Red lines in cooperation agreements between competitors in Colombia
Companies competing in the same market must analyze whether a possible alliance between them is in compliance with the country’s antitrust legislation. To do so, they should bear a number of factors in mind which could be anti-competitive or which, on the contrary, could generate enhancements or efficiencies under the agreement. We analyze below all key points in relation to this type of transactions in Colombia.
Antitrust legislation in Colombia contemplates three types of rules that regulate the way in which a firm can conduct itself on the market: (i) rules on anti-competitive practices, (ii) rules regarding merger control and (iii) rules on unfair competition.
The rules on anti-competitive practices prohibit conduct that affect the welfare of the consumer, unrestricted access to the market by competitors and economic efficiency. These prohibitions are provided in Law 155 of 1959, Decree 2153 of 1992 and Law 1340 of 2009.
Law 155 of 1959 contains a general prohibition against any agreement or practice tending to “restrict competition” or fix unfair prices. This is an open prohibition containing no specification as to what should be understood by “practice tending to restrict competition”. The scope of this prohibition has therefore been defined by the Industry and Commerce Authority (Superintendencia de Industria y Comercio or SIC) in its decisions.
In turn, Decree 2153 of 1992 establishes a catalog of specific practices that are deemed to restrict competition. In particular, Decree 2153 of 1992 prohibits (i) anti-competitive agreements (such as, for example, a business cartel between competitors aimed at fixing the product prices); (ii) anti-competitive decisions; and (iii) abuse of a dominant position (for example, where a parent company reduces prices to below cost with a view to eliminate a competitor).
As for the rules on merger control down in article 9 of Law 1340 of 2009, companies engaging in the same economic activity or participating in the same value chain, whose assets (taken individually or collectively) are equal to or greater than the amount stipulated by the SIC (60,000 minimum wages, applied to assets or revenues from the preceding year), will be obliged to inform the SIC of the transactions they plan to carry out in order to merge, consolidate, acquire the control of or combine, regardless of the legal form of the projected transaction.
Thus, two questions must be asked, both of which must be answered with “yes” for a business combination to have to be reported to the antitrust authority: i) the subjective question; and ii) the objective question (SIC Decision 49903 of 2014).
The subjective question refers to whether the companies involved in the transaction engage in the same economic activity (distribute the same good or service, or their replacements) or participate in the same value chain (have a vertical relationship).
The objective question refers to two aspects:
- first, whether the companies intending to combine have, in the year preceding the transaction, collectively or individually, operating assets or revenues exceeding those stipulated by the SIC in Decision 76544 of 2019 (60,000 minimum wages in Colombia); and
- second, whether the transaction to be carried out effectively gives rise to a business concentration (i.e., whether one company effectively acquires the competitive control of another), inspite of the legal form used for such purpose (merger, acquisition of shares, purchase of assets, mandate agreement, among others).
Should the answer to the aforesaid questions be “yes”, the transaction would be considered relevant from an antitrust standpoint, given that it must be reported to the SIC. This does not necessarily mean the existence of a presumption that the transaction has an impact on the Colombian market, given that an affirmative answer to the questions merely triggers the preventive control by the authorities, who will ultimately determine whether or not the transaction is capable of having a damaging impact on the market.
It is important to note that, if the subjective and objective questions are answered affirmatively and companies are obliged to apply for authorization from the SIC, the transactions should not be materially executed until obtaining the corresponding clearance, for a risk of penalties in the form of fines and, depending on the case, measures that could entail the reversal of the transaction in question, might arise. The reporting duty thus emerges as an obligation, of which the companies involved will be in breach if they merge without having reported the transaction to the SIC.
If the subjective and objective questions are answered affirmatively and the transaction has an impact on the Colombian market, the relevant authorities must be informed before the transaction is carried out, using one of the statutory procedures, i.e., either notification or pre-evaluation.
If the participating companies have a share of less than 20% in each of the markets affected by the transaction, they must submit the transaction to a simple notification process. In such case (according to the law), the transaction will be deemed authorized, but the parties must announce (notify) its execution to the SIC. If the parties have a joint share of more than 20%, they must undertake the pre-evaluation process, which entails obtaining authorization from the SIC before completing the transaction.
On the basis of the foregoing, the SIC has analyzed, in its decisions, how antitrust rules are to be applied to cooperation agreements, examining whether such agreements result in a need to complete the processes aimed at controlling concentrations between companies or whether they should be analyzed from the standpoint of an anti-competitive agreement.
1. Cooperation agreements permitted by law
It could happen that the companies participating in the transaction engage in the same economic activity or are in the same value chain and that, collectively, they have total operating revenues or assets the aforementioned thresholds, but rather than a business combination, their transaction simply amounts to a cooperation agreement between competitors, in which case the transaction does not have to be reported ex ante to the SIC. A few considerations on this type of agreement are set forth below.
Cooperation agreements between competitors occur where “two or more companies situated in the same link of the production chain and effectively competing on the market, combine their resources or join a part of their operations, with a view to achieving certain commercial goals” (SIC Decision N° 53400 of 2013).
Antitrust legislation prohibits agreements that have the purpose or effect of causing distortions on the market. Nonetheless, it is possible for there to be agreements executed between competitors, but tolerated by law because they generate benefits and efficiencies in favor of consumers and the market. These agreements are not, in principle, regarded as falling under the prohibition.
This does not mean that a cooperation agreement that generates efficiencies will per se be treated as lawful, given that the agreement could actually generate more anti-competitive effects than efficiencies in the market. Cooperation agreements might facilitate collusion or increase a given company’s power on the market, which could lead to price increases or negative impacts on production, innovation, variety and quality of products.
Some of the cooperation agreements that tend to produce efficiencies in the market, according to the SIC, are: i) research and development agreements, ii) production agreements, iii) purchase agreements, iv) marketing agreements, v) standardization agreements, among others.
Now, in order to determine that a cooperation agreement does not unduly restrict competition and, accordingly, can be tolerated by the law, an evaluation that considers the following should be performed:
1.1 Whether competitors that are party to the agreement have a share of less than 20% in the relevant market
Where the competitors executing the agreement have a share of less than 20%, it is highly unlikely that the agreement is anti-competitive, given that the other participants will be able to exercise sufficient competitive pressure.
As for the market share of the companies party to the agreement, the SIC took the view that “even in cases in which the market share is slightly higher, it is unlikely that anti-competitive effects will be produced if the market has various effective participants” (SIC Decision N° 53400 of 2013).
1.2 Whether the agreement enhances efficiency
Those enhancements should be generated in the production, acquisition, distribution or marketing of the good or service in question.
1.3 Whether the restrictions are essential
The restrictions on competition caused by the cooperation agreement must be essential to achieving the expected enhanced efficiencies. In other words, the expected benefits can only be achieved by executing the cooperation agreement.
1.4 Whether there are benefits for consumers
The enhanced efficiencies should lead to benefits for consumers on the market, with a view to offsetting the anti-competitive effects caused by the agreement.
1.5 Whether or not competition is eliminated
The agreement should not facilitate the exclusion of competitors with respect to a substantial part of the relevant products or services.
Occasionally, given the complexity of the projected transaction, it is not easy to differentiate a business concentration from a cooperation agreement between competitors, and it becomes necessary to resort to auxiliary indicators that differentiate between the two types of transactions.
It is important to note that in the analysis performed by the SIC, which is executed ex post on a case-by-case basis, there is no definitive indicator that permits, ex ante, the automatic cataloging of a transaction as anti-competitive or as beneficial to the market.
2. Indicators used to differentiate a business combination from a cooperation agreement
It is important to distinguish between the two concepts. In the case of a business combination, the transaction must be reported ex ante to the SIC, while in the case of a cooperation agreement, the pre-evaluation or notification process does not have to be completed. Please note however, in the interest of clarity, that in the case of a cooperation agreement, the transaction is not exempt from the ex post control exercised by the authority regarding whether the agreement has an anti-competitive purpose or effect such as, for example, to agree the prices of products and/or services, or to distribute the market, among others.
This being the case, the SIC has summarized the indicators that determine whether a transaction should be treated as a business combination. In this connection, in the Roma-Axxa decision, marketers of pharmaceutical products approached the SIC, in compliance with the merger control process, to apply for the authorization of a strategic alliance under which they would be able to carry out the joint purchase and negotiation of the pharmaceutical products distributed by all of them on the market. The SIC concluded that this was the case of a business cooperation agreement that did not have to be reported to the SIC, on the basis of the absence of the following indicators which, if present, entail a business combination and, consequently, trigger the duty to report the transaction to the authority:
“i) Intended permanence and elimination of competition in a specific business: The transaction is intended to subsist on the long-term and definitively, or at least substantially, eradicates competition on the relevant market between those party to the transaction.
ii) The transaction is not simply the transfer of one specific function of the allied companies, but rather constitutes the union of a business or market. According to this indicator, the entity arising from the transaction adopts not only specific activities of the allied companies, but also has independent access to or presence on a market.
iii) The business or entity arising as a result of the transaction is fully functional on the market: What arises as a result of the transaction (be it the union of two previously competitive businesses as one, the creation of a separate company, a research center, etc.) has independent resources or at least has the potential for autonomous development on the market, as a separate business”.
In short, if the foregoing three indicators are present in the transaction, in their entirety, it will be regarded as a business concentration and, ultimately, must be reported to the SIC, as explained by the SIC in the Pamphlet (Cartilla) on the application of antitrust provisions to cooperation agreements between competitors.
Should these indicators be present (and assuming that the questions explained above are answered in the affirmative), the projected transaction would be subject to the ex ante control of the SIC, given that it would constitute a concentration. It is worth repeating that one of the essential elements of this type of transaction is the transfer of control between the parties, which means that the transaction gives rise to a change in the competitive decision-making power in the activities shown to be relevant to an analysis of the transaction.
If, on the contrary, the aforesaid elements are deemed not to be present in the transaction, it will be regarded as a cooperation agreement between competitors which need not be reported to the SIC and whose “pro-competitive or anti-competitive nature will be determined by this Agency in exercising its ex post inspection, supervision and control functions”, i.e., it will be evaluated in accordance with the rules that define when an agreement is, or is not, anti-competitive.
Having said that, it is important to recall that an anti-competitive agreement can be defined as “all agreements, treaties, arrangements, concerted or consciously parallel practices between two or more companies” (article 45 of Decree 2153 of 1992) which restrict or distort competition or have the capability of doing so, as stipulated in article 47 of Decree 2153 of 1992.
Agreements between companies can be anti-competitive due to purpose or to effect. Anti-competitive agreements due to purpose imply the existence of a presumption that the conduct caused, or was at least capable of causing, anti-competitive effects on the respective market, for which reason it must be penalized. The foregoing, according to the SIC, means that “inherent in such conduct is a judgment reproaching anti-competitive practice and, accordingly, no further evidence of the specific impact on the market is required” (SIC Decision 31079 of 2019). In turn, anti-competitive agreements due to effect mean that the SIC must obtain evidence of the negative impact on the market caused by the reported conduct.
In view of the foregoing, it is important to note that horizontal cooperation agreements (between competitors) can give rise to substantial economic benefits, especially if they combine complementary activities, knowledge or assets. Horizontal cooperation can serve as a way to share the risk, save costs, increase investments, combine technical knowledge, enhance product quality and variety and launch innovation more quickly.
Alliances or strategies of cooperation on the part of competitors should be evaluated specifically in connection with the potential risks they entail in matters of competition. For this reason the focus of an analysis of alliances or horizontal cooperation agreements always involves an analysis of the potential positive or negative impact on competition produced by the implementation of the agreement.
The foregoing is especially true if the result of the agreement is an environment of cooperation propitious to the generation of coordinated effects or an increase in the market power of the companies party to the agreement, capable of affecting product prices, amounts, quality or innovation.
Thus, with a view to analyzing whether a given alliance is pro-competitive or anti-competitive, it is important to analyze the particular features of each market affected by the transaction, its composition, concentration and dynamics, as well as the possible efficiencies resulting from the agreement in question, in other words, an analysis which, in Colombia, requires the application of the rule of reason.