Transactional elements to be considered in relation to notifications to the competition authorities in Latin America

As with the first part, the aim of this analysis is to provide an at-a-glance account of the main elements to consider in transactions that may touch more than one jurisdiction, to better prepare us for planning our road map.

MEXICO

1) Is there a risk of gun jumping due to conduct obligations between signing and closing? If so, how is this risk usually mitigated?

Yes, in transactions in which a “concentration” (referred to below in relation to Mexico as a merger or acquisition) occurs and exceeds the thresholds set out in the Federal Competition Law, the risk of gun jumping being held to exist, meaning a breach of the suspension obligation in relation to economic competition, may arise where the parties to a transaction exchange information that goes beyond the level permitted by the law or administrative provisions on the subject, or acts are carried out de facto towards completing the transaction before the Mexican competition authority (COFECE) grants clearance to the merger or acquisition or before the time period for a decision after filing the relevant notification has run after which the law allows no decision to mean approval.

In Mexico, any practices amounting to gun jumping may result in administrative, civil or criminal liability for the persons involved.  At first instance, fines are imposed, and depending on the gravity, greater sanctions may be ordered.  The law states that until clearance is obtained before a merger or acquisition which must be notified by law, the transaction in question cannot be entered on the companies’ books (in cases involving share purchases, for example), or formalized by a notary, if the type of transaction requires this to be done. In other words, the intended legal effects would not occur. The law also allows illegal mergers or acquisitions to be investigated or the existence of monopolistic practices by reason of those transactions.

Another of the main risks of incurring gun jumping could arise where COFECE finds that an unnecessary exchange of information existed between the participants to a merger or acquisition, which might run counter to the way business operates in the market.  In this respect, the law bars any exchange of information that may arise as a result of a manipulation of prices, or availability or supply of goods or services on the market, a market segmentation or collusion or concerted practices in tender, competitive bidding or auction processes. In relation to these events, COFECE has stipulated that the merger or acquisition may not ultimately go ahead, and the exchange of information may alter the way in which the companies behave in the markets. 

In its Guide to the Exchange of Information between Economic Agents, COFECE recognizes that in the context of negotiations between economic agents, certain types of information need to be exchanged between the parties. For these purposes, the guide states that in the pre-merger or acquisition period and during the merger or acquisition review process conducted by COFECE, economic agents must retain their independence and conduct themselves as competing companies until clearance is granted to the transaction. Therefore, no coordination of their activities is allowed until this occurs. The guide also states that no strategic information must be exchanged under any circumstances before clearance is obtained for the merger or acquisition, because doing so could give rise to monopolistic practices.

To mitigate this risk, economic agents have to implement audit mechanisms defining the scope of the information to be exchanged, appointing the individuals responsible for the process, together with setting rules on the distribution of information, and, if applicable, its destruction, after the process has run its course. It is moreover recommended to store information that is shared with another competing economic agent separately, to prevent the public officials involved in the decision process having access to strategic information relating to the agent that might be acquired.

Another of the risks of incurring gun jumping is if COFECE finds that the parties to a transaction carried out actions that imply that the potential merger or acquisition took place before obtaining the necessary clearance. The law and various legislative provisions issued by COFECE state that for a “concentration” to exist, a de iure acquisition of control does not necessarily have to take place, instead any act in which assets or influence are gained might qualify if it amounts to a de facto transfer of control.

To mitigate this risk, it is important, in the context of a merger or acquisition, for companies to avoid carrying out acts that could clearly be directed towards completing a transaction that has yet to be approved by COFECE, such as terminating existing commercial agreements, concluding new agreements outside the normal course of business, signing agreements with clients or suppliers of other economic agent(s) involved in the transaction, among others.

2) Are hell or high water clauses common practice?

Hell or high water clauses are not usual practice in Mexico, by these we mean clauses in which one of the parties - typically the buyer - accepts the risk associated with clearance by the competition authority and undertakes to carry out all steps required to be able to complete the transaction.

For the reasons explained in the preceding reply, normally the completion of M&A transactions in Mexico is made subject to the fulfillment of certain conditions precedent, including clearance by COFECE to carry out the transaction.  Therefore, if that authority does not grant clearance to the merger or acquisition, the covenanted transaction does have any effects, and the parties can terminate it without incurring any liability.

3) Is it common practice to assemble clean teams to work on integration matters between signing and closing? 

Yes it is. The creation of clean teams is common practice to work on integration of the economic agents between signing and closing.

COFECE has issued the following recommendations on this subject, which are contained in the guide:

(a) Each economic agent must identify its strategic information. So they will have to determine all information that is not publicly available on prices, discounts, terms and conditions of sale and purchase, clients and suppliers, which is not normally shared with a third party.

(b) Use of strategic information should only be allowed if absolutely necessary and to the extent strictly needed for adequate assessment of the transaction. An exchange is absolutely necessary where the information is reasonably related to the parties’ understanding of the future gains to be obtained from the merger or acquisition and to determine the value of the transaction.

(c) Where possible, preference should be given to using aggregate or historical information to assess key elements of the transaction and to plan the integration process.

(d) Procedures or strict rules should be put in place regarding access to strategic information and a confidentiality agreement should be signed in relation to that information. These rules should:

4)  When does a change of control determine that a transaction has to be notified to the competition authority? Can control be positive and/or negative?

The first analysis from the standpoint of the law is to determine whether the type of transaction to be analyzed and the amounts involved meet the economic thresholds stated in the law. If those thresholds are met, the analysis has to involve determining whether there is a takeover or change of control, to determine whether transactions of a certain type have to be notified or are exempt.

The Merger Notifications Guide published by COFECE in the Official Federal Gazette on April 8, 2021, mentions the following:

“The Mexican Supreme Court has stated that an economic agent may exert decisive influence or control over others for acting on the markets, either as a result of legal acts (de iure) or based on the facts (de facto).

De iure control may take various forms, including where:

(a)     An economic agent, directly or indirectly, holds or owns a majority of the shares or units in a company or a direct or indirect ownership interest that allows that agent to unilaterally impose decisions at meetings;

(b)     An ability to run or manage another exists as a result of a contract, agreement, long-term supply agreements, the provision of loans or where the commercial activities of one or more companies are conducted primarily with another or depend primarily on another, such that this other party exerts real power and a decisive or significant influence over the former;

(c)     An ability or right exists to appoint a majority of the members of the board of directors or equivalent body of another;

(d)     An ability or right exists to appoint high-level managers such as directors, managers, key executives or principal employees of another; or

(e)     There are family relationships by blood or affinity among economic agents which in turn exert control over one or more legal entities.

Moreover, any analysis of de facto control must be done not only by considering the level of shareholder ownership where no shareholder has an absolute majority, but also by considering the chance of a minority shareholder obtaining a majority at meetings in view of the level of attendance; the position of the other shareholders (dispersion, structural, economic or family relationships with the principal shareholder); and the financial interest. On this subject, the judiciary has also held in rulings on competition matters that the control exerted by a legal entity may be real or latent:

"(...) control may be real if it relates to the actual conduct of a controlling company towards its subsidiaries, or latent, where it could potentially be exerted using means of persuasion that may arise between the companies even where there is no centralized or hierarchical relationship, although there is a real amount of power".

Considering that there are multiple ways for an economic agent to acquire control over another, in each case, the parties will have to analyze whether a specific transaction gives control to one of them; in other words, the ability to decide in relation to all or part of the activities of an economic agent.”

5) Are there any particular rules to be considered in relation to investment funds for the notification of a merger or acquisition?

As has been said in other replies, the general rule under the law is that a merger or acquisition must be notified where the type of transaction to be analyzed and the sums involved meet the economic thresholds specified in the law.  The exceptions that apply to investment funds and companies as provided in the law itself, its implementing regulations and the Concentration Notifications Guide; are, in relation to acquisitions of portfolio companies by: (i) investment funds, where the acquisition is only for speculative purposes, the fund has no de facto or de jure powers, and there is no intention to take part in, run or influence, directly or indirectly, the management, operation, strategy or sales and marketing policies of the acquired company, and the fund does not own any investments in other companies or assets in the same relevant market, and (ii) in relation to private equity firms (whose own shares were sold to the investing public), where those companies acquire shares or other securities in other companies, although the private equity firms cannot have a significant influence on the decisions of these other companies.

6) Is the competition agency’s approval needed if an acquisition results from a public offering of shares?

Prior clearance from COFECE is needed to purchase shares in a public offering, if the sums involved in the offering launched by the acquiring company may be higher than the economic thresholds set in the law for notification of a concentration, and exceed the ownership interests mentioned below.  In these cases, obtaining COFECE's approval may be included in the terms and conditions of the offering. 

COFECE's approval is not needed, by contrast, to purchase shares, securities, instruments or documents representing the capital of companies or whose underlying asset is shares representing the capital of legal entities, and which are listed on stock exchanges inside or outside Mexico, where the transaction or sequence of transactions do not enable the purchaser to own 10% or more of those shares, debt securities convertible into shares, securities, instruments or documents, and where, additionally, the purchaser does not have powers to:

COFECE’s prior clearance is not needed for indirect purchases in any transactions that take place outside Mexico and in relation to non-Mexican tax resident companies, by foreign companies, on condition that the companies involved in those transactions do not acquire control of Mexican companies, or obtain in Mexico shares, ownership interests, units of investment or investments in trusts or assets generally, which are added to any owned directly or indirectly before the transaction.

7) For a multi-jurisdictional merger or acquisition, does clearance need to be obtained from the competition authorities in every jurisdiction involved?

Article 86 of the law contains the main tests and economic thresholds determining that a concentration must be notified to COFECE. As a general rule, a transaction must be notified in Mexico if the tests and economic thresholds specified in that article are met.  In actual fact, these tests require an analysis, with respect to Mexico, of the value of the assets of the economic agents involved and the value of the merger in question.  The law does not specify a broad exception to the requirement to notify a transaction in Mexico based on whether clearance has already been granted in another jurisdiction or because its effects are primarily in another jurisdiction.

The Guide to Merger Notifications specifies that for international transactions it is useful for COFECE to know whether the transaction has to be analyzed and cleared by the competition authorities in other jurisdictions, and it is therefore advisable for the parties to inform COFECE about the status of any clearance procedures being carried out and about any conditions that could be laid down for obtaining clearance.

8) Is there any legislation or case law on board interlocking?

The Information Exchange Guide describes board interlocking as taking place where “a person belongs to the boards of directors of two or more economic agents which are not part of the same business group”. The guide defines these as common directors or cross-directors.  This practice is not prohibited per se, although it may give rise to monopolistic practices which as such may be monitored and if so determined subject to a fine levied by COFECE.

COFECE specifies that cases in which common directors arise between economic agents that are competing companies are considered to be the ones posing the most risk to competition, because the exchange of information between those directors may involve and enable collusion and variance monitoring. On top of this, the guide states that COFECE will consider that “the risks to competition arising from the exchange of information through common directors are greater where the number of market participants is lower, because it is likely to facilitate a meeting of minds and collusion.”

This could mean that, where economic agents have common directors, COFECE could analyze and determine whether an illegal exchange of information exists and could result in a monopolistic practice. Additionally, where an illegal exchange of information amounts to an absolute monopolistic practice, the law states that the most common penalties are fines.

PERU

1) Is there a risk of gun jumping due to conduct obligations between signing and closing? If so, how is this risk usually mitigated?

Yes, there is a risk of gun jumping being held to exist in the following scenarios: (i) where a “concentration” (referred to below in relation to Peru as a merger or acquisition) that had to be notified to the Peruvian competition authority (Indecopi) is carried out in practice either before or after the transaction is signed or completed, and that notification obligation is not performed; or, (ii) where a merger or acquisition is notified to the authority before it is completed, although it is carried out in practice without waiting for its final decision or, in any event, before approval by administrative silence takes effect if Indecopi fails to issue a decision within the statutory time periods.

If any of these gun jumping scenarios occurs, then Peruvian law states that it will carry the nullity of any acts arising from the act that has been carried out, which will not have any legal effects. Additionally, these scenarios are considered serious infringements, and as such, Indecopi may levy fines on the liable parties – depending on whether one or both parties should have notified the transaction - of up to 1000 UIT, which must not exceed 10% of the gross sales or revenues obtained by the infringing party or its business group, relating to all their economic activities, in the fiscal year immediately preceding the year of the commission’s decision. In addition to the penalty, Indecopi may order as a corrective measure for the parties to dissolve the merger or to dispose of all the acquired shares or assets, until they have been restored to their position before the transaction and, if they cannot be restored to that position, then it has a general and broad power to order other (structural or behavioral) remedies intended to avoid or mitigate the potential effects that could arise from the transaction.

However, this risk of possibly giving rise to gun jumping may be avoided or mitigated by carrying out the following preventive or proactive acts: (i) conduct at the start of negotiations for the merger or acquisition a study to determine whether or not the requirements are fulfilled for the transaction to be notified to Indecopi before it is completed and implemented (change of control, geographical nexus and legal thresholds); (ii) stipulate, in the documents associated with the merger or acquisition, a notification obligation for the party or parties required to do so under the applicable legislation and/or an obligation not to implement the transaction prematurely (without waiting for Indecopi's decision); and (iii) attempt to ensure that the management obligations in relation to the target company between signing and closing as set out in the share purchase agreement are objective, and do not grant any right to the purchaser to manage the company (to sell an asset, for example).

2) Are hell or high water clauses common practice?

Although hell or high water (HOHW) clauses are standard practice internationally for mergers and acquisitions, because there is still little experience in merger control generally in Peru, it is early days to determine to what extent, for example, the seller or target may covenant with the buyer for the buyer to undertake to accept all the antitrust risk associated with the competition authority’s decision in order for the transaction to go ahead. For example, it might be difficult to reach an agreement on clauses of this type, in complex mergers or acquisitions in relation to which the need to design potential obligations is specified (whether “structural”, such as a divestiture; or “behavioral”, such as acquiring an obligation to do or not to do something), in Phase I or in Phase II, which will be necessary for obtaining clearance through conditional approval, or a lawsuit with third parties who try to question the transaction.

It must be underlined that HOHW clauses are not regulated in the rules on prior control, although they are perfectly applicable and enforceable privately between the parties involved in the transaction; even if they cannot be relied on as against the competition authority.

3) Is it common practice to assemble clean teams to work on integration matters between signing and closing?

Absolutely. It is highly recommendable to create these types of teams in horizontal mergers (transactions involving direct competitors in other words), so as to avoid or mitigate the risks of exchanging sensitive information without any procedures in place and which later, if the transaction does not go ahead, could be found by the competition authority to show a reasonable probability of anticompetitive behavior (because, for example, after the failed transaction a convergence of the parties’ prices took place, and it is presumed that this occurred as a result of that exchange of information).

The creation of a clean team implies the putting in place, by the parties involved in negotiating the transaction, of a special procedure to ensure that any type of information considered to be sensitive due to being related to its competitive strategy in the market (client lists, cost structure, investment plans, development of new technology, among others) is subject to certain rules, in particular: (i) it must be administered by a data controller, (ii) it must not be freely available in the data room concerned; (iii) it must be delivered only to specific officials who have been expressly named beforehand by the parties; (iv) the information must not be shared with others, and must be stored where it can only be accessed by authorized officials; (iv) all information must be returned to the other party, or any hardcopy or digital copies must be destroyed or deleted with conclusive proof that this has been done, if the transaction does not go ahead.

4) When does a change of control determine that a transaction has to be notified to the competition authority? Can control be positive and/or negative?

The Peruvian legislation states that any act or transaction that implies a transfer or change of control of a company or part of one is a “concentration”. A change of control arises where there is a modification at the company that may or is able to have a decisive and ongoing influence on an economic agent, either through ownership rights or rights over use of a company’s assets, or through rights or contracts that allow a party to have a decisive and ongoing influence on decisions by the company’s bodies.

The Peruvian competition authority has stated that control may be exclusive where it is exerted individually or unilaterally in the adoption of decisions on a company's strategy, without needing any other sources of consent. Additionally, there may be joint control, which occurs where a company requires multiple sources with the ability to influence decision-making.

Moreover, control may be positive or negative. Positive control exists where the controlling agent is able to determine the decisions of the agent controlled by it. Control is negative, by contrast, where an economic agent is allowed to exercise a veto right in relation to the decisions determining its competitive strategy, without needing to hold shares that enable it to exercise independent control.

5) Are there any particular rules to be considered in relation to investment funds for the notification or assessment of a merger of acquisition?

The Peruvian prior merger control legislation does not contain any specific rules on assessing joint control in the case of investment funds. Nor has there been any case law on this subject to date in Peru.

The only specific provisions on investment funds relate to the calculation of thresholds. A general rule has been laid down that where an investment fund carries out a merger or acquisition the fund manager must be considered as part of its organizational structure, in that it is acknowledged to have a prevailing role in its investment decisions. From this standpoint, funds managed by the same manager could be considered part of the same organizational structure.

6) Is the competition agency’s approval needed if an acquisition results from a public offering of shares?

For acquisitions resulting from a public offering of shares, Peruvian law requires a decision by the competition authority before the public offering and the related procedures are carried out.

7) For a multi-jurisdictional merger or acquisition, does clearance need to be obtained from the competition authorities in every jurisdiction involved?

All transactions implying a change of control need to be approved by the competition authority in Peru, if the requirements triggering the notification obligation exist: change of control, geographical nexus (with effects in Peru), and the statutory thresholds are met.

8) If there any legislation or case law on board interlocking?

To date there has been no case law related to the treatment of interlocking between directors of companies involved in a merger or acquisition and/or with third companies. Although when requesting the information needed to analyze the transaction, the Peruvian competition authority asks for information about the directors of the companies involved and their relationships with other companies. The aim is to anticipate the risks to competition that could arise, for example, as a result of an exchange of sensitive information between common directors with other agents not involved in the transaction.

CHILE

1) Is there a risk of gun jumping due to conduct obligations between signing and closing? If so, how is this risk usually mitigated?

Article 3 bis, letter b, of Legislative Decree 211 provides that the penalties it determines (including a fine equal to up to 30% of the parties’ annual sales) may be levied on anyone who “breaches the duty not to complete a “concentration” that has been notified to the Chilean competition authority (FNE) and which is suspended under article 49”.

The described event will occur if acts are carried out which imply termination of the independence of both companies, such as for example, starting to influence management or appointing directors at the acquired company before the FNE’s approval is obtained. In this respect, the legal teams accompanying these transactions find advice is constantly needed in relation to the steps required by the parties which could imply a breach of the law.

In addition to the penalty, the FNE may apply to the Competition Court as a corrective remedy for the parties to dissolve the merger or to dispose of all the acquired shares or assets, until they have been restored to their position before the transaction and, if they cannot be restored to that position, then it has a general and broad power to order other (structural or behavioral) remedies designed to avoid or mitigate the potential effects that could arise from the transaction.

Additionally, this rule may be breached if strategic information is exchanged between the buyer and the acquired company, above all if they are competing companies. In these cases, the legal team closely advise the parties on the acceptability of the information they intend to exchange, and at times suggest the creation of a clean team to minimize the risk of strategic information being transferred between them.

2) Are hell or high water clauses common practice?

The parties to a “concentration” (referred to below in relation to Chile as a merger or acquisition) may try to anticipate any mitigations of risk that might be ordered by the FNE as a condition for its approval, by allocating between them the risks associated with potential divestitures and behavioral obligations.

In our experience, however, it is not usual for either of the parties to agree to accept all the risks associated with the authority’s decision through hell or high water type clauses.

In actual fact, the closing of mergers or acquisitions in Chile is normally made subject to the fulfillment of certain conditions precedent, which include the FNE’s approval for carrying out the transaction.  Therefore, if that authority does not grant clearance to the merger or acquisition, the covenanted transaction will not have the intended effects, and the parties may terminate it without incurring any liability.

3) Is it common practice to assemble clean teams to work on integration matters between signing and closing?

Definitely. In particular, in mergers or acquisitions between companies that are currently or potentially competitors, it is recommended to assemble a clean team with members from outside the ordinary operating activities for the buyer's business, who, on behalf of the company, will receive, study, and potentially process the seller’s strategic information which the buyer absolutely needs to access.

4) When does a change of control determine that a transaction has to be notified to the competition authority? Can control be positive and/or negative?

If the sales thresholds defined by the authority are exceeded, both a replacement of individual control with joint control, and a replacement of joint control with individual control, must be notified to the FNE, no matter how the change occurs, because in all these cases rights are acquired which will allow their holders to have a decisive influence on the management of another economic agent.

According to the FNE’s Competition Guide, decisive influence at another company may be acquired positively or negatively. “Positive control” takes place where the controlling economic agent is able to determine decisions on the strategy and competitive conduct of the economic agent. In most cases, this type of positive control is acquired where the agent participates in the ownership of the acquired economic agent and can secure a majority of the votes or members on the bodies that manage it, or the right is acquired to manage the activities of the economic agent and determine its sales and marketing policy on the basis of its organizational structure. Where, for example, an agent can secure a majority of the votes at shareholders’ meetings and choose a majority of the directors, at sociedades anónimas, or secure a majority of the votes at meetings of their members and appoint the director or legal representative or a majority of them, at other types of companies, including where the agent owns preferred shares in relation to which, despite not owning a majority of the voting stock, it has exclusive rights enabling it to carry out any of those actions”.

According to the same Guide, “negative control takes place where an agent has a right to veto or deadlock decisions on the strategy or competitive conduct of the controlled economic agent. For example, deadlocking decisions related to entry to new markets, the business plan, budget approval, appointment of directors and key executives and authorization for certain investments; or even where the agent owns preferred shares with exclusive rights attached enabling it to veto any of those decisions. This is separate from the structure of ownership of the controlled economic agent, since a minority interest, as a result of the existence of acts or agreements relating to the controlled economic agent, or by using powers held under the bylaws, may be able to exert a decisive influence.”

5) Are there any particular rules to be considered in relation to investment funds for the notification or assessment of a merger or acquisition?

According to the FNE’s Competition Gide, “the following will not be considered to amount to a “concentration”: the temporary acquisition of securities made by individuals or legal entities that, within their normal business activities, engage exclusively in making financial investments or investments in financial assets with their own funds or on behalf of third parties, for their sale, provided each of the following requirements are met: the buyer must: a) be a securities intermediary within the meaning of article 24 of Securities Market Law N 18,045, such as securities brokers, securities sales agents; or a banking institution or financial company; or an institutional investor within the meaning of letter e) of article 4 bis of the same law, such as insurance companies, national reinsurance companies and any of the fund managers authorized by law; b) not carry on directly or indirectly the operations of the entities whose securities the buyer acquires; c) not exercise voting rights for the purpose of determining the competitive conduct of the economic agent concerned or the buyer must only exercise that right to prepare the transfer of all or part of that economic agent, or of its shares; and d) transfer its investment within a year from the date it was acquired, in other words, reduce its interest within that time period to a level that does not confer control over the economic agent.”

Moreover, the FNE’s Internal Guide on the Interpretation of Thresholds lays down that to determine whether a transaction in which an investment fund managed by a General Fund Manager (AGF) exceeds the thresholds requiring notification to the FNE, all the sales of the companies in its portfolio must be counted (because control is exerted by the manager not the fund), as well as, potentially, all the sales of its business group (if the fund is the buyer).

6) Is the competition agency’s approval needed if an acquisition results from a public offering of shares?

The only provision in the FNE’s regulations on “concentrations” that refers to a public offering of shares states that “in the case of a public offering of shares the notification may be filed after the notice of the public offering or from when there is a real intention to make the public offering”. It follows from this that these transactions are not governed by any type of special rule, and must be notified to the authority if they involve acquisitions exceeding the thresholds defined by the authority.

7) For a multi-jurisdictional merger or acquisition, does clearance need to be obtained from the competition authorities in every jurisdiction involved?

Concentrations require approval from the Chilean competition authority, if they fulfill the requirements for them to be notified: the transaction must fall within those defined in article 47 (merger, acquisition of rights conferring a decisive influence, alliances between companies forming an independent economic agent and with characteristics denoting permanence, geographical nexus - effects in Chile-), and meet the legal thresholds.

8) Is there any legislation or case law on board interlocking?

Article 3.2.d of Legislative Decree 211 provides that the following will be considered “facts, acts or agreements that prevent, restrict or hinder free competition or that are likely to cause those effects: (…)

d) A person's involvement simultaneously in key executive or director duties at two or more companies competing with each other, if the business group to which each company belongs has annual revenues from sales, services and other activities from their operations that exceed CLF 100,000 in the latest calendar year. This infringement will only arise, however, if after ninety days have run from the end of the calendar year in which that threshold was exceeded, the person continues to be involved simultaneously in the duties of such positions”.

That infringement was written into Law 20945, which completes the competition system and entered into force on February 26, 2017.

According to the FNE's interpretation, as stated recently in two actions brought for infringement of that law, letter d of article 3 not only bars the same person from carrying out key executive duties at competing companies, it also bars their involvement at the parent companies of competing companies, because, due to the nature of their duties, key executives at these companies may have access to strategic information on subsidiaries that do indeed compete with each other, which is precisely what, in the FNE’s option, the bar seeks to prevent.

Additionally, the new article 4 bis of the decree writes into law that “the acquisition, by a company or any entity in its business group, of a direct or indirect ownership interest in more than 10% of the capital of a competing company, including both its own shares and any managed on behalf of third parties, must be reported to the Competition Authority (FNE) within sixty days following completion of the transaction.”

The FNE, for its part, may “carry out an examination of those acts to determine the existence of infringements of article 3”.

However, the notification obligation under that article “shall only apply in the event that the acquiring company or its business group, as applicable, and the company in which an interest is acquired each individually have annual revenues from sales, services and other activities in their operations that exceed CLF 100,000 in the latest calendar year.”

COLOMBIA

1) Is there a risk of gun jumping due to conduct obligations between signing and closing? If so, how is this risk usually mitigated?

Yes there is, any “companies engaging in the same economic activity or participating in the same value chain, and meeting the (following) requirements” as laid down in the law, must give notification to or apply for clearance from the Colombian competition authority (SIC), in relation to any transactions, whatever their legal form, that entail an “integration of businesses” (referred to below in relation to Colombia as a merger or acquisition).

On the understanding that the notification or clearance obligation does not depend on the completion of a transaction with a specific legal form, but rather relates to any transaction, there is indeed a risk of gun jumping being held to exist in cases where (i) the parties meet the requirements in the merger control rules, (ii) a potential buyer is given control over the target’s operations  (iii) and the obligation to give notification or apply for clearance is not performed before the respective contract is concluded.

In addition to imposing the applicable penalties for infringement of competition rules, SIC may, before the required examination process, order reversal of a merger or acquisition where it was not notified or it was performed before the end of the time period for a decision by the authority.

It is usual practice in mergers or acquisitions for a minimum level of interaction to take place between the companies involved in the negotiations. That natural and necessary interaction between the parties often gives rise to concerns as to whether it may at any point be construed as gun jumping. In actual fact there is a blurred line between what is allowed and gun jumping so the parties must act with extreme caution.

Additionally, in respect of each infringement and on each infringing party, SIC may impose fines of up to a sum equal to 100,000 minimum monthly wages in force or up to 300% of gain that the infringing party obtained from its conduct, as long as the gains are quantifiable.

The risk of gun jumping may be mitigated by taking the following preventive and proactive steps: (i) conducting from when the merger or acquisition negotiations start the relevant analysis to determine whether the obligation to notify or apply for clearance under the merger control rules exists, and carry out this procedure before closing the respective contract; (iii) attempt to ensure that any obligations related to management of the target company between signing and closing which are set out in the share purchase agreement are objective, and that any such obligations do not have a direct impact on the target's participation in the markets; and (iv) make the transaction subject to a condition precedent which will prevent any type of act influencing the target’s competitive performance until SIC’s approval is obtained.

2) Are hell or high water clauses common practice?

Colombian law does not prohibit hell or high water clauses, by these we mean clauses in which one of the parties - typically the buyer - accepts the risk associated with clearance by the competition authority and undertakes to carry out all steps required to be able to complete the transaction. However, these clauses are not regulated in the rules on prior control, although they are perfectly applicable and enforceable privately between the parties involved in the transaction; even if they cannot be relied on as against the competition authority.

Now, if, following an application or notification in relation to a merger or acquisition, the SIC identifies risks of market concentration, it is allowed to make its clearance conditional on the fulfillment of certain obligations or requirements, which may be structural, including steps such as divestiture of a line of business, or behavioral, including an obligation to do or not to do something.

The parties to an agreement which implies an “integration of businesses” including a merger or acquisition, may stipulate the treatment that will be given to these conditions through clauses determining which of these conditions are able to release the buyer from its obligation to complete the transaction, and which are not.

In a Colombian context, it is very rare for buyers to agree to hell or high water clauses. A usual practice is to set certain standards or limits which will determine whether the conditions will be mandatory or whether, by contrast, the conditions are too onerous for the buyer, in which event the buyer or acquiring party may pull out of the transaction.

3) Is it common practice to assemble clean teams to work on integration matters between signing and closing?

Though not occurring in every case, it is indeed common practice to create independent teams who are responsible for reviewing the information and preparing any applications that may be required in relation to an “integration of businesses” including in a merger or acquisition.

These teams are particularly likely to be created in transactions involving agents that compete in the respective relevant market, for the purpose of keeping within a restricted team and outside the reach of all commercial negotiations any information that may be considered to be sensitive, or to pose risks from a commercial standpoint.

The main principles for choosing the members of clean teams in Colombia and how they operate, are as follows:

• The members of clean teams should ideally be third parties who have no employment ties with the companies involved in the transaction;
• That said, it might be allowed for an employee of any of the companies involved in the transaction to be part of the clean team, if that employee has no decision-making ability at the level of the transaction, and is not able to find out or share any information which could be a determining factor in the negotiations;
• The members of clean teams must be experts in the subject concerned.

​4) Are there any particular rules to consider for assessment of a change of control due to a suspension of rights (in shareholder agreements, for example)?

From the standpoint of the wording of the law, and also of SIC's decisions in this respect, any transactions that imply control due to a suspension of rights, or negative control, have the same treatment as where positive control is involved (corporate movements, transfer of competitive assets, etc.). A change of control due to a suspension of rights triggers the obligation to notify SIC, on the understanding that the described tests are met. 

5) Are there any particular rules to consider for assessment of common control of portfolio companies by investment funds (common directors, for example)?

There are no particular rules to consider for cases involving portfolio companies of investment funds.

Having said that, if a business group has been declared to exist between the companies involved in the merger or acquisition, they are exempt from the notification obligation.

6) Is the government authority’s approval needed if an acquisition results from a public offering of shares?

According to the Colombian Securities Market Guide issued by the Colombian stock exchange (BVC), approval from the financial authority and by SIC is required for tender offers. The Colombian stock exchange suggests an objective test (revenues).

These provisions pose a practical problem in relation to implementing the law, in that the procedure with SIC may take a considerable length of time, so the acquiring party must be proactive and apply for clearance in good time. This may reduce stock market dynamism. The requirement laid down by the competition rules applies to any type of transaction (meeting the threshold and change of control tests), regardless of its legal form.

7) Is it necessary to obtain the government authority’s approval if it results from an indirect purchase which had been approved by the merger control authority for the domicile of the buyer or seller?

In Colombia’s case, in view of the applicable legislation, any transactions that entail an integration of businesses in the Colombian markets, even if the transaction itself does not take place in Colombia (by being performed through an indirect sale, for example), and have been examined by another competition authority, must be approved by the Colombian competition authority, if the threshold tests determined in the law are met.

8) Are there any rules or case law on board interlocking?

Board interlocking means a scenario where two unaffiliated competing companies share the same directors, and this potentially implies infringements of (i) the conflict of interest rules, which in turn may result in directors’ liability, and (ii) anticompetitive or unfair competition practices.

From a corporate law standpoint, there is a provision in article 202 of the Commercial Code, applicable to sociedades anónimas, which restricts the appointment to a management position or the performance of duties attached to a management position “simultaneously” on more than five bodies”. The Companies Authority has clarified that this restriction applies to sociedades anónimas, although the rules are not binding for simplified joint stock companies (sociedades por acciones simplificadas).

These rules relate only to restrictions from a corporate law standpoint. From the standpoint of competition law, article 5 of Law 150 of 1959 provides that:

“The incompatibility under article 7 of law 5 of 1947, for members of managing bodies and managers of credit establishments and securities exchanges, shall include the chairpersons, managers, senior managers, legal representatives, directors and members of managing bodies of companies, which have in their corporate purposes the production, provision, distribution or supply of the same goods or the provision of the same services, where those companies taken individually or jointly, have assets amounting to twenty million pesos ($ 20,000,000.00) or more.”

That article extended the incompatibility determined in article 7 of Law 5 of 1947, which stated that: “The members of managing bodies and managers of banking establishments shall not belong to managing bodies of other credit institutions, or to stock exchanges, with the exception of the managing body of Banco de la República. Any infringement of that provision shall be subject to a fine of between one thousand pesos ($ 1,000) and five thousand pesos ($ 5.000), imposed by the banking authority. Article 10 of Law 16 of 1936 is amended as set out above.”

Although that law has been repealed, the same rule is set out in article 75.1 of the Organizational Charter for the System, under which the members of managing bodies and managers of banking establishments cannot belong to the managing bodies of other credit establishments, with the exception of the managing body of Banco de la República.

It moreover clarifies that the legislature's intention in Law 155 of 1959 was to extend to the competition rules the restriction preventing anyone from simultaneously being members of managing bodies or managers of credit establishments and stock exchanges, and chairpersons, managers, senior managers, legal representatives, directors and members of managing bodies of companies, which have in their corporate purposes the production, provision, distribution or supply of the same goods or the provision of the same services, where those companies taken individually or jointly, have assets amounting to twenty million pesos ($ 20,000,000.00) or more. In other words, the legislature prohibited the directors of institutions primarily supervised by SFC simultaneously being directors of companies carrying on a competing activity in the same relevant market, without being confined in particular to the financial industry.

Therefore, from a competition law standpoint, there is a provision that expressly prohibits simultaneous involvement by one person on one or more managing bodies of competing companies. That practice may also result in other potential infringements (i) under the conflict of interest rules, which in turn may result in directors’ liability, and (ii) anticompetitive or unfair competition practices. Therefore, in our opinion, it is not recommendable to allow this to occur.