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INTERNATIONAL REPORT

NOVEMBER 1996

Competition Regulation in Brazil

By Jaime E. Fernandez

COMPETITION REGULATION IN BRAZIL

In June 1994, the Brazilian Congress approved a new antitrust law, substantially overhauling the previous legislation. The new law simplified the regulatory framework and strengthened the mechanisms of enforcement of the antitrust laws.

Since the adoption of the new law, CADE, an administrative body with quasi-judicial functions in charge of antitrust enforcement in Brazil, has issued several important decisions, including decisions (i) partially blocking the acquisition of the Brazilian Sinasa by Rhodia, a subsidiary of Rhone Poulenc and (ii) disapproving a proposed joint venture between Brasilit, S.A. and Eternit, S.A., two Brazilian asbestos products manufacturers.

This article summarizes the antitrust regulations in force in Brazil, focusing on the Brasilit decision dealing with mergers and acquisitions.

Antitrust Violations

Violations of the "economic order," regardless of intent, include conduct with the effect of

(i) harming competition,

(ii) dominating the relevant market of goods or services,

(iii) increasing profits in an arbitrary manner, unless the company's position in the market is a result of a "natural competitive process," and

(iv) abusing a dominant position in the market. "Market domination" implies that an enterprise or group of enterprises controls a substantial share of the relevant market. The control of 20% of the market constitutes a "dominant position." "Increasing profits in an arbitrary manner" has been interpreted in decisions under previous statutes to encom- pass any situation where one of the parties arbitrarily sets the price, i.e., when there is no participation of the other parties in the formation of the price.

The following practices constitute a strict liability transgression if they fall within (i), (ii), (iii) or (iv) above: price-fixing and other forms of concerted behavior among competitors; creating obstacles to the formation or development of a competing enterprise; erecting barriers to the entry of competitors; limiting the access of competitors to raw materials or equipment or to the channels of distribution; hoarding or impeding access by competitors to patents and technology; demanding exclusive advertising rights; coordinating bids in public auction; market allocations; suppressing competing technologies; refusals to deal not justified by normal commercial practice; tying the sale of a product to the purchase of another product; imposing resale prices or resale conditions on a distributor; destroying or hoarding a product to elevate its market price; artificially causing prices to oscillate; and either selling a product below cost without justification or interrupting production or operations without adequate justification.

Enforcement by SDE and CADE

SDE, the Secretary for Economic Regulation, ex officio or upon private party complaint, may make a preliminary determination of violation of the antitrust laws. SDE may order correction of the conduct in question, in which case the companies must either comply or be subject to daily fines.

CADE, the Administrative Council for the Defense of Competition, is an administrative judicial board with competence to judge violations and impose sanctions for antitrust violations in Brazil.

Law8.884/94 established a consultation mechanism whereby private parties could direct inquiries to CADE, seeking an administrative opinion on a particular behavior. The mechanism of private consultation was unfortunately abolished by Law 9.069/95.

Criminal Violations

Law 8.137/90 established criminal sanctions for violations against "the economic order." It prohibits abuse of market power through acquisitions or mergers with competing enterprises, ceasing or reducing production, and seeking to impede the functioning of a competing enterprise. The law enacted in 1994 defines market power as existing whenever an enterprise or group of enterprises controls a substantial portion of the market.

Other criminal violations do not require the existence of market power. These include any agreements or collusive arrangements to fix prices, to allocate markets, to control sources of supplies or channels of distribution to the detriment of competition, to hoard or destroy products in order to create a monopoly, or to set prices in order to harm competitors. It is, likewise, a crime to tie the sale of a product or service to the purchase of a different product or service, if this is done with the purpose of discriminating between purchasers, unless one of the purchasers is a distributor of the producer's goods.

All criminal violations require a mental state equivalent to scienter. The criminal enforcement of antitrust provisions is still relatively rare in Brazil.

Mergers and Acquisitions

Pursuant to the Corporation Law, mergers must be approved by the shareholder's assembly, after publication of a "protocol" indicating the terms under which the merger will take place. Creditors can bring judicial action affer the merger to request its annulment.

The 1994 law provides that any act that may lead to market domination or that may limit competition is subject to a reporting requirement for approval by CADE. Asset acquisitions, mergers and joint ventures must be reported for approval when they involve twenty percent or more of the relevant market, or when any of the companies involved has annual gross revenues of at least 100.000.000 UFIR (UFIR is a Brazilian unit of value based on a consumer index). A joint venture may be a violation of the antitrust laws if it is used as a means to eliminate competition from the market.

CADE will authorize a merger, acquisition or joint venture subject to the reporting requirement only if it can be shown that it results in productivity and/or quality improvements, the benefits are "justly distributed" among consumers and producers, and competition is not substantially reduced in a sector of the market.

In the 1994 Brasilit case, CADE denied a request for the creation of a joint venture company between Bralisit, S.A. and Eternit, S.A., which would have merged the asbestos tile and water tank manufacturing operations of both companies in the Southern Region of Brazil. The Brasilit decision discusses market concentration, stating that even though it is not necessarily anticompetitive, it can invite anticompetitive conduct and, when it reaches high indexes, may have detrimental effects by suppressing potential competition.

The decision defines the relevant market as encompassing asbestos tiles and water tanks for sale in the whole Brazilian territory. It determines the relevant product market by entering into an analysis of substitute products. Taking into consideration the prices of alternative roofing and water tanks, CADE concluded that there is no adequate substitute for these products. CADE also

determined that the geographic market covers all the Brazilian territory, since the two companies' products are sold in the national market.

CADE found that the concentration resulting from the proposed venture would mean a sharp increase of the Herfindahl-Hirschman Index. This increase, coupled with the fact that the nationwide market share of the two companies is 51%, triggered an inquiry into the existence of the alleged efficiency gains needed to justify the proposed venture under the law.

According to CADE, the regional market concentration would also increase significantly. This increase in market concentration, coupled with barriers to entry derived from a monopoly over the raw material (distributed in Brazil by companies under the control of the companies seeking to create the joint venture), as well as the efficient distribution system organized by the two companies, would constitute a disincentive to the entry of new competitors and would threaten existing ones, to the detriment of consumers.

This decision followed another antitrust decision partially blocking a proposed merger between two Brazilian chemical product companies (Rhodia and Sinasa), requiring that the acrylic and polyester fiber units of both be excluded from the merger to prevent monopolization of the sector.

The most difficult issue in the analysis of these cases, which was not fully addressed, is whether the relevant geographic market was the local, national or international market. This is particularly important to define clearly, especially after the creation of the Mercosur regional market.

By: Jaime E. Fernandez

New York

NOTE: The material contained in the International Report is only a general review of the subjects covered and does not constitute legal advice. No articles may be reprinted without permission.

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