i INTRODUCTION

The Law for the Promotion of Competition and Consumer Protection No. 7492 (the Competition Law) was enacted in Costa Rica in 1994 and came into effect in January 1995. The Competition Law contains provisions related to deregulation, competition, unfair competition, consumer protection, comparative advertising and strict liability. It also created the institutional arrangements for the competition regime and for consumer protection by creating two separate bodies ascribed to the Ministry of Economy: the Competition Promotion Commission (COPROCOM) and the National Consumer Commission.

The Competition Law is based on Article 46 of the Constitution. Furthermore, Costa Rica's free trade agreement with Canada contemplates a commitment by both countries to establish mechanisms to deal with anticompetitive conduct and concentrations. The same applies to the Association Agreement signed between Central America and the European Union, which aims at having a competition law and enforcement agency at a regional level in Central America.

In the telecommunications sector, General Telecommunications Law No. 8642, issued in 2008, contemplates specific competition regulations for the industry.

Costa Rica's competition law underwent a major change in November 2019 when the Law for the Strengthening of Competition Authorities No. 9736 (Law) was issued. The Law was part of the reforms the country undertook to incorporate the best practices of the most developed countries to meet the requirements to become a member of the Organisation of Economic Co-operation and Development (OECD). The Law amends the Competition Law and the Telecommunications Law, contains a new set of regulations on different issues, and follows the recommendations contained in two peer reviews conducted by OECD experts.2

One of the main topics discussed in the peer reviews was whether the telecommunications regulator (SUTEL) should continue acting as competition authority in that sector. The Law did not change the role of SUTEL as competition authority, although it did introduce changes so that the same competition law applies to SUTEL and COPROCOM, except for a few relatively small differences.

The following are the main recommendations from the OECD and the changes introduced by the Law:

  1. more independence for COPROCOM;
  2. an increase to COPROCOM's budget and human resources;
  3. the expansion of COPROCOM's advocacy powers;
  4. a reduction in the number of industries exempted by the Law;
  5. improvements to the merger control process;
  6. the creation of a special procedure for the investigation of anticompetitive conduct;
  7. the creation of a leniency programme; and
  8. an increase in sanctions for anticompetitive conduct.

Merger control is one of the areas with the most changes. The Law created a compulsory pre-merger notification process and eliminated the possibility of notifying a merger five days after closing. There are also new threshold rules and COPROCOM now has the capacity to move the thresholds within a certain range. COPROCOM will set a notification fee, according to a cost-based criterion and specific regulations yet to be issued. From a procedural perspective, a two-phase process was created. Analysis should now be more focused on competition risks than merely on structural changes. A more detailed description and analysis of the changes to merger control are given below.

ii YEAR IN REVIEW

2019 was marked by the process of discussing the bid for the Law in Congress and negotiating changes proposed by different industries and government institutions. The leading entities in this process were the Ministry of Exports, the Ministry of Economy, COPROCOM and SUTEL. COPROCOM continued with merger control during 2019 and began working under the Law in November 2019. The following table lists some of the merger cases reviewed and approved by COPROCOM in 2019.

Resolution Parties Key decision
01-2019 Banco Davivienda De Costa Rica SA and Recuperadora De Crédito Invercom SA Approved
11-2019 Inversiones El Trueno SA, Centriz Costa Rica SA, Interbusess Uno de CR SA and Strategic Business SA Market shares did not exceed 30% and no anticompetitive effects were identified as a result of the merger. The transaction contained a five-year non-compete provision. According to COPROCOM, a non-compete provision with a term of over three years is unreasonable and can harm competition. COPROCOM approved the transaction subject to the non-compete provision being reduced to three years.
24-2019 Productora La Florida SA, Distribuidora La Florida SA and Comercializadora LALA SA Application withdrawn by the parties and approved by COPROCOM
30-2019 Roma Prince and Kalicox Market shares did not exceed 30% and no anticompetitive effects were identified as a result of the merger. The transaction contained a seven-year non-compete provision. COPROCOM approved the transaction subject to the non-compete provision being reduced to three years.
31-2019 Bananera Dione SA, Hacienda Sahara SA and others Approved
34-2019 CatalinaBD Holdings LP, CatalinaBD LLC, FRS Capital Corporation, Homeport Holdings, Inc and BIP Mercury I LP Approved
37-2019 PepsiCo Inc, CytoSport Holdings Inc and Hormel Foods Corporation Approved
40-2019 KPS Capital Partners, LP, C&D Tecnologies Inc, Joule Acqco LLC, C&D Tecnologies Inc and Trojan Battery Holdings LLC Approved
41-2019 CMA CGM SA and CEVA Logistics AG Approved

iii THE MERGER CONTROL REGIME

Article 88 of the Law defines concentrations as the merger, acquisition, purchase of assets, strategic alliance or any other agreement by which corporations, associations, shares, trusts, powers of attorney or assets in general, concentrate, between competitors, suppliers, clients or other economic agents that are not related, and result in a long-lasting acquisition of economic control by one of the parties, or in the incorporation of a new economic agent. The definition also includes any transaction in which an economic agent acquires control of two or more separate economic agents that are independent.

The definition refers to strategic alliances, but it does not specify that they must be full-function joint ventures. It does state that the result of the transaction must be a long-lasting acquisition of control. This will have to be clarified in the regulations or in merger guidelines. The other issue is that the definition refers to 'assets in general' and not only to productive assets. Article 89 of the Law contemplates the notification thresholds, and does refer to the value of productive assets. This distinction may be determinative as to whether there is a concentration and requirement for a filing before the competition authority.

i Thresholds, exceptions and deadline to notify

According to Article 89 of the Law, concentrations that meet the following criteria must be notified ex ante to the competition authority:

  1. at least two economic agents with activities in Costa Rica at any time during the previous two fiscal years;
  2. the sum of total gross sales or the value of productive assets in Costa Rica of all economic agents involved in the transaction exceeds the threshold set by COPROCOM of between 30,000 and 60,000 base salaries. COPROCOM has set the threshold at the lower limit, which equates to approximately US$23 million (this can be changed by COPROCOM at any time, and must, therefore, be checked on case-by-case basis); and
  3. at least two of the economic agents involved in the transaction have gross sales or productive assets in Costa Rica over the threshold set by COPROCOM of between 1,500 and 9,000 base salaries. Again, COPROCOM has set the threshold at the lower limit, which is approximately US$1.1 million.

These thresholds do not apply in the telecommunication markets because all concentrations in those markets must be notified to SUTEL.

All economic agents in a notifiable transaction are obliged to file a notification; however, notification by at least one party will be sufficient. In practice, this deserves special attention to make sure confidential information is properly protected.

Filing can be made at any time prior to closing. The transaction cannot be closed without COPROCOM's approval, except in very exceptional cases if authorised by COPROCOM.

Acquisitions that are part of the regular business activity of the purchaser and do not have the object or effect of concentrating the operations of independent economic agents do not have to be notified. This may be the case in the purchase of credit portfolios that regularly take place between banks and financial institutions to manage their cash flow. Acquisitions of assets with the purpose of selling them in the short term (less than a year) are also exempted from filing provided the purchaser does not participate in the decision-making of the commercial strategy with regard to such assets.

ii COPROCOM analysis

Merger control for all markets, including regulated markets (except telecommunications), is within COPROCOM's mandate. COPROCOM's analysis is separate from the powers of the regulators and any other government authority. In regulated markets (specifically financial markets), COPROCOM has to consult with the regulator, although the final decision will be issued by COPROCOM, except in very special cases that may pose systemic risks for the financial industry.

The merger control procedure now has two phases. In the first phase, COPROCOM has to determine if the proposed transaction creates risks for the competition process. If it does, the transaction is subject to the second phase.

At the end of the first phase, COPROCOM can authorise the transaction, approve it subject to conditions offered by the parties at filing, or subject the transaction to second phase review. If the transaction is subject to second phase review, COPROCOM must indicate the risk to competition identified and notify the parties of the additional information required for the second phase analysis. This request must relate to the risks to competition identified in the first phase and the additional elements needed to demonstrate the possible efficiencies of the transaction. This is very significant because this provision forces COPROCOM to indicate exactly what it needs to verify the efficiencies the parties argue will be generated by the transaction. The previous process did not offer this opportunity, and although COPROCOM had the capacity to request from the parties any information it needed to resolve the investigation, it chose simply to let parties file whatever information and evidence they thought sufficient to prove the efficiencies and then normally rejected the efficiency defence, indicating that the parties had failed to demonstrate all aspects required for such defence. With the enactment of the Law, COPROCOM must ask the parties for the specific evidence it needs to verify the efficiencies, if this information is not already in the file.

At the end of the second phase, COPROCOM can: (1) approve the transaction with or without conditions; (2) ask the parties to propose conditions or remedies to the competition risks that have been identified; or (3) reject or prohibit the transaction if there are no available remedies to reduce or eliminate the anticompetitive effects.

COPROCOM shall approve concentrations that do not have the object or effect of creating a significant obstacle to competition. The government must issue the executive regulations of the Law before the end of 2020, which must include the ways to determine whether a concentration will create an obstacle to competition.

COPROCOM will consider whether: (1) the transaction creates or enhances market power; (2) the concentration will facilitate coordination among competitors; and (3) consumers will be harmed.

If the concentration has the object or effect of creating an obstacle for competition, COPROCOM shall consider: (1) if the transaction is necessary for achieving efficiencies, (2) if the transaction is necessary for preventing productive assets from leaving the market, if the seller is in an unsustainable financial situation (presumably, the regulations will determine the standard and requirements for this failing firm defence), (3) if the anticompetitive effect can be remedied; and (4) any other circumstance that may protect the interests of consumers.

iii Remedies and conditions

Remedies and conditions can be structural or behavioural. If the approval is subject to conditions or remedies, COPROCOM must indicate specifically what these are and the time frame for implementing and maintaining them. Remedies can be ordered for up to 10 years, extendable for five more years. If market conditions vary and remedies are no longer needed, the party may ask COPROCOM to review and remove the remedies.

If COPROCOM finds that a concentration may cause anticompetitive effects, it may approve the concentration subject to one or more of the following conditions:

  1. transfer or sale of assets;
  2. a limit on the sale of products or services;
  3. an obligation to provide or sell certain products or services;
  4. the spin-off of the target company;
  5. a restriction on acquiring further concessions or permits;
  6. the introduction, amendment or elimination of certain contractual provisions; and
  7. any other condition that may be required to prevent, reduce or counterbalance the anticompetitive effects.

Remedies imposed by COPROCOM must be directly aimed at maintaining competition, and cannot be imposed to improve existing market conditions. Remedies must be easy to implement by the parties and easy to verify by COPROCOM. If COPROCOM can choose among different options, it must elect the remedy that is the least burdensome for the economic agents.

iv Time frames

The Law contemplates a two-phase procedure. The purpose of this is to facilitate and expedite the analysis of transactions that do not raise competition concerns. These cases can be approved relatively easily and quickly, based on a small amount of information gathered by the parties. Only cases that may raise competition concerns should be taken forward to the second phase of the procedure for a more detailed analysis.

The first phase gives COPROCOM 30 calendar days (commencing once the notification is complete) to determine if the concentration creates risks to competition; if it does, COPROCOM will start the second phase, which extends the process for an additional 90 calendar days, during which it may request more information from the parties.

After filing, COPROCOM has 15 working days to review the filing and verify that all the requirements are complete. If filing is not complete, COPROCOM shall grant the parties 15 calendar days to complete the information. If the parties do not complete the filing in the 15-day period, COPROCOM will order the conclusion of the proceeding and will close the filing. Unless the regulations indicate otherwise, the parties will lose the filing fee.

If COPROCOM subjects the case to the second phase of the proceeding, it shall notify the parties, indicating the competition risks identified and granting them 10 working days to file additional information. The parties shall have five working days to appeal this resolution.

If, in the second phase, COPROCOM concludes that the concentration has anticompetitive effects that can be remedied, it shall grant the parties 30 working days to propose such remedies. If COPROCOM considers that there are no available remedies, it shall reject the transaction. In any event, the parties will have 15 working days to file an appeal before COPROCOM.

If the parties file a proposal of remedies, COPROCOM shall approve or reject the proposal within 30 calendar days. This resolution can also be appealed by the parties within 15 working days. COPROCOM will resolve the appeal within 15 working days. If COPROCOM imposes remedies that are different to those proposed by the parties, the parties shall have 20 working days to decide whether they accept these new remedies. If the parties reject the remedies imposed by COPROCOM or do not respond within such time frame, the concentration will be rejected.

v Parties' ability to accelerate the review procedure

It is important to include all information requested by the Competition Law and the regulations, and any additional information that may make it easier for COPROCOM to determine that there will be no anticompetitive effects so that cases may be completed in the first phase of the procedure.

The application must include a description of the concentration and the possible anticompetitive effects of the concentration. Parties may also include proposals to counterbalance these anticompetitive effects. This seems to be the only way to expedite the procedure in cases where anticompetitive effects may be easily identified prior to filing. If COPROCOM agrees that the concentration may cause the effects described by the applicants and determines that the proposals supplied by them will be effective in counterbalancing the anticompetitive effects, it must approve the concentration subject only to the remedies or conditions proposed by the applicants at the end of the first phase of the procedure.

If COPROCOM determines that the proposal is insufficient to counterbalance the anticompetitive effects, it will notify the parties, the case will be moved to the second phase of the procedure and COPROCOM will notify the parties, indicating the risk to competition and requesting additional information. The parties should be able to anticipate this scenario and move quickly to collect and provide the information requested by COPROCOM. This request should include the evidence needed by COPROCOM to prove the efficiencies alleged by the parties at filing.

Expediting the analysis of the possible anticompetitive effects and possible remedies depends on the ability of COPROCOM to quickly understand the market and the rationale of the concentration. Thus, the parties need to be able to approach COPROCOM to explain and discuss ideas for the proposal, and to try to anticipate what the authority's reaction might be.

Article 106 of the Law contemplates the possibility to request working meetings with COPROCOM to discuss the information on the file, proposals from the parties and concerns of the authority. The Law clearly states that the content of these discussions shall not be considered an advanced judgment, which enables COPROCOM's officers to feel comfortable participating in these discussions and sharing their concerns and opinions, including about the risks to competition, possible remedies and proof of efficiencies. Prior to the Law coming into force, these meetings were useless because COPROCOM's officers did not feel comfortable sharing their opinions or concerns.

vi Third-party access to the file and rights to challenge mergers

Once COPROCOM verifies that a filing is complete, it informs all interested parties about the filing by publishing a brief description of the transaction on its website, while protecting any confidential information. COPROCOM also commonly opens a file with the non-confidential information on record, which incorporates details of a public version of the parties' briefs. Third parties have 10 days to file comments and provide additional information.

COPROCOM can also request information from third parties (e.g., competitors, suppliers and clients of the parties involved in the transaction), and these third parties must respond within 15 working days.

vii Resolution of competition concerns of the authorities, appeals and judicial review

COPROCOM's decisions cannot be revoked by the Minister of Economy. Appeals are made before COPROCOM itself to reconsider its own opinion. Opinions can also be challenged before court.

Judicial review may include both the formalities and the substance of the case. In the cases ruled to date by the judiciary, courts have focused on procedural matters, but have also made some considerations on the substance of cases, which is an indication that judges have a good understanding of competition matters.

viii Effect of regulatory review

Concentrations in regulated markets (i.e., banking, stock, pension funds and insurance) are now examined and decided by COPROCOM. In all cases, COPROCOM must consult with the sector regulator but shall issue the final decision itself. Only in cases that may pose systemic risks in the financial industry does the regulator have the capacity to take control of the review and issue the final resolution. It is expected that the executive regulations will expand on this proceeding.

ix The Merger Guidelines

The competition authorities must issue new merger guidelines before the end of 2020. As indicated above, according to the Law, the analysis must be focused on harm to competition. In the meantime, the existing guidelines still offer useful tools for many aspects of the analysis, many of which will also be in the new guidelines.

The current Merger Guidelines (Guidelines) were issued by COPROCOM on 28 May 2014. They are not binding; they were issued to give stakeholders an indication of the economic analysis COPROCOM will use in merger control analysis. The Guidelines are extensive and detailed; therefore, reference is made here to the most relevant topics covered by the Guidelines. Additionally, COPROCOM's application of the Guidelines has not been apparent.

The Guidelines include definitions of some concepts that are not covered herein (e.g., a definition of economic control, plus suggestions of a variety of ways in which a change of control may take place), and a definition of the different types of mergers and how they are likely to impact competition.

In horizontal mergers that involve intermediate goods, if COPROCOM finds a negative impact for the clients, it will assume that such impact will also affect consumers of the final goods. However, if the merger is vertical or conglomerate, COPROCOM shall seek to determine the impact on consumers.

Market shares and market concentration will be more significant in the analysis of more stable markets. With regard to market power and the calculation of market shares, COPROCOM will generally use annual sales. However, in certain markets this may not be appropriate, such as very dynamic markets or markets in which transactions are rather sporadic (i.e., wind turbines); therefore, different periods of sales might be used. In some cases, units sold or production capacity will also be used in the place of sales.

In mergers that involve an entity with a large market share and a recent entrant to the market, COPROCOM will also look at the potential of the entrant to challenge the established competitors. Similarly, in mergers involving a maverick, COPROCOM will look more closely at the transaction.

The general standard based on the Herfindahl–Hirschman Index (HHI) will be:

  1. no anticompetitive effects: HHI variation of less than 100 and HHI of less than 1,500;
  2. potential anticompetitive effects:
    • in markets with moderate concentration: HHI of between 1,500 and 2,500 and HHI variation greater than 100; and
    • in highly concentrated markets: HHI greater than 2,500 and HHI variation of 100 to 200; and
  3. where market power can be increased: in highly concentrated markets: HHI greater than 2,500 and HHI variation greater than 200, particularly if market share exceeds 50 per cent.

The Guidelines list in detail the criteria COPROCOM will use to evaluate unilateral and coordinated effects, including the specifics of bid markets. This is conducted separately for each type of merger.

With regard to efficiency gains, consumer welfare shall prevail over internal efficiencies; thus, efficiencies should create benefits for consumers. Evidence must be based on studies conducted through sound technical methodology, and the studies should probe specificity, cost estimates, likelihood, when and how benefits will be transferred to consumers, how they stimulate capacity to compete, which consumers will benefit, and any other evidence requested by COPROCOM. Reductions in variable costs will be more appreciated than reductions in fixed costs, although the latter will not be ignored.

Finally, the Guidelines include some particularities regarding the analysis of mergers in specific markets, such as telecommunications, air transport, energy and financial services. For instance, according to the Guidelines, with regard to telecommunications, the definition of markets made by SUTEL is for regulatory purposes only. For competition purposes, such definition is not binding, although it might be used as a reference point by COPROCOM in its definition of the relevant market on a case-by-case basis where COPROCOM will favour supply substitution over demand substitution.

iv OTHER STRATEGIC CONSIDERATIONS

Because many aspects of the Law are still pending, strategic considerations are currently difficult to assess. The private sector in general and key economic agencies should closely monitor the appointment of the new members of COPROCOM and the drafting of the executive regulations, the regulations to be issued by the authorities themselves and the technical guidelines, all of which should be achieved by early 2021. Once the competition landscape is complete, discussions about strategy will be more meaningful.

v OUTLOOK and CONCLUSIONS

The completion of the implementation of the Law is expected to be complete by the end of 2020 or early 2021. This means we will see the appointment of three new full-time members and two substitute members of COPROCOM. The government should also issue the executive regulations of the Law, and COPROCOM and SUTEL are required to issue specific regulations on matters such as filing fees and details surrounding the calculation of penalties, among other things. Merger control guidelines for filings and analysis of concentrations are also expected. The workings of this new institutional and normative arrangement are eagerly anticipated.

In the longer term, all stakeholders face a major challenge. The Association Agreement signed by the Central American countries and the European Union contains a competition chapter (Chapter VII), according to which all countries in the region must have in place a competition law that includes regulations regarding horizontal and vertical conduct and merger control. If a country does not have a competition law in place (such as Guatemala), it should enact one within three years of the ratification of the Agreement by all countries. While this may still be in the future, as time passes, we should begin to see greater coordination and teamwork between the region's competition authorities.


Footnotes

1 Edgar Odio is a partner at Facio & Cañas.