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Guidelines for Antitrust Remedies

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Detailed Summary:

In October 2018, the Administrative Council for Economic Defense in Brazil (CADE) issued the first edition of its Guidelines for Antitrust Remedies. The document consolidates the best practices and procedures usually adopted by CADE in the design, implementation and monitoring of antitrust remedies and provides guidelines for the negotiation of antitrust remedies in Brazil. The Guide offers practical reference to M&A applicants, interested third parties, public servants and society, in order to improve predictability and transparency regarding the Council´s performance, facilitating doing business in Brazil.

Antitrust remedies are conditions and obligations (commitments) required by the antitrust authority to correct potential harm to competition caused by a merger or an anti-competitive behavior. Remedies may be negotiated with the parties by means of merger agreements or be imposed by the Administrative Tribunal for Economic Defense. Furthermore, remedies may be part of cease-and-desist commitments related to anticompetitive practices.

The Guidelines are divided into eight topics following a brief introduction: (1) Overview of antitrust remedies: definition, remedies types, legal basis, objectives, and procedural aspects regarding locus and timing in the negotiation of remedies; (2) Principles and guidelines for the design of effective remedies; (3) Structural Remedies; (4) Behavioral remedies; (5) Trustees; (6) Monitoring of Remedies; (7) Compliance with Remedy Order; and (8) Regulated sectors and international cooperation in M&A that involve other jurisdictions. Finally, the Annex provides a Glossary, as well as a sample Trustee Mandate and Confidentiality Waiver.

The document highlights the need of effectiveness for antitrust remedies. In other words, the capability to eliminate successfully the potential competition concerns resulted from the operation under analysis. In this sense, the document provides principles and guidelines that should be observed in the negotiation of remedies. The principles consist in proportionality, timeliness, feasibility and verifiability. In line with international best practices, the guidelines declare Cade’s preference for: (i) structural remedies, which can directly address the causes of the competition concerns; (ii) the adoption of monitoring trustees; and (iii) remedies that do not require continued control.

Following the aim to provide guidelines that help designing effective remedies, the document details three main aspects related to the design and implementation of structural remedies: (i) the definition of the divestiture package; (ii) the definition of the buyer; and (iii) the divestiture proceedings.

The divestiture package may consist in (i) a stand-alone business; (ii) a unit separated from an entire company in the divestment process (carving-out); and/or (iii) a divestiture that includes business segments and assets from both the purchaser and the target company (mix-and-match). The divestiture package should entail all the assets necessary to exert effective competitive pressure to reverse the negative effects of the transaction on the market(s). Regarding the timing of the definition of the divestiture buyer, the structural remedy can be classified as: (i) fix-it-first, when a suitable buyer is chosen before the Cade clears the operation; (ii) upfront buyer, when the parties may not complete the notified operation before having entered into a binding agreement with a buyer; and (iii) post-consummation, when the parties may complete the notified operation before a buyer is identified. The latter solution tends to be riskier, since there is no guarantee that a suitable buyer for the divestment will be found. The Guide also highlights the need to prevent the asset´s deterioration before the divestiture procedure is complete.

In this sense, divestiture proceedings should occur as briefly as possible in a timely manner. Cade´s experience suggests a period from three until six months. The Merger Agreement may provide a “divestiture trustee”, made for executing the divestiture process if the applicants are unable to finish the divestiture within this first deadline. In this case, the “divestiture trustee” makes the divestment for the best possible value, without necessary restriction of a minimum sale value and without being bound to the applicants’ guidelines.

When structural remedies are not sufficient to mitigate the competitive risks associated with a merger in an effective way, behavioral remedies may be employed.

In general, behavioral remedies tend to be more suitable for vertical integrations, given that they can be more appropriate to preserve potential efficiencies resulted from the merger. The main behavioral remedies in vertical integrations are obligations related to granting access to infrastructure with “essential facility” characteristics or intellectual property rights.

Behavioral remedies tend to be more appropriate when used as complementary obligations to a structural remedy. For instance, Chinese walls obligations that shield sensitive information between business units in the merged company are often more suitable as ancillary commitments than as a standalone remedy. On the other hand, behavioral remedies involving direct price controls (e.g. price caps), quantity and quality controls must be used with great caution, as they risk distorting economic incentives and being ineffective.

In general, the implementation of behavioral remedies is more complex than put into practice structural remedies, demanding a longer period. Especially in the case of behavioral remedies, the Guide recommends the adoption of a monitoring trustee to timely identify eventual non-compliance and undertake the appropriate measures. Although, trustees can be valuable in supporting the authority for the remedies implementation and monitoring. It is also important to have a special care in the selection of the trustee and in the clear specification of its mandate. In the same way, the establishment of penalties and sanctions in case of noncompliance has crucial importance to provide incentives for the merging parties to comply.

Also, when remedies are employed in regulated sectors, the interaction between Cade and the regulatory authority is recommended to guarantee that remedies are effective. Similarly, in the case of cross-border mergers for which remedies are negotiated in several jurisdictions, the Guide encourages a close cooperation between competition authorities, which may include the appointment of a common monitoring trustee and other measures to mitigate the risks of unsuitable remedies. Finally, the guide highlights the importance of evaluating the effectiveness of remedies. In this sense, the Guide states that CADE may develop ex-post evaluations of concrete merger cases - including the remedies implemented - as a regular procedure that can help the authority improve its future decisions.