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CADE decide sobre Contratos Associativos

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11/7/2014 10:00 PM Demarest News

NEW CRITERIA GOVERNING THE NOTIFICATION OF 'ASSOCIATIVE AGREEMENTS'
 
In the context of recent changes on the merger regulations in Brazil, the Administrative Council for Economic Defense (CADE) issued this week Resolution 10/2014, which finally defines the concept of associative agreements, set forth by the Antitrust Law (Law 12,529/2011).
 
The new resolution introduces objective criteria to determine when those agreements require mandatory notification to CADE.  The new rule becomes enforceable on 3 January 2015.
 
We describe below the new criteria and anticipate some controversial aspects in the language of the resolution, which may raise uncertainty when the new rule is enforced.
 
1. BACKGROUND OF RESOLUTION 10/2014: 
 
Until publication of the new resolution, there has been a great level of uncertainty as to what would ultimately determine if a contract required antitrust approval, provided that it did not involve a classic situation of acquisition of ownership interest  or formation of a joint venture. Given the lack of a legal definition for associative agreements, the decision as to whether an agreement should or not be submitted to CADE for review depended on guidelines extracted from the case law, which provided little practical guidance with a desirable level of legal certainty.
 
Several types of agreements  have been submitted for antitrust approval under Law 12.529/2011 as a result of this, including distribution agreements, supply agreements, licensing of intellectual property rights, services agreements, infrastructure sharing, leasing of productive units, technical cooperation, codeshares between airline carriers, among others.
 
The legal uncertainty resulting from the lack of a  legal definition was aggravated by the fact that the technical analysis conducted by CADE’s General Superintendent for acknowledging jurisdiction - that is, confirming that the contract was indeed reportable - was frequently put aside by the General-Superintendence of CADE, which would prioritize the authorities' commitment to swiftly render decisions. Considering that the jurisdiction assessment may require a thorough analysis and lead to important precedents, it was common that CADE’s General Superintendence skipped this stage and accepted jurisdiction over such cases ad cautelam, moving forward directly to the merit analysis regarding competitive effects of the agreements.
 
Even though the commitment of CADE to render decisions in a businesswise time is greatly appreciated, this dynamic conveyed an overly conservative message to the market in relation to  reportability of  contracts for approval.
 
2. WHAT DOES RESOLUTION 10/2014 SET FORTH?
 
The new rule defined that associative agreements are those which:
 
•  Term exceeds 2 years, or that the 2-year term is reached or surpassed by renewals provided in the contract; and
 
• Involve horizontal or vertical cooperation or the sharing of risks that generate interdependence.
 
Resolution 10/2014 established that there is  a “horizontal or vertical cooperation or risk sharing that lead to interdependence" in the following situations:
 
2.1 Horizontal overlap
 
a) The contracting parties are horizontally related, i.e. are present in the same relevant market involved in the agreement and, cumulatively
 
b) Their combined market share in the relevant market affected is equal to or greater than 20%.
 
2.2. Vertical relation
 
a) The contracting parties are vertically related, i.e. their activities are in different stages of the same production or supply chain of the product or service involved in the agreement; and, cumulatively
 
b) At least one of them holds 30% or more of the relevant markets affected by the agreement, provided that at least one of the following conditions are met:
 
i) the contract provides for the sharing of profits or losses between the parties;
 
ii) the contract provides for an exclusive relationship.
 
Albeit the Resolution requires that the agreements shall provide for "risk sharing that leads to interdependence", in practice it will not be necessary to evaluate neither the (i) risk sharing nor the (ii) interdependence relation, as the Resolution assumes that such conditions are present if the above criteria are met.
 
The Resolution also provides that, for the sake of determining the horizontal and vertical relations, one should take into account not only the activities of the parties involved, but also the activities of their respective economic groups. The concept of economic group adopted by CADE includes all entities directly or indirectly controlled by the parent company as well as of all entities in which any group company holds 20% or more of the capital or voting stock, regardless the existing governance rights.
 
Finally, like in any other transaction, the agreements that fall within the above definition are still subject to the turnover thresholds provided by law. Only transactions involving economic groups with revenues in excess of R$ 750 million in one side of the deal and R$ 75 million in the other will be of mandatory notification.
 
3. POTENTIAL CONTROVERSIAL ISSUES
 
The introduction of objective criteria for the notification of associative agreements is definitively more than welcome. However, we can already anticipate controversial issues in the language of  the Resolution, that might raise some uncertainty when the new rule is to be applied in practice. By way of example:
3.1. The 2-year term:
 
The Resolution states that agreements which term exceeds 2 years or those that, as a result of the renewal, either reach or exceed such timeframe are of mandatory notification. The question that arises is: what is then the situation of those agreements which term is of exactly 2 years and that do not provide for extensions?
A literal interpretation of the Resolution would lead to the conclusion that 2-year agreements are not reportable. However, this interpretation would contradict the fact that agreements that reach 2 years upon renewal must be reported. A systematic interpretation would therefore lead to the opposite conclusion, i.e. that 2-year agreements are actually reportable.
 
3.2 Moment of submission:
 
The Resolution is not clear enough about the moment of submission of agreements that are reportable only in view of the renewal: is the obligation to notify triggered by the execution of the initial agreement that provides for the possibility of renewal or by the actual exercise of the renewal?
 
In the latter case: by virtue of the mandatory suspension imposed by the pre-merger regime, how - in practice - would the commercial relationship operate in order to avoid gun jumping fines? Should the existing commercial relation be interrupted by the parties until CADE issues its final decision? 
 
3.3 Scope of horizontal and vertical relations:
 
Finally, the consideration of all activities of the economic groups involved for purposes of determining horizontal or vertical links may prove to be overly broad and disproportionate in practice, especially when the link is identified between group companies that do not have any connection with the agreement. This is even more relevant when it comes to commercial agreements involving large economic groups, active in several different markets.
 
These and other questions should be answered by CADE when they arise in practice, in the context of concrete cases.  
 
Only time and experience will show the effectiveness and occasionally also the imperfections of the  new rule. The good news is that CADE has proven to be open to review the regulations and procedures. It is therefore expected that, like in other more experienced jurisdictions, the Brazilian authority continues to conduct this review exercise of its own rules on a regular basis, so as to amend the rules that are not reaching their goal or that are creating a disproportionate burden to the market. It is expected that, in the case of associative contracts, this results in the eventual exemption from them of merger review, as it is done in more mature jurisdictions, which leave them for self-assessment.
 
Demarest Advogados
Competition Law
 
 
Mário Nogueira
mnogueira@demarest.com.br
+55 11 3356-1519
Paola Pugliese
ppugliese@demarest.com.br
+55 11 3356-2084
Bruno Drago
bdrago@demarest.com.br
+55 11 3356-1776
Milena Mundim
mmundim@demarest.com.br
+55 11 3356-2092

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