BRIC Merger Control - The New Regulatory Frontier

Originally published in International In-house Counsel Journal Vol. 5, No. 19, Spring 2012, 1

1. Introduction

   Global M&A activity increasingly focuses on businesses with assets and/or sales in the BRIC countries - Brazil, Russia, India and China. From the end of May 2012, when the regime in Brazil becomes suspensory, each BRIC country will operate a mandatory pre-merger control regime requiring transactions that meet relevant thresholds to be notified to, and approved by, the local competition authority prior to closing. A new Russian regime came into force in January of this year, while the first functioning Indian regime came into force in June of last year. We have recently seen the Chinese competition authority intervening in international transactions, imposing conditions for clearance not imposed by other competition authorities. These developments create a new regulatory environment with additional hurdles for international transactions.

   This article summarises the new regimes, highlighting the recent changes and aspects of particular interest for international transactions, such as low or ambiguous notification thresholds, the risk of lengthy review periods and broader policy considerations potentially coming into play. The authors also draw comparisons with the existing regimes in the United States, Europe and elsewhere, as well as the 2002 Recommended Practices for Merger Notification Procedures of the International Competition Network (ICN).2

2. Brazil

   Brazil has been operating a well-established merger control regime for many years, with approximately 8,000 mergers reviewed since 1994.3 Brazilian filings have been numerous (2011: 758 filings) because thresholds are easily triggered by transactions involving large international companies. Filings typically led to a lengthy review process by three authorities with overlapping competences – the Secretariat of Economic Law (SDE), the Secretariat for Economic Monitoring (SEAE) and the Council for Economic Defence (CADE). However, this did not unduly concern transaction parties in most cases, because the regime has been "non-suspensory" and so allowed for closing of a transaction prior to conclusion of the investigation. The issue of most concern was the filing deadline, which required the parties to make a filing within fifteen business days from the signing of the first binding agreement related to the transaction.

   Potentially lengthy standstill period. The attention paid to the Brazilian regime will increase significantly from the end of May 2012, when Brazil's new merger control rules will come into effect.4 The reform will bring a dramatic shift to a regime that prevents the parties from closing a notifiable transaction before clearance has been received from CADE. The "standstill period" under the new regime while CADE reviews a transaction can take up to 330 calendar days5: this is one of the longest review periods of all the 100+ jurisdictions operating a merger control regime worldwide. While CADE is expected to clear straightforward cases much more quickly, the potentially extremely long statutory review period creates concerns, particularly in light of the lengthy reviews which were typical under the non-suspensory regime.6 Regrettably, a Phase 1 contained in draft legislation was not included in the final bill, contrary to ICN principles. The authorities are discussing potential regulations to deal with this issue, but have issued no guidance yet. As a result, there may be considerable timetable uncertainty for transaction parties when a Brazilian filing is required. Although the 15 business day filing deadline will thankfully disappear under the new regime, parties would be well-advised to continue to make early filings, given the possibility for delay in clearance.

   Agency consolidation and new thresholds. In addition to introducing a suspensory regime, the new rules: (i) consolidate investigative powers within one of the former three Brazilian authorities (CADE); (ii) abolish the former 20% market share threshold; and (iii) introduce a domestic sales threshold for a second party to the transaction. A filing is triggered under the new regime only if one party's group sales in Brazil were at least R$400 million ($234 million) and any other party's group sales in Brazil were at least R$30 million ($17.5 million) in the previous year. These changes are welcome as they should render the review process more efficient and avoid the uncertainties stemming from market share thresholds. However, contrary to ICN principles, the target itself is not required to meet either of the sales thresholds; rather, the seller's group (as well as the purchaser's group) could meet the thresholds and a filing could be triggered on the basis of minimal target sales in Brazil. As such, it will remain the case that a transaction between two major conglomerates can easily require a Brazil filing even when the transaction is small and the target has little activity in Brazil.

   Clawback. A new area of potential concern is a clawback provision which allows CADE to review transactions that fall below the notification threshold...