24 July, 2015
After nearly 25 years of discussion, the Philippines finally adopted a cross-sector competition law at the end of last month. The Philippine Competition Act has been signed by President Benigno Acquino on 21 July 2015 and is scheduled to enter into force two weeks after this date.
The Competition Act is a priority measure of the Acquino administration. Stakeholders such as the Philippine Chamber of Commerce and Industry and the European Chamber of Commerce in the Philippines were consulted in the drafting of the law. Both groups welcomed the passage of this landmark reform.
A new regulator: the Philippine Fair Competition Commission
The central point of the Philippine Competition Act (the “Competition Act”) is the creation of the Philippine Fair Competition Commission (the “FCC”), an independent quasi-judicial body attached to the Office of the President – but independent from the Office of the President’s supervision and control.
The FCC is composed of a Chairperson and 4 Commissioners who should have 10 years of professional experience in the field of economics, law, finance, commerce or engineering. The Commissioners are prevented from exercising any other office or employment, and cannot practice their profession during their tenure.
The Commission will conduct inquiries, investigate, and hear and decide on cases involving any violation of the Competition Act and other existing competition laws on its own volition, upon a complaint from an interested party, or upon referral by a regulatory agency, and begin the appropriate civil or criminal proceedings. Among its investigation powers, the FCC can, after obtaining a search warrant, conduct dawn raids at companies for the purpose of investigating a suspected violation of the Competition Act.
The FCC has also been given an advisory function, as it will issue advisory opinions and guidelines on competition matters, and submit annual and special reports to Congress including proposed legislation for the regulation of commerce, trade or industry.The new institution will monitor competition in the Philippine economy, implement and oversee measures to promote transparency and accountability, and ensure that prohibitions and requirements of competition laws are complied with.
The Competition Act applies to all entities, natural or judicial, foreign or not, incorporated or not, engaged directly or indirectly in any economic activity. This includes entities owned or controlled by the government.
Some pre-Competition Act competition rules are already in force in the Philippines and are scattered across sectors and legislations. This is the case for instance of the telecoms sector, where the sector regulator can investigate complaints against misuse of monopoly of quasi-monopoly powers. In the electricity market, the energy sector regulator monitors and penalises abuses of market power and cartelisation, and can regulate prices to repair the harm caused by anticompetitive conducts. Mergers in all sectors are assessed by the Securities and Exchange Commission (the “SEC”), which delivers certificates of mergers or consolidation making mergers effective. Under the new competition regime, all existing sectorial competition rules will survive and co-exist with the new Competition Act, but the FCC becomes the primary enforcer of competition law in the Philippines. The effect of this primacy is that the FCC will have the power to intervene and participate in the proceedings of other regulators and agencies such as the SEC and the telecoms regulator to ensure that competition laws are interpreted and enforced properly. Such as situation is likely to generate conflicts with the sector regulators, whose approach might be different, and/or who must enforce rules which sometimes are not aligned with competition laws. It is expected that the FCC will enter into MOUs or agreements with the sector regulators to smooth the application of its intervention powers.
Key prohibitions
The new Competition Act prohibits anticompetitive agreements, abuses of dominance, and anticompetitive mergers.
Anticompetitive agreements
Under Section 5 of the Competition Act, agreement between competitors to fix prices, control output, divide markets or rig auctions and bids are per se prohibited. The fact that these agreements are per se prohibited will leave less room for negotiating with the regulator than in other jurisdictions, where some agreements can be exempted by the regulator, or simply found to have no anti-competitive effects. In addition to the per se prohibitions listed above, it is unlawful for competitors to enter into any agreement that have the purpose or effect of unreasonably and substantially preventing, restricting or lessening competition. The Competition Act uses the term “purpose” when most other competition regimes use the term “object”. These are situations where, presumably, the anti-competitive effect will be presumed. The Competition Act does not clarify which agreement will be illegal by purpose, and which agreements will be illegal by effect.
Under the Competition Act, an agreement can be any type or form or arrangement, understanding undertaking or concerted action, whether formal or informal, explicit or tacit, written or oral.
Only agreements between competitors are prohibited under Section 5. Therefore Section 5 of the Competition Act does not apply to vertical agreements, which are agreements between firms not competing on the same market. These agreements can however still fall under the prohibition of abuse of dominance.
Abuse of dominance
Section 6 of the Competition Act prohibits abuses of dominance that are unreasonably preventing or restricting competition. The Competition Act provides that a firm is dominant when it can control a relevant market by behaving, to a significant extent, without regard to its competitors, customers, suppliers, and ultimately, to the end-consumers.
The Competition Act lists behaviours that can potentially constitute an abuse. Imposing barriers to entry and tying-up goods and services with others unconnected goods or services is considered anticompetitive per se. Predatory behaviour is listed as abusive by purpose, which means that the FCC will consider these types of behaviours to be in violation of the Competition Act if they have the purpose of lessening competition. Exclusive dealing and rebates can be anticompetitive by object or by effect.
Finally, it is considered per se anticompetitive under the Competition Act to purchase goods or services at unfairly low prices from marginalised agricultural producers, fishermen, micro, small, medium-scale enterprises, and other marginalised service providers and producers.
Merger control
Sections 7 to 9 of the Competition Act create a merger control mechanism, under which parties to a merger must notify their operations to the FCC. If a merger or an acquisition may prevent or substantially lessen competition in the relevant market, the FCC can require modifications or amendments to the deal, or prohibit the merger altogether. Currently, the SEC is in charge of granting approval to mergers to ensure that they comply with the Philippine Corporation Code, and with other existing laws. The SEC control mechanism is rudimentary, does not allow the parties to amend the merger if it is found in contravention of the law, and does not specifically refer to competition rules and objectives. The new merger control regime under the Competition Act is focused on safeguarding competition.
Acquisition of shares, assets or stocks for more than PHP 1bn (USD 22.3m) must be notified to the FCC prior to their implementation. The current rules do not clarify what is meant exactly by an acquisition for more than PHP 1bn, and further guidance from the FCC is necessary to understand how the fling requirements will be assessed. Failure to notify is punished by an administrative fine of 1 to 5% of the value of the transaction. The exact definition of the “value of the transaction” is not clarified in the Competition Act and will most likely be addressed in the implementing regulations. As explained above, the SEC regime and the FCC regime will co-exist, and as a result the FCC will be able to intervene in mergers which fall below the threshold of PHP 1bn, by participating in the SEC regulatory proceeding. Similarly, because the SEC’s role in mergers is to ensure that proposed mergers abide by the laws, it does mean that the SEC must enforce the provisions of the Competition Act when reviewing transactions, although it will do so by following the somehow archaic provisions of the Corporation Code, as opposed to the new, more modern and flexible merger control regime of the Competition Act.
In terms of timetable, the FCC will have 30 days to act after the filing of a merger, after which the deal will be considered cleared. If the case moves to phase II, the FCC has an extra 60 days to decide on the deal.
Exemptions
Firms can apply for an exemption from the Competition Act under the rule of forbearance. Such an application should be filed with the FCC, who can decide that the applicant is exempt from competition rules, if this exemption does not imped competition or enforcement of the Competition Act, or that competition is not necessary to attain the competition policy behind the law. Entities can also apply for a “binding order” to receive confirmation from the FCC that a certain act or conduct complies with the Competition Act.
The FCC can condition exemptions upon certain measures, and can later withdraw an exemption. The law does not provide for block exemptions that would, as it is the case in most other jurisdictions, exempt entire industries or types of agreements. Instead companies must apply for exemption for some of their conducts or agreements, either under the rule of forbearance or for a binding order.
Penalties and remedies
The FCC can make orders for temporary price controls, and injunctions and orders for the disgorgement of excess profits. To put an end to anticompetitive practices, the FCC may impose structural or behavioural remedies. It should be noted that, contrary to international practice, the FCC must favour behavioural remedies over structural ones where the behavioural remedies are equally or more effective, or less burdensome for the concerned entity.
The Competition Act provides for a fine of 5 to 10% of the entities’ turnover for the previous year, to be determined according to the gravity and the duration of the violation. Penalties under the Competition Act are therefore potentially substantially higher than the pre-existing PHP 1m maximum fine which could be imposed for violation for the anti-cartel laws.
In addition, the new legislation allows the FCC to charge companies and individuals with criminal sanctions: parties to an anticompetitive agreement face between 5 and 10 years in jail, and a fine of up to 10% of the turnover or the assets of the violator, whichever is greater. The Competition Act provides that when the entity involved is a company, its officers, shareholders, directors or employees, representatives and agents in the Philippines will be held liable if they are knowingly and wilfully responsible for the violation. However the final sanction cannot be adjudicated by the FCC and must be imposed by the Regional Trial Court. Decisions of the FCC can be appealed at the Court of Appeals. Criminal sanctions in competition law are rare in Asia and the Philippines’ choice stands out in the region. However this is explained by the fact that agreements and monopolies in restraint of trade are already outlawed under the Reformed Penal Code, which provides for fines and prison terms for these offences.
Under the Competition Act, the FCC will develop a Leniency Programme so that immunity or fine reductions can be granted in exchange for the voluntary disclosure of information on cartels. A complete immunity will be granted if the person applying for leniency came forward to the FCC prior to any investigation, reported the wrongdoing in candour and completeness and provided full, continuing, and complete cooperation throughout the investigation. If an investigation has already started, an applicant may still be granted leniency if, in addition to meeting the conditions above, the applicant is the first one to come forward for leniency, if the Commission does not have evidence against the company that is likely to be convicted, and if granting immunity to the applicant would not be unfair to others.
Finally, fines imposed by the FCC or by the courts are automatically tripled if the anticompetitive practice concerned prime commodities such as rice, corn, sugar, chicken, pork, beef, fish or vegetables. This special protection granted to prime commodities was already present in the competition provisions of the Reformed Penal Code.
Guidelines
The new legislation will take effect within 15 days of its publication, following which the FCC has 120 days to consult the relevant industries and sub-sectors, to prepare the necessary implementing rules and regulations for the Competition Act to be enforced.
Competition law in Southeast Asia
The Philippines join the five other ASEAN countries that have adopted a cross-sector competition law, starting with Indonesia and Thailand in 1999, Vietnam in 2004, Singapore in 2006 and Malaysia in 2010. In 2007, the ASEAN published an Economic Blueprint aiming at turning the ASEAN into a highly competitive trade zone. One of the main components of this plan was the adoption of comprehensive competition laws in all of the 10 countries of the block. The Regional Guidelines on competition policy were published in 2010 to facilitate this objective. The Philippine Competition Act follows the Regional Guidelines in almost all aspects.
Note for companies
Companies doing business in or with the Philippines should review their business practices, and ensure that they comply with the Competition Act, particularly in the light of the severe criminal provisions that can be imposed in court, and of the far-reaching investigation powers of the FCC. A transitional period of two years has been included in the act, but it only applies to agreements, conducts and mergers that were already in place before the Competition Act enters into force.
For further information, please contact:
Clara Ingen-Housz, Partner, Linklaters
clara.ingen-housz@linklaters.com
Anna Mitchell, Linklaters
Anna.mitchell@linklaters.com
Knut Fournier, Linklaters
