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Point of Law

Francisco Ed. Lim

Red tape in infra projects

Francisco Ed. Lim

July 28, 2017

President Duterte’s ambitious infrastructure plan, dubbed the “Build, Build, Build” program, has attracted significant interest from investors.

Sometimes, we even see known competitors joining forces to build a project. An example is the LRT-1 Cavite Extension Project, which is being constructed by a consortium composed of Metro Pacific Light Railway Corp. led by the group of Manuel V. Pangilinan and AC Infrastructure Holding’s Corporation of the Ayala group.

The legal vehicle usually used by these firms is a joint venture company, organized under the Corporation Code.

As I have written in the past, there is a relatively new law enacted by Congress to ensure free and fair competition in the market. This law is Republic Act No. 10667, otherwise known as the Philippine Competition Act (PCA), which is being implemented and enforced by the Philippine Competition Commission (PCC).

The PCA prohibits, among others, anti-competitive mergers or acquisitions (M&A), i.e., those that substantially prevent, restrict or lessen competition in the relevant market.

Under the new law, there is a built-in mechanism to determine whether an M&A is anti-competitive: the compulsory notification process. When the M&A has a transaction value of more than P1 billion, the law requires the parties to notify the PCC. It does not matter whether the parties are competitors or that the joint venture involves an activity unrelated to the main line of business of the partners. As long as the transaction is an M&A that meets the threshold, the new law appears to require the parties to comply with the notification requirement.

Here lies the problem.

The PCA defines a merger as “the joining of two or more entities into an existing entity or to form a new entity.” In corporate law, this usually refers to a merger where two or more companies combine to become one entity and there is only one surviving company that takes over all the assets and liabilities of the non-surviving entity. It also refers to consolidation where the original companies disappear and there is a totally new company that takes over the assets and liabilities of the old corporations.

If one carefully looks at the PCA rules, a merger includes a joint venture. In other words, for PCA purposes, the parties are required to notify the PCC before execution of the definitive agreement for their joint venture transaction. The new law and its rules prohibit the parties from consummating the transaction before the expiration of the relevant period, which can be more than six months.

In practical terms, there can be significant delay in the implementation of the infrastructure project.

There is also a question on whether or not joint ventures must be included in the compulsory notification process.

Some say this is a case of administrative legislation because the PCA does not include joint venture in the definition of a merger, but its rules do include that.

The PCC might also argue that the definition of merger under the law is broad enough to include a joint venture.

Meantime, concerned parties may want to get legal advice on the compulsory notification requirement. The issue poses significant legal risk. Failure to comply with the notification requirement may not only expose the parties to an administrative fine of 1-5 percent of the transaction value, but worse, it may make the joint venture agreement void.

It will be advisable for the PCC to work with agencies involved in infrastructure projects to make a mutually acceptable arrangement to address the matter, otherwise the new law will be another bureaucratic red tape that will cause further delays in the much-needed infrastructure projects.