Brazil: Associative Agreements
The Brazilian Competition Law, No. 12,529/2011 (BCL), entered into force on 29 May 2012.1 One of the innovations it brought was the definition of what kind of transaction would be considered a concentration act notifiable to Brazil’s Administrative Council for Economic Defence (CADE).
According to article 90 of the BCL, a concentration act takes place when:
• two or more previously independent companies merge;
• one or more companies acquire, directly or indirectly, by purchase or exchange of stocks, shares, bonds or securities convertible into stocks or assets, whether tangible or intangible, by contract or by any other means or way, the control or parts of one or more companies;
• one or more companies incorporate another company or companies; or
• two or more companies enter into an associative agreement, consortium or joint venture.
Despite the elucidation brought by the Law regarding the notifiable transactions, the concept of associative agreement was still vague since that was the only mention of it in the whole BCL and the former Competition Law (No. 8,884/1994) did not refer to it.
To clarify in which cases an agreement entered into between companies should be considered as an associative agreements for purpose of notification to CADE, two-and-a-half years after the entry into force of the BCL, CADE issued Resolution No. 10/2014 (the Resolution), in force as from 5 January 2015, which will be further detailed in the first part of this article.
The second part will address the few associative agreements that have been reviewed by CADE since the Resolution entered into force, examining the lessons that can be extracted from them. The third section will address the proceeding for the analysis of associative agreements, and the fourth and final section will address the uncertainties arising from the Resolution.
Notification criteria for associative agreements
According to article 88 of the BCL, amended by Interministerial Decree No. 994/2012, the notification threshold for the filing of a concentration act before CADE is that at least one of the economic groups involved in the transaction has registered, on the last balance sheet, annual gross sales or total turnover in Brazil equivalent or higher than 750 million reais, and at least one other economic group involved in the transaction has registered in its last balance sheet annual gross sales or total turnover in Brazil the equivalent of 75 million reais or higher.
Having overcome this issue, it should then be assessed whether the agreement entered into by the parties shall be deemed associative or not. According to the Resolution, associative agreements are those lasting over two years in which there is horizontal or vertical cooperation, or risk-sharing resulting in an interdependent relationship.
The Resolution establishes that an interdependent relationship takes place when the parties are horizontally related in the object of the agreement and their joint shares in the relevant market meet or exceed 20 per cent; or the parties are vertically related in the object of the agreement, and one of them has at least 30 per cent of market share in one of the relevant markets impacted by the agreement, and the agreement provides the sharing of losses and profits between the parties or from it arises an exclusive relationship.
When calculating the market shares, the whole economic group of each party involved in the agreement shall be taken into account and the agreements entered into for a period of shorter than two years shall be filed before CADE when, upon renewal, a term of two years is reached or exceeded.
When the thresholds and the criteria regarding the concept of associative agreement are met, the submission of the transaction before CADE, prior to the implementation of the contract, will be mandatory.
Under article 88, section 3º of the BCL, if a transaction subject to compulsory submission before CADE is fulfilled before obtaining CADE’s approval, it may be annulled and subject the parties to the payment of a fine that can vary between 60,000 reais and 60 million reais.
Cases reviewed by CADE under the Resolution
Since the Resolution entered into force, very few cases involving associative agreements have been reviewed by CADE. At least two were disregarded, since CADE concluded that they did not meet the criteria to be considered associative agreements. This fact shows that there is still uncertainty regarding the cases that shall be compulsorily submitted to CADE for review.
The first case refers to a distribution agreement in the pharmaceutical sector. It was disregarded because Sanofi Group did not sell in the Brazilian market any other medicine classified under the same ATC 4 according to IMS Health. Thus, there was no horizontal overlap, and the vertical integration was lower than 10 per cent.2
The second case consisted of an alliance among competitors to buy supplies and services necessary to perform their core businesses, to reduce costs and gain scale.3 It was disregarded because, despite the fact that the applicants were competitors in the sugar, ethanol and electricity markets, the agreement did not have any direct impact on those markets since it did not cover the acquisition of sugar cane – their main input – but only the acquisition of chemicals, fertilisers, pesticides and administrative products and services such as plane tickets.
Looking at the goods and services to be jointly acquired by the applicants, CADE concluded that the representation of the companies as buyers is reduced, and therefore the transaction did not create an overlap greater than 20 per cent in any market.
Two other cases were approved without conditions: the first related to a distribution agreement for pesticides in which the parties met the 20 per cent market share requirement for only one product;4 the second refers to amendments to agreements executed in 1997 by Pepsico and AmBev regarding exclusive bottling, distribution and marketing of certain soft drinks.5
In the latter case, the amendments were executed before the Resolution enter into force, and for this reason the case was not reviewed pursuant the terms of the Resolution. Despite that, CADE’s General Superintendence understood that the notification of the amendments to the existing agreements was already compulsory in view of the BCL since the amendments did not simply renew the terms of the existing agreement – which was already reviewed and approved by CADE in the past – but also brought new terms and conditions.
CADE also recognises that if those amendments had been executed after the Resolution entered into force, their submission would also be mandatory, and that the Resolution was created to clarify that agreements exactly like these should be submitted to CADE for prior review. This applies in particular to amendments that not only renew the terms of the agreements in force, but also modify the previous agreement.
Proceeding for the analysis of associative agreements
Owing to the market share criteria set forth by the Resolution, the associative agreements could fall into the ordinary proceeding, which relies on a complete notification form, and takes more time to be reviewed, in comparison with the cases reviewed under the fast-track proceeding.
However, CADE’s General Superintendency has already decided that associative agreements may, in some cases, be reviewed under the fast-track proceeding if they are considered simple enough. This occurred, for example, in the above-mentioned case involving AmBev and Pepsico, in connection with amendments to an agreement that has been executed for more than 20 years.6
Cases reviewed under a fast-track proceeding shall be submitted through a simple form, and a decision is issued by CADE after an average of 20 days, while cases reviewed under the ordinary proceeding shall be submitted through a complete form and take an average 80 days to be reviewed by CADE, if not declared as complex, pursuant to article 56 of Law No. 12,529/11.
According to article 8 of CADE’s Resolution No. 2/2012, the following cases shall be reviewed under the fast-track proceeding:
• classic or cooperative joint ventures;
• replacement of economic agent;
• low horizontal overlap (ie, below 20 per cent);
• low vertical integration (ie, below 30 per cent);
• absence of causal link (ie, HHI7 below 200 points since the transaction does not result in the control of more than 50 per cent of the relevant market); and
• other cases considered simple enough, at the sole discretion of CADE’s General Superintendency.
Since an agreement can be deemed as associative when the market shares resulting from the horizontal overlap should meet or exceed 20 per cent or when the market shares in connection with the vertical integration reach or exceed 30 per cent, the associative agreements, unless considered relatively simple, would be reviewed under an ordinary proceeding.
This aside, according to the Resolution, all the agreements that fulfil the conditions to be considered as associative – except for their term, for being executed for less than two years – shall be filed before CADE when, upon renewal, the term of two years is reached or exceeded.
Despite the absence of formal guidelines regarding the timing for the submission of such agreements, to be on the safe side, the parties shall guarantee that the agreement will be approved by CADE before it reaches the two-year term, at the risk of having the execution of the agreement suspended between the moment
the agreement reaches the two-year term and CADE’s approval.
Uncertainties arising from the Resolution
Despite the Resolution’s aim to bring more certainty to companies entering into agreements which could eventually be considered as associative, there is still some uncertainty regarding the established criteria to define associative agreements.
First of all, the market share thresholds established both for horizontal and vertical relations once again raised the uncertainties under the former competition Law (No. 8,884/94). Pursuant to article 54 of this Law, the mandatory submission of transactions before CADE would take place not only based on the turnover thresholds, but also if the market share of the company resulting from the transaction were to exceed 20 per cent in any of the relevant markets involved.
The problem in defining associative agreements on the parties’ market share lies in the fact that CADE has no case law defining all the products and relevant geographic markets. So, there is no certainty that the relevant markets considered by the parties to evaluate their market shares would be the same as those considered by CADE for the same purpose.
This dissent from the certainty that Law No. 12,529/11 sought to bring, by relying the mandatory notification criteria solely on the parties’ turnover, and not on their market share.
Moreover, regarding the vertical relationships, the cumulative criteria for the mandatory notification of the agreements bring even more uncertainties:
Regarding the first issue, which is the sharing of losses and profits, it is not clear whether the full transfer of risks – in the context, for example, of an operation assignment – would fall within the concept brought by the Resolution.
Beyond that, the Resolution is not clear whether the exclusive relationship criteria would encompass only exclusivity clauses or others that could eventually create an exclusive relationship (eg, preference and first refusal).
Other questions that need to be clarified by CADE include the agreements entered into between competitors or vertically related companies with high market shares, but in which there is no common goal, joint decision-making or effective cooperation or partnership (eg, agreements for the mere provision of goods or services). Since these kinds of agreements would have no impact on the markets, we believe that it would make no sense to determine their compulsory submission before CADE. However, this still has to be clarified by the Brazilian competition authorities.
Finally, it is still not clear if joint agreements for research and development, without the establishment of commercial conditions, could be considered associative agreements, since these agreements would have no impact in the competitive scenario, especially considering the possibility that the product under research may never be sold on the market.
These later issues shall be addressed by CADE’s case law in the months or years to come. However, as regards the most critical question, market share criteria, we see no solution, except for the issuance of a new resolution not based on such parameters.
Despite the Resolution aim to shed some light on the agreements to be compulsory submitted for CADE’s review, from the large proportion of agreements submitted and disregarded since the Resolution entered into force, the criteria based on the parties’ market share and the questions yet to be answered by CADE, it is evident that there is a still a way to go in giving companies certainty regarding the agreements reviewed by the Brazilian authorities.
- Available at www.cade.gov.br/upload/LAW%20N%C2%BA%2012529%202011%20%28English%20version%20from%2018%2005%202012%29.pdf.
- Refer to Opinion No. 110/2015, issued by CADE’s General Superintendence in Merger Case No. 08700.001403/2015-85. Applicants: Sanofi-Aventis Farmacêutica Ltda and Herbarium Laboratório Botânico Ltda. Disregarded on 26 March 2015.
- Refer to Opinion No. 159/2015, issued by CADE’s General Superintendence in Merger Case No. 08700.002887/2015-80. Applicants: Guarani SA, Noble Brasil SA and Bunge Alimentos S.A. Disregarded on 27 April 2015.
- Refer to Opinion No. 150/2015, issued by CADE’s General Superintendence in Merger Case No. 08700.002311/2015-12. Applicants: Bayer SA, Agrium Brasil Participações Ltda. nad Utilfértil – Indústria e Comércio de Fertilizantes Ltda. Approved without conditions on 20 April 2015.
- Refer to Opinion No. 197/2015, issued by CADE’s General Superintendence in Merger Case No. 08700.000540/2015-01. Applicants: Ambev SA, and Pepsicola Industrial da Amazônia Ltda. Approved without conditions on 9 June 2015.
- Refer to Opinion No. 197/2015, issued by CADE’s General Superintendency in Merger Case No. 08700.000540/2015-01. Applicants: Ambev SA and Pepsicola Industrial da Amazônia Ltda. Approved without conditions on 9 June 2015.
- The Herfindahl-Hirschman Index – HHI is an index commonly accepted by Competition Authorities to measure of market concentration. It is calculated by squaring the market share of each player in a determined market, and then summing the resulting numbers. It can range from close to zero to 10,000.