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Jean Paul Chabaneix

Rodrigo, Elias & Medrano Abogados, Lima

jpchabaneix@estudiorodrigo.com

Laura Zuñiga

Rodrigo, Elias & Medrano Abogados, Lima

lzuniga@estudiorodrigo.com

Following its approval in November 2019,[1]a merger control regime is expected to enter into force on 1 March 2021.[2]Thus far, merger controls have only been applicable in the power industry in Peru, but with the approval of this new regime, they will be extended to all industries. The purpose of this article is to present the general aspects of the new merger control regime in Peru and its main consequences, as well as the impact it may have on M&A transactions.

Introduction

With the entry into force of the new merger control regime, the policy of the protection and promotion of free competition in Peru will be complete; in effect, the prior control of mergers, together with law for the defence of free competition, the prevention of unfair competition and the elimination of bureaucratic barriers, whose compliance is verified by the National Institute for the Defence of Competition and Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual or INDECOPI).

Merger controls are not new in Peru, and have been applied for more than 20 years, although only to the Peruvian electricity sector through the provisions contained in Law 26876. With the approval of the Merger Control Law, the mechanism will be extended to all industries.

The new Merger Control Law introduces prior clearance by INDECOPI, the competition authority, to all business concentrations in order to promote economic efficiency in the markets for the welfare of consumers. This new regime follows the international standard applied in other jurisdictions, such as Argentina, Chile and the European Union.

Business concentration acts

Business concentrations subject to the authorisation and prior notification process of the Merger Control Law are those that meet the following conditions:

• any act or transaction that involves a permanent transfer or change of control of a company or part thereof, including: (1) mergers; (2) acquisitions of shares; (3) formation of a joint venture or any other similar form of enterprise involving the acquisition of joint control over one or more economic operators; and (4) acquisition of production assets, among others;

• for these purposes, control is understood to mean the possibility of exercising a decisive and continuous influence on an economic operator by means of: (1) ownership or usage rights over all or part of the assets of a company; or (2) rights or contracts that make it possible to influence, decisively and continuously, the composition, deliberations or decisions of the corporate bodies in charge of determining, directly or indirectly, the competitive strategy;

• take place inside or outside Peru and produce effects in all or part of the Peruvian territory; and

• the value of the transaction exceeds the thresholds set out in the Merger Control Law. For such purposes, the transaction shall be understood to be above the thresholds and, therefore, must follow the prior notification process when:

  • the total sum of the value of the annual sales or gross income in the country of the companies involved in the economic concentration transaction has reached, during the fiscal year prior to that in which the transaction is notified, a value equal to or higher than 118,000 tax units (unidad impositiva tributaria or UIT)^[3] (currently approximately $145m^[4]); and

  • the values of the annual sales or gross receipts in the countries of at least two of the companies involved in the concentration have reached, during the fiscal year preceding that in which the transaction is reported, a value greater than or equal to 18,000 UIT each (currently, approximately $22m for each company).

  Notwithstanding the above, the following transactions are considered to be exempt from the application of the Merger Control Law:

  • organic growth within the same economic group (even if financed by third parties);

  • the acquisition of rights by an economic operator who has not previously participated in the relevant market or in related markets; and

  • transactions having no effect on all or part of the national territory.

  Proceeding

  As in other jurisdictions, this notification proceeding is structured in two stages, and it is conducted by the Technical Secretariat of the Free Competition Commission of INDECOPI.

  The first stage aims to determine whether the merger would qualify as relevant under the Merger Control Law. If it is an act that is not relevant because it does not comply with the requirements or because it is within the exceptions provided for in the Merger Control Law, then INDECOPI will proceed to declare the notification inadmissible, or will approve it within a maximum period of one and a half months (without extensions).

  The second phase, on the other hand, is activated for those acts of concentration that, fulfilling the aforementioned requirements, create a reasonable concern at INDECOPI that their execution may have a significant impact on the market. If this is the case, an analysis of the possible consequences of this act on the market and its implications for consumers is initiated. To date, neither the standard nor draft guidelines establish how INDECOPI will evaluate this possible significant impact. However, based on international experience, we consider that this evaluation will, among other things, identify the alternatives that consumers have in the face of a possible increase in the price of a given good or service, or the potential reduction of competitors in the market.

  This second stage may involve third parties with a legitimate interest or regulatory bodies who give their opinion on the competitive conditions of the market in which they are active. The second phase should last a maximum of four and a half months (without extensions). For this purpose, INDECOPI will model the scenarios that can be derived in the future from the transaction, whether it involves a horizontal, vertical or conglomerate transaction.

  It is worth noting that: (1) not all concentrations are expected to reach the second phase of the assessment; and (2) once INDECOPI's maximum period to make a decision in either phase has expired, positive administrative silence will apply and the application will be considered to be approved. This demonstrates the intention of the rule to not delay or hinder the execution of transactions in the country.

  Decision

  After its analysis is complete, INDECOPI may declare the concentration transaction as allowed, restricted or allowed under conditions.

  In the case of allowed transactions, the procedure will end with INDECOPI's decision on receipt of notification and approval of the concentration.

  The situation is more complex when, as a result of the assessment, it is identified that the transaction will generate a significant negative impact on the market. Depending on the level of such a significant negative impact, INDECOPI may either approve the transaction with conditions or reject it all together.

  Transactions are approved with conditions when it is identified that, with some adjustments, they can bring higher returns and benefits to consumers. Such conditions may imply the imposition of any of the two types of remedies:

  Behavioural remedies

  A typical example of behavioural remedy that aims to ensure that there are competitors in the market or to avoid discriminatory behaviour is a compliance plan that a company should implement in its office in order to raise awareness and create a culture of ethical behaviour. In the context of the electricity sector, INDECOPI has imposed some behavioural remedies,such as the prohibition that related generation companies participate in the public bid organised by an energy distribution company.

  Structural remedies

  Structural remedies, such as divestment orders in cases where the acquirer must dispose of one or more assets in order to undertake the transaction, will undoubtedly be a great challenge for INDECOPI because it has no previous experience in this type of transaction. However, we hope that following comparative experience, INDECOPI will adopt these measures in a healthy consensus with the economic agents who will, in turn, have to present alternatives that make their transactions viable.

  Impact on M&A transactions

  Because the Merger Control Law is mandatory and legal sanctions could be imposed in case of gun jumping, this new regime may become a potential bottleneck for M&A transactions, in particular, those that have a cross-border component.

  Based on the above, the new merger control regime in Peru will mean, among other things, an increase in the terms, costs and time for completion of M&A transactions.

  Notes

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  [1]By means of Urgent Decree 13-2019, later amended by Legislative Decree 1510 (the ‘Merger Control Law’).

  [2]As we write this article, the Peruvian Congress has approved legislation that moves the date for enforcement of the referred law forward. If such new legislation becomes effective, the new merger control regime would enter into force 30 days after its publication in the Official Gazette, which translates into a date before year end 2020.

  [3]       The UIT for 2019 was established at PEN 4,200.

  [4]        At a rate of PEN 3.40 for $1.

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