When bigger is not always better: Regulating business combinations

SUITS THE C-SUITE By Allenierey Allan V. Exclamador

Business World (07/27/2015 – p.S1/4)

In a highly competitive business environment, companies may consider combining business as an avenue for growth.

In the banking sector, for instance, regulators encourage smaller banks to consider combining to stay afloat as banking systems in the region integrate in response to the implementation of the Association of Southeast Asian Nations Economic Community.

However, business combinations should not restrain trade and prevent market competition. Consumers must be allowed to exercise their right of choice over goods and services offered in the market. It is in this light that the Philippine Congress passed the “Philippine Competition Act,” which President Benigno S. C. Aquino III signed into law last Tuesday.

Republic Act (RA) 10667 provides for a national competition policy prohibiting anti-competitive agreements, abuse of dominant position, and anti-competitive mergers and acquisitions. The law also provides for the establishment of the Philippine Competition Commission.

The law shall apply against any person or entity engaged in trade, industry and commerce in the Philippines. It shall also apply to international trade having direct, substantial, and reasonably foreseeable effects in trade, commerce and industry in the Philippines, including acts done outside the Philippines.

PHILIPPINE COMPETITION COMMISSION (PCC)

The PCC is an independent quasi-judicial body with powers to implement the Philippine Competition Act. The PCC shall be an agency attached to the Office of the President and shall have the following powers and functions, among others:

· Conduct inquiries and investigate any violations of the Act;

· Hear and decide cases involving any violation of the Act and other existing competition laws and institute the appropriate civil or criminal proceedings;

· Review proposed mergers and acquisitions and prohibit those that will substantially prevent, restrict or lessen market competition;

· Stop or redress anti-competitive agreements or abuse of dominant position by applying remedies such as, but not limited to, issuance of injunctions, requirement of divestment, and disgorgement of excess profits;

· Conduct administrative proceedings, impose sanctions, fines or penalties for any non-compliance of the Act and its implementing rules and regulations and punish for contempt;

· Issue subpoenas to require the production of books, records, or other documents or data relevant to the investigation and personal appearances before the PCC; summon witnesses; administer oaths; and issue interim orders such as show cause orders and cease and desist orders;

· Upon court order, undertake inspections of business premises and other offices, land and vehicles, where relevant books, tax records, or other documents relevant to the investigation are kept, in order to prevent the removal, concealment, tampering with or destruction of the books, records, or other documents;

· Issue adjustment or divestiture orders including orders for corporate reorganization or divestment in the manner prescribed by the rules and regulations implementing the Act; and,

· Intervene or participate in administrative and regulatory proceedings requiring consideration of the provisions of the Act initiated by government agencies such as the Securities and Exchange Commission, Energy Regulatory Commission and the National Telecommunications Commission.

OFFICE FOR COMPETITION

The Office for Competition under the Department of Justice shall only conduct preliminary investigations and undertake prosecution of all criminal offenses under the Act and other competition related laws.

PROHIBITED ACTS

RA 10667 prohibits the following:

· Entering into anti-competitive agreements which include those restricting competition; fixing price; setting, limiting, or controlling production, markets, technical development, or investment; dividing or sharing the market; and other similar agreements.

· Abuse of dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition such as, selling goods or services below cost; imposing barriers to entry; making a transaction subject to acceptance by the other parties of other obligations which have no connection with the transaction; discriminatory pricing; imposing restrictions on the lease or contract for sale of goods, or services concerning where, to whom, or in what forms goods or services may be sold or traded such as fixing prices, giving preferential discounts or imposing conditions not to deal with competing entities; making the supply of particular goods or services dependent upon the purchase of other goods or services from the supplier which have no direct connection with the main goods or services to be supplied; imposing unfairly low purchase prices for goods and services of marginalized service providers and producers; and other similar circumstances. There is a rebuttable presumption of market dominant position if the market share of an entity in the relevant market is at least 50%.

· Entering into mergers or acquisition agreements that substantially prevent, restrict or lessen competition in the relevant market or in the market for goods or services. Merger refers to the joining of two or more entities into an existing entity or to form a new entity. Acquisition refers to the purchase of securities or assets, for the purposes of obtaining control by: (1) one entity of the whole or part of another; (2) two or more entities over another; or (3) one or more entities over one or more entities. When the value of the transaction exceeds P1 billion, parties to a merger or acquisition agreement are required to notify the PCC which shall have the power to review the agreement. If the PCC determines that the agreement substantially prevents, restricts or lessens competition and does not qualify for exemption, the PCC may prohibit the implementation of the agreement unless modified by changes specified by PCC or the party or parties enter into a legally enforceable agreement. The PCC shall adopt regulations stipulating thresholds subject to notification; information that must be supplied for notified mergers or acquisitions; exceptions or exemptions from the notification requirement, and other rules relating to the notification procedures.

FINES AND PENALTIES

In administrative proceedings, entities found to have committed prohibited acts under the Act will be fined P100 million for the first offense and up to P250 million for the second offense. Non-compliance with an order of the PCC may be fined at least P50,000 up to P2 million for each violation and a similar penalty for each day beginning 45 days from receipt of the decision, order or ruling from the PCC.

Supplying incorrect or misleading information to the PCC may likewise be imposed fines of up to P1 million.

Entities found guilty of entering into any anti-competitive agreement may be punished for each and every violation, with imprisonment from two to seven years and a fine ranging from P50 million to P250 million. For juridical persons, the penalty of imprisonment shall be imposed on the responsible officers, directors, or employees holding managerial positions.

The fine shall be tripled if the violation involves the trade or movement of basic necessities and prime commodities such as rice; corn; bread; fresh, dried and canned fish and other marine products, fresh pork, beef and poultry meal; fresh eggs; fresh and processed milk or fresh vegetables or similar commodities.

LENIENCY PROGRAM

The Act also gives the PCC the power to develop a Leniency Program to be granted to any entity in the form of immunity from suit or reduction of any fine which would otherwise be imposed on a participant in an anti-competitive agreement in exchange for the voluntary disclosure of information regarding such agreements and under certain conditions.

The passage of the Philippine Competition Act by Congress is envisioned to enhance market competition by eliminating monopolies, cartels and other unfair business practices that lead to high prices of goods and services. However, while its purpose is laudable, commercial arrangements including proposed mergers and acquisitions may now be subject to closer scrutiny under the Act. Aside from considering the business purpose of mergers and acquisitions such as lowering costs and increasing long term profitability, parties to such proposed commercial arrangements should also consider the provisions of the newly enacted law. Mergers and acquisitions may now have to undergo additional procedural and substantive compliance requirements before they are given the go signal by regulatory authorities.

Allenierey Allan V. Exclamador is a Tax Partner of SGV & Co.