The Merger Control Review: Ecuador
The Organic Law for the Regulation and Control of Market Power (Law) was enacted on 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 regulations and sector-wide recommendations, among them implementing economic thresholds for mergers.
Merger notifications are filed with the Intendancy for Concentration Control (the Merger Control Intendancy), an investigative authority that issues a recommendation report for resolution by a three-person resolution panel, the First Instance Resolution Commission (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, condition 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 Commission. The Merger Control Intendancy is in charge of analysing notified transactions and issuing final recommendation reports, which contain an economic analysis of the competitive landscape, the transaction's potential impact on the competitive structure, and its final recommendation as to the clearance, conditional clearance subject to remedies, or denial, of the transaction. The agency recently created a fast-track procedure for transactions that do not pose substantive risks to competition, which is a welcome change for a regime that took, on average, five to six months from filing to clearance.
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 on a lasting basis exceeding either of the economic or market share thresholds may be subject to mandatory merger control notification and prior clearance before its execution in Ecuador. Mergers and acquisitions, full-function joint ventures, administration agreements and asset sales, 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 turnover or market share thresholds are met.
Year in review
The most consequential recent development in the Ecuadorian merger regime was the 22 April 2020 resolution by which both a fast-track merger procedure and a three-pronged failing firm defence were created. The failing firm defence is part of the fast-track procedure.
To benefit from the fast-track procedure:
- the undertaking acquiring control should not, directly or indirectly, carry out economic activities in Ecuador;
- in horizontal mergers:
- the parties' joint share in each relevant market must be less than 30 per cent; and
- the Herfindahl–Hirschman Index (HHI) in each relevant market shall be less than 2,000 points and generate, as a consequence, an increase of less than 250 points;
- in vertical mergers, the HHI of the affected relevant market shall be less than 2,000 points; or
- the undertakings must be at risk of bankruptcy. This possibility, known as failing firm defence, is a new feature in the Ecuadorian competition regime. Following EU guidelines, the competition authority created a three-step test to determine the applicability of this criteria:
- the failing firm would, in the near future, be forced out of the market due to financial difficulties;
- there are no less anticompetitive alternatives than the proposed merger; and
- in the absence of the merger, the assets of the failing firm would inevitably exit the market.
Although the effects of this new fast-track procedure are not yet apparent in practice, this regime will generate significant advantages for undertakings by reducing waiting times. Inevitably, as this regime is implemented, several practical questions requiring answers from the competition agency will arise.
The merger control regime
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. The first term of the Superintendent Pedro Páez expired in 2017, and a new Superintendent, Danilo Sylva Pazmiño, was appointed in November 2018.
i Transactions subject to prior control
Ecuador's prior control and approval regime for concentration operations can be generally summarised as follows:
- economic concentrations are defined as a change in or takeover of control on a lasting basis, with an impact on the structure of the market, in one or several economic operators through the following acts:
- 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;
- the above-mentioned exemplary acts, and others falling within this scope, will require the prior authorisation of the Superintendency before their execution; and
- '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 undertaking. This control may be joint or exclusive. Substantial influence has been defined as the possibility of making or blocking strategic commercial decisions of an undertaking (positive or negative control).
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.
The economic threshold will be reached in cases where the combined annual turnover of the undertakings 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||1.28 billion|
|b Concentrations involving insurance and reinsurance companies||214,000||85.6 million|
|c Concentrations involving undertakings not contemplated in (a) and (b)||200,000||80 million|
|* The unified basic remuneration in Ecuador for 2020 is US$400|
† The unified basic remuneration changes yearly; thus, the value 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. Contrary to turnover information, the notifying undertakings must produce updated market share information.
A transaction must be notified if one of the parties holds a share equal to or superior to 30 per cent of the market share, regardless of whether the transaction reinforces this share.
iii Execution and filing
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 accepted by the parties through their governing bodies or the appointment of local administrators. The Regulations provide further guidance in respect of the 'conclusion' concept, and stipulate that it should occur at the following times:
- for mergers: from the time when at least one of the participants at the shareholders' meeting has agreed to the merger;
- 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;
- 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;
- for joint venture and administration agreements: from the time that the administrators have been designated by the shareholders' meeting; and
- 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 Waiting periods and time frames
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 period, although it is still under discussion if this additional term is of 60 or 120 days. 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 five and seven months from the date of filing until a clearance decision is issued for a relatively complex merger, and eight to 12 months if there is a need to negotiate remedies.
On 20 April 2020, the agency enacted a resolution by which a fast-track procedure has been created (see Section II). Although influenced by the European regime, the specific criteria may be different. It takes at least 37 business days from the filing of the notification to complete the new procedure.
The Regulations grant the Superintendency the right to determine official fees for the evaluation of a concentration notification. In 2013, the Superintendency published regulations containing the parameters to be used to determine the fee charged for the processing of each concentration notification.
The regulations establish that the processing fee will be the greatest of the following:
- 0.25 per cent of the income tax paid in the previous fiscal year in Ecuador;
- 0.005 per cent of sales obtained in the previous fiscal year from the undertakings' activities in Ecuador;
- 0.01 per cent of the assets in Ecuador; or
- 0.05 per cent of the book equity in Ecuador.
The current rules for fees require parties to validate their methodology of payment prior to making any disbursements. 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. However, this validation period tends to take several weeks, generally delaying the completion of the review period by two or three weeks. As a consequence, the Authority is currently considering new rules that would set a fixed fee subject to discounts depending on specific circumstances of the parties. These new rules have not yet been made public.
Article 19 of the Law and Article 13 of the Regulations establish that the following operations are exempted from the obligation to notify:
- acquisitions of shares without voting rights, bonds, securities or any other right convertible to shares without voting rights;
- 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;
- acquisitions of shares with the intent of reselling them within a year (any holding of more than a year must be authorised by the regulator);
- acquisitions of failing firms. In Ecuador, the failing-firm doctrine requires prior authorisation of a public authority. It has not been clarified what public body must authorise the acquisition of a failing undertaking; and
- acquisitions of undertakings in the course of judicial or administrative proceedings, such as seizure.
Even though it is highly likely that several undertakings will argue failing firm defences in the coming months, it is worth noting that in Ecuador this is not a proper defence, but rather a prior exemption granted by a (still undefined) public authority. Before considering a failing firm argument in Ecuador, consulting with local counsel is recommended.
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.
vi Third-party access to the file and rights to challenge mergers
The Authority tends to be overzealous with the confidentiality of all files. No public excerpt or declaration is made regarding any pending cases, and only public versions of decisions are published when formally requested and after the statute of limitations for ordinary appeals runs out (20 business days). Unfortunately, the regulator does not even publish the public versions and Freedom of Information Act requests must be filed to obtain them.
This practice complicates any challenge to mergers. Since the decision is published only after the statute of limitation of ordinary appeals runs out, third parties have only exceptional recourse, basically arguing gross misapplication of the law, new evidence or a material change in circumstances. These high bars have proven difficult to meet, and, therefore, few challenges have been proposed and even less have been at least partially successful.
vii Substantive assessment and remedies
The substantive test under Ecuadorian law is modelled on the European significant impediment to effective competition standard. However, the Authority has not fleshed out the contours of the practical application of the test, and at times the decisions seem to apply a more stringent and harder to satisfy substantial lessening of competition test. This is definitely an area that needs more clear development from the Authority.
The Ecuadorian Authority may impose both behavioural and structural remedies. Even though the Merger Control Intendant has voiced his preference for structural remedies (as he deems these more effective), because of their complexity behavioural remedies are often imposed in lieu of these. Furthermore, the largest structural remedy ever imposed by the Authority – the divestiture of the second largest beer brand as part of the SABMiller/AB InBev transaction – was annulled by the judiciary. This case resulted in a more restrained approach and reinforced the practical preference for behavioural remedies.
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 for the closing of transactions. A bill was sent to the National Assembly in 2018 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 to 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. More importantly, this bill contradicts global efforts of eliminating market share thresholds, which tend to be much more subjective than monetary thresholds. Recently, members of the Intendancy have written academic papers suggesting that a better way to move forward requires eliminating the market share threshold and leaving the turnover threshold in place.
1 Diego Pérez-Ordóñez is a partner and Mario Navarrete-Serrano is a senior associate at Pérez Bustamante & Ponce.