Pca-rondez-notes.pdf

PHILIPPINE COMPETITION ACT-RA 10667 DISCUSSION OUTLINE (April 2018) TITLE OF THE LAW The title of the law is: “An act providing for a national competition policy prohibiting ant-competitive agreements, abuse of dominant position and anticompetitive mergers and acquisitions, establishing the Philippine Competition Commission and appropriating funds therefor.” EFFECTIVE DATE OF THE LAW The effective date of the law is August 8, 2015. The subsequent implementing rules and regulations went into effect on June 18, 2016 after its publication on June 13, 2016. PROHIBITED ACTS UNDER THE LAW 1. The prohibited acts under the law are; (a) Anti-Competitive Agreements under Section 14, and (b) Abuse of Dominant Position under Section 15. 2. In addition to the prohibited acts, the PCC shall have the power to review Mergers and Acquisitions that substantially prevent, restrict or lessen competition in the relevant market or in the market for goods or services. 3. The ultimate aim of the law is to protect the competitive process. When competition is eliminated, the competitive process is brought to an end as competitors are excluded from the market (exclusionary effect) and consumers are exploited (exploitative effect). 4. On the other hand, the law will permit an agreement or an act if it has: (a) efficiency gains, and (b) consumer benefits. The agreement or act in this case has the object or effect of “improving production or distribution of goods and services within the relevant market, or promoting technical and economic progress, while allowing consumers a fair share of the economic benefit. This is the rule of reason or efficiency gains with consumer benefits justification.

ANTI-COMPETITIVE AGREEMENTS 1.

The anti-competitive agreements are enumerated under Section 14:

a. The following agreements, between or among competitors, are per se prohibited: (1) Restricting competition as to price, or components thereof, or other terms of trade; (2) Fixing price at an auction or in any form of bidding including cover bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation; b. The following agreements, between or among competitors which have the object or effect of substantially preventing, restricting or lessening competition shall be prohibited: (1) Setting, limiting or controlling production, markets, technical development, or investment; (2) Dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means; c. Agreement other than those specified in (a) and (b) of this section which have the object or effect of substantially preventing, restricting or lessening competition shall also be prohibited: Provided, Those which contribute to improving the production or distribution of goods and services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits, may not necessarily be deemed a violation of this Act. An entity that controls, is controlled by, or is under common control with another entity or entities, have common economic interests, and are not otherwise able to decide or act independently of each other, shall not be considered competitors for purposes of this section. 1.1 Anti-competitive acts are those agreements undertaken with the object or effect of substantially preventing, restricting or lessening competition. This means that competitors are inhibited from competing, or from growing, or staying in the market. When these occur, the agreement is said to have a foreclosure object or effect on competition. 1.2 Foreclosure can be in the horizontal market, where the entity and its competitors operate, or in the vertical market, the upstream or vertical market. In this case there is vertical integration. However, there is no necessity for the entity to have market dominance in both markets.

1.3 There is no need for actual foreclosure to occur as the law allows intervention even before the act of the entity can have an effect on the market. 2. Section 14 has three subsections. Subsections (a) and (b) prohibit anticompetitive agreements between or among competitors, while Subsection (c) prohibits agreements other than those specified under (a) or (b). 2.1 The distinction is material as a violation of Subsections (a) and (b) are criminal in nature, while that of Subsection (c) is not. 3. To resolve the issue as to whether a: (a) parent company and a subsidiary, or (b) parent company and an affiliate company, or (c) subsidiaries or affiliates will be considered as competitors, the law adopted the single economic entity doctrine which is defined under the last paragraph of Section 14. In essence, the entities that are part of the single economic entity are under the control of the ultimate parent entity. 3.1 The control required being the ability to substantially influence or direct the actions or decisions of an entity, whether by contract, agency or otherwise.” This is known as “decisive influence.” Section 25 mandates that the PCC to presume control when: “the parent owns directly or indirectly, through subsidiaries, more than one half (1/2) of the voting power of an entity, unless in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control.” It can also be presumed even if the entity owns one half (1/2) or less of the voting power of another entity when: (a) There is power over more than one half (1/2) of the voting rights by virtue of an agreement with investors; (b) There is power to direct or govern the financial and operating policies of the entity under a statute or agreement; (c) There is power to appoint or remove the majority of the members of the board of directors or equivalent governing body; (d) There is power to cast the majority votes at meetings of the board of directors or equivalent governing body; (e) There exists ownership over or the right to use all or a significant part of the assets of the entity; (f) There exist rights or contracts which confer decisive influence on the decision of the entity. 3.2 As a consequence, it must be realized that while affiliated companies may be shielded from the consequences of their agreements as they are not competitors, the parent company and related companies may be bound by the

act of a subsidiary or an affiliate if it enters into a prohibited agreement with a competitor. 3.3 Under Rule 4, Section 2, Par. (b) of the IRR for purposes of merger control, the reorganization of several legal entities belonging to a single economic entity will not be covered since there can be no “acquiring and acquired preacquisition ultimate parent entities.” Consequently, they are not subject to the notification requirement. 3.4 For purposes of applying Section 15, the single economic entity shall be considered collectively in relation to the definition of dominant position, referring to “a position of economic strength that an entity or entities hold which makes it capable of controlling the relevant market independently from any combination of the following: competitors, customers, suppliers or consumers.” Since a competitor is defined as an entity outside of a single economic entity. Consequently, a parent company cannot be accused of impermissible conduct towards its subsidiaries and affiliates. 4. The penal sanction is imprisonment from 2 to 7 years, and a fine of no less than PHP 50,000,000.00 but not more than PHP 250,000,000.00. 4.1 Administrative penalties will range from PHP 50,000.00 to 2,000,000.00 per violation. ABUSE OF A DOMINANT POSITION 1.

Abuse of Dominant Position is provided for under Section 15:

It shall prohibited for one or more entities to abuse their dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition: (a) Selling goods or services below cost with the object of driving competition our of the relevant market: Provided, that in the Commission’s evaluation of this fact, it shall consider whether the entity or entities have no such object and the price established was in good faith to meet or compete with the lower price of a competitor in the same market selling the same or comparable product or service of like quality; (b) Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner except those that

develop in the market as a result of or arising from a superior product or process, business acumen, or legal rights or laws; (c) Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according to commercial usage, have no connection with the transaction; (d) Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the same goods or services, where such customers or sellers are contemporaneously trading on similar terms and conditions, where the effect may be to lessen competition substantially: Provided, that the following shall be considered permissible differentials: 1. Socialized pricing for the less fortunate sector of the economy; 2. Price differential which reasonably or approximately reflect differences in the cost of manufacture, sale or delivery resulting from differing methods, technical conditions, or quantities in which the goods or services are sold or delivered to the buyers or sellers; 3. Price differential or terms of sale offered in response to the competitive price of payments, services or changes in the facilities furnished by a competitor; and 4. Price changes in response to changing market conditions, marketability of goods or services, or volume: (e) Imposing restrictions on the lease or contract for sale or trade 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 rebate upon such price, or imposing conditions not to deal with competing entities, where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially. Provided, that nothing contained in this Act shall prohibit or render unlawful: 1. Permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements such as those which give each party the right to unilaterally terminate the agreement; or 2. Agreements protecting intellectual property rights, confidential information, or trade secrets; (f) Making 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;

(g) Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalized agricultural producers, fisherfolk, micro-, small-, medium-scale enterprises, and other marginalized service providers and producers; (h) Directly of indirectly imposing unfair purchase or selling price on their competitors, customers, suppliers or consumers, provided that prices that develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall not be considered unfair prices; and (i) Limiting production, markets or technical development to the prejudice of consumers, provided that limitations that develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall not be a violation of this Act: Provided, that nothing in this Act shall be construed or interpreted as a prohibition on having a dominant position in a relevant market or on acquiring, maintaining and increasing market share through legitimate means that do not substantially prevent, restrict or lessen competition. Provided, further, that any conduct which contributes to improving production or distribution of goods or services within the relevant market, or promoting technical and economic progress while allowing consumers a fair share of the resulting benefit may not necessarily be considered an abuse of dominant position. Provided, finally, that the foregoing shall not constrain the Commission or the relevant regulator from pursuing measures that would promote fair competition or more competition as provided in this Act. 2. What Section 15 forbids is abusive conduct by a coercive monopolist. These has the following elements: (a) The entity must have market power or market dominance. This refers to a situation where the entity has the capacity to control the market or stop competitors from entering the market. Under Section 27, this can be presumed if the market share of the entity is at least 50% unless a new market threshold is determined by the PCC. (b) The entity commits abusive conduct. (c) The conduct must have substantial foreclosure effect on the relevant market. (d) There is no objective justification for the conduct.

2.1 Dominant position need not be enjoyed by a single entity. The law will also be called to apply under the concept of collective dominance. This is a situation where several entities demonstrate a collective behavior towards the accomplishment of a particular object that is prohibited. If they possess the ability to control the relevant market, the entities will have collective dominance. It must be noted though that the IRR does not specifically address the matter. 2.2 In an oligopoly, a market dominated by a few entities, there is diminished competition and it may be normal for oligopolists to have parallel behavior. This does not translate to ant-competitive behavior by those enjoying collective dominance unless the behavior is the only reason for parallel behavior. 2.3 Section 15 does not forbid a monopoly. What it seeks to address is the abuse of a monopoly as per the qualifying statements in the quoted section that allows it to maintain and increase market share through legitimate means that do not substantially prevent, restrict or lessen competition. 3. Potential abusive conduct as provided by Section 15 are: (a) Predatory Pricing, which refers to the selling of goods or services below cost with the object of driving competition out of the relevant market. (b) Imposing Barriers to Competition, which refers to barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner. (c) Bundling or Tying, which refers to a situation where the consumer is offered two or more products with inducements to take both, rather than separately or where the sale of the second product is used as a condition for the sale of the first product. (d) Discriminatory Pricing, which refers to setting prices or other terms and conditions that discriminate unreasonably between customers or sellers of the same goods or services, (e) Restrictive Vertical Agreements, which refers to distribution and supply agreements providing prima facie restrictive clauses, such as exclusive dealing, minimum quantity obligations, resale price maintenance, formal or de facto restriction on parallel trade, and online sales bans. Resale Price Maintenance, refers to restrictions on the contract of sale concerning where, to whom or in what forms goods and services may be sold or traded such as fixing prices or the giving of preferential rebates or discounts. (f) Imposing Unfair Price, which refers to a price that is higher or lower than what could objectively be justified insofar as its contract with a marginalized supplier, who is one engaged in a subsistence activity (i.e farmer) and whose annual net income does not exceed the NEDA poverty line for his region. (g) Limiting production, markets or technical development which results in prejudice to consumers, and is not the result of “ a superior product or process, business acumen, or legal rights or laws.”

REVIEW OF MERGERS AND ACQUISITIONS 1. Section 16 gives the PCC the power to review mergers and acquisitions based on factors which they deem to be relevant. 2. Section 17 provides for compulsory notification if the transaction has met the set threshold of PHP 1,000,000,000.00 under the size of the person test and the size of the transaction test. 2.1 The size of the person test refers to the acquiring or target entity, at least one of which must have gross annual revenues in, into or from or assets in the Philippines worth PHP 1,000,000,000.00. This has been increased to PHP 5,000,000,000.00 under PCC Policy Statement 18-01 effective March 20, 2018. 2.2 The size of the transaction test refers to object of transaction and must be worth PHP 2,000,000,000.00 as likewise revised under PVV Policy Statement 18-01. 2.3 In case of acquisitions, to include de facto mergers or consolidations, compliance with the size of the transaction test will require an inquiry as to the place of the subject assets, as: (a) where all the subject assets are in the Philippines, the gross annual revenues or value of assets must meet the threshold, (b) where all the subject assets are outside of the Philippines, the gross annual revenues of such assets generated in or into the Philippines and the value of assets in the Philippines of the acquiring entity must meet the threshold, and (c) where some of the subject assets are inside and some are outside the Philippines, the gross annual revenues generated in or into the Philippines by assets acquired in the Philippines and assets acquired outside of the Philippines must collectively meet the threshold and the value of assets in the Philippines of the acquiring entity must similarly meet the threshold. 2.4 In statutory mergers or consolidations, the size of the transaction test requires that the enterprise value test and the control test be hurdled. In the enterprise value test, the gross annual revenues from sales in, into or from the Philippines or the value of the assets in the Philippines must meet the threshold. In the control test, the acquiring entity must directly or indirectly gain control or further control of the subject enterprise. Both are subject to separate notifications. 2.5 In case of a joint venture, the contributing entities are deemed acquiring entities and the joint venture the acquired entity. Under Rule 4, Section 3, Par. (d), the acquiring entity in the transaction will be subject to notification if either:

(a) the aggregate value of assets combined in the Philippines or contributed into the joint venture exceeds the threshold, or (b) the gross revenues generated in the Philippines by assets combined in the Philippines of contributed into the proposed joint venture exceeds the threshold. 3. Section 17 requires compulsory notification at least 30 days prior to the consummation of the transaction. This will have the effect of prohibiting the parties from consummating the transaction until 30 days after the PCC was provided notification. This gives the PCC the opportunity to issue a decision, or if necessary, to request additional information. In the latter case, the transaction cannot be consummated for an additional 60 days, beginning on the day the request for additional information is received. Provided, that in no case shall the total period of review exceed 90 days from initial notification. 3.1 For creeping transactions, referring to merger or acquisitions consisting of successive transactions or acquisition of parts of one or more entities wich shall take place with a 1 year period, it shall be treated as one transaction. Notification must be on the basis of the preliminary binding agreement, or if none, when the parties execute the agreement relating to the last transaction which, when taken together with the preceding transactions, satisfies the threshold. 4. If there is a failure to give notification, the law will impose an administrative fine ranging from 1% to 5% of the transaction value. This may also result in gunjumping or premature consummation of the transaction without the requisite clearance from the PCC. 5. The PCC can permit an otherwise prohibited merger or acquisition under a rule of reason and/or white knight justification. The former holds that the M & A has brought about or is likely to bring about gains in efficiencies that are greater than the effects of any limitation on competition, while the latter is a situation where a party is faced with actual or imminent financial failure and the agreement is represents the least competitive arrangement among known alternative uses for the failing entity’s assets. 6. A favorable ruling acquires a no-look back protection as the PCC ruling cannot be challenged or reversed by the PCC except when it is obtained through fraud or false material information.