By Diego Herrera Moraes, U.S. Federal Trade Commission*
Starting on May 29, 2012, the most substantive reform of Brazil’s antitrust enforcement since the current framework was established in 1994 will enter into force.(1) But is Law No. 12,529/11 (“the New Law”) in line with international competition best practices? Best answer: reforms have been achieved, but great challenges still lie ahead. Before any further conclusions, it is important to walk through the main changes introduced by the New Law.
The New Law promotes the unification of Brazil’s competition agencies. Employing the antitrust jargon, I like to call it a “structural remedy” to the current Brazilian competition policy system in place now. The New Law “merges” the antitrust enforcement functions of the three competition authorities into a single agency, the Administrative Council for Economic Defense (“the new CADE”).(2)
Similarly to what occurred in Spain and France, the New Law creates a mandate to streamline government competition law enforcement. The intended result is to eradicate inefficient redundancy of the overlapping functions of the current tripartite arrangement. The new CADE will consist of three main bureaus. The Administrative Tribunal, comprised of seven duly appointed Commissioners, will remain the decision-making body in charge of rendering final and binding administrative decisions in both merger and conduct cases. The Superintendent General will possess extensive powers. The Superintendent General, head of this institution, will be empowered to approve mergers that do not raise competitive concerns and to provide non-binding opinions in merger cases that could not be unconditionally cleared. On the conduct front, the Superintendent General will be responsible for conducting investigations of anticompetitive practices. Finally, the third of the new CADE’s bureaus, the Department of Economic Studies, will be in charge of providing non-binding economic opinions and preparing economic studies.
In addition, Brazilian lawmakers were watchful when tackling one of the most relevant sources of backlog in antitrust investigations in Brazil: the chronic lack of human resources. The New Law authorizes the creation of 200 permanent staff positions for the new CADE, which will essentially double the current number of professional staff.
Another highly relevant change is the introduction of a pre-merger notification system, under which mergers will have to be notified no later than 15 days after their “occurrence”,(3) and will be required to be approved by the new CADE.(4) In the current non-suspensive review system, the parties are free to consummate the mergers without the antitrust agency’s clearance. Besides not providing incentives for the merging parties to speed up the process, the current system undermines the effectiveness of remedies imposed by CADE. Due to the reluctance of parties to divest part of the acquired assets once the merger has been consummated, CADE has usually opted for behavioral rather than structural remedies, a jurisprudential trend that may shift under the New Law.(5)
The New Law also eliminates a market share threshold, as well as introduces a secondary national revenue threshold. Under the New Law regime, notification of a transaction will be required when at least one of the merging parties has achieved group-wide revenues of at least R$ 400 million (approx. US$ 214 million) in Brazil in the fiscal year prior to the transaction, and another party to the transaction has achieved group-wide revenues in Brazil of R$ 30 million (approx. US$ 16 million).(6) Nevertheless, the revised thresholds do not yet conform to the International Competition Network’s Recommended Practices for Merger Notification and Review Procedures, which advocates that, on the seller side, only the activities of the business being acquired should be relevant.(7) Failure to notify reportable transactions and gun-jumping may result in invalidation of the transaction and fines between R$ 60,000 (approx. US$ 32,000) and R$ 60 million (approx. US$ 32 million).(8)
The New Law provides more straightforward statutory time periods for the review of transactions, establishing a maximum term of 240 days from the date of notification for the issuance of a final administrative decision. In the case of complex transactions (“Phase II”), the 240 day period can be extended through request by the parties or the Administrative Tribunal for 60 or 90 days, respectively Therefore, the New Law sets the maximum period for the new CADE to render final administrative decisions in merger reviews at 330 days from the date of notification.(9) Although timing of the review is of critical importance under the new suspensive system, President Rousseff specifically vetoed the provision of the New Law that aimed to set a regime of automatic approvals for cases when CADE fails to issue an administrative decision within the statutory time period. Given that this is a critical provision of any pre-merger notification system, the veto raises uncertainty and casts doubts on the feasibility of the promotion of advances in the antitrust landscape in Brazil. In response to the concerns that the waiting periods of the new pre-merger notification system could be an obstacle for M&A activity in Brazil, the New Law allows the new CADE to authorize the merging parties to take particular steps towards the implementation of the merger.
Regarding the enforcement of anticompetitive practices, the New Law introduces significant changes related to the fine setting criteria. According to the New Law, anticompetitive practices could subject companies to fines between 0.1 and 20 percent of the company’s gross revenues in the last financial year preceding the start of the investigation. The range of potential fines introduced by the New Law represents a significant decrease in the options available in the current Law. However, the new provision expressly notes that the revenues to be considered should be related to “the field of business activity in which the offense has been carried out”—a standard that may trigger further litigation. The fines are also applicable to individuals when directly or indirectly responsible for the infraction and upon showing proof of intent.(10)
On the leniency front, the New Law establishes new rules. It eliminates the current Law provision that prevents the “leader” of a cartel from entering into a leniency agreement. Also, the New Law extends the criminal immunity granted to a leniency applicant in order to encompass the crime of fraud in public procurement when related to the cartel’s activity. Regarding criminal prosecution of individuals, the New Law increases the maximum term of imprisonment from two to five years and establishes that violators will be subject to both fines and imprisonment.
Despite being the most substantive reform of Brazil’s antitrust enforcement regime since the current framework was established in 1994, the New Law is accountable for consolidating most of CADE’s jurisprudential development rather than being terribly innovative.(11) The New Law remodels merger control in Brazil by establishing a pre-merger notification regime with new notification thresholds and review timetables. However, it does not address some very important and challenging issues that were expressly or implicitly delegated by the New Law to CADE’s regulatory authority. And, to a great extent, how proficiently the new CADE will exercise its regulatory power is a key element to the answer of the question presented in this paper. In this regard, it can be said that the more experienced the new CADE is, the better its regulatory scheme will tend to be. If this general premise proves to be true, the prospect of the competition landscape in Brazil is worrisome. Depending on whether Commissioner Ruiz’s mandate will be renewed, when the New Law enters into effect, the new CADE will have, out of seven Commissioners, three or four fresh newcomers, and two or three members completing just about a year of their appointments. This scenario poses additional challenges for the consolidation of the advances in the Brazilian antitrust landscape.
The New Law presents additional hurdles. The institutional reform challenges the new CADE to promote, over a short period of time, a smooth transition into a system with a single antitrust enforcement agency. Most likely, the stricter timetable for the merger review will result, in the first months following May 29, 2012, in a prioritization of merger cases to the detriment of conduct investigations.
As Brazil emerges as a key jurisdiction on the global stage of antitrust enforcement, the consolidation of the advances fostered by the New Law become of critical importance. The increased level of foreign investments in Brazil should prompt companies doing business in the country to carefully consider the impact of these developments.
* Diego Herrera Moraes graduated from Berkeley Law in 2011 (LL.M) and is currently serving as an International Antitrust Consultant for the Federal Trade Commission’s Office of International Affairs. The views expressed herein are the author’s own and do not necessarily reflect those of the Federal Trade Commission or any Commissioner.
(1) Law No. 12,529/11, available here.
(2) The three competition institutions under the current law are: Secretariat of Economic Law of the Ministry of Justice, which is currently in charge of investigating anticompetitive practices and issues non-binding opinions in merger cases; Secretariat for Economic Monitoring of the Ministry of Finance, which, in the current system, is responsibility for providing non-binding economic opinions in merger cases, and in some instances, in investigations of anticompetitive practices; and Administrative Council for Economic Defense, where the decision-making power resides.
(3) In the current non-suspensive system, when interpreting Art. 54 of Law No. 8,884/94, CADE defined “occurrence” as the execution of the first binding agreement between the parties. CADE Resolution No. 15 (1998).
(4) Law No. 12,529/11, Art. 88. It is important to note that CADE’s jurisprudence developed an instrument known as Agreement to Preserve the Reversibility of the Operation (“APRO”). APROs were designed to accomplish the same result as a precautionary order, and, in practice, they prevent the economic integration of the firms prior to CADE’s review. See CADE Resolution No. 28 (2002), superseded by CADE Resolution No. 45 (2007). APROs have often been used in complex transactions that involve high market shares and/or raise significant competitive concerns. Between 2005 and 2011, CADE issued 20 APROs, which can be found here.
(5) Highlighting the shortcomings of Brazil’s merger control regime, a 2005 comprehensive OECD peer review of the country’s competition law and policy noted that “the present post-merger system is unwieldy and inefficient for both the competition agencies and the business community.” OECD, Competition Law and Policy in Brazil: A Peer Review (2005), at 38, available here.
(6) The threshold amounts may be altered by an ordinance recommended by the new CADE and issued jointly by the Minister of Finance and Minister of Justice. Moreover, the New Law authorizes the new CADE to examine mergers below the threshold within one year of their completion.
(7) Compare revised thresholds with I.B.3 and I.C.3 of the RPs. Available here.
(8) The New Law expressly exempts consortia constituted for the purpose of attending public bids from mandatory pre-merger control.
(9) See the International Competition Network’s Recommended Practices for Merger Notification and Review Procedures IV, available at http://www.internationalcompetitionnetwork.org/ uploads/library/doc588.pdf. Compared to the New Law’s maximum time frame for merger review, the average review period of the Brazilian authorities was 156 days in 2010 and 150 days in the first nine months of 2011, available here.
(10) The fines applicable to individuals are calculated based on the fine imposed on the company, ranging from 1 to 20 percent of the company’s fine.
(11) In fact, CADE was recognized by a peer review as the best antitrust enforcement agency of the Americas in 2010. See Global Competition Review 2011 Awards Announced, Feb. 7, 2011, available here.