After languishing in Congress for more than two decades, the Philippine Competition Act (PCA) was finally passed by the Philippine Senate and the House of Representatives on 10 June 2015. The PCA was signed into law by President Benigno Simeon C Aquino III on 21 July 2015, and took effect on 8 August 2015. As the country’s first comprehensive competition law, the PCA is widely considered to be a ‘game changer’ and is expected to ‘create a fairer competition environment [in the Philippines] over time.’
The passing of the PCA is consistent with the Philippines’ obligations under the Association of Southeast Asian Nations (ASEAN) Economic Community Blueprint (AEC) adopted by ASEAN heads of state in November 2007. It places the Philippines on par with its neighbours in ASEAN, the majority of whom have already instituted their respective comprehensive competition law and policy.
The PCA considers various competition and antitrust practices in ASEAN, particularly the ASEAN Regional Guidelines on Competition Policy (ASEAN Guidelines), the European Union (EU) and the United States (US).
The PCA has introduced significant changes to the Philippine competition law landscape, particularly in respect of the following key features of the law:
- the creation of a central competition authority, namely the Philippine Competition Commission (the Commission);
- prohibition of anticompetitive agreements and abuses of dominant market position;
- the establishment of a mandatory merger review regime; and
- enforcement mechanisms, including fines and penalties for violations.
This article provides an introduction to the PCA.
The PCA establishes the Commission, which will be the principal competition law regulator in the Philippines. It will be tasked with implementing and enforcing national competition policy. The Commission is envisioned as an independent body attached to the Office of the President. The Commission shall be composed of a chairperson and four commissioners, who shall be appointed by the president and serve for a term of seven years without reappointment.
Once organised, the Commission will replace the Department of Justice (DOJ) and its Office for Competition (OFC) as the national competition authority. The Commission shall have original and primary jurisdiction over the regulation, enforcement and implementation of the PCA, its implementing rules and regulations (which the Commission will also draft), and all other competition-related statutes. The PCA vests the Commission with broad fact-finding, administrative, quasi-legislative and quasi-judicial powers that include:
- conducting inquiries and investigations, and hearing and deciding cases involving any violation of the PCA and other competition laws (either motu proprio, or upon receipt of a verified complaint from an interested party, or upon referral by the concerned regulatory agency) and instituting the appropriate civil or criminal proceedings;
- reviewing proposed mergers and acquisitions;
- issuing injunctions and ordering divestment and disgorgement of excess profits under reasonable parameters;
- conducting administrative proceedings, imposing sanctions, fines or penalties for non-compliance with or breach of the PCA and its implementing rules and regulations, and administering punishment for contempt;
- issuing subpoenae ordering the provision of books, records or other documents and summoning witnesses;
- upon order of the court, undertaking inspections of business premises and other offices, land and vehicles to prevent the removal, concealment, tampering with or destruction of an entity’s books, records or other documents; and
- issuing advisory opinions and guidelines on competition matters for the effective enforcement of the PCA and submitting annual and special reports to Congress.
The Commission should have been established (through the appointment of its members by the president of the Philippines) by 7 October 2015 (ie, 60 days from when the Competition Act took effect on 8 August 2015). However, as at 7 December 2015, the Commission has not yet been organised.
There are essentially three types of anticompetitive conduct prohibited by the PCA. These are:
- agreements between competitors that are considered illegal per se under section 14(a);
- agreements between competitors that are not illegal per se but have the object or effect of substantially preventing, restricting or lessening competition under section 14(b), and other agreements (whether or not between competitors) deemed illegal because they have the object or effect of substantially preventing, restricting, or lessening competition under section 14(c); and
- conduct that constitutes an abuse of dominant position under section 15.
Agreements among competitors that are illegal per se
Agreements between competitors that restrict competition as to price, components thereof, or other terms of trade, and those involving price fixing at an auction or in any form of bidding (such as cover bidding, bid suppression, bid rotation and market allocation) and other analogous practices of bid manipulation, are prohibited per se under the PCA. This prohibition appears to be consistent with the ASEAN Guidelines insofar as the latter prescribe that member states may identify ‘specific “hard-core restrictions”, which will always be considered as having an appreciable adverse effect on competition (eg, price fixing, bid-rigging, market sharing, limiting or controlling production or investment)’. However, under the PCA, only price fixing and bid rigging by competitors are considered per se illegal. Agreements between competitors on the division or limitation of markets and restrictions on production are prohibited if they substantially prevent, restrict or lessen competition, which indicates that these agreements are to be governed by the ‘rule of reason.’
Other anticompetitive agreements
As indicated, under section 14(b) of the PCA, agreements between competitors relating to setting or controlling production, markets, technical development or investment, and 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, are prohibited if they substantially prevent, restrict or lessen competition.
Also, under section 14(c) of the PCA, agreements (that may or may not be between competitors) that have the object or effect of substantially preventing, restricting or lessening competition are likewise prohibited.
The agreements under sections 14(b) and (c) are not illegal per se because their object and effect must be examined before they can be considered anticompetitive and thus, as will be discussed in more detail below, necessitate a rule-of-reason analysis to determine whether a violation of the PCA has been committed.
The distinction between a violation of sections 14(a) and (b) of the PCA (which apply to agreements between competitors) on the one hand, and section 14(c) on the other, is crucial. This is because under section 30 of the PCA, violations of sections 14(a), (b), and (c) may all be subject to administrative penalties. However, only violations of sections 14(a) and (b) are subject to criminal penalties as well.
Abuse of dominance
To determine whether an entity is dominant, the relevant market, consisting of both a relevant product market and a relevant geographic market, should first be ascertained. If the market share of an entity in the relevant market is at least 50 per cent, the PCA provides a rebuttable presumption of dominance in that market. The Commission is authorised to determine and publish the threshold for a dominant position or minimum level of share in a particular relevant market that may engender a presumption of dominant position.
Dominance in a given market is not per se prohibited. The PCA expressly says that the Commission shall not consider the acquisition, maintenance and increase of market share through legitimate means as a violation of the PCA. In line with the ASEAN Guidelines, what the PCA prohibits is an entity’s abuse of its dominant market position. The PCA lists such possible abuses in Section 15. As will be discussed below, under the PCA the determination of whether conduct shall be considered as abuse of dominance requires rule-of-reason analysis.
Rule of reason
The language in sections 14(b) and (c) and section 15 of the PCA, requiring an agreement or conduct to have the ‘object or effect substantially preventing, restricting or lessening competition’, reflects the PCA’s adoption of rule of reason, which is generally followed in the US, EU and ASEAN. In contrast with the per se standard of illegality, the rule of reason requires an analysis of and further inquiry into the conduct in question, the surrounding circumstances, and the resulting economic effects. Section 26 of the PCA sets out factors to determine the existence of anticompetitive agreements or conduct. Among other things, section 26 requires the Commission to:
- determine if there is actual or potential adverse impact on competition in the relevant market caused by the alleged agreement or conduct, and if such impact is substantial and outweighs the actual or potential efficiency gains that result from the agreement or conduct;
- balance the need to ensure that competition is not prevented or substantially restricted and the risk that competition efficiency, productivity, innovation or development of priority areas or industries in the general interest of the country may be deterred by overzealous or undue intervention; and
- assess the totality of evidence on whether it is more likely than not that the entity has engaged in anticompetitive agreement or conduct, including whether the entity’s conduct was done with a reasonable commercial purpose, such as phasing out a product or closing a business, or as a reasonable commercial response to the market entry or conduct of a competitor.
Moreover, sections 14(b), 14(c) and 15 similarly indicate that agreements or conduct that may otherwise be anticompetitive but ‘contribute[s] 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 the PCA. Thus, a particular agreement or conduct would not be considered anticompetitive (and thus illegal under the PCA) under those provisions if the resulting anticompetitive harms do not outweigh the pro-competitive benefits.
Merger review and control
The PCA also established a regime for mandatory merger review and control. To this end, the PCA grants the Commission the power to review proposed mergers and acquisitions, determine thresholds for notification, determine the requirements and procedures for notification, and prohibit mergers and acquisitions that will substantially prevent, restrict or lessen competition in the relevant market.
Under section 17 of the PCA, parties to mergers and acquisitions (as defined in the PCA) where the value of the transaction exceeds 1 billion pesos are prohibited from consummating their agreement until 30 days after providing notification to the Commission in the form and containing the information specified in regulations to be issued by the Commission. The Commission may promulgate other criteria, such as increased market share in the relevant market, in excess of minimum thresholds, which may be applied specifically to a sector, or across some or all sectors, in determining whether parties to a merger or acquisition shall notify the Commission.
Under the PCA’s merger review and control regime, it is critical to determine:
- the types of transactions that may qualify as mergers or acquisitions covered by the PCA;
- notification thresholds; and
- prohibited mergers and acquisitions under the PCA.
Qualifying merger transactions
Under US and EU competition law, merger control and review regimes typically cover not only mergers, but also acquisitions (whether involving corporate shares or corporate assets) and joint ventures. The PCA’s merger control regime reflects similar coverage.
In general, merger review statutes and regulations cover business transactions in which two or more previously independent economic undertakings are combined in a way that involves a lasting change in the structure or ownership of one or more of the undertakings concerned. In this regard, the PCA defines a ‘merger’ as the ‘joining of two or more entities into an existing entity or to form a new entity.’ This definition is broader than the definition of a merger under the Philippine Corporation Code (Batas Pambansa Blg 68). Under the latter, ‘two or more corporations may merge into a single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation.’ On the other hand, the union of two or more existing corporations to form a new corporation, called the consolidated corporation, is a ‘consolidation’ under the Corporation Code.
The PCA definition appears to have adopted clause 18.104.22.168 of the ASEAN Guidelines, which provides that ‘“[m]ergers” refers to situations where two or more undertakings, previously independent of one another, join together.’ As explained in the ASEAN Guidelines:
the definition [of a merger] includes transactions whereby two companies legally merge into one (‘mergers’), one firm takes sole control of the whole or part of another (‘acquisitions’ or ‘takeovers’), two or more firms acquire joint control over another firm (‘joint ventures’) and other transactions, whereby one or more undertakings acquire control over one or more undertakings, such as interlocking directorates.
Under the PCA, acquisitions refer to the purchase of securities or assets, through contract or other means, for the purpose of obtaining control by:
- one entity of the whole or part of another;
- two or more entities over another; or
- one or more entities over one or more entities.
Other combinations and joint ventures
A merger within the purview of the PCA may also occur where, in the absence of a legal merger under the Corporation Code, the activities of previously independent economic entities combine and result in the creation of a single economic unit. This would be relevant in, say, joint venture agreements where two or more entities, while retaining their individual legal personalities, contractually establish a common economic management or structure. While a joint venture does not have a precise definition under Philippine law, it is typically understood to be a form of partnership where the parties pool together their resources in order to pursue an economic undertaking and where the profits and losses arising from the undertaking will be shared by them.
Most merger review regimes usually include the formation of joint ventures as qualifying merger transactions. For example, under EU competition law, a joint venture will be considered a merger for purposes of merger review if it meets the ‘full functionality’ test. This requires that the joint venture should have been established to operate on a market and perform functions normally carried out by entities operating on the same market. The full functionality test is met (and thus the joint venture will be captured by the EU merger review regime) if the joint venture was formed:
- as an independent or autonomous economic entity with sufficient resources (eg, personnel, facilities and resources to enable it to perform the functions normally carried out by other undertakings operating on the same market); and
- to operate on a lasting (not merely temporary) basis.
On the other hand, in the US, a joint venture is usually captured by the merger review regime insofar as one or more of the parties to the joint venture agreement is deemed to be acquiring assets or voting securities that meet the ‘US$50 million (as adjusted)’ threshold set by the Federal Trade Commission.
It remains to be seen what precise tests or standards the Commission will apply to joint ventures in order to subject them to the merger review and control regime under the PCA.
As mentioned, under the PCA, parties to a covered merger or acquisition must notify the Commission of their transaction prior to the latter’s consummation if the value of their transaction exceeds 1 billion pesos, or meets the other criteria or thresholds that the Commission may set. In other jurisdictions, the threshold value for merger notification may be computed based on the national or worldwide turnover of the merging parties in the last completed financial year, market shares of the parties or a combination of both criteria.
This regime for mandatory notification of mergers under the PCA is consistent with the ASEAN Guidelines and prevents entities from implementing the transaction until they have received merger clearance from the competition regulatory body. The ASEAN Guidelines explain that this helps to avoid a situation where anticompetitive mergers have to subsequently be subject to difficult and costly deconcentration measures imposed by the competition regulatory body.
A merger or acquisition covered by the PCA’s notification requirements that substantially prevents, restricts or lessens competition in the relevant market or in the market for goods or services, as may be determined by the Commission, is prohibited under section 20 of the PCA. In this case, the Commission may prohibit the implementation of the agreement, unless modified in accordance with changes specified by the Commission.
In this regard, the PCA has also adopted the rule of reason for evaluating covered mergers and acquisitions. In essence, a covered merger or acquisition will be disallowed if the resulting anticompetitive harms outweigh any pro-competitive justifications. Section 21 of the PCA provides that a merger or acquisition agreement prohibited under section 20 thereof may be exempt from prohibition by the Commission when the parties establish that the concentration has brought about, or is likely to bring about, gains in efficiencies that are greater than the effects of any limitation on competition that result, or are likely to result, from the merger or acquisition agreement. The exemption may also be possible if a party to the merger or acquisition agreement is faced with actual or imminent financial failure, and the agreement represents the least anticompetitive arrangement among the known alternative uses for the failing entity’s assets.
Enforcement, fines and penalties
The PCA’s enforcement mechanism is what gives it teeth. There are three types of liabilities under the PCA: civil liability, criminal liability and administrative liability. Civil liability pertains to liability for injury to persons and is primarily compensatory in nature. Criminal liability addresses injury or damage to the state and is punitive in nature. Administrative liability relates to disobedience to administrative rules and orders and may also be punitive in nature.
A violator of the PCA may concurrently be held civilly, criminally and administratively liable for the same violation or act, precisely because the different types of liabilities have different purposes. For example, consider two competitor firms that entered into an anticompetitive agreement to fix prices and share or divide the market between the two of them, to the detriment of other competitor firms not parties to the agreement and of the public at large. The two competitor firms may thus be held liable:
- civilly, to private persons, such as the competitor firms not party to the anticompetitive agreement, for damages or loss of profits, as well as to the public;
- criminally, to the state for violating section 14(a) or section 14(b) of the PCA; and
- administratively, for violation of the law and the rules implemented by administrative agencies such as the Commission.
- the Commission, motu proprio or through a verified complaint filed by an interested party or upon recommendation by a regulatory agency, may initiate and conduct an inquiry and impose administrative penalties for violations of the PCA and other rules implemented by the Commission;
- the state may file and prosecute, through the Commission and the OFC under the DOJ, respectively, a criminal case for violation of section 14(a) or section 14(b) of the PCA; and
- an affected competitor firm or a member of the public may file a civil case for damages resulting from an anticompetitive agreement. Under section 45 of the PCA, any person who suffers direct injury by reason of any violation of that law may institute a separate and independent civil action after the Commission has completed its preliminary inquiry (of the violation) under section 31.
The following are the specific civil, criminal and administrative liabilities under the PCA for anticompetitive agreements – whether illegal per se or not – and for abuses of dominant position:
- administrative liability:
- first offence: fine of up to 100 million pesos;
- second offence: fine of between 100 million pesos and 250 million pesos; or
- the exact amount of fine depends on the gravity and duration of the violation. Also, amounts will increase every five years to maintain real value.
- civil liability: damages may be awarded on a case-by-case basis; and
- criminal liability:
- for each offence: imprisonment from two to seven years and a fine of at least 50 million pesos, but no more than 250 million pesos; or
- if the concerned entity is a juridical person, imprisonment is imposed on officers, directors or employees holding managerial positions who are knowingly and wilfully responsible for the violation.
Under section 46 of the PCA, the statute of limitations for violations of the law is five years, reckoned as follows:
- for criminal actions, the time the violation is discovered by the offended party, the authorities, or their agents; and
- for administrative and civil actions, the time the cause of action accrues.
Perhaps in recognition of the significant changes brought out by the PCA to the Philippine competition law framework, section 53 of the law provides for a two-year transitional period (reckoned from the PCA’s effective date) to allow affected parties time to renegotiate agreements or restructure their business to comply with the PCA’s provisions. Under section 53, an existing business structure, conduct, practice or any act that may be in violation of the PCA shall be subject to the administrative, civil and criminal penalties prescribed in the law, only if it is not cured or is continuing upon the expiration of two years after the effectivity of the PCA. Section 53, however, does not apply to proceedings initiated against anticompetitive conduct prior to the PCA.
The way forward
The PCA holds much promise and potential. The passing of the PCA has arguably raised awareness of the need to ensure fair trade practices and curb anticompetitive conduct in the Philippines. As long as the law is enforced and applied properly – starting with the appointment of qualified persons to the Commission and the Commission’s issuance of clear and fair implementing rules and regulations for the law that will fill in necessary details for its due implementation – the law should contribute to and maintain the momentum of the Philippines’ current economic growth.