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31 July, 2018
Just recently, the Philippine Competition Commission (PCC) published the draft Joint Venture Guidelines (Draft Guidelines) aimed to help businesses determine when a joint venture shall be subject to compulsory notification pursuant to its power to issue guidelines on competition matters for the effective enforcement of the Philippine Competition Act (PCA).
Under Philippine setting, a joint venture (JV) may be formed through any of the following schemes, among others: a) incorporation of a new company; b) entering into a contractual JV or; c) acquiring shares in an existing JV entity. The Draft Guidelines provided the basis for computation of the notification thresholds for JV transactions and declared that a transaction is notifiable when parties to a JV meet both the size of party test and size of transaction test.
Pursuant to the Draft Guidelines, the size of party test is met when the aggregate annual gross revenues in, into, or from the Philippines, or value of assets in the Philippines of the ultimate parent entity (UPE) of at least one of the acquiring or acquired entities, including that of all entities that the UPE directly or indirectly controls, exceeds P5 billion.
Meanwhile, under the size of transaction test, the JV is subject to compulsory notification when the aggregate value of the combined assets of the JV partners in the Philippines or contributed into the proposed JV exceed P2 billion, or the gross revenues generated in the Philippines by assets combined or contributed into the JV exceed P2 billion. In the case of the acquisition of shares in an existing JV entity, the Draft Guidelines provide that the assets or gross revenues generated by such assets of the existing JV entity shall be included in determining the threshold.
It is worth noting that, under the Draft Guidelines, a JV is considered as a merger or acquisition when it performs on a lasting basis the functions of an autonomous economic entity, and is expected to bring about a substantial change in the competitive conditions of any market in the Philippines. However, the Draft Guidelines fail to clarify what is meant by “a lasting basis.” The PCC should take this into consideration when finalizing the Draft Guidelines to avoid confusion in its implementation later on.
The Draft Guidelines also mandates that if joint control exists after completion of the transaction, the parties need to make a merger notification. Joint control, which may be established on a de jure or de facto basis, is the ability of the JV partners to substantially influence or direct the actions or decisions of the JV, and exists when an entity has the ability to determine the strategic commercial decisions of the JV (positive joint control), or to veto such strategic decisions (negative joint control), except for ordinary veto rights. A joint control may manifest in different forms such as equality in voting rights or appointment to decision-making bodies, veto rights, joint exercise of voting rights.
However, equity ownership alone does not establish the presence or absence of joint control.
The Draft Guidelines recognize that although a JV Partner may hold a minority stake in the JV, he may still exercise substantial influence on the JV.
Furthermore, the JV arrangement shall be notifiable under the Draft Guidelines once the JV is expected to perform on a lasting basis all the functions of an autonomous economic entity, and to bring substantial change in the competitive conditions of the market in the Philippines.
The Draft Guidelines does not consider if the JV is established as a ‘greenfield operation’ or already a previously existing entity. It is likewise provided that a JV created to carry out one or some specific functions of the ultimate parent entity without an independent access to or significant presence in the market may not be considered sufficient to be considered an autonomous economic entity. This may become problematic later on since the fact that a JV is autonomous from an operational perspective does not mean that it enjoys autonomy as regards the adoption of its decisions from its parent companies. In finalizing the draft, the PCC should further clarify the definition of an “autonomous economic entity.”
In the end, the PCC must strive to strike a balance — it must be encouraging and permissive enough to allow the emergence of pro-competitive JVs, while continuing to be the vanguard against activities and transactions that would stifle competition and harm consumer welfare.
For further information, please contact:
Mara Kristina O. Recto, Angara Abello Concepcion Regala & Cruz (ACCRALAW)
morecto@accralaw.com
