Brazil: Merger Control
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Developments in Merger Control in Brazil
While most countries are still recovering from the world crisis, Brazil's economy has reported a remarkable growth. In the first quarter of 2010, foreign investments in Brazil reached $12 billion. 1 In the same period, the Brazilian economy grew 9 per cent in relation to the first quarter of 2009, and federal revenues came to 826.4 billion reais. 2
Accordingly, the number of mergers, acquisitions, joint ventures and other agreements notified to the Brazilian competition authorities for review has risen substantially. In the first half of 2009, 216 transactions/agreements were notified for judgment by the Administrative Council for Economic Defence (CADE), 3 the primary authority in charge of rendering final decisions at the end of the review process, based on the terms of the Competition Act (Law No. 8884) of 11 June 1994. In the first half of 2010, the number raised to 341 transactions/agreements. It is expected that more than 700 transactions/agreements will be notified for CADE's review until the end of 2010. 4
CADE rendered important decisions during 2009 and 2010. Our view is that the decisions consolidated CADE's position favourably to structural remedies when imposing restrictions for approval of transactions/agreements and seemed to have shown CADE's intention to negotiate remedies with the parties, instead of unilaterally imposing restrictions to companies involved in what we call 'concentration acts'.
CADE has also been active in negotiating and executing Agreements to Preserve Reversibility of the Transaction (APRO). An APRO is an agreement by which the parties involved in complex transactions agree to keep the structure of the companies separate, freezing out the transaction until clearance is given by CADE.
Despite the now well-known inefficiencies of a post-merger review process that may involve up to six authorities (CADE, SDE5 - the Economic Law Office (SDE), 5 the Economic Monitoring Office (SEAE), 6 CADE's Attorney General Office, the Federal Prosecutor Office and an industry regulator), improvements have been made towards modernisation of the Brazilian 'merger control system'. However, some argue that such improvements are not enough and that statutory modifications are necessary for Brazil to achieve a first-class level in reviewing transactions and agreements which are potentially detrimental to market competition.
After providing a brief overview of developments in the rules governing the Brazilian 'merger control system', this article contains:
• comments on some of the recent relevant institutional developments;
• comments on the most important decisions rendered by CADE in 2009 and 2010; and
• information on the most expected statutory changes in the near future.
Developments in the rules governing the Brazilian 'merger control system'
It seems fair to state that, since the enactment of the 1994 Competition Act, Brazil has a 'merger and other agreements control system' as opposed to a strict 'merger control system'. As noted by the OECD, 7 the language in the 1994 Competition Act is broad enough to include all agreements 'that may limit or otherwise restrain open competition, or that result in the control of relevant markets for certain products or services'.
As stated above, Brazil has a post-merger and other agreements review system. When notification is mandatory, the parties must file the transaction within 15 business days after its 'occurrence'. 8
In order to ascertain whether a transaction, or 'concentration act', must be notified in Brazil, the Competition Act sets two different criteria:
• whether or not the transaction has effects (including potential effects) in Brazil; and
• a double objective test to determine the relevance of the transaction.
Whether a transaction must be notified for review in Brazil depends heavily on the size of the economic groups involved, although a market share test also applies.
A transaction is deemed relevant for notification in Brazil:
• if, as a result of the transaction, the market share held by any of the participants will be higher than 20 per cent of any relevant market; 9 or
• if, regardless of the resulting market share, any of the participants had reported revenues in the fiscal year preceding the transaction equal to or higher than 400 million reais.
Contrary to what happens in the USA, for instance, the Brazilian currency value threshold is not revised annually. 400 million reais was expressed in the 1994 Competition Act and no change has since been made to this figure.
Still, many believe that the statutory thresholds are overbroad, encompassing transactions that are not even potentially harmful to competition in Brazil. Since the enactment of the 1994 Competition Act, the Brazilian competition authorities have been spending resources inefficiently and several companies have frown at the need to go through a lengthy review process for clearance of simple transactions.
During the past five years, the Brazilian competition authorities have been working within the boundaries of the 1994 Competition Act, not only to lower the number of unnecessary filings, but also to shorten the length of the review process. Some examples of measures taken by CADE are worth recalling.
In January 2005, CADE decided that only concentration acts involving at least one economic group with a recorded annual turnover equal to, or exceeding, 400 million reais in the Brazilian territory should be notified to the Brazilian competition authorities. Also in this regard, CADE published Statement No. 1 in October 2005, giving more transparency to its decision to overrule the previous interpretation that the annual turnover to be considered was the worldwide turnover of any party in the transaction.
In 2007, CADE decided to give more publicity to its decision to release from mandatory notification the acquisition of a minority ownership interest in the voting capital by the partner that already holds a majority ownership interest. CADE Statement No. 2 then explained that such exemption should apply when:
• the seller does not hold powers resulting from laws, acts of incorporation or contracts to appoint a senior manager, determine the trade policy, or veto any corporate matter;
• the transaction does not stipulate any non-compete clauses and conditions that are over five years and/or with territorial coverage that is larger than that of the actual company's operations; and
• the transaction will not give rise to any control power between the parties after the deal.
Although CADE's statements do provide reasonable security to companies in assessing whether to notify a transaction or not, filings should still be decided on a case-by-case basis.
In addition to CADE's statements, case law has also established that if any participant's economic group generates revenues above 400 million reais, the transaction is subject to mandatory notification. 10 CADE has consistently been refusing release from mandatory notification of transactions in which only the selling party generated revenues over 400 million reais in Brazil.
Since 2008, CADE has frequently rendered decisions indicating that a transaction is not subject to mandatory notification if:
• the parties have not generated revenues over 400 million reais in Brazil;
• only the seller was active in the relevant market, even if it had more than 20 per cent of the market share; and
• the transaction does not result in vertical integration.
In other words, although no formal CADE statement has been issued thus far, several CADE decisions imply that the 20 per cent criteria will only be met if it is a direct result of the transaction, and not a pre-existing market share of the participant. 11
Most relevant institutional developments
In view of the overlap provided by the 1994 Competition Act between SEAE, SDE, and CADE in the review of notified transactions, SEAE and SDE have executed several agreements to better coordinate the review process. Such coordination measures are extremely important to simplify and expedite the process.
According to such agreements, SEAE has been working on the scrutiny of the documents and information submitted by the companies and third parties, under the supervision of SDE's technicians, who are no longer repeating the measures taken by SEAE. SDE's technicians have been instructed to concentrate on cartel and individual conduct cases. The result is the release of non-binding opinions by SEAE that are entirely confirmed by an SDE ruling, issued only to comply with the 1994 Competition Act. SEAE's full opinions together with SDE's approval are then considered by CADE in judging the transactions.
As of 2010, SEAE has been responsible for reviewing the parties' request to treat business information as confidential, also in an effort to reduce even further the amount of time spent in the review process.
CADE, SDE and SEAE have also been working on the execution and implementation of cooperation agreements with other regulators, such as the national Department of Mineral Production (DNPM), the national Civil Aviation Agency (ANAC); the national Private Health Agency (ANS); and the national Institute of Industrial Property (INPI). The cooperation agreement executed with the national Electric Energy Agency (ANEEL) even provides for notification of transactions in four counterparts, so that one is forwarded to ANEEL, where a non-binding opinion will be issued. 12
Case law: CADE's main recent decisions
In 2009 and 2010, CADE's decisions signalled that:
• although CADE has an explicit preference towards structural remedies, it usually combines structural and behavioural remedies to achieve its goals; and
• in crafting the remedies, CADE has been calling the parties to negotiate, in order to better understand the transaction at hand, the parties' needs/behaviour and thus achieve a better outcome.
The parties to the transactions seem to be more likely to try to obtain the opportunity of influencing the remedies and limiting the scope of CADE's decisions, even though they acknowledge that they would lose the ability to challenge CADE's decision in the Judiciary. Negotiation seems to have been seen as the best solution both to CADE and to the parties involved, as it allows informed decisions to be made and avoids litigation costs.
In the Chinaglia/DBG case, 13 for instance, CADE conditioned the deal approval to execution of a performance commitment, in view of its conclusion that the transaction would generate a monopoly in the indirect magazines distribution market, and that there was a substantial vertical integration concern.
CADE argued that 'if the new absorbed company makes use of vertical restraints, the publishers not related to the Abril Group [which holds DBG] would have no means of responding and, in the extreme hypothesis of total market foreclosure (_), some of the publishers might be driven out of the market.'
The parties then agreed:
• to divest DBG's physical assets (tangible and intangible) used in São Paulo and Rio de Janeiro;
• to ban, for 10 years, any kind of exclusivity agreement between the Abril Group and companies active in the market for indirect distribution of published materials to retailers; and
• to ensure that distribution services would be offered on a non-discriminatory and objective basis.
In the Sanofi-Aventis/Medley case, 14 which created the largest pharmaceutical company in Brazil, CADE also imposed the terms of a performance commitment on the parties involved. As the combined company would hold market shares exceeding 20 per cent in some specific drugs markets, CADE decided that: two out of four drugs manufactured by Medley that together accounted for 18 per cent of a given relevant market identified by CADE would be disposed to a company with no more than a 15 per cent share in this very same relevant market (therefore reducing the combined market share of Medley and Sanofi-Aventis from 54.14 per cent to 36 per cent); and another drug manufactured by Medley would be disposed to a company with no more than a 15 per cent share in another specific relevant market.
An important negotiation between CADE and the companies to a transaction during the last months took place in the TIM/Telefónica case, which relates to the indirect acquisition of a minority participation in Telecom Italia's corporate capital by Telco (totalling 23.75 per cent of Telecom Italia's corporate capital). 15 The Telefónica Group holds an equity interest of 46.17 per cent in Telco and, as a result of the transaction, now indirectly holds approximately 10.9 per cent of Telecom Italia. The main issue before CADE was whether the transaction raised competition concerns, due to the fact that Telefónica now holds a minority interest in Telecom Italia, which is the controlling company of TIM, one of the major mobile operators in Brazil. The Telefónica Group is the controlling company of Vivo and Telesp, TIM's competitors as mobile and wireline operators.
CADE decided that it was possible for a transaction to generate anti-competitive effects even when the party does not acquire control or the ability to exert relevant influence over the target company, but only a minority passive interest. This is because the transaction might reduce the party's incentive to compete with the rival target company (unilateral effects) and may facilitate collusive arrangements between the parties (coordinated effects).
Based on the agreement executed between the parties and telecom regulator Anatel, 16 the parties agreed with CADE to execute a performance commitment by which: 17
• Telefónica is prevented from voting or vetoing whenever Telco or Telecom Italia will be discussing matters related to the telecommunication market;
• Telefónica is even prevented from participating in meetings to discuss telecommunication matters; and
• Telefónica is prevented from obtaining material information regarding Telecom Italia's participation in the telecommunications market.
The parties also negotiated with CADE and accepted the adoption of a Chinese wall to limit the exchange of material information between them.
It is also worth mentioning the performance commitment executed by CADE in August 2010 in the Banco do Brasil / Nossa Caixa Bank case, which relates to the 5.4 billion reais acquisition of Nossa Caixa Bank by Banco do Brasil. Despite the fact that the deal gave Banco do Brasil a 40 per cent share of the state of São Paulo's banking sector, CADE decided to approve the deal subject to Banco do Brasil's agreeing to offer Nossa Caixa Bank's clients, through a call centre, full portability of their accounts for a period of four years.
The decision is important because it signalled that CADE will continue to intervene in the banking market, despite the fact that some advocate that the Central Bank of Brazil has exclusive jurisdiction over transactions in the banking sector. Discussions on the existence or not of exclusive jurisdiction by the Central Bank over transactions in the banking sector are still before the Superior Court of Justice, but CADE continues to defend its broad authority under the 1994 Competition Act.
In 2009 and 2010, CADE was also very active in executing APROs. On 8 July 2009, CADE executed an APRO freezing the acquisition of Sadia by Perdigão, which will create the world's third biggest meat producer (25.4 billion reais revenues in 2009). The transaction will result in significant overlaps in several relevant markets, including the pasta market (with concentration of 88 per cent according to Santander Corretora) and the frozen pizza market (with concentration of 67 per cent). The APRO prohibits Perdigão from exercising control of Sadia by establishing that the administrative and commercial structures of the companies will be kept separate and independent, and limiting the exchange of information between the companies. On the other hand, the APRO enabled the financial restructuring of Sadia.
On 3 February 2010, CADE executed an APRO in connection with the transaction between Casas Bahia and Companhia Brasileira de Distribuição. The transaction created the biggest retailer company in Brazil. Under the APRO, these companies should not sell the stores and distribution centers currently active, and should keep on marketing and advertising separately the different brands owned by the companies. In addition, the companies were not allowed to coordinate purchases from suppliers.
Towards the modernisation of the Brazilian system: statutory modifications in the near future
Many advocate that effective modernisation will only be seen in the Brazilian review system with statutory modifications. The OECD seems to agree with the heads of CADE and SDE that the system should suffer a major institutional overhaul and that a 'pre-merger' notification system should be immediately introduced.
CADE's president has been pushing hard for enactment of Bill No. 6, which has already been approved by the House of Representatives and still needs to be adopted by the Federal Senate.
With regard to the institutional overhaul, the Bill will arguably eliminate the overlaps between SDE, SEAE and CADE. SDE and SEAE will cease to be responsible for reviewing concentration acts. The Bill creates CADE General Bureau (GB) with powers to approve simple concentration acts and to investigate complex transactions, performing the job currently done by both SDE and SEAE. Approval of complex concentration acts would be decided by the Board of CADE. One criticism seems to be the excess of powers the GB will concentrate.
In relation to pre-merger notification, a most keenly awaited change in the current system, the Bill provides that within 50 business days after being notified, the GB may declare the transaction as complex and determine additional investigation. The additional investigation must be completed within 90 business days, when the GB shall, within 10 business days:
• approve the transaction; or
• recommend denial or modification of the transaction by the Board of CADE.
CADE may request further investigation, but the bottom line is that the entire process would take 240 days, extendable to a maximum of 330 days (and the investigatory period would be considerably shortened).
The pre-merger system will probably work perfectly for simple transactions (which shall be approved by the GB within 60 days), but many practitioners fear that CADE will fail to implement an expeditious review of complex cases even if a host of new technicians are hired for CADE (the Bill provides for the hiring of 200 employees, but hiring and training processes are often lengthy).
In view of the recent developments of the Brazilian economy, and also considering the rules currently governing the review of transactions by the Brazilian Competition Authorities and CADE's recent case law, it remains very important for any corporation doing business in Brazil to be familiar with the terms of and the interpretation given by CADE to the 1994 Competition Act, which are expected to suffer relevant changes in the near future.
- . See http://g1.globo.com/economia-e-negocios/noticia/2010/07/investimento-estrangeiro-no-brasil-soma-us-12-bilhoes-no-1-semestre.html
- . According to the Brazilian Institute of Geography and Statistics. Available at: www.ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=1631&id_pagina=1.
- . The Administrative Council for Economic Defence (CADE) renders final decisions, at the administrative level, with regards to restrictive business practices and concentration acts (mergers, joint-ventures and acquisitions), based on the opinions issued by SDE, SEAE, Anatel and any relevant regulatory agency that may be involved.
- . Valor Econômico newspaper, 30 July 2010.
- . The Economic Law Office (SDE), which reports to the Ministry of Justice, is - under the 1994 Competition Act - the department in charge of investigating restrictive business practices and rendering non-binding opinions on concentration acts, which are subject to CADE's final judgment.
- . The Economic Monitoring Office (SEAE), which reports to the Ministry of Finance, is - under the 1994 Competition Act - the department in charge of rendering non-binding opinions on the economic aspects of concentration acts and assisting SDE in the investigation of anti-competitive business practices, which are subject to CADE's final judgment.
- . In 'Competition Law and Policy in Brazil - A Peer Review'. Organisation for Economic Cooperation and Development, 2010.
- . According to Paragraph 4 of Article 54 of the 1994 Competition Act. CADE's Resolution No. 45/2007 establishes that the 15 business-day period should be defined as 'starting from the first binding document signed between the parties' (Article 98).
- . The 1994 Competition Act does not define 'relevant market'. According to CADE, 'a relevant market of the product includes all the products/services considered substitutable among them by the consumer because of their characteristics, prices and use. A relevant market of the product may possibly be composed of a certain number of products/services that present physical, technical or trading characteristics that recommend the grouping.' (Attachment V of CADE's Resolution No. 15 of 19 August 1998.)
- . See, for instance, CADE's decision in Concentration Act No. 08012.0011559/2006-3.
- . See, for instance, CADE's decision in Concentration Act No. 08012.007026/2008-17.
- . Ordinarily, a transaction is filed in three counterparts, one to each Authority involved in the review process (SDE, SEAE and CADE).
- . Concentration Act No. 08012.013152/2007-20. The companies' primary business was the distribution of magazines.
- . Concentration Act No. 08012.011736/2008-41.
- . Concentration Act No. 53500.012487/2007.
- . The Brazilian Telecommunications Agency (Anatel) is in charge of investigating restrictive business practices in the telecommunications sector and rendering non-binding technical opinions on concentration acts involving telecommunications services providers. Anatel's opinions on such issues are also subject to CADE's final judgment.
- . Anatel reviewed the transaction before CADE and entered into an agreement with the parties imposing several restrictions.