The Colombian merger control regime oversees business integrations (mergers) to ensure fair competition and prevent undue restrictions in the markets. Recent trends indicate a shift in the competition authority’s perspective on gun jumping and on technology markets. Additionally, there has been a growing trend in retail sector integrations, and there was a case involving Avianca and Viva Air that has brought jurisdiction and other traditional concepts of business integration into question.

In this article, we will briefly analyse how the competition authority has increasingly acknowledged the role of digital sales channels as complementary to, or even replacements for, physical channels. We will also demonstrate how the retail sector has seen a significant rise in the number of integrations filed, primarily driven by the adoption of low-cost business models that aim to compete with large supermarket chains. Lastly, we will examine the case of merger control in the air transportation market, including how Avianca and Viva Air’s proposed integration project led to a re-evaluation of the jurisdiction of regulatory authorities, the financially distressed company exception, and the traditional concept of integration used by the Superintendence of Industry and Commerce (SIC).

But first, we will summarise the merger control regime in Colombia:

1. Colombian Merger Control Regime

In Colombia, an “integration” refers to any mechanism used to gain control over one or more companies in the same market or the value chain, aiming to integrate one company into another existing one or to establish a new company for joint venture endeavours. Consequently, the term “integration” implies that competition between the companies involved ceases upon its completion regardless of the transaction’s legal form.

The concept of integration revolves around the acquisition of control. As defined by Article 45 of Decree 2153 of 1992, “control” refers to an undertaking’s potential to influence another company’s decisions relating to its market behaviour, such as business policies, initiation, termination or alteration of the company’s economic activities, or disposition of assets or rights essential for the company’s ongoing operations (Superintendency of Industry and Commerce, Merger review).

1.1 Criteria to trigger merger control

In accordance with Law 1340 of 2009, companies must comply with the business integration regime when conducting commercial operations within Colombian territory or when their effects take place in Colombia, regardless of the company’s legal structure. Moreover, both (i) the subjective condition and (ii) the objective condition must be satisfied.

The subjective condition is met when the parties involved in the transaction participate in the same economic activity, meaning they produce or market goods or provide services in the same industry; in the SIC's words “activity” goes beyond the relevant market definition (Concept 21-48213-9, SIC). This condition is also fulfilled when the participants belong to the same value chain (Article 9).

The objective condition is evaluated based on the operating income or total assets of the parties involved in the transaction. During the fiscal year preceding the anticipated transaction, the parties must have obtained operating income exceeding approximately USD14 million (Article 9).

When both conditions are met, the parties must inform the authority in one of two ways: (i) notification or (ii) request for pre-assessment. The procedure will be conducted via notification if, collectively, the companies involved have less than a 20% market share in each of the relevant markets. In this instance, the requirement is satisfied by submitting a document detailing the operation to the authority, although parties can wait ten days when they have doubts about market shares estimation. On the other hand, when the participating parties hold a 20% or greater market share in any of the relevant markets, the process will be conducted through a pre-assessment. During the 30 days first phase pre-assessment, the SIC will determine whether to authorise the transaction or move forward to an up to six months second phase; the authority may object to, condition or authorise the transaction. The SIC may also establish conditions necessary to prevent any potential undue restrictions of competition arising from the integration.

1.2 Exceptions to the SIC's authority

In general, the SIC has exclusive authority to oversee the ex-ante control of business integrations in Colombia. However, there are specific instances where specialised regulators assume this role.

Firstly, the Superintendence of Finance of Colombia (SFC) is responsible for exercising ex-ante control over business integrations that exclusively involve entities under its oversight. If any participating company belongs to a different economic sector, the integration must be authorised by the SIC. In situations where the SFC holds jurisdiction, it must consult the SIC for guidance before making a decision.

Secondly, the Colombian Civil Aviation Authority (also known as Aerocivil) is tasked with authorising all business integrations between airlines. This includes code-sharing contracts, joint operations, air charter and the exchange or blocking of airspace (Article 8, Law 1340 of 2009 and Article 1866, Code of Commerce).

2. Current Trends in Merger Control

As mentioned, several recent cases illustrate the current developments in the thinking of the competition authority and the regulators. A few examples follow:

2.1 Gun jumping: unauthorised mergers among competitors

Gun jumping, the unauthorised merging of competitors, poses significant risks. According to Colombian competition law, this practice violates antitrust laws (Article 4, Law 1555 of 1959) and can lead to dire consequences, including hefty fines up to USD28 million and legal orders to divest, among others. The competition authority provided further guidance on this in its investigation of the Avianca and Viva Air merger.

In December 2022, the SIC initiated an administrative investigation into Viva and Avianca for allegedly engaging in an anti-competitive practice by undertaking an integration when Avianca’s parent company acquired Viva’s economic rights in April 2022, without having previously obtained authorisation from Aerocivil (Resolution 87164 of 2022, SIC). This investigation revealed a change in position on the part of the competition authority. In 2014, the SIC held that, as a result of Law 1340 of 2009, Aerocivil’s role, in accordance with its new powers set forth in Article 8, was limited exclusively to matters relating to the authorisation of commercial operations between airlines, such as code-sharing contracts, joint operations, aircraft chartering, and exchange and blocking of airspace (Resolution 11001-03-06-000-2011-00047-00(C), Council of State).

Consequently, in the opinion of the SIC, when various contractual modalities go beyond those specific operations and thus involve additional elements not contemplated in the regulations, the exclusive competence of the SIC will prevail. However, in the Avianca-Viva case, the SIC stated that when the operation involves airlines, the approval of Aerocivil must be requested, regardless of the legal nature of the transaction. Therefore, the SIC determined that Aerocivil’s powers are broader than those established in previous cases, and as a result, the SIC did not have jurisdiction in this matter (Resolution 87164 of 2022 and Resolution 20743 of 2023, SIC).

Regarding the configuration of the integration, the SIC noted that although the parent company had not exercised the power it had acquired with the purchase of Viva’s economic rights, the acquisition of control materialised at the time of the transaction. Additionally, it was found that Viva and Avianca were acting in a co-ordinated manner, which demonstrated the effects of the integration. Thus, the SIC concluded that the business group to which Avianca belongs exerts a material influence on Viva’s competitiveness.

During the process, Viva and Avianca submitted a proposal of guarantees in order to terminate the investigation early. The SIC accepted those guarantees, which primarily involved the creation of autonomous assets that would hold the shares of Viva’s parent company and be administered by an independent third party. This would ensure that the airlines have separate administrations and guarantee Viva’s independence (Resolution 87164 of 2022, SIC).

2.2 Digital economy

Integrations in digital markets have posed significant challenges for competition authorities, as these markets exhibit characteristics that hinder the successful application of traditional methodologies. Indeed, authorities are still adapting their interpretations and assessments of such markets. The recent case of Amazon and iRobot illustrates how the Colombian competition authority is adjusting to the realities of these markets.

Recently, the competition authority has shifted its perspective on the infiltration of technology into traditional markets. The authority released an opinion regarding the Amazon-iRobot integration, stating that digital sales channels often are substitutes for, but in many cases also complementary to, physical channels (Concept 23-13648 -9, SIC). 

This stands in contrast to past declarations, such as its decision on the iFood and Domicilios.com merger (both currently out of the delivery market), where the authority asserted that physical and digital channels constituted separate markets. This distinction was based on the disparities in consumer behaviour, product offerings, service availability, user experience and business strategies that had to be taken into account (Resolution 10291 of 2021, SIC).

However, in the Amazon-iRobot case, the SIC considered a study showing that consumers continue to prefer physical or traditional channels and use online channels as a complement during the purchasing process. Mainly, digital channels are used at the beginning to check user reviews, promotions, features, etc. It was also found that the use of digital channels at the beginning of the customer journey does not always translate into the completion of an online purchase, as consumers still show a preference for physical channels to complete the purchase (Concept 19-110185-6, SIC).

In another case involving Soyyo, the SIC issued technical guidance in 2019 for the SFC in relation to the approval process of an integration between financial entities that aimed to create a digital identification platform. In this guidance, the competition authority pointed out that the effects of this integration could be highly restrictive (Concept 23-13648 -9, SIC). 

The SIC warned that the probability of success for a new market entrant would be reduced, mainly because of the cost of having several profiles, which would discourage the use of other platforms. Added to this was the lack of interoperability, which hinders new entrants from lowering their costs. Consequently, it recommended that safeguards be put in place so that the integration could be approved. 

However, in 2022, the integrated companies requested a readjustment of the commitments they had made, as the SIC’s forecasts had not materialised. In this case, the SIC reconsidered its guidance and acknowledged that the integration had not generated the restrictions they had previously predicted, since the platform quickly lost its dominant position and the absence of interoperability had not really been an obstacle to new competitors from entering the market (Concept 22-75347- 79, SIC).

2.3 Retail

The significant increase in retail integrations demonstrates the evolving dynamics of this market over time, making it necessary for suppliers to re-evaluate their business models. In Colombia, a growing trend of notifications and requests for integration has led to a progressive rise in market concentration. In 2022, this sector accounted for 37% of the integrations reported to the SIC, reflecting a three-fold growth compared to 2021. Furthermore, these integrations were executed entirely through the notification process.

This phenomenon is closely associated with the low-cost business model. The substantial increase in integrations within this sector is being driven by companies adopting this model in the retail industry, aiming to compete with large supermarket chains. This competition requires a rapid expansion in both economies of scale and scope.

However, in Colombia’s fuel retail sector, a particular analysis has emerged for determining the relevant market. This is an interpretation that can then be adapted to other retail markets that rely on extensive large alliances with wholesale partners in various regions of the country. Since 2019, the SIC has considered that the geographic scope of the wholesale market is not necessarily national but depends on the scope of the storage areas of the products and thus the possibility of dispatching them within those areas. Consequently, the analysis of a wholesaler’s capacity to influence is no longer determined by the national scope but rather by the area affected by the integration. This means that if the wholesaler seeking integration is dominant in the affected geographic area, it must be understood that its share also comprises the retail outlets it influences, even if it does not own them (Resolution 35210 of 2019, SIC).

2.4 Special regimes: air transportation

As mentioned above, Aerocivil possesses exceptional powers in corporate integrations. The recent Avianca-Viva Air case demonstrates how the authority decided to apply the exception for a company in crisis and its interpretation of its competence.

Recently, Avianca and Viva sought approval for a proposed integration project, which necessitated a re-evaluation of the regulatory authority’s jurisdiction, consideration of the financially distressed company exception (this is the situation in which the competition authority allows a business integration transaction to proceed, which under normal conditions would be objected to as a result of the possible adverse effects on competition, due to the critical financial situation of the company being acquired), and a modification to the traditional concept of integration used by the SIC.

In Colombia, the following conditions must be met to justify the argument that a company is in crisis:

• The company in question, due to its economic problems, must be on the brink of exiting the market.
• No other realistic or achievable alternative or project exists that is less anti-competitive; this includes the absence of any other potential third-party purchases that would be less harmful to competition than the proposed integration.
• The harm to competition resulting from the transaction is comparable to what would be caused by the exit of the distressed company’s assets from the market (Resolutions 13544 of 26 May 2006; 30853 of 17 June 2015; 90622 of 23 November 2015; and 9159 of 2 March 2020, SIC).

On 8 August 2022, Avianca and Viva submitted a request for business integration, aiming for Avianca to gain competitive control of Viva through the transfer of shares and political rights. Within the application, they argued the necessity of applying the distressed company exception, as Viva had encountered economic difficulties due to rising oil prices, the devaluation of the Colombian peso and an increasing inflation rate (Resolution 02473 of 2022, Special Administrative Unit of Civil Aeronautics). Furthermore, they claimed that Avianca’s controlling company was the sole party expressing the financial capability and a firm intention to acquire Viva, since Viva’s economic problems precluded it from seeking loans or entering an insolvency process.

Aerocivil emphasised that the company-in-crisis exception should not be viewed as an alternative to insolvency law, but rather as a last resort. Furthermore, it noted that all established requirements must be met, and the crisis cannot be attributed to the actions of the interested parties. Upon analysing Viva’s financial indicators, Aerocivil concluded that the evidence presented was insufficient to demonstrate the airline’s inability to survive in the market.

In assessing the first criterion, Aerocivil considered Viva’s worrying financial indicators, which had been exacerbated by macroeconomic factors impacting the sector. This indicated an urgent need for a capital injection. However, Aerocivil believed that the interested parties had failed to prove that the crisis rendered Viva’s survival in the market impossible or explain why the macroeconomic factors specifically affected it compared to other companies in the sector. As a result, Aerocivil determined that recent losses and macroeconomic factors did not sufficiently establish the first requirement.

Aerocivil reiterated that the company-in-crisis exception should not replace insolvency law and must be treated as a last resort. Additionally, it stressed the importance of adhering to the established requirements and ensuring the crisis was not brought about by the interested parties.

In its evaluation, Aerocivil also examined the existence of measures other than business integration. It found that the parties did not prove they had explored other viable alternatives, nor did they provide evidence of the nonexistence of another buyer capable of generating fewer competition restrictions.

Addressing the additional requirement put forth by Aerocivil, it was noted that the alleged crisis or lack of alternatives could not be linked to the proposed integration. Aerocivil highlighted that a previous transaction, in which Avianca’s parent company acquired the firm responsible for Viva’s economic rights, limited one of the potential solutions to Viva’s financial crisis.

The authority concluded that no counterfactual analysis was presented between the scenario in which Viva exited the market and the effects of approving the operation. Additionally, no commitments to mitigate the effects were presented, and the request for new routes by competing airlines and incoming airlines to the new market was highlighted, which would make it possible to supply Viva’s demand in the short term. 

Aerocivil determined that the transaction would result in effects such as a significant increase in concentration, asymmetry and dominance indices in the domestic passenger market, negative impacts on international passenger transportation, an accumulation of slots at El Dorado Airport in Bogotá in favour of the operator that had the majority of slots in the market (Avianca), and potential exclusion in the passenger distribution service. These effects would cement the consolidation of market power, raise entry barriers, and increase the capacity to engage in conduct with unilateral and co-ordinated effects.

Consequently, on 4 November 2022, Aerocivil objected to the integration request under the terms described above. Nevertheless, an appeal against this decision was filed on 23 November, and Avianca and Viva jointly presented an offer of conditions.

On 18 January 2023, the Secretary of Aerocivil declared the existence of a substantial irregularity in the administrative proceedings carried out by Aerocivil and, consequently, ordered the Directorate of Air Transportation and Aerocommercial Affairs to redo the administrative proceedings in accordance with the provisions of Law 1340 of 2009 and related regulations (Resolution 79 of 2023, Aerocivil Authority Secretariat).

To comply with this order, Aerocivil once again reviewed the integration proposal. A final offer submitted by the parties was evaluated, which contained two alternatives. The first option proposed primarily the return of slots at El Dorado Airport. The second option consisted of guaranteeing Viva’s survival as a low-cost airline under the Viva brand, with at least 60% of its aircraft operating under this model for five years. The aim was to protect employees and minimise the impact of the transaction without significantly reducing flight frequencies (Resolution 518 of 2023, Special Administrative Unit of Civil Aeronautics).

Both alternatives included additional measures, such as YIELD’s control of new routes with a 100% concentration due to the transaction. The offer also contemplated a code-sharing agreement with SATENA, maintaining existing agreements with third parties, delivering routes between Colombia and Argentina, restricting exclusivity pacts and preserving contracts. Additionally, it sought to protect passengers affected by the suspension of Viva’s operations and to facilitate access to the infrastructure of El Dorado Airport.

The authority considered that the accumulation of slots, particularly at El Dorado Airport, could generate risks of high concentration and increased incentives for possible anti-competitive behaviour, such as predatory pricing, selective slot allocation and cross-subsidies. Therefore, the primary effect of integration would be to limit access to airport infrastructure.

This could restrict the entry of new competitors or other operators and limit competition in the schedules most demanded by consumers. Aerocivil deemed it inadmissible to approve the integration without conditions, as this would lead to an excessive concentration of slots in the hands of the integrated airline. Furthermore, a significant deterioration in the concentration, asymmetry and dominance indices was identified, similar to the market situation in 2015, representing a seven-year setback in both the domestic and international passenger transportation markets.

Viva suspended its operations on 27 February 2023 and had been in the process of business recovery before the Conciliation, Arbitration and Amicable Composition Centre of the Chamber of Commerce of Eastern Antioquia since 10 February 2023. This situation, combined with other evidence gathered, demonstrated that there had been a substantial change in the circumstances since the last decision taken. Thus, it was necessary to reanalyse all the evidentiary material.

Aerocivil acknowledged that the crisis resulted from both external and internal factors and changed its position on the matter. It concluded that the operation of economic rights had limited Viva’s margin of manoeuvre in the crisis and noted the consequences of this since April 2022, which was one of the causes of the situation. However, it was retracted by pointing out that this was not a prerequisite for the application of the company-in-crisis exception. Regarding the second requirement, the parties also provided a certification attesting to the search for alternative financing, as well as evidence of a business reorganisation procedure.

Aerocivil reconsidered its position and stated that requiring a restructuring procedure as a guarantee to evaluate the company-in-crisis exception could affect the opportunities of companies in these conditions to remain in the market. Therefore, this circumstance must be evaluated on a case-by-case basis; this is how it concluded that there was no less detrimental alternative to competition than the proposed integration.

Lastly, an economic study was presented demonstrating that the harm to competition caused by the transaction would be comparable to the exit from the market of the ailing company’s assets. Given that Viva was not operating, the conditional approval and the burden imposed on the airlines as part of the transaction would have a less negative impact on users than a definitive exit and loss of assets, as well as the low-cost model.

In addition, the authority considered that the conditions proposed by Avianca and Viva were insufficient. These conditions consisted of returning less demanded slots, which would allow them to maintain their position in the most sought-after schedules and limit the participation of other competitors in that market segment. As a result, Aerocivil decided to impose stricter conditions, mainly requiring a greater return of slots, especially at the most demanded times, and consumer protection.