16 June 2010
The antitrust authorities in Brazil have been increasing enforcement of that country’s antitrust laws since 1994. That was the year when Brazilian Federal Law no. 8,884/1994 (the “Antitrust Law”) was enacted, creating the current Brazilian antitrust system (SBDC),1 its enforcing authorities, regulations and structure.
The Antitrust Law is worded very broadly with respect to merger control. It defines a “concentration act” as any act or transaction that may limit or otherwise restrain free competition, or would result in one party gaining “control” of a relevant market2 of products or services. Any such transactions must be submitted for merger review by the Brazilian antitrust authorities. Even if the transaction has no impact on the control of the market, there is also a turnover threshold that must be scrutinized. A transaction must be submitted for review by the antitrust authorities 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 belong, is higher than 400 million reais.3
During 2009, the merger review process developed significantly after some interesting decisions by the Brazilian antitrust authorities. The recent fast-track procedure is one such example. Considering that most of the transactions filed before the SBDC do not lessen competition — i.e., do not present horizontal overlap or vertical integration — the two Secretariats in charge of antitrust analysis decided to create a fast-track procedure to expedite merger clearance and become more efficient. 4
The Antitrust Law appoints the Administrative Council for Economic Defense (CADE) as the decision-maker, and the Secretariats, the Attorney-General Office and the Federal Prosecutor Office’s as assistants charged with collecting the requisite information regarding a transaction and drafting non-binding opinions. CADE’s six commissioners and chairman meet and decide whether to approve the transaction or not.
In order to avoid instability, CADE needed to provide the market and its players with a solid framework governing mergers. This mission was accomplished through the issuance of CADE’s Internal Regulation5 (and its amendments6), which enhanced legal certainty. The Internal Regulation details all of the working procedures of the administrative body, types of investigations, the duties of commissioners and, in particular, the different remedies and alternatives to handle a competition case.
There are two possible preliminary remedies to address a potentially suspect merger: (i) the Transaction Reversibility Preservation Agreement (APRO); and (ii) the Preliminary Injunction. Since Brazil has a post-closing merger review system that requires the parties to file the transaction with the SBDC within 15 business days from the execution of the first bidding document, these remedies are intended to insulate the market from the possible effects of a particular transaction.7
After the filing, the antitrust authorities may determine that a specific concentration act does meet the standards for a special treatment by virtue of its potential to restrain competition in a relevant market. In these cases, CADE can suggest that the parties involved in the transaction negotiate the terms and conditions of the APRO.8 The final writing of the agreement will be approved by the reporting commissioner of the case and submitted for the approval of CADE’s board. Note that CADE has the power to address the relevance and convenience of executing the APRO with the parties and assist them in drafting an agreement that will guarantee that competitive conditions will persist throughout the merger analysis review process before the SBDC.
When market players decide to negotiate and enter into a relevant transaction in Brazil, normally there is a period when the antitrust authorities are not aware of the proposed deal. In this scenario, it is possible that third parties could file a preliminary injunction before CADE to maintain the competition status quo prior to the consummation and approval of a deal. This request is possible when the danger in the delay (periculum in mora) and the probability of the alleged claim (fumus boni iuris) are proved. Thus, such request will be decided on an expedited basis by the assigned commissioner, and timely adjudicated by CADE’s board. The CADE retains the ability to revoke or modify any preliminary injunction it grants.
The preliminary injunction may be granted ex-parte (inaudita altera pars) when the matter is considered extremely urgent. Otherwise, the commissioner in-charge will ask the parties to submit position statements within five days of the request for preliminary injunction which the commissioner will then consider in rendering his initial decision. The commissioner can also request non-binding opinions from the Secretariats and the Attorney-General's Office.
CADE’s powers to freeze the transaction’s effects by means of the preliminary injunction are very broad and can reach any corporate or business decision that may interfere with the competitive operation of the market. The Internal Ruling mentions the following acts that the parties are not allowed to do while the preliminary injunction remains in force: (i) any type of corporate amendment; (ii) change facilities, transfer or waive rights regarding assets, including trademarks, patents, and lists of clients and suppliers; (iii) use trademarks and products of the other party; (iv) change structure, logistics, distribution and marketing practices; (v) administrative changes that result in dismissal of workers and transfer of personnel to other working sites for the purpose of integration; and (vi) interrupt investment plans previously decided by the acquired company.
Please note that both preliminary remedies mentioned herein are only applicable to sensitive transactions with the potential to restrain competition. The execution of an APRO is considered the best option by CADE’s commissioners, as, theoretically, it would be more enforceable as it is a product of the parties’ agreement. The preliminary injunction is a unilateral action by the CADE and provides an opportunity for other interested parties and governmental agencies to get involved and request the preservation of competition.
Recent Case Law
Despite the economic crisis, Brazil’s macroeconomic situation in the last few years has allowed for some key mergers and acquisitions in significant sectors of the economy (energy, financial, petrochemical, pharmaceutical, telecom, engineering, retail outlets, food). In light of the SBDC’s limited resources, the relevant and complex transactions can take as long as 18 months to be finally approved by CADE.9 As a result, APROs recently were executed by the involved parties in several transactions.10
Comparatively, there is only one relevant preliminary injunction of note. In February 2010, a major Brazilian company called CSN (Companhia Siderúrgica Nacional) filed an ex-parte preliminary injunction with respect to the acquisition of shares of the Portuguese company Cimpor by the Brazilian cement company, Votorantim. Cimpor is a cement company, and the transaction involved Votorantim and the French cement company Lafarge. The complaint was based on CSN’s knowledge of confidential and strategic information about Votorantim, which had announced the purchase of 17 percent of Cimpor from Lafarge, and the growing concentration in the Brazilian cement market. Note that this transaction had not yet been submitted to CADE for approval, but the preliminary remedy allowed CSN to request the preservation of market conditions.
The opinion of the Secretariat for Economic Law of the Ministry of Justice (SDE) was delivered four days after the preliminary injunction was filed. In it, the SDE agreed with CSN’s claim and recommended that CADE grant the order. However, the involved parties — Votorantim, Lafarge, and Camargo Corrêa — requested the negotiation of an APRO, which was the commissioner’s choice.
Consequently, one month after the initial complaint by CSN, CADE’s board approved the execution of three separate APROs by the companies involved. CADE’s board did this in order to maintain the status quo, including the protection from disclosure of all of Cimpor’s commercial information, until CADE’s final decision regarding the “concentration act.”
This recent decision confirmed SBDC’s preference to execute APROs and avoid unilateral preliminary injunction decisions. But this decision also highlights the importance of a third-party claim before the Brazilian antitrust authorities. Even if the injunction is not granted, the execution of an APRO is a success as the practical effects are the same.
In February 2010, the closing of another major transaction involving Pão de Açúcar and Casas Bahia, two great economic groups in Brazil, also resulted in the execution of an APRO. Because of the overlapping of functions between the two groups (several small- and medium-sized cities have retail stores held by the two groups) and the potential abuse of market power created by the new combination, CADE negotiated an APRO with the companies to prevent any anticompetitive effects until it could review the transaction in more detail and issue its final decision on the substance.
According to the terms of that APRO, the parties agreed to keep: (i) the normal functioning of the several stores, including the normal amount of employees; (ii) the normal operation of the distribution centers; (iii) the intellectual rights, trademarks and investment in propaganda and marketing duly separate; (iv) the commercial structure duly separate, including the agreements with respective suppliers; (v) the separate entities and the operation of the furniture provider of Casas Bahia; and (vi) the credit concession policy of the companies in all stores. By addressing the main concerns about the transaction in the APRO, the Brazilian antitrust authorities were able to secure additional time to analyze and discuss the competitive impacts of the deal and best evaluate the possibilities of approval.
The availability of preliminary remedies under the Antitrust Law confirms that Brazil is on the right track in developing its antitrust enforcement. Merger control is essential for that purpose since it allows the SBDC to have updated information from the different relevant markets and to control ex ante potential abuses of a dominant position.
In a global market, international mergers and acquisitions take place every now and then, and it is important to comply with local antitrust laws in order to avoid problems before, during and after the deal is consummated. In Brazil, the Antitrust Law allows post-closing notification of the transaction, and its completion is not delayed by virtue of the SBDC analysis period. Thus, the normal scenario is to complete the merger or acquisition and then wait for the authorities’ approval. However, as explained above, there are other ways to stall a transaction in Brazil while it is being duly analyzed by the SBDC and thereby avoid potentially anticompetitive behavior that may cause irreversible damage to the relevant market.
In order to avoid these types of situations, large companies that are contemplating substantial mergers in Brazil should consider voluntarily negotiating an APRO with the Brazilian antitrust authorities and thereby avoid the hassle of a third party challenge to the transaction.
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. The control of a relevant market of products or services is presumed when one of the parties involved in the transaction or the resulting entity owns 20 percent or more of a certain relevant market. This market share criterion is one of the thresholds established by the Brazilian Antitrust Law.
3. The decision to limit the turnover requirement to Brazil (and not worldwide) can be considered as an improvement fostered by CADE to avoid the analysis of transactions with no domestic effects. This restriction was established by Precedent n. 1, published in the Brazilian Official Gazette on October 18, 2005.
4. Joint Ordinance no. 1, as of February 18, 2003, issued by SDE and SEAE.
5. Resolution no. 45, of March 28, 2007, issued by CADE.
6. Amended by Resolutions no. 46, as of September 4, 2007; no. 47, as of June 4, 2008; no. 51, of February 4, 2009; and no. 52, as of May 13, 2009.
7. The preliminary documents, such as MOUs and LOIs should be reviewed to make sure that they will not be seen as the first bidding documents executed by the parties for purposes of triggering the obligation to institute a merger review proceeding before the Brazilian antitrust authorities.
8. Although unusual, the parties also have the right to request the negotiation and execution of the APRO by CADE.
9. The Brazilian Constitution grants the right to any company or citizen to appeal to the judicial courts against any administrative decision. Thus, CADE’s final decision can be challenged before the judiciary branch. Recently, CADE has faced several challenges against its decisions to condemn parties for antitrust violation before the Brazilian courts.
10. For quick reference, the following is a list of relevant transactions that were subject to APROs: (i) Oi–Brasil Telecom (2008); (ii) Medley–Sanofi-Aventis (2009); and (iii) Sadia–Perdigão (2009).