FRAMEWORK OF PHILIPPINE COMPETITION POLICY
Prior to the passage of the Philippine Competition Act, regulation of monopolistic or anti-competitive acts was not centralized. With the recent passage of the Philippine Competition Act, a more level playing field for business can be expected from a more comprehensive, centralized, and consistent approach against anti-competitive behavior. To achieve this, the Philippine Competition Act regulates or prohibits anti-competitive agreements, abuse of dominant position, and mergers and acquisitions that prevent or restrict competition.
The first category of prohibitions are anti-competitive agreements, which are further classified into 2, those that are prohibited per se and those that are prohibited if shown to have an adverse impact on competition. Per se prohibited agreements are agreements between or among competitors that restrict competition as to price or other terms of trade, or that fix the price and terms of engagement at an auction or bidding. Arguably, the safe harbor clauses embedded in the law cannot be invoked as a defense in case of violations of per se prohibited agreements.
On the other hand, under the law, certain arrangements are prohibited only if they have the effect of substantially preventing, restricting or lessening competition, such as arrangements that control production, technological development, or investments, and those that divide the market whether by volume of sales, purchases or territory. Unlike the first group of anti-competitive agreements discussed above, this second group of prohibited anti-competitive agreements could potentially enjoy the benefit of safe harbor clauses embedded under the law. Under the law, agreements that promote technical or economic progress or improve production or distribution of goods are not prohibited if the consumers enjoy a fair share of resulting benefits. The law leaves it up to the Philippine Competition Commission (“Commission”) through its decisions or regulations or to the courts to interpret the concept of “fair share of resulting benefits”, such as, for instance, whether benefits must necessarily be quantifiable (e.g. lower prices) or may be qualitative (e.g. more product choices, higher quality products) and whether it is necessary that all consumers enjoy the “benefit”.
Further extending specific safe harbor clauses, there is a general provision in the law that mandates the Commission, in determining whether an anti-competitive agreement or conduct has been committed, to evaluate whether actual or potential efficiency gains outweigh adverse impact on competition. Whether or not the safe harbor clauses under the law will leave a wide or narrow gap for defense of an otherwise anti-competitive agreement will depend on the rigor with which regulatory authority will evaluate economic data or statistics presented as evidence.
It is noted that the text of the law limits the definition of prohibited agreements to those entered between or among competitors. This leaves the applicability of the prohibition to vertical agreements open to interpretation/ argument.
ABUSE OF DOMINANT POSITION
The second category of prohibitions are certain acts that are committed by market players enjoying a dominant position. The law defines “dominant position” as a position of economic strength such that an entity can control the relevant market independent from other competitors, customers, suppliers, or consumers. The following factors are further considered in determining whether an entity has a dominant position in a relevant market: market share and the corresponding ability to fix prices, the existence of barriers to entry into the market, tax regimes, and government regulations, as well as the potential for these barriers to be altered. The Commission may also consider other facts, including the existence and power of the main competitors, their access to the input source or raw materials, the ability of customers to freely switch to other goods or services, as well as the recent conduct and behavior of the entity in question. For clearer guidance, the law also assigns a 50% market share as the default threshold for presumed market dominance. However, this threshold is not static, as the Commission has the authority to prescribe a different threshold across all or for a particular sector or market.
Establishing market dominance is only the first step in the analysis of the second category of prohibitions. This is the case because market dominance is not per se proscribed. The legislature acknowledges that through industry or skill, a company may gain dominance within its market. Thus, the law specifies the acts or agreements which, if committed by a dominant enterprise, are potentially illegal. Among such acts are predatory pricing, erecting barriers to entry, subjecting transactions to unreasonable conditions, product tie-ups and limiting production, markets, or technical development to the prejudice of consumers. In order to be illegal, these specifically identified acts/agreements must prevent, restrict or lessen competition. As with anti-competitive agreements, the safe harbor clause may be invoked as a defense.
PROHIBITED MERGERS AND ACQUISITIONS
The last category of prohibitions is that of mergers and acquisitions that prevent, restrict and lessen competition. To allow the Commission adequate opportunity to assess whether a transaction is prohibited, the law requires parties to a transaction to notify the Commission where the value of the merger or acquisition transaction exceeds Php1,000,000.00.
The draft implementing rules and regulations propose to expand the criteria for transactions requiring prior notification to include total revenues of the target and the level of ownership in the company to be acquired. If the Commission does not act on the transaction within a period of 30 days from notification, the transaction may proceed. However, the 30-day period may be extended for a period not exceeding 60 days by a request for additional information by the Commission. It would appear, however, that a transaction that does not trigger the notification requirement is not shielded from review should the transaction be shown to prevent, restrict or lessen competition.
Notification allows the Commission to determine whether or not the transaction comes within the purview of the prohibited mergers and acquisitions. If after evaluation, the Commission concludes that the transaction is anathema to competition, the Commission is empowered to take measures necessary to ensure compliance with the law, such as outright prohibition of the transaction or the recommendation and imposition of modifications to the transaction. The requirement to notify the Commission is in addition to any approvals already imposed by laws or regulations that must be obtained from the relevant regulatory authority (such as the central monetary authority for transactions involving banks). The law therefore adds a crucial closing condition for acquisition and financing transactions. Compliance with the notification requirement is crucial to these transactions because the consequences of failing to notify are serious. In addition to the imposition of fines amounting to 1% to 5% of the transaction value, the transaction may be declared void and without effect.
Under the law, the sole standard against which a merger or acquisition will be evaluated is whether or not the transaction prevents, restricts or lessens competition. Without further guidelines, the evaluation of transactions against this standard would appear to be quite subjective. While other jurisdictions employ concentration indices to determine whether there is, at the outset, indicia of anti-competitive behavior in a transaction, the Philippine Competition Act is silent on these metrics, and the rules and regulations providing clearer and quantifiable guidelines on prohibited horizontal or vertical mergers and acquisitions have yet to take shape.
In case a merger or acquisition is found to substantially prevent, restrict or lessen competition, the safe harbor provisions of the law may come into play and the transaction parties may invoke the same cost-benefit analysis available to the 2 other categories of prohibited acts/agreements. The transaction may also be justified if the party to the agreement is faced with imminent financial failure and the merger or acquisition is the least anti-competitive arrangement involving the company’s assets.
A clear understanding and application of the concept of relevant market is crucial in ensuring that an agreement is not prohibited under the law. The legal definition appears to be clear under the law – it refers to a relevant product in a relevant geographic market. A relevant product is a group of substitutable goods or services, while relevant geographic market is the area in which conditions of competition are homogenous. However, in cases where a market is comprised of differentiated or specialized products, a consistent application of the legal definition to the facts may prove to be a challenge and prone to dispute.
CONTINUING BUSINESS COMPLIANCE
Compliance with the newly-enacted Philippine Competition Law will require counsel to review existing competition compliance programs to ensure that pricing, supply, purchase and other cooperation agreements will not breach Philippine regulations. Further, corporate decision makers must review potential acquisition or merger transactions to determine that these will not violate Philippine Competition Law. This evaluation will require familiarity with the state of Philippine markets and how regulators are likely to define the relevant market and quantify and interpret changes in the levels of industry concentration. Apart from a prospective review, compliance will also require a review of existing agreements vulnerable to antitrust challenge. A transitional clause provides a cure period of 2 years from effectivity of the law for parties to renegotiate or restructure their businesses. A key feature of the law is its extraterritorial reach. Thus, acts done outside the Philippines are covered by the law if these have direct, substantial and reasonably foreseeable effects in trade, industry or commerce in the Philippines.
CHAPTER 2 ENFORCEMENT AND SANCTIONS
The Commission is charged with the original and primary jurisdiction to enforce the Philippine Competition Law. As such, it has a broad range of powers, which include the power to conduct inquiries, investigate, hear, and decide on any case involving a violation of the competition law. Its power to investigate comes with the power to issue subpoena or to require the production of books, records or other documents. Upon finding that a company has entered into anti-competitive agreements or has abused its dominant position, the Commission may prohibit a transaction, require divestment and disgorgement of excess profits, and impose administrative fines. Apart from administrative fines and penalties, certain violations of the law are deemed criminal and are punishable by imprisonment of 2 to 7 years and imposition of substantial fines.
Interface with the Commission may occur at several levels, and early engagement is advantageous, where possible. Engagement prior to adversarial proceedings is allowed by the law and proposed regulations. Thus, prior to review of a covered merger or acquisition, parties to a transaction may confer to determine whether or not the notification requirements apply, and if so, what information must be disclosed to the Commission. A binding ruling effective for a specified period may also be requested from the Commission, in case a clarification on the interpretation of the provisions of the law is necessary. An adverse ruling may be the basis for the parties to rectify transactions or arrangements. Finally, the power of the Commission to extend limited exemption to entities may be invoked.
Note: This article has been prepared for informational purposes only and should not be considered as legal advice.
FRANCHETTE M. ACOSTA
VILLARAZA & ANGANGCO (V&A LAW)