Merger review: recent developments in merger control in Chile
May 2014 | PROFESSIONAL INSIGHT | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
The process of assessing the competitive effects of concentrations between competitors in Chile has evolved significantly over the last decade, moving from a voluntary pre-merger control system to what can effectively be considered a semi-mandatory pre-merger control system when the level of industry concentration is high. Additionally, the national antitrust prosecutor agency and the Competition Court have extended their reach in the investigation of mergers where the level of concentration is such that the merger would pose an anticompetitive risk, frequently imposing structural remedies.
Merger control system and antitrust authorities
Only for certain industries, such as telecoms and media companies, Chile has a mandatory merger control system. However, the general rule is that parties to an agreement can voluntarily submit an agreement to a consultation to the Competition Court (Tribunal de Defensa de la Libre Competencia (TDLC)) and to the National Antitrust Prosecutor (Fiscalía Nacional Ec onómica (FNE)). It is worth bearing in mind that even if not mandatory, the TDLC has stated that some concentrations with the ability to raise significant anticompetitive concerns (e.g., where the market is highly concentrated) should be submitted to a consultation to the TDLC. The consultation procedure before the TDLC is not controversial (at least in principle) and, once started, a natural consequence is that the merger cannot be completed until the TDLC rules on the matter. A benefit of submitting a merger to a consultation to the TDLC is that once the TDLC approves the merger, it may not be reviewed unless new information, not considered by the TDLC in its former decision, is provided.
Additionally, it is possible to reach an agreement with the FNE and to submit such agreement for the TDLC’s approval. However, even with the agreement of the FNE it is possible for third parties (a ‘legitimately interested party’, such as a consumers organisation) to oppose the merger and de facto transform the procedure into a controversial one. This occurred in the LAN-TAM case of 2011.
Factors analysed by the Chilean antitrust authorities when assessing a merger
The FNE, has issued guidelines indicating how a merger will be assessed (the ‘Guidelines’, issued in 2006 and replaced in 2012). The analytical framework of the Guidelines is in line with that used by US and European regulators, with a special emphasis on levels of concentration, barriers to entry, and unilateral and coordinated effects, among others. Additionally, the FNE has indicated that it will keep a close eye on those industries which are particularly sensitive, such as the health and energy industries, or those industries which are highly concentrated.
Conditions imposed by the TDLC
In general, decisions of the TDLC and the Supreme Court (the Supreme Court can review decisions of the TDLC) in mergers with high concentration levels include the imposition of structural and/or behavioural remedies.
In two recent cases (SMU and Hoyts), where the merger took place without the prior approval of the TDLC and which were reviewed upon request of the FNE, the TDLC imposed structural remedies.
In the case of a merger between supermarket chains SMU and other supermarket chains (2012), SMU requested ex-post the TDLC to approve certain mitigating conditions; the TDLC reviewed the entire transaction (and not just the conditions) and imposed structural remedies, among them the divestiture of several supermarkets and distribution hubs, including the complete divestment of a minor competitor (Montserrat). Paramount to this case (and a key element for the judgment) was the high level of concentration that would have taken place after the merger in certain small cities in the south of Chile. Additionally, and as an interim measure while some divestments took place, the TDLC imposed on SMU the duty not to worsen the competitive conditions in terms of price and infrastructure of the supermarkets and distribution hubs to be divested.
In the case of a merger between two cinema chains (Hoyts and Cine Mundo, 2013), the FNE initiated an investigation after the merger was completed. It requested to the TDLC the imposition of fines and the divestiture of assets. The TDLC called on the parties to reach an extra judicial agreement and the parties agreed to divest one of the cinemas complexes in two cities. The agreement was approved by the TDLC, as it considered that the measures were enough to mitigate the anticompetitive concerns.
Additionally, in the LAN-TAM case of 2011, the TDLC and the Supreme Court imposed structural and behavioural measures. The case consisted of a merger between airline companies LAN (from Chile) and TAM (from Brazil) creating the largest airline in South America, and was submitted for approval of the TDLC with the prior agreement of the FNE. A consumer’s organisation opposed and the TDLC reviewed the entire merger. The merger was approved by the TDLC subject to certain conditions such as the divestment of airport slots in the Santiago-Sao Paulo route, imposing certain conditions to such divestment; conditions on the functioning of the frequent flyer programs; a prohibition to increase the seats available in the Santiago-Sao Paulo route for a period of time; and the obligation of the merged entity to withdraw from one of the global alliances to which LAN or TAM belonged, among others. In general, the TDLC was concerned with specific routes which for Chile are particularly sensitive.
A 2012 ruling in the fuel distribution industry, the Terpel case, exemplifies the extent to which the TDLC and the Supreme Court are willing to use structural remedies when in presence of a highly concentrated industry. The TDLC rejected the acquisition of Terpel by the holding company of local competitor Shell due to the high concentration in the industry and the fact that the mitigating conditions (divestitures) offered by the merging parties did not outweigh the anticompetitive risks posed by the acquisition. The Supreme Court overturned the ruling of the TDLC, giving the green light to the acquisition, although imposing certain burdensome remedies, such as additional divestment measures in areas where there was a high concentration index. The required divestments had to take place by means of a public tender, without a reserve price and within six months from the date of the acquisition. Additionally, the termination of certain lease agreements in place with regard to the storage of fuel was required.
Compliance with the rulings of the TDLC is entrusted to the FNE. In the Terpel case, the Supreme Court expressly ruled that the remedies adopted in an antitrust case can be revisited to verify their effectiveness, and that the FNE has a duty (and not just a right) to police such remedies.
Non-compete provisions in the context of a merger
Although non-compete provisions in the context of a merger are customary and, in many cases, the premium paid to the seller is to acquire part of the know-how of the company – a purpose which would be frustrated should the seller set up a parallel business immediately after the merger – the TDLC keeps an eye on these provisions, especially when they are not limited in time. In the case involving supermarket chains, it reduced the term of a non-compete provision applicable to the seller from five to two years.
It is expected that the merger control system will be amended by the entrant government by expressly regulating mergers that would substantially lessen competition, following the European type analysis, and granting extra powers to the FNE to quickly negotiate and agree to remedies to mergers. Additionally, it has been recommended by a commission of experts that the competition law establishes a mandatory merger control system for concentrations that reach certain thresholds.
As can be seen from recent developments of the case law on merger control of the TDLC and the Supreme Court, the law on mergers has been expanded significantly, even if with very limited legal background. Indeed, the TDLC and the Supreme Court are active in blocking mergers, or imposing structural and behavioural remedies on them, when they pose an anticompetitive risk. Significant changes to the law on mergers, including a rule regulating their assessment and extra powers to the FNE, are expected to take place in the next few years.
Gonzalo Cordero A. is a parter and Felipe Corvalán L. is an associate at Morales & Besa. Mr Cordero can be contacted on +56 2 24727000 or by email: email@example.com. Mr Corvalán can be contacted on +56 2 24727000 or by email: firstname.lastname@example.org.
© Financier Worldwide
Gonzalo Cordero A. and Felipe Corvalán L.
Morales & Besa