Brazil: Merger Control
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Overview and regulatory framework
CADE,1 the Brazilian antitrust authority, was created in 1962 in the context of a broader attempt to set up in Brazil a regulatory framework aimed at preventing abuses of economic power. CADE was originally created with a very broad mandate, which included a limited power to review merger transactions, but in fact it has not exercised this authority, for several reasons, over the entire three first decades of its existence. Actual antitrust merger review only started in Brazil in the early 1990s, when competition defence really hit the political agenda in the context of the liberal reforms that resulted in trade liberalisation, tax reforms, inflation control, privatisation and market deregulation. During this time, CADE was completely restructured by Brazilian Federal Statute No. 8,884/94, which entered into force on 11 June 1994, giving rise to the modern era of Brazilian competition law enforcement. CADE gained administrative and legal independence from the federal government, its commissioners became independent and were given fixed mandates, and the obligation to notify and obtain (at that time ex post, non-suspensory) antitrust clearance for mergers that fell within the corresponding statutory thresholds became clearly established.
During the second half of the 1990s and the early 2000s, CADE worked to consolidate this new mandate, reviewing a number of transactions and imposing numerous sanctions on companies that failed to notify mandatorily reviewable mergers. It also rejected a small number of transactions, and imposed restrictions on some others, including a handful of high-profile cases. Later in the 2000s, CADE's technical capabilities grew stronger (a Department of Economic Studies (DEE) was stablished in 2009, for instance), its processes became more institutionalised and transparent (public meetings started being broadcasted live on the internet in 2005, and guidelines were issued on fines for late notification and horizontal mergers), and enforcement in general became sturdier and more effective.
A new restructuring came about in 2011, by means of Brazilian Federal Statute No. 12,529/11 (the current Brazilian Antitrust Act, in force since 29 May 2012), which replaced Federal Statute No. 8,884/94 and is today the most important piece of legislation governing merger review in Brazil.
The Brazilian Antitrust Act also consolidated the investigative, prosecutorial and adjudicative functions of all other former Brazilian dispersed competition authorities into CADE, and put in place a new suspensory merger regime. It created within CADE three distinct bodies:
- the Administrative Tribunal,2 with authority to reject merger transactions and decide, inter alia, on complex merger cases that demand remedies or have been subject to appeals by third parties;
- the General Superintendence,3 with a broad mandate to, inter alia, investigate all merger cases and decide on those that can be cleared without remedies; and
- the DEE,4 responsible for producing non-binding opinions to support and ground the technical decisions rendered by both the Tribunal and the General Superintendence.
Brazil's current antitrust regulations are all-encompassing and do not grant legal immunity for specific firms or sectors. State-owned entities are also subject to it, as are companies operating in regulated sectors. A longstanding legal disagreement exists in Brazil between the Brazilian Central Bank and CADE over the application of the Brazilian Antitrust Act to banks and financial institutions, particularly on merger cases, but, in practice, those cases continue to be notified to CADE, which has recently reviewed important merger cases involving banks (eg, the merger between HSBC and Bradesco). Harmonisation between CADE's antitrust intervention and the regulatory action of sectorial agencies is nonetheless stimulated by the Brazilian Antitrust Act, which allows the regulatory agencies to participate in some proceedings.
Since it entered into force, the Brazilian Antitrust Act has been extensively complemented by a number of regulations issued by CADE. As of May 2017, these included 19 regulations governing matters such as the definition of economic groups for turnover calculation purposes, the definition of associative agreements that shall be submitted to CADE for prior antitrust clearance, the list of transactions that qualify for fast-track analysis, not to mention CADE's Internal Rules (Resolution No. 1/2012), which regulate the procedures to be adopted by CADE in a number of specific cases.
Merger review: criteria and thresholds
Pursuant to the Brazilian Antitrust Act, a filing before CADE is mandatory when the transaction has effects in Brazil, constitutes an economic concentration, and the merging parties meet the relevant revenue thresholds established by the applicable regulation.
A transaction is considered to have effects in Brazil when the relevant target company (or companies) is a Brazilian entity, a Brazilian branch of a foreign entity, or generally speaking when it is an entity that has assets, plants or businesses (eg, export sales) in Brazil. This being the case, foreign-to-foreign transactions will also meet the effects requirement if the target or combined entity has a direct presence in Brazil (eg, through a subsidiary, commercial representative, distributor, etc), an indirect presence in Brazil (eg, through export sales to Brazil) or even concrete plans to be active in Brazil in the near future. There is no de minimis rule on the volume or value of export sales that would meet this test.
The following transactions are caught by the definition of economic concentration:
- mergers between previously independent firms;
- acquisitions and changes of control;
- acquisitions of minority interests (if the following criteria are met: acquisition of an interest of at least 20 per cent if the acquirer and target are neither competitors nor active in vertically related markets; or acquisition of an interest of at least 5 per cent if the acquirer and the target companies are competitors or active in vertically related markets);
- acquisition of assets; and
- joint ventures, consortia and associative agreements (unless established for the purpose of participating in public bids).
The revenue thresholds are met when (i) one of the economic groups involved in the transaction has had gross revenues in Brazil or a volume of businesses related to Brazil in the amount of at least 750 million reais in the last fiscal year prior to the transaction, and (ii) any other economic group involved in the transaction has had gross revenues in Brazil or a volume of businesses related to Brazil in the amount of at least 75 million reais in the last fiscal year prior to the transaction.
The definition of economic group for revenue calculation purposes comprises:
- the undertaking directly involved in the transaction (either as a buyer, seller, target or merging entity, each one referred to hereinafter simply as a ‘UDI');
- the undertaking or undertakings that control, by virtue of holding a majority stake, being part of a shareholders' agreement, appointing a relevant number of board members, or being able to exercise a relevant influence by any other means, the relevant UDI (the ‘UDI Parent' or ‘UDI Parents');
- any other undertakings controlled by the relevant UDI (the ‘UDI Subsidiaries') or by the UDI Parent or Parents (‘Parent Subsidiaries'); and
- the undertakings in which the relevant UDI, the UDI Parent or Parents, the UDI Subsidiaries, or the UDI Parent Subsidiaries hold, directly or indirectly, a stake of at least 20 per cent of in the voting or total capital stock.
When dealing with investment funds, the definition of economic group for revenue calculation purposes comprises:
- the economic group of each investor (quota holder) that holds, directly or indirectly, at least 50 per cent of the fund involved in the transaction through either individual interest or any type of quota holder or investors' agreement; and
- the portfolio companies in which the fund directly involved in the transaction holds, directly or indirectly, at least 20 per cent of the total capital stock or voting capital stock.
CADE has powers to request the notification of any transaction that does not meet the revenue thresholds referred to above for a period of one year after closing of the transaction. As of June 2017, CADE had used such powers only once (Guerbet/Mallinckrodt Group), in 2016.
Joint ventures and associative agreements
Joint ventures of any kind are caught by the statutory concept of concentration, notwithstanding their legal structure (ie, irrespective of the fact of being purely contractual or organised as a formal legal entity, a special partnership, or otherwise). The only exceptions, as mentioned above, are consortia, joint ventures and associative agreements created for the purpose of participating in public bids.
Moreover, pursuant to CADE's current regulations, certain associative agreements might also require prior antitrust clearance to be executed or extended. These are agreements with a duration equal to or over two years, which establish a common enterprise for the exploration of an economic activity, provided that the risks and results of the activity are shared between the contracting parties and the contracting parties (or any other member of their corresponding economic groups) are competitors in the relevant market affected by the agreement. CADE has recently decided that vessel sharing agreements (VSAs) entered into among maritime shipping companies, for instance, would qualify as associative agreements, and has also reviewed a number of code sharing agreements among airlines under the same umbrella. Agreements originally signed with no specific term, or with a term of less than two years, will qualify for mandatory review upon renewal beyond that term, or if their actual duration comes to exceed, in fact, two years, in which case they will need to be suspended on their second anniversary unless formal antitrust clearance is obtained prior to that date.
As said, joint ventures and associative agreements would only qualify for mandatory merger review by CADE if their parties meet the above-mentioned revenue thresholds.
Process and timing
The merging parties are jointly responsible for the merger filing and for the payment of a filing fee of 85,000 reais, which can be contractually split between the parties or paid by one of them. In any case, filings before CADE are usually made jointly by the parties to the transaction. There is no deadline for the filing but, in any circumstance, the actual implementation of the deal is conditional on the obtainment of prior and final antitrust clearance. The filing can be submitted at any time before the closing of the transaction, but ideally after the execution of a binding document between the parties. Since CADE's clearance is a condition precedent to closing, before it is granted the parties to the transaction are expected to remain completely independent, with no interference in each other's activities or any disclosure of competitively sensitive information among each other.
Unless the transaction qualifies for fast-track review, extensive information shall be provided to CADE upon filing, including information on the parties and their corresponding economic groups, major clients, major suppliers, turnovers, lines of businesses, interlocking directorates, and detailed market information for the past five years concerning all relevant markets horizontally or vertically related to the transaction, as the case may be, including proposed relevant market definitions, estimates of the parties and relevant competitors' market shares, a summary of the competitive dynamics of the affected markets, including entry and exit conditions, rivalry, etc. The extent of this initial information is similar, for instance, to the information required in a US second request discovery procedure. In non-fast-track cases it is also customary to approach CADE in pre-filing meetings prior to the actual filing of the transaction. If the case qualifies for a fast-track review, the required market information is much more limited and the filing form is much easier and faster to prepare.
Once filing is made, the corresponding investigation is initially carried out by CADE's Superintendence General. Should it conclude that the merger does not raise antitrust concerns, it shall issue a clearance opinion. If such opinion is not challenged within 15 days by an interested third party nor is subject to a revision request by any member of CADE's Tribunal (which are both rare events), it becomes final and enforceable, authorising the parties to consummate the transaction.
If the Superintendence General concludes that the transaction does raise antitrust concerns and should not be unconditionally cleared, it shall challenge the transaction before CADE's Tribunal, which will be then responsible for a second-level and final review of the case at administrative level, deciding whether the merger will be unconditionally cleared, cleared subject to remedies, or blocked. CADE's Tribunal will also review the case if the opinion issued by the Superintendence General is challenged, as said above, by a third party, or upon a discretionary request made by any of its members.
The merger review process may legally take up to 330 days. In practice, however, it is usually much quicker.
Most of the transactions (approximately 77 per cent in 2016) are reviewed by CADE under the fast-track procedure, which applies, for instance, to transactions that do not entail horizontal overlaps or vertical integration, or to those that do entail one or the other, but the combined market share of the parties, in the case of horizontal mergers, is low (ie, below 20 per cent), or do not result from the transaction itself (HHI variation below 200 points and combined market shares below 50 per cent), or, in the case of vertical mergers, if none of the parties or other entities belonging to their economic groups has a market share of more than 30 per cent in its corresponding relevant market. In fast-track cases, the Superintendence General shall issue its clearance opinion within 30 days from formal filing.
As said, parties to transactions that do not qualify for fast-track review are given the opportunity to engage in discussions with the Superintendence General prior to formally submitting the filing form. While such contacts are not mandatory, they are highly recommended as they enable the parties to confirm whether the authority regards the notification as ‘complete' - thereby giving a green light for the parties to file - or ‘incomplete', in which case the parties will amend the notification accordingly without causing significant delays in the review process. There is no maximum term for such pre-notification discussions. In practice, the process may last for a number of weeks depending on the complexity of the case and the potential for competition concerns. Pre-notification discussions do not apply in fast-track proceedings.
In non-fast-track cases that nonetheless do not raise serious competition concerns, the Superintendence General tends to issue its clearance opinion within 60 to 90 days from formal filing (excluding the pre-filing negotiations period). In the case of complex mergers or transactions that need to be cleared with remedies, CADE's review may take considerably longer.
According to CADE's figures for 2016, the average review period for fast-track cases was 16 days, while the average review period for non-fast-track cases was 74 days. Cases that were formally classified as ‘complex', or were forwarded to CADE's Tribunal for a second level review, averaged 133 days at the Superintendence General, in addition to the second-level review period at CADE's Tribunal.
Interested third parties may request to intervene on cases that might potentially affect their interests, providing market data, documents and opinions to the authority. Such requests for intervention shall be submitted within 15 days of the publication of the notice granting publicity to the case. After the submission, the Superintendence General will be responsible for analysing the request and deciding whether to accept it or reject it. The request for intervention is usually accepted in cases in which the third party is a player in the relevant market, such as a competitor, customer or supplier.
As mentioned above, formally admitted interested third parties can challenge the clearance decision issued by the Superintendence General before CADE's Administrative Tribunal, within 15 days of the publication of the corresponding opinion.
Remedies and merger control agreements
Remedies, when necessary, can take the form of structural or behavioural commitments and, in practice, are usually negotiated between the parties and CADE's Tribunal rather than unilaterally imposed by the latter. Negotiated remedies are materialised in merger control agreements (ACCs, in Portuguese). If it is proposed by the merging parties before the corresponding opinion is issued by the Superintendence General, the ACC is negotiated with it and will be subsequently examined by CADE's Tribunal. After the opinion is issued by the Superintendence General, the ACC is negotiated directly with CADE's Tribunal.
CADE tends to prefer structural remedies (ie, the divestment of assets or entire business unities) to behavioural ones, but the latter have been used in a few number of cases, especially in cases involving cooperation among competitors or vertical issues.
International cooperation and cross-border deals
CADE has cooperation agreements with competition authorities in a number of jurisdictions. In global transactions that raise competition concerns in Brazil, the Superintendence General usually requests waivers to the merging parties in order to discuss the matter with other authorities that are reviewing the same transaction. This is more likely to happen in relation to transactions that affect relevant markets with a worldwide scope requiring remedies that may affect different jurisdictions. CADE provides a standard waiver form both in English and Portuguese.
As said, transactions that qualify for CADE's mandatory review cannot be consummated before the corresponding final clearance decision is granted. Until that moment, the parties are expected to remain independent and to compete with one another, if they are already competitors in a given market. No influence whatsoever shall be exercised by one party over the other until CADE's clearance is obtained. The only exception concerns transactions carried out at stock exchanges or at organised over-the-counter markets, which might be financially liquidated (eg, the subscription of shares may occur and the corresponding price may be paid) before CADE's clearance, as long as any political rights relating to the ownership of the interests acquired are not exercised before CADE approves the transaction.
The Brazilian Antitrust Act allows the merging parties to request a provisional authorisation to CADE in order to close the deal while clearance is still pending in some exceptional cases and circumstances. In order to request such authorisation, the parties will have to prove that:
- the transaction does not entail any risk to competition in the relevant markets affected;
- the required closing measures are totally reversible; and
- the target would suffer severe and irreversible financial losses should closing take longer to occur (eg, the target is in financial distress).
CADE has been extremely reluctant, however, to grant such requests, and has never actually granted an authorisation like that to date.
Any violation to the standstill obligation, known as a ‘gun-jumping' violation, may lead to the imposition of the following penalties, cumulative or not:
- fines, ranging from 60,000 to 60 million reais;
- annulment of the acts carried out by the merging parties; and
- opening of a formal investigation for anticompetitive behaviour against the merging parties (eg, for collusive practices), which may lead to additional fines and penalties for such specific anticompetitive behaviour.
Between August 2013 and August 2016, CADE reviewed 11 merger filings that involved possible gun-jumping violations. Most of them were settled between the Tribunal and the merging parties, and the highest financial contribution negotiated for gun jumping so far amounted to 30 million reais. In only one precedent (Blue Cycle), CADE determined the annulment of the infringing act and imposed a fine of 1.5 million reais. In another precedent (Goiás Verde/Brasfigo), the parties were prohibited by CADE to use a brand for two years, in addition to agreeing to a negotiated financial contribution of 3 million reais.
In the event CADE suspects of gun-jumping, it will carry out a gun-jumping investigation under a specific procedure (‘APAC', in Portuguese). The APAC is carried out by the Superintendence General and is subsequently sent to CADE's Tribunal for ruling.
The Brazilian Antitrust Act does not address the possibility of carve-outs, and CADE's officials have more than once expressed the position that they will not tolerate carve-out practices. Recently, the issue was explicitly discussed in one precedent (Cisco/TCH), and CADE concluded that carve-outs amount to gun jumping in Brazil. The financial contribution negotiated in the Cisco/TCH matter for early closing of the transaction was 30 million reais.
Recent trends and upcoming challenges
Efforts to increase the institutionalisation of CADE's procedures and methods of analysis have been seen since the enactment of the Brazilian Antitrust Act in 2012, and will probably continue to be seen in the future. In the merger review area, these efforts began with the enactment of guidelines on gun-jumping practices,5 and continued with the enactment, on 27 July 2016, of a new version of CADE's Horizontal Merger Guidelines, which provide non-binding guidance for CADE's technical staff and enhance the transparency of the authority's assessment of merger cases, which is of course very helpful to parties, economists and the legal community. These new guidelines comprise rules for relevant market definition, assessment of the corresponding levels of concentration, entry barriers, rivalry, portfolio and purchasing power, coordinated effects and efficiency gains, and also suggest supplementary and alternative methods of analysis that might be used in specific circumstances (such as the acquisition of maverick firms, for instance).
These new guidelines on horizontal mergers depart significantly from the older ones with respect to such alternative methods, including notes on the possible disregard of relevant market definitions in some specific cases, the analysis of portfolio power, acquisition of minority interests and evaluation of failing firm defences.
This trend will probably continue in the future (guidelines on remedies have been considered by CADE for a while, for instance, but are still to be issued), and the interest on the interaction of competition law with other areas of the law (such as intellectual property, for instance) will probably increase as well in the coming years. In addition, the development of instruments to evaluate competition policy is being considered by CADE, which might leave space for more accessible and detailed annual reports, specific analyses of the impact of CADE's decisions on the markets, and the production of new sectorial studies.
- CADE is the acronym for ‘Conselho Administrativo de Defesa Econômica', Admnistrative Council for Economic Defence.
- The Tribunal is a collegial body composed, in full quorum, by six Commissioners and a President, all appointed by the President of Republic, after being approved by the Federal Senate.
- The General Superintendence is composed by one General Superintendent appointed by the President of Republic, after being approved by the Federal Senate and two Deputy Superintendents.
- The appointment of the Chief Economist is made jointly by the President and the General Superintendent.
- An English version is available at www.cade.gov.br/acesso-a-informacao/publicacoes-institucionais/guias_do_Cade/guideline-gun-jumping-september.pdf.