Navigating Merger Control in Latin America: A Strategic Guide for Global M&A

Nuestras abogadas, Verónica Sattler y Fiorella Monge, comparten su articulo titulado ¨Navigating Merger Control in Latin America: A Strategic Guide for Global M&A¨ para World Service Group (WSG).

“Prior to the entry into force of the current merger control regime, most acquisition agreements included a short long-stop date provision or even simultaneous signing and closing.”

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INTRODUCTION

Is merger control regulation in force?

Yes. On January 7, 2021, Law No. 31112, the Merger Control Law, was published in the Official Gazette “El Peruano” and came into force on June 14, 2021. Previously, a merger control regime was applicable only in the power industry under Law No. 26876, the Antimonopoly and Anti-oligopoly Law.

HOT TOPIC 1: GUN JUMPING

1. Can the notifying parties get permission to partially execute the transaction before the merger
control approval?
No. According to article 23 of Law No. 31112, the notifying parties (the agents that gain control of another agent) are bound by the standstill obligation under which the agents involved in the transaction need to remain as separate and independent economic agents until approval. In other words, the notifying parties must not have the power to exert a decisive and continuous influence or control over the other company involved in the transaction.

2. What are the consequences of implementing a transaction without approval/permission? Is
unwinding the transaction contemplated?

The transactions implemented without approval/permission will entail the nullity of the acts. Moreover, article 27 of Law No. 31112 sanctions the behavior with a fine of up to 1,000 tax units (up to USD 1.3 million) provided that such fine does not exceed ten percent (10%) of the infringing company’s or its economic group’s sales or gross income during the calendar year immediately prior to the issuance of the Peruvian antitrust authority´s (INDECOPI) infringement resolution.

3. Specific cases: (a) Can the mere exchange of commercially sensitive information be considered as gun jumping? and (b) Can the mere potential to influence the target be sanctioned or is an effective exercise of such influence required?

a. The mere exchange of commercially sensitive information is considered an indication of gun jumping. Sharing commercially sensitive information that is relevant in the market can reveal a coordination between the companies with the intention of harming competition. The risk of sharing confidential information increases when it involves the agent’s commercial strategy. Therefore, it is recommended to limit the exchange of information to that which is strictly necessary in the framework of the transaction and through a Clean Team.

b. The mere potential to influence the target can be considered as gun jumping. For example, under Resolution No. 001-2010/CLC-INDECOPI, issued under the former merger control regime applicable only in the power industry, the Peruvian competition authority analyzed an acquisition where the buyer designated the members of the target’s board of directors prior to having obtained the relevant authorization. The buyer was sanctioned even though the designated directors did not take any effective decision regarding the commercial strategy of the target in Peru. Since the appointed board of directors could potentially influence the target’s strategy, the authority considered this designation as a gun jumping scenario.

HOT TOPIC 2: IMPOSEDREMEDIES (2023 – 2024)

1. Based on your competition authority’s decisions during 2023-2024, what kind of remedies are the
most widely used? Please mention a relevant case.

Within this period, three merger transactions have been subject to specific remedies:

Resolution N° 014-2024/CLC-INDECOPI
INDECOPI evaluated the acquisition by China Southern Power Grid International (HK) Co., Limited of all shares in Enel Distribución Perú S.A.A. and Enel X Perú S.A.C. Both the acquiring and target companies are active in Peru’s power sector.
Conditions: The transaction was approved under the condition that the target entities must procure power through a competitive bidding mechanism, supervised by OSINERGMIN (Peru’s electricity regulator). This process will allow both affiliated companies and independent third parties to compete on equal terms. The bidding mechanism is mandated to remain in effect until 2030, subject to oversight by INDECOPI.
Resolution N° 187-2024/CLC-INDECOPI
INDECOPI assessed the joint acquisition of control by Pangea LuxCo S.à r.I. and Telefónica Hispanoamérica, S.A. over Pangeaco S.A.C., a joint venture established to deploy the largest fiber optic network in Peru.
Conditions: The approval requires the parties to amend certain transaction agreements to adjust the wholesale and retail non-compete clauses and the exclusive purchase provisions in line with INDECOPI’s standards. Additionally, provisions concerning the right of first offer and matching rights must be removed. The parties are also required to appoint a compliance officer and report any exclusivity clauses executed by Pangeaco S.A.C. with future customers over the next five years to INDECOPI.
Resolution N° 206-2024-CLC-INDECOPI
This resolution conditionally authorizes Sika AG’s acquisition of the Peruvian group Chema, which specializes in producing construction materials.
Conditions: As part of the approval, Sika must permanently divest specific Chema Group brands and license other brands to an independent company for a period of seven years. This independent entity will be allowed to operate and compete effectively, temporarily using the Chema logo and branding in market segments where competitive concerns were identified. After the seven-year licensing term, Sika will face a three-year blocking period, during which it cannot commercialize products under the licensed brands. This measure is designed to provide the licensed company adequate time to establish itself as a meaningful competitor within the Peruvian market.

2. What is the standard for the duration/term of a behavioral or hybrid remedy?
The duration of obligations generally ranges between five to ten years. For instance, as outlined in Resolution N° 014 2024/CLC-INDECOPI, the requirement for a competitive bidding process to select the energy supplier will remain in effect until 2030, covering an approximately six-year term. Similarly, under Resolution N° 206-2024-CLC-INDECOPI, the obligation for Sika to license specific brands to an independent company is set for a period of seven years, followed by an additional three-year restriction period on Sika’s use of these brands. Before, in 2022, INDECOPI issued another ruling with imposed remedies under Case No. 076-2022/ CLC-INDECOPI. This case established a behavioral remedy designed to be temporary, commencing immediately after the transaction closed and lasting until specific licensing agreements were executed. During this period, a price policy was enforced to prevent the involved companies from raising the prices of products marketed under the trademarks to be licensed. Additionally, INDECOPI required the signing of these licensing agreements as part of a hybrid remedy, with a duration set at five years.

3. What are the consequences of breaching the agreed/imposed remedies?

Non-compliance with the conditions set forth will lead to the imposition of a fine of over 1,000 tax units (over USD 1.3 million), provided that such fine does not exceed twelve percent (12%) of the infringing company’s or its economic group’s sales or gross income during the calendar year immediately prior to the issuance of INDECOPI’s resolution. Additionally, INDECOPI may establish corrective measures aimed to reverse the breach of the imposed conditions by unwinding the transaction.

HOT TOPIC 3: CLEAN TEAM AGREEMENTS

1. Are there any legal standards for the terms and conditions of a Clean Team Agreement in your jurisdiction? (scope of the confidentiality obligation, term of the agreement, members, among others).
Although it is not considered as a requirement for exchanging information, the competition authority recommends that all information to be shared between companies shall be done through a Clean Team. Moreover, it is recommended that the Clean Team should not be formed by: (i) any member of the company involved in competitive decisions; or (ii) people who may share sensitive information with such personnel. It is recommended that the Clean Team be formed by external advisors. The Clean Team Agreement should establish a timeframe in which it is considered reasonable to exchange information. It is advisable that there should only be an exchange of information during the due diligence and negotiation stage. After these stages, sharing information must be justified by criteria that demonstrate that the information exchanged is strictly necessary to protect the value of the target company.

2. Is the existence of a Clean Team Agreement a decisive factor for the competition authority to discard gun jumping behavior regarding the exchange of information?

The existence of a Clean Team Agreement can sway the competition authority’s decision regarding the gun jumping behavior, as it is considered as a precaution aimed to mitigate coordination risks. However, the competition authority will conduct case-by-case analysis in order to determine if the Clean Team is sharing the strictly necessary information and guarding the confidentiality of said information.

3. Is there any guidance on how to identify the information that is ‘strictly necessary’ for the transaction, so that it may be shared through a Clean Team Agreement?

Strictly necessary information is considered to entail only the information required to carry out the transaction. Accordingly, if information that does not have a direct link to the transaction’s feasibility is shared, it could be considered as not necessary. This criterion is established based on an analysis of necessity and reasonability. Moreover, it is recommended, to the extent possible, that the shared information: (i) is aggregated, so that the competitors related to this information cannot be identified; (ii) contains historic data, since information based on projections could be used for anticompetitive purposes; and (iii) is nonstrategic, to diminish the influence one party could exert over the other.

HOT TOPIC 4: ANTITRUST RISK ALLOCATION IN THE SPA

1. Is the hell or high-water clause commonly accepted?

Hell or high water (“HOHW”) provisions are currently rare in the Peruvian market as they require the buyer to take all necessary actions to obtain antitrust clearance by the agreed long stop date, regardless of the cost or burden. While regulating a HOHW provision may be considered powerful to ensure that the transaction closes despite regulatory hurdles, buyers tend to resist this clause due to the potential risks involved. Under Peruvian law, INDECOPI can impose behavioral conditions (e.g., non-discrimination obligations), structural conditions (e.g., divestitures) and hybrid conditions (e.g., licensing) intended to prevent or mitigate the potential anticompetitive effects that could arise from the transaction. As such, buyers in our jurisdiction are mostly reluctant to agree on a HOHW provision as there is a possibility that INDECOPI may impose structural or hybrid conditions as part of the antitrust clearance procedure.

2. Are buyers’ obligations usually limited to those that do not entail a material adverse impact?

The Peruvian merger control procedure has two phases. If INDECOPI determines that the proposed transaction raises serious concerns regarding potential restrictive effects on competition in the corresponding market, then the transaction will be evaluated in the second phase. If deemed necessary to prevent or mitigate potential anticompetitive effects, in the second phase INDECOPI may impose conditions for the closing of the transaction. Especially when buyers foresee that it is likely for the transaction to be assessed by INDECOPI in the second phase, it is common practice for buyers to negotiate limitations to the antitrust compliance covenant to avoid any events that may materially adversely affect their businesses, assets, revenues, financial or trading position, profits and prospects. Typically, the material adverse impact is assessed considering the buyer’s group post-closing, taken as a whole (e.g., including the target company and any indirect targets), because the buyer’s primary concern is to ensure that its post-closing strategy is not jeopardized.

3. How do parties typically regulate a middle ground in risk allocation?

Parties may seek a moderate stance on risk allocation through antitrust compliance covenants that, on one hand, require the buyer to use “commercially reasonable efforts” without imposing undue hardship on the buyer, and, on the other hand, provide certain material adverse impact carve-outs. Such carve-outs may also be included by defining specific regulatory material adverse conditions (e.g., divestment of another line of business) that the buyer is not required to accept in case INDECOPI imposes conditions to the closing of the transaction.

HOT TOPIC 5: CONTRACTUAL MECHANISMS TO MITIGATE UNDESIRED DELAYS CAUSED BY ANTITRUST RULINGS:

1. How has antitrust clearance impacted long stop date provisions?

Prior to the entry into force of the current merger control regime, most acquisition agreements included a short long-stop date provision or even simultaneous signing and closing. Considering the terms of the two phases provided for by the current regime (i.e., 55 business days for the first phase and 90 business days for the second phase, which can be extended by 30 additional business days under certain circumstances), some parties are now opting for longer long-stop dates, which can even be automatically extended for an additional term if the antitrust authorization has not been obtained. However, there are still parties that prefer to have shorter long-stop dates, usually considering only the term of the first phase of the antitrust procedure and preserving the right to terminate the agreement if the antitrust procedure is drawnout in the second phase. In this second scenario, if the antitrust review takes longer than expected and the parties opt to amend the transaction agreement after its execution to extend the long-stop date, that amendment must be submitted to INDECOPI as soon as it is executed.

2. Is the inclusion of walkaway clauses a common trend in your market regarding regulatory complexities?

From the over fifty requests for authorization processed since 2021 by INDECOPI, only five have raised serious concerns regarding their effects on competition and have been assessed in the second phase. Given the low number of transactions with regulatory complexities to date, the inclusion of walkaway clauses is not yet a common trend in our jurisdiction. However, these clauses may become more prevalent as our regulatory environment continues to evolve.

3. Are reverse termination fees commonly used to compensate any of the parties in case of rejection?

Only one request for authorization has been rejected to date by INDECOPI. Therefore, the use ofreverse termination fees is not common in our jurisdiction, given the low incidence of rejections. However, they may be included in certain high-risk transactions as a precautionary measure to compensate the parties involved in case of an unexpected rejection. As seen in other jurisdictions, depending on the complexity of the transaction, reverse termination fees can be structured either as a single fixed amount or a ticking fee that accounts for the duration of the antitrust review.