Venezuelan antitrust legislation

I

General aspects of Venezuelan antitrust legislation

1) Basic provisions.

Specific antitrust control and regulations, although mentioned in the Constitution of 1961, did not exist in Venezuela until 1992. The basic legal instruments are:

a. The Law to Protect and Promote Free Competition (the Competition Law) which became effective on January 13, 1992 (published in Official Gazette No. 34,880 of January 13, 1992).

b. Regulations N° 1 contained in Decree N° 2,775 of January 21, 1993, published on February 26, 1993 (Official Gazette N° 35,160) containing certain basic applications of the Law, develops the powers given to the Superintendency to Protect and Promote Free Competition (the Superintendency), the exceptions to the general application of the Law and the development of certain very important concepts such as "relevant markets", "effective competition" indicating the evidence and the criteria that the Superintendency must follow

c. Regulations N° 2 contained in Decree N° 1,311 of May 2, 1996, published on May 21, 1996 (Official Gazette N° 35,963) containing provisions to examine and control operations of economic concentration. These Regulations contain the framework applicable to the transactions envisaged by Gerber and Mavesa.

d. Instructions N° 2 contained in Resolution N° SPPLC/0026-94 issued by the Superintendency on May 23, 1994, indicating the information that must be submitted by the applicants when requesting the Superintendency to examine an operation of economic concentration.

The Competition Law defines the term "free competition" as "such activity where conditions exist enabling any economic subject, whether supplier or consumer, to enter or exit the market, and under which those within the market, either individually or collectively, are not in a position to impose any condition on exchange relations" (Art. 3°).

This law was enacted to prevent distortions to the freedom with which players in the market operate. It aims to:

a. Promote and protect the exercise of free competition and efficiency for the benefit of producers and consumers.

b. Prohibit monopolies, oligopolies and other situations that might prevent, tamper with, restrict or otherwise limit the exercise of economic freedom.

The Competition Law applies to all individuals and corporations, either public or private, carrying out economic activities within the country, that are either profit-oriented or not.

This law contemplates several types of forbidden practices:

a. Horizontal restraints or agreements between competitors.

b. Vertical restraints between non competitors.

c. Unilateral conducts, such as the abuse of dominant position and boycott practices.

d. Economic concentrations which may have anticompetitive effects or may create a dominant position. An economic concentration is the result of mergers or acquisitions. This prohibition aims to establish merger and acquisition control rules in Venezuela.

2) Exceptions:

There are practices or agreements that, although forbidden by law, may be permitted in order to achieve beneficial effects in the market in a way not possible if competition were to be sternly protected. The exceptions are permitted when benefits offset the restrictions to free competition.

The following items are included within the regime of exceptions:

a. Price-fixing of goods or services either directly or indirectly, individually or agreed upon.

b. Applying different conditions to equivalent payments in trade relations, which in some cases might cause inequalities in free competition.

c. Exclusive territorial representations and franchises with prohibition to market other products.

Such exceptions must be established through regulations issued by the President of the Republic prior consultation with the Superintendency to Protect and Promote Free Competition (Superintendency of Free Competition or Superintendency). Such authorization must aim at improving production, marketing and distribution of goods and the provision of services or at promoting technical and economic progress, and provided the authorized activities provide advantages to consumers and users, among other requirements.

The general regime of exceptions is contained in Regulations Nº 1. It details the procedure and the necessary conditions required to obtain exceptions. It is important to note that these regulations solely refer to exceptions of anticompetitive practices, but they do not refer to the prohibition of economic concentrations.

3) Enforcement of the Law.

The Superintendency of Free Competition is the competent authority to determine the existence or non-existence of forbidden practices. The procedure must be initiated at the request of an interested party or with a written request by an official entity, within one year of the date of the alleged violation or of the date when a continuous or permanent violation has ceased.

In its decision, the Superintendency shall determine whether practices forbidden by this law actually exist or not.

4) Powers of the Superintendency.

Where forbidden practices do exist, the Superintendency of Free Competition has the following powers:

a. To order the end of the practice by a certain deadline.

b. To impose certain conditions or obligations on violators.

c. To order the suppression of the effects of forbidden practices using all legal means within its power.

d. To impose penalties provided for in this law.

5) Penalties.

The law provides the following penalties for violators:

a. Fines of between 10 percent and 20 percent of the value of the sales affected by the violator. This amount will be increased up to 40 percent in case of a repeated violations. The fine is based on the total sales made in the fiscal year before the date of violation.

b. Fines of up to one million Venezuelan Bolivares (Bs. 1,000,000) (about U.S.$ 2,100 at the current exchange rate) for contempt of orders contained in the Superintendency's resolutions, which will be successively increased by 50 percent of the original amount if the violator does not pay by the deadline.

c. Fines of up to three million Venezuelan Bolivares (Bs. 3,000,000) (about U.S.$ 6,300 at the current exchange rate) according to the seriousness of the violation, for those violations not expressly penalized otherwise.

There are no criminal penalties.

6) Civil Liability Actions.

Persons affected by practices forbidden by this law are also entitled to resort to the law courts and to file civil suits against violators of this law for damages and losses suffered once the Superintendency's decision is final and within the six months following the decision.

7) Absolute Nullity

The Competition Law establishes absolute nullity of all agreements, contracts or pacts whose object or purpose is any of the conducts forbidden by this law, provided they are not included in any of the exceptions provided therein.

This provision of the law should be interpreted in the sense that the specific provisions of the agreement which violate the prohibitions of the law will be declared null and void, provided that the severability does not frustrate the purpose of the agreement. There are no precedents on this specific matter; nevertheless, the text of this article of the law is drawn from European legislation, where the courts have allowed the severability of the agreements in this case.

Importance should be given to the parties' intention, if the agreement provides for the severability of the agreement and effects foreseen by the parties in the event the operation is prohibited by the authorities.

II

The prohibition of economic concentrations having anticompetitive effects

1) General aspects.

The sole provision of the Competition Law that refers to economic concentrations is Article 11. It provides that:

"Economic concentrations, in particular those that occur in the exercise of the same activity are prohibited, when as a consequence thereof, restrictive effects to the free competition are obtained or when a dominant position is created in whole or part of the market."

2) Regulations N° 2.

These regulations were issued in accordance to Article 11 of the Competition Law to give guidelines an establish the procedures when the Superintendency is examining operations of economic concentration.

Articles 2° and 3° indicate when, according to the amount of the operations, the Superintendency is authorized to act. Under these provisions and Resolution N° SPPLC/1496 of July 15, 1996, are subject to review those operations that exceed 120,000 fiscal units. Fiscal units today are 2,700 each. Then are subject to be controlled by the Superintendency operations that have a volume exceeding Venezuelan Bolivares 324,000,000 (US$ 679,245). In order to make the calculation for this volume Article 3° indicates that sales of products and services in the last fiscal year are to be taken into account, excluding discounts on sales, value added taxes and other sales taxes. It is also indicated that the volume of sales of the participants is to be added. Section a) of this Article 3 indicates that when the operation consists on the acquisition of a portion of a business or a division, only the portion of the business included in the operation is to be taken into account.

What is most striking of these regulations is that they do not make mandatory that every concentration operation be submitted for approval by the Superintendency before it is executed. Participants may carry the transaction and be subject then to review by the Superintendency that has wide powers to impose precautionary measures, rearrange the transaction, nullify it and impose penalties if it considers that the transaction has anticompetitive effects. Prior evaluation and approval has the advantage that unless the Superintendency has based its decision on false, erroneous or incomplete information or if the transaction is carried out in a different manner as it was proposed, the parties may not be penalized in the future (Articles 13, 15, 16 and 17).

Article 4° of Regulations N° 2 defines the operations of economic concentration :

a. Merger of two legal entities.

b. The incorporation of a joint venture company.

c. The direct or indirect acquisition of control of a legal entity.

d. The acquisition of productive assets or businesses.

e. Any other act, contract, judicial adjudication, liquidation, inheritance or any other legal form that result in the concentration of productive assets or businesses.

Article 5° of Regulations N° 2 provide that the Superintendency when determining whether an operation of economic concentration generates restrictive effects to free competition or produces or invigorates a dominant position is to take into account, among other criteria, the following :

a. If the operation produces a significant increase of concentration in the relevant market and if as a result of same a moderate or highly concentrated relevant market is created.

b. If the operation eases substantially conducts, practices, agreements or contracts that impede, restrict, limits free competition as well as the creation of barriers for the entry of new competitors.

c. If the operation makes possible for the resulting entity to unilaterally increase prices not permitting competitors to presently or eventually counteract said power.

d. If after the operation is concluded the entry in the market of a new competitor is not sufficiently easy, timely, possible and sufficient, to avoid that the participants in the market, individually or collectively, increase prices.

e. If the operation is not indispensable to avoid the exit from the relevant market of the productive assets of the business entity being acquired.

f. If the operation, particularly with regard to those operations of concentration of business entities engaged in the same production line, has or may have the effect to discard other business entities form the market or create hindrances for their entry into the market.

Based on the above criteria the Superintendency will issue General Lines of Evaluation. As of this date, it has not done so.

When reading the above criteria they seem applicable only to mergers or acquisitions of legal entities but it is clear that the intention is to have them rule whatever form of economic concentration indicated in Article 4°.

According to Article 9° of Regulations N° 2 the petition for the Superintendency prior ruling is to be filed separately by all the entities participating in the operation of concentration. Each of them individually must answer the questionnaire contained in Instructions N° 2 hereinafter referred to

The Superintendency of Free Competition, in effect, has issued instructions on the information to be submitted when filing a notice of an economic concentration to the agency (Instructions N° 2 of May 23, 1994).

The Superintendency of Free Competition has issued several decisions regarding economic concentrations since it was created in 1992. In three occasions the agency has blocked a proposed merger or acquisition that the parties had submitted to obtain prior approval [acquisition of Yukery by Heinz (1994); merger of Montana and Pinco Pittsburgh Paints (1993); acquisition by S.C. Johnson of Cruz Verde waxes from Procter & Gamble]. Eleven decisions have found that the proposed concentration did not create anticompetitive effects in the relevant markets.

A recent decision, (Coca-Cola/Pepsi) which was issued on December 8, 1996 challenged the well publicized breakup of the bottling agreement between the Pepsi and the Cisneros Group and the Coca Cola-Embotelladoras Hit concentration. In this case, the Superintendency started the case after the parties had executed their agreements, upon the complaint filed by Pepsi. The Superintendency found that the transaction involved an economic concentration between Coca Cola and Embotelladoras Hit that created anticompetitive effects, but did not order the unwinding thereof, instead, it chose to impose a fine on the parties and the demise of some trademarks.

The Superintendency of Free Competition has defined what should be considered an economic concentration, and among them, which create anticompetitive effects:

An economic concentration exists when two or more companies merge or when a company through the acquisition of corporate stock, assets or through other means, acquires directly or indirectly control over part or the whole of one or more enterprises or undertakings. (Heinz-Yukery case, p. 6)

A concentration will create anticompetitive effects:

a. if it generates restrictive effects to the free competition, by allowing the concentration the possibility of unilaterally imposing conditions in the market, in other words the created market power will adversely affect the market; or

b. if it creates a dominant position in the market, when as a consequence of the operation a sole person or group of related persons perform an economic activity; or when there is no effective competition among players of a particular market (Cerámicas de Carabobo-Refractarios de Caroní decision- March 1994).

To ascertain whether the operation creates anticompetitive effects as described, the Superintendency of Free Competition applies the following methodology in the analysis of merger cases:

a. The definition of the relevant market, which is the first step to determine which is the market to take into consideration to measure the effects of the concentration. The relevant market is determined taking into consideration the geographic market and the product market. Within the relevant product market are included those products that may be a substitute for the products manufactured or commercialized by the economic concerns participants in the concentration. The degree of substitution is considered from the demand and the supply perspective.

b. The degree of concentration of the different participants in the relevant market.

c. Evaluation of the dynamic of competition between the competitors.

d. The barriers of entry to the relevant market.

e. Economic advantages or efficiencies produced by the concentration.

When the Superintendency determines that the proposed transaction does not violate Article 11 of the Law according to the above mentioned criteria, the parties may carry forward the negotiation and will have the assurance that the transaction will not be challenged in the future if it was executed according to the structure and plan submitted to the Superintendency.

This report was prepared by

J. Eloy Anzola E. and Gonzalo Rodríguez-Matos

Partners of Anzola Bóveda Raffalli y Rodríguez

jeaabrr@ven.net

grmabrr@ven.net

February, 1997

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