This country-specific Q&A provides an overview to merger control laws and regulations that may occur in Ecuador.
It will cover jurisdictional thresholds, the substantive test, process, remedies, penalties, appeals as well as the author’s view on planned future reforms of the merger control regime.
This Q&A is part of the global guide to Merger Control. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/merger-control
The primary piece of Ecuadorian legislation dealing with economic competition matters is the Organic Law for the Regulation and Control of Market Power (Ley Orgánica de Regulación y Control del Poder de Mercado), in force since October 11, 2011 (hereinafter “LORCPM”). The Regulation for the Application Organic Law for the Regulation and Control of Market Power (Reglamento para la Aplicación de la Ley Orgánica de Regulación y Control del Poder de Mercado), is the most relevant piece of secondary legislation dealing with competition matters, in force since May 7, 2012 (hereinafter “RLORCPM”).
The LORCPM introduced the merger control regime to ecuadorian legislation and provides that the Superintendency of Market Power Control will be the competetn entity grant or not authorization for mergers subject to control. The Superintedency, thorugh the Merger Control National Intendency, has reviewed and analyzed several cases in a wide range of markets and industries. The final decisions of the Superintendency are now a relevant piece of case law.
Is mandatory notification compulsory or voluntary?
Pre Merger Notification is mandatory when either one of the following conditions is met:
a) When the resulting Market Share is equal to 30% or more of the relevant market, or;
b) When the Business Volume (Total turnover minus VAT) of both undertakings, in Ecuador, is equal to the US Dollar threshold established by the Regulation Board for each market. The current thresholds are:
- Banking sector: US$ 1,235,200,000.
- Insurance: US$ 82,604,000.
- Real Sectors: US$ 77,200,000.
What are the conditions of the test for control?
The LORCPM sets forth a low standar of the conditions of the test for control. Any direct or indirect change in control or takeover is subject to scrutiny if the thresholds (see question 2) are met. Article 14 of the LORCPM provides the following:
“Art. 14.- For the effects of this provision, economic concentration is understood as merger, acquisition and/or takeover of one or more enterprises or economic operators, by carrying out one the following:
- Merger between companies or economic operators.
- Total transfer of the effects of a merchant.
- Direct or indirect acquisition of property or any other rights in shares or debt documents which may give any right to be converted into capital (…), when such acquisition may give the buyer control of or substantial influence over the seller.
- Linkage due to shared management.
- Any other agreement or act that transfers in a de facto or legal manner the assets of an economic operator or gives control or substantial influence over decision making and management of such economic operator, to a third party, whether it be a specific individual or an economic group.”
What are the conditions on minority interest in your jurisdiction?
Acquisitions of minority interests that do not result in direct change of control fall outside the scope of the LORCPM. There is not a given percentage of what is minoruty interest but in closed corporations will ussually be under the 51% of the shareholders voting rights.
When direct control is not generated, the Superintendency is requiered to analyze whether the acquirer has the means to exercise de jure or de facto control over the acquired undertaking (i.e: negative control through ancillary agreements, special rights attached to shares or contained in shareholders’ agreements, board representation or the control of productive assets).
What are the jurisdictional thresholds (turnover, assets, market share and/or local presence)?
The jurisdictional thresholds are turnover and/or market share. If one is met, then the operations is subject to mandatory filling (See question 2).
How are turnover, assets and/or market shares valued or determined for the purposes of jurisdictional thresholds?
Art. 17 of the LORCPM define how the turnover threshold has to be determined. The following shall be added:
- The target turnover.
- The turnover of the companies in which the target owns (directly or indirectly):
- 51% or more of the paid equity.
- 51% or more of the voting rights.
- The power to appoint more than half of the members of the board,
- For the right to direct the activities of the enterprise or economic operator.
- The turnover of those companies who have the rights or powers listed in the literal b) in regard to the target.
The market share threshold is calculated through the sum of the both target and acquired participation within the relevant market.
Is there a particular exchange rate required to be used for turnover thresholds and asset values?
Ecuador has a dollarized economy; therefore any calculation is presented in US Dollars. If other currencies have to be converted, the applicable exchange rate will be the official published by the US government at the date of calculation that is also published by the Ecuadorian Central Bank.
Do merger control rules apply to joint ventures (both new joint ventures and acquisitions of joint control over an existing business?
New joint ventures will usually fall outside the scope of the merger control regulation. However, acquisition of existing joint ventures are subject to merger control rules.
In relation to “foreign-to-foreign” mergers, do the jurisdictional thresholds vary?
The jurisdictional thresholds do not vary according to whether the transaction is 'foreign-to-foreign' or 'local-to-local' under the LORCPM.
For voluntary filing regimes (only), are there any factors not related to competition that might influence the decision as to whether or not notify?
Yes. The broad investigation powers of the competition authority and the publicity of its resolutions are a barrier for voluntary fillings, as well as the mandatory fee that undertakings have to pay in order to trigger the analysis and resolution of the filling.
Additional information: Jurisdictional Test
The Regulation RLORCPM has set a relevant limit to the turnover threshold. Intragroup operations are not added in the calculation. Additionally, Article 14 of the Regulation RLORCPM provides that in case of carve outs, meaning that only a line of business is acquired, then the turnover threshold will only be calculated considering the total sales of such business unit and not the entire undertakings turnover.
What is the substantive test applied by the relevant authority to assess whether or not to clear the merger, or to clear it subject to remedies?
The SCPM will apply, depending on the approach of the investigation, a Dominance Test or a Substantive lessening test, and if needed a third test (not competition related) will be applied in order to evaluate additional factors (see question 13).
It is usual that the authority evaluates a transaction through a SSNIP test (a form of cross elasticity of demand), cross elasticity of supply and a comparison of pre-merger HHI (sum of squared market shares of all players in market) to post-merger HHI. If the resulting HHI is above 1500 points the market is considered highly concentrated.
Are non-competitive factors relevant?
Yes. In addition to the substantive test, Article 22 of the LORCPM provides that the Competition is deemed to analyze the following factors:
The contribution of the merger to:
- The development and promotion of technological or economic progress for the country;
- The development and competitiveness of the domestic industry in the international market;
- The consumers welfare;
- The diversification of equity within the workers of the target or acquirer.
Are there different tests that apply to particular sectors?
Are ancillary restraints covered by the authority’s clearance decision?
Yes. Ancillary restraints can be ordered by the authority, as remedies to negative effects, or can also be proposed by the undertakings in the filling in order to increase success in the filling.
What is the earliest time or stage in the transaction at which a notification can be made?
Fillings must be submitted in a 8-day period after conclusion of an agreement, wheatear binding or not.
For mandatory filing regimes, is there a statutory deadline for notification of the transaction?
Please see question 16.
What is the basic timetable for the authority’s review?
Once the notification has been made and the notifying undertaking has received confirmation that the notification requirements have been fulfilled, the authority has 60 days to review and to issue a decision (Article 21 LORCPM; Art. 20 RLORCPM). This period may be extended for an additional 60 days.
Under what circumstances the basic timetable may be extended, reset or frozen?
There are no specific objective circumstances in which the authority may agree or decided to extend the timetable. Is a discretionary power.
However, the timetable may be suspended/frozen in the event that the authority needs to make information requests from third parties or any other governmental institution. In any event, the suspension period shall not be longer than 60 days.
Are there any circumstances in which the review timetable can be shortened?
No, there are no circumstances where the review timetable can be shortened.
Which party is responsible for submitting the filing? Who is responsible for filing in cases of acquisitions of joint control and the creation of new joint ventures?
As a general rule, the party who is acquiring control is responsible for submitting the filing. In the case of acquisition of joint control and the creation of new joint ventures, a joint application must be filed. (Article 18 LORCPM and Article 19 RLORCPM).
What information is required in the filing form?
The following information is required to be included in the filing form (Article 18 RLORCPM):
- Names and addresses of the undertakings involved;
- Description of the economic activities performed by the involved undertakings;
- Relevant markets in which the involved undertakings operate and their respective market shares.
- Turnover of the involved undertakings, including that of their respective subsidiaries or any third entity under their control;
- Description of the relation that each one of the undertakings has with companies of their corporate groups, provided that those companies operate in any of the markets affected by the transaction.
- Description of the market conditions including the structure of market’s supply and demand. This information shall include a description of the relevant suppliers; indication of the percentage of the sales of those suppliers in the undertaking’s needs; description of distribution channels; description of production costs of goods and services; identification of main competitors; existence of entry barriers, among others.
- Description of the structure of the merger transaction;
- Description of the contribution that the merger/acquisition would have, inter alia, on the national market, the countries’ technological or economic development, consumer welfare, any restrictive effects that it may create.
- Offer of any remedies for the authorization of the merger/acquisition.
Which supporting documents, if any, must be filed with the authority?
The following documents must be filed with the authority (Article 18 RLORCPM):
- Notification form;
- Copy of the transactional documents;
- Undertaking’s financial statements of the previous fiscal year;
- Any analysis or report that the parties may consider to be relevant;
- Request for considering the notification, or information contained on it, confidential.
- Unilateral authenticated declaration that the filed information is accurate and that all opinions and calculations in the notification have been made in good faith.
Is there a filing fee? If so, please specify the amount in local currency.
Yes, there is a filing fee. However, this fee is not a fixed one but is calculated on the basis of a percentage of certain parameters. As such, the filing fee is the highest amount of either: a) 0.25% of Income Tax, b) 0.005% of turnover; c) 0.010% of Assets and d) 0.05% of Equity (Assets - Liabilities). Local currency is dollars of the United States of America. (Article 3, Regulation Imposing the Filing Fee).
Is there a public announcement that a notification has been filed?
No, there is no public announcement that a notification has been filed. Only the final resolution is public.
Does the authority seek or invite the views of third parties?
The authority has broad powers that allow it to seek information from any third party (Article 49(2) LORCPM and Article 26 (RLORCPM)). Under these powers, the authority may request reports from any other governmental body that may assist during the notification process. The authority may also compel any third party to provide any kind of information that it may seem relevant for the assessment of the merger notification.
What information may be published by the authority or made available to third parties?
During the notification process, information is confidential and only the parties have the right to access the case docket (Article 47 LORCPM and 65 RLORCPM). In addition, the parties have the right to request the authority to declare the information that has been provided to be confidential. Final decisions may be published by the authority but information that has been declared to be confidential during the process will remain as such. Generally, the authority has the right to publish opinions, guidelines, technical criteria, and market studies. Such publications cannot contain information that is deemed to be confidential.
Does the authority cooperate with antitrust authorities in other jurisdictions?
There is nothing in the local applicable law impeding the authority to cooperate with antitrust authorities in other jurisdictions. There are no precedents, however, showing that this has been the case yet.
What kind of remedies are acceptable to the authority? How often are behavioural remedies accepted in comparison with major merger control jurisdictions, such as the EU or US?
Both behavioral and structural remedies are acceptable to the authority. Similar to major merger EU or US jurisdictions, structural remedies are often preferred over behavioral remedies. In a case involving the largest producers in the market of beer (Cervecera Ambev Ecuador S.A and Cervecería Nacional CN S.A., case No. SCPM-CRPI-2016-017, 22 July 2016), the authority approved the merger transaction subject to the following remedies, which included behavioral, structural and quasi-structural ones:
- Total divesture from the production plant and distribution channels;
- Sale of certain beer brands to a third competitor;
- Commitment to allow competitors to use the notifying party’s distribution channels;
- Imposition of limits on the marketing budget in the iconic brand of beer, Pilsener, and other brands such as Club and Budweiser;
- Commitment to guarantee space in coolers and freezers for competing brands;
- “Hold Separate” commitment, imposing an obligation on the acquired entities to continue to keep arms-length competition between each other until a third competitor enters into the market;
- Commitment to create an e-commerce portal for the sale of competing “hand-crafted” beer;
- Limitations on the ability of executing exclusivity contracts.
What procedure applies in the event that remedies are required in order to secure clearance?
There is no specific procedure regulated in the local legislation regarding remedies. This is rather a matter that is dealt with during the authority’s review and it is under the discretion of the authority to determine whether to clear the transaction in the light of the proposed remedies. As a general rule, however, remedies shall be implemented in a period of 90 days after the approval of the transaction. The authority is also under the discretion to impose monitoring obligations in order to verify the compliance of the accepted remedies. The authority may grant an additional period, under its discretion, if the undertaking shows that despite its best efforts, it has been impossible to implement the remedies in the initial 90 days. (Article 21 RLORCPM).
What are the penalties for failure to notify, late notification and breaches of a prohibition on closing?
Penalties in the Ecuadorian legislation consist on light violations, serious violations, and very serious violations.
Late notification is considered to be a light violation and is sanctioned with a fine amounting to eight per cent (8%) of the undertaking’s total turnover (Articles 78(1)(a) and 79(a)).
Implementing the merger transaction without prior notification or before obtaining clearance is considered to be a serious violation and is sanctioned with a fine amounting to ten per cent (10%) of the undertaking’s total turnover (Articles 78(2)(d) and 79(b) LORCPM).
If the merged entity enters into any contract or performs any act before obtaining clearance or without prior notification, it may be sanctioned with a penalty amounting to twelve per cent (12%) of the undertaking’s total turnover (Article 78 (3)(c) and 79(c).
What are the penalties for incomplete or misleading information in the notification or in response to the authority’s questions?
Incomplete or misleading information can be deemed to be a breach of the duty to cooperate with the authority (Article 50 LORCPM) and may also be seen as an act obstructing the performance of the authority’s duties (Article 78(1)(h) LORCPM). This constitutes a light violation sanctioned with 8% of the total turnover.
Without prejudice of the imposition of this penalty, the authority may also impose an additional “coercive fine” destined to force the undertaking to provide complete and accurate information. This fine may amount to total amount equivalent to 200 Basic Uniform Remunerations (i.e. USD 75.000).
Can the authority’s decision be appealed to a court? In particular, can third parties who are not involved in the transaction appeal the decision?
Yes, the authority’s decision can be appealed to a court. However, third parties who are not involved in the transaction cannot appeal the decision. (Article. 69 LORCPM)
What are the recent trends in the approach of the relevant authority to enforcement, procedure and substantive assessment?
As a young authority that was only appointed in 2012, the Superintendence for the Regulation and Control of Market Power is still perfecting both the procedure and substantive assessment of merger transactions. The adoption of remedies, both structural and behavioral, are novel to its practice and it is expected that the approval of more transactions subject to such remedies continue to increase.
Several secondary regulations have been issued since the LORCPM was sanctioned on 13 October 2011 with the purpose of providing more guidance on merger control. On 7 may 2012 the Regulation for the application of the LORCPM was enacted and it provided more details on how the notification process has to be performed. On 9 may 2013, the authority issued a “Notification Form” further facilitating the notification process. On 30 May 2013, notification fees were set. More recently, on 9 February 2017 the authority issued a note with instructions on how to pay the notification fees.
Are there any future developments or planned reforms of the merger control regime in your jurisdiction?
At this time, there are no future developments or planned reforms of the merger control regime.