The Philippine Competition Commission (PCC) has nullified the agreement between Udenna Corporation and KGL Investment Cooperatief U.A. (KGLI Coop), and levied them a fine of P19.6 million, equivalent to 1% of the value of the two companies’ merger transaction, after both firms allegedly failed to run the deal by the government agency as required by law.
The transaction involved the sale to Udenna by KGLI Coop of all its shares in KGL Investment B.V. (KGLI-BV). At the time of the transaction, KGLI-BV owned 39.71% of KGLI-NM Holdings, Inc. (KGLI-NM), a Philippine company that partly owns Negros Navigation Co. Inc. (NENACO), the mother company of total logistics solutions provider 2Go Group, Inc.
In an en banc decision signed by PCC Commissioner Stella Luz Quimbo and released on February 19, PCC found that the transaction, worth US$120 million, met the P1-billion threshold, and as such, the transacting parties should have notified the competition commission of the acquisition.
Under Section 17 of the Philippine Competition Act (PCA), parties that fail to notify the PCC of a transaction that meets the threshold are slapped a fine ranging from 1% to 5% of the transaction value, and their business deal voided.
“The law is clear: an agreement consummated in violation of the competition law’s compulsory notification requirement shall be fined and is considered void,” read the PCC decision.
In a statement, Udenna called the PCC decision to declare the transaction void and impose a penalty “unduly harsh and uncalled for, particularly considering the interest of the Udenna Group’s many stakeholders and the decision’s effect on business.”
The company said it may challenge the PCC decision either by filing a motion for reconsideration with the Commission, or through a petition to the Court of Appeals.
Udenna explained that the transaction was executed one month after the implementing rules and regulations of the PCA took effect, which is the basis for the decision of the PCC. “Udenna acted in good faith in consummating the transaction based on its interpretation of the newly-issued rules of the PCC, which in Udenna’s opinion are ambiguous. At the time of completion of the subject transaction, the PCC Rules were new, and Udenna had no guidelines, interpretative rulings or precedents to rely on,” the company said.
“Udenna believes that PCC had the discretion not to declare the subject transaction void but the majority, or 3 of the 4 seating Commissioners concluded differently,” it added. The fifth seat in the Commission is currently vacant.
“Udenna is confident that its acquisition of the shipping holding company remains assured considering that it has paid the agreed consideration and its counter-party is still committed to the consummation of the transaction,” it said.
PCC got wind of the transaction through a letter of complaint filed on December 28, 2016.
In its investigation, the PCC Mergers and Acquisitions Office (MAO) found that Udenna bought the entire shareholdings of KGLI-BV, as signed by the two parties through a share purchase agreement dated July 28, 2016, and that the deal was consummated, as reflected in a deed of transfer dated August 19, 2016.
Udenna and KGLI Coop initially sought to be excused from notification, claiming that the buyout satisfied the “size of person test” but not the “size of transaction test” required under the PCA and its implementing rules.
But MAO’s investigation found that the transaction met the threshold based on both tests. The aggregate annual gross revenues in, into, or from the Philippines, or the value of the assets in the Philippines of Udenna were both above P1 billion at the time of the transaction. The parties also admitted that the acquisition involved the entire, or 100% of, the shareholdings of KGLI-BV.
“It’s one thing for transactions to be found as anti-competitive during the review. It’s another thing when businesses evade the legal requirement of notification in the first place,” PCC said.
“This is a reminder for companies to comply with the Philippine Competition Act, including filing a sufficient notification prior to consummation of a merger that meets the thresholds,” it added.
As to remedies that might be available to Udenna, PCC said the parties could file a proper notification, and go through the merger review process.
Udenna is a domestic holding company whose subsidiaries are engaged in the distribution and retail of petroleum products; commercial shipping; ship management; logistics; financial services; environmental services; and property development. KGLI Coop and KGLI-BV are both based in the Netherlands.
Under the PCA, the country’s anti-trust body is mandated to review mergers and acquisitions to ensure that these deals will not be prejudicial to the interest of consumers.