INTERNATIONAL BAR ASSOCIATION ANTITRUST COMMITTEE. SUBMISSION REGARDING THE PUBLIC INQUIRIES N. 1, 2 and 3/ _2

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1 INTERNATIONAL BAR ASSOCIATION ANTITRUST COMMITTEE SUBMISSION REGARDING THE PUBLIC INQUIRIES N. 1, 2 and 3/ _2

2 SUBMISSION REGARDING THE PUBLIC INQUIRIES NO. 1, 2 AND 3/ INTRODUCTION AND PURPOSE OF SUBMISSION The IBA is the world's leading organisation of international legal practitioners, bar associations and law societies. It takes an interest in the development of international law reform and seeks to help to shape the future of the legal profession throughout the world. Bringing together antitrust practitioners and experts among the IBA's 30,000 individual lawyers from across the world, with a blend of jurisdictional backgrounds and professional experience spanning all continents, the IBA is in a unique position to provide an international and comparative analysis in this area. Further information on the IBA is available at This submission is made to Administrative Council for Economic Defense ( CADE ) on behalf of the Merger Working Group ( the Working Group ) of the Antitrust Committee of the International Bar Association ( IBA ) that has been specifically formed to consider the implications of and respond to public consultations in the area of merger control in a world-wide context. The Working Group sets out below, for your consideration, a submission responding to the Public Inquiries n. 1, 2 and 3, all published on February 27, The Working Group is grateful for this opportunity to comment on the proposed changes and appreciates the willingness of CADE to consider its comments and suggestions. The Working Group s comments and recommendations draw on the members experience of competition law and practice in Brazil and elsewhere. 2. EXECUTIVE SUMMARY The Working Group appreciates the opportunity to make this submission to the Authority and hopes to contribute constructively to the ongoing consultation focusing, among other topics, on the proposed: 1. Changes in the thresholds for notification of transactions involving funds - The Working Group believes that the definition of investment funds is quite unclear and will create uncertainty. Further, the application of the proposed notification requirements to minority interests in investment funds, which are not based on control or competitive overlap, risks disincentivising funds from investing in Brazil due to compliance costs and the likely practical difficulties in obtaining data from the underlying investments in order to comply with the proposed notification requirements; 2. Criteria of notification of debentures acquisition/conversion The Working Group believes that the existing provisions dealing with concentrations adequately address forms of securities such as debentures which convert into shares; 3. Definition of criteria for notification of associative contracts The Working Group believes this provision can be refined as to the nature of the "associated contract" to more clearly address CADE's perceived gap in the notification regime _2 1

3 3. GENERAL COMMENTS Brazil is currently an attractive market for foreign investment at a time when global merger activity remains subdued due to financial constraints. Experiences in other jurisdictions indicate that overly extensive notification requirements lead to a decline in the timeliness and effectiveness of the merger review process. Overly extensive notification requirements do not only burden the parties to a transaction with the need to collect information that may not be readily available and delay the completion of a transaction in a way that may jeopardize the attainment of the benefits associated with the deal, but also lead to inefficient use of scarce resources allocation at the enforcement agency. They force agency staff to review notifications of transactions that lack the structural requirements to produce effects that will have a negative impact on competition. In light of these matters, the Working Group recommends caution in increasing notification requirements without clear evidence the existing requirements are missing merger transactions that have substantive negative competition impacts in Brazil. 4. NOTIFICATION RULES RELATING TO INVESTMENT FUNDS The Public Inquiry n. 01/2014 proposes changes to CADE Resolution n. 2. Among the suggestions, there is the new definition of economic group for the purposes of calculation of sales revenue in the case of transaction involving investment funds. The draft proposes the following changes to the text of the relevant provision Article 4 Parties to the transaction are understood as the entities directly involved in the legal transaction under notification and the respective economic groups. 2 In the event of investment funds, the following are considered as parts of the same economic group, cumulatively: I II III IV The funds that are under the same management; The manager; The shareholders that hold directly or indirectly over than 20% of the quotes of at least one of the funds of the Item I, and The companies members of the funds portfolio in which the directly or indirectly interest held by the fund is equal to or greater than 20% (twenty per cent) of the capital stock or voting stock. 2 In the event of investment funds, for the purposes of calculating the sales revenue addressed in this Article, the following will be considered as parts of the same economic group, cumulatively: I The economic group of each shareholder which holds directly or indirectly more than 20% of the share in the fund involved in the transaction; _2 2

4 II III The companies controlled by the fund involved in the transaction and the companies in which said fund holds directly or indirectly an ownership interest equal to or higher than twenty per cent (20%) of the capital stock or voting stock; and The companies controlled by the funds which are under the same management of the fund involved in the transaction and the companies in which said funds hold directly or indirectly an ownership interest equal to or higher than twenty per cent (20%) of the capital stock or voting stock. 3 The economic group definition in this Article applies only to the events of calculation of sales revenue for the purposes of checking the compliance with the objective criteria established in Article 88 of Law 12529/2011, and it does not bind Cade s decision in connection with the request for information and analysis on the merits of the concrete cases. The Working Group appreciates that CADE has always considered investment funds as potentially important economic agents from a competition point of view when they are investing in companies that are active in the same relevant market as other portfolio companies in which they already hold a significant investment. However, the Working Group respectfully submits that the approach outlined in the consultation document gives rise to significant uncertainties, is in danger of unjustifiably discriminating against certain types of businesses and will be difficult to implement in practice. Moreover, it does not contribute to the main aim pursued by merger control rules the review of structural changes to the market. Instead it conflates the enforcement of behavioural and structural rules, and is likely to increase the workload on CADE officials without corresponding competition/merger control benefits. 4.1 The consideration of resources available to minority shareholdings for notification purposes The Working Group believes that CADE rightly takes the view that in order to assess the need to notify a given transaction regard should be had to the resources available to the undertakings concerned (for which turnover usually serves as a useful if imperfect proxy). It also agrees that for such a purpose, the consolidated turnover achieved by all entities under common control is an appropriate point of reference as this fully captures the resources that can be made available to the entity in question. However, the Working Group believes that resources of entities in which only a non-controlling minority participation is held should not be included in this calculation. This is because the minority (non-controlling) shareholder normally does not have access to the resources of these entities even if it would be in its interest to use them in a certain way. Attributing such resources to the minority shareholder does not reflect its financial strength and thus would lead to inaccurate results when assessing the notifiability of transactions done by the minority shareholder. The Working Group acknowledges that an authority may have a legitimate interest in obtaining information in relation to existing minority investments in other businesses active in affected markets for the purposes of the substantive assessment. In fact, many _2 3

5 jurisdictions have reporting requirements in relation to such participations (e.g. both US reporting requirements under the HSR rules as well as EU notification requirements pursuant to Form CO include such elements). However, a requirement to provide certain information on the new proposed investments is fundamentally different from the allocation of resources for purposes of establishing jurisdiction which the proposed rule is said to focus upon. The Working Group finds it difficult to see a sound reason that would justifying the attribution of resources of entities in which non-controlling minority stakes are held resources to which the investment fund normally does not as a matter of fact have any access. The same is true with regard to the activities of investors which hold a non-controlling participation in the fund. With regard to investors, the Working Group understands how for jurisdictional purposes, a controlling shareholder and the fund may be considered together as this shareholder ultimately can decide how the resources of the fund should be used. However, it fails to see how the fund and a non-controlling investor in the absence of additional elements that would give the shareholder sole or joint control over the fund could be considered to form a single economic group. Legally, the investor s rights to direct the fund and the resources at its disposal (the critical test for determining the existence of such a economic unit) will be limited. As a factual matter, investors in investment funds tend to be financial investors who provide a defined amount of financial resources to the fund for investment purposes. The fact that they refrain from making investments themselves but leave certain assets to be managed by a third party they do not control clearly indicates a lack of involvement in the commercial activities of the businesses in which the fund invests. The resources they may have invested in other business activities or investments generally will not be available to the investment fund in question and be used in a coordinated fashion that would justify their being considered on a consolidated basis. Therefore, the Working Group respectfully suggests that such activities should not be included in the calculation used to establish jurisdiction. 4.2 Lack of a meaningful definition of investment funds The Working Group submits that the provision outlined above will be difficult to implement in practice as it is unclear exactly which entities will be captured by the rule. In particular, it is not clear who will be captured by the reference to investment funds. Technically, an investment fund may be any collection of assets set aside for purposes of investing in equity or financial assets including other funds. Funds may be allocated to a special vehicle a legal entity or they may not. They may be set up to manage assets of a single individual (such as Bill Gates Cascade Investment LL.C.) or a very large number of individuals (such as the California State Teachers' Retirement System (CalSTRS)). They may be actively managed or simply track certain indices (often stock market indices). Their strategies in relation to the companies they invest in differ widely. Some will acquire a controlling interest and actively participate in the strategic positioning of the company they are investing in, while others may be focused on simple financial investments where the fund acquires a minority interest in a company with a view to collecting dividends and/or selling the equity at a profit later on. Internal structures vary widely, too, in particular in relation to the coordination of behaviour (or lack thereof) of individual funds that belong to the same group of funds _2 4

6 Many further distinctions between different types of investment funds would be possible, but for present purposes the picture which emerges is that investment funds represent a very diverse way of grouping assets: Some are similar to a private investor while others are similar to holding companies at the top of many corporate groups. What is clear is that there is no single overall type of investment scheme that would squarely fit into the definition proposed by CADE. Indeed, there is no single definition that would encompass all types of investment funds other than a very general definition that would be meaningless for purposes of distinguishing certain effects funds may or may not have on the structure of competition. The Working Group respectfully submits that the proposed wording of the provision would give rise to considerable uncertainty in relation to the entities to which the proposed rules would apply. Such a result would be particularly undesirable in the context of rules aimed to establish jurisdiction such rules should be clear and straightforward to apply to avoid uncertainty as to what is expected from the parties to a transaction. 4.3 The special nature of investment funds The Working Group acknowledges that investment funds may play an important role in consolidating fragmented markets, in particular in times when strategic investors lack the resources to effect needed consolidation. However, their activities tend to differ from those of other strategic investors in that their portfolios may be more diversified than those of holding companies at the top of conglomerate groups of companies. In particular, there does not seem to be any evidence that would justify the assumption that in general investment funds take a more active role in managing their shareholdings than other shareholders. This is the case in particular where investment funds acquire minority participations that do not give them the ability to control the relevant business (e.g. through related shareholders agreements that provide for management rights or the low attendance rate in the annual meetings of publicly listed companies that may lead to de facto control by a minority shareholder). Experience shows that where funds consciously choose to take non-controlling minority shares, this usually indicates a hands off attitude of the financial investor. In relation to minority shareholdings, strategic investors have a greater incentive to make use of their shareholders rights to influence the competitive behaviour of companies in which they hold a minority shareholding than investment funds. Even leaving aside the question of whether a minority participation should be sufficient to attribute the resources to the shareholder, the Working Group submits that there does not seem to be any substantive reason to single out investment funds with regard to the allocation of resources (as this is what the attribution of turnover implies) of minority participations. 4.4 Availability of turnover data for minority participations or shareholders The Working Group draws CADE s attention to the fact that the proposed rule is likely to create a conflict between reporting requirements under Brazilian merger control rules and the ability to obtain such data under local corporate law rules that govern the relationship between the undertaking in which a minority participation is held and its shareholders. With regard to publicly traded companies in particular, minority shareholders are usually restricted by law to the information that is publicly available. Making available additional _2 5

7 data to individual shareholders may conflict with the requirement to treat all shareholders equally. In privately held companies, the ability to obtain detailed turnover information will regularly require consent by the majority of the shareholders and thus be beyond the control of the investment fund in question. Under these circumstances, the company in which a participation is held may thus be able to effectively reject certain information requests from its shareholder for the information required under the proposed Article 4 2 (in particular with regard to the geographic allocation of turnover). Requiring the shareholder to provide detailed information thus may create a conflict between Brazilian merger control rules and local corporate law requirements, which the shareholder will not be able to resolve. The Working Group suggests that such a conflict can and should be avoided by reconsidering the proposed changes to Article 4. The investment fund will be even less likely to obtain information on its non-controlling investors and their business activities outside of the investment fund. Even if Brazilian law technically should be able to require the fund to provide this information, it is difficult to see how the fund would be able to compel its investment entities to provide this information. By attributing the activities of non-controlling investors to the investment fund, the proposed rule thus creates a potential legal and practical conflict, which the fund cannot resolve. The Working Group suggests that such conflicts should also be avoided. 4.5 Detailed information requirements for minority investments The Working Group understands that, while the definition of the economic group discussed here does not directly affect the substantive assessment, information requirements extend the duties to provide data to entities that are part of the group of companies to which the parties belong. It acknowledges that there is a legitimate interest in learning about noncontrolling participations in affected markets. In fact, a number of jurisdictions require the parties to the transaction to identify minority participations in markets that are affected by the transaction. For example, reporting requirements in the US under the HSR Act or in the EU pursuant to Form CO require the parties to identify such shareholdings. However, the Working Group respectfully suggests that extending such requirements to all minority shareholdings in any market and to all their business activities is unduly burdensome, largely irrelevant for purposes of an effective merger review in Brazil, and likely to be very burdensome for parties to comply with. In the Working Group s experience investment funds do not regularly collect detailed information on the commercial activities (e.g. information on market shares, competitor information etc.) of their portfolio companies. Compiling this information is going to present a major challenge and require expenditure of significant resources for the parties to transactions under the proposed rules. In the Working Groups view, such an endeavour is unlikely to be matched by corresponding benefits for the competition agency or the public interest in effective competition. Given that a shareholder at the level identified by CADE will as a rule not be able to materially influence the competitive behaviour of the entity in which the shares are held, the shareholding also will not affect materially the market position held by the party to the transaction. Thus, the information sought by the agency will not have a significant impact on the substantive assessment by CADE (beyond the assessment of corporate links created by minority shareholdings on the relevant market) _2 6

8 Finally, it is suggested that the information requested will often not be available to the shareholder and in particular in those instances where it is likely to be of most interest to the competition authority. Where other portfolio companies are already active in the same market, the flow of competitively sensitive information between the entity in which a minority participation is held and the fund manager is likely to be restrained by competition law requirements. Thus, available information will largely be limited to non-affected markets data that is largely irrelevant for the competitive assessment of the transaction. The Working Group therefore suggests limiting the information required in relation to entities in which only a non-controlling minority shareholding is held to the activities of portfolio companies active in markets that are affected by the transaction and in that respect to publicly available information. 4.6 Conclusion In the light of the above, the Working Group recommends that CADE not introduce the proposed new rules which create a broader definition of the economic group based on a minority and non controlling shareholding position as far as investment funds are concerned. 5. NOTIFICATION OF ACQUISITION OF DEBENTURES Public Inquiry n. 01/2014 also proposes the inclusion of a new Article 11 concerning the notification of corporate bonds/debentures, setting forth the moment of the notification of this type of business. Article 11 The acquisition of bonds convertible into shares must be mandatorily notified at all times the future conversion into shares fits any of the events in items I or II of Article In the event of initial public offering of convertible bonds into shares, the bonds acquisition is not conditional on receiving CADE s previous approval to close the deal, but the exercise of any political rights in connection with the acquired bonds is prohibited until the approval of the transaction by CADE. 2 Upon analyzing the transactions of bonds acquisition addressed by this Article, CADE may, by considering its convenience and opportunity, also establish the mandatory previous notification of the transaction of bonds conversion. The Working Group understands that CADE is concerned that transactions which involve the acquisition of bonds convertible into shares should be subject to effective merger control. However, it is suggested that this aim can be achieved by applying the general rules on notifiable transactions properly to the substance of any given transaction involving the conversion of debentures into voting shares. Specific rules, such as the proposed Article 11, are in danger of obfuscating the issue of whether and when control is indeed acquired, providing incentives for circumvention by focussing on certain types of transactions, and _2 7

9 extending merger control requirements beyond what is necessary to effectively control structural changes to the markets. 5.1 Options to acquire shares and merger control rules The Working Group believes that, in the context of merger control, convertible bonds in general do not fundamentally differ from any other contractual arrangement that gives the purchaser an option to purchase certain shares in another undertaking. Whether the acquirer will ultimately exercise its conversion right may depend on a number of factors and is usually subject to considerable uncertainty. Merger Control rules aim at identifying and if certain requirements are met reviewing transactions that change the structure of competition in a market. Brazil has sensibly chosen a substantive criterion the acquisition of control as the general point of reference for what constitutes a change to the market structure to which merger control rules apply. The Working Group suggests that the proposed Article 11 unnecessarily deviates from this principle. In particular, there is no enforcement gap with regard to the acquisition of convertible bonds that would require a deviation from the principle that notifiable transactions occur where there is a change of control in another undertaking. Convertible bonds as such generally do not give the bondholder any influence over the issuer. They merely constitute an option to acquire the shares as a means of securing the financing arrangement that is at the core of the instrument and/or to obtain a better rate of return where increases in the share price exceed the coupon rate. It is well recognized that as a general principle an option to purchase or convert shares will not in itself confer control (unless it is clear that the option will be exercised in the near future according to a legally binding agreement). The acquisition of an option does not lead to any change in the market structure that should be of concern under aspects of merger control 1. This is the case even if the acquirer obtains a number of bonds, which if converted would give it a shareholding that would lead to an acquisition of control over the issuer as it is uncertain whether and when such a change will occur. Extending merger control requirements to their acquisition therefore does not seem justified. For example, the Canadian Competition Bureau has explicitly recognized that substantive competition issues would not normally arise until a conversion to voting shares takes place and the usual Canadian merger prenotification rules are applied to the acquisition of the shares rather than the earlier issuance or acquisition of convertible debentures. In fact, making the acquisition of bonds in general subject to merger control requirements could well have undesirable consequences. Firstly, it would unjustifiably discriminate against this form of financial instrument. In particular the publicity and burdensome process of merger control could well result in parties choosing other financial tools that may be less suitable to their needs. Thus, the proposed Article 11 could have a negative effect on efficient financial capital markets. By focussing on the formal element of bonds that are convertible into shares, the proposed rule would also give rise to the possibility of seeking other means to achieve the same effect, but without having recourse to the formal financial tool identified by Article II. Thus, it is conceivable that other contractual arrangements that have the a similar effect 1 See for example the decision by the European Commission in Case No IV/M Nomura/Blueslate at para _2 8

10 giving the acquirer the right to obtain ownership of a certain number of shares could be chosen for the very purpose of avoiding merger notification in respect of a debenture. Such avoidance strategies usually entail higher degrees of complexity and associated losses of efficiency. Such consequences would appear to be undesirable from the point of view of an enforcement agency that is concerned about the efficient allocation of resources and the positive effect it has on consumer welfare. 5.2 Lack of an enforcement gap The Working Group respectfully submits that the proposed rule could not be justified as having the effect of closing an otherwise existing enforcement gap. Such a gap does not exist. Other merger control regimes that also subject changes of control (rather than the formal acquisition of a certain number of shares) to review, show that this is the case. They can also provide insights into how to address potential competition concerns in relation to transactions that involve the issuance of convertible bonds. Issuing a certain type of convertible bonds may directly lead to a change in control. This will be the case where the bondholder itself is able to exercise the voting rights associated with the shares in question even before conversion takes place or where as a matter of law or agreement the bondholder can give binding directions to the formal owner of the shares in relation to how voting rights are exercised. In such a case, the acquisition of the bond in itself is equal to the acquisition of control provided that a sufficient number of votes in the shareholders meeting of the issuer are acquired. This would be the case under the European Merger Control Regulation where changes of control are taken as the point of reference for the identification of a notifiable transaction. The US system although directly referring to formal ownership of securities achieves the same result; there, bonds of this type are considered voting securities and thus count directly towards the relevant thresholds. 2 The parties may choose to issue only non-voting convertible bonds but may enter into other contractual arrangements that allow the bondholder to exercise the voting rights associated with the shares or give binding directions as to their exercise to the formal shareholder. In such a case, control over the issuer may be obtained through the contractual arrangements. The bonds in such a case serve as the element that elevates the whole matter to the level of a structural, sufficiently lasting change in control over the issuer. In such a case, too, the resulting change in control can be sufficiently captured by the general provision that merger control is triggered by a change in control over the target. The circumstances of a particular case may indicate that, although the bonds do not carry voting rights and no contractual arrangements exist in this regard, the circumstances of the particular case indicate that the arrangements between the bondholder and the owner of the shares give the former a substantial level of influence over how the company is run, in effect conferring factual control over the issuer. A number of transactions done by the Japanese financial institution Nomura in Europe reflect the operation of this principle within the scope of the European Merger Control 2 Under US HSR rules, the the conversion of such bonds into shares at a later stage may also be reportable if it results in the acquiror crossing a higher threshold than it previously filed for _2 9

11 5.3 Conclusion Regulation. 3 These cases show how the choice of a certain transaction structure for reasons wholly unconnected with the application of merger control rules can be adequately accommodated within the scope of the general rules. In fact, it shows how an approach that considers the substance of a transaction rather than its form ensures that the competition authority can maintain effective oversight over deals that do change the market structure while leaving the parties free to choose the type of transaction that best suits their commercial needs. Under these circumstances, the Working Group believes that the acquisition of convertible bonds can be adequately dealt with by applying the general rules on concentrations. Generally making the acquisition of convertible bonds subject to merger control requirements does not seem justified, particularly since the exercise of the conversion right normally would constitute a notifiable transaction (if other relevant financial thresholds are met). The proposed approach would move the control of concentrations to a point where no concentration has yet occurred with all the negative implications of disassociating the review process from the point at which control actually changes. It may in fact may make financing arrangement subject to merger control requirements where no concentration ever takes place (i.e., where the conversion right is not exercised). The Working Group submits that those cases in which control actually does change can appropriately be captured by the application of the general principles. It therefore suggests that Article 11 should be dropped from the proposed changes to avoid defining transactions that qualify for notification too broadly. This would avoid capturing a potentially large number of financing arrangements that are unlikely to have a material impact on competition, thus placing a greater burden on business and law enforcement resources than would seem justified. 6. ASSOCIATIVE CONTRACTS According to Brazilian Law n , associative agreements executed among economic groups having sales revenues in Brazil of 750 million Reais and 75 million Reais respectively must be notified to CADE. The law does not define what constitutes an associative agreement and its wording is broad enough to capture a large number of agreements. In order to provide some clarity on the type of agreement captured, CADE has proposed the following resolution: Article 1 This resolution rules the events of notification of execution of an association contract, addressed by item IV or Article 90 of Law 12529, of Article 2 Subject to the objective criteria set forth in Article 88 of Law nº of 2011, a contract is considered an associative contract if it is executed: I - among competitors; or 3 See European Commission in Case No IV/M Nomura/Blueslate at para. 8 et seq., Case No COMP/M.2464 Nomura International / Le Meridien Hotels, _2 10

12 II - among economic players which operate in a verticalized market, at all times at least one of them holds a twenty per cent (20%) or higher share of the respective relevant market, provided that at least one of the following conditions are met: a) the contract establishes the share of revenues and losses among the parties; b) the contract results in an exclusivity relation, whether legal or factual. Sole Paragraph. In order to rate the horizontal and vertical relations which establish the classification of the transactions in the items of this Article, the business of the contracting parties and the other companies which are part of the corresponding economic groups should be taken into account, according to the definition in Article 4 of Resolution nº 2. The Working Group acknowledges the attempt by CADE to develop a definition of associative agreements referred to in Article 90 of Law nº of 2011 that distinguishes these arrangements from the consortia and joint ventures that are also referred to in this Article. The primary issue which this provision gives rise to is that the types of arrangements referred to usually do not amount to changes in the structure of competition in the relevant markets. In this way, Article 90 of Law nº of 2011 introduces an element that is foreign to merger control and should properly be dealt with by applying behavioural competition rules. A consortium is usually considered to be an association of two or more undertakings with the objective of participating in a common activity or pooling their resources for achieving a common goal. Joint ventures are likely to serve the same purpose, but are more likely to have a legal personality of their own. Whether endowed with legal personality or not, both consortia and joint ventures may be internal arrangements that only address the interaction between the parties to the agreement (such as production joint ventures that leave the parties free to individually sell the products) or may be outward looking (such as bidding consortia that participate in tenders for major projects which the parties cannot or do not wish to undertake alone). The broad scope of what may constitute a consortium or joint venture does not leave much room for the definition of associative agreements. In fact, given that consortia and joint ventures are generally associated with arrangements amongst (actual or potential) competitors, there seems some merit in CADE s focussing on arrangements amongst vertically related undertakings (e.g. suppliers and customers or manufacturers and distributors) to give meaning to this term. The Working Group thus supports the approach adopted by CADE in this respect. However, it suggests that adding further clarifications to the list would be very helpful in limiting the scope of what might otherwise be a very broad notification requirement, which could well deter parties from entering into such agreements. This would be particularly unwelcome as vertical agreements generally are efficiency enhancing. Thus, any action taken by CADE which imposes unnecessary barriers to such arrangements would be problematic _2 11

13 The Working Group would suggest that the provision would benefit from further clarification in several regards: Introduce a structural element by restricting the scope of the provision to arrangements implemented through the creation of a legal entity. Make the revenue/loss sharing and exclusivity requirements cumulative. While the Working Group generally rejects the use of substantive criteria (such as market shares) for purposes of determining jurisdiction, it believes that in the present case, such criteria may serve the useful purpose of limiting the scope of the provision to transactions that are likely to have a significant impact on the affected markets. A dual market share threshold is likely to serve this purpose better than the present single market share. It therefore suggests requiring one party to the associative agreement to have a market share of 20% or more and the other party to have a minimum market share of at least 10% in the vertically related market. Alternatively, if CADE wishes to maintain a single market share threshold, it might consider increasing the market share of one of the parties in one of the vertically related markets to 30%. The Working Group also has a concern with the breadth of Article 2 I "among competitors" as that is very broad and has the potential to be over reaching without some form of context as to the possible impact of that agreement between competitors. That is, just as the vertical agreements language has some contextual framework, so should the arrangements between competitors. 7. CONCLUSION For the reasons set out above, the Working Group submits that the proposed changes would benefit from further consideration as to whether they would create a greater administrative and regulatory burden than economic benefit to Brazil's merger control regime. We thank CADE for the opportunity to provide comments on the draft changes to the law. Please let us know if you have any questions in relation to our comments or require any further elaboration on any of the above. We would be pleased to assist CADE in relation to its consideration of these matters. * * * _2 12