The purpose of a merger control regime is to assess, normally prospectively, the net competitive effects of a given transaction and to provide for remedies that preserve competition otherwise believed to be lost as a result of a given transaction. The fundamental merger control question across most jurisdictions is whether, as a result of a proposed transaction, competition will be lessened or distorted significantly enough to result in higher prices, lower quality or output, or reduced innovation. The stakes are high – strategic deals that could change the trajectory of a buyer for years to come can be blocked in their entirety. Lesser, but nonetheless significant, maladies are major delays to closing a transaction to comply with merger control requirements and conditions imposed on transaction parties, including divestitures. Merger control regimes also present an opportune platform for strategic mischief by complaining rivals. In short, merger control can be a snake pit for the unaware and unprepared.
Merger control led the wave of antitrust reforms seen in Latin America in the 1990s, when antitrust enforcement became more prominent in the context of economic liberalisation efforts throughout much of the region. In those early days, the greatest challenge for national antitrust authorities was developing an awareness for antitrust rules, or “antitrust culture”, where none previously existed. More than two decades later, and after considerable success making antitrust relevant, the region is well into a new wave of antitrust development, this time towards international enforcement convergence, with merger control in the region becoming more sophisticated and aligned with international practice.
Against this background, since 2011 many countries have revised their merger control legislation, generally with the objective of improving effectiveness and predictability; this review process remains ongoing also in the form of secondary legislation and soft law. In Brazil, the merger regime was heavily modified in mid-2012 to, among other changes, require pre-merger notifications with suspensory effect, establish higher filing thresholds and restructure the merger review process. Since then, CADE has issued secondary legislation on many topics – most recently, in 2015 CADE published a guidance paper on gun jumping, and established a formal consultation procedure; in 2016 CADE issued guidelines on the review of horizontal agreements and on compliance programmes, defined new rules for the mandatory filing of collaborative agreements and formally set a soft deadline for the review of cases under fast-track procedure. In Mexico, legislative reforms implemented in 2013 and 2014 streamlined the merger review process, created two authorities responsible for antitrust enforcement (one exclusively for the telecommunication sector) and created specialised competition courts; a new federal competition law was enacted, introducing mostly procedural changes to the Mexican merger review process. Continuing this process, in 2015 COFECE published merger control criteria to calculate the Herfindahl-Hirschman Index to measure market concentration. In Colombia, in 2015 the SIC issued a resolution to clarify, among other aspects, the application of turnover thresholds, the time frame for merger review, as well as the possibility to carve out or hold separate assets or businesses that might affect competition in Colombia until review is complete, while closing the transaction abroad in international deals. In 2016, Chile approved significant changes to its (previously voluntary) merger control regime – notably to introduce a mandatory pre-closing notification obligation, prohibit interlocking directorates between competitors and require post-closing notification of acquisitions of 10 per cent or more shareholdings in competitors; the FNE issued regulations fixing the notification thresholds and the timeline for merger review that shall be in force in Chile as of mid-2017, to implement this new regime. Costa Rica reformed its previously voluntary merger control regime to become mandatory as of 2013. Ecuador and Paraguay enacted merger control legislation for the first time, respectively, in 2011 and in 2013; they issued corresponding implementing legislation, respectively, in 2012 and in 2014.
Changes to merger control laws and regulations are being discussed in Argentina, El Salvador and Peru. In Argentina, the new government has put competition enforcement back on the map, announcing a number of initiatives that include restructuring the competition authority, training personnel, reviewing internal procedures to expedite decision-making, increase cooperation with other antitrust authorities and amending the current antitrust law to include a premerger notification regime to replace the post-closing one it has in effect today. In El Salvador, reforms are being discussed in relation to merger notification thresholds and to clarify the scope of economic efficiencies, among other issues. In Peru, the Congress is considering a bill that will introduce a mandatory merger control regime.
Overall, most economies in Latin America today have a merger control regime in place, and most of these prohibit closing pending a review. Brazil, Chile, Colombia, Costa Rica, Ecuador, El Salvador, Honduras, Mexico, Nicaragua, Paraguay and Uruguay are among the jurisdictions now with pre-merger notification obligations. One notable exception is Argentina, where post-closing notification remains the norm, although, as mentioned, reforms are being discussed to implement a pre-merger regime. In Panama and Venezuela notification is voluntary, but the enforcement authority can investigate and modify a transaction post-closing if it is found to violate national competition law. Bolivia and Peru require previous authorisation for mergers in certain regulated sectors or industries, such as utilities and banking (Bolivia) and electricity (Peru).
M&A activity specific to Latin America slowed down in 2015 and 2016 compared with prior years, when the region experienced strong M&A activity while the financial crisis wreaked havoc around the world. The social-political and economic challenges affecting different countries in the region – during this period are likely to have had an impact on the M&A environment. Notably, corruption scandals continue to proliferate in Brazil, fuelling persistent internal unrest following the impeachment of the country’s president. Declining commodity prices have also had a negative impact on growth of the region as a whole, and exchange rate variations have caused the value of Latin American currencies to drop. That said, as a firm, we have been involved on a number of significant M&A assignments in the region over the past couple of years and continue to see strong interest from corporates and private equity funds to invest and acquire businesses across borders in Latin America. In addition, the region’s current distress has also created interesting investment opportunities as the dollar-value of assets decreases and distressed companies sell their businesses. The region’s long-term growth potential, due in part to growing middle classes in certain countries, also attracts investors. Recent regulatory reforms, particularly in Mexico, have helped to foster dealmaking. Overall, although the outbound expansion of Latin American companies may have stalled, inbound investment (including private equity investment) in the region has gained further traction, with an emphasis on the countries that form the Pacific Alliance (Colombia, Chile, Mexico and Peru). Expectations are that both Latin American and international companies will continue to build businesses across the region.
Noteworthy examples of intra-regional deals – in 2015 include Empresas Públicas de Medellin of Colombia – acquiring the water division of the Chilean Antofagasta Plc for US$960 million. In Brazil, Banco Bradesco SA bought HSBC Holdings Brazilian unit for US$5.2 billion. Within Mexico, retailer Organizacion Soriana bought over 140 stores from Controladora Comercial Mexicana for US$2.6 billion; Grupo Trimex acquired Grupo Gruma’s wheat flour operations (Molinera de Mexico) for US$260 million. In 2016, Mexico-based Femsa, the largest bottler of Coca-Cola in Latin America, agreed to acquire Brazilian bottler Vonpar for US$1.9 billion. In Brazil, stock exchange and futures market operator BM&FBovespa SA agreed to acquire Cetip SA for US $2.6 billion. Argentina’s Pampa Energia SA acquired a majority stake in Petrobras Argentina SA for US$1.2 billion. Mexican Grupo Lamosa acquired Ceramica San Lorenzo, with activities in Chile, Peru, Colombia and Argentina, for US$230 million. Chilean port operator SAAM SA acquired a majority stake in Costa Rica’s Puerto Caldera for US$48.5 million.
Examples of deals involving Latin American targets in 2015 include American AT&T’s acquisition of Mexican Lusacell for US$1.8 billion; US-based Owens-Illinois’s acquisition of Mexican Vitro for US$2.1 billion; Israeli Teva Pharmaceutical Industries’ acquisition of Mexican Rimsa for US$2.3 billion; British American Tobacco’s acquisition of control in Brazilian Souza Cruz for US$3.5 billion. Relevant examples in 2016 include French Vinci’s acquisition of Peruvian toll road operator Lamsac for US$1.6 billion; Canadian Brookfield Asset Management’s acquisition of a majority stake in the Colombian power generator Isagen SA for US$2 billion; China-based CMOC’s acquisition of the Niobium and Phosphates' Brazilian businesses of Anglo American plc for US$1.5 billion.
While M&A activity in the region has been relatively tame compared to previous periods, merger control enforcement has continued to be brisk, with antitrust authorities actively blocking or imposing conditions to clear concentrations, as well as investigating gun-jumping cases. For example, in 2015 the Mexican authority blocked IEnova’s planned purchase of Pemex’s 50 per cent interest in a gas pipeline joint venture, determining that Pemex had to sell such assets through a public bid; the parties restructured the deal and COFECE ultimately approved it in 2016. Also in 2015, COFECE imposed restrictions on the number of stores that Soriana could acquire from Comercial Mexicana and imposed gun-jumping fines of US$1.5 million to Alsea and US$174,000 to Grupo Axo for failing to notify a merger executed in mid-2013. In 2016, COFECE imposed conditions to approve a joint venture between Delta Airlines and Aeromexico to operate flights between Mexico and the US, ordering the airlines to divest landing and take-off slots at Mexico City’s international airport and to eliminate duplicities in routes where they both operated. In Brazil, in 2015 CADE blocked Tigre’s acquisition of Condor, both paintbrush producers, claiming that the merger would significantly increase concentration in market with high entry barriers and limited rivalry, and dismissing the remedies offered by the parties as insufficient to address such concerns. Between 2014 and 2016, CADE imposed structural and behavioural remedies to clear complex mergers, including that between Kroton and Anhanguera in the education sector; ALL and Rumo in the transport sector, Telefónica and GVT in the telecommunications sector, Ball and Rexam in the beverage can industry Banco Itau and MasterCard in the e-payments sector and Banco Bradesco and HSBC in the financial sector. In 2016, as of this writing, CADE’s General Superintendency issued an opinion against the approval of a joint business agreement between LATAM Airlines, British Airways and Iberia, under the argument that high market concentration (70 to 80 per cent share in the route between Sao Paulo and London, and 50 to 60 per cent between Sao Paulo and Madrid) made it difficult for new entrants to compete; CADE’s Tribunal is now going to hear the case. In 2016 alone CADE imposed at least six fines for gun-jumping or untimely notification, ranging between US$200,000 to US$8.5 million. CADE imposed the record fine of US$8.5 million in relation to Technicolor’s acquisition of a Cisco Systems’ subsidiary because the parties announced the completion of the deal while CADE’s review was still pending and CADE rejected the effectiveness of the carve-out agreement the parties signed to shelter Brazilian assets. CADE went beyond fines in punishing gun-jumping with respect to the Blue Cycle Joint Venture between distributors of spare parts for bicycles. CADE declared the transaction void and ordered the parties to return to the original status quo (eg, suspending all ongoing contracts with suppliers and customers), until CADE concluded its review.
Proving the relevance of merger enforcement in the region, between 2014 and 2015 authorities from Mexico, Brazil and Chile imposed remedies to clear Continental’s acquisition of Veyance. In Colombia, in 2015 the SIC imposed remedies to clear transactions, including those between Grupo Argos and Grupo Odinsa in the infrastructure sector, and between Pepsi and Postobon in the beverages sector. The SIC also blocked two deals involving fuel distributor Terpel: it blocked the acquisition of retail aircraft fuel distributor Aviacom, finding that otherwise Terpel would both increase its dominance in the upstream market and consolidated its monopoly position in the retail market; and it blocked Terpel’s application to become the exclusive operator of the fuel network in one of Colombia’s airport, finding that the fuel network is an essential facility and Terpel would have a significant competitive advantage if it acquired such network. In Chile, in 2015 the FNE imposed remedies to approve Electrolux’s acquisition of GE’s interest in its Chilean distributor – Controladora Mabe; Electrolux had to waive statutory rights that enabled it to influence MABE’s board decisions, as well as create a Chinese wall to prevent the sharing of confidential information.
The combination of M&A activity and the labyrinth of different merger control rules (with different and increasingly powerful antitrust authorities actively enforcing such rules) can result in a complicated and difficult situation for dealmakers and their counsel. Developing a coherent regulatory approval strategy in advance of any significant investment – particularly where the target operates in more than one Latin American jurisdiction – is critical.
This reference section aims at offering a quick, practical, and yet comprehensive view of the merger control rules in force in different Latin American jurisdictions so as to allow an assessment as close to reality as possible concerning the requirements, delays and risks involved in the notification process. For this purpose, this section describes the procedural aspects and substantive tests applied in each jurisdiction, as well as covering the latest enforcement trends and the most relevant precedents in the appreciation of merger cases by local authorities. This section further attempts to offer a view on practical aspects such as the risk of prohibition and imposition of remedies in each country, which have proved to be material in many jurisdictions.
By Michael G Egge and Rita Motta