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Market efficiency

Nicholas Felix Ty and Aldrich Fitz Dy of Mosveldttlaw take a look at the country’s two-year old competition law’s main provisions

Nicholas Felix Ty and Aldrich Fitz Dy of Mosveldttlaw take a look at the country’s two-year old competition law’s main provisions

www.mosveldttlaw.com

Until recently, there was no unified and comprehensive competition law in the Philippines. Competition concerns were minimally covered by: (1) specific, piecemeal legislation such as the Price Act, which protects consumers from profiteers and cartels, or (2) single articles in codified statutes, such as article 186 of the Revised Penal Code which criminalises monopolies and combinations in restraint of trade.

This all changed in July 2015 when the Philippine Competition Law (PCL) was passed. Aside from enhancing market efficiency by promoting competition, it aims to establish a national competition policy to be implemented by the government.

The PCL undoubtedly has an impact on foreign investment in the Philippines. The law itself states that it applies to international trade having direct, substantial, and reasonably foreseeable effects on trade, industry or commerce in the Philippines.

Compulsory notification

The most notable impact of the PCL on foreign investment is the compulsory notification of certain mergers and acquisitions to the Philippine Competition Commission (PCC), the agency created by the PCL tasked with regulating competition matters. Compulsory notification can be an additional requirement for a foreign investor who seeks to enter the Philippine market via M&A with a going concern in the country. The term merger has been loosely defined to include joint ventures. The term acquisition has been defined as the purchase or transfer of securities or assets for the purpose of obtaining control. Only M&As that exceed PHP1 billion ($20 million) are subject to compulsory notification. This has been referred to as the notification threshold.

Notification thresholds

There are two notification thresholds that must both be met before an M&A will be subject of compulsory notification. These thresholds are: (1) the revenue of party threshold and (2) the value of transaction threshold. The revenue of party threshold is met when the annual gross revenues of the ultimate parent entity of at least one party to the M&A exceeds PHP1 billion. The value of transaction threshold shall depend on the type of M&A involved (eg assets, shares or joint venture).

For an M&A involving assets inside the Philippines, the value of the transaction threshold is met if: (1) the value of the target assets exceeds PHP1 billion or (2) the gross revenue generated in the Philippines by the target assets exceeds PHP1 billion.

For an M&A involving assets outside the Philippines, the value of transaction threshold is met if: (1) the value of the assets in the Philippines of the acquiring entity exceeds PHP1 billion, and (2) the gross revenue generated in or into the Philippines by the target assets exceeds PHP1 billion.

For an M&A involving assets inside and outside the Philippines, the value of transaction threshold is met if: (1) the value of the assets in the Philippines of the acquiring entity exceeds PHP1 billion and (2) the gross revenue generated in or into the Philippines by the target assets (both inside and outside the Philippines) exceeds PHP1 billion.

For an acquisition of voting shares, the value of transaction threshold is met if: (1) the aggregate value of the assets of the target entity exceeds PHP1 billion or (2) the gross revenue of the target entity exceeds PHP1 billion. In either case, the transaction must (3) result in a substantial change of control, which is defined as: (a) at least 35%, or (b) at least 50%, if the 35% threshold was formerly met.

Finally, for a joint venture, the value of transaction threshold is met if (1) the value of assets to be combined or contributed exceeds PHP1 billion, or (2) gross revenue generated in the Philippines by the assets to be combined or contributed exceeds PHP1 billion.

Procedure

The compulsory notification process entails a review by the PCC of the merger or acquisition's impact on competition in the relevant market. The process is triggered by the filing of a PCC notification form which can be downloaded from its website. The notification form is a comprehensive, detailed document that will take time and effort to prepare. Thus, the PCC allows for pre-notification consultation where parties may seek non-binding advice on specific information that is required on the notification form.

All parties to the M&A are required to file their own form. The specific entity to do the filing is the ultimate parent entity, defined as the juridical entity that, directly or indirectly, controls a party to the transaction and is not controlled by any other entity. Notice must take place prior to the execution of any definitive agreement for the transaction. Pending review by the PCC, the transaction cannot be consummated. Otherwise, the transaction is voided, and a fine of one to five percent of the transaction value is applied.

After filing of the notification form by all parties to the M&A, the PCC has a period of 15 days to determine if the submission is complete. When the PCC is satisfied, it shall inform the parties. This, in turn, triggers a phase I and, possibly, a phase II review.

A phase I review commences upon the PCC's notification of all parties that their requirements are complete. The regulator has 30 days to inform parties of the need for a more comprehensive and detailed analysis under a phase II review. Expiry of the 30-day period without any action from the PCC means the transaction is deemed approved and the parties can consummate the transaction without the need of a phase II review.

A phase II review commences after the PCC's request it. It effectively extends the process for 60 days during which the transaction cannot be consummated. In no case shall the total waiting period (covering both phases I and II reviews) exceed 90 days from time initial notification is deemed complete. The expiry of the 90-day period without any decision means transaction is deemed approved.

PCC action

As mentioned previously, inaction by the PCC after the lapse of the relevant period will allow the consummation of the transaction. The same goes for PCC approval, if actually given.

The PCC can also prevent the transaction should it be deemed as a transaction that can substantially prevent, restrict or lessen competition. Factors considered by the PCC in making this determination include the structure of relevant markets, the market position of entities concerned, actual or potential competition.

There are three possible consequences in the event that an M&A is deemed prohibited: (1) the agreement cannot be implemented; (2) the agreement must be modified in accordance with the PCC's specifications; or (3) the agreement cannot be implemented unless the parties enter into legally enforceable agreements specified by the PCC.

Other relevant aspects of the PCL

Compulsory notification is the most relevant aspect of the PCL for foreign investors who wish to do business in the Philippines. However, once the foreign investor is already part of a going concern, aspects such as anti-competitive agreements and abuse of dominance may come into play.

Anti-competitive agreements

The PCL prohibits anti-competitive agreements (ACAs). There are two general types of ACAs: agreements prohibited per se (eg price fixing, bid rigging) and agreements with the object or effect of substantially preventing, restricting or lessening competition (eg limiting supply, sharing markets). Some ACAs may be exempt from prohibition if it can be shown that they can contribute to improving productivity or distribution or promoting technical or economic progress, while allowing consumers a fair share of resulting benefits.

When determining anti-competitiveness, the tribunal concerned will consider the relevant market, which consists of two main components: (1) the relevant product market, which means all goods and services regarded as interchangeable or substitutable by consumers; and (2) the relevant geographic market, which refers to the area where an entity operates in which conditions of competition are sufficiently homogenous. Other factors to be considered include efficiency gains, past behaviour and prevailing market conditions.

Abuse of dominance

Abuse of dominance is essentially engaging in conduct that would substantially prevent, restrict or lessen competition. Examples include predatory pricing, price discrimination and refusal to deal.

Dominance is defined as a position of economic strength of an entity that enables it to control the relevant market. Criteria for dominance include market share, the ability to unilaterally fix prices, and the existence of barriers to entry. The PCL created a presumption of dominance for entities with a market share of at least 50%. Dominance per se is not prohibited but rather the abuse of that dominant position.

Conclusion

At barely two years, the PCL is clearly still in its rudimentary stage. Much of the details of competition law in the Philippines will be fleshed out once the law is more widely implemented and the PCC further grows as an implementing agency. However, from the look of things, it is clear that competition law will evolve into a rich, nuanced and thriving area of law in the Philippines.

About the author

Nicholas Felix L. Ty

Co-managing partner of Mosveldtt Law Offices

Pasig City, Philippines
T: 632 656 4096
E: info@mosveldttlaw.com
W: www.mosveldttlaw.com

Nicholas Felix L. Ty is co-managing partner of Mosveldtt Law Offices, specialising in corporation law, commercial transactions and special projects. He is also an assistant professor in the University of the Philippines College of Law teaching subjects in commercial law, criminal law and private international law. He is the director of the Institute of Government and Law Reform of the University of the Philippines Law Center, a research and policy think tank that provides advisory, training and support services to government offices. He was recently engaged by the Philippine Competition Commission for its training module on competition law and economics.

Ty obtained his law degree and business economics degree (cum laude) from the University of the Philippines. He also obtained a Master in Laws in International Economic and Business Law from Kyushu University, Japan as a Japanese Government Scholar.

About the author

Aldrich Fitz U. Dy

Co-managing partner of Mosveldtt Law Offices

Pasig City, Philippines
T: 632 656 4096
E: info@mosveldttlaw.com
W: www.mosveldttlaw.com

Aldrich Fitz U. Dy specialises in litigation, particularly civil, commercial, labour, criminal, taxation, and intellectual property cases, including alternative modes of dispute resolution like commercial arbitration.

One of the most notable cases that he has handled is the petition to strike down the Priority Development Assistance Fund and the Pork Barrel System for being unconstitutional, of which he was among those who conducted oral arguments before the Supreme Court. In a landmark decision, the Supreme Court found in favour of the petitioner that he represented. He also represented a non-profit organisation and successfully defended them in a proceeding for the issuance of a Writ of Kalikasan to enjoin the field trials of Bt talong.

Currently, he is a member of the faculty in the Ateneo Law School and is the co-managing partner of Mosveldtt Law Offices.

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