By Ernesto Cavelier and José Elías Del Hierro
This article will review the antitrust and restrictive practices regulations in view of two recent decisions issued by the Superintendence of Industry and Commerce. Both cases serve to illustrate the conditions that require a filing and the powers enjoyed by the antitrust authority in Colombia, and provide an excellent outline of the type of decision likely to be issued in other cases. Moreover, the cases illustrate the wide range of discretion enjoyed by the antitrust authority, particularly since the decisions reached seemed to be contradictory. The first case approved a merger between the two largest brewers in the country. While the approval was granted, a good number of conditions were imposed on the parties to the transaction. The second case objected to the proposed merger of the two largest airlines in Colombia, on the basis of forceful but debatable arguments. The study of both cases will give the reader substantial information to understand the regulations that apply to a proposed merger and the likelihood of an approval.
In a recent newspaper article, the former Superintendent of Industry and Commerce explained his decisions saying that while they might have seemed contradictory, in both cases he was trying to benefit the public and the consumers. In the first case (the Beer Manufacturers Case) the approval was granted in view of the fact that one of the beer manufacturers would not survive without the integration; if that were the case, a monopoly would emerge, and there would be no easy legal recourse to break it afterwards. Therefore, the decision was to allow the two companies to integrate, while at the same time certain stringent conditions were put in place so as to allow other competitors to enter the market at a later time, whether they would be national or foreign companies.
In the Airlines Case, the Superintendent reached a decision using the same rationale, that is, what would be the best way to advance and serve the interests of the public and of the country in general. The common good was defined as the preservation of the competition for the benefit of the consumers, allowing the investors and their companies to continue in operation, carrying out their normal activities in the most effective manner. The former Superintendent notes that one of the airlines proposing the integration claimed to be in poor financial shape, having consistently lost market share, while the other was in much better shape, financial and otherwise, and had gained market share in the last years of operations. Therefore, the Superintendent concluded that the interests of the country and of the consumers would be better served by objecting to the integration, since in the event of failure of the least efficient airline, there would be several other airlines that would take its place, thus providing more efficiently and effectively the transportation service the country needs. On the contrary, if the decision had been to approve the integration, the Superintendent argued, a quasi-monopoly would have been created, generating the possibility of abuses of dominant position, and of the imposition of practices contrary to the interests of the consumers.1
The regulating authority for the cases commented in this note, (hereinafter the Superintendency or the authority), is the Superintendence of Industry and Commerce (Superintendencia de Industria y Comercio); it is the main authority in charge of ensuring competition among commercial organisations in the country. It is also in charge of approving or objecting to any form of integration that may create unlawful restrictions to competition.
Other entities that have some functions related to mergers and acquisitions are the Superintendence of Banks (Superintendencia Bancaria), The Superintendence of Securities (Superintendencia de Valores), the Superintendence of Residential Public Services (Superintendencia de Servicios Públicos Domiciliarios), the Superintendence of the Social Economy (Superintendencia de la Economía Solidaria), The Air Authority Aeronáutica Civil, the Communications Regulatory Commission (Comisión de Regulación de Telecomunicaciones), the Television Regulatory Commission (Comisión de Regulación de Televisión), and the Energy and Gas Regulatory Commission (Comisión de Regulación de Energía y Gas).
The regulations applicable to filings and the administrative process they will follow will be shown in the footnotes.
The Beer Manufacturers Case
The beer industry in Colombia is highly concentrated. In fact, until a few years ago, it was all (with one notable exception) in the hands of one of the five or six powerful conglomerates that control most of the industrial production in the country. The main producer (identified here as Bavaria) was challenged by a company established by the largest manufacturer of soft drinks (Leona), that built a beer plant with the purpose of serving the national market. At around the same time, Bavaria started competing with Leona’s Group in the soft drinks market, including fruit juices (whether natural or artificial). Leona’s beer manufacturing operation did not reach the desired profitability levels and it offered the business for sale. Bavaria made a bid for part of the company, which was accepted. Subsequently, both parties requested the approval from the authorities in pursuance of the regulations. Those rules require the prior filing for approval, that is, no agreements or unconditional commitments should be entered by the parties to the transaction before filing.2
Transactions whereby two or more organizations intend to merge, consolidate, or integrate, as well as acquisitions, must be reported to the Superintendence of Industry and Commerce prior to the transaction. The reporting requirement applies to transactions involving commercial, industrial and services legal entities whose joint market share will be more than 25 per cent of the relevant market or when the joint value of the assets involved is higher than 50.000 Colombian monthly minimum salaries (about US$6 million). Given this low threshold, most of the transactions involving mergers or acquisitions must be reported.
The reporting requirement applies to all organizations involved in the production, supply, distribution or consumption of similar goods, raw materials, products or services. The integration of the organizations subject to the reporting requirement may take any legal for, whether it is an acquisition, integration, merger, or other type of integration.
In pursuance to those rules, and in accordance with the application filed, the beer manufacturers were served with a decision, granting the approval to the integration of the beer manufacturers. The main purpose of such decision was meant to generate the economic and competitive environment required for the establishment of other beer manufacturers at any time within the term of effectiveness of the rules. The approval was granted making the approval subject to several relatively stringent conditions, meant to comply with the regulations, which require the authorities to grant the approval under certain circumstances.3
The Superintendence of Industry and Commerce made a decision on the application to approve the proposed integration within thirty working days from the date of the application. While it is not evident from the decision issued on the case, the Superintendence probably requested additional documentation, therefore extending the thirty days term as from the date the new information was submitted. If the Superintendence had not made a decision within the said term, it would be understood the transaction had been approved once the thirty days had expired.
The following conditions were imposed on the parties:
Measures regarding advertising:
The media owned or controlled by each of the parties to the transaction should in the future offer potential competitors in the production or distributions of beer and malt beverages, the same market conditions or the conditions for advertising as offered to the participants in the operation. The same conditions were imposed to the media owned by one of the parent companies of the main beer manufacturer. Regarding announcements in other media, not directly owned by the parties, it was prohibited to the parties to enter into exclusivity agreements that would prevent competitors to advertise beer or malt products.
Technology, information technology, and beer manufacturing knowledge:
The parties may not enter into exclusivity clauses in agreements regarding technology transfer and supply of information technology services, unless a potential competitor will have access to the same technology in the same conditions given to the other parties.
National production of malt:
The malt manufacturer in the group may not require from third parties more stringent conditions than those offered to companies members of the each of the groups to which the members belong. The authority also required an offer to third parties of up to 5 % of its installed capacity.
Access to raw materials:
The parties were required not to prevent the sale or supply of raw materials or other components for manufacturing beer and malt beverages, whenever supplied by any company belonging to any of the groups or controlled by them. The authority also prohibited exclusive supply agreements with unrelated third parties.
National installed capacity:
The parties were required to allow third parties to enter into production agreements to use the installed capacity of the Leona plant seven years after the initiation of the beer production in the Leona plant by Bavaria.
The beer manufacturers were required to eliminate exclusive distribution agreements for their products.
Changes in prices:
All parties to the integration agreements were required to provide the authority with information of variation of prices of each product of each beer manufacturer by company, product, region, brand, presentation and price of sale to distributors. As well, they were required to provide like information as to costs.
Sale of shares of stock of Leona:
The authority limited to seven years the validity of a provision in the production agreement of the parties, regarding future potential acquisitions of Leona’s shares of stock.
Points of sale:
The parties were mandated to abstain from including, and to eliminate, all exclusive provisions in agreements for purchase and sale of beer and malt beverages. The same provision was imposed on the distributors of the beer manufacturers in their relations with points of sale or retailers. Exclusivities tied to the supply of refrigerators or other furniture or advertising matter were also prohibited.
Efficiency in the operation of the market:
The authority requested the parties to provide a document with commitments as to economic benefits generated for consumers as a consequence of the operation, such as the quality of the products, quantities, and prices.
Brands and products of Leona:
Leona should maintain at least two brands of its own in the market, representing at least 10 % of the production capacity of the Leona plant.
Plants to be closed:
Plants to be closed must be offered for sale, indicating where and when offers will be received and the terms and conditions therefor. The sale must be advertised in the Latin American and the US beer manufacturers associations.
Sales conditions to distributors and retailers:
The parties were required to abstain from subordinating the sale of beer and malt products to the sale of other products made by each of the groups. A similar prohibition was made as to the sale of products different from beer and malt beverages.
At the same time, the Superintendence required the parties to the transaction to provide guarantees or supervision of third parties to ensure compliance with the mentioned conditions.4
In summary, these guarantees or supervision were the following:
(i) Insurance policies guaranteeing compliance;
(ii) auditors supervision for several of the conditions;
(iii) public communication of the commitments of the parties;
(iv) written commitments for each of the conditions.
As some time has passed now since the date of the decision, and some events that would have required prior notice to the authority have taken place (such as the closure or suspension of activities of several production facilities of Bavaria), the parties in this case probably have made several reports and complied with many of the conditions imposed in the decision.5
The Airlines Case
The airline industry was a monopoly for many years, since the inception of passenger flights in 1919. At that time an airline called Scadta ("Sociedad Colombo Alemana de Transporte Aereo")6 was founded by Colombian and German investors (and pilots). Their first flights would take passenger and cargo back and forth between Honda, a river port in the Magdalena river (in the center of the country), to Barranquilla, the main port in the Caribbean coast. The German amphibious Junkers F-13 aircraft would fly all along the winding river, sometimes having to make emergency stops in the middle of the dense jungle. Scadta changed its name later to Aerovías Nacionales de Colombia, and then to Avianca (created as a result of a merger with Servicio Aereo Colombiano SACO), the Colombian flag airline serving national and international routes. Other airlines tried to break Avianca’s monopoly, without success, such as Aerocondor, which went broke several years after its creation. Other airlines followed, including a small regional airline called Aerolíneas Centrales de Colombia, ACES, created by then wealthy coffee growers to serve the coffee growing region, from the legendary city of Manizales (the airline later changed its head offices to Medellín). ACES grew rapidly and captured a relatively large market share, both in domestic and international routes. More recently, ACES tried unsuccessfully to find a strategic partner, but the recession in the Colombian market discouraged at least two prospective investors. The critic financial condition of Avianca prompted the airlines to devise a plan to merge. According to press reports, the airlines would be managed by ACES President.
The airlines were in a dilemma as to filing for approval of the merger, since there had not been a precedent of two airlines merging, and the regulations had not been tested. The airlines could choose to requests the approval from the Civil Aeronautics Authority, of from the Superintendence of Industry and Commerce, or from both at the same time. They finally chose to file with both making what proved later to be the wrong decision, since the Superintendence of Industry and Commerce (an "ad hoc" supernintendent) found it was not competent for the case, and left the matter to the Civil Aeronautics Authority.7 The latter has not made a final decision yet. However, the Superintendence of Industry and Commerce issued a decision on the case, which is still of interest, despite the fact the competent authority is a different one. This decision may be a model for future cases, since other industry sectors may be in similar competitive circumstances as the airlines; therefore, similar arguments can be used in future cases.
The decision of the Superintendence of Industry and Commerce rejected the application to approve the integration of the airlines.8 The application for approval had been well documented and provided a schedule for the integration, which did not contemplate the merger of the two entities. Rather, the two airlines would remain as separate entities, under a common management and ownership. 9
The Superintendence in its decision made a summary of the legal provisions, including those relating to competence, finding that the integration of the two airlines did require a prior approval, since given the level of assets of each of the companies and the market share they hold, they were under the obligation to file with the Superintendence.10
The market share of both airlines in the three market segments used by the Superintendence was found to be higher than 25 %, the minimum limit to require a filing. The market segments defined by the Superintendence were passenger transport, mail and cargo.
The objection to the integration was made on the following grounds:
- Concentration of the offer:
- The finding of an undue restriction to competition was a conclusion reached after the examination of several measures. These included the Herfindahl-Hirschman Index, which would increase from 2600 to 4807 after the integration in the national routes. The index would also increase from 1944 to 2830 in international routes. Both indexes are considered as highly concentrated, even before the integration.
- Next the NEE index was issued to determine the reduction of the level of competition; in both domestic and international passenger markets; the index would be reduced as a consequence of the transaction. Also, in the route-by-route analysis, the authority found domestic routes would become a classic example of a highly concentrated market.
- The other index analysed by the Superintendence was the CR4, or Four Firm Concentration Ratio. This index provides indications as to the existence of an oligopoly, which in fact was found to exist, since in the domestic market the index would go from 88% to 94% and in the international routes the increase would be of 7 % from 71 % to 78 %.
- Reduction of the power of the second competitor:
- The integration would imply that there would not be significant competitors for the new organisation. The integrated airline would have 67 per cent of the domestic market, and the second competitor would have only 14%. In the international market, the combined group would enjoy 49 per cent of the market, and the second competitor would only have one third of this new competitor’s market share.
- Therefore, the installed capacity of the rest of the competitors would not be sufficient to counteract possible abusive competitive actions of the integrated airline.
- The claimed needs of integration and the effects thereof are not consistent:
- Insufficient structure for competitors:
- Reduction of the offer:
- Reduction of the market power of the travel agencies:
- The travel agencies do not handle a sufficiently large percentage of the ticket sales to become a potentially effective deterrent for the airlines. This would mean the airlines would be able to impose their conditions in this market.
- The market of tour packages, to some extent controlled by the airlines, would increase the market power of the integrated airlines.
- Reduction of the market power of the consumers:
- Competitive advantages vis-à-vis existing competitors :
- The integrated airlines would end up with more than 50% of the market, thus preventing other competitors from reaching the same level.
- The integrated airline would increase its market power in relation to suppliers, thus obtaining more favourable conditions from them, with the consequent advantage over competitors.
- Quality of service:
- Absence of price controls:
- Impossibility of access to the market by new competitors:
- Absence of "efficiency effects" of the integration:
- There will be a reduction of the offer of seats:
The concentration that would ensue in the market, specially the national market, would imply an undue restriction to competition. The resulting integrated organisation would have the ability to unilaterally determine the market conditions, including prices and qualities. This conclusion was based on the following reasons:
The integration of the airlines in the domestic market would result in the exercise of monopolistic powers, to compensate the competitive disadvantages in the international market.
The lack of sufficient aeronautic infrastructure would not allow the competitors to increase their offer in the market, since the integrated airlines would control the infrastructure required to operate 90% of the national flights.
The proposed integration would reduce the available offer of seats, thus generating a potential unfairness towards consumers.
The consumers would be unable to find a substitute provider of transportation services: (i) there are not other sufficiently large airlines; (ii) there are no alternative transportation means by land or water; (iii) there are no large purchasers of airline seats that can exercise leverage with the integrated airline.
The quality of service would be reduced, in terms of overbooking, cancelled flights, and reduction of scheduled flights.
The Aeronautic Authority does not have the powers to effectively control tariffs. Their powers are limited to authorize price increases or reductions as announced by the airlines.
New competitors are prevented from accessing the market by several factors: (i) Legal restriction to foreign airlines for domestic flights; (ii) privileged slots in the airports; (iii) impossibility of reducing tariffs below certain levels; (iv) stringent requirements for new airlines; (v) bilateral operation agreements; (vi) airport infrastructure; (vii) the airline business is not one of the most profitable; (viii) reduced costs for the integrated airline, not available for the competitors; (ix) the size of the market prevents entry of new competitors, whether foreigners or nationals; (x) access to reserves systems is limited, since there are only two providers worldwide; (xi) mileage programs in place would make it less likely customers would switch to competitors; (xii) only 16% of airline passengers consider price a relevant factor at the time of making a decision for the airline, therefore, reductions in prices would not be sufficient to motivate customers to switch to the competitor.
The regulations require the authority to approve the integration if there are significant improvements in efficiency, with savings in costs that cannot be obtained otherwise, provided there is not a reduction of the offer in the market. The authority did not find any reason to approve the integration, since there would be no savings from the new market efficiencies, but from the monopolistic conditions of the market.
The regulations also require the authority not to object the integration if there is not a reduction in the offer. The applicants, in the opinion of the authority, did not demonstrate that more seats would be available.
The two cases summarised in this note are typical of what future decisions of the Superintendence of Industry and Commerce may be in other merger or integration cases submitted to it in accordance with the filing requirements. The constitutional provisions of Colombia are of paramount importance to the antitrust authority. Article 333 of the Constitution states:
"The economic activity and private initiative are free, within the limits of the common good. For its exercise, no one may request prior permits or requirements, without legal authorization.
"Free economic competition is everyone’s right, with its corresponding liabilities.
"Free enterprise, as the basis of development, has a social function that implies obligations. The State shall support social sector organisations and shall stimulate the entrepreneurial development.
"The State, as mandated by the Law, shall prevent the obstruction to economic freedom and shall avoid and control any abuse that individuals or organisations may make of their dominant position in the national market.
"The Law shall limit the reaches of economic freedom whenever the social interests, the environment and the cultural patrimony of the Nation may so require."
This Constitutional provision was the basis of the two decisions: despite strong pressures and the risk of taking controversial decisions, the Superintendence sided with this Constitutional provision, and chose the "common good" as its guiding principle. This was achieved by observing well into the future the effects of decisions made today. Whether they were the right decisions or not, we shall not know soon. However, they were brave decisions, made in a difficult economic and social context, which generated an intense debate in the country.
The main rules and statutes are the following:
National Constitution, articles 333, 334.
Commercial Code, articles 172 to 179.
Law 222 of 1995, article 227.
Control of mergers and acquisitions:
Law 155 of 1959, article 4.
Decree 1302 of 1964, articles 5, 6, 7, 9.
Decree 2153 of 1992, article 51 (transactions that may not be objected to by the Government).
Circular 002 of 2000.
Circular 10 of 2001.
Functions of the different entities in charge of enforcing the legislation:
Decree 2152 of 1992, articles 2, 20 on functions of the Ministry of Development.
Decree 2153 of 1992, articles 2, 3, 4, 11, 12, 24, 45, 46, 47, 48, on functions of the Superintendence of Industry and Commerce.
Commercial Code, article 1866 on civil aviation.
Control on mergers and acquisition in the financial sector:
Financial System Organic Statute (Decree 663 of 1993), articles 55 to 67.
Law 79 of 1988, articles 104, 105 (on mergers of co-operatives).
Law 510 de 1999, articles 2, 3, 19 (amendments to the Financial System Organic Statute).
Decree 1401 of 1999, articles 5, 6 (creation of the Superintendence of the Social Sector and assignment of functions).
Control on mergers and acquisitions in the public services sector:
Law 142 of 1994, articles 3; 11.1; 11.2; 16; 34; 73; 73.2. a), b), c); 73.10; 7. 13; 73.14; 73.15; 73.16; 73.21.
1"El derecho a la competencia es de todos", by Emilio José Archila, "Portafolio" October 8, 2001.
2 Closings before clearance are sanctioned with ineffectiveness of the transaction. The absence of approval of the Superintendence of Industry and Commerce will make the transaction ineffective and third parties may seek the declaration of ineffectiveness from the courts.
3 See note 7. below.
4 Undue restrictions to competition may be lifted by removing or modifying the conditions that may give rise to a presumption of restriction to competition, or by qualifying under the exempt transactions by adjusting the terms of the agreement subject to control. Otherwise, the law provides that the parties to a transaction subject to clearance may provide guarantees to the authorities to ensure that objectionable actions or conducts will not take place. The type of guarantees provided and their terms of validity are subject to negotiation with the authorities.
5 The Superintendence of Industry and Commerce has the following enforcement powers:
- Take measures to initiate investigation, ex officio or at the request of third parties, as to violation of the rules on promotion of competition and restrictive practices.
- Carry out inspections and interrogation of individuals under oath, in order to collect evidence relating to possible violations of restrictive practices rules.
- Order, as precautionary measures, the immediate suspension of conducts that may result in the violation of the provisions as to restrictive practices.
- Accept or reject guarantees offered by parties who submitted applications for approval or clearance of agreements resulting in concentration of undertakings.
- Order the termination of the practices infringing restrictive practices legislation.
- Impose fines to the undertakings engaged in the infringement, up to the equivalent of two thousand minimum salaries (one minimum salary is equivalent to about USD $120) to violators of rules on restrictive practices.
- Impose fines to the administrators, directors, legal representatives, auditors and other individuals who may authorise, carry out or tolerate conducts in violation of the rules on free competition and restrictive practices, up to the equivalent of three hundred minimum salaries.
6 See www.avianca.com.co
7 The Superintendence of Industry and Commerce typically will take the following steps:
- Receive the information, and process it through its internal channels, to the Executive Director’s office, who will then acknowledge receipt and request additional information.
- The Superintendence may order evidence to be obtained or submitted. The authorities may carry out inspections of the facilities to obtain evidence, may request executives of the interested parties to testify and answer questions, and may request third parties to testify or to submit information.
- Once the additional information is received, the Superintendence will undertake the study.
- Finally, the Superintendence will reach a decision, which will be communicated to the interested parties in accordance with the rules of the administrative process. The decision is subject to the appeals granted by the administrative procedure rules.
8 Once a decision is made by the administrative authority, the parties making the filing or application will enjoy all the rights to due process afforded by the Colombian Constitution and by the Code of Administrative Procedure. These rights are translated in the right to appeal decisions of administrative entities and to obtain prompt answer to the appeal. If the administrative entity rejects the right to appeal or rejects the appeal after having heard it, the complainant will still have the right to appeal to the administrative courts (which are part of the judiciary and not of the executive branch). The courts have the right to annul the administrative decision if it was illegal, unconstitutional, or given without following due process. Once the administrative decision is annulled, the courts may even proceed to issue a ruling in substitution of the administrative decision. The courts will also have the authority required to enforce the judgement they may issue.
9 The transaction will be objected to if it may give rise to undue restriction to free competition. The authorities will determine if the restriction may in fact occur, and in that case, they will object to the transaction.
The law provides that there is a legal presumption that there are undue restriction to free competition if:
- The concentration (consolidation, merger, integration) has been preceded of agreements among the undertakings, made in order to unify and impose prices to producers of raw materials or to consumers, or to apportion among them the markets, or to limit production, distribution, or rendering of services.
- The conditions of the corresponding products of services in the market are such that the merger, consolidation or integration of the undertakings producing or distributing them may determine unfair prices damaging competitors or consumers.
- The transaction is used as the way to obtain a dominant position in the market.
On the other hand, the authorities may not object to concentration of undertakings (mergers, consolidations, integration), if the interested parties prove that the transaction may generate substantial improvement in efficiency, resulting in savings in costs that may not be obtained otherwise. The interested parties must guarantee that the transaction will not create a supply reduction in the relevant market.
10 It may be useful to recall that transactions whereby two or more organizations intend to merge, consolidate, or integrate, as well as acquisitions, must be reported to the Superintendence prior to the transaction. The reporting requirement applies to transactions involving commercial, industrial and services organisatinos whose joint market share will be more than 25 % of the relevant market. The reporting requirement also applies when the joint value of the assets involved is higher than 50.000 Colombian monthly minimum salaries (about USD$6,000,000).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.