I INTRODUCTION

The Organic Law for the Regulation and Control of Market Power (Law) was enacted in October 2011, implementing the first domestic competition regime in the country. The Law created the Superintendency of Market Power Control (Superintendency or Authority) as its governing administrative authority in charge of the application of the Law, and a separate regulatory body, the Regulation Board, in charge of, inter alia, issuing governing regulations and sector-wide recommendations, and implementing economic thresholds for mergers.

Merger notifications are filed with the Intendancy for Concentration Control (Merger Control Intendancy), an investigative authority which must issue a recommendation report for resolution by the First Instance Resolution Commission. The Merger Control Intendancy is vested with the powers of investigation of notified transactions and non-notified transactions, as well as for issuing its recommendation report to clear or deny transactions subject to its control. The Intendancy is authorised to act ex officio in the case of non-notified transactions that come to its attention. The Superintendency is organised into four investigative intendancies. These intendancies perform their analysis and investigations independently and issue recommendation reports to the decision-making authority, the First Instance Resolution Commission. The Merger Control Intendancy is in charge of analysing notified transactions and issuing final recommendation reports, which contain economic analysis of the competitive landscape, the transaction's potential impact on this competitive structure, and its final recommendation as to the clearance, conditional clearance subject to conditions, or denial of the transaction. The analysis and evaluation performed by the Intendancy in all transactions subject to its control has reflected a rigour and in-depth analysis similar to that of a Phase II investigation by the European Commission. The First Instance Resolution Commission, a three-person resolution panel, must then evaluate this recommendation report and issue its final decision.

The basic principles of the merger control regime are set forth in Chapter II, Section 4 of the Law, making any act deemed a ‘concentration operation' subject to merger control. Although ‘exemplary acts' are broadly defined, any act granting control of or substantial influence in another party exceeding either of the economic or market share thresholds may be subject to mandatory merger control notification and prior approval before its execution in Ecuador. Mergers and acquisitions, joint-venture and administration agreements, and assignments of the effects of a trader, inter alia, are defined as ‘concentration operations', although the broad scope of the law may determine that other forms of agreements could be subject to notification in this jurisdiction, and may therefore merit further legal analysis with local counsel when the economic or market share thresholds are met.

In addition to the competition perspective, under which merger control regulation has only been effective since October 2011, mergers and acquisitions where a local business presence exists may also be subject to corporate and tax implications, and governed by the Superintendency of Companies, Securities and Insurance and the Internal Revenues Service. It is worth noting, however, that even if the parties do not have a direct business presence in Ecuador, the merger control regulation may be mandatory, considering the effects-based approach instated by the Law.

II Ecuadorian LEGISLATION

The Law was enacted on 13 October 2011. On 23 April 2012, the President signed Executive Decree No. 1152, published in the Official Register of 7 May 2012, comprising Regulations to the Law (Regulations). The Superintendent of Market Power Control was appointed in July 2012, at which time the administrative structure of the Authority began to be organised and the Law was implemented.

i Transactions subject to prior control

Ecuador's prior control and approval regime for concentration operations can be generally summarised as follows:

  • a economic concentrations are defined as a change in or takeover of control in one or several economic operators through the following acts:

• mergers;

• assignment of assets of a trader;

• direct or indirect acquisition of shares, equity or debt certificates if they grant influence over the other operators' decisions, thereby giving the acquirer control or substantial influence in the other operator;

• joint-venture and administration agreements; or

• any other act or agreement transferring the assets of an economic operator, or granting control or determinant influence on an economic operator's adoption of regular or extraordinary administration decisions;

  • b the above-mentioned exemplary acts, and others falling within this scope, will require the prior authorisation of the Superintendency before their execution; and
  • c ‘control' is defined by the Law as control over any contract, act or, bearing in mind the de facto and de jure circumstances, circumstances that confer the possibility of exercising substantial or determinant influence over an enterprise or an economic operator. This control may be joint or exclusive.
ii Thresholds

When an act is considered to be a ‘concentration agreement' under the terms of the Law, notification and prior approval will be mandatory if either of the following alternative thresholds is exceeded.

Economic threshold

The economic threshold will be reached in cases where the combined annual turnover of the parties in Ecuador in the year preceding the transaction exceeds an amount fixed by the Regulation Board. The Regulation Board modified the previous threshold through Resolution No. 009 of 25 September 2015. The turnover threshold is currently as follows:

Type

Amount of unified basic remuneration*

Value (in US$)†

a Concentrations involving financial institutions and entities that participate in the stock exchange.

3.2 million

1.2 billion

b Concentrations involving insurance and reinsurance companies.

214,000

80.25 million

c Concentrations involving undertakings not contemplated in (a) and (b).

200,000

75 million

* The unified basic remuneration in Ecuador for 2017 is US$375.

† The unified basic remuneration changes yearly; thus, the amount in US dollars provided above will change on a yearly basis.

Market share threshold

The market share threshold will be reached in the case of concentrations where the parties will acquire a market share equal to or greater than 30 per cent within the relevant market in Ecuador.

iii Timing

Concentration operations that exceed either of the above-mentioned thresholds require clearance from the regulator to be executed. Notification must be made within eight calendar days from the date of the ‘conclusion of the agreement'. Generally, conclusion of the agreement will take place on the date when the general terms and conditions of a transaction are decided by the parties through a letter of intent, memorandum of understanding, joint-venture agreement or share purchase agreement. The Regulations to the Law, however, provide further guidance in respect of the ‘conclusion' concept, and stipulates that it should occur at the following times:

  • a for mergers: from the time when at least one of the participants at the shareholders' meeting has agreed to the merger;
  • b for an assignment of assets of a trader: from the time the entities agree to the operation, and determine the form, term and conditions thereof. In the case of companies, as of the moment that the assignment is approved by the shareholders' meeting;
  • c for a direct or indirect acquisition of shares, equity or debt certificates: from the time that the participants consent to the operation giving rise to the concentration, and determine the form, term and conditions for its performance. In the case of companies, as of the moment the assignment is approved by the shareholders' meeting;
  • d for joint-venture and administration agreements: from the time that the administrators have been designated by the shareholders' meeting; and
  • e for any other act or agreement that grants control or determinant influence: from the time the parties consent to the operation giving rise to the concentration, and determine the form, term and conditions for its performance.
iv Requirements for notification

Merger notifications must be submitted by the party that acquires control. If several undertakings are acquiring joint control, notice must be given jointly through a common attorney in fact. The Superintendency issued a filing form template on 9 May 2013, which must be completed and used in all mandatory merger control filings. The requirements and mandatory accessory documents are fixed by the Regulations of the Law, and generally require information regarding, inter alia, the notifying entities, the transaction, the market structure, barriers to entry, efficiencies and the rationale for the transaction. Accompanying documents principally relate to the corporate existence of the parties to the transaction, their financial statements, a power of attorney to represent the entities in the merger notification, and a sworn affidavit attesting to the veracity of the information being provided and the good faith calculation of the figures submitted to the Authority.

v Deadlines and filing fee

As of the date of admittance to file as complete, the Superintendency has 60 working days to approve, deny or impose conditions on a transaction. That period can be extended by the regulator for an additional 60 days, although it is still under discussion whether this additional term is a calendar or working day calculation. It is frequently the case that the Merger Control Intendancy issues one or more requests for information (RFIs) prior to the admittance of the file as complete. Hence, the starting of the clock is frequently delayed for several weeks following the original submission, or the term is suspended, while new RFIs are issued. In practice, it can take an average of between four and six months from the date of filing until a clearance decision is issued for a merger.

The Regulation grants the Superintendency the right to determine official fees for the evaluation of a concentration notification. On 9 May 2013, the Superintendency published regulations containing the parameters that will be used to determine the fee that will be charged for the processing of each concentration notification. The regulations establish that the processing fee will be the greatest of the following:

  • a 0.25 per cent of the income tax paid in the previous fiscal year in Ecuador;
  • b 0.005 per cent of sales obtained in the previous fiscal year from the undertakings' activities in Ecuador;
  • c 0.01 per cent of the assets in Ecuador; or
  • d 0.05 per cent of the book equity in Ecuador.

Through a new instructive for filing fee payment from February 2017, prior rules governing payment of the filing fee were modified and clarified, now requiring parties to validate their methodology of payment prior to making any disbursements. This manual now clarifies what was the generally admitted practice in acquisitions where the figures must be applied to the combined entities in the case of mergers, and to the acquired or target entity in the case of acquisitions.

vi Exemptions

Article 19 of the Law establishes that the following operations are exempted from the obligation to notify:

  • a acquisitions of shares without voting rights, bonds, securities or any other right convertible to shares without voting rights; and
  • b acquisitions of undertakings or economic operators that have been liquidated, or that have not had economic activity in the country in the past three years.

These exceptions have served as a safe harbour for recent global transactions where the acquiring entity alone exceeded the mandatory thresholds, but the acquired entity did not have economic activity in the past three years.

III CONCENTRATION OPERATIONS

The regulator has approved a large number of global transactions subject to multi-jurisdictional control and that required prior approval in Ecuador. Statistically, only one transaction that was originally denied on formal grounds was later approved on appeal, only one transaction was denied on anticompetitive concerns, and, to date, two global transactions have been subjected to structural remedies: the first was subsequently closed because of the termination of the original merger, and the other is still pending completion after the implementation of a monitoring trustee to supervise compliance with the imposed remedies.

The following table depicts transactions that have been subject to notification in Ecuador following the enactment of the merger control regime in 2011:

Operators

Industry

Year

Nutreco/Gisis

Fish feed

2013

Metlife/Genesis

Insurance

2013

Veolia/Interagua

Water services

2013

Arca/Toni

Food and beverages

2014

Cabcorp/Tesalia

Beverages

2014

Proamerica/Produbanco

Financial

2014

Nestle/Ecuajugos

Beverages

2014

Aercap/Aig

Aircraft financing

2014

Bimbo/Supan

Bread

2014

Hapag-Lloyd/Csav

Container liner shipping

2014

Indura/Swissgas

Industrial gas

2014

AT&T/DirecTV

Telecommunications

2014

Banco Del Pacifico/Iece

Financial

2014

LaFarge/Unacem

Cement

2014

Burlingtown/Chiquita

Banana production

2014

Hamburg Sud/Ccni

Container liner shipping

2014

Hebei Iron & Steel/Ipac

Steel processing

2014

Corporación Favorita/Librimundi

Book distribution

2014

Bayer/Merck

Consumer care products

2014

Abbott/CFR Pharmaceuticals

Pharmaceuticals

2014

Colonial/Seguros Oriente

Insurance

2014

Conecel/Ecuadortelecom

Telecommunications

2015

Ab Electrolux/General Electric

Home appliances

2015

Imbauto/Vallejo Araujo

Vehicle distribution

2015

Yura/EPCE

Cement

2015

Nokia/Alcatel-Lucent

Telecommunications

2015

Sigma/Ecarni

Meat products

2015

Casabaca/Autoconfianza

Vehicle distribution

2015

Casaracra SA/Unacem

Cement

2015

Bolton Group SRL/Conservas Isabel

Tuna production

2015

Corporacion Favorita/Librimundi

Publishing of books

2015

Hebei Iron & Steel/Ipac

Steel processing

2015

Bayer/Merck & Co

Pharmaceuticals

2015

Cartopel/Esursa

Package

2015

Juventud ecuatoriana progresista/Federacion obrera del Azuay

Financial

2015

Marjoram Riverside/Quiport

Airport concession services

2015

Halliburton/Baker Hughes

Oilfield services

2015

CMA-CGM/NOL

Transport

2016

Cooperativa Cacpe-Yantzaza/CACCCY

Financial

2016

Prosegur/Tevcol/Tevsur/Tevlogistic

Security

2016

Hamburg KG/CCNI

Transport

2016

Anheuser-Bush/Sab Miller

Alcoholic beverages

2016

Cervecera Ambev Ecuador/Cerveceria Nacional CN

Alcoholic beverages

2016

HNA group/Gate group holding AG

Air transport

2016

Sherwin Williams/Valspar

Painting and coating

2016

Seguros sucre/Rocafuerte seguros

Insurance

2016

Abastible/Repsol Butano

Refinement of oil products

2016

Colonial/Seguros oriente

Financial

2016

Banco del Austro/FIDASA

Financial

2017

IV FINES

The Law is very severe in its the application of fines for lack of, or late notification of, transactions subject to its control. The amount of fines will depend on the state of execution of the transaction once the regulator commences its investigation into the lack of notification. Late notification (that is, notification outside the eight-day term from execution) is considered a minor offence under the Law, whereas execution prior to notification, or prior to approval, is considered a serious offence under the Law. Execution of acts or agreements prior to notification or prior to approval is considered a serious offence under the Law. Minor offences are subject to a fine amounting to 8 per cent of the annual turnover in Ecuador of the combined entities in the year preceding the imposition of the fine; serious and very serious offences are subject to 10 per cent and 12 per cent fines corresponding to the annual turnover, respectively. The regulator has initiated several ex officio proceedings to pursue alleged gun-jumping following publication of global transactions in international news, and has summoned parties to justify the lack of notification in relation to global transactions with a direct or indirect impact in Ecuador.

In addition to these exorbitant fines, the Authority can also order the divestment or unwinding of the transaction in cases where the effects of the non-notified transaction are considered anticompetitive in order to restore the competitive process. The statute of limitations of the authority to gain knowledge of non-notified transactions expires four years from the date when it comes to know that a transaction subject to its control was not notified, thus making the risk of lack of notification or gun-jumping practically indefinite.

v THE MERGER CONTROL REGIME

Mergers and acquisitions of commercial companies are governed by the Companies Law and the Commercial Code. The following types of procedures are available under local law: mergers by union or takeover; acquisitions by assignment of business; and acquisitions by assignment of shares or share participations.

i Merger procedures

According to corporate legislation, a merger can take place in one of two ways: two or more companies join to form a new company that succeeds them regarding their rights and obligations (merger by union); or one or more companies are taken over by another company that continues post-takeover (merger by takeover).

For a merger of any company (or companies) into a new company (merger by union) to take place, it is first necessary to agree the former's dissolution and then to transfer all the corporate assets in bulk to the new company. If the merger results from a takeover of one or more companies by another existing company, the existing company must likewise acquire the assets of the company or companies taken over by means of capital increase.

In the event of a merger by takeover, the company taking over must approve the basis for the operation and the amended incorporation charter during a special shareholders' meeting specifically called for that purpose. The companies that will be taken over or that merge to create a third company must likewise approve the merger in the same manner (that is, by calling a shareholders' meeting).

Either type of merger must be recorded in a public deed to which the balance sheets of the absorbed companies must be attached. The Superintendency of Companies, Securities and Insurance must approve such public deed. Finally, for the merger to take effect, an excerpt of the deed must be published, and the deed must subsequently be registered with the Mercantile Registry.

The effects of a merger of two or more companies, as the case may be, are the following:

  • a in the case of a merger by union, the major effect is the appearance of a new juridical person that is the successor of the rights and obligations of the merged companies; and
  • b in the case of a merger by takeover, the company that takes over will be in charge of paying the liabilities of the company taken over, and must assume the responsibilities inherent to a liquidator with respect to the creditors of the company that was taken over.

From a taxation standpoint, the Tax Code provides that those who acquire businesses or enterprises are responsible as successors of the absorbed company's liabilities, and thus will be liable for all taxes owed by the transferor, and for the taxes generated from the business or enterprise being transferred during the year the transfer takes place and for the two preceding years. Liability is limited to the value of the assets.

Merger transactions are not taxable, except for tax on immoveable property transfer in some types of mergers. For instance, merger by union of capital stock companies shall not bear any tax on immoveable property transfer; however, the merger by union of limited liability companies and mergers by takeover of limited liability companies and of capital stock companies is subject to a 1 per cent tax on the immoveable property transfer price.

Transfers of assets and liabilities in mergers are not subject to income tax, and the greater or lesser value reflected in the value of the shares of merged companies is not taxable or deductible. Transfers of assets (tangible or intangible) may take place at present value or at market value.

ii Acquisition by assignment of business

Another form of acquisition that differs from the already-mentioned merger alternatives is the sale of all or part of the business of a business person, which is governed by the Commercial Code. In practice, this system has been used to purchase and sell all assets and liabilities of a commercial corporation (i.e., a company controlled by the Superintendency of Companies, Securities and Insurance) or of the branch of a foreign company.

It should be noted that this system does not result in the union of two or more juridical persons, or in the takeover of one or more of them by a third party, such as is the case for mergers ruled by the Law on Companies; rather, it is a commercial purchase and sale contract provided that it involves all the merchandise or assets of a business person.

The only formality to perfect these contracts is that, under penalty of annulment, they must be executed through a public deed. It is not necessary to register them with the Mercantile Registry.

From a taxation standpoint, the acquirer of the businesses is responsible as successor for the taxes generated from the business or enterprise being transferred during the year the transfer takes place and for the two preceding years. Liability is limited to the value of the assets.

The sale of a business transferring all assets and liabilities is not subject to value added tax. However, it is subject to income tax withholding at a rate of 2 per cent in a local transfer.

iii Acquisition by assignment of shares or share participations
Shares assignment

Another way to acquire an Ecuadorian commercial company is through a transfer of shares (capital stock companies) or share participations (limited liability companies).

Shares - whether common or preferred - are freely transferable, and their transferability cannot be avoided even in the case of a contract between parties limiting their transferability. For instance, in cases of a breach of a contractual limitation of the transferability of shares, the transfer cannot be undone, but there can be a contractual penalty applicable against the default party.

Ownership of shares in a stock corporation is transferred by means of an assignment letter signed by the transferor or by a securities trading company that represents the transferor. The assignment must be written on the corresponding share certificate or on a sheet attached thereto. In the case of share certificates delivered for custody at a centralised securities clearing and liquidation deposit, the assignment may take place pursuant to mechanisms established by such centralised deposits. An assignment of shares or a transfer of ownership takes effect via the company and third parties only as of the date it is registered in the book of shares and shareholders of the company. Registration is made with the signature of the company's legal representative upon delivery of a joint (or individual) communication from the assignor and the assignee.

If the shares are immobilised in a centralised securities clearing and liquidation deposit, they will be registered in the book of shares and shareholders by the centralised deposit upon submission of an assignment form signed by the securities trading company acting as an agent. The centralised deposit must keep files and records of transfers, and must give notice thereof to the company on a quarterly basis.

Stock corporations must be incorporated with at least two shareholders. The company's legal existence begins upon such registration.

If the shares of a stock corporation are not listed in a stock exchange, their transfer requires no formality other than that described above (that is, by means of an assignment document and registration of the assignment in the book of shares and shareholders). On the other hand, if the shares are listed in a stock exchange, several Stock Market Law rules must be observed.

From a taxation standpoint, shares assignment is subject to income tax.

Share participations assignment

Given the different juridical nature of limited liability companies - that is, they are partnerships involving persons and not capital - the assignment of share participations is governed by different rules with respect to an assignment of shares. Share participations are quotas (contributions) in the company's capital. Since share participations are not documents of title, they lack the characteristics inherent to shares (e.g., their free circulation and valuation in the market).

Share participations are transferable by an act inter vivos for the benefit of another partner or partners of the company or of third parties if the unanimous consent of the capital is obtained according to Article 113 of the Law on Companies.

An assignment of share participations must be carried out by means of a public deed. The notary will include in the protocol a certificate from the company's legal representative evidencing that the requirement mentioned in the preceding paragraph has been met. The assignment will be recorded in the books of the company.

From a taxation standpoint, share assignment is subject to income tax.

Thus, mergers and acquisitions are governed in Ecuador by the Law on Companies and the Commercial Code with respect to their formalisation, and in most cases they require prior authorisation. All of the above-described forms of concentration are subject to notification and authorisation by the Superintendency if they surpass the thresholds set in the Law.

VI OUTLOOK AND CONCLUSIONS

From the competition and corporate perspective, two separate rules are in force in Ecuador, and they are subject to different procedures and clearance processes. From the competition perspective, however, considering the few years of practice and the high degree of turnover of regulator staff, practice can at times be unpredictable and deadlines may be extended further than anticipated. From the perspective of global transactions being cleared in different jurisdictions, it will likely be the case that a merger notification will be filed in Ecuador far in advance of other jurisdictions, merely because of the country's strict deadlines for notification and prior approval. In our opinion, a reform should take place regarding Ecuador's strict eight-day deadline, considering that it is in the parties' interest to submit complete notifications as far in advance as possible, and considering the requirement to have approval in order for the closing of transactions. A bill was sent to the National Assembly last year proposing to eliminate the monetary threshold, in an alleged effort to simplify contracting procedures in Ecuador. We believe this would generate uncertainty in global transactions where relevant market analysis is not typically performed in the local market until after a filing obligation based on the monetary threshold is met. It would likely lead parties having to notify otherwise non-notifiable transactions, based on the concern that a different market definition could lead them to a contingency for gun jumping in Ecuador.

DIEGO PÉREZ-OrdÓñez

Pérez Bustamante & Ponce

Diego Pérez-Ordóñez was admitted to practise in 1996 and holds a doctor of law from the Catholic University of Quito. He completed an undergraduate microeconomics course at the London School of Economics in 1990. Mr Pérez-Ordóñez is a partner with Pérez Bustamante & Ponce (and a member of its M&A antitrust practice). On the academic front, he is a professor of constitutional law (1999-present) at the Universidad San Francisco de Quito.

LUIS MARÍN-TOBAR

Pérez Bustamante & Ponce

Luis Marín Tobar was admitted to practise in 2007 and is a senior associate at Pérez Bustamante & Ponce (and also a member of the IP and antitrust practice). He obtained his JD at the Universidad San Francisco de Quito, Ecuador, a master's degree in international legal studies from Georgetown University Law Center and a postgraduate diploma in economics for competition law from King's College London. Mr Marín Tobar worked as an international associate with the competition disputes team of White & Case LLP in Brussels during 2013.

NATALIA ALMEIDA-Oleas

Pérez Bustamante & Ponce

Natalia Almeida was admitted to practise in 2009 and is a senior associate at Pérez Bustamante & Ponce. She obtained a JD at Pontificia Universidad Católica del Ecuador and a Master of Science degree in law and finance at the University of Oxford. Her practice is focused on financial and commercial law. She assists banks and insurance companies in regulatory and compliance matters. She also advises financial and non-financial entities in designing financial products, and structuring and implementing financed transactions. She also participates in merger and acquisition processes.

Pérez Bustamante & Ponce

Av República de El Salvador

1082 y Naciones Unidas

N36-140, Edificio Mansión Blanca

Torre Londres, Piso 9

Quito, Pichincha

Ecuador

Tel: +593 2 382 7800

Fax: +593 2 382 7800

dperez@pbplaw.com

lmarin@pbplaw.com

nalmeida@pbplaw.com

www.pbplaw.com

1 Diego Pérez-Ordóñez is a partner and Luis Marín Tobar and Natalia Almeida-Oleas are senior associates at Pérez Bustamante & Ponce.