Action Filed before the Supreme Court of Justice
Recently a Venezuelan company unsuccessfully claimed damages following a decision of the Venezuelan Pro-competition Superintendency.
On August 7 1993 CIF SA Consorcio Inversionista Fabril executed a contract with Corimon SACA pursuant to which it sold to Corimon 99.5% of its shares in the Venezuelan company Pinco Pittsburgh SA. The parties agreed to make the sale dependent on the superintendency's approval, since a merger between Pinco and Corimon was involved and since both were engaged in the manufacture and sale of paint. The sale price was fixed at $30 million.
The parties submitted the transaction to the superintendency's review. On October 5 1993 the superintendency ordered the suspension of the merger of Pinco and Corimon as a preventive measure, alleging that there was a "high risk that such operation would cause anti-competitive effects". In court, the plaintiff claimed that this ruling had delayed the sale of its shares. By means of an administrative declaration of November 29 1993 the superintendency concluded that the merger would have restrictive effects on free competition.
On January 12 1994 the parties filed an administrative appeal of annulment against the superintendency's act before the First Court of Administrative Contentious Matters, requesting that the court order the superintendency to refrain from imposing fines with respect to the performance of their contract. The court granted this request.
The parties filed a second request before the superintendency requesting that it re-examine the transaction, alleging that the contract's performance and the merger were the only way for Pinco to avoid becoming insolvent, since the delay to the sale had considerably worsened the company's finances. On August 10 1994 the superintendency authorized the sale of shares and the merger.
Action Filed before the Supreme Court of Justice
The plaintiff's argument before the Supreme Court was that between November 29 1993 and August 10 1994 the value of Pinco's shares fell from $30 million to $12.9 million, which was the final sale price to Corimon. According to CIF, this decrease was caused by the superintendency's November 29 1993 declaration, which was subsequently declared null by the First Court of Administrative Contentious Matters on March 6 1994. CIF also alleged that the superintendency's inadequate or irregular performance of its activities had caused Pinco's financial situation to worsen and the consequent decrease in its share value. The damage suffered was the difference between the price originally agreed and that paid at the time of performing the contract (ie, just over $17 million). CIF requested that this amount be paid as damages.
The superintendency counter-argued that CIF and Corimon could have carried out the transaction without any damage to the share price once the first court ordered the superintendency to refrain from imposing a fine. It also argued that the parties must have known that the transaction could be prohibited by law - otherwise they would not have submitted it for review. The superintendency also argued that no causality existed between the declaration and the decrease in the sale price.
The Political Administrative Chamber confirmed that three requirements must be met in order for state liability to be declared:
- damage must be caused to the goods or rights of the party in question;
- the damage caused must be attributable to the state administration as a result of the performance of its activities, regardless of whether such activities are regular; and
- causality must exist between the act attributed to the state administration and the alleged damage.
The Supreme Court stated that CIF's calculations of the damage suffered differed from that of the court. According to the court's appraisal, the share price fluctuated for several reasons including not only the declaration of the superintendency but also a decline in Pinco's sales. CIF's calculation did not tally with its claim for over $17 million damages and the means used to prove the alleged damage were inadequate. Therefore, it was impossible to determine the existence or amount of the damage.
Notwithstanding this element of the court's judgment, the court analyzed the state's liability for the damage suffered. The court concluded that the administration cannot be held liable for actions performed by individuals of their own free will. The parties had decided to make the transaction conditional upon the superintendency's approval, a condition which they could have refrained from agreeing in order to perform their mutual contractual obligations.
With respect to the issue of causality, the court ruled that no damage had been determined and there was no evidence that the administration was responsible for the damages. Therefore, the court stated that an analysis of the argument was unnecessary. CIF was ordered to pay the court costs.
This decision is significant for companies intending to perform an economic concentration transaction. It confirms that an economic analysis of the relevant market and potential restrictive effects on competition should be made by the parties when market shares and other factors indicate from the outset that the transaction could be prohibited by Article 11 of the Law to Promote and Protect the Exercise of Free Competition. If an internal analysis conclusively shows that no restrictive effects would be caused (or no dominant position would be created or reinforced in the market), then the parties need not file a request for the superintendency's approval. Clauses that make the closing of a transaction conditional upon its approval must be carefully reviewed before the contract's execution.
Finally, the parties should not assume that the courts will award an indemnification for damages allegedly caused by an act of the state administration (in this case, the Pro-competition Superintendency) merely because it is subsequently declared null.
For further information on this topic please contact Olga Nass de Massiani, Isabel Victoria Márquez or Vera De Brito de Gyarfas at Travieso Evans Arria Rengel & Paz by telephone (+58 212 277 3333) or by fax (+58 212 277 3334) or by email ([email protected] or [email protected] or [email protected]).