Brazil: Joint Ventures
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In May 2012, Brazil’s New Competition Act became effective, bringing major changes to the Brazilian merger control system. The New Competition Act adopts a pre-merger notification system, according to which transactions that require merger notification cannot be closed before their approval by the Administrative Council of Economic Defence (CADE). The New Competition Act also establishes a new approach and definition as to which types of transaction would require previous approval and sets out new notification thresholds. In addition, the New Competition Act changes the institutional design of the Brazilian System of Competition Defence by unifying the roles of the previously existing competition authorities into a single authority,1} and provides for modified procedural rules and steps relating to the approval process of transactions that require submission.
In the context of these substantive and procedural changes, the purpose of this article is to address specific aspects that may concern joint venture transactions. Joint venture transactions may require submission to CADE in case they meet the revenue thresholds, which have been increased by the Brazilian government. Whenever the notification thresholds are met, the parties to a joint venture cannot implement it before receiving an authorisation by CADE. Joint venture transactions may be reviewed under a fast-track procedure in certain circumstances, in which case the review process may be expedited. Apart from these rather straightforward aspects, however, the new legal framework established by the New Competition Act provides little guidance as to aspects referring to standards of review for joint ventures, the types of information that parties may exchange while in the pre-formation phase, types of restraints that may be acceptable in the context of joint ventures and the limits that should be respected by the parties in the phase of implementation of the joint ventures, when approved by CADE.
Joint ventures under the New Competition Act
Joint ventures as concentration acts that require antitrust clearance
As indicated above, the New Competition Act establishes a mandatory pre-merger notification system and the closing of the transactions that require submission cannot occur before the previous approval by CADE or the expiration of the statutory time period.
In contrast with the previous Competition Act, which provided for a rather wide and generic definition for the types of transactions that could be considered ‘concentration acts’ - and, therefore, could require submission - the New Competition Act provides for an exhaustive list of transactions that will be considered ‘concentration acts’ for purposes of merger control (article 90, items I to IV of the New Competition Act), namely:
- when two or more previously independent companies are subject to an amalgamation procedure;
- when one or more companies directly or indirectly acquire control or parts of one or other companies through purchases or exchanges of shares, quotas, bonds or securities convertible into shares, or tangible or intangible assets, by means of contractual instruments or any other means or form;
- when one or more companies are merged into another company or other companies; and
- when two or more companies formalise an association agreement, consortium or joint venture.
The New Competition Act makes no distinction between full-function joint ventures and cooperative joint ventures, and both of them are subject to merger control, provided the notification thresholds are met.
The New Competition Act expressly exempts from notification association agreements, consortia or joint ventures created for the specific purpose of participating in public bids carried out by the public administration (article 90, sole paragraph, of the New Competition Act).
In addition to defining which types of transaction are considered as concentration acts for purposes of merger control, the New Competition Act provides for a dual revenue notification threshold and establishes that concentration acts, as defined in article 90, will require notification when one company or group of companies registered revenues or volume of business in Brazil in the last fiscal year above 750 million reais, and at least one other company or group of companies involved in the transaction registered revenues or volume of business in Brazil in the last fiscal year above 75 million reais (article 88, items I and II).2} It is noteworthy that the previous Competition Act provided for a market share threshold (when the transaction resulted in a company or group of companies holding a market share of 20 per cent or more), which has been eliminated under the New Competition Act.
In the assessment of whether a transaction would meet the dual revenue threshold under the New Competition Act, one should take into account not only the revenues or volume of business registered by the companies directly involved in the transaction, but also the revenues or volume of business registered by their respective economic groups.
Under the previous Competition Act, CADE considered as part of the same economic group all companies under the same control. Under the New Competition Act, CADE enacted new rules through CADE Regulation No. 2/2012 to determine which companies shall be considered as part of a same economic group. According to CADE Regulation No. 2/2012, the following companies shall be considered as part of the same economic group for purposes of assessing whether a transaction meets the notification thresholds: companies that are under a common control; and companies in which any of the companies mentioned above hold, directly or indirectly, at least 20 per cent of the voting shares or capital stock (article 4, I and II).3
In sum, joint ventures are considered ‘concentration acts’ under the New Competition Act and, if the parties or their respective economic groups meet the dual revenue threshold, the transactions will require notification to CADE and may not be implemented before receiving clearance.
Joint Ventures and fast-track procedure under the New Competition Act
CADE Regulation No. 2/2012 sets out a list of transactions that may be eligible for fast track procedure, in view of their limited potential to harm or restrict competition. Under article 8 of CADE Regulation No. 2/2012, the following transactions may be eligible for fast track treatment:
- classic or cooperative joint ventures for the creation of a new company, provided they do not result in horizontal overlap or vertical integration;
- consolidation of corporate control, when a controlling shareholder acquires, from at least one single seller, a direct or indirect participation of 20 per cent or more of the capital stock or voting shares of the target;
- substitution of players, where the acquirer did not have activities in the relevant markets in which the target was active or in any vertically related markets;
- transactions that do not result in overlap above 20 per cent in any relevant market;
- transactions that do not result in vertical integration above 20 per cent in any vertically related relevant market; and
- other cases that could be considered simple enough to be exempted from a deeper analysis, at the discretion of the Superintendency-General.
Cases that follow fast-track procedure will be subject to simplified decision by the Superintendency-General of CADE. The decision on whether or not a transaction will follow fast-track procedure will be made by CADE, on a discretionary basis, and based on the experience of the Brazilian competition authorities with respect to merger control cases.
CADE Regulation No. 2/2012, thus, expressly provides for the possibility of joint ventures being eligible for a simplified or fast-track procedure under the wording of article 8, I, of CADE Regulation No. 2/2012, as long as they do not result in horizontal overlap or vertical integration. In principle, it is reasonable to conclude that even joint ventures that might result in some horizontal overlap or vertical integration could be eligible for the fast-track procedure under the wording of article 8, IV and V of CADE Regulation No. 2/2012, provided they do not result in overlap or vertical integration above 20 per cent in any relevant market.
Under the previous system, classic or cooperative joint ventures for the creation of a new company with no horizontal overlap or vertical integration could also be eligible for a simplified or fast-track procedure, according to Ordinance No. 1/2003, jointly issued by the Ministry of Justice and the Ministry of Finance, as amended. In fact, under the previous regime, CADE has reviewed several merger notifications involving joint ventures under the simplified procedure.4
Risks at the pre-formation stage of joint ventures and before approval by CADE
The New Competition Act (article 88, paragraphs 3 and 4) provides that transactions that require notification may not be closed before obtaining approval by CADE and that all competitive conditions between the companies involved must be preserved until CADE renders a final decision, subject to annulment and a fine that may vary from 60 thousand reais to 60 million reais, in addition to the possibility of being investigated for possible anti-competitive practices.
CADE Regulation No. 1/2012 (article 108, paragraph 2) further provides that the parties to transactions that require submission must keep physical structures and competitive conditions unchanged until CADE renders a final decision, stating that no transfer of assets, no type of influence of one party over another and no exchange of competitively sensitive information that is not strictly necessary for the execution of the agreement that binds the parties will be allowed.
With the new regime, therefore, in light of the aforementioned provisions, companies contemplating the formation of a joint venture will need to be extremely careful at the early stages of negotiation, since the New Competition Act, as complemented by the mentioned regulation, states that any exchange of competitively sensitive information that is not strictly necessary for the execution of the main agreement related to the transaction may be considered as an unlawful exchange of information and, therefore, as a violation of the New Competition Act, subjecting the parties to penalties.
In the context of joint ventures between competitors, companies must obviously evaluate the commercial reasons and benefits for entering into the transaction and, for that purpose, may need to exchange information that could be considered commercially sensitive. In this regard, this type of information exchange could be considered as leading to a type of pre-merger coordination, putting companies at risk of being investigated and suffering penalties. Since there is no specific guidance by CADE on this matter, careful analysis of which type of information may be exchanged is of extreme relevance in such situations.
The standard of review of joint ventures
Following the entering into effect of the New Competition Act, CADE enacted a series of regulations relating to issues such as procedural aspects, listing of transactions that could be eligible for fast-track procedure, and the new notification forms. CADE, however, has not enacted any specific guidance on the standard of review of joint ventures of any kind, nor has it made a distinction in the various regulations with respect to possible different types of joint ventures.
Under the previous regime, there were no guidelines on the standard of review to be adopted with respect to joint ventures either. The language of the former Competition Act was very broad as to which transactions would require notification, and there was no guidance as to how joint ventures in general should be examined.
As mentioned, the analysis of CADE’s case law indicates that joint ventures that did not result in significant horizontal concentration or vertical integration were usually reviewed under the fast track procedure and did not require an in-depth analysis. In cases of joint ventures resulting in horizontal concentration or vertical integration, on the other hand, CADE usually carried out a deeper scrutiny. Under the previous Competition Act, however, CADE has not developed a specific methodology to review joint venture transactions. In general, CADE has examined joint venture transactions under the same approach used for the review of typical merger-type transactions.5
In joint ventures between competitors, CADE has usually conveyed concerns relating to the possible reduction of the level of rivalry between the parties and the facilitation of coordinated practices in the segments in which the members of the transaction would remain competing. Generally, in evaluating the level of risk, CADE would assess the structure of the markets in which the parties to the agreement sell their products and compete, the levels of concentration in each market and the market shares held by the parties of the agreement.
There have been cases in which CADE has concluded that the creation of certain joint ventures could result in unlawful coordination or exchange of information. In certain cases, CADE has decided to impose conditions for the approval of the transaction, such as the implementation by the parties of corporate governance rules designed to limit the interactions and the exchange of information, the limitation of the period of duration of the joint venture, and the limitation of exclusivity arrangements.6
As to purchasing joint ventures, CADE has tended to assess their possible effects in the markets directly affected by the joint purchasing arrangement (eg, the relevant purchasing market) and the selling markets in which the parties to the joint venture sell their final products. Some cases of joint ventures for the creation of B2B electronic marketplaces that combined the activities of competitors in respect to the purchasing of certain raw materials provide some guidance as to how these transactions tended to be examined.7} CADE has indicated that this type of collaboration agreement could raise concerns relating to the creation or enhancement of a monopsony position (buying power), the possibility of exclusionary effects in regard to the purchase of certain goods or services, the sharing of competitively sensitive information between competitors and facilitation of coordinated practices in the downstream markets in which the parties could compete.
Although the previous Competition Act did not provide for any specific guidance regarding non-competition clauses in the context of joint venture transactions, CADE has decided in various cases that such clauses would generally be reasonable to prevent the parties from competing in the same relevant markets in which the joint venture would operate for the entire duration of the joint venture.8 Similarly to the previous Competition Act, the New Competition Act does not contain any specific provisions regarding non-competition clauses. One may expect, however, that CADE will tend to adopt a similar approach to the one adopted under the previous act and, therefore, to accept non-competition clauses in joint venture transactions, as long as such provisions do not exceed the boundaries of the relevant markets in which the joint venture will conduct its activities and the reasonableness of the provisions considering the purposes of the joint venture.
CADE Regulation No. 1/2012 states that transactions that require submission should be presented, preferably, after the signing of the formal agreement that binds the parties and before any act related to the transaction is implemented. Therefore, notifications based on preliminary and non-binding agreements will, in principle, be accepted.
Under the New Competition Act, the maximum term for the issuance of a final administrative decision is of 240 days from the date of the submission of a valid and complete notification, which may be extended for up to 90 days if the transactions require a deeper analysis. Therefore, CADE will have to render final administrative decisions on merger notifications within the maximum period of 330 days. CADE Regulation No. 1/2012 (article 133) establishes that, if CADE does not render a final decision within the maximum review period established in the New Competition Act, the transaction will be automatically approved.
Although there is no provision in the New Competition Act or in the existing regulations which sets a maximum review period in cases eligible for the fast track procedure, it is expected that these cases should be reviewed in a faster pace and should not take the entire maximum period to be cleared.
Concerns relating to anti-competitive behaviour in the context of joint ventures
Joint venture transactions may raise concerns relating to the possibility of anti-competitive practices being carried out between the parties to the transaction, mainly relating to the possibility of the parties engaging in coordinated practices or in unlawful information exchange.
Under the New Competition Act, anti-competitive practices are governed by article 36, which sets out, in its heading, that any act in any way intended or otherwise able to produce certain effects may be considered a violation of the economic order.9 Paragraph 3 of article 36, in its turn, provides for a non-exhaustive list of conducts that may be deemed as a violation if they are able to produce the effects listed in heading of article 36.
Coordinated practices or unlawful exchange of information between competitors in the context of a joint venture may subject the parties to investigations and to different types of penalties.10 Although the Brazilian competition authorities have initiated a series of investigations relating to anti-competitive behaviour in the past few years - in particular, cartel behaviour - there have been limited instances in which the Brazilian competition authorities have initiated cases involving anti-competitive conduct in the context of joint venture agreements.
The New Brazilian Competition Act brings a series of new challenges to companies, private practitioners and competition authorities alike, in particular with respect to the new merger control system. As the new system develops, many issues that are still subject to uncertainty, such as the timing of analysis and whether or not certain transactions require submission, will likely be clarified through the issuance of decisions and guidance by the new CADE. In view of the diversity and complexity of certain aspects that may arise in the context of joint venture transactions, it may take a bit longer for CADE to issue systematic decisions or guidance. In any event, companies contemplating executing joint venture transactions that may have effects in Brazil - and that, therefore, may require submission in Brazil - should be aware of the new regime and follow how it develops, so as to ensure that the negotiation and implementation of the transactions are in full compliance with the Brazilian competition law.
- The unification of the three existing competition authorities into a single authority is expected to bring more efficiency to the system and avoid the overlapping of functions. Under this new arrangement, CADE will be composed by the Administrative Tribunal, the Superintendence General and the Department of Economic Studies.
- Joint Ordinance No. 994 of 31 May 2012, issued by the Ministry of Justice and by the Ministry of Finance.
- In case of investment funds, CADE Regulation No. 2/2012 provides that the following entities shall be considered as part of a same economic group: funds that are under the same management; the manager of the funds; the quota-holders that hold directly or indirectly more than 20 per cent of the quotas of at least one of the funds listed above; and the companies that are included in the portfolio of funds in which the direct or indirect interest held by the fund is equal to or greater than 20 per cent of the voting shares or capital stock (article 4, III).
- See, for example: Concentration Act No. 08012.012188/2011-72 (Applicants: Evonik Industries AG and Treibacher AG); Concentration Act No. 08012.004528/2011-91 (Applicants: Merck & Co, Inc e Sun Pharmaceutical Industries Ltd); Concentration Act No. 08012.006152/2011-50 (Applicants: Companhia de Tecidos Norte de Minas, Fazenda Cantagalo and others); Concentration Act No. 08012.004856/2009-73 (Applicants: Nokia Siemens BV and Juniper Networks BV).
- See, for example: Concentration Act No. 08012.010582/2010-85 (Applicants: JBS S/A and Link Snacks Inc.); Concentration Act No. 08012.004856/2009-73 (Applicants: Nokia Siemens BV and Juniper Networks BV); Concentration Act No. 08012.003086/2009-41 (Applicants: Caterpillar Inc and Navistar Inc).
- See, for example: Concentration Act 08012.010192/2004-77 (Applicants: Votorantim Celulose e Papel SA and Ripasa Celulose e Papel SA); and Concentration Act 08012.011196/2005-53 (Applicants: White Martins Gases Industriais Ltda and Air Liquide Brasil Ltda).
- See, for example, Concentration Act No. 08012.00001/2001-16 (Applicants: General Motors Corporation, Ford Motor Company and others) and Concentration Act No. 08012.003632/2001/97 (Applicants: Sadia SA, Cargill Agrícola SA and Danone SA).
- See, for example, Concentration Act No. 08012.007805/2008-12 (Applicants: T&C Consultoria e Construções Ltda. and Cyrela Brazil Realty SA Empreendimentos e Participações); and Concentration Act No. 08012.011642/2008-72 (Applicants: ASR Exportação, Importação, Comércio e Indústria de Produtos de Barbear Ltda, American Safety Razor do Brasil Ltda, and Hypermarcas SA).
- These effects are to limit, restrain or in any way harm open competition or free enterprise; to control a relevant market of a certain product or service; to increase profits on a discretionary basis; and to abuse a dominant position.
- Penalties include fines that may vary from 0.1 per cent to 20 per cent of the gross revenues registered by the company, group or conglomerate in the field of business in which the practice was carried out, in the year before the opening of the administrative procedure to investigate the practice. Managers directly or indirectly responsible for the practice may also be subject to fines that may vary from 1 per cent to 20 per cent of the fine imposed to the company.