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Amicus Curiae

Edson Byron K. Sy

Is corporate restructuring subject to compulsory notification?

Edson Byron K. Sy

August 25, 2016

The recent issuance of the Implementing Rules and Regulations (IRR) of the Philippine Competition Act (PCA) is a game changing regulation for corporations doing business in the Philippines. The IRR clarifies the notification requirement for mergers and acquisitions, among others, and regulates mergers and acquisitions of businesses. Simply put, large corporations cannot continue their business practice of merging or acquiring other businesses without considering the effects of such transaction in the market.
  
While the PCA merely provides for compulsory notification to the Philippine Competition Commission (PCC) when the value of the transaction exceeds P1 billion, the IRR further clarifies the value of the transaction by using gross revenues and/or value of the assets as basis in computing the compulsory notification threshold for asset purchase, share purchase, and joint venture. Instead of looking at the transaction price, the P1 billion threshold is applied to the gross revenues and/or the value of the assets in the Philippines.
 
Even as the IRR clarified the notification rule for business transactions, the applicability of the notification requirement in an internal corporate restructuring arrangement seems to be a lingering question for businessmen and lawyers alike. As currently worded, it appears that the IRR is broad enough to cover all types of transactions, including corporate restructuring. The IRR does not specifically provide for its exception, leaving some businessmen to postpone or abandon any plans of restructuring. Corporations are more likely to comply with the notification requirement for fear of violating the law, which carries a penalty of 1% to 5% of the transaction value.
 
Further issuances or guidelines from the PCC may help clarify the situation. In the meantime, the PCC may want to consider excluding corporate restructuring from the coverage of the notification requirement for the following reasons:
 
First, there is generally no change in control taking place at the level of the parent entity in corporate restructuring. Control is defined as the ability to substantially influence or direct the actions or decisions of an entity. It is presumed to exist when the parent owns directly or indirectly, through subsidiaries, more than one-half of the voting power of an entity. In corporate restructuring, it is common practice for the parent to direct the policies of the restructured organizations, directly or indirectly.
 
Second, the IRR requires the ultimate parent entities of the parties to the transaction to make the notification. It would seem that the IRR contemplates of two independent entities to be the parties to the transaction. In corporate restructuring, the ultimate parent entity of the restructured organizations would be one and the same entity.
 
Third, it is difficult to argue that corporate restructuring will substantially prevent, restrict, or lessen competition in the relevant market or in the market for goods and services when the same entity controls the restructured organizations. There would be little to no impact in the existing structure of the market. It is important to consider that the purpose of a good number of corporate restructuring is to maximize profitability and efficiency, which in turn could benefit consumers.
 
Nonetheless, the discussion above only covers internal corporate restructuring within a group of corporations where there is no change in control. In other words, the concept of single economic entity should still be present in the resulting reorganization.
 
Pending confirmation from the PCC, an entity may want to consider scheduling a pre-notification consultation with the PCC before undertaking corporate restructuring. The pre-notification consultation may be availed of to seek a non-binding advice from the PCC prior to filing a notification.
 
With the hefty penalty imposed on the parties for violating the notification requirement of the PCA and its IRR, an entity contemplating of restructuring would just be inclined to file a notification to play it safe. Others would simply postpone restructuring until a more definite ruling is made by the PCC. A clear position from the PCC would certainly enlighten the business community.
 
In further improving our competition law, the PCC should consider that internal corporate restructuring is less likely to have an adverse effect in the market. It may even lead to efficiency gains for consumers. The PCC may want to exclude corporate restructuring from the coverage of compulsory notification, or impose a less rigorous notification requirement instead, to make sure that the Philippines remains to be business-friendly.
 
During the public consultations for the IRR, the PCC reiterated many times that the IRR would be supplemented by other issuances that will improve and develop our competition law. We can only hope that this matter will be clarified by the PCC soon to settle the issue once and for all.