PCC nullifies Uy-led Udenna’s takeover of 2GO shareholder

THE Philippine Competition Commission (PCC) nullified Udenna Corp.’s takeover of a Dutch company that owns a majority stake in Negros Navigation Co., Inc. (Nenaco), the parent company of 2GO Group, Inc., for failure to notify the antitrust body of the $120-million deal.

In an en banc decision released on Monday, the commission found Udenna’s acquisition of KGL Investment Cooperatief U.A. ( KGLI) shares in KGL Investment B.V. (KGLI-BV) satisfied the P1-billion threshold, ruling that the parties should have informed the PCC of the transaction.

The deal between holding firm of businessman Dennis A. Uy and KGLI is the first to be voided by the country’s anti-trust body for non- notification. Both companies were also slapped with a penalty of P19.6 million, equivalent to 1% of the value of the merger transaction.

“The law is clear: an agreement consummated in violation of the competition law’s compulsory notification requirement shall be fined and is considered void,” the PCC said.

Under the Philippine Competition Act ( PCA), parties to the merger and acquisition deals above P1 billion are prohibited from consummating their agreement until 30 days after providing notification to the commission.

The PCC launched a review of the transaction after receiving a letter complaint from Negros Holdings & Management Corp. (NHMC) in December 2016.

NHMC is owned by the Tagud family, who was locked in a court dispute with the group of Mr. Uy over the ownership of 2GO. The entry of Udenna and Sy-led SM Investments Corp. into the logistics firm prompted Sulficio Tagud, Jr. to retire both from the management and the board of 2GO last year.

At the time of the transaction, KGLI-BV owned 39.71% of KGLINM Holdings, Inc. (KGLI-NM), a key shareholder of Nenaco, which in turn owns 88.31% of 2GO, according to the latest regulatory filing of the listed firm.

The Udenna- KGLI deal will only be valid if the proper notification is filed with and cleared by the regulator, PCC Spokesperson Attorney Mercedes B. Torrijos said in a phone interview.

In its investigation, the PCC’s Mergers and Acquisitions Office ( MAO) found that Udenna bought the entire shareholdings of KGLI-BV through a share purchase agreement dated July 28, 2016, and the deal consummated as reflected in a deed of transfer dated Aug. 19, 2016.

Udenna and KGLI initially sought to be excused from notification, claiming that the buyout satisfies the “size of person test,” but not the “size of transaction test” required under the PCA and its implementing rules and regulations (IRR).

MAO’s investigation, however, found that the transaction met the threshold based on both tests.

The PCC argued that the aggregate annual gross revenues in, into or from the Philippines, or the value of the assets in the Philippines of Udenna exceeded P1 billion at the time of the transaction. The parties also admitted that the acquisition involved the entire shareholdings or 100% 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,” PCC said.

The PCC order was signed by Chairman Arsenio M. Balisacan as well as Commissioners Johannes Benjamin R. Bernabe and Amabelle C. Asuncion. Commissioner Stella Luz A. Quimbo concurred with the imposition of the administrative fine, but disagreed with the decision to void the transaction.

Ms. Quimbo noted that under the PCC’s IRR, how the void penalty will be applied, implemented and monitored in the context of the Udenna-KGLI case is debatable and the current guidelines on the void penalty and the infrastructure to implement the same are insufficient.

“The suspension of the void penalty will not set a dangerous precedent because of the specificity of the factual milieu,” Ms. Quimbo said in her dissenting opinion.

“What is dangerous is for the Commission to impose a void penalty, merely because the law ‘ plainly’ requires so, without regard to the Commission’s obligation to apply the law in consonance with its legislative intent, and without regard to the current state of rules on implementing the void penalty,” she added.

In a statement, Udenna VicePresident for Corporate Affairs Adel A. Tamano said the company has “sufficient basis” to challenge the PCC decision either by filing a motion for reconsideration with the PCC, or through a petition to the Court of Appeals.

Udenna cited the argument of Ms. Quimbo that imposing the void penalty is “arguably a surplusage” since “there is no continuing direct harm to the market by the subject transaction that the void penalty needs to prevent.”

Udenna is currently weighing its options, including submitting to the PCC decision and filing a notification to the government agency.

“Udenna believes that the decision to declare the transaction void and at the same time impose a penalty of P19.7 million was unduly harsh and uncalled for, particularly considering the interest of the Udenna Group’s many stakeholders and the decision’s effect on business,” Mr. Tamano was quoted in a statement as saying.

“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,” Mr. Tamano said.