The analysis of coordinated effects in merger control is definitely a topic that has gained a prominent position on the agenda of the Administrative Council of Economic Defense (CADE), the Brazilian antitrust authority, in 2017.
The number of merger cases in which the coordinated effects have been analyzed is a good reference. Between 2012 and 2014, CADE examined the coordinated effects in three cases, but this soared to 16 between 2015 and 2017 (six of them in 2017 alone).1
The fact that coordinated effects are under CADE's spotlight may be due to (i) publication of an updated version of CADE's Guidelines for Economic Analysis of Horizontal Mergers in 2016 (2016 Guidelines), which put more emphasis on the subject, as will be further explained; and (ii) the new composition of CADE's Administrative Tribunal,2 that seems to favor a more comprehensive approach to merger review.
Legal basis in Brazil
Coordinated effects under merger control analysis are not exactly new within the Brazilian antitrust legislation. Law 12,529 of November 30, 2011, which structures the Brazilian Competition System, establishes that a dominant position is held to exist when a company or group of companies is able to unilaterally or jointly change market conditions.3
In addition, the analysis of coordinated effects in merger control was slightly addressed in the previous CADE's Guidelines for Economic Analysis of Horizontal Mergers (August 2001) within the context of examination of the likelihood of exercise of market power and, in the 2016 Guidelines, it appears in greater detail in a separate item.
According to the 2016 Guidelines, CADE should examine whether the proposed transaction makes coordination more likely to occur in the relevant market under analysis (or in the related markets, depending on the case).
To support such analysis, the 2016 Guidelines list a number of elements allegedely indicating that a relevant market is more conducive to coordinated exercise of market power – for instance, the limited number of players; a high level of interactions; product homogeneity; a history of coordination in the market under analysis/ corporate relationships between the deal companies that could impair rivalry or transparency, among others.
CADE's precedents until 2016
According to a survey conducted by CADE's General Superintendent Alexandre Cordeiro, within the context of the analysis of the Alesat/Ipiranga case,4 until 2016, the analysis of coordinated effects under the merger control regime did not lead (exclusively) to a rejection of transactions.
The concerns with a potential collusion always existed to a lesser or greater degree, but the background shows it has never been a central point of CADE's analysis. Mr. Cordeiro recalled that several cases involving players with high market shares (C4 analysis) and relevant markets with a substantial history of collusion were approved with the imposition of remedies in a view to mitigating any concerns on collusion practices (e.g., HSBC/Bradesco, cleared with conditions in June 2016).
In light of this, CADE's Tribunal until then took a majority stand that a history of collusion cannot be seen as a per se difficulty or barrier naturally leading to rejection of deals that result in some level of concentration.5
CADE's recent precedent
The Alesat/Ipiranga deal6 can be seen as a milestone with respect to the analysis of coordinated effects in Brazil. In short, on August 2, 2017, CADE vetoed the acquisition of fuel distributor Alesat Combustíveis S.A. by its competitor Ipiranga Produtos de Petróleo S.A. mostly because of the high likelihood of ensuing coordinated effects.
According to CADE's Tribunal, the proposed merger would negatively affect regional markets, especially because Alesat is the biggest fuel distributor in the region where it does business, having more capacity to compete with Ipiranga, Petrobrás and Raízen, the three companies operating on a national level. Besides, CADE held that the parties did not submit remedies proposals capable of neutralizing the risks or concerns identified.
Although the Reporting Commissioner João Paulo Resende considered a few elements corroborating to reject the transaction, the key note was his conclusion that the transaction would raise a likelihood of collusion in the relevant market under analysis (fuel distribution sector) and in its related market (i.e., fuel retail sector) in a post-deal scenario.
CADE acknowledged there is no direct relation between concentration and coordination (neither theoretical nor empirical), but expressly stated that a transaction can create favorable conditions to collusive practices (tacit or explicit).
In this specific case, CADE grounded its decision on the following main elements: (i) the fuel distribution market has at least 12 aspects that foster collusion,7 being the history of investigation the most relevant aspect considered by CADE; (ii) negative externalities in the market of fuel retail, facilitating even more the collusion; and (iii) the fact that CADE's Department of Economic Studies ("DEE") concluded that the transaction would raise the incentives for collusion in 168 relevant markets, corresponding to 54.7% of the total relevant markets under analysis.
With respect to the history of investigation, CADE's internal statistics revealed that the fuel sector is by far the leader of cartel cases in the history of the Brazilian Competition System and that the parties were directly involved in eight formal investigations initiated between 2000 and 2009. CADE emphasized this point during the trial session.
The Alesat/Ipiranga case clearly indicates a shift in CADE's perception regarding the relevance of coordinated effects in merger analysis in Brazil. CADE's greater attention to the subject seems to be a trend in very recent cases still in progress, and adds an important element to be taken into consideration by companies when considering its involvement in a potential merger.
Salient issues involving the coordinated effects in merger control cases
This subject matter raises several interesting and provocative questions that have to be henceforth explored by the antitrust community in Brazil, as will be seen below.
The first question is whether an analysis of coordinated effects within the merger control regime would be appropriate (and, if so, to what extent). In the Mataboi/JBJ8 case recently rejected by CADE's Administrative Tribunal, Mr. Cordeiro, then Reporting Commissioner, stated that collusive practices are economic offenses that are difficult to detect and punish and, thus, prior control of market structures would be justifiable.
Although the Reporting Commissioner's rationale has some legal grounds, it is not intuitive to put in the same basket distinct elements originating from the preventive and repressive roles of CADE, such being two independent duties attributable to the antitrust authorities in Brazil.
The second question lies in the fact that an analysis of coordinated effects not properly or carefully undertaken could even cause a pro-competitive transaction to be rejected. This is so because a merger deal in a concentrated market can have a twofold effect: (i) raise the likelihood of coordination in a post-deal scenario; or (ii) increase competition in a certain relevant market (for example, a merger between the second and third players, which could perhaps compete more vigorously with the first player after the transaction).
The third question refers to the analysis of coordinated effects in fast-track cases. In the Kroton/Estacio case (June 2017), Commissioner Gilvandro Araújo indicated there should be a sequential order to be followed in analyzing merger cases and, thus, the analysis of potential coordinated effects would only be conducted when previous exercises pointed to potential antitrust concerns as a result of the transaction (i.e., high combined market shares and likelihood of exercising market power).
Nonetheless, in the Mataboi/JBJ case, CADE concluded that the post-deal coordinated effects were crucial and sufficient to justify its rejection, even though no horizontal overlaps resulted from the transaction and vertical integration was very limited in Brazil.
The fourth question is that the analysis of coordinated effects is still very subjective in Brazil (lack of predictability). CADE only establishes a list of relevant elements for analysis, without indicating the methodology to be adopted, the relevance of each element, or the guidelines for defining a high likelihood of post-deal collusion (e.g., C4 analysis, history of collusive practices, etc.).
All things considered, it is possible to infer that the analysis of coordinated effects in merger cases is gaining momentum in terms of volume, relevance and visibility in Brazil. This fact raises a number of questions and challenges that need to be faced by CADE with the support of the antitrust community in Brazil with a view to ensuring a predictable, rigorous, and solid antitrust analysis.
Luís Henrique Perroni Fernandes is an associate at Pinheiro Neto Advogados. He can be reached at email@example.com.
Rodrigo de M. Carneiro de Oliveira is a partner of Pinheiro Neto Advogados. He can be reached at firstname.lastname@example.org
- Data collected until October 2017.
- CADE's Administrative Tribunal is responsible for issuing a final decision on complex merger cases in Brazil.
- Article 36, paragraph 2.
- Alexandre Cordeiro Macedo served as CADE's Tribunal Commissioner until October 2017.
- This is also the current understanding of Mr. Cordeiro, the current General-Superintendent, who diverged from the other Commissioners in recent cases.
- Concentration Act n. 08700.006444/2016-49.
- 1) A reduced number of companies and/or concentration of a large portion of the offer within a few companies (in 16 of the 21 state markets under probe, C3 would be above 75% in the post-deal scenario); 2) A high level of interaction among the several markets; 3) A reduced capacity of rivals to expand their offer in the short run, which is evidenced in this case by the fact that the market share of the three largest companies remained unchanged even in the long run; 4) Product homogeneity; 5) A reduced purchase power of customers; 6) Frequent and small orders; 7) Low demand elasticity; 8) Technology stability of products and processes; 9) market maturity and demand forecasting; 10) Non-existence of more aggressive pricing conduct alternatives; 11) History of coordination in the market or in related markets; 12) Commercial relations that may impair rivalry, as the four largest fuel distributors also have a trade association of their own (Sindicom).
- Concentration Act n. 08700.007553/2016-83.