On 12 February 2019, the Philippine Competition Commission (PCC) released its first ever decision prohibiting a proposed merger in the Philippines and rejecting the voluntary commitments of the parties to the transaction.
The PCC blocked the merger of Universal Robina Corporation (URC) with Central Azucarera Don Pedro Inc (CADPI) and Roxas Holdings Inc (RHI) on the basis that it will lead to a monopoly in the sugarcane milling services market in southern Luzon province.
Implications for business
Mergers and acquisitions (M&A) and joint venture transactions that meet the thresholds for mandatory notification under the Implementing Rules and Regulations (IRR) of the Philippine Competition Act (PCA) must comply with the mandatory notification procedure, timelines and requirements under the IRR and the new Rules on Merger Procedure before consummation of the deal.
If the PCC determines that the proposed transaction substantially prevents, restricts or lessens competition in the relevant market, or in the market for goods or services, it may: (1) prohibit the implementation of the agreement; (2) prohibit the implementation of the agreement unless and until it is modified by changes specified by the PCC; or (3) prohibit the implementation of the agreement unless and until the pertinent party or parties enter into legally enforceable agreements specified by the PCC.
Prohibited M&A transactions may, nonetheless, be exempt from prohibition when the parties establish that: (1) the concentration has brought about, or is likely to bring about, gains in efficiencies that are greater than the effects of any limitations on competition that result or are likely to result from the merger or acquisition agreement; or (2) a party to the merger or acquisition agreement is faced with actual or imminent financial failure, and the agreement represents the least anti-competitive arrangement among the known alternative uses for the failing entity’s assets.
The PCC’s decision signals that it will not hesitate to exercise its power to prohibit a proposed M&A transaction if it determines that the same may lead to a monopoly and potential harm for stakeholders in the relevant market.
What the case says
URC is engaged in a wide range of food-related businesses. Its sugar division operates six mills producing raw sugar, refined sugar and molasses for supply to other URC business segments and third parties.
RHI owns 100% of the shares in CADPI (RHI-CADPI), which also operates an integrated sugar cane milling and refining plant. RHI is also engaged in the trading of raw and refined sugar and molasses.
URC proposed to acquire all buildings, machinery and equipment, land and other assets necessary for the operations of the refinery and milling plant of RHI-CADPI located at Batangas. The PCC raised competition concerns on the proposed transaction, and the parties voluntarily committed to increase sugar recovery rates, perform capital upgrades, maintain trucking allowances, provide planter assistance, share ratios, and obtain feedback from stakeholders.
In its decision, the PCC stated that although URC’s sugar mill is located in Balayan, Batangas while that of CADPI-RHI is in Nasugbu, Batangas, the monopoly that would be created by the merger would substantially lessen competition in the sugar milling services market not only in Batangas, but also in Cavite, Laguna, and Quezon. Based on its earlier investigations, the PCC expressed concerns that farmers would stand to lose the benefits of competition due to the merger, especially in terms of planters’ cut in sharing agreements, sugar recovery rates and incentives. In particular, the PCC raised the following competition concerns:
- The transaction is a merger-to-monopoly and will eliminate the only competitor of URC in the relevant market;
- The transaction will create market power for URC and allow it to unilaterally reduce the planters’ share in the planter-miller sharing agreement, the theoretical recovery rates quoted to planters, and the incentives provided to planters;
- Other sugar mills outside of Batangas are too far away (Pampanga, Tarlac, Camarines Sur), thus not sufficient to constrain URC from exercising market power; and barriers to entry are high and the possibility of a new entrant seems remote, and may not be immediately forthcoming as to constrain URC from exercising market power after the transaction.
The PCC ultimately rejected the proposed commitments of the parties on the basis that these failed to sufficiently address the competition concerns.
The decision is a clear indication that the PCC intends to enforce fully the PCA in case it finds M&A agreements to be anti-competitive. It also shows that the PCC will not hesitate to block M&A if voluntary commitments and other measures are not sufficient to address the substantial lessening of competition arising from the proposed transaction.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by emailing Danian Zhang at firstname.lastname@example.org.