PCC needs balance with joint venture guidelines

On 15 September 2018, the Philippine Competition Commission (PCC) published the Joint Venture Guidelines (JV guidelines), aimed at helping 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).

In the Philippines, a JV may be formed through any of the following schemes, among others: (1) incorporation of a new company; (2) entering into a contractual JV; or (3) acquiring shares in an existing JV entity. The JV guidelines provide the basis for computation of the notification thresholds for JV transactions, and declare that a transaction is notifiable when parties to a JV meet both the size of party and size of transaction tests.

Under the JV guidelines, the size of party limit is exceeded 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 PHP5 billion (US$92 million).

On the other hand, 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 their contribution to the proposed JV, exceed PHP2 billion, or the gross revenues generated in the Philippines by assets combined or contributed to the JV exceed PHP2 billion.

In the case of the acquisition of shares in an existing JV entity, the JV guidelines provide that the assets or gross revenues generated by such assets of the existing JV entity shall be included in determining the threshold. Assets refer to both tangible and intangible assets pursuant to the PCC Guidelines on the Computation of Merger Notification Thresholds.

In case the JV partner intends to defer its contribution to the JV, the deferred contribution forms a part in determining the amount of contribution to the JV, provided it is contemplated in the JV agreement. Should the JV partners agree to transfer assets that constitute successive contributions not included in the JV agreement, the subsequent transfer of assets contained in any subsequent agreement within one year from the JV agreement must be treated as part of the JV agreement. In case the JV partners agree to transfer assets subject to conditions that may or may not occur, the JV partners are required to notify the PCC within 30 days from fulfillment of such conditions.

The JV guidelines mandate 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.

Veto rights over specific decisions critical or essential for the JV in the particular market it in which it does, or will, operate may be an important element in establishing the existence of joint control. A joint control may manifest itself in different forms such as equality in voting rights or appointment to decision-making bodies, veto rights, or joint exercise of voting rights. However, equity ownership alone does not establish the presence or absence of joint control. The JV guidelines recognize that although a JV partner may hold a minority stake in the JV, they may still exercise substantial influence on the JV. In the acquisition of shares in an existing entity, there is no minimum percentage of shares that must be acquired to establish joint control.

It is worth noting that entities intending to form part of a JV are presumed to acquire joint control whether through the formation of the JV or through the acquisition of shares in an existing entity conferring joint control, post-transaction.

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 in the vanguard against activities and transactions that would stifle competition and harm consumer welfare.

Mara Kristina O Recto is an associate at the Corporate and Special Projects Department of ACCRA Law Offices