Fewer delays for mergers

Author: | Published: 1 May 2008
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The Portuguese Competition Authority, Autoridade da Concorrência (PCA), has recently approved several guidelines aimed at clarifying the rules set forth in Law 18/2003 of June 11 (Competition Act) after its amendment by Decree-Law 219/2006 of November 2 regarding the procedure for appraising concentrations between undertakings. It is noteworthy that Decree-Law 18/2008 of January 29 amends the Competition Act. But the amendment did not directly affect merger proceedings.

Those guidelines concern (i) the time limits of the several steps of the merger control procedure, and (ii) the procedure of avaliação prévia (prior evaluation or pre-notification) of concentrations. The PCA has also issued a notice on the possibility of adopting a simplified decision.

The main objective of the amendments to the Competition Act and the subsequent guidelines of the PCA is to accelerate the average time to issue decisions in merger control proceedings. Because they were only recently adopted, the practical impact of these changes has not yet been felt. It is believed that 2008 will be the decisive year.

Substantive rules

A concentration is deemed to arise in the case of a merger between two or more independent undertakings and when one or more individuals, who already have control of at least one undertaking or of one or more undertakings, acquire control, directly or indirectly, of the whole or parts of one or more undertakings. "Control" is the ability to exercise a decisive influence by legal or de facto means.

The concept of "undertaking" should be broadly interpreted for the purposes of the Competition Act. It includes any entity, regardless of its legal form, that is able to generate a turnover. Also, the PCA has already decided that for the purposes of the Competition Act the concept of undertaking should include any commercial company that has as its corporate object the performance of an economic activity even when the undertaking has not yet started its activity and therefore does not have any turnover, but has got the essential assets to operate on the market in the short-term. In this case, the PCA relies on the future market share to determine the need to file a notification (see thresholds below), when the future considerations are reliable and present some certainty. Finally, an undertaking typically refers to a group of entities that are in a relationship of direct or indirect control.

A concentration is subject to prior notification to the PCA, provided that it is not subject to notification to the European Commission, when one of the following thresholds is met: (i) its implementation creates or reinforces a share exceeding 30% of the national market for any good or service or of a substantial part of it; or (ii) in the preceding financial year, the undertakings concerned have recorded a turnover exceeding €150 million ($238 million) in Portugal, net of directly related taxes, provided that the individual turnover in Portugal of at least two of the undertakings concerned exceeds €2 million.

According to information received from the PCA, as of the institution of the new competition regime in Portugal and of the PCA in 2003, up to the end of 2007, 97 notifications were filed under the market share threshold whereas there have been 111 filings under the turnover threshold. Since the first threshold has some degree of uncertainty, the pre-notification procedure approved by the PCA may benefit its implementation. Indeed the PCA may offer jurisdictional guidance to the undertakings concerned in order to assess the need to file a notification when there is no precedent in the relevant market, or when the parties have reason to argue that the correct market definition does not correspond to the precedent.

A concentration will be the object of a non-opposition decision when it does not create or strengthen a dominant position that results in significant barriers to effective competition in the Portuguese market or in a substantial part of it. The PCA may impose commitments when deciding not to oppose to a concentration. Between 2003 and 2007, 20 non-opposition decisions were subject to commitments. As of 2003 only three prohibition decisions had been made, in the sectors of transport, petrol and motorway concessions.

In the competitive assessment, the PCA will take the following factors into account: the structure of the relevant markets; the strength of the undertakings concerned; potential competition and entry barriers; opportunities for choosing suppliers and users; access of the different undertakings to supplies and markets; distribution networks; supply and demand trends; special or exclusive rights; control of essential infrastructure; technical and economic progress provided that it is to the consumer's advantage and does not create an obstacle to competition; and the role of the concentration in the international competitiveness of the Portuguese economy. It is noteworthy that the PCA is not keen on using the last factor as a criterion for assessing concentrations. However, the notifying parties may use it if they want to appeal a prohibition decision to the Minister of Economy, because of its industrial policy nature (see below).

If an undertaking fails to file a notification with the PCA when it is due, and/or implements the concentration before a decision is taken, a fine of an amount up to 10% of the undertaking's turnover in the previous year may be imposed. On the other hand, failure to timely file a notification when the concentration is not implemented may lead to a fine of an amount of 1% of the undertaking's turnover in the previous year. The Competition Act is not clear about the geographical limits of the turnover to be taken into account in calculating the sanctions. We consider that such sanctions can only be calculated on the basis of the turnover generated in Portugal, because the relevant turnover triggering the turnover threshold is the turnover generated in Portugal.

The validity of the transaction will be subject to the adoption of a non-opposition decision by the PCA. Consequently the transaction will be null and void if the PCA's decision is to prohibit the concentration. Furthermore, the following ancillary sanctions are possible: publication of the decision in the Official Gazette and in a national newspaper, and a penalty payment of an amount up to 5% of the average turnover in the preceding year. The amendment of the Competition Act in January 2008 set out a new ancillary sanction that, although not especially targeting concentrations (rather cartels), does not exclude them. The provision states that whenever a breach to the Competition Act occurs during or because of a public tender, the parties to the infringement may be prevented from participating in public tenders for a maximum of two years.

Directors of legal persons may also be held responsible for infringements to the Competition Act if they know or should have known about the infringement but did not take the appropriate measures to stop it immediately. However, a fine will not be imposed when a more serious penalty is applicable according to other legal rules. The statute of limitation is five years for non-compliance with the obligation of filing a notification with the PCA.

Procedural rules

A concentration that is subject to prior notification must be filed with the PCA within seven working days of the execution of the relevant agreements. In a takeover bid, the notification must be submitted up to seven working days from the public release of the preliminary announcement. Furthermore there is a standstill obligation according to which no concentration subject to prior notification shall be implemented before it has been notified and (expressly or tacitly) approved by the PCA. Nonetheless, under exceptional circumstances, the PCA may grant the notifying parties a derogation to the standstill obligation. The granting of this derogation depends on balancing the consequences for the undertakings of suspending the concentration or the exercise of the attached voting rights and the negative effects of a derogation to this obligation for the competition in the relevant market. The derogation may if necessary be accompanied by commitments and monitoring obligations intended to guarantee effective competition. Still, it does not prohibit putting into effect a takeover bid or an exchange offer that has been notified to the PCA provided that the acquirer does not exercise its voting rights. When such exercise is foreseen, the acquirer must request a derogation to the conditions described above. The notification shall be presented in a form approved by the PCA for that purpose. It is subject to the payment of a fee of €7,500, €15,000 or €25,000 depending on the turnover of the undertakings concerned.

After the filing, the PCA has 90 working days to decide not to oppose (with or without commitments), or to prohibit the concentration. Thirty working days correspond to a first phase during which the PCA decides whether or not to oppose to the concentration or to refer it to an in-depth investigation, where the remaining days are used up. It is possible to suspend this time limit when the PCA asks the notifying parties or eventual opposing parties for additional information. Opposing parties are entities that have presented observations against the implementation of the concentration within the timeframe established by the PCA for that purpose (typically 10 working days), and which benefit from a special standing. However, as an administrative entity, the PCA may accept opposing parties' observations after that time, especially when it believes that the entities at stake may make a valuable contribution to the appraisal of the concentration. This does not seem to be the usual practice of the PCA but it has, in fact, already occurred.

Procedurally, the failure to file a notification when it is due means that the PCA is not limited to the time constraints described here. Nevertheless it is commonly understood that the general rules for the administrative acts may apply. Also, the fee for the procedure is the double of which would have applied in a voluntary proceeding.

Appealing the decision

The decisions of the PCA may be appealed at the Lisbon Commercial Court. This in turn will be subject to the review of the Lisbon Court of Appeal and subsequently to the review of the Supreme Court of Justice in matters of law or directly to the Supreme Court when the issues are only matters of law. In addition, the notifying parties may appeal the PCA's prohibition decisions with the Minister of Economy, who may grant an authorisation when the benefits to the Portuguese economy that would result from the concentration exceed the disadvantages to competition. In one of the few concentrations prohibited by the PCA, the Minister of Economy approved the concentration on this basis.

2007 guidelines

The amendments to the Portuguese legislation in 2006 have addressed two main issues that practitioners and firms raised: (i) the time spent to take a decision and the number of requests for additional information; and (ii) that it is not foreseen the possibility to file a notification before executing the relevant agreements.

As to the first issue, the amendments have placed limits on the PCA's ability to request additional information, stating that the merger control procedure can only be suspended for a period no longer than 10 working days. The wording of the legal text is ambiguous, however, leading to different interpretations. In this context, the PCA decided to approve guidelines in February 2007. According to the PCA's interpretation, the limitation for requesting additional information only applies to the in-depth investigation phase. Even regarding this phase it does not prevent the PCA from sending as many requests for information as it needs, as long as each request for information does not exceed 10 working days.

With regard to the second aspect, the amendments referred to have committed the PCA to the task of approving a general proceeding of prior evaluation of concentrations. Consequently, the PCA issued guidelines in April 2007. The PCA's guidelines regard mainly the pre-notification contacts before a formal filing. Those guidelines nevertheless address the issue of filing a notification before the execution of the relevant final agreements, stating that it is possible to file a notification on the basis of preparatory documents such as memoranda of understanding or letters of intent, if they lay down the essential elements of the concentration subject to notification. This analysis will be made on a case-by-case basis.

Regarding pre-notification contacts, it is common practice for the PCA to meet the parties before the execution of the agreements to discuss controversial aspects of the notification and thus accelerate the merger control proceedings. The amendments to the law and the guidelines created a more formalised set of rules for a reality that the PCA, informally, has already accepted.

The pre-notification contacts are voluntary and held in absolute confidence. The main objectives to be pursued with the pre-notification procedure are (i) discussion of the need to file a notification in cases where it is not clear – notably when there are serious doubts about the market definition; (ii) clarification of what additional information (besides the required in the form) is needed to minimise the requests for additional information after the formal filing, which leads to the suspension of the time limits to take a decision; and (iii) discussion of substantive aspects of the concentration, which the parties may find necessary, including the identification of competition concerns at an early stage. It is advisable to initiate those contacts no later than 15 working days before the execution of the relevant agreements. Pre-notification contacts do not bind the PCA regarding the decision on the a non-opposition/prohibition of the concentration.

In July 2007, the PCA approved a simplified decision procedure aimed at accelerating the decision-taking process. A concentration may benefit from a simplified decision procedure when (i) there is undoubtedly no significant change in the market structure; (ii) in a joint venture, when its activity in the market is expected to be negligible or non-existent, or when there are no significant horizontal or vertical issues; (iii) the transaction at stake does not qualify as a concentration or is not subject to prior notification. This does not directly affect the parties' position, but is rather an internal proceeding within the PCA.

Practitioners and firms have welcomed these developments. The main advantages that may arise from them are a reduction of the average time for decision taking and a greater certainty in the implementation of the market share threshold. The possibility to discuss the scope of the information required by the PCA is also regarded as of utmost importance, given that notifications will not be considered effective if the PCA does not consider them complete.

From the date of the approval of the PCA guidelines there were 18 cases of pre-notification procedures, of which 13 occurred in 2007. This may not appear a significant number if we take into account the notifications filed in 2007, which amounted to 81. However, the use of the pre-notification contacts seems to be increasing in 2008 – the balance is of 25 notifications filed at the time of writing, and five pre-notification procedures. If the use of prior evaluation and simplified decision procedures spreads it is foreseeable that the PCA will be able to provide decisions more quickly. In line with these developments, the implementation of a simplified procedure to file non-complex concentrations is still expected, notably the revision of the notification form to adapt it to the new reality of the simplified decision procedure.

The data on number of notifications provided in this article was sourced in information received from Autoridade da Concorrência and the respective website. The authors would like to thank Autoridade da Concorrência for the statistical information kindly provided.

Author biographies

Frederico Pereira Coutinho

Gonçalves Pereira, Castelo Branco & Associados

Frederico Pereira Coutinho was born in Lisbon in 1964. He obtained a law degree from the University of Lisbon Law School in 1987.

Frederico Coutinho was admitted to the Portuguese Bar in 1987. He has been partner of the firm since 1996 and is head of the EU and competition law department. He lectured on international private law at the University of Lisbon Law School between 1988 and 1989. Between 1987 and 1990 he was legal adviser of the Portuguese Tourism Fund.

Frederico Coutinho's areas of practice include competition law, mergers and acquisitions, corporate restructuring and real estate. He has advised in a number of high-profile mergers and joint ventures. He has also provided advice on companies' commercial practices from the point of view of competition and European law, and on distribution systems and antitrust litigation. Frederico Coutinho has worked on several aspects of competition, with particular emphasis on merger control, anti-competitive practices, competition compliance, due diligence, state aid, dawn raids and leniency. He has published several articles in various fields of law.

Frederico Coutinho is a member of the Portuguese Bar, the International Bar Association (IBA) and the board of the Portuguese Law Firm Institute.

Rita Leandro Vasconcelos

Gonçalves Pereira, Castelo Branco & Associados

Rita Leandro Vasconcelos was born in Oporto in 1975. She obtained a law degree from the Portuguese Catholic University Law School in Oporto in 1998 and a Master's in European Studies (Competition) from the University of Lisbon Law School in 2004. She completed a postgraduate course in Economics in Competition Law at King's College, London in 2007.

Rita Vasconcelos was admitted to the Portuguese Bar Association in 2002. Since 2003 she has been an associate in the EU and competition law department. She has been a lecturer in the University of Lisbon Law School on commercial and company law, and litigation (2001-2006) and she contributes to a postgraduate course on energy law at the University. In 2002 she was deputy to the Secretary of State of the Presidência do Conselho de Ministros.

Her main areas of practice are competition law and EU law. Her specialisms include mergers, acquisitions and joint ventures, restrictive practices, advice on companies' commercial practices from the perspective of competition and European law, and advice on distribution systems and antitrust litigation. She also works on legal due diligences of competition compliance. Rita Vasconcelos is a member of the Portuguese Bar Association.