On 10 September 2018, the Philippine Competition Commission (“PCC”) issued its Guidelines on Notification of Joint Ventures (“JV Guidelines”) to aid parties in assessing whether a proposed M&A transaction would be considered a joint venture (“JV”) that is subject to mandatory notification under the Philippine Competition Act (“PCA”), and in the application of the thresholds for mandatory notification to a JV. The JV Guidelines apply to JVs between public or private entities, and shall be effective immediately.
Implication for Business in the Philippines
Under the JV Guidelines, a notifiable JV may be formed by (i) either incorporating a JV company (“JV Company”), (ii) entering into a contractual JV (“Contractual JV”), or (iii) acquiring shares in an existing corporation. An acquisition of shares in an existing corporation constitutes a JV if joint control will exist among the JV partners (“JV Partners”). Joint control refers to the ability of the JV Partners to substantially influence or direct the actions or decisions of the joint venture, whether by contract, agency or otherwise. Equity ownership does not solely establish the presence or absence of joint control, such as when minority shareholders have rights that allow them to veto decisions that are essential to the strategic commercial operations of the JV Company. Therefore, an acquisition of a minority interest may result in a notifiable JV if there will be joint control among the JV Partners, post-transaction.
For purposes of computing the mandatory notification thresholds, the JV Partners are considered the acquiring entities, while the JV entity is considered the acquired entity. If the JV entity or a Contractual JV is yet to be formed, only the acquiring entities are required to file notification forms.
In the absence of joint control in an acquisition of shares in an existing corporation, the relevant thresholds for acquisition of shares shall be applied to determine if the transaction should be notified to the PCC.
What the Guidelines Say
The JV Guidelines provide that a JV may be formed by (i) either incorporating a JV Company, (ii) entering into a Contractual JV, or (iii) acquiring shares in an existing corporation.
In a Contractual JV, the parties enter into a legal and binding agreement under which the contributing entities shall perform the primary functions and obligations under the JV Agreement without forming a JV Company.
Manner of Filing a PCC Notification Form for a JV
The JV Guidelines provide additional guidance on the notification process for a JV that meets the notification thresholds:
- For purposes of notification, the JV Partners shall be deemed as the Acquiring Entities while the JV Entity is the Acquired Entity.
- If the JV Company or a Contractual JV is yet to be formed, only the Acquiring Entities are required to file their notification forms. Each JV Partner must also submit information relating to the proposed JV, such as its business objectives, term, degree of participation of each JV Partner, and defined combination and contribution of assets and division or profits, risks and losses, among others.
- In the case of acquisition of shares in an existing Entity, the prospective JV Partners are the Acquiring Entities. The Acquired Entity shall be the existing Entity, as well as the existing shareholder/s exercising control over such Entity. For this type of transaction, all the Acquiring and the Acquired Entities must file their respective notification forms.
Basis for Computation of Thresholds
Parties to a proposed JV must notify the PCC if the transaction meets the Size of Person Test and the Size of Transaction Test.
Size of Person Test
A JV will meet the Size of Person Test if the aggregate annual gross revenues in, into or from the Philippines, or value of the 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 controls, directly or indirectly, exceeds Php 5 Billion.
Size of Transaction Test
A joint venture transaction shall be subject to notification if either:
- the aggregate value of the assets that will be combined in the Philippines or contributed into the proposed joint venture exceeds Php 2 Billion or
- the gross revenues generated in the Philippines by assets to be combined in the Philippines or contributed into the proposed joint venture exceed Php 2 Billion
In the case of a JV that is formed through the acquisition of shares in an existing corporation, the aggregate value of the assets or gross revenues to be combined or contributed will include the assets of the existing corporation or JV Company, or the gross revenues generated by such assets.
In determining the value of assets of the JV, the following shall be included:
- all assets which any entity contributing to the formation of the JV has agreed to transfer, at any time, whether or not such entity is subject to the requirements of the act; and
- any amount of credit or any obligations of the JV which any entity contributing to the formation has agreed to extend or guarantee, at any time.
In addition, the following deferred or future contributions to the JV would also be considered in applying the Size of Transaction Test:
- any deferred contribution to the JV that is contemplated in the JV agreement;
- any subsequent transfer of assets contained in any subsequent agreement provided that the subsequent agreement is executed within one (1) year from the JV agreement; and
- any agreement to transfer assets subject to a condition that may or may not occur, is included upon fulfillment of such condition.
The JV Guidelines highlight the element of ‘joint control’ over the JV . Therefore, in an acquisition of shares resulting in joint control over the JV Company, the transaction will be considered a JV, and there is no minimum percentage of shares that must be acquired to meet the Size of Transaction Test.
On the other hand, absent the element of joint control, the transaction would be subject to the notification thresholds for an acquisition of shares or acquisition of assets as the case may be, and not those for a JV.
Element of Joint Control
In the context of JVs, joint control refers to the ability of the JV Partners to substantially influence or direct the actions or decisions of the joint venture, whether by contract, agency or otherwise. The JV Guidelines provide the following rules to determine whether there is joint control, post-transaction:
- Joint control 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).
- Joint control may be established on a de jure or de facto basis, such as in the equality of voting rights, appointment to decision-making bodies, veto rights, joint exercise of voting rights, or in analogous cases.
- Veto rights that establish joint control must be related to strategic decisions in the business policy or activities of the JV. This includes decisions on issues such as the appointment of corporate officers or key management personnel, determination of the budget, adoption of and amendments to the business plan and other similar aspects of business management.
- Two or more minority shareholders may obtain joint control in the JV in instances where the minority shareholdings provide for the means of controlling the JV.
Actions to Consider
Parties involved in or contemplating an M&A transaction should carefully review whether the same might be considered a JV for purposes of a mandatory notification under the PCA . As early as possible in the course of the transaction, parties should consider both short-term and long-term arrangements that may impact the characterization of the transaction, and the application of the thresholds for mandatory notification. Among others, parties should keep in mind that an acquisition of shares in an existing entity may still be subject to mandatory notification as a JV without being subject to any minimum share acquisition requirement. In the event of uncertainty as to the rules that will apply to their transaction, it would be prudent for parties to seek legal advice, in managing the transaction.
Parties that consummate an M&A transaction that meets the thresholds for mandatory notification without notifying the PCC, will be liable for the twin penalties of (i) an administrative fine ranging from 1% – 5% of the value of the transaction; and (ii) the transaction shall be considered void. The determination of the administrative fine may be adjusted accordingly in case of the presence of certain mitigating or aggravating circumstances.