ANTITRUST APPROVAL IN BRAZIL –Evolution of competition precedents in transactions involving the aviation market.
Bernardi e Schnapp Advogados
The importance of the antitrust review in Brazil has been increasing since 1994, when Federal Law 8,884/1994 was enacted and the current Brazilian antitrust system was created to enforce competition laws and regulations.
After several years, with the evolution of the merger review process and numerous decisions by local antitrust authorities, the Brazilian Federal Government decided to implement a new federal law, in order to modernize the local system and narrow the transactions that would require antitrust approval.
Generally, Federal Law 12,529, which entered into force in May of 2012 (“Brazilian Antitrust Law”), has restructured the merger review system in Brazil to implement a pre-merger regime and redefine the transactions that would be subject to mandatory filing with the Brazilian Council of Economic Defense (known by its Portuguese acronym “CADE”).
Notwithstanding the antitrust review process has been in place for more than 30 years, given the relatively low number of transactions involving acquisitions in the aviation market, until the latest couple of years most of CADE’s precedents associated with the aviation market involved the examination of code-share agreements and other similar agreements between air carriers.
One may say that the low number of acquisitions in Brazil result from the limitation of foreign capital ownership in Brazilian carriers, since the Aeronautical Code sets forth that Brazilian citizens need to own at least 80 per cent of the voting shares of local carriers.
The foreign-ownership limitation has been under debate in Brazil for a long time, and the discussion has increased during the past few years. Though the Federal Government publicly tried to implement measures to enlarge such limitation, the matter is currently under discussion in the Brazilian Congress and the Aeronautical Code limitation continues to apply.
Notwithstanding such limitation, certain transactions involving a deeper level of engagement and integration between foreign and local air carriers have been submitted and reviewed by CADE, what therefore revealed signs on what would be the most relevant aspects currently considered by CADE in situations in which the activities of the carriers are more deeply integrated.
Antitrust Review: Most relevant aspects considered by CADE to approve transactions in the aviation market
According to the Brazilian Antitrust Law, as amended by the Joint Directive nr. 994/2012, the parties involved in the transaction shall submit to CADE the acts of economic concentration in which, cumulatively: (i) at least one of the economic groups involved registered gross revenue in Brazil, in the previous year, equal or superior to R$ 750,000,000.00, and (ii) at least another economic group involved registered gross revenue in Brazil, in the previous year, equal or superior to R$ 75,000,000.00.
In case the gross revenue requirement pointed out above is met, the Brazilian Antitrust Law sets forth that a transaction will be considered an act of economic concentration, subject to mandatory filing with CADE, when:
I Two or more independent companies amalgamate with each other;
II 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, the control or parts of one or more companies;
III One or more companies merge into another, or
IV Two or more companies enter into an associative agreement, a consortium or joint venture.
In reviewing the requirements pointed out above, it is possible to say that the requirements under items I to III clearly involve a deeper level of structural involvement, with the actual corporate concentration, either with purchase of quotas, completion of a merger, or the creation of a new corporate vehicle integrating the activity of the parties.
In the event the scope of the transaction is to complete the acquisition of minority stakes in a certain company, but not actual control, CADE’s Resolution nr. 2 establishes that the filing will be required when the economic group of the purchaser and the target are horizontally or vertically related, and:
(a) acquisition will result in a direct or indirect ownership equal to five per cent or more of the voting capital or capital stock of the target company; or
(b) acquisition is of an additional 5 per cent stake in the total share or voting capital when the purchaser already holds an interest of at least 5 per cent in the target.
There are different percentage thresholds that apply when the parties are not vertically or horizontally related.
With respect to item IV, upon the enactment of the Brazilian Antitrust Law, the concept of “associative agreement” generated a debate on what sorts of transactions would be covered by this concept, which was not clearly defined under the Brazilian Antitrust Law. In order to clarify what agreements should be considered associative, CADE has enacted the Resolution nr. 10, dated as of November 4, 2014, which was afterwards replaced by the Resolution nr. 17, dated as of October 18, 2016, in order to define the rules applicable to the filing of associative agreements with the Agency (the “Resolution”).
According to the Resolution, an agreement shall be considered ‘associative’ when it is entered for a term of two or more years and, cumulatively: (i) the agreement establishes sharing of risks and outcomes for the economic activity; and (ii) the contracting parties (or their respective economic groups) are competitors in the relevant market in relation to the subject matter of the agreement. Further, agreements with a term inferior to two years or with undetermined term shall be notified only if the two-year period, counted as of its execution, is reached.
In other words, though the execution of an agreement to perform an economic activity usually involves some level of collaboration between the parties, not all agreements involving horizontal collaboration now requires submission with Brazilian Antitrust Authorities.
It is important to keep in mind that, although the Brazilian Antitrust Law and the Resolution created more detailed criteria for the parties to evaluate whether a transaction should be submitted for CADE’s review, in the past CADE accepted the filing of acts of economic concentration between parties that simply met the gross revenue requirements, based on a generic notion that the transactions could potentially restrain the free competition.
Such trend, however, has been changing over the last years. Specially after the implementation of the Resolution, CADE has started considering in more details whether a transaction effectively had the potential to affect the relevant market(s) involved, as well as to what extent the transaction indeed resulted in the sharing of risks and outcomes for the development of the economic activity.
It is therefore important to first evaluate in which situations CADE would consider that both parties effectively develop activities in the same relevant market and then whether the transaction result in the effects mentioned in the Resolution.
There are several precedents from CADE, in reviewing transactions involving transportation of passengers, in which each city-pair was considered a specific relevant market. Note that different a criterion applies to the transportation of cargo. Using such concept, one may say that only agreements between companies operating in the same routes would be subject to mandatory filing with CADE.
However, in specific situations, CADE has defined the relevant markets affected not only in view of the routes operated by each carrier through direct fights, but also through indirect flights. Such broader concept certainly requires a more detailed analysis of the services offered by both parties and to what extent it could be considered competitors in a certain relevant market.
As to the second requirement, neither the Brazilian Antitrust Law nor the Resolution establish in which situations it would be interpreted that both parties would be sharing risks and outcomes associated with the scope of the agreement.
Such concept though was applied by CADE in the Aviation Market during 2017. At such opportunity, in reviewing an act of economic concentration that formalized the submission of a codeshare agreement between a foreign and a local air carrier, CADE decided that the transaction did not require the prior approval of the Agency, since the obligations undertaken by the parties – typical authorization for the marketing carrier to place codes on the metal carrier, without any interference on establishment of prices, operation of flights, blocked space, did not result in the sharing of risks and outcomes for the economic activity.
This was a very important outcome for the Aviation Industry, as a significant number of codeshare agreements follow a similar structure and now parties have more elements to decide on whether the agreement would require filing with CADE.
If the agreement requires mandatory filing, it is important to note that the level of concentration, barriers to entry and the efficiencies arising from the transaction are the most relevant aspects taken into consideration by CADE, when the competition review is carried out.
Though typical codeshare transactions tend to represent less risks in terms of economic concentration – since parties usually do not share sensitive information related to their pricing structure and keep their business decision centers segregated – specially over the last year CADE started reviewing Joint Venture Agreements with integrated “metal-neutral” alliances, which therefore required a deeper analysis of the partnership intended by the parties.
In reviewing such transactions, CADE considered that the level of operational integration between the parties would require a closer analysis of the markets potentially impacted, as if the partier were formalizing an actual merger.
In one of the transactions involving this kind of partnership, CADE considered that the high concentration in specific direct flights, with overlapping operations, associated with the barriers to entry in the market – related to lack of airport infrastructure – and the regulatory limitations arising from the applicable Agreement on Air Transport, would result in material risks to the free competition.
CADE therefore subjected the approval of the transactions to certain remedies intended to (a) give incentives for new players to enter in the respective relevant market (e.g. with the assignment of slots in certain airports and entering into interline agreements with entrants), (b) prevent the parties from reducing the offer of seats within a certain period of time in specific routes, and (c) allow the operation of new routes involving the relevant markets affected.
In another JV transaction involving the same Brazilian air carrier, which was analyzed by CADE later in 2017, CADE approved the transaction without any restrictions. Though parties also had overlapping activities in this specific transaction, CADE considered that the high number of players in the affected routes, associated with the more flexible conditions provided for under the applicable Agreement on Air Transport, which would allow new entrants in the relevant markets affected, and alternatives available for lack of airport infrastructure, would uphold the approval of the transaction without restrictions.
The scope of this article was to provide some visibility on how Brazilian legal framework currently deals with transactions that may be considered an act of economic concentration between two players, as well as the relevant aspects took into consideration by CADE in reviewing agreements in the aviation market.
Considering that the number of passengers transported started recovering in the last year, after a couple of years of economic recession, and the initiatives of the Brazilian Government to negotiate and implement open skies agreements and reduce the foreign-ownership limitation currently applicable in Brazil, one may expect that the number of transactions involving a deeper level of integration between air carriers will increase in the near future.
Also, based on recent precedents from CADE, from a regulatory perspective the flexibilization of the conditions provided for under agreements for air transport will be an important development to allow a higher level of rivalry with new entrants in the potential relevant markets affected and hence uphold the approval of such transactions.
Finally, even though a certain agreement could in principle not require CADE’s prior approval, it is important to keep in mind that such agreement would still be subject to CADE’s review under the perspective of repressive control, as an anticompetitive practice, if and when it potentially hinders the free competition. Also, parties need to carefully evaluate which information will be exchanged during the phase of negotiations, as CADE has considered in the past that certain conducts during this phase could be considered a gun-jumping violation, if the transaction requires the prior approval of the Agency.
This article is for general informational and educational purposes. It is not intended as and does not constitute legal advice or legal opinions and should not be used as such. You should not act or rely upon any information provided herein without seeking the advice of a lawyer.