PSE must comply with the PSE Rules which include compliance with the disclosure requirements, minimum capitalization, lock-up, track record, operating history, number of directors, among others.

Listing by way of introduction applies to a listing where no public offering will be undertaken. In such instances,  Companies will still be required to  file a registration statement with the SEC for the outstanding shares listed or to be  listed and traded with  the PSE.  Listing by way of introduction, would likewise apply to shares which are already listed or traded in another exchange or will be simultaneously be listed in another stock exchange or are listed in another trading market.

Companies whose shares are listed in other exchanges must comply with the following:

1. The applicant’s securities must be, or will be listed on a stock exchange which is a member of the World Federation of Stock Exchanges or the Asian and Oceanic Stock Exchanges Federation, or such other exchanges as approved by the PSE;
2. In case the applicant will simultaneously list in another exchange, it shall provide a certification from the foreign stock exchange of its duly received application for a proposed listing, acceptance or provisional acceptance for listing on such exchange(s) as well as the dates of such listing or proposed listing;
3. In case the applicant is already listed in another exchange or several exchanges, it shall submit a certification of compliance with the requirements of such exchange or exchanges as well as with the requirements of the competent authority(ies) or regulatory body(ies) which regulate such company and/or its securities; and
4. Arrangements may be made between the applicant and the PSE with regard to the listing and disclosure requirement of the foreign stock exchange.

Philippine laws are silent about the issuance of weighted voting rights for listed companies. The RCC does recognize cumulative voting (a form of weighted voting) by giving stockholders the right to vote their shares  (a) for as many persons as there are directors to be elected; (b) cumulate said shares and give one (1) candidate as many votes as the number of directors to be elected multiplied by the number of shares owned; or (c) distribute them on the same principle among as many candidates as may be seen fit; provided that the total number of votes cast shall not exceed the number of shares owned by the stockholders as shown in the books of the corporation multiplied by the whole number of directors to be elected.

The regulations are silent with respect to reserving special rights for certain shareholders within a specific class of shares after a company goes public. However, certain classes of shares (such as preferred shares) may have rights different from the listed class of shares. All details of any other class of shares and such special rights attached thereto must be fully disclosed in the prospectus to be submitted to the regulators and distributed to potential investors.

Listing of SPACs or Special Purpose Acquisition Companies are not allowed in the PSE. Companies that apply for listing must have a track record and must comply with very specific stringent requirements, among others, a 3-year financial and operating track record requirement. Likewise, newly formed holding companies that want to list will need to invoke or rely on the operational records of its subsidiary/ies.

In general, the prospectus must contain complete and accurate statements of material information about the registrant. The SRC provides that any person acquiring a security, the registration statement of which or any part thereof contains on its effectivity an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make such statements not misleading, and who suffers damage, may sue and recover damages from the following, unless it is proved that at the time of such acquisition he knew of such untrue statement or omission:

1. The issuer and every person who signed the registration statement (“RS”);
2. Every director of the issuer at the time of the filing of the RS;
3. Every person who is named in the RS as being or about to become a director and whose written consent thereto is filed with the registration statement;
4. Every auditor or auditing firm named as having certified any financial statements used in connection with the registration statement or prospectus.
5. Every person who, with his written consent, has been named as having prepared or certified any part of the RS, or as having prepared or certified any report or valuation which is used in connection with the RS.
6. Every selling shareholder, with respect to that portion of the registration statement which purports to have been contributed by him.
7. Every underwriter with respect to such security.

Please see refer to our discussion under no. 4 of this article for brief discussions on MTO and Appraisal Rights of the shareholders. In addition, the SEC and PSE impose significant regulations concerning related party transactions imposing investment thresholds beyond which shareholder approval must be sought.

The Disclosure Rules provide for structured (i.e., monthly, quarterly, annual reports) and unstructured (communication of corporate developments as they occur) reporting requirements and even enumerates events that mandate prompt disclosure. However, the enumerations are not exhaustive and the test in determining whether disclosure is necessary is where the information:

1. is necessary to enable the company and the public to appraise their position or standing, such as, but not limited to, those relating to the Issuer’s financial condition, prospects, development projects, etc.; or
2. is necessary to avoid the creation of a false market for its securities; or
3. may reasonably be expected to materially affect market activity and the price of its securities.

The SEC issued SEC Memorandum Circular No. 10 series of 2019 or the Rules for Material Related Party Transaction for Publicly-listed  Companies (“RPT Rules for PLC”). RPT Rules for PLC applies to related party transactions (“RPT”) that amount to 10% or higher of a company’s total assets (“Material RPT”).

Some key points in the RPT Rules for PLC include requiring: (a) all publicly-listed companies (“PLC”) to adopt a Material RPT Policy; (b) the board of directors of PLCs to appoint an external independent party to evaluate the fairness of the terms of the Material RPT; (c) 2/3 of the board of directors, with at least a majority of the independent director, to approve the Material RPT; (d) the filing of an Advisement Report within 3 days from the execution of the transaction; and (c) a summary of Material RPT to be disclosed in the company’s Integrated Annual Corporate Governance Report.

Ownership of 10%

Every person who is, directly or indirectly, the beneficial owner of 10% or more of any class of any security of a public company, or who is a director or an officer of the issuer of such security, shall:

1. Within 10 days after the effective date of the registration or after he becomes such beneficial owner, director or officer, whichever is earlier, file a statement with the SEC and the PSE on Form 23-A;
2. Within 10 days after the close of each calendar month thereafter, if there has been any change in such ownership during the month, file a statement with the SEC and the PSE, on Form 23-B; and
3. Notify the SEC if his direct or indirect beneficial ownership of securities falls below 10%, or if he ceases to be an officer or director of the Issuer. After filing such notification, he shall no longer be required to file Form 23-B.

Ownership of 5%

Any person who acquires in any manner the beneficial ownership of 5% of any class of equity securities of public company shall within 5 business days after such acquisition, submit to the company, the PSE, and the SEC, a sworn statement containing the information required by SEC Form 18-A. If the legal owner is not the beneficial owner, both of them shall comply with the same disclosure report whether individually or jointly. If there is any change in the facts set forth in the statements, an amendment shall be transmitted to the company, the PSE and the SEC.

Approval of Shareholders Holding at Least 2/3 of the Total Issued and Outstanding Capital Stock

1. Extend or decrease corporate term
2. Increase or decrease capital stock
3. Incur, create or increase bonded indebtedness
4. Invest corporate funds in another corporation or business or for any other purpose
5. Amendment of articles of incorporation
6. Approval of the plan of merger or consolidation or amendment thereof
7. Corporate dissolution where creditors are affected
8. Withdrawal of dissolution petition
9. Delegation of the authority to the board of directors to amend by-laws
10. A sale of all or substantially all of the corporation’s
11. Power to enter into management contract where (i) a stockholder or stockholders representing the same interest of both the managing and the managed corporation own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation or (ii) where a majority of the board of directors of the managing corporation are also board of directors of the managed corporation
12. Removal of directors or trustees
13. Ratifying corporate dealings with 1 or more of its directors, trustees, officers or their spouses and relatives within the fourth civil degree of consanguinity or affinity
14. Issuance of stock dividends

Approval of Majority Shareholders

1. Adopting a term electing to maintain a specific corporate term other than a perpetual one
2. Adoption/amendment of the by-laws
3. Calling a special meeting to remove a director or trustee
4. Grant directors or trustees with compensation and approve the amount thereof at a regular or special meeting.
5. Dissolution where no creditors are affected

As discussed above, an MTO is triggered when a person or group persons acting concert intending to purchase 35% to 50% equity securities of a public company.

The implementing rules of the SRC provide the following exemptions to the tender offer requirement:

1. Any purchase of securities from the unissued capital stock; provided, the acquisition will not result to a 50% or more ownership of securities by the purchaser or such percentage that is sufficient to gain control of the board;
2. Any purchase of securities from an increase in authorized capital stock;
3. Purchase in connection with foreclosure proceedings involving a duly constituted pledge or security arrangement where the acquisition is made by the debtor or creditor;
4. Purchases in connection with a privatization undertaken by the government of the Philippines;
5. Purchases in connection with corporate rehabilitation under court supervision;
6. Purchases in the open market at the prevailing market price; and
7. Merger or consolidation.

Yes, the implementing rules and regulations of the SRC require public companies to have at least 2 independent directors or at least 20% of its board size, whichever is the lesser. However, the widely accepted practice is provided under the  Manual of Corporate Governance for Publicly Listed Companies issued by the SEC which  recommends at least 3 independent directors or at least 1/3 of the member of the board, whichever is higher.

The implementing rules of the SRC defines an independent director as a person who, apart from his fees and shareholdings, is independent of management and free from any business or other relationship which could, or could reasonably be perceived to, materially interfere with his exercise of independent judgment in carrying out his responsibilities as a director in any covered company and includes, among others, any person who:

1. is not a director or officer of the covered company or of its related companies or any of its substantial shareholders (“Related Party”) except when the same shall be an independent director of any of the foregoing;
2. does not own more than 2% of the shares of the covered company and/or Related Party;
3. is not related to any director, officer or substantial shareholder of the covered company, any of its Related Party;
4. is not acting as a nominee or representative of any director or substantial shareholder;
5. has not been employed in any executive capacity by the covered company, any of its Related Party within the last 2 years;
6. is not retained, either personally or through his firm or any similar entity, as professional adviser, by that covered company, any of its Related Party, within the last 2 years;
7. has not engaged and does not engage in any transaction with the covered company and/or Related Party, whether by himself and/or with other persons and/or through a firm of which he is a partner and/or a company of which he is a director or substantial shareholder, other than transactions which are conducted at arms length and are immaterial.

The above list, however, is not exhaustive. The Manual of Corporate Governance for PLC lists down other qualifications and disqualifications of an independent director. Corporations are also free to adopt other qualifications.

Companies are required to submit, to both the PSE and the SEC, audited financial statements covering the three (3) full most recently completed fiscal years for the company intending to offer its securities through an initial public offering. At the time a registration statement is to become effective, the financial information therein shall be as of a date 180 days from effective date.

Financial statements must conform to the SRC Rule 68, the Philippines Financial Reporting Standards (PFRS) issued by the Financial Reporting Standards Council of the Philippines, and SEC Financial Report Bulletin.

PLC are required every year, as an attachment to its Annual Report, to submit a sustainability report outlining the ESG policies and ESG metrics of the Company pursuant to SEC Memorandum Circular No. 4-2019.

In October 2023, the SEC announced plans to revise the Sustainability Reporting Guidelines for PLC in an effort to align with the latest global sustainability frameworks, notably the IFRS S1 (General Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (Climate-related Disclosures). Once approved, PLCs  will  be  mandated  to  submit  sustainability reports in two formats: the SR Narrative and Sustainability Report (SuRe) Form.

Debt securities issuances in the Philippines are typically fixed income debt securities and are offered through private placements or public offerings. Debt securities listed with the PDEx are direct issuances.

Yes, trust agreements are usually adopted for issuing debt securities in the Philippines. The appointed trustee acts as the legal title holder of the bonds and shall monitor compliance and observance of all covenants of and performance by the issuer of its obligations under the debt securities and enforce all possible remedies pursuant to such mandate.

Under the listing rules of PDEX, the Issuer of the debt securities sought to be listed must be rated by a credit rating agency duly recognized by applicable governmental authorities at the time of listing. Debt securities that are not offered to the public have more variety in terms of credit enhancement measures including cash reserves account, senior/subordination structures.

Typical restrictive covenants would include maintaining financial ratios, negative pledge, sale of all or substantially all of its assets, permit any change in control, change its business, restrictive covenants on the issuance of dividends among others. These covenants are put in place to ensure credit standing and ability to repay existing debts of issuers.  We are currently not seeing any trends in respect of such restrictive covenants.

Under Philippine tax laws, interest income received by individuals who are Philippine residents as well as domestic and resident foreign corporations shall be subject to a final withholding tax of 20.0%, while that received by non-resident foreign individuals not engaged in trade or business in the Philippines shall be subject to a final withholding tax of 25.0%. Interest income on debt securities is subject to a withholding tax at rates of 10.0%, 20.0%, 25.0% or 25.0%, depending on the tax status of the relevant debt security holder under relevant law, regulation or tax treaty. While the issuer is the withholding agent, the tax shall be for the account of the debt security holder.

PDEX’s general listing criteria are categorized into those related to issuers and those related to securities. Issuers of debt securities may be private entities, the Philippine National Government or instrumentalities thereof, foreign governments with which the Philippines maintain diplomatic relations or a supranational body or international organization composed of member states as well as other entity approved by the SEC and other applicable governmental authority to have its securities sold, purchased or traded in the Philippines

Listing criteria related to the securities include (i) capability of being traded in the PDex; (ii) must have a licensed registry; (iii) must be freely transferable to non-Qualified Investors and Qualified Investors; (iv) must have no restrictions on transferability to investors of different tax categories, and (v) must be rated by a credit rating agency, among others.

Once listed, the issuer must comply with its continuing obligations including the disclosure of all material information which may affect the price or value of issue or the decision to buy, sell or hold the admitted security; submission of periodic reports (e.g., annual quarterly report, audited financial statements); payment fees and continual rating of issuer/issue, among others.