Venezuela: Overview

Venezuela: Merger Regulation

In Venezuela, any transaction where an entity takes control over another is categorised as a merger by the Competition Law. In this sense and under the Competition Law, a merger or economic concentration may result from any of the following transactions:

• a merger of previously independent enterprises;
• joint ventures; and
• transactions as a result of which one or more entities directly or indirectly gain control over one or more previously independent enterprises, or parts thereof, through the acquisition of equity, assets or otherwise.

Under the Competition Law, control means the possibility for one person or entity to exercise a decisive influence on the activities of one of the persons or entities subject to the Law, either through the exercise of property rights or by the use of all or part of the assets of that person or entity, or through the exercise of rights or contracts that permit a decisive influence on the membership, deliberations, or decisions of the bodies corporate of said person or entity or on their activities.

In addition, Regulation No. 2 expands the spectrum to include:

• the merger between two or more independent companies pursuant to the terms of the Commercial Code; the Commercial Code provides certain formal obligations which must be met for the safekeeping of the creditors and workers of the company, and which may eventually disappear or be legally terminated;
• the constitution of a common company between two or more independent companies, in which scenario the criteria of the European Directive on common companies is applied; such Directive distinguishes between the direct or indirect acquisition of control, by a company over another, through the acquisition of shares, the participation in the capital stock or by means of any other contract or legal figure which grants the control of a company;
• the acquisition of productive assets or commercial funds; and
• any other act, contract or legal figure by which companies, divisions or parts of companies, commercial funds or assets in general may be concentrated.

The criteria for determining whether an economic concentration may generate restrictive effects over free competition, or may produce or reinforce a dominant position in the relevant market, are as follows:

• Does the transaction produce a significant increase in concentration resulting in a moderate or highly concentrated relevant market?
• Does the transaction facilitate the entering into agreements restricting free competition, as well as the creation of barriers to entry of other potential competitors?
• Does the transaction facilitate the increase of prices by the company, leaving competitors with no capacity of countering said pricing power?
• Will new competitors find the market easy, convenient and possible enough to avoid a price increase after the transaction?
• If not for the transaction, would the productive assets of the acquired company exit the market?
• Does the transaction have, or may it have, the objective of wrongfully displacing other companies from the relevant market, or preventing other companies from accessing the market, especially between companies in the same line of business?

Based on the aforementioned criteria, The Office of the Superintendent for the Promotion and Protection of Free Competition (Procompetencia) has traditionally used the evaluation method, principally based on:

• identification of the relevant market in which the concentrating companies operate;
• determination of the resulting concentration rate;
• the rate of competition in the relevant market;
• the existence of barriers to entry for new participants;
• the possibility for collusion between the remaining competitors;
• availability of substitute products or services; and
• economic efficiencies created by the transaction (eg, effective competition, the interests of consumers, promotion of cost reduction and development of new technology, among others).

In practice, the main focus has been on barriers to entry. Procompetencia generally evaluates the existence of barriers to entry, focusing on increases or decreases in market share, if it considers that barriers to entry for imports or new competitors are low. Procompetencia also considers the effects of a merger on the suppliers and the customers of the companies wishing to merge. In the case of vertical mergers, Procompetencia also evaluates the effects on each market.

Legislation

The Venezuelan merger legislation is contained in the following texts:

• Article 113 of the Venezuelan Constitution of 1999, which is the main constitutional provision regarding free competition. Said article contains an express prohibition against monopolies. It also provides that acts, activities, conducts or agreements for the direct or indirect creation of monopolies, as well as the abuse of a dominant position in the marketplace, both violate constitutional principles. Furthermore, article 113 provides that in order to protect consumers, producers and free competition conditions within the economy, the state shall adopt all necessary measures to prevent the restrictive and pernicious effects of monopolies, and those derived from the abuse of a dominant position in the marketplace.
• Article 11 of the Competition Law of 1992 (published in Official Gazette No. 34,880 dated 13 January 1992), which provides that: 'Economic concentrations are prohibited, especially those taking place in the same line of business, when they would trigger restrictive effects on free competition or create a dominant position in all or part of the market.'
• Regulation No. 2 of the Competition Law on Mergers ('the Merger Regulation'), (published in Official Gazette No. 35,963 dated 21 May 1996), governing:
• the voluntary notice of economic concentration transactions;
• the types of transactions subject to voluntary control;
• the method for calculating business volume;
• the method for evaluating the effects of economic concentrations on free competition; and
• the procedure for prior or post merger voluntary evaluation;
• Procompetencia Resolution No. 14/96 (dated 24 May 1996 and published in Official Gazette No. 36,000), providing a combined sales test and the jurisdictional thresholds.
• Regulation No. 3 on Economic Concentration Transactions (Official Gazette No. 36,209 dated 20 May 1997), providing the information that private parties must submit to Procompetencia when filing a notice of an economic concentration transaction; and
• The current Guidelines for Analysing Economic Concentration Transactions issued by Procompetencia (Official Gazette No. 36,819 dated 1 November 1999), providing the method and parameters for evaluating economic concentration transactions.

The Venezuelan merger legislation provides that filing a notice of an economic transaction is voluntary. In other words, there is no obligation to file or notify a transaction to Procompetencia, even if the threshold amounts set in the Guidelines for Analysing Economic Concentrations Transactions are met.

Please note that Constitutional Transitory Provision 18 provides that the National Assembly (ie, Parliament) must issue a new law to protect free competition based on the constitutional principles of article 113. Moreover, Constitutional Transitory Provision 18 provides that the new law to protect free competition must contemplate the following:

• which agency shall be in charge of competition;
• that the National Assembly shall appoint the person to preside such agency; and
• that public officials and judges in charge of hearing free competition cases must observe the constitutional principles of article 113.

Based on the foregoing, a bill for the defence of free competition was discussed by the National Assembly two years ago.

The bill radically changes the Venezuelan merger control regime. If approved, notice of economic concentrations would be compulsory in cases where combined assets of the merged companies exceed 2.5 million tax units (approximately US$39 million) or where combined sales of the merged companies exceed 1 million tax units (approximately US$15.5 million).

Other relevant legislation for mergers

The Organic Telecommunications Law and the Capital Markets Law both contain additional relevant merger legislation.

The Organic Telecommunications Law mandates that any form of economic concentration between telecommunications providers or any change of control in any telecommunication provider shall be approved by the National Telecommunications Commission (Conatel). In such cases, Conatel must consult and receive a prior affirmative recommendation from Procompetencia.

In addition, the Capital Markets Law provides that any person or persons, connected or not, attempting to acquire a certain volume of shares representing a significant participation in the capital stock of a public company (ie, a company registered before and supervised by the National Securities Commission) shall give notice of such intent to the National Securities Commission and to the general public. Failure to give such notice will impede the holder from exercising any and all rights derived from the volume of shares acquired in this manner and any decision taken with the favourable vote of such volume of shares will be considered void.

Notification

The Venezuelan notification system is voluntary and there is no deadline for notification. The voluntary notification system is based on self-regulation by the respective economic agents, who may choose to notify Procompetencia if they find that significant restrictive effects are or would be generated in the Venezuelan market.

Because notification is voluntary, companies may choose to notify or not the merger. The Competition Law does not sanction companies involved in a merger who choose not to notify. Moreover, there is no temporary limit regarding the notification; thus, companies may notify before, during or even immediately after the merger. Nevertheless, Procompetencia has the legal power to evaluate mergers that have not been notified to them.

The Venezuelan voluntary notification system is almost an exception to the compulsory notification system applicable throughout Latin America. As explained above, if the National Assembly passes the proposed bill for the defence of free competition, it is likely that Venezuela will have a compulsory notification system beginning the second half of 2007. The companies may choose whether or not to file the notification. Even in cases where a merger technically requires notification and clearance, there are neither risks nor sanctions for entities that chose not to file. In any event, Procompetencia has the legal power to evaluate mergers that have not been notified or filed with them.

When a merger or economic concentration transaction has taken place without previous filing by any of the companies involved, Procompetencia may open a preliminary investigation to study the case. The preliminary investigation may result in either a decision to close the case (if there is no presumption of the existence of restrictions to free competition); or in the opening of a proceeding to establish sanctions in accordance with article 32 of the Competition Law.

In addition, the preliminary investigation and/or the proceeding to establish sanctions may be opened at the request of a third party considering itself to be affected by the transaction. In such cases, the affected third party may take part in the proceeding to expose the evidence and arguments of the claim.

The preliminary investigation is not subject to a fixed time period, but the proceeding to establish sanctions has a fixed time period as provided in the Competition Law (approximately four months). During the investigation, Procompetencia has broad powers to request information and to practise any tests they deem necessary (in the majority of past cases Procompetencia has asked for questionnaires to be answered). The Competition Law also grants Procompetencia the power for issuing preliminary injunctions ex-officio or at the request of affected third parties.

In its final decision, Procompetencia must state whether or not the transaction restricts free competition. If Procompetencia declares that the transaction does not restrict free competition, the case is closed. On the other hand, if Procompetencia declares that the transaction does restrict free competition then it may order, pursuant to article 17 of Regulation No. 2, the separation of the concentrated companies, assets or divisions.

Time frame for notification

The notification may be filed at any stage in the transaction timetable. In practice, Procompetencia has conducted preliminary investigations of already closed transactions and has admitted after-closing filings for the sole purpose of evaluating the transaction and for measuring the concentration impact on the Venezuelan market.

Time frame for scrutiny of the merger

The time frame for scrutiny of the merger by Procompetencia is four months from the date of filing. However, the actual duration of the proceeding depends on the complexity of the concentration transaction and on to the time it takes the parties to provide complete information relating to each case.

The main stages in the regulatory process are:

• Compliance with the requirements set out in Resolution No. 3 on Economic Concentration Transactions; and
• Procompetencia's sending of questionnaires to companies active in the market in which the merger is taking place (competitors, suppliers and clients) to gain an understanding of how that market works.

Generally, Procompetencia will wish to meet some of the parties seeking to merge to clarify certain issues relating to the market and their commercial activities.

Responsiblity for filing the notification

Both parties are responsible for making the notification, although the purchaser normally files before the transaction closes. However, once the proceeding is opened, Procompetencia has the power to request information from any party. It is customary for all parties involved in a merger or economic concentration transaction to jointly make the filing.

Third parties

Any third party claiming a personal and direct interest in the proceeding may request to participate in the regulatory scrutiny process, in order to oppose or support the merger. In addition, Procompetencia generally requests market information from competitors, suppliers and clients.

The end of the process: remedies, appeals and enforcement

As stated above, in its final decision, Procompetencia must state whether or not the transaction restricts free competition. If Procompetencia declares that the transaction does not restrict free competition, the case is closed. On the contrary, if Procompetencia declares that the transaction does restrict free competition, then Procompetencia may order the separation of the concentrated companies, assets or divisions.

Negotiation for possible remedies

Under the Merger Regulation, Procompetencia may order divestitures, among other remedies. Divestitures are considered among the most appropriate measures for remedying the anti-competitive aspects of a transaction. In fact, Procompetencia has ordered that the assets to be divested should be places under the control of a trustee, which must sell such assets within a limited period of time (between six months and one year). If the assets are not sold, they are returned to the original owner.

In practice it its very hard to negotiate remedies with Procompetencia, which generally decides remedies unilaterally and without consulting the affected entities - even when they submit a remedies proposal.

There is no time frame for submitting a remedies proposal. Depending on the complexity of the transaction and the degree of concentration in the relevant markets, it may be convenient to submit a remedies proposal upon filing or at the end of the proceeding.

In those cases in which Procompetencia has imposed remedies, it has demanded that the concentrating entities report back on how they are complying with such remedies and has demanded to approve any final divestitures.

Time frame for appealing a merger decision

Any affected party may appeal a merger clearance decision before the First Contentious Administrative Court, within 45 days from the rendering of Procompetencia's decision. In general, the appeal automatically suspends the effects of the decision, provided that a bond is posted by the appellant. However, to date no mergers have been suspended by the court. First Contentious Administrative Court decisions can now be appealed before the Supreme Tribunal of Justice.