Cade publishes draft of Non-Horizontal Merger Guidelines
Initiative seeks to clarify criteria the antitrust authority uses in non-horizontal merger analysis
In July 2023, the Brazilian Antitrust Authority (Cade) released a preliminary draft of its Non-Horizontal Mergers Guidelines (V+ Guidelines), which was put to a public consultation that finished on September 18. Grounded in existing laws, the guidelines aim to systematize how Cade decides on non-horizontal merger transactions, and increase transparency vis-à-vis its technical analysis criteria.
Cade’s initiative has been well-received and falls in line with antitrust authorities’ efforts in other countries. The US Federal Trade Commission (FTC) and Department of Justice (DOJ) also published an updated draft of US merger guidelines in July, which include specific guidelines for non-horizontal mergers, while the UK’s Competition & Market Authority updated its merger guidelines in 2021. The European Commission also published new legislation on vertical agreements (a type of non-horizontal transaction) and concerted practices in May 2022.
Non-horizontal mergers involve parties operating at different levels of the production chain (vertical mergers) or in which the parties have complementary activities. Precisely because non-horizontal mergers involve interactions between multiple markets, analyzing them tends to be more complex. However, this does not mean that every non-horizontal merger will require antitrust authorities to apply a greater level of scrutiny.
The V+ Guidelines draft sets out the scenarios where transactions are eligible for a simplified merger review (fast-track) proceeding. The first of these scenarios is already provided for in Cade regulations, and concerns transactions involving parties with a market share of no more than 30% in the markets affected by the transaction. The V+ Guidelines draft also provides that the fast-track proceeding is applicable when the parties already supply and purchase the input in question on a fully captive basis, or when at least one of the parties is already verticalized pre-transaction and there is no significant increase in market share.
However, the V+ Guidelines draft points out that competitive concerns may exist even in such scenarios, a stance in line with Cade’s past decisions. In 2020, in a case involving Nike and the Brazilian sporting goods retailer Centauro (Merger Case No. 08700.000627/2020-37), both Cade’s General Superintendence and Tribunal concluded that more in-depth analysis was necessary even though the parties’ market shares did not exceed 30%, primarily due to factors such as the significance and power of the Nike brand.
In conducting an in-depth analysis to identify a transaction’s potential to harm competition, Cade has to consider whether the parties have the capacity to exercise market power, whether the parties have the incentive to exercise market power and whether there are anticompetitive effects. This last point is extremely important and has been the subject of debate.
In line with the FTC’s position in the Microsoft/Activision case, the preliminary draft of the US guidelines takes a more aggressive stance in not recognizing the need to prove a transaction has the effect of substantially reducing competition. On the other hand, Cade’s V+ Guidelines draft includes the need to identify anticompetitive effects as a step in the analysis process.
Input foreclosure and customer foreclosure are two of the anticompetitive effects that can result from non-horizontal mergers. Input foreclosure concerns limiting or restricting competitors’ access to inputs important to the production process. Customer foreclosure refers to restricting competitors’ access to a sufficient customer base. In analyzing these cases, one of the key factors involves verifying if the costs associated with the loss of sales or the difficulty (or impossibility) of acquiring inputs from competitors outweigh any gains the transaction makes possible – through price increases, for example.
Non-horizontal mergers can also facilitate coordination between market players. Cade used the existence of coordinated effects addressed in the V+ Guidelines draft to justify blocking a transaction between the Brazilian companies JBJ and JBS in 2017 (Merger Case No. 08700.007553/2016-83). Cade deemed that as the parties’ controlling shareholders shared a family relationship and JBJ’s owner would be appointed to take over as the CEO of JBS in the absence of JBJ’s controlling shareholders, showed a potential coordination between the parties post-transaction.
Even if a transaction’s anticompetitive effects are proven, they must be weighed up against the efficiencies created. The V+ Guidelines draft rightly (albeit briefly) acknowledges that vertical mergers can also be pro-competitive and result in improvements to production and distribution processes, reduced costs, or the elimination of double marginalization, for example. That said, in Cade’s view, it is possible that double marginalization is not eliminated, or its elimination is not specific to the transaction. The existence of caveats on this matter is unsurprising, given that the FTC and the DOJ have taken an even more radical approach by not mentioning double marginalization in the US guidelines draft.
The V+ Guidelines will not be normative or binding. Cade will publish its final version of the V+ Guidelines after reviewing the comments received during the public consultation process. It is expected to be very similar to the preliminary draft.
For further information on this topic, please contact Mattos Filho’s Antitrust practice area.