SUBJECT: The Rule on ‘Interlocking Directors’

I. Introduction

This memorandum provides an exhaustive analysis of the rule on interlocking directorates within the Philippine legal framework, primarily under the ambit of competition law or antitrust law. The rule prohibits or restricts the practice of having the same individual or individuals serve as directors or officers in two or more competing corporations. The core legal prohibition is found in Section 32 of the Philippine Competition Act (Republic Act No. 10667). This memo will examine the statutory basis, underlying rationale, elements of the violation, applicable exceptions and defenses, enforcement mechanisms, remedies and penalties, comparative perspectives, and practical implications for corporate governance.

II. Statutory Basis and Legal Foundation

The primary statutory prohibition against interlocking directorates is explicitly stated in Section 32 of the Philippine Competition Act (PCA), which took effect in 2015. The provision states:
“No person shall serve as an officer or director in two or more corporations that are engaged in whole or in part in competition with each other, unless one of the corporations is a subsidiary or an affiliate of the other, or the market share of each of the corporations in the relevant market is less than thirty percent (30%), or unless otherwise authorized by the Philippine Competition Commission (PCC) pursuant to regulations issued for this purpose.”
This rule is a specific application of the PCA’s general prohibition against anti-competitive agreements (Section 14) and abuse of dominant position (Section 15), as interlocking directorates can facilitate the coordination of competitive behavior and the exchange of confidential information.

III. Rationale and Policy Objectives

The prohibition is grounded in fundamental competition law principles aimed at preserving and promoting market competition. The primary policy objectives are:

To prevent the facilitation of anti-competitive coordination, including price-fixing, market allocation, and bid-rigging, between competing corporations.

To eliminate or reduce the potential for the exchange of competitively sensitive information (e.g., pricing strategies, cost structures, business plans) through common directors or officers.

To safeguard the independence of corporate decision-making and ensure that each corporation’s board of directors acts solely in the best interest of its own company and shareholders, free from conflicting loyalties.

To maintain a level playing field in the market by preventing structural links that can dampen competitive vigor and lead to tacit collusion.

IV. Elements of the Violation

For a violation of Section 32 of the PCA to exist, the following elements must concur:

Identity of Person: The same natural person serves as an officer (e.g., President, Treasurer, Corporate Secretary) or director (whether executive or non-executive) in two or more corporations.

Competitive Relationship: The corporations involved are engaged, in whole or in part, in competition with each other. This requires an assessment of the relevant market (both product and geographic) to determine if the corporations are actual or potential competitors.

Absence of Exceptions: The arrangement does not fall under any of the statutory exceptions (see Section V below) or has not been authorized by the PCC.

V. Exceptions and Defenses

Section 32 itself provides three principal exceptions where an interlocking directorate is permissible:

Corporate Relationship Exception: When one corporation is a subsidiary or an affiliate of the other. This recognizes that within a corporate group, common directorships are often necessary for unified control and strategy, and the entities are not considered independent competitors.

De Minimis Market Share Exception: When the market share of each corporation in the relevant market is less than thirty percent (30%). This safe harbor reflects a presumption that interlocks between firms with limited market power are unlikely to substantially harm competition.

PCC Authorization Exception: When the PCC authorizes the interlock pursuant to its issued regulations. The PCC may grant such authorization if the parties can demonstrate that the interlock results in net efficiencies that outweigh any anti-competitive effects, or if it is in the public interest.

Additionally, a potential defense may be raised that the corporations are not, in fact, competitors within a properly defined relevant market.

VI. Enforcement and Administrative Procedure

The Philippine Competition Commission (PCC) is the primary enforcement agency. Its powers include:

Investigation: The PCC can initiate a motu proprio investigation or act upon a verified complaint from any interested party.

Issuance of Orders: It can issue cease and desist orders (CDOs) during preliminary investigations if there is a prima facie violation.

Administrative Adjudication: The PCC conducts formal administrative proceedings, where parties are given the opportunity to present evidence and arguments.

Referral: While the PCC has primary jurisdiction over the administrative violation, it may also refer the matter to the Department of Justice (DOJ) for the filing of criminal charges under Section 14(b) of the PCA, which criminalizes anti-competitive agreements.

VII. Comparative Analysis (Jurisdictional Approaches)

The approach to interlocking directorates varies across jurisdictions, primarily in terms of per se illegality versus a rule of reason analysis.

Jurisdiction	Primary Statute	Core Approach	Key Thresholds/Exceptions	Enforcement Agency
Philippines	Philippine Competition Act (Sec. 32)	Prohibited with defined exceptions (safe harbors).	Subsidiary/affiliate; <30% market share; PCC authorization.	Philippine Competition Commission (PCC)
United States	Clayton Act (Section 8)	Per se prohibition for competitors above a size threshold.	Dollar-value thresholds for capital, surplus, and profits; non-profit exceptions.	Federal Trade Commission (FTC) & Department of Justice (DOJ)
European Union	Treaty on the Functioning of the EU (Art. 101)	Assessed under rule of reason as a potential restriction of competition.	No specific prohibition; analyzed as a facilitating practice for collusion.	European Commission (DG COMP)
Singapore	Competition Act (Section 34)	Assessed under the prohibition against anti-competitive agreements.	No specific rule; analyzed for object or effect of preventing, restricting, or distorting competition.	Competition and Consumer Commission of Singapore (CCCS)
Japan	Antimonopoly Act (Article 13)	Prohibition on interlocking directorates for large companies.	Applies only to companies with capital exceeding statutory amounts.	Japan Fair Trade Commission (JFTC)

VIII. Remedies and Penalties

Violations of Section 32 are subject to administrative, civil, and criminal remedies:

Administrative Fines: The PCC can impose fines of up to One Hundred Million Pesos (PhP 100,000,000) for the first offense. For the second offense, the fine can be up to Two Hundred Fifty Million Pesos (PhP 250,000,000).

Structural Remedies: The PCC can order the corporation to cease and desist from the violation, and may require the resignation of the common director/officer from one or all of the competing corporations.

Criminal Liability: If the interlock is found to be part of an anti-competitive agreement (e.g., price-fixing), responsible individuals may face imprisonment of two (2) to seven (7) years, and a fine of up to Fifty Million Pesos (PhP 50,000,000) under Section 14(b) of the PCA.

Damages: Any person who suffers direct injury due to the violation may file an independent action for treble damages (Section 45 of the PCA).

IX. Practical Implications for Corporate Governance

Corporations and their boards must implement robust compliance programs:

Due Diligence: Conduct thorough due diligence on the backgrounds and existing board positions of all prospective directors and key officers.

Ongoing Disclosure: Maintain and regularly update a register of directors’ and officers’ external positions, especially in other corporations.

Market Analysis: Regularly assess the relevant markets in which the corporation operates to identify potential competitive relationships with companies where its directors/officers hold positions.

Board Education: Educate the board of directors on competition law compliance, with specific emphasis on the rule against interlocking directorates.

PCC Consultation: In borderline cases, consider applying for an authorization or guidance from the PCC before establishing a potentially problematic interlock.

X. Conclusion

The rule on interlocking directorates under Section 32 of the Philippine Competition Act is a critical competition law provision designed to prevent structural links that can undermine competitive markets. It establishes a clear prohibition with specific, objective exceptions, moving away from a purely effects-based analysis. Corporations must be proactive in their compliance efforts, integrating this rule into their corporate governance and risk management frameworks. Given the substantial administrative fines and potential criminal liability, vigilance in identifying and remedying prohibited interlocks is not merely a best practice but a legal imperative. Legal counsel should be sought to navigate the exceptions and, if necessary, engage with the PCC for authorization.