Costa Rica: Merger Notifications
Initial Experiences from the Introduction of the Compulsory Merger Notification System in Costa Rica
A year has passed since Costa Rica introduced the legal obligation to report certain company mergers to local Antitrust Authorities. The obligation to report applies to mergers involving medium and large-sized companies as defined by specific criteria established in the regulations, a lack of compliance with which would result in hefty fines. In the first year of the new merger notification system, Costa Rica’s Commission for Promoting Competition has analysed some important concepts related to the application of the notification system to operations. Many companies are still unaware of this important regulation, as evidenced by the lack of notification of some transactions.
The Costa Rican Competition Merger Regime prior to 2013
The Competition and Effective Consumer Defence Act (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 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.
The law also created the Commission for Promoting Competition (COPROCOM), 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 the Competition and Effective Consumer Defence Act, the operations of economic concentrations are banned whenever they produce restrictive effects on free competition or lead to a dominant position in the market. The original text of article 16 of the law read as follows:
A concentration is understood to be any merger, acquisition of control, or any other act by virtue of which companies, associations, shares, capital stock, trusts or assets in general are concentrated, that is engaged in by competitors, providers, clients or other undertakings for the purpose or effect of reducing, harming or impeding competition or free market participation with respect to equal, similar or substantially related goods or services.
Nevertheless, unlike that of other countries in the world, Law No. 7472 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. It also implied conducting a regular procedure in advance with quite extensive periods for reviewing the concentrations.
Introduction of the pre-merger notification system
On 5 April 2013, a legal amendment to the Competition Act came into effect on Costa Rica, introducing the legal obligation of the parties to report certain mergers of companies to the local antitrust authorities. The legal reform, which comprises a change in the text of article 16 of the Competition and Effective Consumer Defense Act, establishes the mandatory reporting to COPROCOM of mergers before they take place or within five business days of its execution. The obligation to report applies to mergers that involve medium to large-sized companies, a classification based on specific criteria established in the regulations, and lack of compliance would result in hefty fines.
The new regulation applies to a broad concept of merger, encompassing in it article 16, Law No. 7472, as reformed by Law No. 9072 of 5 April 2013, which states:
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.
According to the new rules, mergers that fall within the obligation to report are those where:
- 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 merger involving any individual company that meets or exceeds said criteria, regardless of the size of the smaller company being merged, will have to be notified to the Competition Commission.
Whenever the purpose of a merger is the acquisition of a branch of economic activity, business unit, establishment or any part of an enterprise in general, the asset or income volume of those enterprise parts or segments will be considered to determine whether or not 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 of 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.
Failure to comply with this legal obligation is punishable with fines of up to 400 times the amount of the minimum wage, without prejudice to application of any other sanctions deriving from other violations of the law and independent of other provisions that the Commission may order to eliminate or offset any monopolistic effects of the merger.
Authorisation criteria for mergers
The Competition Act specifies that the measurement criteria of substantial power in the relevant market must be followed with mergers when determining relative or vertical monopolistic practices.
The Commission will approve mergers 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 merger 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 anti-competitive 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
- if the anti-competitive 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 anti-competitive 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 type 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 behavioral condition necessary for impeding, reducing or offsetting the merger’s anti-competitive effects.
Purchases of assets, stock or shares made temporarily for the purpose of resale do not need not be notified. The exception established here will apply as long as their resale is made within one year from their purchase, the economic agent purchasing the shares does not participate in making decisions concerning the business strategies of the acquired economic agent, and prior to the resale, the assets, stock or shares are not the object of a merger requiring notification pursuant to article 16 bis of the law.
Term to file the pre-merger 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, this being understood as whichever comes first of the merger’s formal agreement date or the date at which the merger’s implementation was initiated.
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 following procedures will be followed:
The written notification must be signed by a duly accredited legal representative with sufficient power for the act, and must contain the following:
- a detailed description of the merger containing the type of operation and a summary of the legal act or acts by means of which the notified operation was or will be finalised;
- the identification of all the undertakings involved in the merger, whether domestic or foreign, 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, specifying their use in the market;
- 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 ones produced or offered by the undertakings involved in the merger, including their share of total domestic sales;
- a description of the distribution channels used by the merging undertakings, indicating to what degree distribution is provided by third parties, themselves or other companies in the same group and the geographic areas where they offer their goods or services;
- a description of the relevant markets involved;
- the share of those relevant markets held by the undertakings involved;
- the entry barriers to the production, distribution and marketing of the goods and services produced or offered by the undertakings involved in the merger, whether legal or of any other nature;
- an economic justification for the merger, including the objectives and potential benefits;
- an analysis of the potential pro and anti-competitive effects of the merger, should there be any – in the latter case, a proposal could be included for offsetting them;
- audited financial statements for the last three fiscal years of the undertakings involved in the merger; and
- any additional information deemed pertinent for the application’s evaluation.
The foregoing information must be accompanied by the respective documentation for its verification.
The notifier will have three business days from the day following the filing of the notification to publish in a national newspaper a brief description of the merger with a list of the undertakings involved, informing interested third parties of the case number assigned to the notification and of the fact that they have 10 calendar days in which to present at the COPROCOM office any pertinent information or evidence for analysis of the merger.
Within three business days after this publication obligation is met, the applicant must send a copy to COPROCOM confirming the publication date and media used.
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.
Furthermore, the undertakings may present any information they deem useful for COPROCOM’s analysis of the merger. In the event the information requested in article 45 or that which is additionally requested by COPROCOM or its Technical Unit is incomplete, the undertakings may be given a one-time warning to present the complete information within three business days. 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.
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. This term will start on the day the complete information is filed.
In especially complex cases thus declared by means of a reasoned resolution, COPROCOM may, before the 30 calendar days expire, extend this term for up to 60 additional calendar days at expiration of the initial term.
Authorisation or conditioning of the merger
Once it has concluded its analysis of the merger, COPROCOM may:
- authorise the merger;
- condition its authorisation to meeting specific commitments proposed by the notifiers as mentioned in section III herein, in which case they will be executed under the terms indicated in the resolution;
- notify the applicant that the merger’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, conceding it a term of 10 calendar days for presenting 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 without further ado order the case to be shelved.
Initial experience under the new merger notification system
During the first year under the new merger notification system, COPROCOM has already received and authorised merger notifications that have been filed from local and foreign companies. We have identified four particular issues that are of interest for the parties.
Duration of the process
Although the law sets an ordinary 30-day term for COPROCOM to analyse the notification application, in practice this term has been extended in some cases, since COPROCOM has requested additional information – mainly economic – in order to complete the analysis. As per the recent COPROCOM precedents, while the parties submit the additional information to COPROCOM, the term is suspended, which in the end has extended the original resolution deadline. This stresses the importance of preparing a complete submission.
Foreign companies are obliged to notify
COPROCOM has stated that foreign companies have the obligation to file a merger notification as long as both parties in the operation have activities with influence in Costa Rica. It has been interpreted that foreign companies selling products in Costa Rica – even indirectly – through third parties, are subject to the merger notification regime. On this particular issue, COPROCOM has found that some international mergers of foreign companies that sell products in Costa Rica – that have been publicly announced – have not been notified and they are currently analysing a strategy to prosecute those cases.
Merger notification guidelines
COPROCOM recently published some merger notification guidelines that parties should take into consideration when submitting an application. These guidelines are particularly useful for the preparation of the economic support of the application.
Acquisition of control is interpreted broadly
One of the elements required for the merger notification obligation is the acquisition of control by one the parties over the other party. Although the precedents regarding this matter are still somewhat limited, the concept has been interpreted broadly, 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 Costa Rican Competition Regime and Merger Regulations have suffered significant amendments. There has been a shift from an ex-post merger notification and control regime, in which the mergers where analysed by COPROCOM after they have taken place with a punitive emphasis, to an ex-ante merger notification system that seeks to preventive and corrective actions to avoid merger transactions that might be harmful to the market due to its effects on the competition.
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 our 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.