Brazil: Merger Control
Since the enactment of Law No. 8,884/94, Brazil has been experiencing the consolidation of its merger control system. The big expectation of a deep renovation of the Brazilian Antitrust Law - which will bring a pre-merger control system, among other features, to Brazil - did not curb the consolidation and technical evolution of the merger review. This is evidenced in recent decisions, such as the one related to the merger between Sadia and Perdigão (analysed in more detail later).
As one of the ‘BRIC’ economies, it goes without saying that the economic growth in Brazil brings an additional component to the context of its merger control: the complexity of the transactions submitted to the Brazilian System of Competition Defence (SBDC) is increasing, as is, consequently, the expertise of the authorities in charge of the competition defence in the country. This can be observed within the Administrative Council for Economic Defence (CADE), where an Economic Studies Department was created to handle difficult and complex economic and econometric matters on CADE’s behalf. Therefore, the antitrust private practice is evolving through a technical path requiring a deeper knowledge of the several theories and tools available worldwide, whether economic or legal, in order to handle the difficult and complex transactions at hand.
According to CADE’s 2010 Annual Report, which was released to the public at the beginning of 2011,1 the number of ‘acts of concentrations’ saw a 57.5 per cent increase, in comparison with the number registered in 2005. Since 2005, CADE has seen an increase in the number of technical staff who were also given more responsibility, resulting in a rise in the number of cases analysed per year (which rose from 497 in 2005 to 660 in 2010), as well as the average time taken, within CADE, to analyse the cases, which went from 81 days in 2005 to 40 days in 2010. In addition to this, the staff increase, the reformulation, and the enhancement of cooperation between the components of the SBDC (ie, SEAE, SDE, ProCADE, MPF2 and CADE), eliminated the overlapping activities, granted a significant reduction on the average length of analysis of acts of concentration: which went from 252 days in 2005 to 165 days in 2010.
The depth and strength of the decisions can also be regarded as an achievement. Both in merger and conduct controls, CADE has imposed severe decisions of veto (such as the cases Saint Gobain/Owens in the fibreglass market and Polimix/Tupi within the cement and concrete industries), of partial approval with heavy commitments of selling assets (such as the case Sadia/Perdigão, which involved circa 35 per cent of the parties’ production capacity in Brazil comprising production facilities, distribution centres and an important portfolio of products and brands), and high fines (such as the case of abuse of dominant position of AMBEV with its points of sale, circa 352 million reais, and the Industrial and Hospital Gases cartel conviction, circa 2.6 billion reais). The latter led CADE to be awarded the prize of ‘Agency of the Year, Americas: Brazil’s CADE’ (Global Competition Review, Best Agency of the Americas 2011).
Although, based on the provisions of the 1988 Federal Constitution (article 5, item XXXV), any individual can take action before the courts in order to review CADE’s final decisions, none of those cases were reverted in the courts. A good part of this result should be attributed to the improvement of the technical approach carried out by the Brazilian antitrust authorities in the several existent proceedings, both in merger review and conduct control. It is worth mentioning that preliminary injunctions are not granted in order to suspend the efficacy of CADE’s decision until the plaintiff makes a judicial deposit amounting to the totality of the fine imposed. This is applicable in both conduct cases and merger review cases, where fines are usually imposed for non-compliance with a decision of, for example, selling assets. In addition to this, according to CADE’s 2010 Annual Report, 84 per cent of the cases taken to courts to challenge CADE’s decision were decided in CADE’s favour.
Following the best practices recommendations of OECD, ICN, UNCTAD, the World Bank and other multilateral international organisations on antitrust/competition, transparency and predictability are also topics under the SBDC’s focus. This can be seen, in particular, within the Brazilian merger-review system, where, for example, they are open to third party participation in complex cases. The asymmetric information between the antitrust authorities and the several segments of the economy is accurately assumed by the Brazilian authorities once third parties are given the opportunity to actively participate within the merger analysis. This includes consumer protection associations, competitors, related industries associations among others, which allows for a better understanding of different markets’ dynamics, how a given transaction would affect them and what the ideal remedies for the case would be.
The transparent, technical and open nature of antitrust actions in Brazil resulted with more proximity between the SBDC and the sector regulators (such as ANATEL, ANEEL, ANTT, BACEN, etc),3 spreading some expenditure and antitrust expertise to the merger review in those branches. To clarify, once a transaction affects regulated markets in Brazil, the responsible Agency participates, at some point, in the antitrust analysis of the merger, usually giving a technical, but non-binding, opinion that will be regarded by CADE in the antitrust scrutiny of the case. Good examples of this phenomenon are the cases in the banking sector (the acquisition by the consortium Santander/Fortis/RBS of the ABN/Amro Bank group, the merger between Itau and Unibanco, the acquisition by Banco do Brasil of the Nossa Caixa, etc) and cases in the telecommunication sector (the acquisition by Oi of Brasil Telecom, etc).
Predictability can also be seen in the merger-review system by some evolving settlements in CADE’s case law, such as the recent case related to supply agreements. According to recent case law (Rumo/ALL in 2009, Monsanto/Iharabras in 2010, and Monsanto/Dow in 2010), there is no need to submit supply agreements to the SBDC if there is an:
- inexistence of transfer of rights over assets;
- inexistence of corporate, structural or control related to amendments; and
- inexistence of contractual or actual exclusivity.
Hopefully, other similar settlements will be reached in the near future regarding private equity funds’ transactions with no impact on competition. The SBDC’s transparency allows private players to participate in the constant renovation of the proceedings and rules within the Brazilian system.
The Brazilian Merger Review System itself
Under Brazilian Law, the general concept of ‘concentration’ is very broad. Article 54 of Law No. 8,884/94, which governs antitrust and competition cases, refers to ‘any form of market concentration’, including in its scope: cooperatives agreements, contracts, informal arrangements and other arrangements.
Within the Brazilian system there is a twofold criterion that, if met (whether in a horizontal or vertical merger), triggers a mandatory submission, requiring the parties to file the transaction before the SBDC. The criteria are revenue and market share; more specifically, where one of the parties involved registered gross revenue of more than 400 million reais in the previous year or the resulting market share derived from the transaction is higher than 20 per cent in some of the relevant markets or both.
Brazilian law requires that the relevant authorities approach market concentration cases on a case-by-case basis, assessing the specific circumstances of each transaction before concluding if it is anti-competitive or not. This approach, inspired by the rule of reason, considers that not all market concentration is illegal or unacceptable and not every collaboration among competitors or market players is a cartel. It is essential in ensuring that only conducts that are actual or potential restraints on trade are deemed to be unlawful.
That is not to say, however, that CADE takes these cases lightly. In fact, in recent years, CADE has taken a more rigid view on mergers. Although (and possibly because) Brazilian law does not allow per se offences, CADE has been inclined to view arrangements among competitors as quasi-per se offences, imposing their enforcement actions on any and all transactions in violation of the terms of Law No. 8,884/94.Besides laying out offending behaviour and sanctions to be imposed on such conduct, Law No. 8,884/94 governs the standards for review of transactions that yield a market concentration and the procedures that should be carried out when investigating these cases. Article 54, paragraph 4 of this law states that all agreements that meet the aforementioned twofold criteria of revenue or market share or both are required to notify the SBDC of the transaction. The notification can be made:
- prior to the signing or execution of the relevant contractual arrangements;
- prior to the conclusion of the transaction; or
- within 15 business days of the execution of the contract.
Once such notification is submitted, paragraph 6 (of the same article) requires that SEAE issues a non-binding Technical Opinion on the transaction, and based on the principle of reasonability, within 30 days.
Vertical and horizontal mergers are reviewed based on objective criteria set out in the Brazilian Horizontal Merger Guidelines (which were inspired by the US FTC Horizontal Mergers Guidelines of 1992). The idea behind these Guidelines, which were released by SEAE and the SDE in 2001, is to provide greater clarity to market players with regard to applicable rules that they are bound by. The Guidelines’ idea of divulging the main stages of merger review that SEAE and the SDE should follow - namely the concepts, procedures and principles - allows for greater transparency and clarity.
By disclosing the objective criteria and the systematic analysis that both SEAE and the SDE are required to follow at each stage, the discretion of their acts is consequently limited, and thus the fundamental applicability of the rule of reason and the transparency of the Public Administration in antitrust cases is established.
The analysis basically follows five main stages and is influenced by the Harvard School’s ‘structure-conduct-performance’ paradigm:
- determination of the relevant market;
- determination of share and market control (assessment on barriers to entry and rivalry);
- probability of exercise of market power;
- review of efficiencies yielding from the transaction; and
- the assessment of the resulting costs and benefits to Society’s welfare.
The first stage requires the relevant market to be established. In determining the relevant market, SEAE uses the ‘hypothetical monopolist test’, which identifies market share by analysing if a (hypothetical) monopolist can impose a small but significant increase in price in the product market and still profit from it. The answer to this must be ‘yes’ for the market to have been correctly identified, and the investigation can go forward in assessing if antitrust laws are being violated.
The next stage is to analyse the impact that the transaction has on consumer welfare and on competition. When a transaction does not generate a market concentration of more than 20 per cent (or more than 10 per cent in a market where the combined market share of the four principle players is equal to or higher than 75 per cent), it tends to be favourably considered by the authorities. In these cases, the procedure is stayed and the last three stages are not analysed. Alternatively, if the market concentration surpasses the threshold, the analysis moves onto the third stage.
At this point, it is important to note that a transaction that merely results in high market share and power is not a per se violation of antitrust laws. In theory, one has to actually and unilaterally abuse this power in order to offend the antitrust and competition principles. However, due to the preventative nature of antitrust and competition authorities, the mere potential of abuse often prompts the authorities to either determine a full or partial divestiture order or impose behavioural remedies or both. This third stage of the analysis considers the presence of barriers to entry, cost structures, vertical integration and product differentiation. Once these conditions are favourable, resulting in a market that is inelastic to price changes, companies can exercise price variation (through restriction of output) at their leisure.
The authorities will then measure the net effect of the three efficiencies (innovation, production/productivity efficiencies and allocative efficiencies) against the costs to competition. In doing this, they consider factors such as the index of economies of scale and scope, fixed costs, average production levels and costs, work productivity, introduction of new technology, the appropriation of positive externalities and the elimination (or internalisation) of negative externalities, to name but a few of the benefits of an increase in market share and power. If the net effect is equal or superior to the costs to competition, the authorities are required to recommend clearance of the transaction. In practice, clearance at this stage is very rare. In 2004, the merger between Nestlé Brasil Ltda and Chocolates Garoto SA was rejected by CADE, setting a narrow precedent requiring efficiencies to be of such nature that the result thereof is a reduction in the prices of the relevant products.
Finally - and in order to clear an act of concentration that results in significant market share with probability of exercise of market power, and based on yielding efficiencies - it is necessary to demonstrate that the impact of the transaction on society’s welfare would be positive.
Once this analysis has been done, SEAE and the SDE are required to emit their non-binding Technical Opinion, containing their recommendations that range from the unconditional clearance of the transaction to the conditional clearance of the transaction, to the full divesture thereof.
It should be noted that the role of antitrust and competition laws, as well as of the relevant authorities, is to ensure the free functioning of a market structure, as well as the free initiative of its players, with the ultimate aim of protecting economic efficiencies and, consequently, consumer welfare. As such, transactions are approved only when:
- there is a lack of control of a significant share of the market;
- despite significant market share, it is improbable that the player will exercise control; and
- despite the exercise of control, the ultimate effect of the transaction is positive to the market and to consumer welfare.
Recent case law
The biggest case at stake within 24 months at SBDC was that of Sadia/Perdigão. The case relates to Perdigão’s acquisition of Sadia, through a takeover, creating BRF-Foods (BRF). The transaction was submitted to the SBDC on 9 June 2009 and on 8 July 2009, in an attempt to assure that the operation be reversed, an Agreement to Preserve Reversibility of the Transaction (a type of consent decree) was reached between CADE and the Applicants.
The applicants, through a series of measures imposed on them, agreed to, basically, comply with the following.
- Maintain Perdigão and Sadia’s administrative, production and commercial structures relating to commercial activities independent and autonomous from one another.
- Abstain from exchanging:
- competition related information that could affect the independent and autonomous management or could be interpreted as a strategy to integrate their activities, except in certain cases; and
- the adoption of uniform commercial policies.
Later, on 29 October 2010, SEAE issued their non-technical Opinion, suggesting that the operation be conditionally approved with severe structural restrictions (such as temporary licensing of the main brand (Sadia or Perdigão), as well as the sale of a group of production assets; or the sale of a block of assets corresponding to the combating brands, as well as the sale of a block of production assets), as well as behavioural restrictions (the applicants are required to disclose and submit any information, on a rolling basis, about their fidelity and bonus programs, as well as their points of sales to CADE, in an attempt to keep CADE informed about their promotions).
The SDE, agreeing with SEAE’s Opinion, also suggested that the operation be approved conditionally.
The records were then sent to CADE for judging. It is important to note that, in virtue of a request made by the applicants, the reporting judge, Carlos Ragazzo, determined that the records should be sent to ProCADE for them to reconsider and come to a decision with regard to the confidential treatment given to the information contained in SEAE’s Opinions, as well as a list of competitors and clients that could be found in the records. After the analysis of the documents, ProCADE suggested the creation of new, public, versions of the official letters and documents contained in SEAE’s records, as well as a new version of the Opinion submitted by the SDE, with the aim of avoiding a procedural turmoil and respecting the principles of the legal process and the legal defence. This suggestion was approved by the reporting judge.
Once this matter was solved, ProCADE issued a new Opinion that basically stated that the remedies, as suggested by SEAE, would not be sufficient to combat the problems identified as a result of the transaction. In the end, they agreed to approve the transaction, as long as there were restrictions that would allow a third economic agent to balance BRF’s market power, or would allow the benefits generated from the transaction to be passed onto the consumers or both. If such measures were not imposed, ProCADE recommended for the transaction to not be approved. On 8 June 2011, in plenary session, the reporting judge issued his vote, opting to not approve the transaction.
Besides having a big concentration in the innumerous markets in question, the reporting judge concluded that the transaction would result in barriers to entry, lack of competition and the presence of a dominant player who would be too strong to be challenged by its competitors. Notwithstanding this, other questions also contributed to the decision to not approve the transaction, such as:
- the question of the necessity of an integrated operation with the market (in the three types of meats: red meat, pork and turkeys) and the reflexes arising from this assumption, ie, the need to sell the vertically integrated capacity of BRF;
- the need to preserve non discriminatory access to the distribution channels (ie, points of sale); and
- the existence of a dominant player in the brand and product portfolio (ie, or the transaction resulted in a portfolio power that was too strong).
The result of this analysis justified the adoption of a significant structural remedy that would involve the sale of production capacity, relevant brands and products in a vertically integrated manner from upstream markets to the point of sale, combined with behavioural commitments with regard to the distribution channels.
After reading the opinion, CADE’s council member, Ricardo Ruiz, stayed the judgment to better examine the case. The applicants, who were not happy with the decision of the reporting council member, began to negotiate with the authorities, attempting to have the transaction approved conditionally.
On 13 July 2011, after numerous negotiations, an Instrument of Commitment to Performance was reached between the applicants and CADE, where, in an attempt to limit the damage that would be felt by Brazilian consumers, the applicants agreed to adopt the following conditions, imposed on them within the national territory:
- Sale of the following brands: Rezende, Wilson, Texas, Tekitos, Patitas, Escolha Saudável, Light Ellegant, Fiesta, Freski, Doriana and Delicata.
- Sale of ten food processing factories, two pig slaughterhouses, two poultry slaughterhouses, four feed factories, 12 chicken farm matrices, and two poultry hatcheries.
- Sale of eight Distribution Centres;
- Suspension of the use of the Perdigão brand in certain products, in the national territory, and for a period of at least three years;
- Suspension of the use of the Perdigão brand in the sale of salamis, in the national territory, and for a period of at least three years;
- Suspension of the use of the Perdigão brand in certain products, in the national territory, and for a period of at least five years;
- Not to use any other brands, for a period of five years (already existing or yet to be created);
- Suspension of the use of the Batavo brand in certain products, for a period of four years.
The council members Olavo Chinaglia, Alessandro Octaviani and Marcos Paulo Veríssimo accepted Ricardo Ruiz’s decision. The reporting judge, Carlos Ragazzo, in turn maintained his opinion that the transaction should be completely vetoed. And so, with four votes for, one vote against and two abstentions (president Fernando Furlan and council member Elvino Mendonça) the transaction was approved by CADE, conditioned upon the aforementioned restrictions.
The likely renovation of the SBDC
There are high expectations over the passing of the Bill 06/09 (local acronym PL No. 06/09), which ultimately intends to eliminate the overlap between the SDE, SEAE and CADE. The overhaul of the system will take the responsibility for reviewing concentration acts from the SDE and SEAE, and the newly created General Superintendence will take over. The General Superintendence will be given the power of both approving simple concentration acts and investigating the more complex ones; however, it will be CADE’s Board (the Tribunal) who will approve the latter.
It is worth noting that currently there is an ongoing debate between the Brazilian Senate and the other Chamber of Duties. The figures below represent the proposal of the Brazilian Senate, which is more negatively seen by the Brazilian antitrust community.
A long awaited change that is proposed by the Bill is the new time limits that will be applied to pre-merger notifications. The Bill attempts to impose a 50-day limit on the General Superintendence from the date of the notification to determine whether the transaction is deemed complex, in which case additional investigation will be required. This additional investigation will then need to be carried out within 90 business days and the General Superintendence will then have 10 days to either approve the transaction or recommend that it be rejected (partially or fully) by CADE. The idea is that, even if CADE request further information, the process should take no longer than 120 days (extended to a maximum of 210 days). The other Chamber of Duties’ proposal suggests 240 days, extended to a maximum of 330 days.
Another change, viewed by economists and antitrust lawyers alike as less positive, is the requirement that, before there is a requirement for the transaction to be submitted for CADE’s approval, one of the parties (the buyer) must have had a gross annual income, in the last financial year, of 1 billion reais or more, and the other party must have had a gross annual income, in the last financial year, of 40 million reais or more. The problem with these new thresholds is that by requiring that one of the players has had a gross annual income of 1 billion reais, entire relevant sectors of the Brazilian economy would be given antitrust immunity, which conflicts with the ideal of social welfare within the 1988 Federal Constitution. On the other hand, the other Chamber of Duties’ proposal suggests a more reasonable threshold of 400 million reais and 30 million reais, respectively.
Some other concerns for the Bill include the fact that the General Superintendence will hold excessive power, as well as the fact that although the new system is likely to function well with simpler cases, it is unlikely that the more complex cases will receive the technical and speedy assessment that they require. The Bill provides for the hiring of a further 200 CADE technicians; however, this process is not automatic. It depends on the good will of the Ministry of Planning; therefore it is likely to be slow, affecting the transactions that require assessment during the transition period.
In the 2010 OECD Peer Review, it was concluded that ‘the Brazilian competition policy has registered a constant and notable progress, becoming more efficient especially in merger review.’ In the very same review, somebody also said that although the Brazilian System is far from perfect, it is doing very well. However, based on this dualism of thoughts, the SBDC currently faces some very important challenges for the future.
Firstly, the anxiety derived from the likely approval of the Bill 06/09, which restructured the whole system and brought bad results for the ongoing merger control in Brazil. This can be specially observed within SEAE, at least during the past six months, when a large number of the technicians that were prepared and fully dedicated to the scrutiny of antitrust mergers left the staff because of the new roles given to SEAE by Bill 06/09.Bill 06/09 provides that SEAE no longer carries out mergeranalysis, but only develops competition advocacy activities and monitors regulated sectors. Unfortunately, Bill 06/09 did not foresee the transfer of knowledge that was acquired in the last 17 years to the new SBDC. For obvious reasons, this problem led to some losses in the technical analysis and in the speed of the merger reviews. Hopefully this is a problem that will soon be solved.
Secondly, due to regular problems in the length and bureaucracy of the legislative proceeding, Bill 06/09 is facing some obstacles in its conclusion and immersion into the system. As it still faces such problems, the SBDC’s main achievements are at risk, most notably its efficiency, reflected by its technical and speedy approach.Thirdly, there is no consensus for a ‘plan B’ among the different authorities within the SBDC if Bill 06/09 is not passed in Congress. One exception is CADE’s chairman, who has a clever plan should Bill 06/09 fail in Congress. He plans on implementing a new, shorter and more narrowed Bill, to renovate only the most important points in the Brazilian Antitrust Law, such as the staff increase and the pre-merger notification system.
Although optimism prevails among the authorities with the likely passing of the Bill, the private sector remains sceptical and afraid of the short-term results. So, will the passing of this Bill be the right path for the Brazilian antitrust community to take towards the development of its system?
- Available at: www.cade.gov.br/Default.aspx?1d1d1fe12eec2f0b252b. Last visited on 28 July 2011.
- Secretariat for Economic Monitoring of the Ministry of Finance (SEAE), Secretariat of Economic Law of the Ministry of Justice (SDE), CADE’s General Attorney’s Office (ProCADE) and the Federal Prosecution Office (MPF).
- National Agency of Telecommunication (ANATEL), National Agency of Energy (ANEEL), National Agency of Terrestrial Transportation (ANTT) and Brazilian Central Bank (BACEN).