Ecuador: Merger Control
On 13 October 2011, Ecuador implemented its own competition regime through the enactment of the Organic Law for the Regulation and Control of Market Power (LORCPM). The entity in charge of overseeing compliance with the LORCPM is the Superintendency for the Control of Market Power (SCPM).
This article will focus on the power of the SCPM to approve, condition or reject economic concentrations. We will also analyse the current situation of merger control, as experienced by recent cases at the SCPM.
The SCPM, as provided in the LORCPM and its regulations, has broad investigative powers, including:
- – investigating and imposing sanctions related to antitrust matters and violations, restrictive practices and market power abuse;
- – approving, conditioning or rejecting economic concentrations (mergers); and
- – investigating and imposing sanctions related to unfair trade practices.
General legal regime
Operations of economic concentration are those that have the potential to affect the structure of a market by limiting the number of competitors or the means of production.
The LORCPM determines that operations of economic concentration include, but are not limited to the following:
- – mergers;
- – full transfer of the assets of a merchant;
- – direct or indirect acquisition of the property or of any other right over the shares or interests in the capital or securities that grant any type of right to be converted into shares or interests in the capital, or to have any type of influence in the decisions of the person that issues them, when such acquisition grants to the acquiring party the control of or a substantial influence over it;
- – economic concentration through appointment of common managers or directors; and
- – any other agreement or act that transfers to a person or to an economic group the assets of an economic operator, or that grants such person or economic group a decisive control or influence in the adoption of the decisions of the ordinary or extraordinary management of an economic operator.
Thresholds and conditions
Certain operations of economic concentration require prior approval from the SCPM before taking effect. Prior approval is required in the following cases:
- – when the total business volume in Ecuador of all the transaction participants, jointly considered, in the previous fiscal year of operation exceeds the amount of unified basic remunerations (RBU) set forth by the Regulating Board, as follows:(i) for operations involving financial institutions and stock market entities, 3.2 million RBU, which in 2017 is equivalent to US$1.2 billion; (ii) for operations involving insurance and reinsurance companies, 214,000 RBU, which in 2017 is equivalent to US$80,250,000; and (iii) for operations involving economic operations not included in (i) and (ii) above, 200,000 basic unified salaries (equivalent to US$73.2 million); or
- – when the transaction involves economic operators with a combined market share of 30 per cent or above in the relevant market of products or services.
If the conditions described above are not met by the parties to the transaction, or the transaction itself, no prior approval by the SCPM is necessary. Nevertheless, the SCPM, may, ex officio, or at the request of an interested third party, may review the transaction.
Total business volume calculation
To identify the total business volume of the transaction, the LORCPM establishes a broad method of calculation, which involves the sum of the business volume of the following:
- – the company or economic operator examined;
- – the companies in which the examined operator has a direct or indirect (i) majority ownership; (ii) controlling voting rights; (iii) appointment control; or (iv) administrative control;
- – those companies where it holds controlling voting rights;
- – those companies where it holds appointment control; and
- – the companies described above, where they jointly hold (i) majority ownership; (ii) controlling voting rights; (iii) appointment control; or (iv) administrative control.
The application must be filed by the acquiring party; however, all parties involved in the transaction must share their information before filing, since the application includes information from all the parties involved. If the acquiring party involves several actors, the application must be filed jointly through a common proxy. The application must be filed within eight days of the date when any of the following events occur:
- – Merger: in case of a merger between two companies or economic operators, from the moment that the shareholders or members of at least one of the companies or economic operators, or the competent body pursuant to the by-laws, agree to undertake the merger.
- – Merchant transfer: in case of a complete transfer of the assets of a merchant, from the moment the economic operators agree to perform the operation and determine the terms and conditions in which such transfer will be executed.
- – Interest acquisition: in case of direct or indirect acquisition of the property or of any other right over the shares or interests in the capital or securities that grant any type of right to be converted into shares or interests in the capital, or to have any type of influence in the decisions of the person that issues them, from the moment the participants agree to undertake the operation of economic concentration and determine the terms and conditions in which the transaction will be executed.
- – Administrative consolidation: in case of economic concentration through the appointment of common managers or directors, from the moment the managers or directors have been designated by the general shareholders or members meeting, or the competent body, pursuant to the by-laws of such company.
- – Other types of acts: in case of any other agreement or act that legally or factually transfers the assets of an economic operator to a person or economic group, or grants them decisive control or influence in the decision-making process of the ordinary or extraordinary management of an economic operator, from the moment the participants agree to undertake the operation of economic concentration and set forth the terms and conditions under which the transaction will be executed.
When the participants of any of the acts described above are companies, the triggering event will be the date when the general meeting of shareholders or partners, or the competent body pursuant to the by-laws of such company, resolves to undertake the transaction.
The regulation to the LORCPM provides the parties a withdrawal right; if the parties decide not to continue or withdraw from the transaction, at any time, between the filing date and the approval date, the applicant must immediately notify its decision to the SCPM. Following the notification, the SCPM, without further action, may dismiss the case. We consider a reform must be introduced to the regulations, since it gives the authority the faculty to dismiss the case, following withdrawal, when it should be automatic.
The SCPM has a 60-day term to issue its approval; this term may be extended, once, for an additional 60-day term, under exceptional circumstances. The SCPM usually extends the initial term. If the SCPM fails to issue a decision within the terms provided above, the operation will be deemed authorised. However, these terms may be suspended when: it is necessary to require an interested third party, documents, and any support elements; and it is necessary to require reports or administrative acts from other SCPM dependencies or administrative agencies. The suspension cannot exceed a 60-day term. As reviewed, the SCPM has the possibility of extending its investigation for a long period of time, which may result in the business frustration. Given that the terms previously described only include working days, clearance, in the worst-case scenario, can take up to nine months.
The administrative decision may include a full and unconditional approval, a conditional approval upon fulfilment of certain requirements, or a rejection.
The SCPM has issued several resolutions involving transactions subject to prior approval. We describe below some examples of the remedies established by the SCPM.
In the concentration involving the Ecuadorean operation of Halliburton Company and Baker Hughes Incorporated, the SCPM imposed the following conditions to clear the merger:
- – Baker Hughes International, in the term of six months, had to divest of its core completion tool business in Ecuador;
- – Halliburton Company, in the term of six months, had to divest of its directional drilling, fixed cutter bits, mobile cutter bits and LWD/MWD business operation in Ecuador; and
- – Halliburton Company, in the term of six months, had to divest of its expandable liner hangers business in Ecuador.
The concentration was approved in November 2015.
In the concentration involving the Ecuadorean operation of Bayer AG and Monsanto, the SCPM imposed a condition to clear the merger. The imposed condition involved a prohibition on the production, introduction and commercialisation of seeds and transgenic products, as to the application of modern, risky and experimental biotechnologies, with the purpose of protecting the genetic patrimony of Ecuador and the entrance of genetically modified organisms to Ecuador.
To fulfil this condition Bayer AG had to prepare a commitment document for review and approval. This document included an obligation to file every six months a sworn statement by the company and its subsidiaries declaring fulfilment of this condition. This document also included a resolutory condition, which will be active upon violation of the commitment.
The concentration was approved in June 2017, upon fulfilment of the obligations described above. We are not aware of any interested parties filing any type of recourse against the imposed condition or the status of the commitment letter.
Parties that disagree with the content of the SCPM resolution may file recourses that the LORCPM provides, as described below.
In the administrative instance (ie, before the SCPM), the law provides for three type of recourse: horizontal, vertical and extraordinary:
- – The horizontal recourse is reposición or petition before the same authority. This recourse must be filed within 20 days of the notification of the administrative resolution before the same authority that issued the resolution. The authority will have 60 days to resolve the matter.
- – The appeal is the vertical recourse. The appeal must be filed before the Superintendent within 20 days of the notification of the administrative resolution. This recourse may also be filed against a resolution denying the reposición. The Superintendent will have 60 days to resolve the matter.
- – The revision recourse is an extraordinary recourse filed before the Superintendent. This recourse can be filed against administrative resolutions with enforceable effects (ie, final resolutions that cannot be appealed against using other administrative recourses). The interested party, or the Superintendent itself, may file the revision recourse within three years of the date when the resolution acquired its enforceable effect.
Notwithstanding the above-mentioned recourses, the parties may file a judicial action against the resolution. The interested party will have a term of 90 days, following notification of the resolution, to file the judicial action.
Economic operators are able to enquire in writing before the SCPM whether their transaction requires prior approval.
Some operations are exempted from applying for prior approval, including:
- – the acquisition of shares without voting rights;
- – the acquisition of bonds, obligations or any other securities convertible into shares without voting rights;
- – the acquisition of liquidated economic operators; and
- – the acquisition of economic operators that have not had any local activity for the past three years.
Ex post control
If a transaction is executed without prior approval, the SCPM may request an explanation from the parties. The parties will then have a 30-day term to file their explanations. If the explanations are not sufficient for the SCPM, or if the operators do not file any explanation, the SCPM will initiate an investigation proceeding for a 60-day term, which may be extended, once, for another 60-day term. The SCPM may confirm that the operation was not subject to mandatory prior notification and approval, or it may declare it was an operation that required prior approval, and therefore, its execution violated the LORCPM. In the latter case, in addition to applicable fines, the SCPM may order disinvestment, or any other necessary remedy, to revert the effects of the operation.
Filing an application for prior approval outside the applicable term set forth in the LORCPM (eight days) and failure to notify a transaction that later requires an ex officio investigation by the SCPM constitute minor violations of the LORCPM, and as such are subject to a fine of up to 8 per cent of the total business volume of the economic operator in the previous fiscal year.
Closing a transaction subject to approval before filing for approval or before being approved by the SCPM constitute serious violations of the LORCPM, and as such are subject to a fine of up to 10 per cent of the total business volume of the economic operator in the previous fiscal year.
The execution of acts or contracts by the resulting economic operator (of the transaction) before filing for approval or before being cleared by the SCPM constitute very serious violations of the LORCPM, and as such are subject to a fine of up to 12 per cent of the total business volume of the economic operator in the previous fiscal year.
If the total business volume cannot be determined, the sanctions are as follows:
- – minor violations involve a fine of between 50 and 2,000 RBU, which in 2017 is equivalent to between US$18,750 and US$750,000;
- – serious violations involve a fine of between 2,001 and 40,000 RBU (between US$750,375 and US$15 million); and
- – very serious violations involve a fine of over 40,000 RBU (US$15 million).
The Ecuadorean experience
In the period between 2012 and 2016 (up to 31 August 2016), the SCPM examined 107 concentration cases, which roughly represents 20 per cent of the SCPM’s activity.
As presented by the SCPM, during the period described above, 11 per cent of the cases involved the financial sector, 13 per cent involved the commerce sector, 29 per cent involved the service sector, 6 per cent involved the real estate sector, 21 per cent involved the health, food and beverages sector, and 21 per cent involved the industrial sector.
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Fecha de publicación: 08 September, 2017