On February 19, 2014, the Administrative Council for Economic Defense (CADE) published a public consultation with proposed amendments to regulations of certain provisions of the Brazilian Competition Act (Law No. 12529/2011), of CADE Internal Rules (CADE Resolution No. 1/2012) and of CADE Resolution No. 2/2012, which deal with the control of mergers, acquisitions and joint ventures (the so-called economic “concentration acts”). The texts of the proposed regulations will be available for general comments until March 21, 2014 (see www.cade.gov.br). CADE will then review such submissions and define the text of the new regulations.
Law No. 12529/2011 has been in force for almost two years by now, and this is an opportunity to review and improve its provisions currently in effect. Within this context, it is expected – and it is extremely positive – that not only competition lawyers, but also companies and associations/institutes contribute towards CADE keeping up with the best international practices. Below is a summary of the main proposed regulations, the contexts involved and our preliminary comments.
- Definition of associative agreements subject to prior notification to CADE
Context: Under the Brazilian Competition Act, “associative agreements” entered into between companies whose economic groups reported a turnover in Brazil equal or higher than R$ 750 million and R$ 75 million, respectively, must be notified to CADE for prior approval. As the Brazilian Competition Act does not define “associative agreements,” companies and market agents in general have had doubts over which types of agreements can be held as “associative” for the purposes of mandatory notification to CADE.
Proposal: CADE proposes that a new regulation define “associative agreements,” subject to mandatory notification, as those executed:
“I – between competitors; or
II – between market players that operate in a vertically-related market, whenever at least one of them holds twenty percent (20%) or more of the respective relevant market, provided that at least one of the following conditions is fulfilled:
a) the agreement establishes sharing of income and loss between the parties;
b) the agreement gives rise to a relationship of exclusivity, whether de jure or de facto.”
Preliminary comments: Given the broad terms of the Competition Act, the definition in a regulation of which types of agreements can be held as “associative agreements” is of paramount importance to ensure legal certainty for market agents. CADE’s proposed wording, however, seems still broad and may consider of mandatory notification a large number of agreements that are neutral from a competition perspective. Therefore, it is worth considering suggesting to CADE a text for exclusion of certain agreements between competitors or between vertically-related companies which, by their own features, have no potential to produce effects on competition in the relevant markets where such companies operate.
- Exemption for deals involving consolidation of control and for those resulting in the largest individual shareholder status
Context: According to CADE Resolution No. 2/2012, acquisition of equity interest by the controlling shareholder falls within the scope of mandatory notification when the equity interest directly or indirectly acquired by at least one seller, individually, is equal to or greater than twenty percent (20%) of the capital stock or voting capital, or when such acquisition gives the purchaser a status of the largest individual investor. Considering the status of controlling shareholder, acquisition of additional equity interest is quite unlikely to have the potential of raising competition concerns.
Proposal: CADE proposes the exclusion of this event from the list of deals falling within the meaning of economic “concentration acts” whose notification would be mandatory.
Preliminary comments: The proposal seems to emphasize a more systematic and reasonable interpretation, exempting from notification deals not clearly generating effects on relevant markets where the controlled company operates. This is so because an increase in the controlling company’s equity interest does not change sensitive market decisions which could fall within the scope of CADE’s preventive control.
- Notification of trades performed on stock exchanges, and approval process
Context: CADE Resolution No. 1/2012 establishes that public offerings of shares involving groups whose turnover was equal or higher than R$ 750 million and R$ 75 million, respectively, must be notified for review after their announcement and can be consummated without CADE’s prior approval. Decision-making rights attaching to the equity interest acquired via public offering cannot, however, be exercised until CADE clears the deal. On request of the parties, CADE may grant an authorization for exercise of these rights where such exercise is necessary to protect the investment value.
Proposal: CADE proposes that “trades on stock exchanges” should be accorded the same treatment as public offerings of shares. Under the proposed regulation, trades on stock exchanges are not contingent upon CADE’s prior approval (but must be notified when meeting the legal thresholds relating to the economic groups’ turnover in Brazil).
Preliminary comments: Given the sensitive matters involved, it is reasonable not to impose CADE’s prior approval as a condition for trades on stock exchanges. Within this context, it is yet to be known whether CADE’s proposal offers companies the necessary legal certainty.
- New fast-track procedures in prior approval of concentration acts
Context: CADE currently follows fast-track review procedures for: (i) classical or cooperative joint-ventures: cases in which two or more separate companies constitute a joint venture to form a new company, under common control, which aims solely and exclusively at the share in a market where the products/services are not horizontally or vertically related; (ii) consolidation of control; (iii) replacement of market player; (iv) companies that compete in a certain relevant market, but hold a small market share (below 20%); and (v) companies that operate in vertically-related markets (production and distribution of goods, for instance), with a small share in the relevant markets where they operate (below 20%).
Proposal: CADE proposes a percentage change from 20% to 30% for deals undertaken by companies operating in vertically-related markets (production and distribution of goods, for instance), with a small share in the relevant markets where they participate. CADE further proposes fast-track review procedures for concentration acts resulting in a market share below 50% and in which the Herfindahl-Hirschman Index (HHI) is less than 200.
Preliminary comments: It is reasonable to increase the percentage market share to consider more vertical integration deals as eligible to fast-track review procedures. Perhaps it would also be interesting to increase the percentage of horizontal concentrations (between competitors) as there are no significant deals raising competition concerns that involve a market share below 30%, whether between competitors or between companies operating in vertically-related markets.
CADE has hit the right trail by affording different treatment to deals producing high market shares not as a result from itself, but rather from the previous situation of one of the parties involved, that is, where there is no clear causal relation between the deal and the post-deal market share.
Within this context, one could consider suggesting the inclusion of other types of deals that do not cause material impacts on competition for fast-track procedures.
- Rules on notification of convertible debenture transactions
Context: Currently, there are no specific rules in place dealing with notification of convertible debenture transactions.
Proposal: CADE proposes that mandatory notification should apply to acquisition of convertible debentures whenever the future conversion of stock falls within one of the notification events set forth in the Competition Act. When public offering of convertible debentures is involved, CADE further proposes that acquisition of these debentures should not depend upon CADE’s prior approval to be consummated, prohibiting the exercise of any decision-making rights attaching to such debentures until CADE’s clearance.
Preliminary comments: The proposed mechanism calls for a thorough review as debenture transactions play an important role in the company’s routine operations and in the capital market as a whole, in order to avoid creating unnecessary costs or even impairing debenture transactions.
- Definition of economic group for calculation of turnover in deals involving funds
Context: CADE Resolution No. 2/2012 established broad rules to calculate the turnover of investment funds for definition of economic groups.
Proposal: In deals involving investment funds and in calculating the turnover that determines mandatory notification, CADE proposes that members of the same economic group be considered cumulatively as: I - the economic group of each shareholder that directly or indirectly owns more than twenty percent (20%) of the shares of the fund involved in the deal; II - the companies controlled by the fund involved in the deal, and the companies in which such fund directly or indirectly holds an ownership interest equal to or higher than twenty percent (20%) of the capital stock or voting capital; and III - the companies controlled by the funds under the same management as the fund involved in the deal, and the companies in which such funds directly or indirectly hold an ownership interest equal to or higher than twenty percent (20%) of the capital stock or voting capital.
Preliminary comments: CADE’s proposed modification to the definition of economic group is positive, excluding the role of the fund manager condition in calculating the turnover. Yet, the definition of economic group remains rather broad. It is important to consider other adjustments to be made in this definition under the new regulatory framework.