23rd Jun 2016

Free trade in the Philippines has been a battle cry of businesses in all nations. With the influx of globalization, new business models have been created, leading to more innovative modes of doing business in the Philippines. On the face of a highly competitive business environment in the Philippines, profitable commercial entities have blossomed leaving smaller competitors to close shop. Certain segments of the Philippine market have in fact been left to the hands of a few businesses who have remained strong market leaders, even with the entry of global business players.

The government saw the dangers of leaving important industries such as power, telecommunications, health, among others, to a few businesses, who because of their market control, can actually dictate pricing, supply, and control the market to their advantage.

The Revised Penal Code, particularly Article 186, is one piece of antiquated legislation, which was enacted to curb the tendencies of big business players from employing devices and schemes for the commercial benefit, and to the detriment of the public.

Article 186, which punishes certain forms of monopolies and combinations and restraints of trade provides:

Art. 186. Monopolies and combinations in restraint of trade. — The penalty of prision correccional in its minimum period or a fine ranging from 200 to 6,000 pesos, or both, shall be imposed upon:

1. Any person who shall enter into any contract or agreement or shall take part in any conspiracy or combination in the form of a trust or otherwise, in restraint of trade or commerce or to prevent by artificial means free competition in the market;

2. Any person who shall monopolize any merchandise or object of trade or commerce, or shall combine with any other person or persons to monopolize and merchandise or object in order to alter the price thereof by spreading false rumors or making use of any other article to restrain free competition in the market;

3. Any person who, being a manufacturer, producer, or processor of any merchandise or object of commerce or an importer of any merchandise or object of commerce from any foreign country, either as principal or agent, wholesaler or retailer, shall combine, conspire or agree in any manner with any person likewise engaged in the manufacture, production, processing, assembling or importation of such merchandise or object of commerce or with any other persons not so similarly engaged for the purpose of making transactions prejudicial to lawful commerce, or of increasing the market price in any part of the Philippines, of any such merchandise or object of commerce manufactured, produced, processed, assembled in or imported into the Philippines, or of any article in the manufacture of which such manufactured, produced, or imported merchandise or object of commerce is used.

If the offense mentioned in this article affects any food substance, motor fuel or lubricants, or other articles of prime necessity, the penalty shall be that of prision mayor in its maximum and medium periods it being sufficient for the imposition thereof that the initial steps have been taken toward carrying out the purposes of the combination.

Any property possessed under any contract or by any combination mentioned in the preceding paragraphs, and being the subject thereof, shall be forfeited to the Government of the Philippines.

Whenever any of the offenses described above is committed by a corporation or association, the president and each one of its agents or representatives in the Philippines in case of a foreign corporation or association, who shall have knowingly permitted or failed to prevent the commission of such offense, shall be held liable as principals thereof.

However, the Revised Penal Code, where Article 186 is found, was enacted more than fifty years ago. Moreover, the Revised Penal Code patterned after the Spanish Penal Code which was enacted more than a century ago. During the time of its enactment, Philippine legislators certainly did not envision the mechanics of doing business in the Philippines.

Moreover, the government saw the dangers and potentials of big business players, and their ability to stifle competition and prevent the entry of new players in the market, given the newer schemes that may be employed and which are not found in Article 186 of the Revised Penal Code.

The Philippine legislators, responding to the call of times, enacted Republic Act No. 10667 otherwise known as the Philippine Competition Act. This law is not entirely new, as it was passed as early as 28 July 2014. This law is a great feat for the Philippine Congress, given that the law has been sitting as a bill for the past twenty-five (25) years, before it was enacted into law in 2014.

It is the policy of the law to “liberalize key sectors in the economy”, and provide “equal opportunities to all” in pursuit of the entrepreneurial spirit. Through the law, the Philippine government encourages private investments, facilitates technology development and transfer and enhances resource productivity.

Its thrust, therefore, is to “regulate or prohibit monopolies when the public interest so requires and that no combinations in restraint of trade or unfair competition shall be allowed”

Under the law, the State shall envisions to enhance economic efficiency and promote free and fair competition in trade, industry and all commercial economic activities, establish a National Competition Policy to be implemented by the Government of the Republic of the Philippines and all of its political agencies as a whole, prevent economic concentration which will control the production, distribution, trade, or industry that will unduly stifle competition, lessen, manipulate or constrict the discipline of free markets, and penalize all forms of anti-competitive agreements, abuse of dominant position and anti-competitive mergers and acquisitions, with the objective of protecting consumer welfare and advancing domestic and international trade and economic development.

The Philippine Competition Act is a landmark piece of legislature which applies to any person or entity engaged in any trade, industry and commerce in the Republic of the Philippines. It shall likewise be applicable to international trade having direct, substantial, and reasonably foreseeable effects in trade, industry, or commerce in the Republic of the Philippines, including those that result from acts done outside the Republic of the Philippines.

The passage of the Philippine Competition Act resulted in the repeal of Article 186 of the Revised Penal Code, and other laws, to wit:

(a) Article 186 of Act No. 3815, otherwise known as the Revised Penal Code

(b) Section 4 of Commonwealth Act No. 138;

(c) Section 43(u) on Functions of the ERC of Republic Act No. 9136, entitled “An Act Ordaining Reforms in the Electric Power Industry, Amending for the Purpose Certain Laws and for Other Purposes”, otherwise known as the “Electric Power Industry Reform Act of2001”, insofar as the provision thereof is inconsistent with this Act;

(d) Section 24 on Illegal Acts of Price Manipulation and Section 25 on Penalty for Illegal Acts of Price Manipulation of Republic Act No. 9502, entitled “An Act Providing for Cheaper and Quality Medicines, Amending for the Purpose Republic Act No. 8293 or the Intellectual Property Code, Republic Act No. 6675 or the Generics Act of 1988, and Republic Act No. 5921 or the Pharmacy Law, and for Other Purposes”, otherwise known as the “Universally Accessible Cheaper and Medicines Act of 2008”. insofar as the provisions thereof are inconsistent with this Act; and

(e) Executive Order No. 45, Series of 2011, Designating the Department of Justice as the Competition Authority, Department of Justice Circular 005 Series of 2015, and other related issuances, insofar as they are inconsistent with the provisions of this Act.

The passage of the Philippine Competition Act also resulted in the creation of the Philippine Competition Commission, composed of a chairperson and four (4) commissioners, with broad executive, quasi-legislative and quasi-judicial powers to enforce the law, enact regulations, and hear and decide cases under its jurisdiction.

Excepted from its application are combinations or activities of workers or employees, agreements or arrangements of employers and employees, where such combinations, activities, agreements, or arrangements “are designed solely to facilitate collective bargaining in respect of conditions of employment.”

In sum, the law talks about an entity acquiring securities or assets of another, through contract or other means, for the purpose of obtaining control by one entity over another, by two (2) entities over another, or by one entity over one or more entities.

The law lists down various acts which are punishable:

Sec. 14. Anti-Competitive Agreements. 

(a) The following agreements, between or among competitors, are per se prohibited:

(1) Restricting competition as to price, or components thereof, or other terms of trade;

(2) Fixing price at an auction or in any form of bidding including cover bidding, bid suppression, bid rotation and market allocation and other analogous practices of bid manipulation;

(b) The following agreements, between or among competitors which have the object or effect of substantially preventing, restricting or lessening competition shall be prohibited:

(1) Setting, limiting, or controlling production, markets, technical development, or investment;

(2) Dividing or sharing the market, whether by volume of sales or purchases, territory, type of goods or services, buyers or sellers or any other means;

(c) Agreements other than those specified in (a) and (b) of this section which have the object or effect of substantially preventing, restricting or lessening competition shall also be prohibited: Provided, Those which contribute to improving the production or distribution of goods and services or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits, may not necessarily be deemed a violation of this Act.

An entity that controls, is controlled by, or is under common control with another entity or entities, have common economic interests, and are not otherwise able to decide or act independently of each other, shall not be considered competitors for purposes of this section.

The law also defines the term “Abuse of Dominant Position”, which prohibits “one or more entities to abuse their dominant position by engaging in conduct that would substantially prevent, restrict or lessen competition”. The punished acts which are tantamount to abuse of dominant position are identified as follows:

(a) Selling goods or services below cost with the object of driving competition out of the relevant market: Provided, That in the Commission’s evaluation of this fact, it shall consider whether the entity or entities have no such object and the price established was in good faith to meet or compete with the lower price of a competitor in the same market selling the same or comparable product or service of like quality;

(b) Imposing barriers to entry or committing acts that prevent competitors from growing within the market in an anti-competitive manner except those that develop in the market as a result of or arising from a superior product or process, business acumen, or legal rights or laws;

(c) Making a transaction subject to acceptance by the other parties of other obligations which, by their nature or according to commercial usage, have no connection with the transaction;

(d) Setting prices or other terms or conditions that discriminate unreasonably between customers or sellers of the same goods or services, where such customers or sellers are contemporaneously trading on similar terms and conditions, where the effect may be to lessen competition substantially.

(e) Imposing restrictions on the lease or contract for sale or trade of goods or services concerning where, to whom, or in what forms goods or services may be sold or traded, such as fixing prices, giving preferential discounts or rebate upon such price, or imposing conditions not to deal with competing entities, where the object or effect of the restrictions is to prevent, restrict or lessen competition substantially

(f) Making supply of particular goods or services dependent upon the purchase of other goods or services from the supplier which have no direct connection with the main goods or services to be supplied;

(g) Directly or indirectly imposing unfairly low purchase prices for the goods or services of, among others, marginalized agricultural producers, fisherfolk, micro-, small-, medium-scale enterprises, and other marginalized service providers and producers;

(h) Directly or indirectly imposing unfair purchase or selling price on their competitors, customers, suppliers or consumers, provided that prices that develop in the market as a result of or due to a superior product or process, business acumen or legal rights or laws shall not be considered unfair prices; and

(i) Limiting production, markets or technical development to the prejudice of consumers

The law further enumerated exceptions to what would constitute abuse of dominant position, such as socialized pricing for the less fortunate sector of the economy, price differential which reasonably or approximately reflect differences in the cost of manufacture, sale, or delivery resulting from differing methods, technical conditions, or quantities in which the goods or services are sold or delivered to the buyers or sellers, among others. Moreover, activities such as Permissible franchising, licensing, exclusive merchandising or exclusive distributorship agreements such as those which give each party the right to unilaterally terminate the agreement, and agreements protecting intellectual property rights, confidential information, or trade secrets are excepted from the term abuse of dominant position.

Mergers and acquisitions, where the merger or acquisition will result in a transaction that will breach the threshold amount under the Philippine Competition Law is now subject to scrutiny and regulation. In particularly, where the merger or acquisition or the value of the transaction exceeds one billion pesos (P1,000,000,000.00), the parties are prohibited from consummating their agreement until thirty (30) days after providing notification to the Philippine Competition Commission in the form and containing the information specified in the regulations issued by the Philippine Competition Commission.

In addition to the requirements of the Corporation Code on mergers and acquisitions, the Philippine Competition Law now requires the submission of additional documents, affidavits and disclosures which will be evaluated by the Philippine Competition Commission, subjected to scrutiny and thereafter, a determination of whether the merger or acquisition will be approved or not.

An agreement consummated in violation of this requirement of the law is expressly declared as null and void. Moreover, the parties to the transaction are subjected to a steep fine of one percent (1%) to five percent (5%) of the value of the transaction.

Even if the specific regulatory agency governing mergers or acquisitions of banks, banking institutions, building and loan associations, trust companies, insurance companies, public utilities, educational institutions and other special corporations governed by special laws, have already given their approval to the proposed contract, this does not dispense with the requirement of securing notifying the Philippine Competition Commission, in addition to the requirement of a favorable recommendation by the appropriate government agency under Section 79 of the Corporation Code of the Philippines.

As an exception to the threshold, there are mergers and acquisitions which have been declared as prohibited per se such that such entities cannot merge and will not be approved by the Philippine Competition Commission. The law states that merger or acquisition agreements that substantially prevent, restrict or lessen competition in the relevant market or in the market for goods or services as may be determined by the Commission shall be prohibited. The Philippine Competition Commission, however, has yet to make such determination.

There are a few exceptions to the rule on prohibited merger and acquisitions and these may be raised by either party to the merger or acquisition, who shall establish that the concentration has brought about or is likely to bring about gains in efficiencies that are greater than the effects of any limitation on competition that result or likely to result from the merger or acquisition agreement, or 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. In such cases, being the exception to the rule, the burden of proof is upon the party seeking the extension. Such party must prove the existence of significant gains if the agreement or merger or acquisition is implemented, and non-realization of such gains, where the agreement is not implemented.

Note however that the Philippine Competition Law’s manner of repeal states that “laws, and all other laws, decrees, executive orders and regulations, or part or parts thereof inconsistent with any provision of this Act, are hereby repealed, amended or otherwise modified accordingly.” This gives rise to the possibility that Article 186, among others, would still be applicable insofar as transactions which are not covered by the new competition law. Thus, it may be argued that transactions not beyond the threshold amount of One Billion Pesos (P1,000,000,000.00) may still be covered by Article 186, notwithstanding the repealing clause in the law.

Finally, it will be in the best interest of the parties to a merger or acquisition to first determine whether their merger or acquisition is covered by the law, and if so, to ensure compliance with its provisions. The penalties under the law are gargantuan, with a fine for a first time violator of up to One Hundred Million Pesos (P100,000,000.00) and for a second offense, a minimum find of One Hundred Million Pesos (P100,000,000.00) and up to Two Hundred  Million Pesos (P200,000,000.00).

Other administrative penalties are:

A penalty of not less than fifty thousand pesos (P50,000.00) – two million pesos (P2,000,000.00) per violation, per day, where there is failure or refusal to comply with a ruling, order or decision issued by the Philippine Competition Commission, until the said entity fully complies. 

Fines of up to one million pesos (PI,000,000.00) where, intentionally or negligently, they supply incorrect or misleading information in any document, application or other paper filed with or submitted to the Commission or supply incorrect or misleading information in an application for a binding ruling, a proposal for a consent judgment, proceedings relating to a show cause order, or application for modification of the Commission’s ruling, order or approval, as the case may be.

Any other violations not specifically penalized under the relevant provisions of this Act shall be penalized by a fine of not less than fifty thousand pesos (P50,000.00) up to two million pesos (P2,000,000.00).

The law also has a penal clause. An entity that enters into any anti-competitive agreement as covered by Chapter III, Section 14(a) and 14(b) under this Act shall, for each and every violation, be penalized by imprisonment from two (2) to seven (7) years, and a fine of not less than fifty million pesos (P50,000,000.00) but not more than two hundred fifty million pesos (P250,000,000.00). The penalty of imprisonment shall be imposed upon the responsible officers, and directors of the entity. When the entities involved are juridical persons, the penalty of. imprisonment shall be imposed on its officers, directors, or employees holding managerial positions, who are knowingly and willfully responsible for such violation.

Nicolas & De Vega Law Offices is a full service law firm in the Philippines. You may visit us at the 16th Flr., Suite 1607 AIC Burgundy Empire Tower, ADB Ave., Ortigas Center, 1605 Pasig City, Metro Manila, Philippines. You may also call us at +632 4706126, +632 4706130, +632 4016392 or e-mail us at info@ndvlaw.com

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