This article is an extract from GTDT Market Intelligence Merger Control 2021. Click here for the full guide.
Lexology GTDT Market Intelligence provides a unique perspective on evolving legal and regulatory landscapes. This interview is taken from the Merger Control volume discussing topics including enforcement priorities, evidence review and notable cases within key jurisdictions worldwide.
1 What are the key developments in the past year in merger control in your jurisdiction?
As M&A activities have been facing a significant increase, worldwide and in Brazil, we are also seeing a greater number of deals being subject to merger review. According to official statistics, 501 merger cases were field with the Brazilian antitrust authority (Administrative Council of Economic Defence or CADE) between September 2020 and August 2021, a considerable increase in relation to the previous year, when 417 cases were filed. CADE is not only busier, but it continues to have a very active role on the merger front, with both national and cross-border deals facing a strong level of scrutiny. The number of formal in-depth reviews also increased in relation to the previous year (18 cases, which is almost three times greater than the previous year).
Such strong enforcement is applicable across all industries, even in sectors that suffered a severe financial impact due to the covid-19 crisis. A clear example is the fact that CADE carried out a deep and detailed review on the Delta Airlines/Latam Group case, a deal in the aviation sector, one of the most affected by the crisis.
Another clear trend is that CADE has been putting more and more emphasis on economic data, something that we would expect to continue now that several previous members of CADE’s Department of Economic Studies (DEE) have joined the case teams at the General Superintendence.
CADE remains focused in some markets that have been facing an increase consolidation and concentration. These include, for instance:
- the healthcare industry in general (insurance/health plans, hospitals, clinics and diagnosis companies), as it can be seen from the decisions on Hapvida/Plamed and Unimed/GSHMed cases, both subject to a deep and long market test phase (the first also subject to a robust remedies package that included disinvestments and heavy behavioural remedies on the pricing strategy of the parties);
- the pharmaceutical industry, with the Hypera/Takeda case being subject to an intense review process and cleared subject to disinvestment commitments;
- the infrastructure sector, as it can be seen from the decision on Petrobras/White Martins deal to impose remedies aiming to prevent Petrobras’ from abusing its market power in the natural gas;
- the services sector, especially in retail and finance services, including cases such as Magalu/Hub and Linx/Stone in the payment sector, both subject to heavy challenges from third parties. More recently, Magalu/Kabum deal involving e-commerce has been facing a deep round of market tests, including questions that aimed to discuss a possible review on relevant market definition in the retail and e-commerce sectors; and
- the agricultural sector, after a comprehensive review process (including an extensive market test and appeals from third parties), CADE cleared the incorporation of a company formed by Bayer/BASF/Corteva/Syngenta to manage the payment of royalties that are due in connection with the crop of transgenic soybean in Brazil.
As regard cross-border deals, CADE is also taking a proactively role, with cases being subject to an in-depth review process, including the review of FCA/PSA merger in the automaker sector, Tupy/Teksid in the iron foundry auto parts industry and Danfoss/Eaton, also in the auto parts; these last two subject to robust remedies.
2 Have there been any developments that impact how you advise clients about merger clearance?
Every year, a significant number of cross-border deals are submitted in Brazil and CADE continues to coordinate its review with other antitrust authorities around the globe. Recently, in the Danfoss/Eaton case, CADE coordinated its review with the European Commission, the Department of Justice and other foreign authorities, and the divestiture package related to the Brazilian filing was defined in close cooperation with such authorities, having in mind the global aspects of the affected market.
This close cooperation should not be interpreted as CADE deferring to a foreign regulator to decide. On the contrary, CADE will take a closer view on the local effects of any global deal and would not refrain from applying a strong level of scrutiny on those transactions that may, in CADE’s view, potentially harm competition in Brazil. A recent example was the Tupy/Teksid deal, in which CADE imposed remedies, despite the fact that the deal was still under review in other jurisdictions.
CADE is known for its efficiency in clearing merger cases. However, the review average time may vary significantly, and ensuring communication with the case team in charge of the case at CADE (ie, actively engaging in pre-notification discussions, when applicable, and providing the most complete and accurate information since the beginning of the process) is crucial to avoid delays and unexpected requests.
Companies should bear in mind that DEE is actively participating in both complex and non-complex cases, especially in sectors such as healthcare, retail, financial services and platforms/tech companies in general. In those sectors companies should expect more scrutiny and requests for information, regardless of the size of the deal. Also, CADE is requesting information related to different market scenarios and proxies to measure the level of concentration, which may require an increasingly amount of data from parties, as well as the use of information provided by independent market consultancy companies.
In addition to that, over the past year, we have seen a sharp increase in the number of requests for complementary review made by CADE’s Tribunal. From 2020 to mid-2021, CADE’s Tribunal requested the review of eight cases unconditionally approved by the General Superintendence. Although in none of these cases CADE’s Tribunal overruled the clearance decision, the requests shows that CADE’s Commissioners are taking a closer look into all merger reviews, even in non-complex matters.
Finally, CADE is also taking a closer look into the accuracy of information provided by the parties in the context of merger filings, with discussions on deceptive information taking place. In March 2021, Delta Airlines/Latam Group deal was unconditionally cleared. However, an inconsistency was noticed during the review, which ended up with CADE’s Tribunal requesting the General Superintendence to open an investigation against the parties. The investigation is still ongoing and at this point it is unclear whether the companies will be fined or whether the decision issued by CADE in 2020, on a previous case involving the same companies will be annulled. In any event, this case is an indication that CADE has been closely watching out for matters involving deception and companies involved in a merger cases should have comfort and clarity with regards to the accuracy of the data before submitting it to CADE.
3 Do recent cases or settlements suggest any changes in merger enforcement priorities in your jurisdiction?
As in many other jurisdictions, CADE is closely monitoring technology companies, not only the big-tech global companies, but also Brazilian tech companies and platforms in general, including social media, video and music streaming services, online tourism, food/products delivery, etc. Cases involving digital companies and platforms in general have been (and will likely continue) to be subject to a greater scrutiny from CADE.
CADE has already stated that considering the importance of digital platforms for the Brazilian economy, the agency will be taking a closer look into this broader segment. In August 2021, DEE released a new study on the matter in which the department summarised the current precedents for digital markets, but also pointed that such precedents should not prevent the agency to reviewing previous definitions. One interesting debate is the ongoing Magalu/Kabum deal, where CADE seems to be discussing the impact of digitalisation and a possible review on relevant market definition in the retail sector.
Apart the digital segment, CADE is also interested in industry sectors that are experiencing a trend of increasing consolidation and concentration. For example, deals on the healthcare sector have been closely monitored by CADE, which already raised concerns over an alleged tendency to market concentration and growing verticalisation between health insurance companies and services providers (such as hospitals and diagnostics companies). Furthermore, sectors such as pharmaceuticals, financial services, infrastructure, retail and industrial continue to face a heavy scrutiny in Brazil, with a lot of discussions on the market definition and the existence of alternative market scenarios.
There also examples of matters where CADE is looking into consecutive acquisitions of smaller rivals in recent years. This topic was discussed, for instance, in Klabin/International Paper and Prosegur/Sacel deals. In the latter case, the deal was cleared subject to the commitment made by Prosegur that the company will make no acquisitions in the segment for the coming years.
On the infrastructure sector, DEE recently entered into a partnership with the Organisation for Economic Cooperation and Development (OECD) to perform a joint assessment on the ports and civil aviation sectors in Brazil, which are considered strategic by the agency. The main goal is to evaluate advocacy measures that could promote competition in these sectors; however, we cannot rule out the possibility of such assessment impacting the way these markets are being defined and mergers cases are being reviewed.
Although some debate has emerged on the interface between antitrust and other public policies such as environmental protection, data protection and others, we would expect CADE to keep carrying out independent reviews of the deals, guided by economic and competitive principles, with no interference from other public interests.
4 Are there any trends in merger challenges, settlements or remedies that have emerged over the past year? Any notable deals that have been blocked or cleared subject to conditions?
CADE has been increasing its merger control scrutiny over recent years and the past year’s decisions only reinforces that the agency does not intend to lessen its approach. This is also applicable to remedies. A study published by DEE in 2020 indicates a growing trend towards the introduction of new economic tools in remedy negotiations, as well as a new focus on the nature of the remedies, the feasibility of their implementation and their proportionality.
In 2020, seven cases were cleared by CADE subject to remedies, four of which involved structural measures. The upfront buyer and fix-it-first mechanisms were used in two cases, both involving only the Brazilian market: Supermercados BH/Sales and Consórcio Liquigás. In 2021, the cases ruled so far indicates that the tendency towards structural remedies and prior identification of the buyer may even have increased. By August 2021, CADE imposed remedies in five transactions, four involving structural remedies. The upfront buyer and fix-it-first mechanisms were requested in three cases: upfront buyer in Plamed/Hapvida and Eaton/Danfoss deals and fix-it-first mechanism in Hypera/Takeda deal.
In Teksid/Tupy deal, CADE took the lead in the negotiation of soft structural and behavioral remedies with the parties even before the negotiations with the Department of Justice in the United States and the Mexican authority were concluded.
Such proactive and strict approach is the result of the difficulties experienced in the implementation of structural and behavioral remedies in recent transactions, such as Videolar/Innova and Hapvida/Plamed cases.
In April 2021, CADE decided that the Videolar/Innova 2014 transaction should be undone, given the alleged evidence that the companies failed to comply with the behavioural remedies imposed by agency at that time. CADE noticed significant increases in polystyrene prices in Brazil since the transaction was approved in 2014 and, in CADE’s view, undoing the transaction was the most appropriate solution considering the absence of competing players in the market and the existence of high barriers to entry. The case is still ongoing, since the parties have appealed the decision, but it nonetheless negatively impacted the willingness of CADE to accept behavioural remedies in similar matters going forward.
In February 2021, CADE concluded that the Hapvida/Plamed deal would result in significant overlaps in the healthcare plans in the state of Sergipe and cleared the transaction subject to the divestiture of client portfolios by Plamed. However, in August 2021, after no buyer had emerged in the period that has been determined by CADE, the agency decided to revisit its previous decision. The case is still on going but CADE could eventually decide to block the deal.
Having this in mind, it seems that structural remedies with a request for upfront buyers or fix-it-first mechanisms may become more commonly requested, not only in pure domestic deals, but also in cross-border transactions.
5 Have the authorities released any key studies or guidelines or announced other significant changes that impact merger control in your jurisdiction in the past year?
In the past years, DEE has been issuing reports indicating that CADE is paying close attention towards some sectors. The highlights include a study on the TV sector, summarising CADE’s experience of more than 20 years in reviewing mergers and investigations (December 2020) and a study on digital platforms (August 2021), summarising CADE’s precedents in merger reviews involving digital platforms. The study on digital platforms includes a comprehensive analysis of the merger cases analysed by CADE in recent years in the online retail, marketplaces, advertising, different apps and financial markets; and also provides an overview of the factors considered in relevant market definitions and competitive assessments.
In March 2021, DEE also published a working paper to analyse the concepts of dominance and market power. The study addressed OECD’s recommendation that CADE should ‘adopt guidelines and commit to applying a clear analytical framework to assess dominance’. The study points out the difficulty in defining whether a certain competitor holds a dominant position, as dominance can hardly be identified in a binary way. The document indicates that merger cases involving firms that are dominant or hold a strong market position may be deeply scrutinised by CADE.
Also, in June 2021, DEE published a working paper illustrating the benchmarking on data protection measures taken by antitrust authorities around the world. Although there is no specific mention of merger cases, the working paper demonstrates that CADE is aware of the effect of data on competition and economics, which may be used on the merger front, especially in cases involving data-driven markets.
6 Do you expect any significant changes to merger control rules? How could that change your client advocacy before the authorities? What changes would you like to see implemented in your jurisdiction?
Even though we have not seen significant changes to merger control rules, there are some important trends and discussions taking place within CADE that may eventually lead to changes in the approach taken in some cases in the future.
For instance, CADE has recently changed its understanding on collaboration agreements that could be seen as ‘associative agreements’ for the purposes of the Brazilian merger rules, consequently being subject to mandatory merger filing in Brazil. As per the current rules, associative agreements are the ones carried out by competitors in the scope of the agreement. Until last year, CADE had consistently taken a broader definition of the term ‘competitor’ for the purposes of this specific assessment, considering that companies vertically related were also competitors in the context of collaboration agreements. Recently, CADE dismissed two cases (Coca-Cola/HNK Group and Volkswagen/Robert Bosch deals) disregarding such vertical overlaps and concluding that only horizontal overlaps should be considered in the analysis of whether the parties are competitors in the scope of the agreement.
Also, during the BRF/Upfield case, CADE provided important insights on the requirements for the notification of collaboration agreements in Brazil, including the discussion on whether contractual joint ventures would be subject to different criteria for the assessment on the obligation to notify in comparison with corporate joint ventures. Although CADE has reached the conclusion that contractual joint ventures would be subject to different criteria (being seen as a type of associative agreement), there was an intense debate, with some divergent opinions from CADE’s Commissioners. As a consequence, companies engaging in collaborations which could be seen as contractual joint ventures should carefully reviewed the need to file in Brazil.
As a final remark, CADE’s personnel changed considerably in 2021, with the former General Superintendent taking office in August 2021 as CADE’s new president and with a new General Superintendent and some new Commissioners to be appointed in the near future. Although these changes should not affect the agency’s institutional mission toward preserving competition with a focus on consumer welfare, the appointment of new members might fuel debates and affect, either directly or indirectly, the decision-making process on the merger front.
The Inside Track
What should a prospective client consider when contemplating a complex, multi-jurisdictional transaction?
There are key aspects to have in mind: first is to establish a common and aligned strategy for Brazil and other jurisdictions, which should include discussions on possible remedies aiming to address concerns across such jurisdictions. Not only would we expect a close cooperation between CADE and foreign authorities, but the analysis will likely consider different market scenarios, which by itself may result in a greater amount of data being requested. Clients should be careful when analysing the timing for the submission in Brazil, as factors such as the participation of active third parties may significant impact the review period.
In your experience, what makes a difference in obtaining clearance quickly?
A filing form that provides clear indication on overlaps under different possible scenarios, combined with robust economic evidence on the lack of concerns, is crucial to expedite the merger review and obtain a quick clearance. Such economic evidence should include a comprehensive explanation on the methodology used for calculating market shares, especially when figures are not estimated by an independent source or when market data is not publicly available. Consideration of local aspects is also important, especially in regional markets or sectors that are heavily regulated in Brazil, such as, for example, retail, healthcare, infrastructure and financial sectors, among others.
What merger control issues did you observe in the past year that surprised you?
CADE’s decision to undo Innova/Videolar deal, which is still subject of an appeal. The deal was approved in 2014, subject to behavioral commitments related to investments in R&D, prices and future production capacity. In April 2021, due to complaints regarding continuous non-compliance with such commitments, CADE decided that the deal should be undone, stating that this extreme measure would be the most appropriate solution considering the absence of competing players in the market and the existence of high barriers to entry. The decision also shed a light on the risks of behavioural remedies, which may impact future negotiations.