Notification of concentrations in Costa Rica
Five years ago, Costa Rica introduced the obligation to report mergers and acquisitions to local antitrust authorities. In the early stages of this merger control implementation, there were some concepts that were not totally clear. However, the Commission for Promoting Competition (COPROCOM) has clarified different issues, by means of its jurisprudence. The following article analyses the current status of merger notification in Costa Rica, including the most recent developments. It also covers briefly a draft bill that is expected to be discussed in the near future at the Legislative Assembly.
The Costa Rican Competition and Effective Consumer Defence Act (Law No. 7472)
Law No. 7472 was enacted in Costa Rica in December 1994. It was the first law to deal with the right to competition in Costa Rica, and established for the first time a set of legal principles and regulations that filled the legal void regarding free market competition and safeguarding free enterprise as set out in the Constitution.
The primary objectives of Law No. 7472 included:
• the safeguarding and promotion of competition and free market participation by preventing and banning monopolies, monopolistic practices and other restrictions to the efficient working of the market;
• the effective protection of consumer rights and interests; and
• the elimination of unnecessary regulations on economic activity, or deregulation of economic activity.
According to Law No. 7472, COPROCOM is the public body charged with overseeing enforcement of Law No. 7472. COPROCOM’s activities fall into two main types: prevention and promotion; and protection and sanctioning.
As provided by Law No. 7472, the operations of economic concentrations are banned whenever they produce restrictive effects on free competition or lead to a dominant position in the market. Originally, this law did not contain a policy for preventing corporate mergers and acquisitions as it did not establish mandatory pre-notification for these acts. This was hindering COPROCOM’s efforts, as it omitted the possibility of conditioning the concentration, which is technically the correct way of working, and it could find itself in the difficult situation of ordering a deconcentration ex post once the concentration had been carried out.
Introduction of the pre-concentration notification system
Five years ago, on 5 April 2013, a legal amendment (the Amendment) to the Competition Act came into effect in Costa Rica, introducing the legal obligation of the parties to report certain transactions between companies (‘concentrations’, as defined by the law) to the local antitrust authorities. The Amendment, which comprises a change in the text of article 16 of Law No. 7472, established the mandatory reporting to COPROCOM of transactions that fall under the definition of concentration, and which reach the thresholds established by the Law. The parties involved in these concentrations have the obligation to report the concentration, either prior to executing the concentration, or up to five days after the concentration has taken place. This obligation to notify the transaction applies when at least two of the parties have operations with ‘an incidence’ in Costa Rica. The lack of compliance with this obligation may result in hefty fines, and in more complex cases, could result in an order to execute a de-concentration.
Following the Amendment, a ‘concentration’ is defined in the following way:
the merger, purchase and sale of a business establishment, or any other action that merges companies, associations, shares, capital stock, trusts, management powers or other assets in general that is taken by competitors, providers, clients or other undertakings that have been independent from each other and that results from one or the other of them acquiring the financial control over the other(s) or the formation of a new economic agent under the joint control of two or more competitors; as well as any transaction used by any individual or company, whether public or private, to acquire the control of two or more undertakings that are independent from each other and that were current or potential competitors up to that point in time.
Based on the previous definition, it is clear that one of the elements that composes a ‘concentration’ is the acquisition of control by one of the parties over the other party; or the exercise of joint control between them. The concept of ‘control’ has been interpreted broadly (negative control is considered to be ‘control’), and changes of control from joint control to sole control and vice versa are sufficient to fall under the scope of the merger notification regime. Also, there is a tendency to apply the concepts of decisive influence found in other antitrust legislations to analyse control aspects under Costa Rican law.
The transactions that fall into the definition of concentration shall be notified when any of the following thresholds is also reached:
• the sum total of the productive assets of all the undertakings involved and their headquarters exceeds 30,000 minimum wages, including transactions executed within a period of two years that, in total, exceed this amount; or
• the sum total of revenue generated by all the agents involved within the national territory during the past fiscal year exceeds 30,000 minimum wages.
Any concentration involving any individual company that meets or exceeds said criteria, regardless of the size of the smaller company involved in it, shall be notified to COPROCOM.
Whenever the purpose of a concentration is the acquisition of a branch, business unit, establishment or any part of an enterprise in general, the asset or income volume of those enterprise parts or segments shall be considered to determine whether or not a notification is necessary, rather than the volume of the whole, regardless of whether or not the acquired division or part has its own status as a legal entity.
They should be treated as undertakings involved in operations that have a bearing on Costa Rica.
The legal obligation to notify these mergers is imposed regardless of the assessment of the effects that the merger may or may not have on economic competition.
All the undertakings involved in the merger have the obligation to notify, although notification by any one of them will be sufficient.
Definition of ‘incidence in Costa Rica’
As mentioned, only the transactions in which at least two of the involved parties have operations with an incidence in Costa Rica have the obligation to be notified. However, this was an issue in the early stages after the concentration authorisation process was implemented, since the Amendment did not define this concept. Currently, owing to COPROCOM’s precedents, there is a better understanding of this concept.
According to COPROCOM, incidence is understood as ‘those operations which may be executed at an international level, but could have consequences or alter in any way the markets involved in the transaction. In other words, there may be anticompetitive effects as a result of a transaction in which the companies have sales or assets in Costa Rica.’
Also, COPROCOM has established that a company that is a shareholder over a Costa Rican subsidiary, even when it does not have voting rights, is considered to have activities with an incidence in the country.
Even when this precedent exists, the scope of this incidence, is still not completely clear. Nonetheless, the interpretation given by COPROCOM appears to be extensive, and in case of any doubt, it is recommended to either obtain the authorisation or file a separate application to COPROCOM asking for it to determine whether the transaction requires its approval.
Authorisation criteria for concentrations
Law No. 7472 specifies that the measurement criteria of substantial power in the relevant market must be followed when analysing the concentration.
The Commission will approve concentrations whose purpose or effect does not include:
• acquiring or significantly increasing substantial power, thus leading to a limitation or elimination of the competition;
• facilitating collusion or express coordination among competitors or producing adverse results for consumers; or
• reducing, harming or impeding competition or free market participation for equal, similar or substantially related goods or services.
If it is determined that the concentration has any of the foregoing purposes or effects, in order to approve it the Commission must assess the following:
• if the merger is necessary for attaining economies of scale or developing efficiencies, the benefits of which would be greater than the anticompetitive effects;
• if the merger is necessary for preventing one of the merger’s participating undertakings from leaving the production assets market, as would be the case of an unsustainable financial situation; and
• whether the anticompetitive effects can be offset by the conditions imposed by the Commission.
The Commission can impose one or several of the following conditions for the authorisation of a merger, in order to reduce or offset potential anticompetitive effects:
• assignment, transfer, licensing or sale of one or more of the assets, rights, shares, distribution systems or services to a third party authorised by the Commission;
• limitation or restriction on providing specific services or selling specific goods, or the marking off of the geographic area in which these can be provided or the types of customers to which they can be offered;
• an obligation to supply specific products or render specific services under non-discriminatory terms and conditions to specific customers or other competitors;
• introduction, elimination or modification of the clauses contained in the written or oral contracts with their customers or suppliers; and
• any other structural or behavioural condition necessary for impeding, reducing or offsetting the merger’s anticompetitive effects.
Recently, the Telecommunications Superintendency (SUTEL), which is the competent authority to authorise mergers in the telecommunications sector, rejected a merger between two companies. That specific case may serve to determine some of the issues or topics to which this authority pays more attention. However, it must be noted that SUTEL is an entity independent from COPROCOM, so its views and precedents do not represent COPROCOM’s vision or interpretation of the law.
Purchases of assets, stock or shares made temporarily for the purpose of resale do not need not be notified. This exception applies only if the following conditions are met:
• resale is made within one year from their purchase;
• the buyer does not participate in making decisions concerning the business strategies of the acquired economic agent; and
• the assets or shares may not be the object of a different merger requiring notification pursuant to article 16-bis of the Law.
However, if there is even the slightest chance that any of the mentioned conditions may not be fulfilled, the notification of the transaction is highly recommended.
Term to file the concentration notice
Notification of a merger must be filed at COPROCOM prior to its execution or within five business days following the signing of the agreement.
In the event of successive transactions, the term will begin as of the date on which the transaction is made that meets the threshold for notification.
Procedure to file a notice
In the cases where pre-notification of a merger applies, the notification shall include the following contents:
• a detailed description of the merger;
• identification of all the undertakings involved in the merger, including the capital structure and the share of each partner or direct or indirect shareholder and of those who have or will have control prior to and after the merger;
• an indication of:
• all the companies controlled, directly or indirectly, by the undertakings involved in the merger;
• all the companies or individuals who control, directly or indirectly, the undertakings involved in the merger; and
• all the companies controlled directly or indirectly by each of the companies or individuals mentioned in the preceding points;
• a detailed description of the main goods and services produced or offered by the undertakings involved in the merger;
• an enumeration of the substitute goods and services that are normally considered as being within the same markets due to their physical or technical characteristics, use or functions, consumer or user perceptions, pricing, distribution system, or legal or regulatory product definitions;
• a list of the agents producing or offering goods or services that could be competitors of the goods or services produced or offered by the undertakings involved in the merger;
• a description of the distribution channels used by the merging undertakings;
• a description of the relevant markets involved;
• the share of those relevant markets held by the undertakings involved;
• a description of the entry barriers existing in the relevant markets;
• an economic justification for the merger, including the objectives and potential benefits;
• an analysis of the potential pro- and anticompetitive effects of the merger (which may be accompanied by a proposal on how to mitigate the anticompetitive effects, if any); and
• audited financial statements for the last three fiscal years of the undertakings involved in the merger.
The foregoing information must be accompanied by the respective documentation for its verification.
COPROCOM, or its Technical Unit, may ask the undertakings involved in the merger for any information it deems necessary for the analysis, whether in reference to the relevant market, competitors or any other information of interest, which it must justify technically or legally. If the economic agent does not present the complete information by this deadline, COPROCOM will order the case to be shelved and the request will be deemed not to have been filed, without prejudice to any sanctions that may apply pursuant to section k of article 28 of the Competition Law.
Furthermore, the undertakings may present any information they deem useful for COPROCOM’s analysis of the merger.
All documents and information provided for the case will be presumed confidential and will initially be added to the confidential investigation file for later classification as relevant.
Duration of the process
The Competition Law sets a term of 30 calendar days for COPROCOM to issue a resolution. However, this term is ambiguous since it starts running from the moment when the complete information has been filed (including any information that COPROCOM may request).
In especially complex cases, COPROCOM may, before the 30 calendar days expire, extend this term for up to 60 additional calendar days upon expiry of the initial term. In practice, COPROCOM often extends the 30-day period.
Authorisation or conditioning of the concentration
Once it has concluded its analysis of the concentration, COPROCOM may:
• authorise the concentration;
• condition its authorisation to meeting specific commitments proposed by the parties;
• notify the applicant that the concentration’s foreseeable negative effects cannot be offset with the proposal presented, and concede the applicant a term of 10 calendar days for presenting a new proposal; and
• in the event the applicant has not presented a commitment proposal and COPROCOM determines that the merger has foreseeable negative effects that could be offset, the applicant will be notified, and be given a term of 10 calendar days to present a commitment proposal.
COPROCOM’s final resolution will be subject to appeal for review, which must be filed within three days following its notification.
If, after notification of the merger, and prior to COPROCOM’s issuance of a final resolution, the parties decide to suspend its execution or to back out of it, the applicant will immediately inform COPROCOM of this circumstance and COPROCOM will promptly order the case to be shelved.
Transactions that are not notified
In the first years after the introduction of the concentration notification regime, there was a perception that several concentrations were not being notified. COPROCOM’s role in terms of prosecuting and sanctioning this failure to notify seemed to be passive. This has been noticed by the authority, and recently COPROCOM has manifested its intention to investigate these situations. So far, there is no precedent of a sanction imposed due to failure to notify. However, there are several investigations currently under the analysis of COPROCOM.
The recent pre-merger notification requirement introduced in the Competition Law requires companies to become familiar with antitrust regulations and to seek adequate legal counsel before entering into business agreements that can be encompassed as mergers under Costa Rican law.
The way in which the company submits its pre-merger notice plays an instrumental role in guiding the authorities to the correct resolution and analysis of the market effects of the transaction.
Companies should be aware that the notification regime applies not only to local companies, but to foreign companies with business activities in Costa Rica, even indirectly through third parties. Also, antitrust counsel should carefully analyse changes in the control structure of a company since the acquisition of control requirement of mergers set forth in the Competition Act has been interpreted to a significant degree.
In 2015, the OECD carried out an analysis of Costa Rica’s competition law, as well as the implementation of the law executed by COPROCOM and the sectorial competition authorities. This analysis found an overall well-established competition regime. However, there were some specific relevant issues that were noted by the OECD, and also some recommendations made by the organisation.
Following these recommendations, there is a draft bill expected to be discussed in the coming months at the Legislative Assembly, which aims to reform Law No. 7472. There are expected to be some structural modifications with the aim of providing COPROCOM greater independence. There are also some possible modifications regarding leniency, the time frame for notifying concentrations, and anticompetitive practices. However, the legislative process is still in its preliminary stages so it is not possible to analyse in more depth the scope of this draft bill.
Zürcher, Odio & Raven is one of the most important and consolidated law firms in Costa Rica, committed to offering the best legal services in the country. Established in 1936, Zürcher, Odio & Raven is one of the oldest and largest organised law firms in the Central American region. The firm is composed by a team of over 45 lawyers, who provide a full-range portfolio of legal services seeking to fulfil the increasing demands of its growing clientele.
In terms of competition law, Zurcher, Odio & Raven’s practice is lead by partner Clauduio Donato Monge, who is a former president of COPROCOM. The firm is, without a doubt, one of the major players in relation to the conducting of procedures before COPROCOM, having provided legal advice in numerous anticompetitive practice investigations; representing both plaintiffs and defendants. The firm represented a plaintiff in an anticompetitive practice investigation that led to the highest fine ever imposed by a Costa Rican competition authority.
Since the introduction of the concentration notification regime, Zürcher, Odio & Raven has successfully obtained the authorisation of over 20 different transactions, and it has extensive experience handling matters with COPROCOM.
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