In a strategic restructuring case, Company ABC, a sole proprietorship operating a resort business, enters into an asset-only transfer with a newly formed ordinary stock corporation. The corporation then acquires full ownership of the main revenue-generating assets, including accommodations, dining, and recreational facilities, while the sole proprietorship retains the underlying title to the pool and agricultural areas. To maintain operations, the retained facilities are leased back to the corporation under a lessor-lessee arrangement.
This scenario demonstrates the flexibility of asset-only transfers in the Philippines, which strategically allow businesses to move key assets without the burden of all-or-nothing mergers. However, understanding the legal steps, approvals, and documentation involved is fundamental to ensuring that such transfers are enforceable, legally compliant, and protective of the interests of all parties—key topics that will be explored in this article.
What is an Asset-Only Transfer?
An asset-only transfer is a commercial transaction in which a corporation or entity (transferor) transfers ownership of specific assets—such as real property, equipment, inventory, motor vehicles, IP rights, and contracts—to another (transferee) without transferring the entire corporate entity or assuming its liabilities.
Unlike in a full merger, acquisition, or consolidation, the transferor remains a separate entity and retains responsibility for its remaining assets and obligations, while the transferee acquires only the designated assets under the terms agreed upon in a Deed of Sale or Assignment.
Asset Transfer versus Share Transfer
Choosing between an asset-only transfer and a share-level acquisition involves a strategic trade-off between the precision of the acquisition and the simplicity of the transaction. Here’s the difference between the two:
Nature of Assets
In an asset transfer, the transferee selectively acquires properties, such as specific equipment or real estate, without taking over the entity itself. On the other hand, a share transfer involves purchasing the ownership interests of the corporation, acquiring the entire bundle of assets owned by the entity.
Liabilities
Under the Nell Doctrine, an asset transfer generally allows the transferee to leave the transferor’s liabilities behind unless expressly assumed or the sale is fraudulent. In a share transfer, the corporation remains the same legal person, and all its existing liabilities stay and become the transferee’s burden.
Transactional Complexity
Asset transfers are often more complex because they require individual deeds of sale, new registrations, and physical inventories of specific items. Share transfers are legally more straightforward, as they only require the endorsement of stock certificates and recording in the corporation’s Stock and Transfer Book (STB).
Due Diligence Requirements
Due diligence in an asset transfer focuses primarily on verifying the clean titles of specific properties and ensuring they are free from liens or encumbrances. In a share transfer, the scope is much broader, requiring an exhaustive audit of the company’s entire history, finances, tax compliance, and past litigation.
Legal Bases for Asset-Only Transfers in the Philippines
The legal bases for asset-only transfers between companies in the Philippines are grounded in corporate, civil, and tax laws, as well as relevant jurisprudential doctrines:
Revised Corporation Code of the Philippines (R.A. 11232)
Section 39 of the Code provides that, in the ordinary course of business, a corporation may dispose of its assets upon approval by a majority of its board, subject to the Philippine Competition Act (R.A. 10667) and relevant laws. However, the sale of “all or substantially all” corporate assets, including its goodwill, requires the vote of the stockholders representing at least two-thirds (⅔) of the outstanding capital stock or members (under SEC Memorandum Circular No. 12 Series of 2020, a sale of at least fifty-one percent (51%) of total assets is deemed a sale of “all or substantially all” assets).
Civil Code of the Philippines (R.A. 386)
While the RCC governs the authority to sell, the Civil Code regulates the contracts and transfers of ownership. For instance, Article 428 grants the broad rights to enjoy and dispose of a property, while Article 1306 empowers parties to stipulate any contractual terms deemed convenient, provided they do not contravene the law, morals, and public policy. These foundational principles converge in specific contracts, such as a Contract of Sale (Article 1458), where the law defines the reciprocal obligations of transferring ownership and paying a certain price.
Philippine Competition Act (R.A. 10667)
This law imposes additional regulatory requirements on asset transfers that may affect market competition and requires transactions that meet the statutory threshold for a merger or acquisition to be notified to, and in certain cases, obtain prior review and approval from the Philippine Competition Commission (PCC), as provided under Sections 16 to 23.
Securities Regulation Code (R.A. 8799)
Where the assets to be transferred include securities, such as equity interests in other entities, the transaction may be subject to review by the Securities and Exchange Commission (SEC). Such review is intended to safeguard shareholder interests—particularly those of minority shareholders—and to ensure compliance with investor protection standards under the Code.
The Nell Doctrine (Jurisprudence)
This is a landmark legal principle, established by the Supreme Court in Nell vs. Pacific Farms, Inc., G.R. No L-20850 (11-29-1965), which reinforces the general rule that a corporation purchasing the assets of another is not liable for the transferor’s debts. However, this protection is waived if the transferee assumes the liabilities, the transaction is a de facto merger, the new company is a mere continuation of the old one, or the transfer is a fraudulent attempt to evade creditors.
The Bulk Sales Law (R.A. 3952)
This law applies to asset transfers involving “substantially all” business fixtures or stock outside the regular course of trade and business. For instance, Section 3 provides that the transferor must provide a sworn affidavit listing all creditors to whom it may be indebted and the amounts thereof, before it may receive any part of the purchase price from the transferee. Section 5 mandates that after creating a detailed inventory, the transferor must notify the creditors at least 10 days prior to the sale before transferring possession of any stock of goods, wares, merchandise, provisions, or materials. Failure to comply renders the transaction fraudulent and void.
National Internal Revenue Code of 1997 (R.A. 8424, as amended)
Under the Tax Code, asset transfers are “onerous” transactions subject to specific taxes required for BIR recognition. For instance, Sections 24 and 27(D) govern Income and Capital Gains Taxes on sales profits. Sections 173-196 mandate the payment of Documentary Stamp Tax (DST) on the resulting deeds of sale or assignment.
Duran & Duran-Schulze Law provides legal services for asset-only transfers between companies in the Philippines, covering due diligence, documentation, valuation considerations, and compliance with corporate and tax regulations.
How to Legally Transfer Assets from One Company to Another
Executing strategic asset-only transfers in the Philippines requires strict compliance with corporate approvals, tax obligations, registration requirements, and regulatory rules to ensure a valid and protected ownership transfer.
1. Facilitate the Transferee’s Due Diligence on the Assets.
On the part of the transferee, due diligence involves verifying the transferor’s absolute ownership, checking for existing liens, encumbrances, or pending litigation, and confirming the physical and functional conditions of the assets. In the case of real property, the transferee must verify the integrity of the title against the records of the Registry of Deeds.
2. Obtain Corporate Resolutions with Board and Stockholders’ Approval.
Generally, both the transferor and transferee must obtain formal authorization to buy or sell company assets through board resolutions. Depending on the asset size or valuation—such as when transferring “all or substantially all” of the company’s assets (i.e., at least 51%)—approval must be secured from the majority of the board and/or at least two-thirds (⅔) of the stockholders’ vote.
3. Draft and Execute Deeds of Sale or Assignment.
Asset transfers are typically formalized through either a Deed of Absolute Sale (DOAS) or a Deed of Assignment (DOA), the choice of which generally depends on the nature of the assets. Unlike a sale, an assignment may or may not involve monetary consideration and typically focuses on the transfer of rights (e.g., intellectual property and contractual rights) rather than ownership of physical property. To manage liability, the deeds usually include specific warranties and representations regarding the transferor’s authority, along with “as-is-where-is” clauses to limit future obligations.
4. Secure Additional Regulatory Approvals (if applicable).
Beyond corporate requirements, additional regulatory approvals may be required depending on the nature of assets and transactions. For example, asset transfers involving certain business sectors may need clearances from the National Economic and Development Authority (NEDA), Department of Environment and Natural Resources (DENR), Bangko Sentral ng Pilipinas (BSP), and other industry-specific regulatory bodies.
5. Meet BIR Tax Requirements for CAR Issuance.
Depending on the nature of each asset, the sale may be subject to 12% Value-Added Tax (VAT) (if used in trade or business), either Capital Gains Tax (CGT) or Ordinary Income Tax on the profit, and other applicable taxes for the BIR’s issuance of the Certificate Authorizing Registration (CAR).
6. Pay the Transfer Taxes.
Once the BIR CARs are issued for the individual assets, the Transfer Taxes must be paid to the City or Municipal Treasure’s Office for the Tax Clearance Certificate or any document serving as proof of tax payment.
7. Register the Transfers with the Registry of Deeds (or Other Agencies).
To bind third parties, the asset transfers must be recorded with the appropriate government registries. For real properties, the filing is made with the Registry of Deeds and the Land Registration Authority (LRA), after which they will issue new Transfer Certificates of Titles (TCTs) or Condominium Certificates of Title (CCTs). Motor vehicles, on the other hand, must be transferred through the Land Transportation Office (LTO), while intellectual property, such as trademarks and patents, with the Intellectual Property Office of the Philippines (IPOPHL).
8. Update Tax Declarations.
Following the issuance of new titles or the completion of the sale of assets (real properties), the transferee must update the Tax Declarations with the City or Municipal Assessor’s Office. This ensures that Real Property Taxes (RPT) are accurately assessed under the name of the new owner.
8. Update Other Operational Documents and Registrations.
The final stage involves updating operational documents, including Mayor’s Permits, SEC General Information Sheets (if applicable), and environmental or industry-specific licenses. Proper regulatory updates ensure that the transferee can legally operate the newly acquired assets without administrative interruption.
Final Thoughts: Asset-Only Transfer Risks and Professional Assistance
Company asset transfers carry significant legal, tax, and operational risks, including defective titles, undisclosed liens, or third-party claims that can trigger costly litigation. From a tax standpoint, misclassification of assets can lead to BIR deficiency assessments and heavy penalties. Operationally, the transferee must also manage the complexities of contract continuity and ensure that the transfer is not to circumvent employment security, which could lead to labor liabilities.
In the end, professional assistance mitigates these risks by conducting rigorous due diligence and ensuring all documentation strictly complies with the law. Legal and tax experts facilitate the seamless acquisition of registration documents and coordinate with various government agencies. Additionally, they can help provide robust indemnification clauses and structured tax planning that can insulate the transferee from the transferor’s pre-existing debts and future regulatory disputes.
For legal consultations and service inquiries regarding asset-only transfers between companies in the Philippines, call us at (02) 8478-5826 (landline) or +639171940482 (mobile), or email info@duranschulze.com.
