Expanded concept of M&As in competition law
Is the concept of merger and acquisition in corporate law the same under the Philippine Competition Act (PCA)?
In corporation law, merger is the absorption of one or more corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises, properties, claims, liabilities and obligations of the absorbed corporation(s). The absorbing corporation continues its existence while the life or lives of the other corporation(s) is or are terminated.
Consolidation, on the other hand, is the union of two or more corporations into a single new corporation. All the constituent corporations cease to exist as separate legal entities. The consolidated corporation will possess all the rights, privileges, immunities, franchises and properties, and assume all the liabilities and obligations of each of the constituent corporations in the same manner as if it had itself incurred such obligations.
The PCA defines a merger as “the joining of two or more entities into an existing entity or to form a new entity.”
It basically adopts the concept of merger as traditionally understood in corporate law. But unlike corporate law which distinguishes between merger and consolidation, the PCA includes consolidation in the concept of merger.
The PCA extends the definition of mergers and consolidations to sole proprietorships and partnerships. This is so because it does not talk of mergers of corporations. It talks about mergers of entities. An entity is defined by the PCA as any person, natural or juridical, sole proprietorship, partnership, combination or association in any form, whether incorporated or not, domestic or foreign, including those owned or controlled by the government, engaged directly or indirectly in any economic activity.
Equally important is the concept of acquisition under the PCA.
Section 4(a) defines the term “acquisition” as the “the purchase of securities or assets, through contract or other means, for the purpose of obtaining control by: (1) “one entity of the whole or part of another; (2) “two or more entities over another; or (3) one or more entities over one or more entities.”
Under the PCA, “control” refers to the “ability to substantially influence or direct the actions or decisions of an entity, whether by contract, agency or otherwise.”
Control is presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than one half of the voting power of an entity, unless in exceptional circumstances, it can clearly be demonstrated that such ownership does not constitute control.
But what if the acquiring entity acquires less than 50 percent of the voting stock of an entity? Does it mean that the transaction is exempt from the notification requirement mandated by the PCA?
The PCA expressly provides that “control also exists even when an entity owns one half or less of the voting power of another entity when there: (a) is power over more than one half of the voting rights by virtue of an agreement with investors; (b) is power to direct or govern the financial and operating policies of the entity under a statute or agreement; (c) is power to appoint or remove the majority of the members of the board of directors or equivalent governing body; (d) is power to cast the majority votes at meetings of the board of directors or equivalent governing body; (e) exists ownership over or the right to use all or a significant part of the assets of the entity; (f) exist rights or contracts which confer decisive influence on the decisions of the entity.
The concept of control under the PCA is basically the same as that under the Securities Regulation Code (SRC) Rules. But unlike the SRC Rules, the PCA does not limit the concept of control to share ownership and voting control. It expands the concept to the right to use or ownership of assets.
To be sure, in defining the term “acquisition,” the PCA includes purchase of assets. It defines the term as the “the purchase of securities or assets, through contract or other means, for the purpose of obtaining control by: (1) “one entity of the whole or part of another; (2) “two or more entities over another; or (3) “one or more entities over one or more entities.”
It provides that even if the acquiring entity owns less than 50 percent of shares, there is control where there “exists ownership over or the right to use all or a significant part of the assets of the entity.”
Unlike corporate law that distinguishes between share and asset acquisition, the PCA does not differentiate between the two concepts.
Clearly, the notification requirement under the PCA applies not only to acquisition of voting control but also to acquisition of all or substantial assets of an entity for the purpose of obtaining control thereof.
Also interesting is the question of whether a joint venture is considered a merger under the PCA and/or governed by the PCA. We can discuss this separately in a future column.
(The author is a senior partner in the Angara Abello Concepcion Regala & Cruz Law Offices and teaches law in the Ateneo Law School. The views in this column are exclusively his and may not be attributed to the institutions with which he is connected. He may be contacted through [email protected])
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