Generally obtaining anti-trust clearance for M&A transactions is at the top of the list of conditions present in the contract. Accordingly, the merging entities should properly evaluate from the outset of the negotiations,any substantive and procedural aspects related to the merger control proceedings that could impact the timing for closing and even the feasibility of the deal itself.
In this Top Ten will highlight the key factors to the success of the transaction from a merger-control point of view and other anti-trust concerns to be considered in M&A deals in Colombia or which have effects on the Colombian market. We hope that this Top Ten will be useful when dealing with any M&A transaction involving anti-trust issues in any other jurisdiction.
1. Identify whether the transaction is subject to merger control regulations
The first task is determining whether the anti-trust authority needs to be notified of the transaction. An M&A deal is often subject to anti-trust clearance, as the target company is usually a competitor or its business is part of the same value chain as that of the purchaser - for example, when a manufacturing company is acquiring a distributor for its products.
Companies that (i) meet certain thresholds (i.e., combined gross assets and/or operational turnover of the undertakings during the previous year in excess of approximately USD 33 million); and (ii) engage in the same economic activity or participate in the same value chain are required to notify the anti-trust authority about the intended operation.
For purposes of calculating these thresholds the financial information of the foreign parent companies must also be considered.
If the above conditions are met but the companies' individual or combined market share is below 20% of the relevant market, the merger will be deemed as authorized by operation of law. However, the parties are still required to report the merger to the authority before closing. This notification is less cumbersome than a full anti-trust filing and, more importantly, the closing of the transaction is not subject to the authority's clearance.
Foreign mergers that have an effect on the Colombian market will be subject to a merger control review. This means that even companies with no direct presence in Colombia, but that indirectly participate in the Colombian market (e.g., through third party distributors) will have to satisfy anti-trust regulations.
2. Set expectations and fully inform the parties to the deal of the possible outcomes
Do your best to avoid surprises when dealing with anti-trust matters in an M&A transaction. All parties involved in the transaction should be thoroughly informed from the beginning of negotiations regarding key issues affecting the deal's success such as:
all information about the companies and their businesses needs to be provided to the competition authoritythe estimated timing and phases of the anti-trust proceedings the possible outcome of the regulator's decision - including any potential remedies that the clearance might be subject tothe public nature of the anti-trust proceedings and the scope of the confidentiality protection of disclosed informationany economic and market-wise considerations that will potentially take into account the authority when evaluating the anti-trust filing.
Local counsel should play a significant role in assessing these matters. Once the parties have been duly informed about factors above they will be able to properly evaluate them during negotiations, and to properly regulate them under the contract, if required. For instance, the parties should decide up front whether the imposition of a structural remedy - such as the divestiture of a significant asset to a third party - will automatically trigger the termination of the contract or will have any other legal effect. There should be no room left for improvisation in these matters.
3. Coordinate with the other party's legal team
The anti-trust analysis and the further preparation and drafting of the filing will require both parties to be fully aligned and coordinated. Proper communication with the other party's counsel is paramount for guaranteeing a satisfactory result with the anti-trust filing. For example, if the parties decide to file separately but have a different approach towards the relevant market in question, this will most likely affect the outcome of the decision.
Such coordination with the other party's counsel may even be useful for setting a good ambiance for the negotiation of the transaction that it is usually running parallel to the anti-trust preparation. It is also important to clearly define the specific role of each party's counsel in these matters. An independent counsel can also be hired by the merging parties who could be in charge only of the anti-trust matters. Any task division that best suits the interests of both parties should be the chosen option.
4. Coordinate the gathering of information.
As part of the anti-trust filing, the parties must submit a thorough body of information including general information related to, but not limited to, a description of the transaction, corporate information of the parties, relevant market product(s), prices to customers and cost structure, lists of clients, distributors and marketing channels.
Gathering the above information can be time consuming and will require internal coordination in different areas of each company. This process must be thoroughly planned in order to avoid any delays in the anti-trust filing that could impact the overall transaction schedule. As certain key employees will be required to collect the information, a proper confidentiality mechanism and internal communication strategy should be put into place (see No. 9 below).
Also, each counsel should be responsible for obtaining the information corresponding to each party. Moreover, each counsel must protect the confidentiality of that information from the other merging party. The merging entities must remain as competitors until obtaining anti-trust clearance. Therefore, they are not allowed to share sensitive information even for purposes of a joint filing. A confidentiality protocol agreed upon by the parties for the management of the information.
5. Assess the estimated timing of the anti-trust proceedings and its impact on the timeline of the M&A transaction.
Time is of the essence in an M&A deal and the anti-trust filing is, as a general rule, the key milestone in the timeline of the transaction. For this reason it is of the utmost importance to clearly define from the outset of the transaction the estimated timing of the anti-trust proceedings.
This assessment made by the parties, with the support of counsel will depend on various factors such as the nature of the market(s) in question, the current market share of the parties to the transaction and, in general terms, the potential complexity of the merger from an anti-trust perspective.
We recommend monitoring the proceedings on-line on a daily basis and, to the extent possible, following-up with the officers in charge to obtain a realistic idea of the timing of the decision. This will ensure control over the timing of the anti-trust proceedings. Since anti-trust clearance is, most times, the main condition precedent for closing, monitoring the timing of the anti-trust proceedings will have a direct impact on when the deal may be closed.
6. Any economic efficiencies resulting from the M&A transaction may be useful for the anti-trust filing
During due diligence parties will be able to identify the potential synergies and other economic efficiencies resulting from the merger. These will certainly be useful during the integration plan post-closing. However, such benefits can also be useful for the purposes of the anti-trust filing as they may result in potential direct advantages for the customer – something that is looked at closely by the anti-trust authority. In-house counsel should have a key role as a link between the due diligence and the anti-trust teams. There should be a close interaction between them.
7. Beware the competitors.
Bear in mind that the anti-trust proceedings are made public even though any confidential information provided by the parties to the SIC is kept as such.
Soon after the anti-trust filing, the SIC publishes a summary of the transaction. Furthermore, the SIC contacts competitors and other third parties with interest in the proceedings (e.g., clients, distributors, consumers) to gather information from them in order to conduct its own analysis.
Accordingly, it is important to anticipate any possible negative input that could be provided from third parties to the Superintendence of Industry and Commerce (the "SIC"), the Colombian competition authority, by including in the anti-trust filing the respective counter-arguments to any such objections or negative information. It is usual that competitors will strongly oppose the merger and seek a decision from the SIC in favor of rejecting the merger or, at least, imposing structural or behavioral remedies. In case of a structural remedy, the SIC usually subjects the merger to the sale of a significant asset or brand to a third party competitor not involved in the merger. This can be an incentive for competitors to actively intervene in the proceedings by seeking such a decision from the SIC.
8. Beware the penalties.
With the enactment of Law 1340 of 2009, Colombian merger control regulations and the powers vested in the SIC were amplified and tightened. If the parties fail to notify the SIC, they can impose fines against each of the parties of up to approximately 33 million USD or 150% of the profit obtained from the merger, whichever is higher. The directors and officers of the companies may also be subject to fines of up to approximately 650,000 USD. Additionally, if the SIC concludes that the merger poses an undue restriction on competition, it may order reversal. Any such penalties are made public, so a reputational risk should also be considered.
9. Define up front an adequate and tailor-made communication strategy.
Given that the anti-trust proceedings are made public, it is important for the success of the M&A deal to set an efficient and effective communication strategy involving both internal and external stakeholders. The key internal members include the company shareholders (especially in the case of public companies) and its employees. The principal external stakeholders include the SIC, other governmental agencies, clients, competitors, customers, and the media.
The merging parties must provide a unified and cohesive message regarding the benefits of the merger and the possible negative impact on the current market conditions. Furthermore, the parties must consider the effect of that message on different audiences. It is advisable to include a communications expert such as a corporate affairs manager or an external consultant in the M&A team.
It is also recommended that both parties have a clear strategy formulated in advance to avoid improvising responses to any misleading information provided by competitors or any other third party that goes counter to the merger. Press releases and Q&A documents between the merging parties are very useful for this purpose. In such releases and documents, the parties may address the following:
What is the main purpose of the transaction? What are the primary gains expected from the transaction for each party, the employees, strategic partners, suppliers, consumers, clients, even the country?What are the possible negative effects for these stakeholders?
10. Record the experience for future transactions.
The anti-trust proceedings and everything that happened during the process – including the gathering of information, confidentiality management, the implementation of the communication strategy, and experiences with competitors should be recorded so as to be used as reference for any other M&A transaction involving anti-trust issues. A memo provided by in-house counsel to the company management and to the key members of the different teams involved with the above information would be useful in the future.
