The Organic Law for the Regulation and Control of Market Power (Market Power Law) was enacted on the 13 October 2011, and its accompanying Regulation (Regulation) was enacted on 7 May 2012. The latest amendments to the law were published on 9 December 2016. Several decrees for the application of the Market Power Law and its Regulation have been passed since its publication, including recent rules for fast-track procedure applicable in certain cases. Additionally, the general legal regime applies for matters not contemplated in the Market Power Law.
The Market Power Law and its underlying Regulations and decrees constitute the main body of law for all mergers and acquisitions in Ecuador; when pertinent the necessary approval shall be obtained as per the mandate of the Market Power Law and underlying Regulations. However, there are certain areas of the law, including oil and gas exploration and production contracts as well as the transfer of mining concessions, where an additional parallel approval shall be obtained from the energy authorities. This approval is related to the capacity of the new operator rather than the extent of its market control and also implies payment of a fee, qualifications and assumption of certain obligations from the prior operator. The Market Power Law approval, in contrast, is only related to market power.
The Market Power Law provides that the Superintendency of Market Power Control (SMPC) is the pertinent authority, having the capacity to authorise the merger and acquisition processes when a notification is required as per the mandate of the Law and its underlying Regulations. It also has the capacity to independently sanction anti-competitive practices and unfair competition, whether or not these originate in an M&A case.
Notification is compulsory when an economic concentration operation meets the thresholds established in the Market Power Law.
The SMPC can start an investigation at any time and can decide to (i) reverse the transaction, (ii) impose structural or conditional measures, and/or (iii) impose penalties of up to 12% of the prior year's turnover of the participants in the economic concentration.
All acts that generate economic concentration are caught by the Market Power Law. This is understood to mean the change or acquisition of control of one or several companies or economic operators through acts such as mergers between companies or economic operators, transfer of all assets and liabilities, acquisition of shares or any equity titles, joint administration, or any other act that generates a transfer of assets of an economic operator or generates control of material influence in the decision-making of an economic operator.
Internal restructuring or reorganisations generally do not need to be notified, nor shareholders agreements or changes of articles of association.
Control is defined as the possibility, depending on the circumstances of each case, to have a substantial or determining influence over a company or economic operator. The acquisition of a minority interest, or one that does not involve control, is generally not caught.
At least one of the following two thresholds should be met in order for it to be necessary for an economic concentration to be notified.
It should be noted that the thresholds relate to turnover and the relevant market in Ecuador. If the parties involved in the economic concentration do not have local turnover in Ecuador or if the turnovers of all of the participants do not meet the thresholds or if market share in Ecuador does not surpasses 30% notification is not mandatory.
The thresholds are measures in accordance with the values of the year prior to the year of the concentration.
Notification shall be filed within eight calendar days from the date of the agreement for the economic concentration.
Ecuador uses US dollars as its official currency and all sales in Ecuador as well as accounting records shall be kept in US dollars. All local sales are made in US dollars and all thresholds are set in US dollars. In the rare event that a local sale has been made in another currency, the market rate of exchange shall apply. Thresholds are set regarding turnover, meaning the total local sales in US dollars as per the records of the company audited by the Ecuadorian Internal Revenue Service and the Superintendency of Companies.
Only businesses or corporate entities incorporated or functioning in Ecuador are relevant for the purpose of calculating the jurisdictional thresholds. The seller's turnover in Ecuador needs to be included with that of the target. Thresholds are calculated on a group-wide basis and group-wide is defined through joint ownership and joint control. Changes in the business during the reference period – such as other acquisitions, divestments or business closures – shall be reflected on the notification if these have occurred in the fiscal year (January 1 to December 31) of the year before the notification.
Foreign-to-foreign transactions are only subject to merger control if said foreign entities have a local presence through local subsidiaries, branches or other types of controlled entities. Filing is not required when a target has no sales and/or assets in Ecuador.
Ecuador has a marker share threshold of 30% of the relevant market in Ecuador or a specific geographical market within Ecuador. However, one party – either a target or an acquirer – does not meet this threshold in the absence of a substantive overlap.
Joint ventures are subject to merger control. In accordance with Ecuadorian laws, joint ventures created in Ecuador need a joint administrator and need to have joint accounting independent of its partners. The thresholds of a joint venture that is considered to be an independent economic unit distinct from its partners are the same as for any other economic operator.
The SMPC has the capacity to investigate any transaction even if it does not meet the jurisdictional thresholds. However, it cannot impose any sanctions for not notifying if the thresholds were not met at the time of the transaction. A statue of limitations of three years applies. However, other sanction may apply at any time if anti-competitive practices or unfair competition is detected.
Implementation of a transaction shall be suspended until clearance by the SMPC. This entity shall issue a “resolution” approving the transaction. The resolution of the SMPC may impose structural or conduct conditions on the approval. However, these conditions usually do not need the transaction to be suspended until the conditions are met.
The SMPC can order the same penalties for implementation before clearance as it would for a transaction that had not been notified:
There has not been a recent case of penalties. However, to the best of our knowledge, most of the transactions that meet the thresholds have been notified. The penalties are public and third parties can request the SMPC to start an investigation for lack of notification. There have not been any cases of foreign-to-foreign investigation when foreign entities have not had a local presence through branches or subsidiaries.
The only exceptions to the suspensive effect contemplated in the law are the acquisition of (i) shares without voting rights, (ii) liquidated companies or economic operators, or (iii) entities that have not registered any activity in Ecuador in the last three years.
It may be possible, in multinational mergers, to carve out certain businesses or assets in Ecuador and implement a global closing as per the Market Power Law. However, for practical purposes the request to carve out may take longer to be approved that the notification itself. There have yet to be any cases of carve-out.
The law provides that the notification should be filed eight days after the agreement to close the transaction has been reached. It is understood that the agreement has been reached when the parties to the economic concentration have reached, in any way, a written agreement with a commitment to concentrate, even if that commitment is subject to conditions precedent. Penalties for late notification can be the same as for lack of notification.
The parties can file on the basis of a less formal agreement, such as a letter of intent or memorandum of understanding as long as it is in writing. A translated version of the agreement shall be filed with the notification.
The filing fees are calculated immediately after the notification is filed. The SMPC shall issue a communication ordering payment and providing a time to pay. The fees are calculated based on the following.
For the notification of economic concentrations, the economic operator providing notification must pay filing fees to the SMPC in a sum equal to the higher of the following: 0.25% of income tax, 0.005% of sales volume, 0.01% of assets, or 0.05% of equity. These sums are calculated taking the economic operators with presence in Ecuador into account.
The parties to the agreement are responsible for filing.
The parties involved in the concentration may file the notification together or the acquirer can do it directly. The notification shall be made by the company perfecting the transaction, if that company operates outside Ecuador it shall appoint an attorney in fact in Ecuador to represent the notifying company and said power of attorney shall be apostilled or sealed by an Ecuadorian Consul depending on the country where the economic operator perfecting the concentration is located. The transaction contract or letter of intent or memorandum of understanding reflecting the transaction shall be filed.
Additionally, balance reports of the local subsidiaries or branches in Ecuador of the economic operator shall be filed as well as a description of the transaction, the relevant market, and the impacts of the concentration. All the documents issued abroad shall be certified by a director or equivalent of the company and apostilled or legalised if public documents. All of the documents need to be translated into Spanish and said translation shall be certified by a notary in Ecuador. Additionally, a form with all the information shall be completed. In addition to the form or as part of it, it is convenient to file an explanation of the transaction.
The main documents – including the power of attorney for the person filing in Ecuador and the form, the certified balance reports of the subsidiaries or branches in Ecuador of the economic operators and the concentration contract or equivalent – shall be included in a notification. The SMPC shall request additional information after filing. If the above minimum is not completed the concentration can be rejected. There have been a few rejections. It is advisable to file as completely as possible in order to avoid delays in the approval process.
If the information in the filing has been intentionally altered to mislead the authority the concentration may be rejected and a criminal case for fraud can even be started. Usually when the SMPC feels that the information is not complete or is otherwise unclear, it keeps making additional requests to the economic operators or to third parties or other government entities.
The process starts with the filing of the notification with the SMPC, it reviews whether the documents are complete and issues an order to pay the filing fees. Review of the concentration is made by the Intendency of Concentrations which forms part of the SMPC. Within this process, it is common for the Intendency to request a meeting with the parties or additional information. The Intendency makes a recommendation to approve or deny the concentration or to make the concentration conditional on compliance with certain structural or conduct measures. Then the case is passed to the Approval Committee of the SMPC which issues the final approval. There have been a few cases where the final approval has been appealed by a third party and further reviewed by the SMPC. However, this is not the usual rule. The process may take up to six months. A fast-track procedure is possible on certain cases and can expedite the process by up to 60 days.
It is possible to engage in pre-notification discussions with the authorities. Depending on the case it may be advisable but it is not compulsory. All the information filed with the notification is treated confidentially. There is no confidentiality provision for informal pre-notification discussions but these are likely to be kept confidential.
Depending on the case, requests for further information can be burdensome and are quite common. Such requests stop the clock but generally will not take more than six months.
A fast-track procedure applies for those economic concentration operations that "do not have the potential to generate detrimental effects on competition and free competition". Such concentrations must meet at least one of the following criteria.
The economic concentrations subject to the fast-track procedure will be resolved within a maximum period of 25 working days from the date on which the SMPC becomes aware of the operation.
The substantive test employed by the authorities is overlapping in the relevant market, and the main point of controversy/discussion is usually what constitutes the relevant market.
Authorities determine which markets may be affected by the transaction.
Normally, the SMPC performs an analysis of the defined relevant market structure, concentration indexes, barriers to entry, efficiencies, supply and demand structure of the relevant market, benefit or detriment to consumers as a result of the concentration, and competitive pressures.
In its analyses of economic concentration operations, the SMPC has used economic concentration indexes of the relevant market as its tool for calculating. For this purpose, it uses the Stenbacka threshold calculation and the Herfindahl-Hirschman Index.
Usually, authorities do not rely on case law from other jurisdictions. However, on transactions that have equivalent impacts on other countries, the relevant authority may consider the outcome in other jurisdictions but this is not conclusive.
The most important concerns that the authorities investigate are vertical concerns and the elimination of potential competition.
Authorities do consider economic efficiencies. However, vertical concerns and elimination of potential competition usually have a more important impact than economic efficiencies.
Authorities may take into account as part of their review several non-competition issues, such as local production, small producers' rights, employment and even sustainability. Several articles of the Ecuadorian Constitution can be used to support additional considerations other than pure competition matters.
There are no special considerations in the substantive review of joint ventures. The authorities are allowed, but unlikely, to review possible co-ordination issues between joint venture partners.
The SMPC has the ability to reject a transaction or make it conditional on compliance with structural or conduct measures. If the transaction continues they may order the reversal of the transaction and impose fines.
When the SMPC has concerns about a transaction it is possible for the parties to suggest remedies – for example, divestiture or behavioural remedies. However, the authority is not bound to said suggestions and may end up imposing even higher measures than those discussed with the parties.
There is not a legal standard that remedies must meet in order to be deemed acceptable. It is at the discretion of the SMPC.
Behavioural remedies are typically used in practice. However, structural remedies – such as divesting overlaps – have also been imposed. Non-competition remedies such as employment related rights were also imposed a few years ago.
The parties can suggest remedies and discuss these remedies with the SMPC at any time before the decision is taken by the SMPC. However, it is not a negotiation it is just a good faith suggestion and the SMPC can impose remedies on their own motion. There have been cases where the SMPC has imposed remedies that the parties did not even suspect, and even cases where the SMPC had imposed additional remedies after the approval of the notification has been granted. Usually the SMPC issues a decision conditional to the parties executing a document accepting the implementation of the remedies, once it is executed the transaction can close and the remedies are implemented as per the document executed with the parties.
The standard approach regarding conditions and timing for the divestitures is that said conditions shall be satisfied after completion of the transaction. Therefore, the transaction can be completed before remedies are complied with. However, the decision and agreement with the parties usually provide for reversion of the transaction if the remedies and not fully complied with. Third parties can also file claims related to uncompetitive practices due to non-compliance with remedies.
A formal decision permitting, conditioning or prohibiting a transaction shall be issued to the parties. The decisions are generally publicly available.
The authorities have not recently required remedies or prohibited transactions, in particular in foreign-to-foreign transactions.
A clearance decision does not cover related arrangements (ancillary restraints). Separate notifications are possible for ancillary restraints.
Third parties, customers, competitors and complainants have, in certain cases, been permitted to be involved in the review process and have also appealed the decisions of the SMPC. In most cases the SMPC has rejected their petitions. It has, however, partially reversed its initial decision in some cases. Third parties may also file a claim with the competition authority or constitutional action with a regular judge arguing that non-compliance with measures is affecting their constitutional rights.
When the SMPC feels the case is debatable it usually contacts third parties or other government agencies with a written questionnaire. This is done to market test its decision to impose certain remedies.
The notification and/or description of the transaction is kept confidential including commercial information and business secrets. However, the final decision is usually public. It generally does not include all the analysis but the main facts.
The SMPC usually co-operates with other jurisdictions on general policy matters and eventually will share information in the context of specific transactions. The SMPC does not need to seek the parties' permission to share non-confidential information with other jurisdictions.
The parties can appeal a decision to the Administrative Court and from there to the National Court. Depending on the case, they can also request a constitutional review with a District Judge and from there appeal to the Superior Court and Constitutional Court.
Appeals to the Administrative Court can be filed within 90 days of the decision and constitutional actions do not have a time limit but are generally filed immediately afterwards. There is an important case where a decision of the SMPC was reversed through a constitutional action before a District Judge. Constitutional actions need to be based on a violation of a constitutional right such as lack of due process.
Third parties can appeal a clearance decision. Such appeals are usually rejected. However, there is at least one case where the initial decision was expanded with additional conditions.
There have not been any recent changes to the legislation or implementing regulations except for the implementation of the fast-track procedure (for more details of which, see 3.11 Accelerated Procedure).
The Market Power Law and the SMPC have been in existence for almost ten years now and, in general, it has improved substantially and become a more technically proficient entity. There have not been any recent cases of failure to notify, prohibiting transactions or requiring remedies.
The current concerns of the SMPC are largely related to competition matters and less with non-competition related issues. It has evolved to take a more positive and pragmatic view.
Concerns about Merger Clearance in Ecuador
Ecuador's competition law (the Organic Law for the Regulation and Control of Market Power, or Market Power Law) and its competition authority (the Superintendency of Market Power Control, or SMPC) have now been in existence for a decade. During this period, local and foreign investors have raised the following concerns about the clearance process for mergers and acquisitions involving Ecuadorian subsidiaries or branches of foreign economic operators:
The following is an analysis of how those conditions have evolved during the past ten years of the existence of the Market Power Law and the SMPC.
Duration of the clearance process
In many cross-borders transactions, clearance is required in several jurisdictions. Ecuador, in most of these cases, is not the biggest market but the delays involved in acquiring clearance may prevent the entire transaction from continuing. In general, we consider that there has been an improvement in this aspect for two main reasons:
Therefore, if the notification is properly filed, the timeframe can be reduced by at least 30%. It is difficult to predict the duration of the SMPC's proceedings but – in general and if everything moves smoothly – the full process can take four months and a fast-track proceeding can be completed in as little as two months.
High amount of information to be provided
There has not been a material improvement in this area. Due to legal requirements, powers of attorney and other required documents still need to be legalised and apostilled in the country of origin, couriered to Ecuador and translated. However, on both the SMPC's and practitioners' sides, there is greater experience of what is required and how to expedite all the necessary procedures to obtain and produce the required documents in compliance with all Ecuadorian legal formalities.
Need to file the notification in a short period of time
Unfortunately, this is a requirement that has not changed because the law needs to be amended in order to overcome this obstacle. As a result, in many cross-border transactions the notification in Ecuador is one of the first to be filed, without having much knowledge of the way in which it was filed in other jurisdictions. It is important to prepare well ahead on both the substance of the application and description of the transaction and the production of the documents, including translations.
The first analysis to be done well ahead is whether a notification is required or not. The usual main question is whether a foreign-to-foreign cross-border transaction needs to be notified in Ecuador. These only need to be notified in Ecuador if the thresholds relating to turnover and/or market share are met through the economic operators' subsidiaries or branches in Ecuador. See the Ecuador Law & Practice chapter (2.5 Jurisdiction Thresholds) in this guide for further information.
Difficulties of negotiating structural or behavioural conditions with the SMPC
Ecuadorian law does not allow for a negotiation of the conditions with the SMPC. The parties may suggest some of the conditions, but the ultimate decision is to be taken by the SMPC at its discretion. There have been difficult examples in the past where the decision committee has taken measures that the parties never expected. There have also been cases when, even after the decision has been adopted, the SMPC has resolved to impose additional structural measures.
While the main rule has not changed and the conditions are still to be implemented at the sole discretion of the SMPC, there has been an important improvement in the sense that the type of conditions that will be imposed are more predictable.
Unpredictable outcome and eventual imposition of conditions not related to competition matters
There has also been an improvement in this area. It is less likely that conditions unrelated to competition will be imposed on an economic concentration. Unfortunately, in the past, Ecuadorian competition law was used to regulate certain aspects of mergers not related to competition but to other areas of the law, including labour matters. This does not seem to be the case anymore.