Introduction

In the complex world of mergers and acquisitions (M&A), intellectual property (IP) assets often emerge as critical factors that can make or break a deal. In the Philippines, where IP laws have their unique set of complexities, understanding the nuances is even more crucial. This article aims to provide an in-depth look into how to conduct IP due diligence in the Philippine context during an M&A transaction.

Intellectual Property Inventory

Creating a complete inventory of the company’s IP assets is the foundational step. This includes identifying all patents, trademarks, copyrights, and trade secrets that the company owns or licenses. The inventory serves as a roadmap, helping both parties understand what is at stake. Accurate valuation and strategic planning can only occur when you know exactly what IP assets are involved.

Ownership and Control

Clarifying ownership and control of IP assets is the next critical step. Many deals have fallen apart because of misunderstandings or conflicts over IP ownership. All IP assets must be either legally owned or controlled by the company. Pay special attention to any joint ownership arrangements and understand how they impact control and revenue sharing. It’s also essential to consider IP owned by subsidiaries, as these can significantly affect the transaction’s value and complexity.

Compliance and Regulation

Being compliant with both local and international laws is not just a legal necessity but also a valuation factor. Always check the IP assets’ standing with the Intellectual Property Office of the Philippines and other relevant bodies. If the IP has international reach, make sure it complies with the laws of those jurisdictions and international treaties.

Financial Assessment

A detailed financial assessment of IP assets is non-negotiable. This includes obtaining professional valuation reports, understanding the revenue streams tied to the IP, and recognizing the costs of maintaining these assets. Knowing the financials in and out can offer insights into the return on investment and help to structure the deal better.

Litigation and Risks

Uncovering any ongoing or past litigation related to IP assets is essential. Any legal issue can not only diminish the IP’s value but can also bring reputational risks. A thorough risk assessment should be conducted to identify potential challenges or vulnerabilities in the IP portfolio. Knowing these risks upfront can help in making an informed decision.

Agreements and Contracts

Reviewing all existing agreements and contracts related to the IP is crucial. This includes licensing agreements, non-disclosure agreements (NDAs), and employee contracts that specify IP ownership. These documents can significantly impact the revenue streams, control, and overall value of the IP assets.

Future Prospects

It’s not just about the present; one must also consider the future. Understand what IP is currently in development and how it aligns with the acquiring company’s future strategies. Additionally, it’s essential to assess any plans the company has for leveraging this IP for market expansion or penetration into new domains

Beginning 31 July 2019, all General Information Sheet (GIS) due for submission by corporations shall include a Beneficial Ownership Declaration in the form prescribed by SEC Memorandum Circular No. 15-2019.

Corporations are now required to disclose in the Declaration the beneficial owner/s of their corporate shareholders. Previously, corporations were only required to disclose their direct shareholders regardless of whether or not these consisted of natural or corporate persons.

A “beneficial owner” is defined under the SEC Circular as the NATURAL PERSON/S who ultimately own/s or control/s, or exercise/s ultimate effective control over the corporation. 

The Circular also provides for categories of beneficial owners arranged in order of priority for determining the beneficial owners of corporations.  At the top of the list are the beneficial owners who directly and/or indirectly own at least twenty-five percent (25%) of the shares in the corporation. For corporations with multiple layers of corporate shareholders, this will entail tracing both the direct and indirect ownership of shares.  If the beneficial owners cannot be determined based on the first category, the next category will apply and so forth. 

Only after exhausting all the categories can the members of the board of directors or trustees be declared as the beneficial owners of the corporation.

Non-compliance with the beneficial ownership disclosure rules will expose not only the reporting corporation but also the directors or trustees to liability.

The Supreme Court recently upheld the constitutionality of SEC Memorandum Circular No. 8, Series of 2013. The salient points of said Memorandum Circular are as follows:

a. The covered corporations are those involved in areas of activities or enterprises specifically reserved, wholly or partly, to Philippine Nationals by the Constitution, the Foreign Investments Act, and other existing laws.

b. All covered corporations shall, at all times, observe the constitutional or statutory ownership requirement.

c. The required percentage of Filipino ownership must be met in both (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.

d. Corporate Secretaries of covered corporations are directed to monitor and observe compliance thereto. The Corporate Secretary may not delegate this responsibility without an express authority from the Board of Directors or Trustees.

e. Failure to comply will be punished with the administrative sanctions provided in Section 14 of the Foreign Investments Act as amended, summarized below:

The Securities and Exchange Commission (SEC) formally adopts the judicial affidavit rule in SEC Memorandum Circular No. 4 (series of 2016). The judicial affidavit rule will now have to be observed in all actions, proceedings and incidents requiring the reception of evidence before the SEC. 

An alien cannot be elected as president/chairman or officer of a corporation that is engaged in a nationalised activity pursuant to the Anti-Dummy Law. This rule has been reiterated by the SEC in Opinion No. 16-02. The Anti-Dummy Law, however, allows an alien to be elected as director in proportion to his allowable participation or share in the corporation’s capital. 

Petitions to set aside revocation orders pursuant to failure to comply with reportorial requirements may now be filed anytime subject to compliance with MC No. 5-2016. Thus, if you have a company that had its registration revoked because of failure to submit reportorial requirements  (e.g., general information sheet, audited financial statements, etc.), and the deadline to file the petition to revoke the order has lapsed, you may still proceed to do so. 

The newly elected President of the Philippines has announced a crackdown on online gambling facilities. It appears from the statements made that the new President is against gambling in general. This policy may affect the Philippine gaming industry. 

Sales to the general public, through a single outlet owned by a manufacturer of products manufactured, processed or assembled in the Philippines, irrespective of capitalisation is not considered as retail, pursuant to Section 3(d) of the Retail Trade law and Section 2(d) of its Implementing Rules and Regulations. Please refer to SEC Opinion No. 16-03.