The Uruguayan Government recently enacted law number 18.159 named "Trade Freedom and Free Competition Preservation Act" (Libertad de Comercio y Preservación de la Libre Competencia) (the "Antitrust Act") which included, for the first time in Uruguayan statutes and aside from provisions regarding anticompetitive conducts, a type of pre-merger control approval in certain specific cases (economic concentrations). Such law becomes effective during the first week of August 2007.
Based on that circumstance there are no precedents that may guide our conclusions concerning the application of the abovementioned provisions and, consequently, the following report is solely based on our interpretation of the Antitrust Act.
"Economic concentrations" are generally considered as operations which modify the relationship among agents that operate in the market and that affect or may affect the ownership of the firms which operate in a certain market sector or of certain assets, number of firms, independence of their administrators, etc, and which have the potentiality to modify or affect the market structure. For this reason, economic concentrations have been the subject of regulation in most of the jurisdictions with competition laws.
The Antitrust Act introduces provisions directed towards having a mechanism of notification of certain operations (with some exceptions) and in certain cases, previous authorization.
2. Analysis of the Antitrust Act
2.1. Definition of "economic concentrations"
Article 7 of the Antitrust Act establishes that any act of economic concentration when certain thresholds are exceeded (and are defined as "Covered Transactions" for the purposes of this report) must be notified.
Second paragraph of the same Section provides that "for the purpose of interpreting this article, it will be considered potential acts of economic concentration those operations that imply a modification in the control structure through: mergers of companies, acquisition of shares, quotas or participations, acquisition of business as an ongoing concern, total or partial acquisition of corporate assets, and any other type of legally valid agreements which imply transferring the control of all or part of the economic units or enterprises". Such transactions must be notified to the enforcement agency by the relevant companies 10 (ten) days prior to the completion of the transaction (change in control).
Very briefly, below you will find a description of the hypothesis regulated under Section 7:
- Mergers. All types of companies' mergers regulated in Uruguayan Companies' Law N° 16.060 are covered.
- Acquisition of shares, quotas or social participations. This also addresses a case of transfer of control of the companies resulting as a consequence of the transfer of such assets.
- The acquisition of commercial, industrial or civil establishments.Transfer of business as ongoing concerns or business units will qualify. However, it is not clear, nor can it be inferred by the legislative records, what was meant by "civil establishments".
- Total or partial acquisition of assets. Since the Antitrust Act does not specify what type of asset acquisitions shall be considered included, acquisitions which imply a transfer of control of the productive units should be covered by the Antitrust Act. Bear in mind, that the word "assets" could include any type of asset (tangible or intangible).
- Any other type of business that imposes a transfer of control of total or part of an economic unit or companies. This is a residual category by which any other form of business and / or agreement that results in a transfer of control would be included.
2.2.1. Transactions that shall be notified
The Antitrust Act requires the relevant companies to notify to the competition authority (Comisión de Promoción y Defensa de la Competencia, hereinafter the "Antitrust Commission") - ten days prior to closing – about the occurrence of an economic concentration operation that qualifies as a Covered Transactions (as defined below).
For the purpose of the notification term, it will be crucial to determine the moment when the transfer of control (which triggers the obligation to notify) is effectively achieved and this determination will depend, among other things, on the terms and conditions and type of the economic concentration operation under analysis. Through the Antitrust Act and for the first time in Uruguay, a system of notification is introduced.
It is relevant to stress that the aim of the notification is not to obtain a clearance for the Covered Transaction (which is only required in cases where a "de facto monopoly" is in place, please see 2.3 below) but to notify the Antitrust Commission of the occurrence of an economic concentration operation that qualifies as a Covered Transaction: thus, the Antitrust Commission could not object the notified Covered Transaction.
In other words, the objective of this notification is to give the Antitrust Commission information about the occurrence of Covered Transaction so that the competent agency is aware of such "economic concentration" and consequently gains knowledge about sectors of the economy in which it could be more likely that anticompetitive practices or abuse of a dominant position may take place.
According to Section 7 of the Antitrust Act, notification filings are mandatory- whichever type of concentration- when one of the following conditions are met (each a "Covered Transaction"):
a) When, as a consequence of the operation, a market share equal or higher than 50% is reached. This alternative does not take into account the volume of the concentration operation, but the market share participations of the parties involved or, more precisely, of the resulting structure. The implementation of this criterion allows to include - within the notification process - certain transactions that would probably cause relevant changes in the market structure. In order to determine whether a company does or does not have a certain market share, the relevant market should be determined by the parties involved.
b) When the gross annual turnover in Uruguayan territory of the group of participants in such operation, in any of the last three accounting years, is equal or superior to 750.000.000 Indexed Units (equivalent to approximately US$ 50.000.000 (fifty million United States dollars). This is a much more objective and precise criteria than the one mentioned in (a) above.
2.2.2. Exceptions to the obligation to notify
Section 8 of the Antitrust Act establishes that the obligation to notify provided by Section 7 is not required in the following cases:
(a) The acquisition of companies in which the buyer is the holder of at least 50% of the shares of the former. The idea behind this exception is that in said case, there is no real transfer of control.
b) The acquisition of bonds, debentures and securities or any other debt instruments issued by the company, or the acquisition of shares with no voting rights. In the same line, the acquisition of said instruments does not imply a transfer of equity control.
c) The acquisition of a sole company on behalf of a foreign company that did not previously possess assets or shares in other Uruguayan companies. This is a very common exception in other jurisdictions, and would exempt first investments ("first landing" in the country) thus avoiding time consuming processes that could discourage the investment.
d) The acquisition of companies, declared bankrupt or not, with no activities in the country in the last year. This is normally included with the objective of facilitating the purchase of companies with no activity or in distress, and to avoid liquidation or other similar procedures of the company.
2.2.3. Consequences of non-compliance
The Antitrust Act provides that the Antitrust Commission shall regulate the formalities and content of the notifications to be sent, as well as the corresponding non compliance sanctions, in line with Section 17, 18 and 19 of the Antitrust Act. Although it is not expressly stated, we believe that sanctions may be imposed in case the notification obligation has not been observed. We do not anticipate that said sanction would be a large amount except of course, when the competition authority concludes that the economic concentration is creating a "de facto monopoly" in which case (assuming that the competition authority would have decided to block the proposed transaction had it been notified) the Antitrust Commission could argue that: (i) it should have requested the prior authorization and (ii) consequently, argue that, as of closing date (transfer of control), the parties should have conducted their business as independent units.
2.2.4. What the Antitrust Commission could do upon notification ?
One must bear in mind that the Antitrust Act has not established a term for the Antitrust Commission to issue an opinion regarding the notified Covered Transactions (which would have been highly convenient), nor has it established the tasks and duties of the Antitrust Commission, reason why we believe that the Antitrust Commission is not legally vested with the authority to question the notified Covered Transaction.
In these cases, we believe that the Antitrust Commission must simply take notice of the existence of said concentration operation and in no case may question it, except, of course, if it considers that the operation falls into the realm of Article 9 (to be analyzed below in this report). Hopefully all these pending topics will be addressed by future regulations.
2.2.5. Subsequent control by the Antitrust Commission. Periodic information
Although no authorization or permission would be required in connection with the concentration operation, if it deems it convenient or necessary, the Antitrust Commission is authorized to require periodic information to the participants (which have filed the notification of Covered Transactions) in order to follow-up on the prevailing market conditions. Through this channel, control on behalf of the Antitrust Commission is not limited to the moment of receiving the notification, but may be continued later, at the discretion of the Antitrust Commission through the request of periodic information.
2.3.1. A "de facto monopoly". A sole market participant ?
The Antitrust Act requires in Section 9 prior mandatory filings in those cases in which the economic concentration operation ultimately results in a "de facto monopoly". Unfortunately, it is not clear what is meant by a "de facto monopoly", nor results from the legislative records. Probably this issue will be clarified by future regulations.
Nonetheless, we believe that the expression "de facto monopoly" has been simply used as opposed to "legal monopoly", and it actually refers to a market structure where there is a single participant and no close substitutes for consumers.
This would be so due to the following reasons: (a) from an economic point of view, it is clear that a monopolist is the only participant in a particular market. This has been the interpretation of foreign doctrine on the matter, that indicates that a monopoly consists of a market structure in which a sole company provides a product for which there are no close substitutes for all the consumers. There are no doubts concerning this concept, and b) this is a logical and reasonable interpretation to Section 7 and 9 of the Antitrust Act. In other words, if a monopoly is something different to a sole company holding 100% of the market, then we wonder when are we faced with a case which falls into the realm of Section 7 and when in turn does it fall within the scope of Section 9. As a consequence we conclude that this results because Sections 7 and 9 regulate different situations. Hence, section 7 foresees the notification of certain concentration operations that qualify as Covered Transactions (because they generate or might generate highly concentrated structures) while Section 9 refers to situations when a monopolistic situation has been achieved.
However, we must not discard the possibility that a future regulation (beyond the scope of the Antitrust Act) considers that the expression "de facto monopoly" includes those situations which are not a monopoly but can be assimilated to a monopoly (what the European Union considers a "near monopoly") and that refer to highly concentrated market (around 90 % of the market share) segments or structures that are presumed to have the same or very similar negative impacts, as a monopoly of a 100% market share.
In addition, and regarding criteria that should be taken into account by the Antitrust Commission in order to determine if an economic concentration qualifies as a "de facto monopoly", the Antitrust Act provides that the Antitrust Commission should consider and analyze factors such as the relevant market, external competition and efficiency gains in each case. Once notified, the Antitrust Commission will have a 90 day term to issue an opinion regarding the transaction. If there is no opinion within this time frame, clearance is automatically granted.
2.3.2. Failure to file prior notification requesting authorization, in case of monopoly
In order to review the effects of an authorization request failure, it is relevant to analyze the nature of the act of prior authorization in order to determine if it constitutes a validity requirement or, instead, an effectiveness condition of the operation.
Section 9 simply establishes that "in the cases in which the economic concentration act implies the conformation of a de facto monopoly, the process must be authorized by the competition authority" without stating the consequences of a non compliance or omission.
Given the lack of an express legal provision in the Antitrust Act declaring "null" and "void" those eligible operations where the prior request seeking authorization was not filed, there are enough reasons to conclude that such authorization is not a validity requirement. Indeed, our current statutes provides that unless the law clearly state a nullity effect resulting from a non compliance, validity is never at stake Consequently, the fact that Section 9 does not establish such consequence (nullity), implies, that the parties may choose to validly close an operation in absence of prior authorization for such operation.
Finally, if the Antitrust Commission concludes that the entity resulting from such concentration operation (which failed to notify or request authorization, as the case may be, to the Antitrust Commission) qualifies as a de facto monopoly, we anticipate (although no specific regulations have been enacted in this respect) the two following scenarios as feasible:
a) If the concentration operation that was not notified was finally approved whenever the Antitrust Commission became aware of its terms and conditions, we anticipate that the Antitrust Commission would most probably conclude that the relevant parties failed to comply with the Antitrust Act, and may impose a fine (but without further consequences).
b) If on the contrary, the Antitrust Commission rejects the concentration operation, it is likely: (i) that penalties could be applied under the Antitrust Act resulting from the violation (ii) that said penalties could be higher if the monopolistic company resulting from the concentration were to operate as a de facto monopoly after closing, with adverse effects on consumers, and (iii) that the Antitrust Commission orders the company to cease to operate as a unified decision-making unit.
2.3.3. Possibility of imposing conditions in order to award clearance
Although included in the first draft law of the Antitrust Act, there is no provision in the ultimately enacted wording of the Antitrust Act addressing the possibility of an authorization being granted subject to conditions required by the Antitrust Commission.
The fact that this article was eliminated, may be interpreted in the sense that the intent of the representatives and senators that participated in the discussion within the approval process, was to eliminate any type of condition to authorize a "de facto monopoly" and therefore conclude that the Antitrust Act does not vest the Antitrust Commission with the authority to demand any conditions in exchange for the clearance.
Anyhow, upon rejection, parties may always file a new petition specifically addressing in it those problematic issues, so that the likelihood of obtaining a clearance is higher.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.