There have been several drivers behind the rapid growth and evolution of antitrust legislation in Latin America. The first has been Latin America’s transition to a free market economy in the nineties coupled with a desire to catch up with Europe and the US. Legislation has been framed and shaped in the context of US and EU law.
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Francisco Todorov, |
Mexico’s antitrust laws have their roots in NAFTA and as trade between Mexico and the US strengthens, their laws are becoming more intertwined. Mexico’s Comision Federal de Competencia (CFC) and the US Department of Justice and Federal Trade signed an agreement on the application of its antitrust laws last January. Both countries agreed to take jurisdiction in antitrust matters and prosecute anticompetitive conduct when the antitrust authority of the other country requests prosecution. For example, the US authority can request the CFC to investigate and prosecute anti-competitive practices originating in Mexico that are affecting a US company in the US market. The CFC and the FTC must also exchange information on any application of its competition laws that may affect the interests of the other country. US law has had more influence in Mexico than in, for example, Brazil, where elements of anti-trust law are modelled on the EU’s Treaty of Rome.
The second impetus has been a concern to prevent companies from forming cartels, or colluding to control prices in their markets. Francisco Todorov, antitrust associate with Trench Rossi e Watanabe in Brasilia, points to the desire to avoid cartels as the driving force behind Brazil’s legislation. Brazil’s Economic Law Office of the Ministry of Justice (SDE) initiated 10 new cartel investigations since the middle of 1999 and is the first non-OECD member country to formally associate itself with the 1998 Recommendation of the OECD Council Concerning Effective Action Against Hard Core Cartels.
This means that antitrust law must be placed in the context of other measures to regulate competition. In Brazil, companies must notify Brazil’s Administrative Council for Economic Defence (CADE) of any merger that would involve a company controlling over 20% of a market. In Mexico, the CFC must be notified on all mergers and acquisitions putting combined assets or sales over $219.5 million. But in Chile the authorities do not require notification on the majority of mergers, although the banking sector is an exception. The antitrust authorities can prevent mergers if the outcome means one financial institution controls more than 20% of the market.
Pruning back politics
Decisions to prevent mergers can become politically contentious. One benefit of introducing legislation and merger review procedures is that it removes some of the controversy from the process by putting responsibility in the hands of independent bodies. Brazil’s antitrust body is made up of three agencies, two of which are government agencies: the Economic Law Office of the Ministry of Justice (SDE), the Secretariat for Economic Monitoring of the Ministry of Finance (SEAE) and one independent agency (CADE) made up of officials appointed on two-year terms by the President. SEAE, a government agency, has initiated several investigations into cartels. Since it fined the three members of the Brazilian Steel Institute in 1996 for colluding to hamper competition in Brazil’s steel market, it has instigated investigations into the aluminium, civil aviation, maritime transport and pharmaceutical industries. Brazil wants to consolidate these agencies into an independent body but opposition politicians oppose any changes to legislation by a “provisional measure”, or a ruling by the President, says Todorov. They want the legislation to pass through congress first.
The difficulty in Chile is that, with no specific antitrust legislation and no procedures for pre-approval, dealmakers are playing a lottery every time they embark on a transaction. “In many cases there is little choice but to go ahead and then wait for the reaction of the authorities,” says Rodrigo Ochagavia, a partner at Claro y Cia in Santiago. Seeking guidance in advance is hazardous, not least because there is no set time for a response.
Chile is also considering reforms that would make the antitrust authorities more independent. Chile’s antitrust body comprises regional commissions and a national commission with members appointed by the administration in office. As there are no set procedures the decision to investigate mergers is taken by the head of the antitrust body. Rodrigo Ochagavia, partner with Claro y Cia in Santiago explains this means decisions change with each administration. Under the Frei administration, the head of the antitrust authority took a very active approach. The agency initially blocked, on vertical integration grounds, the Spanish energy company Endesa’s efforts to expand its presence in the energy sector by buying Enersis’s generation assets. The antitrust body was concerned that Endesa would own generation, distribution and transmission assets giving it a monopoly in the electricity market. Ochagavia says the merger was eventually approved because according to Chile’s electricity regulations, Enersis is unable to raise prices. Endesa also volunteered to sell transmission company Transelec and sold it last April to Canadian energy company Hydro Quebec.
But since the Lagos administration came in, the authority has been less interventionist, says Ochagavia.
The Pitfalls of Regulation
Antitrust legislation clearly makes sense to provide a predictable framework for executing M&A transactions. The antitrust authorities in Chile are considering how to improve legislation and may set out procedures for pre-approval. That said, a framework can also prove too restrictive, as it did initially when Argentina introduced new rules two years ago.
Until recently, the acquisition of assets in Argentina by multinationals was a painful experience: any transaction in which the purchaser had a worldwide business in excess of $2.5 billion was subject to scrutiny. Even the purchase of a small building or a gas station by a huge oil company fell within the reach of the National Commission for the Defense of Competition.
Sensibly enough, Argentina has reformed its legislation. The revisions enacted by Decree 396/2001 last April mean only mergers valued above the de-minimis exemption, or threshold amount, of $200 million need to be reported to the authorities. The changes are designed to encourage inbound investment. Given Argentina’s overall economic difficulties, it does not make sense to impose what Aranovich describes as “red tape.” Argentina is clearly on the right track.
Regulations can also be a headache when they are not applied consistently or transparently. In Mexico, says Alejandro Delgado, a partner with Santamarina y Steta, “You usually have a sense of whether or not there is a problem or some workable difficulties,” when a proposed transaction is submitted to Mexico’s Federal Commission on Competition (CFC). Luis Santos says there can be problems because of the novelty of the legislation and the fact that it is written in an “economical” style. This leaves room for several interpretations. In Brazil, where mergers and acquisitions must be submitted to CADE 15 days after the deal is consummated, there has been confusion over the “trigger date.” The parties must notify CADE of the merger 15 days after the signing of the “first binding document” unless on an earlier date the “competition relations” between the parties are altered, resulting in “effects on the market.” Over three quarters of fines imposed by CADE in 1999 were for late filings.
Regulators show their mettle
Privatised companies have also found themselves on the receiving end of activist antitrust authorities. Last year, Mexico’s CFC ruled against the merger between Grupo Televisa’s Sistema Radiopolis and Grupo Acir Comunicaciones. Televisa would have owned the largest radio broadcasting group in Mexico in addition to being Mexico’s largest television broadcaster. The CFC said at the time that the merger would give Televisa the capacity to fix advertising prices unilaterally. CFC also ruled in February 1998 that the privatised national telephone company, Telefonos de Mexico (Telmex), was dominant in five markets. The commission is now examining conditions in the domestic market for liquefied petroleum gas (LPG), which could presage a similar ruling.
But enforcing such rulings is not easy. Industry regulators, such as Cofetel, Mexico’s telecommunications regulator, have the final say on translating recommendations into rulings. Cofetel adopted some of the CFC’s regulations on Telmex but not others. It required Telmex to reduce its local telephony services from 1,500 to 485 over a five-year period. It also required Telmex to wait 24 months before starting its wireless mobile phone operations.
In Brazil, the impact of reformed antitrust agencies was felt when Brazil’s largest beer companies, Brahma and Antartica, wanted to merge in March 2000. Brahma controlled 25% of Brazil’s national market and Antartica controlled around 50%. The next largest company in Brazil with a 15% market share was Kaiser, which is owned by Coca-Cola Company. Both SEAE and SDE investigated the merger and recommended that the newly merged entity, American Beverage Company (AmBev), divest its Bavaria brand, previously owned by Antartica, and sell Bavaria’s breweries and distributions systems in different regions across Brazil. It also wanted AmBev to open up its distribution systems to five regional breweries as well as put its production facilities up for sale if it decided to close them. CADE enforced the recommendation with a ruling.
Lawyers do not see the competition authorities as impeding privatization, although these authorities shape the competitive framework within which privatized utilities and companies operate. They are also playing a far more influential role in defining the structure of these new companies. The CFC authorized the merger between Grupo Financiero Banamex- Accival (Banacci) and Citigroup in July, but recommended the company restructure its interests in some of its companies. It must amalgamate two pension funds, Garante and Banamex Aegeon, withdraw its share in the capital stock of Servicios Electronicos Globales (E-global) and sever links with Grupo Financiero BBVA Bancomer.
Framework for the future
Brazil’s main focus of change is increasing the system’s efficiency. The creation of a single National Agency for Competition and Consumer Protection to streamline the evaluation process and set new thresholds for investigation is underway. Presently, any merger involving a company with more than R$400 million (US$147 million) in sales worldwide is subject to review: the new rules would apply only to deals involving R$150 million (US$59 million) of sales within Brazil. This will allow the authorities to focus on the important cases and oblige them to conduct review mergers within 120 days. The AmBev case took nine months to be reviewed by the three separate authorities.
The proposals in Brazil have not been universally endorsed. Francisco Todorov says, “We think it’s a good idea to rationalize the process.” But, he adds, “There is a debate about the beneficial impact of creating a new agency. There are other ways in which it would be possible to make the process more focused.” He suggests reducing the number of filings by eliminating the investigation of mergers of companies that do not have Brazilian subsidiaries. He also recommends increasing the tenure of the board members of CADE and other agencies from its current maximum of four years. He says it would help develop expertise within the body. Phasing staff replacements would also minimize dramatic shifts in policy. As Noronha Advogados noted recently, there has been concern in Brazil over “The great amount of power to be placed in the hands of the director general of the agency.” This concern is also echoed in Chile.
Nevertheless, there are not too many complaints from lawyers over the workings of antitrust in the region. Even in Argentina, Aranovich notes that, of the 300 cases submitted for prior approval by the National Commission for the Defence of Competition, only six had restrictions imposed and only one was actually prohibited.
In Mexico there have been few cases of flat denials or enforced divestments. In Brazil, CADE has only imposed divestitures in two mergers: Colgate’s acquisition of Kalynos’s oral hygiene product business and the AmBev case.