The potential of minority shareholding to restrict competition is an oft-discussed subject in the antitrust world. There are many reasons to believe that a competitor’s minority participation in its rival’s business can affect the market. Even when it does not give the competitor control over its rival, such minority shareholding can generate effects that may impact competition in the relevant market, including: (i) unilateral effects regarding the reduced incentive to compete and (ii) coordinated effects in connection with the possibility of collusion. These effects, in turn, may give cause to anticompetitive practices such as the exchange of information between competitors, the interest of one competitor on the profits of its rival, the possibility of coordinated actions and the ability of one competitor to influence the decisions of other competitors and thereby reduce competition.
In Brazil, the current debate focuses on two main issues: (i) whether acquisitions of minority participation should be filed before the Brazilian antitrust system (SBDC1) for antitrust clearance and (ii) whether the decision-making agency (CADE) should use structural and behavioral remedies for such transactions. Both issues are discussed below.
Federal Law 8.884/94 (the “Antitrust Law”) defines a “concentration act” as any act or transaction that may limit or otherwise restrain free competition, or that would result in one party gaining “control” of a relevant market of products or services.2 Any such transactions must be submitted for merger review by the SBDC if the turnover in Brazil in the last financial year, by at least one of the economic groups to which one of the parties to the transaction belongs, is higher than BRL 400 million, or if the transaction results in a concentration of at least 20 percent of market share.
Therefore, it is important to understand whether acquisition of a minority position may harm competition or result in the control of relevant markets, thereby requiring that the transaction be submitted for merger review. It is also important for companies to know if minority participation could create—for antitrust purposes—a new economic group3 or if it simply would be a regular investment of a company in another without competitive concerns.
The concept of relevant influence has been addressed in the past by CADE case law. Notwithstanding the control of a company by the majority shareholder, minority shareholding can also cause some influence in the company. Sometimes, this influence can be enough to affect the competition between the companies. CADE set some parameters to identify the relevant influence of a minority shareholder,4 such as: (i) the opportunity to elect members of the board of directors and board of officers, (ii) fragmented shares among the shareholders, (iii) the possibility for the minority shareholder to exercise effective and continued influence, (iv) the existence of shareholders’ agreements that grant decision-making powers to the minority shareholder in connection with specific matters, (v) existence of a contractual relationship and (vi) provisions that allow the minority shareholder to participate actively in the company decisions.
It is also important to refer to CADE’s Precedent no. 2,5 which exempts from merger review the acquisition of minority participation by a majority shareholder since this transaction does not impact competition or the control of the company.
Going one step further, Commissioner Carlos Emmanuel Joppert Ragazzo recently declared6 that the absence of relevant influence of a minority shareholder means that the referred entities are not part of the same economic group. However, the Commissioner stated that the absence of relevant influence is not enough to discharge anticompetitive concerns.
With this latest decision, the question related to whether the minority participation would create a new economic group seems to be clarified: in the absence of relevant influence, the companies would not be considered part of the same corporate group. But the question regarding the potential anticompetitive effects of minority participation remains unanswered.
Recent Case Law and Remedies
Despite the fact that CADE previously analyzed some cases involving minority participation and the applicability of the Antitrust Law,7 the April 7, 2010, decision regarding concentration acts8 is now generally considered the leading case on the issue.
In that decision, the SBDC9 analyzed the indirect acquisition of minority shares issued by Telecom Italia S.p.A. (Telecom Italia) by Telefónica S.A. (Telefónica), two major players in the telecommunication market. Telefónica controlled two important companies in the Brazilian telecom sector (Telesp and Vivo). Telecom Italia, on the other hand, controlled “Tim,” one of the leading mobile services providers in Brazil. The acquisition of minority participation in Telecom Italia was made by Telco S.p.A. (Telco), an economic group of which Telefónica is the major investor. As a result of the transaction, Telefónica would have an indirect participation of 10.9 percent in Telecom Italia shares.
The SBDC’s main concern was the competition between Vivo and Tim, two of the largest companies in the already highly concentrated mobile service market. Specifically, the SBDC was concerned that Telefónica’s influence over Telecom Italia could restrict competition between these two companies.
In its judgment of the case, CADE provided some new guidance for identifying the relevant influence and its potential to harm the competition. First, it reinforced the concept of relevant influence previously set by the case law, focusing on the possibility of coordinated actions, the potential of one company to intervene in the decisions of the other, the interest of the minority shareholder on its rival’s profit and the possibility of an actual influence of a competitor on another. However, the case set a new parameter for the antitrust analysis of the minority participation, which is the possibility that the minority shareholder could have access to essential information.
According to the relevant precedent, a minority shareholder’s participation can be (i) active participation, when the shareholder has the control or the possibility of relevant influence over the company or (ii) passive participation, when the shareholder does not have the control or possibility of relevant influence over the company. Passive participation means the shareholder simply benefits from the company’s profits, as a regular investment but does not exercise control.
Considering Telefónica’s acquisition of Telecom Italia shares, CADE decided that even passive participation could give to the minority shareholder possible access to essential information. CADE determined that passive participation should also be divided into two types: passive participation with the possibility to access relevant information and passive participation without this possibility. With the first type, there would be concern about the anticompetitive effects of the minority shareholding, once the exchange of relevant information between the companies would be possible.10 With the second type, however, the anticompetitive concern could be discharged once it becomes clear that the exchange of information is not possible.
In order to clarify the factors to be considered in a minor shareholding acquisition, the SBDC has identified market characteristics that will be subject to heightened scrutiny, such as: (i) concentration of market shares and number of players, (ii) barriers to entry, (iii) interaction and cooperation among the competitors, (iv) regular growth of demand, (v) homogeneity of products, (vi) reduced innovation, (vii) lack of information transparency for consumers regarding prices and market conditions, (viii) possible access by one competitor to information of its rivals, (ix) lack of market regulation and (x) low investments on marketing by the players. When the market has these characteristics, the minority participation has more potential to affect competition, even if the relevant influence is not possible. As a result, the possibility and the advantages of information exchange or coordinated actions also depend on the conditions of the market and not only on the corporate relations between the companies.
Against this backdrop, the acquisition of minority shares of Telecom Italia by Telco was approved by CADE, but was conditioned on some requirements set by a Performance Commitment Agreement.11. These remedies were set basically to ensure (i) the passive participation or, in other words, the minority shareholding without the possibility of relevant influence, (ii) the elimination of interlocking directorates and (iii) the creation of “Chinese walls.” The last two remedies are especially relevant, because they aim to prevent the companies from influencing the decisions of each other and from exchanging information between them. It emphasizes CADE’s concern about the possibility of collusion and coordinated actions between the companies by the exchange of relevant information, even without active participation between rivals. Hence, the Performance Commitment Agreement sets forth behavioral remedies and partial structural remedies regarding interlocking directorates.
In order to guarantee the enforcement of the decision, ANATEL and CADE agreed to monitor the businesses of the parties in Brazil, including decisions from the board of directors and officers, market reports, independent auditing and in locus inspection. The competitors agreed to provide relevant information to both agencies in connection with their businesses in Brazil.
According to CADE precedent, transactions involving the acquisition of minority shares in various businesses are common but nonetheless subject to the Antitrust Law. In order to better assess the antitrust issues in connection with such transactions, CADE has focused its analysis of such transactions on the relevant influence thesis.
The remedies imposed by CADE in the recent transaction involving the telecom sector serve as a guideline for future minority share acquisition transactions. As illustrated by the telecom transaction, the antitrust authorities may subject the parties to significant monitoring obligations (and costs), and restrict the powers of the shareholders, in order to protect competition.
Observations in this article about Brazilian law are by Tauil & Chequer Advogados. They are not intended to provide legal advice to any entity; any entity considering the possibility of a transaction must seek advice tailored to its particular circumstances.
1. SBDC is composed of three administrative entities that are jointly responsible for the antitrust enforcement: (i) Secretariat for Economic Law of the Ministry of Justice (SDE), (ii) Secretariat for Economic Monitoring of the Ministry of Finance (SEAE) and (iii) Administrative Council for Economic Defense (CADE).
2. See Bruno Dario Werneck & Gustavo Flausino Coelho, Merger Control and Preliminary Remedies in Brazil - The Growing Enforcement of Antitrust Law, Mayer Brown Antitrust & Competition Review (Spring/Summer 2010).
3. In case the antitrust authorities consider that the acquisition of minority shareholding creates a new economic group (i.e., a wider definition of an economic group), this definition might cause the filing of more transactions that originally would not meet any threshold for antitrust review.
4. Vote from Commissioner Ricardo Villas Bôas Cueva regarding concentration act no. 08012.010293/2004-48 on February 1, 2005.
5. Precedent CADE no. 2, from August 22, 2007: “The acquisition of minority participation on voting capital by a quotaholder that already has majority shareholding does not constitute the obligation to notify (article 54 of Federal Law no. 8,884/94) in the following circumstances: (i) if the seller did not have powers granted by law, statute or contract (i.a) to appoint director or officer, (i.b) to determinate commercial strategy or (i.c) to restrict any corporate act; and (ii) if the act does not include (ii.a) non-competition clause with duration greater than five years and/or geographic scope larger than the business area of the target company, and (ii.b) any clause providing controlling powers to the parties after the transaction.”
6. Judgment of the concentration act no. 08012.008415/2009-41 on February 10, 2009.
7. For example, the concentration acts no. 08012.014090/2007-73, no. 08012.002529/2007-15, no. 08012.000476/2009-60 and no. 08012.005056/2010-11.
8. Judgment of the concentration act no. 53500.012487/2007 on April 7, 2010 (Reporting Commissioner: Carlos Emmanuel Joppert Ragazzo).
9. Please note that all antitrust cases involving the telecom sector must be submitted for analysis of the National Telecommunications Agency (ANATEL). ANATEL issues a non-binding opinion in order to assist CADE for the final administrative decision. Thus, all references to the SBDC regarding the telecom sector should also include ANATEL as an extraordinary member of the Brazilian antitrust system.
10. The disclosure of information to a rival can harm competition if it facilitates coordinated actions and collusion, which will depend on the conditions of the market. Thus, the characteristics of the relevant market must also be considered in the analysis of a minor shareholding acquisition and its anticompetitive effects.
11. The Performance Commitment Agreement (Termo de Compromisso de Desempenho - TCD) is an agreement that CADE enters into with the parties in order to set forth some conditions (remedies) to approve a transaction. Please note that the Performance Commitment Agreement is executed by virtue of the final decision by CADE.