Udenna Corporation and KGL Investment Cooperatief

PCC Case No. M‐2017‐001

FACTS:
Udenna is a domestic holding company with registered principal office located in Davao
City, Philippines. Its 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, the seller, is a cooperative incorporated under the laws of The Netherlands,
and is the parent company of KGL Investment B.V. (“KGLI‐BV").

On 28 December 2016, the Mergers and Acquisitions Office ("MAO") received a letter
dated 23 December 2016 from Negros Holdings & Management claiming that Udenna and
KGLI Coop executed an acquisition agreement and consummated the same. Udenna purchased
100% of KGLI Coop’s shares in KGLI‐BV through a Share Purchase Agreement dated 28
July 2016 between Udenna and KGLI Coop, and the Deed of Transfer dated 19 August
2016 was executed by KGLI Coop assigning its shares of stock in KGLI‐BV in favor of
Udenna for a consideration of USD 120 Million.

Parties did not dispute the execution and consummation but argued that the Transaction does
not breach the threshold for notification under Rule 4, Section 3 of the IRR.
Note: Negros Holdings and KGLI‐BV are partners in KGLI‐NM Holdings, Inc.

SEC 16.1. PCC Rules on Merger Procedure. Non‐notification of a consummated merger and
gunjumping

1. Do parties to a merger have an obligation to notify the Mergers and Acquisition

Office?
YES, if the parties and the transaction meet the threshold

2. What is the threshold for notification?

Section 17 PCA, amount adjusted annually through Commission Resolutions

3. When should the notification be made?

Within 30 days from agreement to merge or acquire

4. What are the elements for a finding of violation of compulsory notification

requirements?
a. The transaction breaches the notification thresholds provided under Section 17 of
the PCA and Rule 4, Section 3 of the IRR;
 A. Size of Person Test

i. Udenna as ultimate parent entity and its subsidiaries have, in the aggregate,
assets exceeding Php 1 Billion

B. Size of the Transaction Test

i. 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, exceed the threshold, OR
ii. 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 the threshold,
AND
iii. As a result 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 that, in the aggregate,
carry more than the following percentages of the votes attached to all the
corporation`s outstanding voting shares: I. Thirty‐five percent (35%) or II.
Fifty percent (50%), if the entity or entities already own more than the
percentage set out in subsection I as above, as the case may be, before the
proposed acquisition.
iv. KGLI‐NM`s total assets in the Philippines were valued at PhP 18.3 Billion

b. consummation of the transaction; and

c. failure of the merger parties to properly notify the Commission of the transaction
 26‐27. 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 entities … (because) the value of the controlled entities already
forms part of the computation. If the value of the acquired company's participating
interest in a controlled entity is aggregated with the value of such controlled entity itself,
then the value of the same asset would end up being counted twice. … However, the
assets of said controlled corporations are still included in the valuation.

28. 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. Otherwise, the value of the acquired company's participating
interest in entities it does not control will not be properly reflected in the evaluation of
the acquired company’s assets.

29‐30. 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 computation. In this case,
KGLI‐BV's 39.71% interest in KGLI‐NM amounting to USD 41,791,704 or PhP
1,966,717,590.24 should be included in the valuation of the Transaction. With this, the
aggregate value of KGLI‐BV's assets in the Philippines exceeds the Php 1 Billion
threshold provided under Section 17 of the PCA and Rule 4, Section 3(b )( 4 )(i) of the
IRR.

31. The phrase "other than assets that are shares of any of those corporations"
cannot be interpreted to mean that all shareholdings of the acquired company in all
other entities shall be excluded in the valuation. It must be remembered that the purpose
of Rule 4, Section 3(b)(4)(i) is to implement the PhP 1 Billion threshold for compulsory
notification set forth in Section 17 of the PCA. The PhP 1 Billion threshold serves as a
filter such that only the transactions that are large enough to likely affect the market are
mandatorily notified to the Commission. Thus, the various formula for computation
provided in Rule 4 are meant to, on one hand, screen out the small transactions, and
on the other hand, ensure that the large transactions are notified.

32. If Respondents` interpretation is accepted, entities holding billions of

shareholdings in other companies would have a very small valuation simply because
those assets happened to be shares in other companies. This would lead to an absurd
situation where mergers or acquisitions involving multi‐billion peso corporations may
conveniently evade regulatory scrutiny by ensuring that most of their assets take no form
other than shareholdings, effectively concealing their true worth. Merger parties would
practically be able to circumvent the compulsory notification requirement under the PCA.
This is not the intent of the law or the IRR. As such, Respondents interpretation cannot be
countenanced.

NOTES:
Where the acquisition … involves the entire shareholding of the acquired entity, the Transaction
is deemed to be 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.

Section 21 (Exemptions from Prohibited Mergers and Acquisitions) may not be invoked as a
defense in cases involving violations of the compulsory notification rule under Section 17 of
the PCA. Sections 20 (Prohibited Mergers and Acquisitions) and 21 (Exemptions from
 Prohibited Mergers and Acquisitions) of the PCA contemplate a situation where a
transaction has been subjected to the Commission's review of its implications on competition…
NOT when the parties failed to notify under Section 17 of the PCA and Rule 4, Section 3 of the
IRR.

The power to determine whether or not a merger or acquisition will bring about the
prevention, restriction or lessening of competition requires a substantive analysis of the relevant
markets, possible horizontal or vertical overlaps which may result from the merger or
acquisition and the theories of harm that may be applicable, using economic analysis within
the legal framework established under the statute and the Commission's various rules,
regulations and guidelines.

On the other hand, the power to determine whether a transaction has breached the
notification obligation under Section 17 requires a straightforward determination of whether
the notification thresholds have been met by a transaction, whether the parties thereto have in
fact consummated their transaction, and whether or not a notification has been submitted
to the Commission as required by law. The Commission cannot and should not be compelled or
bear a duty 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. To do
so would be to confuse, and worse, render nugatory the clear and explicit mandate vested
by Section 17 of the PCA upon the Commission.

5. What are the penalties for a finding of violation of compulsory notification

requirements?
Section 17…An agreement consummated in violation of this requirement to notify the
Commission shall be considered void and subject the parties to an administrative fine of one
percent (1%) to five percent (5%) of the value of the transaction.

 transaction was voided and a fine of 1% of transaction value (PhP 19,667,175.9) was
imposed
(February 2018)

NOTES:

The void penalty for non‐notification is primarily intended to deter parties to a merger or
acquisition from noncompliance with the notification requirement under the PCA. Given the
compulsory system of notification adopted therein, Congress deemed it imperative that the
sanctions for non‐compliance have real deterrence effect. Otherwise, transacting parties may
be tempted to disregard the legal requirement with impunity.

gun‐jumping ‐ proceeding with their transaction without notifying the Commission

The PCA does not provide for an exception under Section 17

Forbearance is specifically relevant only in cases involving Anti‐Competitive Agreements

under Section
14 and Abuse of Dominant Position under Section 15 of the PCA, such that entities may seek
exemption from the application of these provisions to their agreements or conduct for a
limited time, under conditions to be imposed by the Commission. Forbearance is not intended
to apply to Prohibited Mergers, where an exemption from prohibition is specifically governed
by Section 21 of the PCA. Nor does it apply to non‐notification of notifiable transactions,
the exemptions from which are presently limited to cases of internal restructuring.
 NOTES:
An application for Forbearance is an ex ante procedure which must be initiated by
concerned entities prior to an investigation by the Commission or the relevant office. It can
not be that an entity will seek Forbearance, much less the Commission initiate motu proprio
Forbearance proceedings, after a prohibited act has been found out and made the subject of an
investigation by the Commission.
 PCC has no discretion to refrain from imposing the void penalty.
Section 4 of the PCC Rules provide for pre‐notification consultations
SECTION 4. Consultations preceding the submission of notification.
(a) Prior to filing a notification pursuant to this Rule, parties to a proposed merger or
acquisition that are required to notify may inform the Commission of their proposed
merger or acquisition and request a prenotification consultation with the staff of the
Commission.
To request a meeting, the parties must provide the following information in writing:
(1) the names and business contact information of the entities concerned;
(2) the type of transaction; and
(3) the markets covered or lines of businesses by the proposed merger or acquisition.
(b) During such pre‐notification consultations, the parties may seek nonbinding advice
on the specific information that is required to be in the notification.
Under the Rules on Merger Procedure, the Commission may consider Respondents'
cooperation during the investigation or review beyond what is required in the PCA and its
IRR as a mitigating circumstance, which has the effect of reducing the imposable fine.

Chelsea Logistics Holdings Corporation, KGLI‐NM Holdings, Inc.

PCC Case No. M‐2018‐002

Among Chelsea's subsidiaries are: (1) Chelsea Shipping Corporation, which is engaged in the
business of petroleum hauling;
(2) Starlite Ferries ("Starlite") Inc. which is engaged in domestic shipping; (3) Worklink
Services, Inc., which provides domestic logistics solution for various local industries; and (4)
TransAsia Shipping Lines, Inc. ("Trans‐Asia"), which is engaged in the business of
transporting passengers and cargo, through its seven Roll‐on Roll‐off Passenger Ships
("RoPax") and three cargo‐only vessels.

KGLI‐NM Holdings, Inc. ("KGLI‐NM") is a domestic holding corporation, borne out of the
strategic partnership between Negros Holdings and Management Corp ("Negros Holdings")
and KGL Investments BV, a private liability company organized under the laws of
Netherlands. KGLI‐NM was created solely to own shares in Negros Navigation Company,
Inc. ("Negros Navigation"), a holding corporation, which in turn holds shares in companies
engaged in 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. ("2GO Group"), where it
holds 88.31% ownership. 2GO Group provides shipping, logistics and distribution services
throughout the Philippines.
On 29 May 2018 the Mergers and Acquisitions Office ("MAO") issued a Statement of
Concerns ("SOC") pertaining to the Transaction which involves the acquisition by Chelsea
of shares in KGLI‐NM to consolidate its shareholdings over KGLI‐NM and gain majority
ownership, or 52.98%, over 2GO Group.
Q: An internal restructuring carried out in April 2018 reduced Udenna's effective
shareholdings in 2GO Group, and Udenna claims it has no control over 2GO Group post‐
Transaction. What indicators of control show otherwise?
A:
1. Udenna elects the majority of all regular directors of Negros Navigation and 2GO Group
as per the Shareholders Agreement
2. A majority of the members of 2GO Group's Nomination Committee are also affiliated
with Chelsea… The role of the Nomination Committee is explicitly stated as being
"chiefly responsible for establishing the criteria used in the selection of directors and key
officers and the recommendation of the former for membership of the Board …”
3. Chelsea, KGLI‐NM, Negros Navigation, and 2GO Group have overlapping directors and
officers

NOTES:
 A relevant product market comprises all those goods and/or services which are regarded
as interchangeable or substitutable by the consumer or the customer, by reason of the goods
and/or services' characteristics, their prices and their intended use;
 The relevant geographic market comprises the area in which the entity concerned is
involved in the supply and demand of goods and services, in which the conditions of
competition are sufficiently homogenous and which can be distinguished from neighboring
areas because the conditions of competition are different in those areas.
Q: Are long‐haul and short‐haul passenger shipping services two different product markets?
A: No...the Commission finds that customers plan their trips depending on which ports are
closest to their origin and destination, and do not take into consideration the entire route plied
or the other ports served by a specific vessel. Regardless of whether routes are long‐haul or
short‐haul, customers are able to purchase tickets and check schedules on a per leg basis.
Considering this, the Commission finds that passenger shipping services are substitutable
and belong in the same relevant service market irrespective of whether they are long‐haul or
short‐haul shipping services.

Q: Will the transaction give rise to substantial lessening of competition (SLC)?

A: Yes
a. The transaction eliminates a competitor that was previously a source of competitive
constraint.
b. In these markets, there is a strong likelihood of price increases of a magnitude that adversely
affects customers.
c. Barriers to entry are high. Entry into the relevant market will not be timely, likely, and
significant such that a new entrant will not serve as a competitive constraint to the Parties.
COMMISSION DECISION:
The Commission will take no further action with respect to the Transaction, on the
condition that the transaction subject of the (Trans‐Asia) Non‐notification Decision is void.
Should Udenna or any of its subsidiaries or affiliates re‐ execute or in any way pursue the sale
of shares of Trans‐Asia, or acquire the business, or any portion thereof, of Trans‐ Asia through
sale, assignment, corporate restructuring, or any other means, the Parties shall notify any such
transaction to the Philippine Competition Commission, regardless of whether the same is
notifiable under the mandatory notification regime of the PCA and its IRR. The
Commission shall review such transaction pursuant to Section 16 of the PCA and Sections
3.3 and 13 of the PCC Rules on Merger Procedure.
If within the relevant periods stipulated in the preceding section, the Commission
determines that such agreement is prohibited under Section 20 and does not qualify for
 exemption under Section 21 of this Chapter, the Commission may:
(a) Prohibit the implementation of the agreement;
(b) Prohibit the implementation of the agreement unless and until it is modified by
changes specified by the Commission.
(c) Prohibit the implementation of the agreement unless and until the pertinent party or
parties enter into legally enforceable agreements specified by the Commission.
SEC. 20. Prohibited Mergers and Acquisitions. 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.

SEC. 23. Finality of Ridings on Mergers and Acquisitions. – Merger or acquisition agreements
that have received a favorable ruling from the Commission, except when such ruling was
obtained on the basis of fraud or false material information, may not be challenged under this
Act.
SEC. 21. Exemptions from Prohibited M&A. Merger or acquisition agreement prohibited
under Section 20 of this Chapter may, nonetheless, be exempt from prohibition by the
Commission when the parties establish either of the following:
(a) 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
(b) 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:
Provided, That an entity shall not be prohibited from continuing to own and hold the
stock or other share capital or assets of another corporation which it acquired prior to
the approval of this Act or acquiring or maintaining its market share in a relevant market
through such means without violating the provisions of this Act:
Provided, further, That the acquisition of the stock or other share capital of one or more
corporations solely for investment and not used for voting or exercising control and not to
otherwise bring about, or attempt to bring about the prevention, restriction, or lessening of
competition in the relevant market shall not be prohibited
SEC. 22. Burden of Proof. – The burden of proof under Section 21 lies with the parties
seeking the exemption. A party seeking to rely on the exemption specified in Section 21(a)
must demonstrate that if the agreement were not implemented, significant efficiency gains
would not be realized.
Efficiencies – Merger Review Guideline

9.2. A primary benefit of mergers to the economy is their potential to generate significant
efficiencies and enhance the merger firm’s ability and incentive to compete. Benefits include
lower prices, improved quality, enhanced service and new products.
9.3. Efficiencies that increase competition in the market may also be considered.
9.4. xxx, a party seeking to rely on an efficiencies justification must demonstrate that if the
proposed merger or acquisition were implemented, significant efficiency gains would be realized.
9.5. The burden is on the merging firms to substantiate efficiency claims xxx
9.6. xxx the efficiencies must be demonstrable, with detailed and verifiable evidence of
anticipated price reductions or other benefits. Moreover, the efficiency gains must be
merger specific and consumers will not be worse off as a result of the merger. For that
purpose, efficiencies should be substantial and timely, and should, in principle, benefit
consumers in those relevant markets where it is otherwise likely that competition concerns
would occur.
9.7. Merger specific efficiencies are those likely to be accomplished with the proposed
merger and unlikely to be accomplished in the absence of either the proposed merger or another
means having comparable anti‐competitive effects.
9.8. The greater the potential adverse competitive effect of a merger, the greater must
be the demonstrated efficiencies, and the more they must be passed through to customers.

Udenna Corporation, Chelsea Logistics Holding Corporation, and Trans‐Asia Shipping

Lines, lnc.
PCC Case No. M‐2018‐003

Chelsea, is an entity incorporated under the laws of the Philippines.

Through its subsidiaries, Chelsea is engaged in the business of maritime
trade by conveyance, carriage, loading, transportation, discharging and
storage of petroleum products, goods and merchandise of every kind, over
waterways in the Philippines. Chelsea is a wholly‐owned subsidiary of
Udenna. Chelsea is a publicly‐listed.

Trans‐Asia, the acquired company, is also an entity incorporated under the

laws of the Philippines. It is primarily engaged in domestic shipping by
transporting passengers and cargoes within Philippine territorial waters
and in the high seas.

On 12 December 2016, Chelsea Logistics Holdings Corporation ("Chelsea")

and Trans‐Asia Shipping Lines, Inc. ("Trans‐Asia") entered into several
deeds of absolute sale of shares whereby Chelsea acquired of 100% of the
shares in Trans‐Asia, for a total consideration of PhP205,366,987.00.

The Mergers and Acquisition Office initiated a fact‐finding inquiry on the

transaction, with MAO sending a letter to explain to each of the
respondents on 12 October 2017. Conferences and submissions ensued. On
26 June 2018, the case was submitted for decision by the Commission.
To sustain a finding of violation of the compulsory notification
requirements under the PCA and its IRR, the following elements
must concur:
(i) The transaction breaches the notification thresholds provided
under Section 17 of the PCA and Rule 4, Section 3 of the IRR;
a. Size of the person, and
 Chelsea admitted that size of the person threshold is
breached though its parent,
Udenna
b. Size of the transaction
(ii) consummation of the transaction
 Deeds of absolute sale of shares executed on 12 December
2016
 Requisite documentary stamp taxes and capital gains tax
 already paid
(iii) failure of the merger parties to properly notify the Commission
of the transaction
 Admitted
Q: Rule 4, Section 3(b)(4) of the IRR requires that the value of the transaction
exceeds PhP1 Billion. Is the purchase price deemed the value of the transaction?
If yes, because the purchase price was only PhP205,366,987, and therefore does
not exceed Php1 Billion, the Subject Transaction is not covered by the compulsory
notification requirement.
A: under Rule 4, Section 3(b)(4) of the IRR, parties to a merger or acquisition are
required to provide notification with respect to a proposed acquisition of voting
shares of a corporation, if either the aggregate value of the assets or the gross
revenues from sales in, into, or from the Philippines of the acquired corporation
exceeds PhP1 Billion.
The purchase price is what the parties to a contract have agreed to pay the
buyer in exchange of the object of the contract. xxx Purchase price may be
increased or decreased subject to the discretion of parties. Its value can be
negotiated above or below the actual value of the transaction. However, the
aggregate value of assets or gross revenues from sales accurately reflects the value
of transaction. Such value is not subject to any arbitrary valuation, or negotiation
from the parties.

Q: Does aggregate value of assets refer to net assets?

A: The law simply provides that in determining whether notification must be
made, the aggregate value of assets (as reflected in the latest available financial
statements) is controlling. "Aggregate value of assets" or "gross assets" or "total
assets" is the total resource controlled by the entity as a result of a past events and
from which future economic benefits are expected to flow to the entity. On the
other hand, net asset, or the difference between the Total Assets and Total
Liabilities, is more conceptually similar to capital or equity.

Penalty: deeds declared void & penalty of 2% of the aggregate value of assets
(PhP1,142,700,772), which is equivalent to PhP22,854,015.44. (Decision dated: 28
June 2018)