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One Year Since The Introduction Of Pre-Merger Control In Costa Rica

By Claudio Donato Monge, Marco López Volio & Claudio Donato López
Posted: 11th April 2014 09:27
One year after the date in which the legal amendment to the Competition and Consumer Defence Act (Law 7472), that introduced the legal obligation to notify certain mergers and transactions to the local Competition Commission (Costa Rican Antitrust Authority), came into effect, there are still high levels of unfamiliarity related to the application of this law.  This amendment was later reinforced by the changes to the Bylaws of the Competition and Consumer Defence Act, which entered into force on 23 September 2013. 
From our experience this past year, and having served as legal counsel for different transactions that underwent the merger notification process, we understand some of the main concerns or uncertainties that local and foreign managers and businessmen face related to this process.  On this article we will briefly address some of these general issues. 
“Should This Transaction Be Notified?”
Merger definition

The first question that usually arises when discussing potential deals that may be considered a merger or acquisition is: “Are we obliged to undergo the pre-merger notification process?”
In order to provide an answer to this question, the transaction must be analysed in the light of the definition provided by Article 16 of Law 7472.  This article provides a very broad concept of “merger” which includes any action that merges companies, associations, shares, capital stock, trusts, management powers or other assets that is taken by competitors, providers, clients or other undertakings, that have been independent from each otherand that results in the acquisition of financial control from one over the other, or the formation of a new economic agent under joint control of two or more competitors. 
We must note that even joint ventures and other forms of commercial alliances may fit this definition.  The main issue is to determine if there is an acquisition of economic control by one of the agents over the other, or if there is any sort of joint control over any of the involved economic agents.
Regarding this particular issue of economic control, a topic that generates some confusion is the acquisition of shares from a company, and determining at what point there is an acquisition of control.  Even when there has not been a continuous list of cases resolved this way, the Competition Commission has interpreted that whenever a company acquires 50 per cent or more of another company´s shares there is acquisition of economic control.  Due to this criterion, any acquisition of more than 50 per cent of a company´s capital stock fits the merger definition provided by Article 16.  However, this criterion does not automatically remove the pre-merger notification obligation for purchases of less than 50 per cent of a company´s shares.  In these cases, depending on the transaction´s conditions, the obligation to notify may still apply, for example when there is a change in the control or influence by the acquiring party in certain strategic or commercial decisions (e.g. veto rights).  This is why we strongly recommend seeking for legal counsel in order to determine whether a transaction fits or not the merger definition provided by the law. 
Another, important aspect that has been defined after the initial enactment of the Competition Law amendment has to do with the territorial jurisdiction of COPROCOM.  On this subject, article 39 of the Competition Act Bylaws, set forth the obligation to notify any merger in which at least two economic agents have operations with influence in Costa Rica.  This article restricted the general notification obligation of the law that – initially - did not specify any limitation to the mergers that had to be notified with respect to territorial jurisdiction.  We must note, however, that the concept of influence is indeterminate and very broad, and could encompass any operation that has a bearing, impact or effect in Costa Rica.  In a recent precedent COPROCOM considered that a foreign company with exports into Costa Rica was in fact under the obligation of submitting the notification

The sole fact that the transaction is covered by the merger definition provided by the law is just the first step of the process to determine if a transaction or merger must be notified.  Additionally, in order to trigger the obligation to notify, the transaction should exceed at least one of the following thresholds: i) total productive assets in Costa Rica of all the undertakings involved exceeds 30,000 minimum wages (approximately $14.5 million, or ii) total revenue generated by the involved agents in Costa Rica during the last fiscal year exceeds 30,000 minimum wages (approximately $14.5 million). 
There is one important consideration to note regarding the calculation of either the assets or the revenues.  Both, the sales executed and the assets owned by intercompanies of the agents involved in the transaction, should be considered in these calculations.  This is relevant not only because of the information that should be considered as part of the calculations to determine if the transaction should be notified; but because the Competition Commission, as part of the pre-merger notification process, may demand the filing of information related to the parties´ intercompanies. 
Obligation to Notify

In any transaction covered by the definition provided by Article 16 of Law 7472, which meets the above mentioned thresholds, the pre-merger notification is mandatory for all of the involved parties. 
The notification does not necessarily need to be filed by all of the parties.  The notification of one of the parties fulfills the obligation for the rest of the parties, according to the Law.  The notification may be filed any time prior to closing the transaction or agreement, or up to five business days after
During the last year, the Competition Commission has analysed different mergers and has set some initial parameters that reflect the way in which the process will be conducted.  The Commission, so far has been very efficient, and all cases have been resolved within the terms stated by the Law (including extensions permitted by law).  Some of the resolutions have been very interesting due to the novelty of these topics in Costa Rica, and have helped to clarify some aspects related to the conduction of the process. 
Nonetheless, even a year after the enforcement of the amendment, there are still some grey areas where we still face uncertainty towards the application of the law.  Hopefully, in the next couple of years, as the Competition Commission continues to solve pre-merger notification processes, these aspects may be clarified.  In the meantime we advise companies with operations in Costa Rica that may be in the process of negotiating a transaction which might fit the definition provided by Article 16 of Law 7472, and trigger one of the thresholds provided by the law, to seek local legal advice in order to avoid any sanctions which may result in substantial fines, and even risk the legality of the merger or transaction. 
Zurcher Odio & Raven is a Costa Rican law firm with over 75 years of experience.  The services provided by the firm are well recognised for their excellence, quality and commitment to satisfying its clients´ needs and interests, which distinguish Zurcher Odio & Raven as one of Costa Rica´s most prestigious law firms.  The firm has excellent relations with other law firms located in the main cities of North America and Europe.
Claudio Donato Monge, partner of the firm, is the director of the regulatory and antitrust area of practice.  He served as president of the Costa Rican Competition Commission and has provided legal counsel on several antitrust matters, including successful pre-merger notifications, direction of antitrust proceedings, as well as the application of different training and capacitation Antitrust programs and elaboration of internal Antitrust guidelines.  

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