PCC Case No.

M-2017-001

In the matter of Udenna Corporation and KGL Investment Cooperatief

Facts:

Udenna Corporation and KGL Investment Cooperatief U.A failed to comply with the compulsory
notification of mergers and acquisitions under the Philippine Competition Commission Act anf
Rules and Regulation to implement R. A No. 10667 in relation to Udenna’s purchase of 100
percent of KGL share by means of Share Purchase Agreement. The transaction involved in this
case amounted to 120M USD.

Here, Udenna is Domestic holding company with registered principal office at Davao City. Its
subsidiaries are engaged in shipping, logistics, petroleum products and financial service. While
KGLI Coop is cooperative incorporated under the laws of Netherlands. KGLI Coop was the
parent company of of KGLI-BV, the acquired company, which is duly organized private limited
liability company incorporated under the laws of The Netherlands. At the time of the said
transaction, KGLI-BV had a 39.71 percent share interest in KGLI-NM Holdings, Inc, a domestic
corporation.

The Mergers and Acquisition Office or MAO prompted a fact-finding investigation on the
transaction because of a letter from Negros Holdings and Management Corporation. Through
the course of the investigation by MAO, it found out that the transaction breached the
notification thresholds and that Udenna and KGLI-Coop violated the provisions on compulsory
notification particularly Section 17, PCA Rule 4 and Sec. 3 of the IRR, when they executed and
consummated the transaction without notifying the commission. Further, the final report shows
that the respondents violated provisions on compulsory notification when they executed and
consummated the transaction without notifying the commission and such final report was
submitted for decision to the Commission.

Issue:

Whether or not Udenna Corporation and KGL Coop violated the compulsory notification set forth
in Section 17 of the PCA and Rule 4, Section 3(b)(4) of the IRR.

Held:

The Commission came to a positive conclusion, that “parties to a merger or acquisition are
obliged to inform when both the (a) Size of Person Test and (b) Size of Transaction test are
satisfied, as mandated in Section 3, Rule 4 of the PCA IRR.

As to the size of person test, the transaction will be covered by the 1 Billion Php threshold on
the basis that Udenna as ultimate parent entity and its subsidiaries have in aggregate assets
exceeding 1 Billion Php. Whereas, the size of the transaction test, it is also met. This requires
that the value of the transaction exceeds P1 Billion, and when used as a tool in evaluating the
size of a proposed acquisition of voting shares of a corporation, is satisfied upon breach of the
following thresholds: (1) if the aggregate value of assets in the Philippines that are owned by
the corporation or non-corporate entity or by entities it controls, other than assets that are
shares of any of those corporations; or the gross revenues from sales in, into or from the
Philippines of the corporation or non-corporate entity or by entities it controls, other than assets
that are shares of any of those corporations, exceed P1 Billion; and (2) if as a result of the
proposed of the proposed acquisition of the voting shares of a corporation, the entity or entities
acquiring the shares, together with their affiliates, would own voting shares of the corporation.

To determine whether the transaction satisfies the size of transaction test, it is important to
resolve whether KGLI-BV’s shares in KGLINM should be included in the computation of the
aggregate value of KGLIBV’s assets in the Philippines. The MAO in their explanation describes
the phrase “ other than assets that are shares of any of these corporations” means only to the
acquired company’s shares in the entities over which it has control. The respondents argue that
it means that the assets which are the shares of KGLI-BV in KGLI-NM are excluded from the
computation. The Commission agrees with MAO’s interpretation explaining that Rule 4, Section
3 (b)(4)(i) excludes the value of shares held by the acquired company in its controlled entities
to avoid double counting of assets of the acquired company in its controlled. Thus, for purposes
of computing the size of the transaction test under the rule, the acquired company’s shares in
entities it controls are excluded. But, the assets of said controlled corporations are still included
in the valuation. Conversely, the value of the acquired company’s shares in entities it does not
control cannot be excluded from the valuation of the transaction because the value of such
shares must be properly accounted for in computing the aggregate value of the acquired
company’s assets.

KGLI-BV not having control over KGLI-NM at the time of the transaction, the proper
determination of the aggregate value of the assets of KGLI-BV requires inclusion of the value of
its shares in KGLI-NM in the corporation. Even assuming, however, for the sake of argument
that KGLI-BV has control over KGLI-NM, the transaction would still satisfy the Size of the
Transaction Test. Thus, whether it had control or not, the Transaction would still be notifiable.
With this, the aggregate value of KGLI-BV’s assets in the Philippines exceeds the Php 1B
threshold provided under Sec. 17 of the PCA and Rule 4, Sec. 3(b)(4)(i) of the IRR.
Respondent’s other arguments: 1. Respondents also argue that the transaction is not covered
by the rules on compulsory notification because it was not carried out for the purpose of
obtaining control.

Section 3(b)(4)(iii) of the IRR serves as the objective standard in determining whether a
transaction is executed for the purpose of obtaining control. The 35% or 50% baselines in the
said provision integrate the component of control in the satisfaction of the Size of Transaction
Test If acquisition of at least 35% of the shares in the acquired corporation is the proxy for
concluding that an acquisition is for the purpose of obtaining control, the fact that the
Transaction results in Udenna obtaining 100% of KGBLI-BV’s capital stock is overwhelmingly
sufficient to find that it was carried out for the purpose of obtaining control. 2. Respondents
also cite Sec. 21 claiming that the Transaction was carried out for the purpose of investment
and does not bring out or an attempt to bring about the prevention, restriction, or lessening of
competition in the relevant market. Sec. 21 finds no application in this case. This provision
contemplates a situation where a transaction has been subjected to the Commission’s review of
the implications on competition. In this case, the issue is whether the respondents failed to
notify under Sec. 17. The power of the Commission to determine whether a merger or
acquisition will restrict competition is separate and distinct from the power to determine
whether a transaction breached the notification obligation. The former requires a substantive
analysis of the relevant markers, while the latter requires a straightforward determination
whether the notification thresholds have been met by a transaction. The Commission should not
and cannot be compelled to undertake a substantive review or make a preliminary finding on
the presence or absence of any harm to the market as an excuse to exempt a compulsory
notification. Finding of the Commission. Based on the foregoing, the Transaction satisfied the
Size of Transaction Test. Accordingly, the consummation of the Transaction by the Respondents
without complying with the compulsory notification requirements is a violation of Sec. 17 of the
PCA and Rule 4, Sec. 3(b)(4)(i) of the IRR. Penalties: 1. Sec. 17 of the PCA provides for twin
penalties: (i) the transaction shall be considered void; and (ii) an administrative fine. 2. Both
penalties should be imposed. The rationale behind the void penalty in Sec. 17 is primarily
intended to deter parties to a merger or acquisition from non-compliance with the notification
requirement under the PCA. The penalty of a fine, when imposed by itself, may be seen simply
as additional transaction cost which will not sufficiently prevent parties from “gun-jumping” or
proceeding with their transaction without notifying the Commission. Notwithstanding any
special circumstances, the rule is that a non-notified transaction shall be considered void. The
PCC has no basis to declare otherwise. The only aspect of the penalties that may be subject to
determination by the Commission is the amount of the administrative dine, which cannot be
higher than 5% but not lower than 1% of the transaction value. The Commission considers
Respondent’s cooperation as a mitigating circumstance and adjusts the penalty from the basic
fine of 3% to 1% of the transactional value.

PCC Case No. M-2018-003

In the matter of Udenna Corporation, Chelsea Logistics Holdings Corporation, and

Trans-Asia Shipping Lines, Inc.

Facts:

Chelsea, acquiring company, is an entity incorporated under the laws of the Philippines.
Through its subsidiaries, Clesea is engaged in the business of maritime trade. It is wholly
owned subsidiary of Udenna, a domestic holding company with principal address at Davao City,
whose subsidiaries are engage in the distribution and retail of petroleum products.

Trans-Asia, acquired company, is also an entity incorporated under the laws of the Philippines.
It is primarily engaged in domestic shipping and by transporting passengers and cargoes within
the Philippines.

Chelsea Logistics Holdings Corporation and Trans-Asia Shipping Lines Inc. entered into several
deeds of absolute sale of shares whereby Chelsea acquired of 100 percent of the shares in
Trans-Asia, for a total consideration of Php. 205,366,987.

The Merger and Acquisition Office initiated a fact-finding inquiry on the transaction, with MAO
sending a letter to explain to each of the respondents. The conferences and submissions
ensued and the case was submitted for decision by the Commission.
Issue:

Whether or not the transaction breached the notification threshold and violated the notification
requirement.

Held:

To sustain a finding of violation of the compulsory notification requirements under the PCA and
its IRR, the following elements must concur:

1. The transaction breaches the notification threshold provided under Section 17 of PCA;
Chelsea admits that the size of the Person Test was satisfied, the law provides 1
Billion Php threshold, but in this case, Chelsea go beyond the threshold. As to
the Size of Transaction Test, is the aggregate or the gross assets as reflected in
the latest financial statement, wherein it exceeded the 1 Billion Php threshold.

2. Consummation of the transaction and;

Respondents already consummated the transaction through several deeds of
absolute sale of shares and they already paid the requisites DST and Capital
Gains tax which is necessary for the transfer of shares.

3. Failure of the merger parties to properly notify the Commission of the transaction.
The respondents do not dispute the fact that they did not notify the Commission
of the subject transaction.

PCC Case No. M-2018-002

In the matter of the proposed acquisition by Chelsea Logistics Holdings Corporation

of Shares in KGLI-NM Holdings, Inc.

Facts:

Chelsea, a wholly-owned subsidiary of Udenna Corporation which is organized and registerded

under the laws of the Philippines. While, Udenna is the ultimate parent entity, is a domestic
holding company with registered principal office located in Davao City. Udenna’s subsidiary are
engaged in the distribution and retail of petroleum products, commercial shipping, ship
management, logistics, financial services, environmental services and property development.

Among are Chelsea’s subsidiaries (1) Chelsea Shipping Corporation; (2) Starlite Ferries Inc.; (3)
Worklink Services Inc. and (4) Trans-Asia Shipping Lines Inc.

KGLI-NM Holdings Inc., is a domestic holding corporation, borne out of the of the strategic
partnership between Negros Holdings and Management Corp. and KGL Investments BV, a
private liability company organized under the laws of The Netherlands. KGLI-NM was created
solely to own shares in Negros Navigation Company Inc., a holding corporation, which in turn
holds shares in companies engaged iin passenger and cargo shipping and support services.
Negros holdings is the ultimate parent entity of KGLI-NM. Negros holdings holds interests in
companies engaged in passenger transportation and cargo freight services, logistics services
and supply chain management.

One of Negros Navigation’s subsidiaries is 2GO group Inc., where it holds approximately 88.31
percent of the latter’s outstanding capital stock. 2GO Group provides shipping, logistics and
distribution services throughout the Philippines.

2GO Group has a fleet of 26 vessels consisting of RoPax Vessels, fast craft vessels and cargo-
only vessels. Also long-haul shipping services offered by 2GO group and short-haul shipping
services.

October 3, 2017, the Commission through its MAO, received the respondent’s notification forms,
pursuant to Section 12 (b) and 16 of the PCA and Section 1, Rule 4 of the IRR of the PCA. The
information stated that Udenna group will indirectly own 52.62 percent voting and 35.19
percent economic interest in 2GO, while the SMIC will indirectly have 14.01 percent voting and
30.46 percent economic interest in 2GO.

On May 29, 2018, the MOA issued a Statement of Concerns pertaining to the transaction which
involves the acquisition by Chelsea shares in KGLI-NM to consolidate its shareholdings over
KGLI-NM and gain majority ownership or 52.98 percent over 2GO Group.

In the evaluation of the case, the Commission also considered the developments in a related
case involving a related party (Trans-Asia) in another proceeding.

This case involved the acquisition of Udenna, through Chelsea, of the entire shareholdings of
Trans-Asia for the sum of PhP205,366,987. In the final report issued by MAO, it was alleged
that Udenna, Chelsea, and Trans-Asia violated the Compulsory Notification Requirements under
Section 17 of the PCA and Rule 4, Section 2 of the IRR.

The MAO recommended that the subject transactions be declared void, and a fine of 3% of the
value of transaction be imposed on Udenna, Chelsea, and Trans-Asia.

Issue:

Whether or not there is a merged entity for the purposes of the PCA

Held:

The Commission held in affirmative. On April 20, 2018, recent corporate restructuring of Negros
Navigation and the 2GO Group resulted in the conversion of Negros Navigation preferred shares
to common stock which would dilute Udenna's stake in Negros Navigation from 59.59% to
39.85%.

Section 4(a) of the PCA: Acquisition refers to the purchase of securities or

assets, through contract or other means, for the purpose of obtaining control
by: (1) One (1) entity of the whole or part of another; (2) Two (2) or more
 entities over another; or (3) One (1) or more entities over one (1) or more
entities.

Further, the transaction qualifies as merger within the purview of the PCA and its IRR. First, it is
the purchase of securities by one entity of the whole or part of another. It can be manifested in
the case at bar, that the transaction involves Chelsea’s purchase of shares in KGLI-NM and
Second, the transaction made is for the purpose of obtaining control as it will result in Udenna
consolidating its full ownership over KGLI-NM. It is presumed that control exist when a parent
company owns directly or indirectly more than one-half of the voting power of an entity. The
transaction made here falls within the definition of a merger as contemplated in the IRR as it is
for the purpose of increasing Udenna’s ownership outstanding voting shares in KGLI-NM from
39.71 percent to 100 percent.

Regardless of the subsequent internal restructuring of Negros Navigation and 2GO Group
alleged by the respondents, the fact remains that the transaction, which is the acquisition by
Chelsea of the shares in KGLI-NM, qualifies as a merger under the PCA and its IRR.

Case Analysis:

PCC Case No. M-2017-001, the parties to the merger failed to comply with the rules on
compulsory notification pursuant to Philippine Competition Act and its implementing rules and
regulation. Prior to Udenna’s acquisition of 100 percent shares of KGLI-BV, the respondents in
this case failed to comply the rules on notification.

Udenna Corporation and KGLI coop failed to notify the Commission on the transaction before
consummating the agreement. From the foregoing facts of the case, it can be showed that the
value of the transaction exceeded the threshold of 1 billion pesos and therefore the parties
need to notify the Commission and upon the investigation made by MAO, the merger and
acquisition satisfies the test on compulsory notification namely; (1) Size of the Person Test and
(2) Size of the Transaction Test.

In PCC Case No. M- 002/003, this case involves the proposed acquisition by Chelsea Logistics
Holding Corporation of share in KGLI-NM Holdings. The transaction involves the acquisition by
Chelsea of shares in KGLI-NM to consolidates its shareholdings over KGLI-NM and gain majority
ownership, or 52.98 percent, over 2GO Group.

Upon the acquisition, it gives rise to substantial lessening of competition. The transaction
eliminates a competitor that was previously a source of competition. The transaction eliminates
the competitor from the relevant market, in which case, there would be a likelihood that the
present competitive market would transform into a monopolistic market.

Upon investigation made by MAO, the Commission finds that the acquisition of Udenna through
Chelsea of Trans-Asia, is considered void due to failure to comply the notification requirements.
Due to nullification of the Trans-Asia Agreements. It eliminates such horizontal overlaps. While
MAO in its SOC treats the Trans-Asia Agreements valid, the Commission considers the
agreements void in accordance with the rules on non-notification pursuant to PCA.

In three cases presented above, it gives us an idea that the parties to a merger have an
obligation to notify the Commission when the transaction met the threshold set forth by the
Commission itself. The threshold is adjusted annually through resolutions issued by the
Commission. Under the PCA, the parties are given 30 days from the time of the agreement to
merge or acquire.

The cases present, provides for the elements when there is a need to notify the Commission.
The following are the elements that guides us, (1) if the transaction breaches the notification
threshold; (2) there is already a consummation of the transaction and; (3) failure of the merger
parties to properly notify the Commission of the transaction.

On personal note on these cases, on the issue on threshold, the Commission will adjust the
threshold level annually, but they were not transparent as to the basis of the adjustment. The
Commission and perhaps in coordination with NEDA and PSA should identify common grounds
or basis on the threshold level. Because, there is a saying that “ a peso today is not the same
peso tomorrow” meaning, the value of the currency from time to time changes based on the
current economic and political situation.

I think in terms of merger and acquisition, the Commission should be more liberate on this kind
of economic or business structure. The market now is leaning toward global market, local
companies need to merge with other local or international companies in order for them to
compete globally and same time more competitive.

With easing the cross-border transaction, the Philippine economy must adopt the changes in
the international market, the Commission should look into beyond numbers of the merger and
acquisition, they should look also in the welfare of those will be affected if the merger and
acquisition is illegal, but it there is no irregularity to the merger and acquisition, the Commission
should allow such business model.

On the social implication of merger and acquisition, intangible assets like the knowledge and
reputation of the company will bring changes in the acquiring entity. Knowledge transfer can be
visible in this kind of structure, on the aspect of reputation, the best practices and technology
to increase reputation can also be brought into the acquiring entity.

My take on the issue of merger and acquisition, I’m leaning towards that economic and
business model. It can be justified that when an entity adopts such model, new formed firms
will be more efficient, they could deliver goods in the same quality or perhaps better quality at
lower price. One effect also, that the company can offer different products to different segment
of the economy.

Therefore, the Commission, must go beyond numbers and more liberate in approving such
business structure. Better public policy should also be in placed in order to implement and
adjust to the growing market.