Notification on joint ventures

The threshold on the transaction value of mergers and acquisitions that should be brought to the attention of the Philippine Competition Commission (PCC) has been increased from P1 billion to P5 billion and P2 billion depending on the gross revenue of the acquiring party and the value of the transaction, respectively.

This and other changes form part of PCC Memorandum Circular No. 18-001, dated March 1, 2018. The cut-off amounts were adjusted to reflect the inflation rate and economic growth in the country.

In its circular, the PCC said the rationale behind the setting of a threshold “is to ensure that mergers or acquisitions that are more likely to substantially lessen competition in the marker for goods and services are subject to compulsory notification … and to exclude those that are less likely to pose competition concerns.”

The transacting parties are required to notify the PCC of the proposed transaction if the following requisites are present:

First, the ultimate parent entity of at least one of the acquiring or acquired entities, which shall include all the entities that the parent entity directly or indirectly controls, has aggregate annual revenues or assets in, into or from the Philippines that exceed P5 billion.

Second, the transaction value exceeds P2 billion and which amount shall be determined based on the nature of the transaction, i.e., acquisition of assets inside or outside of the Philippines, or both; acquisition of voting shares of a corporation or an interest in a noncorporate entity, or a joint venture.

For this, the total value of the underlying assets or shares, or the gross revenue they have generated in, into or from the Philippines shall be taken into account.

Note that the obligation to notify the PCC of the transaction will arise only if the two requisites mentioned are present. If any of the requisites is absent or does not meet the valuation criterion, the PCC need not be notified and the contracting parties can proceed with the transaction.

Under normal circumstances, mergers and acquisitions are, depending on the objective of the acquiring party, effected either by buying the target firm’s assets, minus its liabilities; or its shares of stocks which means acquiring both its assets and liabilities.

Although in the strict sense a joint venture is not in the nature of a merger or acquisition because the parties involved maintain their respective juridical personalities and are temporarily partnering to accomplish a common objective, the PCC nonetheless classifies it as a merger and therefore covered by the notification requirement if the transaction comes within the threshold.

In this case, the PCC considers all the parties involved in the joint venture as the “acquiring entity” and therefore are obliged to make the notification if any of the following conditions are present:

the aggregate value of the assets that will be combined in the Philippines or contributed in the proposed joint venture exceeds P2 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 P2 billion

Consistent with the principle that parties in a joint venture do not lose their respective juridical identities, the valuation of the assets for purposes of determining the application of the notification requirement shall be limited to (a) the properties that the entities involved have agreed to contribute to the joint venture at the time of its signing and in the future, and (b) any amount of credit or obligation of the joint venture that any of the parties has agreed to extend or guarantee at any time.

The P5 billion and P2 billion thresholds earlier mentioned are applicable only for one year from the date of announcement.

The circular states they shall be adjusted starting March 1, 2019 and on March 1 of every succeeding year using as index the Philippine Statistics Authority’s official estimate of the nominal Gross Domestic Product growth of the previous calendar year rounded up to the nearest hundred millions.