Guía Integraciones Empresariales ingles by Superintendencia de Industria y Comercio

MERGER GUIDELINE SUPERINTENDENCE OF INDUSTRY AND COMMERCE

Andrés Barreto González Superintendent of Industry and Commerce Juan Pablo Herrera Saavedra Deputy Superintendent for the Protection of Competition Angélica Acuña General Secretary Angelica Asprilla Head of the Office of Consumer Services and Business Support Aura María García Pabón, Carolina Liévano Liévano, Andrés Pérez Orduz Authors first edition Daniel Alejandro Bosa Rincón, Santiago Espinosa Moyano, Aura MaríaGarcía Pabón, Carolina Liévano Liévano Style correction OSCAE Diagramming Year 2021

CO N TE N T Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Applicable regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Pre-evaluation procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Control . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Exception from the duty to inform. . . . . . . . . . . . . . . . . . . . . . . . . . . .

Assumptions to inform and notify . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Definition of the relevant market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Potential effects of the merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Barriers to entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Potential competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 Bargaining buyer power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Merger efficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 Conduct during the study of the pre-evaluation request . . . . . . . . .

Merger remedies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

MERGER GUIDELINE

INTRODUCTION 1. These Merger Guidelines (hereinafter, Guidelines) are intended to provide a framework on how the Superintendence of Industry and Commerce (SIC) approaches the study of requests for authorization of a merger. Likewise, this document presents the analysis criteria that the SIC generally uses to determine whether the projected transaction could lead to an undue restriction of free competition, in the terms of Law 1340 of 2009; Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce and other concordant regulations.

2. In accordance with article 9 of Law 1340 of 2009, when merging parties demonstrate that they have less than 20% of the market share, jointly evaluated, in each of the coinciding markets or in each of the links of the value chain that turn out to be common between them, the notified merger is automatically understood to be authorized. For this reason, these Guidelines do not address in detail the processing of notifications.

3. Given the particularities of each market, these Guidelines do not aim to resolve all the questions that may arise in all cases, nor to make absolute statements about the interpretation of the applicable regulations. The analysis carried out by the SIC regarding mergers is dynamic and flexible in nature, considering the particularities of each case. Accordingly, these Guidelines do not incorporate absolute principles and are for illustrative purposes only.

4. Through the analyses carried out on a merger, the SIC will strive to protect competition in the affected markets in order to guarantee free participation of companies in the market, the welfare of consumers and economic efficiency.

These Guidelines identify the various phases of the procedure for evaluating a merger. Mergers in which no negative effects on competition are seen since Phase I (Preliminary Assessment) will be authorized without the need to continue with Phase II (Background Study). On the contrary, mergers in which, according to the available information, concerns on the existence of negative effects are raised, will require the move to Phase II (Background Study), in order to have more information that allows a deeper analysis on the potential effects of the transaction.

6. In general, the SIC develops the analysis of mergers in the following stages: (i) definition of the relevant market(s); (ii) analysis of the structure of the relevant market: concentration, dominance, potential competition and barriers to entry; (iii) analysis of potential risks to competition if the transaction is carried out: unilateral, vertical and coordinated effects; and (iv) the study of the efficiencies that might outweigh these risks. Depending on the level of complexity of each case, the analysis may omit one or more of the stages. The analysis will be done on a caseby-case basis.

APPLICABLE REGULATIONS 7. The applicable procedure is indicated by articles 9, 10 and 11 of Law 1340 of 2009; Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce and other concordant regulations, which modified the second chapter of title VII of the “Circular Única” of the SIC.

DEFINITIONS 8. Fiscal year: In accordance with article 14 of Decree 111 of 1996, the Organic Statute of Budget, the fiscal year begins January 1 and ends December 31 of each year.

9. Barriers to entry: In general, they can be understood as factors that delay, reduce or prevent the entry of new companies to a given market. Consequently, barriers to entry can facilitate the exercise of market power1.

10. Barriers to expansion: In general, they can be understood as factors that delay, reduce or impede the growth of those who compete in a given market. Like entry barriers, the

existence of expansion barriers can facilitate the exercise of market power.

11. It is possible to classify barriers to entry and expansion into two categories:

- Structural barriers: They arise from basic market conditions such as costs, demand, required technology, among others. Some examples of structural barriers are: (i) The existence of economies of scale; (ii) the existence of high sunk costs and slow recovery; (iii) the existence of a competitor (or a small group) that controls an essential and irreplaceable asset for the production of a good or service; (iv) when market competitors have access to superior technology and harden its access for an incoming competitor or for lagging competitors; and (v) when there are network economies in the market.

- Legal barriers: In general, they correspond to government provisions such as the requirement for operating licenses, the protection of intellectual property rights, limits to the participation of companies in the market, among others.

12. Value chain: In the terms of Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce it is the: ““(…) set of activities wherefrom it is possible to generate an order in which the

1 See merger of Protabaco / Coltabaco, Resolution No. 29937 of 2010.

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product obtained in one activity turns out to be an input for another. In this way, each activity or link successively adds value to the goods or services at the time of analyzing such process, from the generation of the product until it reaches the final consumer”.

13. Horizontal merger: It is a merger that occurs between market agents that compete in the same link of a value chain, this is, in the same relevant market.

14. Vertical merger: It is a merger that occurs between market agents that participate in different links of the same value chain.

15. Control: In the terms of numeral 4 of article 45 of Decree 2153 of 1992, control is defined as: ““(…) the possibility of directly or indirectly influence the business policy, the initiation or termination of a company’s activity, the variation of the activity to which the company is engaged or the disposition of the essential assets or rights for the development of the activity of the company”. The exercise of control can be directly or indirectly, or there may even be joint control by two or more companies over another in the market2.

16. Market share: It is a measure of the relative size of a company in a specific relevant market. The variable on which this calculation is made may vary depending on the See merger of Isagen/EEB, Resolution No. 5545 of 2014 and Resolution No. 32185 of 2014.

corresponding market and the main activity carried out by the companies. The variables generally used correspond, among many others, to the value of sales, volume of sales, production capacity, volume and / or value of imports and number of clients.

17. Duty to inform: Obligation established in Law 1340 of 2009 for companies to previously inform the SIC about the transactions that they plan to carry out, whatever the legal form of the projected transaction is. The duty to inform can occur in one of two ways: (i) Notification; and (ii) request for pre-evaluation.

18. Company: The legal notion of company is established in article 25 of the Commercial Code in the following terms: “a company shall be understood to be any economic activity organized for the production, transformation, circulation, administration or custody of goods, or for the provision of services. This activity will be carried out through one or more commercial establishments”.

19. Legal form of a merger: It refers to the modality or legal vehicle through which a change in the control situation of one or more companies, lines of business and / or assets materializes. It can be, for example, an acquisition of shares, purchase of assets, merger, spin-off, creation of a company, business alliances, franchise contracts, among others.

20. Business group: In accordance with article 28 of Law 222 of 1995, it occurs when there is a subordination bond and a unity

of purpose and direction between a parent company and its subordinates and / or subsidiaries. There is unity of purpose and direction when the existence and activities of all entities pursue the achievement of an objective determined by the parent or controlling company, by virtue of the direction that it exercises over the whole, without prejudice to the development of the corporate purpose or individual activity of each of the companies3. In every business group the unit of control is inferred.

21. Merging parties: In the terms of Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce, the following should be understood as intervening parties: “(…) those companies that exercise the same economic activity or belong to the same value chain and that are part of a merger transaction that is planned to be carried out and may have effects on the national market”. The definition of merging party must be understood, in accordance with article 2 of Law 1340 of 2009, as “anyone who develops an economic activity or affects or may affect that development, regardless of its form or legal nature and in relation to conducts that have or may have effects totally or partially in the national markets, whatever the activity or economic sector”.

Superintendence of Corporations. Resolution No. 2467 of September 18, 1997

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22. Relevant market: Market in which competition could be affected because of the merger. It is made up of the product market and the geographic market. When referring to the product market, this concept includes the goods or services where the merging parties compete, or those that belong to the same value chain.

23. Notification: One of the modalities of the duty to inform provided in Law 1340 of 2009, Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce and other concordant regulations, consists on the obligation to notify the SIC, prior to its completion, a merger that complies with the assumptions set forth in article 9 of Law 1340 of 2009 and in which the merging parties, together, have less than 20% in each of the markets involved.

24. Market participant: It is considered that an economic agent participates in a given market when at least one of the following assumptions is verified: (i) The economic agent carries out commercial activities in said market (either directly or through a company on which he exercises control); or (ii) that although at the specific moment of merger the economic agent does not obtain income in the market involved, there is evidence that it has the capacity (in terms of assets, human capital, financial capacity, among others) and has executed actions that allow the SIC to consider that it will carry out transactions and obtain income in said market in the near future 4.

4 See merger of Exito / Super Inter, Resolution No. 54416 of 2014 and Alienergy / Molinos Roa / Molinos Florhuila case, Resolution No. 3703 of 2013.

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25. Product: In the terms of numeral 6 of article 45 of Decree 2153 of 1992, it is “any good or service”.

26. Request for pre-evaluation: One of the modalities of the duty to inform provided in Law 1340 of 2009; Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce and other concordant regulations, consists on the obligation to submit an authorization request to the SIC, prior to the completion of the merger transaction, when the assumptions provided for in article 9 of Law 1340 of 2009 are met and the merging parties, together, have more than 20% of each of the markets involved.

27. Demand substitutability: Measure of the degree to which products are considered interchangeable by the consumers or users, because they present similar characteristics, satisfy the same needs and have similar prices. Demand substitutability determines the products that generate a competitive pressure towards a company with respect to a specific good, which could decrease or increase the restrictive effect of a merger.

PRE-EVALUATION PROCEDURE Stages Phase I. Preliminary evaluation:

29. This stage has a maximum duration of 30 business days, counted from the business day following the date of submission of the complete pre-evaluation request by the merging parties. Once the request is filed, the SIC has 3 business days, counted from the day following receipt of the request, to order the publication of the merger transaction presented on the Entity’s website, as long as it considers that the information provided is complete, in the terms of numeral 2.2 of Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce.

30. The merging parties may request the SIC, before submitting the pre-evaluation request, to hold a preliminary meeting to review the conditions of the transaction and the required documentation. The foregoing, to provide guidance and facilitate the subsequent presentation of the merger, to initiate a preevaluation process.

28. Supply substitutability: Supply

31. The preliminary meeting will be

substitutability measures the degree to which other actors would be in a position to transform their current production, in the short term and at reasonable costs, and direct it towards products that are part of the relevant market.

coordinated by the Merger Working Group, prior request of the participants made five (5) business days in advance of the proposed date for its celebration.

32. The preliminary meeting does not exempt companies from complying with the provisions of the Pre-evaluation Guide contained in Annex

9.1 of Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce. Likewise, its holding has no impact on the timing provided in Law 1340 of 2009 to carry out pre-evaluation procedures, since this would be carried out before its start, without compromising in any way the terms available to the SIC for its analysis and decision.

projected transaction. The term envisaged for the second phase is three (3) calendar months from the date on which all the information requested in the official letter where the participants are informed of the start of the second phase sent by the SIC has been received.

33. Once the publication process on the Entity’s website has been completed, whoever considers it pertinent will have ten (10) business days to submit to the Entity the respective observations or comments that may arise regarding the merger that is intended to be carried out.

study of a merger transaction the SIC deems necessary to request additional information to the merging parties, an information request could be made by the authority, meaning that the three (3) calendar months that the SIC has to decide on the merits of the initiated process will start after its complete response.

34. The previous terms do not interrupt

38. Notwithstanding the foregoing, the

the term for the final pronouncement of the Entity.

SIC may make additional information requirements during the study of a merger, both to the merging parties and to third parties. These additional requirements will not interrupt or restart the term of three (3) months that the SIC has to decide on the merits of the process initiated.

Phase II. Background study:

35. If, within the thirty (30) business days provided for the first phase, the SIC does not have sufficient elements that allow granting authorization without conditions to a merger transaction, either because the information collected does not allow to rule out potential undue restrictions on competition arising from the transaction, or because possible competition concerns arise from the evidence collected, the SIC will give way to the second phase of the procedure and will communicate it to the merging parties.

36. This phase is planned for the SIC to collect additional information, which may be considered useful to deepen the analysis of the

MERGER GUIDELINE

37. In the event that during the in-depth

39. In the event that the merging parties provide all the information indicated in annexes 9.1 and 9.2 of Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce from the beginning of the pre-evaluation process, and it is not necessary to require additional information for the in-depth study of the merger, the three (3) months that the SIC has to decide on the merits of the procedure initiated, would count from the date of communication to the merging parties that the second phase started.

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CONTROL 40. The competition protection regime

44. Not all types of control assume that the

defines the concept of control in paragraph 4 of article 45 of Decree 2153 of 1992. Control is the possibility of influencing the decisions of another company that are related to the way it behaves in the market, namely: (i) business policy; (ii) the initiation, termination or variation of the economic activity to which the company is engaged; or (iii) the disposition of the essential assets or rights for the development of the company’s activity.

controlling shareholder and the controlled company can be considered as a single economic agent in the market from the perspective of competition law. Only in those situations in which, in addition to configuring a control situation from the point of view of competition law (that is, a material influence is exerted), a control situation is also configured from the point of view of corporate law, in the terms of articles 260 and 261 of the Commercial Code. In those cases, it may be said that the controlling company and the controlled company constitute a single economic agent for competition law.

41. The essential element of the definition of control is that one company has the ability to influence the competitive performance of the other.

42. . It is not required a demonstration that the possibility of influencing the competitive performance of a company has materialized in the past, nor is it necessary to demonstrate that it will materialize soon. The mere possibility of influencing is enough for there to be control from the point of view of competition law. TYPES OF CONTROL

43. There are different types of control, depending on the conditions of each market agent. Control can be exclusive or joint, depending on whether it is exercised individually or through two (2) or more companies. Similarly, the control can be positive or negative, depending on whether it has the power to determine the decisions that affect the competitive performance of the company or to veto the strategic decisions that materially affect them5. 5 See merger of Isagen / EEB, Resolution No. 5545 of 2014 and Resolution No. 32185 of 2014..

45. In conclusion, only in those cases in which the controlling company exercises a subordination from corporate law (either because it owns more than 50% of the shares with voting rights; or because it can choose the majority of the members of the board of directors; or because through an act or business it exerts a dominant influence), it can be affirmed that the controlled and the controlling entity are a single economic agent.

EXCEPTION FROM THE DUTY TO INFORM 46. Companies that are integrated, merged or reorganized and can prove the existence of a Business Group or in which the parties are under the same control unit in the terms of article 261 of the Code of Commerce, will be exempt from the duty of notification and information before the SIC, in accordance with the provisions of paragraph 3 of article 9 of Law 1340 of 2009 and number 4 of Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce.

ASSUMPTIONS TO INFORM AND NOTIFY 47. The regulations have referred generically to the term company for purposes of generally naming the great variety of subjects that are subject to the merger regime. However, the subjects that are understood to be subject to the merger regime are not only companies, but also other types of subjects, such as: legal entities of any type legally constituted in Colombia, foreign legal entities that carry out activities of a contractual nature, or possess real assets or rights in the Colombian territory or with effects therein, or participate in Colombian companies and act in them within the legal requirements of the control or business group. Natural persons who carry out activities of a commercial or commercial nature will also be understood to be subject to the regulation.

48. It will be understood that these subjects are covered by the norm, to the extent that commercial operations must be carried out in Colombian territory or their effects materialize in Colombia. Thus, the companies that plan to carry out an economic integration, regardless of its legal form, must inform the SIC, when the assumptions provided in article 9 of Law 1340 of 2009 are met. These are: (i) Subjective assumption. (ii) Objective assumption. Subjective assumption

49.

The subjective element is related to: (i) those market participants who carry out the same economic activity, that is, if they produce or market the same goods, or provide the same type of service; and (ii) those participants that belong to the same value chain6, in the terms provided in these Guidelines. Objective assumption (Test of assets and operating income)

50. The objective assumption refers to the threshold, measured in operating income or total assets of the merging parties, from which the obligation to report a merger arises. There are two requirements, noting that it is only necessary to meet one of them to satisfy the objective element7: a) That the merging parties, jointly or individually considered, have obtained during the fiscal year prior to the projected 6 Article 9, Law 1340 of 2009. 7 In the case of foreign companies, the values for assets and operating. income are calculated in pesos with the official exchange rate on the date of preparation of the corresponding financial statement.

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transaction, operating incomes higher than the amount established by the SIC in legal monthly minimum wages, or b) That, at the end of the fiscal year prior to the projected transaction, the merging parties, collectively or individually, have total assets greater than the amount established in minimum wages by the SIC.

51. To determine the operating income and total assets, only those obtained or located in national territory will be taken into account, both by the companies involved, and by those companies that meet the following conditions: (i) they are linked by virtue of a control situation with the merging parties; and (ii) develop the same economic activity or are in the same value chain of the merging parties.

52. When the merging parties participate in the Colombian market exclusively through exports, and do not have operating income or total assets in the national territory, the total assets and operating income of said firms abroad will be the ones taken into account for the objective element, as well as those of the companies that meet the following conditions: i) They are linked through a control situation with the merging parties; and ii) develop the same economic activity or are in the same value chain of the merging parties.

53. On the other hand, the law establishes a third threshold that is not part of the assumptions, but that determines the procedure that the merging parties must carry out before the SIC.

54. When the merging parties jointly hold 20% or more of the relevant market, they will have the duty to inform the transaction to the SIC through the pre-evaluation process to be able to integrate. Otherwise, although the transaction is understood to be authorized, the companies must inform the SIC of the transaction in advance through the notification process.

55. Thus, the transactions must be reported through the pre-evaluation process, if the merging parties comply with: - The subjective assumption - The objective assumption (that is, if the assets or operating income exceed the threshold amounts) and, - If they have 20% market share

56. Once the transaction has been reported, the SIC may approve, object or condition it.

57. Transactions must be notified if merging parties comply with: - The subjective assumption - The objective assumption (that is, if the assets or operating income exceed the threshold amounts), but - Together they have less than 20% participation in the relevant market, in which case the transaction will be deemed authorized.

DEFINITION OF THE RELEVANT MARKET 58. The definition of the relevant market seeks to establish the set of agents, goods or services and their corresponding prices, whose production, supply, distribution or consumption must be examined in order to determine who is subject to reporting economic merger transactions, as well as the restrictive or beneficial effects on competition that may derive from them. In order to delimit the relevant market correctly, it must include all the alternatives available to consumers of the products manufactured or offered by the companies that are being integrated and include those sources that market participants consider to be their competition. The definition of the relevant market is typical of the authorization procedures for mergers and may not be carried out by the authority in other administrative actions, such as, investigations of cartelization.

59. The definition of the relevant market is carried out from two perspectives: (i) the product dimension, and (ii) the geographical dimension. The product market dimension refers to the group of products that consumers consider close substitutes, while the geographic dimension refers to the smallest geographic area in which bidders, acting as a single firm, can profitably influence the price, quality, variety, service, advertising, innovation and other competitive conditions. The geographic market can be local, regional, national, or global with effects in Colombia.

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Relevant product market

60. Firstly, the sector where market participants carry out their activity is determined, to perform a general diagnosis on the characteristics of the market where they are located. It is important to “know the business” in which companies carry out their activity to understand their behavior and that of their competitors.

61. To identify the product market, factors on the demand side are fundamentally considered. Additionally, other characteristics of the market that may eventually influence the determination of the price are analyzed. Demand-side considerations

62. It is important to have as much information as possible from the merging parties, since they are the ones who know their activity best. To do this, all available market studies are requested, as well as a description of the products or services in terms of characteristics, uses, prices and quantities sold. Likewise, information is requested on the products considered as substitutes, reasonably justifying said substitution.

63. To correctly establish those goods and/or services that can be considered as substitutes by consumers, it is necessary to analyze factors that determine the degree of substitution of the products or services.

64. Thus, the product market must include those products to which consumers would move in the event of a small, non-transitory and significant increase in the price of any of the products or services offered by

MERGER GUIDELINE

merging parties, maintaining the price of other products and/or services constant (hypothetical monopolist test). Product characteristics or type of service provided

65. In order to define whether the characteristics of the product or service are similar to those of another substitute candidate, it is studied whether the raw materials used, active ingredients 8, inputs used or specific characteristics and form of service provision are equivalent, in such a way that the physical, technical and general characteristics that define the products or services make them substitutable for the consumer. Thus, the characteristics of the products or services are the first clue to establish substitutability. However, this is not a conclusive element, so other attributes of the product or service are studied.

66.

As it is a service, in defining the relevant product market, the characteristics that allow defining whether there are substitute services will be different from those considered for a production or distribution company. Thus, when we refer to services, some of the characteristics to consider are the coverage of the service, opportunity and agility, availability, guarantees offered and compliance. General uses of the product (purpose of the service)

67. The degree to which two products or services are functionally interchangeable is 8 For example, for the analysis of mergers in the pharmaceutical sector

an important source for determining whether substitution is likely between them. However, it is a necessary but not sufficient condition for two products to be substitutes for each other, since the uses are defined according to the characteristics of the consumer or user, their preferences and habits. For the purposes of this analysis, market studies are used, mainly studies on the behavior of consumers and their attitudes and consumption trends. If these studies are not available, consumer surveys could also be used. Price of the product

68. There are different qualitative and quantitative tools that allow the analysis of the behavior of product prices.

69. One of them is the estimation of elasticities that allows determining changes in the quantity demanded of a product in the face of changes in its price and changes in the price of substitute products. Thus, the price elasticity of demand allows quantifying the percentage variations in the quantity demanded in the face of percentage changes in the price of the product. For its part, the cross elasticity of demand allows quantifying to what extent the increase in the price of a product causes a displacement of its consumers towards the demand for another product in percentage terms. The greater the substitutability between two products from the perspective of the consumer or user, the greater the displacement of consumers from the first to the second, as a consequence of a significant and non-transitory increase in the price of the first, keeping the other variables constant.

70.

Theoretically, the cross elasticity of demand is positive for substitute products and will be greater the greater the substitutability between them. On the contrary, the cross elasticity of demand is negative for complementary products and close to zero when the products have no relation to each other, that is, when their demands are independent.

can be used that allow it to infer, through the behavior of prices and sales, which is the relevant product market affected by the merger transaction.

73.

Prices correlation is another statistical tool used to define the relevant product market. If two products or services belong to the same relevant market, their prices will tend to move in the same way over time, so if the prices of two products or services evolve in absolute or relative terms with a high degree of correlation, it could be inferred that they are part of the same relevant market. The absence of a strong correlation in price movements between two products and / or services for a significant period prior to the merger suggests that they are not part of the same relevant product market.

74. However, it is necessary to note that this 71. Elasticity allows more accurate conclusions about the substitutability between products or services; however, in most cases, its calculation requires statistical information on price series, quantities sold, seasonality of demand and other variables that affect the demand for the products produced and/or distributed not only by the merging parties, but also by competitors9.

72. The SIC will prefer, if it has the necessary information, to define the products or services that are part of a relevant market by calculating elasticities. However, if the information necessary to estimate these variables is not available, other technical tools 9 See merger of Protabaco - Coltabaco, Resolution No. 29937 of 2010 and merger of Pepsi - Postobón, Resolution No. 79716 of 2015.

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evidence is indicative, but not sufficient, to determine whether two products are part of the same relevant market. Therefore, when using the correlation test there is a risk of including within the same relevant market two products or services whose prices have evolved in a similar way due to the behavior of common factors (for example, inflation or the increase in the price of some input in common), but not because they belong to the same relevant market. Therefore, to avoid the risk of including products or services belonging to different markets within the same relevant market, the correlation tests will only be used to rule out that two products or services belong to the same market.

75. The application of the tools described will be used if the companies under study present

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all the necessary and sufficient information to carry it out. In most cases, it will be necessary to consider at least qualitative factors for defining the market, such as behavior analysis and the usual strategies adopted by consumers in the face of changes in the relative prices of the products or services studied and the exchange costs that can inhibit a large number of consumers to opt for other products. It is important that, in cases where there is no information on prices and / or quantities for the development of quantitative analyzes, the merging parties provide recent market studies that allow supporting the qualitative analysis and reaching reasonable conclusions about substitutability.

76. It should also be considered when analyzing prices if the observed price is already distorted by the exercise of market power. If this were the case, the conclusions about the behavior of the market in the face of an increase in prices could be incorrect. Other characteristics of the market

77. Taking into account that not all markets are the same, it is sometimes necessary to include in the definition of the relevant market the analysis of other factors such as: (i) indirect competition; (ii) two-sided or multi-sided markets (network economies); (iii) secondary or related products; (iv) self-sufficiency and; (v) asymmetric limitations, among others.

78. Indirect competition refers to those products that are not direct substitutes, as they are aimed at satisfying the same needs of the final consumer.

79. Regarding two-sided markets, it is necessary to include them in the definition of the relevant market, since in these there is a platform that acts as the provider and two different types of consumers that interact with each other, in the presence of network economies, being necessary the existence of the aforementioned platform, in such a way that it allows the users of two goods or services to meet10.

80. Secondary or related products are those that are acquired because of the purchase of a primary product11.

81. Finally, the asymmetric limitations imply that the relevant market is not the same in all the cases under study, the foregoing because, in some markets for goods and services where two goods belong to the same relevant market, the first one turns out to be a good substitute of the second, but not the other way around12.

82. The SIC will carefully define the relevant market in order to delimit in the most precise way the framework in which the analysis is carried out, as that allows determining whether, by virtue of the transaction, the merged entity can significantly influence the conditions of sale, especially when imposing prices and/or limiting the production, distribution or provision of the service.

10 Newspapers are an example of a two-sided market since, in addition to being an informative element for a group of consumers (readers), they are also an advertising and propaganda space for other types of consumers (advertisers). 11 For example, the automotive parts market is related to the car sales market, since a consumer goes to the automotive parts market to the extent that they must repair a vehicle. 12 For example, in telecommunications markets such as mobile and fixed telephony, the former turns out to be a good substitute for the latter, but not the other way around.

Relevant geographic market Horizontal mergers

83. The definition of the relevant geographic market consists of determining the minimum area necessary for companies, acting hypothetically as one, to find it profitable to increase their prices as long as the prices of all relevant products sold in other geographic areas remain constant. This is, the area in which market participants carry out their activities is defined, where the conditions of competition are sufficiently homogeneous and that can be distinguished from other areas because the conditions of competition in it are different or potentially differentiated.

84. First, the area where the activities of the participating companies overlap will be determined. Then the transportation costs and the location of the buyers are observed. Starting from the location of the production plants and/or distribution points, the geographic market will expand to those regions where the consumer has access to products or services under equivalent conditions, without incurring in higher costs that make the decision to buy to be another one.

85. For a correct definition of the limits of the geographic market, the participation of the companies in the analyzed areas and the past behavior of consumers will be considered. It is important to analyze the physical characteristics of the product13, exchange

13 They are those factors or attributes of a good or product that determine its uses. Additionally, they also allow it to be differentiated from other goods. Among the physical characteristics of the products we can find presentation, design, shape, perishability, brand, etc.

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costs14, transportation costs, relative prices of products, loading and storage patterns, dispatch frequency, competition from imports or abroad, among other aspects15.

86. Additionally, the SIC will analyze the competitive pressure exerted by the foreign market on tradable goods. For the foregoing, information can be obtained regarding the volume of imports of the product or products that make up the relevant market, analyzing whether there are barriers to their entry. Therefore, if necessary, it will be evaluated if there are delays in delivery, minimum volume, advance payments in cash, differences between the import price and internal price, the import logistics itself and the accessibility to the landing ports, among others. Vertical mergers

87. In relation to vertical mergers, the previous analysis will be carried out for each of the relevant markets where the merging parties participate and that are part of the same value chain.

88. The relevant geographic market will be defined based on the alternative sources of supply of raw materials or inputs required by competing companies of the merging parties located downstream, their ability to source from different suppliers located in different geographic areas, as well as evaluating the possibilities or limitations faced by the 14 Exchange costs refer to those costs that consumers incur when they change the products they currently consume, for products that are offered in other geographic areas. Within this concept, both the value of the products and the time that consumers spend to make the change are considered. 15 See merger of Éxito/Cafam, Resolution No. 38171 of 2010; Bodytech/ Nordic Fitness merger, Resolution No. 43425 of 2017 and Terpel/EDS Las Vegas merger, Resolution No. 30853 of 2015.

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alternative suppliers of the merging parties located in the production phase -upstream- to serve the client.

89. The delimitation analysis of the geographic market, therefore, makes it possible to establish how significant the cost of acquiring the relevant product from another geographic area is in a given area, in such a way that said product or service satisfies demand under the same conditions of competition. The criteria for defining the geographic market at each stage of the value chain are the same as those described for horizontal mergers. Competitors and market shares

90. Once the relevant market has been defined and the competitors participating in it have been identified, the market shares are calculated.

91.

To calculate the shares, the figures for the value of sales, sales volume or any other variable that is considered appropriate16, depending on the market, for at least the year immediately prior to when the merger will be carried out must be verified.

92. Likewise, the following factors will be taken into consideration:

93. Degree of differentiation and substitutability of products and services: in horizontal mergers, if the products are homogeneous and the suppliers use similar production systems, one of the variables used 16 Generally, the variables used are production, sales in units, sales value, installed capacity, number of surfaces, surface area, number of customers, etc.

to make this calculation would be the installed capacity. In products differentiated by quality or price, the calculation based on sales revenue would be more appropriate.

94. Dynamic analysis of market shares: variations in market shares will be analyzed over a significant period. The purpose of comparing the market share of the companies before and after the transaction is to measure the impact on the level of concentration that occurs with the merger.

95. Degree of market maturity: generally, the effects derived from a merger are greater in mature markets where the possibilities of new entrants are exhausted and where innovation is not a determining factor.

96. Relative size of the companies: it is important to consider the difference between the market shares of the merging parties and those of their immediate competitors. This factor is directly related to the importance of the companies involved in the merger, since it is not the same that the leading companies of a market merge to that of a leading company and a follower that does not have a representative market power or its participation is small in relation to that of the leaders (analysis of quotas in absolute and relative values).

97. Market shares are indicators of the market power and dominance of a company. However, they are indicators that may be biased because they only consider elements that are endogenous to the relevant market.

The SIC will use the market share of the merging parties to determine whether they may restrict free competition because of the merger. Thus, if because of the proposed transaction, the market structure does not change substantially, in principle a more detailed analysis that includes barriers to entry and other factors would not be necessary.

98. Even if the market is concentrated because of the merger, the transaction does not necessarily result in the creation or strengthening of a dominant position. To confirm the effects of the merger, the SIC will carry out an analysis of asymmetry and dominance indicators.

is the Herfindahl-Hirschman Index (IHH)17, obtained by adding the square of the market shares of each of the competing companies in the defined relevant market. In theory, this indicator reflects the degree of market integration.

101. Other concentration indices used are: Number of Equivalent Companies (NEE)18, the LEADER, CR2 and CR4 indices. The LEADER indicator represents the share of the leading company in the market, while the CR2 and CR4 indices represent the sum of the market shares of the first two and four companies in the market, respectively.

99. In vertical mergers, the analysis of the market shares for each of the relevant markets involved in the transaction will be carried out. In the upstream level of the chain value, the market shares of the input supplier companies will be determined, including imports, based on the level of sales, volume, and any other indicator depending on the nature of the transaction. In the downstream level of the chain value, market shares will be calculated based on the level of sales and/or volume to determine which companies require the aforementioned inputs and to whom the suppliers of inputs could supply, other than those involved in the merger.

100. On the other hand, to evaluate whether a merger could reinforce or create a dominant position, some indicators are used that describe both the number and relative market power of the agents. The commonly used index

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17 It is calculated from the sum of the squares of the market shares of the firms that compose it.

Where S_i is the percentage market share of firm i and N is the number of firms present in the market. The IHH takes values between 0 (corresponding to a market in perfect competition) and 10.000 (obtained when the market is a monopoly). According to the Department of Justice and the Federal Trade Commission, levels above 2.500 correspond to highly concentrated markets. For more detail see: Herfindahl, O. Concentration in the U.S. Steel Industry (Doctoral Dissertation). Columbia University, 1950; Hirschman, A. National Power and the Structure of Foreign Trade. Berkeley: University of California Press, Bureau of Business and Economic Research, 1945; and U.S. Department of Justice and The Federal Trade Commission. (2010). Horizontal Merger Guidelines..

18 The Number of Equivalent Companies consists of the number of companies of the same size that would generate a certain value of the IHH. If the number of existing companies in the analyzed market is higher, then the value of the IHH obtained can be explained by the existing inequality between the sizes of the companies in the industry. It is calculated as follows:

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102. Additionally, the SIC also uses

105. In accordance with the foregoing, any

the KWOKA asymmetry index and the STENBACKA20, dominance index, among others.

market share above that threshold could mean a dominant position. However, this index constitutes a first approximation since other elements of analysis are necessary to determine the dominant position of a company.

103. The KWOKA Asymmetry Index focuses on measuring the symmetry of the size of firms within a market. It emphasizes on the distribution pattern of the market shares. In this way, when there is a large difference between the size of the firms, the index tends to its maximum value (1). On the other hand, when the shares of firms converge, the value of the index tends to zero, regardless of the number of firms in the market.

104. For its part, the STENBACKA dominance index is a measure to identify when a company could have a dominant position in each market. Considering the market share of the leading company and the second largest company, the STENBACKA index yields a market share threshold after which the leading company would possibly hold a dominant position. 19 The KWOKA index focuses on the structure of companies’ market shares. In this way, when the inequality between the size of the companies increases, the dominance increases and, consequently, the index rises. This index is determined by the following formula:

Where are ordered from highest to lowest and correspond to the market shares of the companies. The index varies between 0 and 1, with 1 being the value corresponding to a monopoly market structure. For more detail see: Kwoka. John, “Large Firm Dominance and Price-Cost Margins in Manufacturing Industries”, Southern Economic Journal, Vol. 44, No. 1 (Jul., 1977), pp. 183-189 20 The formula for calculating the STENBACKA threshold is as follows:

Where refer to the market shares of the two most important companies, respectively. For its part, is a specific parameter to each industry and is related to barriers to entry, public policy instruments to encourage competition, economic regulation, the existence of intellectual property rights, among others. In this regard, see: Stenbacka et al, “Assesing Market Dominance”, Journal of Economic Behavior, Vol. 68, Issue 1, (October 2008), pp. 63-72.

POTENTIAL EFFECTS OF THE MERGER Horizontal mergers Unilateral effects with homogeneous products

106. The effects of a merger are linked to the type of transaction being analyzed. Thus, for horizontal mergers, the first effect that can occur is the decrease in the number of competitors in the relevant market and the disincentive to the entry of potential competitors. Likewise, because of the merger, the ability of one or more companies to determine market conditions independently of the other agents participating in it may be strengthened, a circumstance that may lead to an undue restriction of competition. These types of effects are called “unilateral” effects. They are manifested, among others, in the following elements: - The reduction of competition: this occurs when, because of a merger, a strong competitor is eliminated from the market. - A high level of concentration after the merger. - The notable increase in the distance

between the leader and her immediate competitor (relative dominance). - The ability to influence prices (which can be measured with the margins between prices and costs - Price cost margins). - Increased barriers to entry. - The substantial variation in concentration levels. - The increase in switching costs for consumers and buyers. - The reduction of probabilities of entry of new competitors. Unilateral effects with differentiated products

107. In the case of differentiated products, the effects generated mean that the companies can obtain a greater benefit derived from price discrimination, having, after the merger, joint control over the price of the products. In this way, it is possible to set a higher price for those consumers who are willing to pay more, according to their reserve price21. The risk that companies had before the merger of losing sales due to the increase in price is reduced as a result of the merger, by reducing the number of competitors where consumers who are not willing to pay said price can go. In the same vein, if there are fewer symmetric and asymmetric substitute products, the benefits for the merging parties will be greater.

108. When the products of the merging parties compete closely and are differentiated

- whether by brand, quality or any other variable - it is likely that the merger will lead to unilateral effects. To assess whether this type of effects would be generated as a result of the transaction, the SIC will analyze the change in the pricing incentives that the new merged entity would have under the scenario where it controls both differentiated goods

109. Unilateral effects may arise since an increase in the price of a good would be less expensive under the post-merger scenario, where both products belong to the same legal or natural person. Without the merger, it would be costly for one of the participating firms to increase the price of its product as an increase in the price of one of the goods would divert consumers towards the product(s) produced by the other merging party and by other competing firms. Thus, the cost for a company of increasing the price of its good in a pre-merger scenario is made up of two elements, namely: - Loss of sales to consumers who divert their demand to the product offered by the other merging party; - The loss of sales to consumers who divert their demand to products offered by competing companies.

110. After the merger, it is not that expensive for the merged entity to raise the price of any of its products since it will recover sales to consumers who divert their demand towards the good of the other merging party.

21 Maximum amount that the buyer is willing to pay for a good.

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111.

In evaluating the probability that a horizontal merger with differentiated products leads to harmful unilateral effects, the SIC will consider, among others, the following factors:

112. Substitutability: If the products of the merging parties are close substitutes, unilateral effects are more likely to arise because of the merger. The foregoing, taking into account that the merged entity will be able to recover a significant portion of the sales that are diverted to other goods, in response to the increase in the price of one of the products of the merging parties. The diversion ratio22 of the good of one of the parties towards the good of the other is a useful indicator to analyze the ability of the second product to limit the price of the first.

113. Variable income margins: In some cases, when the variable income margins of the merging parties’ products are high relative to the market, the appearance of unilateral effects as a result of the transaction is more likely, since the merged entity will recapture more sales and the price increase on one of the goods will be less expensive.

114. Price sensitivity of consumers: If consumers are not very sensitive to changes in the prices of the merging parties’ products, the merger is more likely to have unilateral effects. In this case, an increase in the price of any of the goods will not cause a significant reduction in sales, making said increase in price less expensive. The elasticity of demand for a good is a good indicator to determine the magnitude 22 The diversion ratio between good A and good B represents the portion of sales that would be diverted to good B (as opposed to goods C, D, E, etc.) as the consumer’s second best option, before a increase in the price of good A.

of the deviation of consumers in the face of an increase in its price.

115.

The potential response of the merging parties’ competitors to any attempt by them to raise the price will also be considered by the SIC in its evaluation. Coordinated effects

116.

In the same way, a horizontal merger can give rise to a coordination between the merged entity and its immediate competitors to restrict supply, increase the price level, etc. An important element to consider is the prior evidence of coordination in the corresponding market, before to the completion of the merger.

117.

The main characteristics of the market that facilitate coordination between companies are: - A reduced number of companies, since coordination is easier to the extent that the number of agents to coordinate decreases. - Oligopolistic market structures with high levels of uncertainty.

- Similar market shares and homogeneous competition conditions. - Homogeneous and non-durable products. - The ease of detecting companies that are not part of the coordination and the possibility of retaliation for them. - Having incentives to coordinate. - The existence of high barriers to entry. - Absence of small firms. - Inelasticity of demand. - Deconcentrated and decreasing market demand over time. - The main firms sell in the same link in the distribution chain. - Price competition is the most important. - High proportion of fixed costs versus variable costs.

118. However, conducting a comprehensive analysis that assesses each of the factors that create a favorable scenario for coordination between competitors is unnecessary and even in some cases may become unmanageable for the competition authority. Therefore, for the analysis of possible coordinated effects, the SIC will be able to identify and prioritize the most relevant criteria for the industry affected by the merger23.

Vertical Mergers

119. Vertical mergers are generally procompetitive by generating efficiency; however, they can, in some cases, lead to an undue restriction of competition. Unilateral effects of vertical mergers

120. Regarding the unilateral effects of vertical mergers, unlike horizontal ones, a competitor does not disappear from the market. However, these mergers could translate into the closing of the market due to an increase in the costs of competitors in another link in the chain. The above situation occurs if, for example, the merging party that produces raw materials increase their cost to favor its own company located in the lower link of the value chain by obstructing other competitors or restricting their access to the market. These effects will occur if the market share of the producing companies are sufficient to allow such restriction and there is no competition capable of providing those inputs in the upper link of the chain. Likewise, the vertical restriction can occur when the merging party located in the lower link of the chain has a significant market share that could generate a market closure for the competing producers of the intervening producer, located in the upper link of the value chain.

121. To measure the unilateral effects of vertical mergers, it is necessary to consider the importance that the input represents within the cost structure of the companies located in the lower link of the chain. The higher this level, the greater the impact of vertical merger. Likewise, the number of suppliers of these

23 See merger of Yara / Abocol, Resolution No. 54049 of 2014

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inputs and their origin will be analyzed. If there is a sufficient supply of inputs, the incentive for merging parties to restrict the supply or increase the prices of such inputs will be reduced.

122. It is also important to determine if there are substitute goods in the upper link of the value chain, towards which competing companies located in the lower link of the chain can shift consumption.

123. In summary, the factors that will be considered to measure whether there is a unilateral effect in vertical mergers are:

124. The ability of companies in the upper link of the value chain to increase costs, reduce quality and deteriorate commercial conditions in general for customers located below the value chain and who compete with the other merging party. The factors that facilitate this capacity will be significant market power, the absence or reduced presence of substitute products, either from the demand or the supply side.

125. The ability of non-merged companies that are located at the bottom of the value chain to obtain inputs from alternative sources. Coordinated effects of vertical mergers

126. Vertical mergers can incentivize the coordination of companies to increase prices, obstruct competition, reduce the quality of their products or services, create or increase barriers to entry, share markets, etc. Likewise, it can lead to coordination between agents

that, through vertical integration, can obtain sensitive information from competitors.

127. In some cases, knowledge and information transparency can facilitate coordination between companies through access to sensitive information about rivals, their marketing conditions, production strategies, product launches, prices, order frequency, etc.

BARRIERS TO ENTRY 128. The analysis of barriers to entry is carried out when market shares are sufficient to indicate that there might be market power and imply a probable degree of obstruction of competition. What is sought with this analysis is to determine if the entry of new competitors is feasible in terms of probability and opportunity.

129. Barriers that may prevent, hinder or delay the entry of competitors to the relevant market will be identified, analyzing structural

barriers -which are of general application for the merging parties and their competitors-24 and the artificial barriers that are those that companies can eventually generate or produce as a result of the transaction and that may lead to an undue restriction of competition.

130. Another classification for barriers to

134. Size of sunk costs: Sunk costs are those costs that agents must incur to enter the market but cannot recover when leaving it. Generally, when their value is high, they act as a means of discouraging the entry of new competitors. An example of sunk costs is business start-up costs25.

135. Entry Time / Opportunity: The

entry that is closely related to the previous one corresponds to exogenous and endogenous barriers. The firsts are specific to market conditions and cannot be controlled. They include, for example, the existence of firms with cost advantages, product differentiation, brand image, capital needs and initial investment, exchange costs, access to distribution channels, economies of scale, legal barriers, etc.

SIC will analyze the time it has taken for incumbents to become real competitors. This time can be increased if companies must learn to use specific assets and develop efficient distribution networks. Generally, a period of less than one year is considered acceptable to make an effective entry into the market.

131. On the other hand, endogenous

for companies wishing to enter the market it is only profitable to enter the business with a high production capacity and by selling many units.

barriers are those created by established companies through their market strategies and competitive behavior.

132. The barriers to entry that occur most frequently and, therefore, are the object of the SIC study analysis are the following:

133. Legal barriers: Legal barriers are those that are generated through regulations that create a cost disadvantage for companies that wish to enter the market, such as permits, licenses, among others.

24 Examples of structural barriers are: technological requirements, production capacity measured through the minimum scale of production and / or distribution required, investment in infrastructure, etc.

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136. Entry scale: It is considered a barrier if

137. Brand identity: Some products are identified and recognized by the consumer or user through the brand, to the point that they would not shift their consumption towards similar products from other brands, maintaining brand loyalty, which creates a barrier to entry for new competitors. Trademark analysis becomes important in asset purchase operations, due to its implications for trademark licenses and uses.

25 Endogenous sunk costs depend on the particular strategy chosen by the entrant and incumbents. An example of endogenous sunk costs is investing in advertising or creating a distribution network.

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138. Technological requirements

and capital investments: The SIC will

understand as capital investments the minimum investment so that a potential competitor can develop the same activity offering the same products as incumbents. If the technological requirements are too high, the entry of new competitors to the market can be prevented or delayed.

139. Transportation costs: The repercussions of high transportation costs will generally limit the size of the geographic market. Similarly, difficulties in accessing distribution in each area, such as regulatory obstacles, tariff quotas and customs duties, can also constitute obstacles that isolate a geographical area from the competitive pressure of companies located outside it.

140. Access to sources of supply: Access to sources of supply refers to the links that market participants, in addition to commercial ones, have with suppliers of inputs and raw materials, to determine if access to sources is restricted to some extent.

141. It is important to note that entry barriers do not appear in the same way or with the same intensity in all markets, sectors, or types of activity. Therefore, the analysis of barriers to entry should lead to determine whether the merging parties could act independently of their competitors and, in accordance with the provisions of Article 45 of Decree 2153 of 1992, may alter the price, supply and other competitive factors, without being disciplined by entrants26. 26 See merger of Protabaco / Coltabaco, Resolution No. 29937 of 2010.

POTENTIAL COMPETITION 142. Although some competition authorities in other jurisdictions consider supply substitutability when defining the relevant market, this Superintendence takes this concept into consideration if the merger requires an analysis of entry barriers and potential competition.

143. The analysis takes into account those companies that, although they are not competitors of the firms to be integrated, are capable, in the face of eventual changes in factors that affect demand (such as prices), to adjust their production to offer products or provide services involved in the merger.

144. This seeks to establish whether, in the face of an increase in the price of a product or service, the manufacturers of other products can reorient their production facilities -in the short term and at a reduced cost- towards the production of the good affected by the merger, neutralizing an eventual price increase. Based on the description of the productive processes of the companies, in the case of companies that provide services, the installed capacity in locations and adequate physical infrastructure for the provision of the service will be analyzed. However, the concept of productive capacity applies specifically to producing companies and suppliers27.

27 See merger of Exito / Cafam, Resolution No. 38171 of 2010 and merger of Exito / Super Inter, Resolution No. 54416 of 2014..

145. Another alternative source of supply comes from imports of products or services. The SIC will verify whether there is free importation of products or raw materials and inputs, under competitive conditions, compared to the supply of the merging parties and the agents in charge of the distribution of such products.

146. Some of the factors that the SIC will consider in deciding whether to include in the definition of the relevant market those firms that are able to compete with the participating companies after the merger are: - Information on the costs of adjusting the production process and variable marginal benefits that these companies would obtain.

BARGAINING BUYER POWER 147. The ability of companies to affect the economic variables of the market after the merger can be counteracted not only by their competitors. Consumers or clients can also use their bargaining power to limit that ability. This is the case, for example, of large supermarkets, who in some cases determine the conditions of the negotiation in the purchase with their suppliers or the vehicle assembly companies that negotiate materials with the suppliers.

MERGER EFFICIENCIES 148.

- Information on the production process, stages that are common for different products and the excess production capacity that would be generated. - Information on the distribution systems of the different suppliers and the speed with which they can increase the volume of sales of a product. - Evidence of frequent changes in production capacity in the face of price and profitability variations. - The evidence of similar profit margins for different products.

In accordance with the provisions of Article 11 of Law 1340 of 2009, the Superintendent of Industry and Commerce could object a merger when he finds that it tends to produce an undue restriction on free competition.

149. In accordance with article 3 of Law 1340 of 2009, a merger tends to restrict competition if it affects: - The free participation of companies in the market. - The welfare of consumers. - Economic efficiency.

150. If it is inferred from the previous analysis that there may be an undue restriction to free competition, the efficiencies generated by the transaction that can be transferred to consumers will be analyzed.

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151. In accordance with the provisions of article 12 of Law 1340 of 2009, the following exception is considered for the objection of a merger that leads to a possible undue restriction of competition: “Article 12. Efficiency Exception. Modifies article 51 of Decree 2153 of 1992, which will read as follows: The national competition authority may not object to a merger if the interested parties demonstrate within the respective process, with studies based on methodologies of a recognized technical value, that the beneficial effects of the merger for consumers exceed the possible negative impact on competition and that such effects cannot be achieved by other means. In this event, the commitment that the beneficial effects will be transferred to consumers must be accompanied. (…) Paragraph 1. Whenever the competition authority refrains from objecting to a merger based on the application of the efficiency

exception, the authorization will be considered conditional on the behavior of the interested parties, which must be consistent with the arguments, studies, evidence and commitments presented to request the application of the efficiency exception. The authority may demand guarantees that support the seriousness and fulfillment of the commitments acquired. Paragraph 2. In carrying out the function provided in numeral 21 of article 2 of Decree 2153 of 1992, the competition authority may issue instructions that specify the elements that will take into account for the analysis and evaluation of the studies presented by the interested parties”.

152. The types of efficiency can be divided into: (i) efficiencies on the supply side and; (ii) efficiencies on the demand side. Efficiencies on the supply side

153. Efficiencies on the supply side occur when, because of a merger, the merged entity can offer its product at a lower cost. The main examples of efficiencies on the supply side are: cost savings, avoidance of double marginalization (double benefit, for the producer and for the distributor and / or marketer), reduction of the lack of incentives for investment and product repositioning.

154. Firstly, cost savings correspond to the technical efficiencies of the companies (in administrative, financial, and accounting aspects).

155. Regarding double marginalization,

161. In the cases in which possible anti-

vertical mergers can lead to improve efficiency levels by integrating the various stages of production into one.

competitive effects are noticed and the efficiencies are quantitatively demonstrable and superior to said effects, the possibility of approving the merger with conditions is analyzed. Otherwise it must be objected.

156. Similarly, vertical mergers can incentivize investment. An example of the above is a distributor of a product who is not willing to invest in promoting the products because his investment can benefit other distributors.

157. Finally, the product repositioning processes carried out by the participating companies and their competitors mean that consumers have a greater variety of products. Demand-side efficiencies

158. On the other hand, efficiencies on the demand side arise when, as a result of the merger, the incentive for consumers to purchase the products offered by the merged entity grows, due to the achievement of greater productivity, efficiency, quality and service. These types of efficiencies include network effects, price effects, portfolio effect and “one-stop shopping”.

159. One benefit that vertical mergers can lead to is the reduction of transaction costs for the consumer, by only having to negotiate with a single company.

160. The important thing will be that the companies involved in the merger can demonstrate that it will achieve a cost reduction that will translate into a better price, better quality and/or variety for the consumer.

CONDUCT DURING THE STUDY OF THE PREEVALUATION REQUEST 162. When the closure of a merger depends on the authorization by the SIC, the merging parties may engage in certain concertation actions during the study of the pre-evaluation request that may be considered illegal by the competition authority and may be a cause of sanctions, insofar as they suppose that the intervening parties acted in the development of the merger without the respective authorization from the SIC.

163. Some of these actions may include the following: (i) coordinate marketing or sales strategies; (ii) coordinate prices; (iii) distribute clients, products or territories; (iv) issue guidelines or instructions by the acquirer to the acquiree; (v) apply joint business plans; (vi) refer clients to each other or refrain from searching; and (vii) share sensitive information other than that necessary for the merger negotiation.

MERGER REMEDIES 164. If the result of the analysis of a merger, after studying the counterweight of its possible

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anticompetitive effects against its efficiencies, is that it is allowed to be carried out but with remedies or commitments, it must be guaranteed that the conditions of competition that may be altered as a consequence of the merger are preserved and effective competition is maintained.

undue restriction of competition. However, it may authorize it subjecting it to compliance of remedies or commitments when, in its opinion, there are sufficient elements to consider that such remedies are suitable to ensure the effective preservation of competition. (…)”.

165. Remedies are commitments that the

168. The remedies or commitments can be

companies in an economic merger undertake to obtain the approval of said transaction by the SIC.

proposed directly by the merging parties. For this, numeral 4 of article 10 of Law 1340 of 2009 establishes that the merging parties can present their proposal of commitments, in a process of pre-evaluation of a merger transaction, within fifteen (15) days following the moment in which the SIC begins the second phase of the merger approval process, a phase that must be informed by the Entity, after the time established in paragraph 3 of the same article has expired.

166. These remedies usually come into force once the merger is approved. However, the SIC also has the power to require prior compliance with a remedy, so that the approval of the proposed transaction is subject to a suspensive commitment. Decision to impose remedies

167. In article 11 of Law 1340 of 2009 it was established that: “The Superintendent of Industry and Commerce shall object to the transaction when he finds that it tends to produce an

169. However, given the optional nature that the legislator himself established for the offer of remedies, the merging parties retain the possibility of presenting their proposal for commitments during any part of the merger approval process, including the appeal for reconsideration28.

170. On the other hand, the Superintendent of Industry and Commerce, based on the respective studies and the determination of possible anticompetitive effects in the relevant market, may establish the remedies or commitments that it deems appropriate to generate effective competition schemes29.

28 Numeral 4 Article 10 Law 1340 of 2009 29 Article 11 Law 1340 of 2009

171. The Superintendent of Industry and

174. The remedies may be structural or

Commerce will decide on the relevance of the commitments proposed by the merging parties to the purposes that they must fulfill; Consequently, its approval or denial will be discretionary and will thus be established in the administrative act signed by the Superintendent of Industry and Commerce that decides the request.

behavioral, depending on the case. They may also be structural and be accompanied by behavioral commitments to reinforce compliance with the former.

Content and considerations of the remedies

172. The considerations of the remedies proposal must contain at least: - Duration: the period during which the activities and commitments acquired will be carried out; this duration may be extendable or fixed. - Merging parties: the companies that are going to acquire the commitments must be fully identified and will respond to the SIC for their due compliance. This identification will depend on the type of transaction projected, meaning by this that if, for example, the transaction is the total disposal of a business line, the main responsible parties must be the new owners of the business line. Types of remedies

173. According to the type of merger that occurs, the effects on competition differ. Thus, the remedies imposed on each merger transaction must be designed to preserve the conditions of competition and maintain the efficiencies that the transaction generates.

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175. In the case of horizontal mergers, the main effect on competition is the increase in the market power of the merged entity as a consequence of the elimination of a current or potential competitor, the increased risk of coordination with competitors, or both. The increase in market power can occur because of combining assets destined for certain activities that under other circumstances could be used to compete. Therefore, it is common that, in most horizontal mergers, the remedies required to preserve competition include divestment of assets.

176. In the case of vertical mergers, the main effect on competition is related to the fact that the merged entity can influence the competitive processes of the value chain. In these cases, the remedies usually appropriate to preserve the conditions of competition are behavioral, which prohibit or impose certain behaviors that could reinforce the undue restriction of free competition derived from the merger or to prevent competition problems in the future.

177. Behavioral remedies must be designed to protect consumers from anti-competitive conduct that the merged entity may carry out. Notwithstanding the foregoing, depending on the type of transaction analyzed, it is also possible to consider structural remedies to preserve competition.

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178. The remedies must be drafted clearly and precisely and be accompanied by continuous monitoring by the SIC. For this purpose, the obligation is established for companies to make periodic reports where the advancement of structural commitments and the permanence of behavioral ones are reported. Regardless of these reports, the SIC reserves in each case, the power to make visits or carry out any type of test that it requires, to determine at any time compliance with the established remedies.

179. When the merger transactions are horizontal and vertical, the negative effects that occur on competition must be analyzed, and depending on the case, combinations of structural and behavioral remedies may occur. Main Structural remedies

180. Divestment of the assets necessary for their buyer to be an effective competitor: this remedy requires a clear identification of the assets that the competitor would need to compete effectively in a timely and durable manner.

181. Assets can be: tangible, such as machinery and production equipment; intangibles, such as trademarks and patents; or a combination of the two.

182. Additionally, the assets must be in good condition to guarantee the buyer that they can be used in the short, medium, and long term, and restore the existing competition conditions in the relevant market prior to the merger. The sale of the assets may be carried out jointly or individually considered, ensuring

that the buyer is an economic agent who is able to use them to compete adequately.

183. For the remedy to effectively preserve competition, the buyer of the assets must use them in the defined relevant market and must not use them to produce other goods.

184. If the divestment of the assets is not carried out, a fiduciary order could be carried out to manage such assets and make possible their sale to a competitor.

185. Divestment of a business unit: The business unit must be functioning and profitable for competitors to take an interest in it. When this type of remedy is considered, all assets related to the business unit shall be incorporated, including the transmission of the technical knowledge required to put the assets into transaction.

186. Divestment of rights to critical intangible assets30: this type of remedy is used when the merging parties have intellectual property rights that grant them certain types of advantages to produce or market a certain type of good or product. In these cases, the sale of said rights makes it possible to preserve the conditions of competition in the relevant markets.

187. Depending on the case being analyzed, it may be necessary for the buyer or licensee to acquire the rights to produce and sell only the relevant product, while in other cases it is necessary for the licensee to also obtain the right to produce and sell other products. 30 A critical asset is one that is necessary for the buyer to compete effectively in the defined relevant market.

188.

The foregoing for the buyer or licensee to have the possibilities of achieving economies of scale and scope that allow them to compete effectively in the defined market.

189. For this type of remedy, the following criteria must be considered: - Time: the period during which the acquired activities and commitments will be carried out; this duration may be extendable or fixed, depending on the proposed remedy. In cases such as the sale of an establishment or machinery, it is necessary to specify the prudent time to carry out the respective process. - Conditions: the commitments offered cannot be subject to any type of condition and must be specific activities that can be verified. - Identification: each of the elements involved in the structural remedy, whether they are machines or materials, must be duly identified within the proposals. - Verification: this information is complementary to the identification and seeks to have conclusive information on quality and / or price aspects that provide clear criteria on the suitability of the remedy. A suitable example would be a condition for the sale of machinery in which the parties attached to their condition an expert report that would guarantee the operation of the machines and their approximate price in the market.

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- Subsidiary remedies: optional commitments may be established subject to the condition that it is impossible to comply with the main one. For example, in cases where the commitment establishes a term for the disposal of assets, and within that period the execution of the promise has not been achieved, it is necessary to apply alternative commitments in which, as in the main ones, its main component must be a function of the purposes of the remedy. Once the optional commitments have been satisfied, the remedy will be considered fulfilled. Main Behavioral remedies

190. Orders to separate parts of the merged company “firewall”: these remedies seek to prevent the transmission of information between the firm that is in the upper link of the chain and that that is in the lower link. This restriction seeks to prevent anti-competitive behavior using this type of sensitive information..

191. Orders not to discriminate: this type of remedies seeks equal conditions in the treatment, access, and supply to all competing firms of the merging parties. The foregoing so that, because of the merger, the company that is in the upper link of the chain does not favor the company that is in the lower link and discriminates against its competitors.

192. Orders to license the use of intellectual property: this type of order seeks that the competitor has access to certain technologies or other assets that are necessary to compete effectively in the defined relevant market.

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193. Transparency orders: under this figure, the merged entity must make certain information available to the competition or regulatory authority that in other circumstances would not be requested, expanding the flow of information to the regulatory entity so that the merged company does not evade regulation.

194. Non-Retaliation Orders: these orders prohibit the merged entity from discriminating or retaliating against a company or entity that provides information to the SIC.

are considered pertinent to verify that the committed companies are fully complying with their commitments, as well as the other regulations for the protection of competition.

198. Some criteria that are considered are: - Publications - Periodic reports - Availability of information - Responsibilities within the organization

195. Prohibitions of certain practices in contracts: they are used especially in cases where the merged entity uses contracts to block its competitors from accessing an important input, or in order to delay or close the entry of new competitors to the market.

196. Despite all the above, the SIC considers that the figure of the remedies is flexible and, therefore, it is possible to structure, design and implement any type of commitment that has the objective of avoiding the possible harmful effects of the transaction studied. Monitoring Scheme

197. Within the proposal of remedies it is relevant to consider the need to verify compliance with the commitments by this Entity. Therefore, once the structural and/or behavioral constraints have been consolidated, the next step is to establish the respective verification mechanisms. This monitoring scheme does not limit the powers of the SIC to carry out the additional controls that

199. All the above, without prejudice to the fact that the Entity, in accordance with the conditions of each case, considers that it is necessary to include or analyze additional criteria. Tracking of remedies

200. Article 11 of Law 1340 of 2009 refers to the fact that if a merger is approved with remedies, the SIC will oversee supervising compliance with these. For this task, the Delegation for the Protection of Competition has the human capital in charge of reviewing compliance with the approved remedies.

201. Although the remedies have a main component in the approved monitoring scheme, interested third parties may file complaints, or report situations that show, directly or indirectly, the probable noncompliance of the defined commitments. Based on these complaints and on the follow-

up scheme, the SIC will proceed to validate the information necessary to determine whether a breach existed. Based on this review, the SIC officials in charge may use the powers conferred by Decree 4886 of 2011 to this Superintendence, within which the following may be included, without being limited to them: - Administrative visits. - Review of accounting information. - Information requirements to the merging parties. - Information requirements to third parties. - Collection of digital information from the merging parties. - Receipt of testimonies.

202.

All activities carried out for verification must have all the willingness and help from the merging parties, as well as the SIC to be carried out with total efficiency. To this extent, merging parties will make available to the Entity all the information that is required to carry out said monitoring.

203. If during the exercise of the activities above it is determined that there was a breach of the accepted commitments, and upon request for explanations, said breach may be declared and the respective sanction imposed|. The termination of the monitoring of commitments will take place on the date determined in the administrative act by which

a merger subject to remedies is approved unless it is decided to extend said term.

204. On the other hand, companies, in accordance with the specific circumstances that arise in the affected market and in the event of significant changes in it, will have the right to request the termination or modification of the remedies. To resort to this right, they must submit their request in writing in accordance with the provisions of numeral 5 of Title VII, Chapter Two of the Sole Circular of the Superintendency of Industry and Commerce, adding all the information they consider pertinent to demonstrate that market conditions have indeed changed sufficiently to revalue, modify or eliminate the current remedies. All the information and the reasons for the request, as well as the effect that they have in relation to the commitments, will be duly evaluated and the Entity will decide at its discretion on its origin. Contribuciones

205. Article 22 of Law 1340 of 2009 establishes, among other things, that the monitoring activities carried out by the SIC as a result of the authorization of a merger with remedies will be subject to the payment of an annual monitoring contribution. Therefore, once the merger subject to remedies is approved, the parties must be responsible for the corresponding payment. This payment will be annual, and its value will be determined based on the criteria established in Resolution No. 72896 of 2010.

Foto Portada: Pexels Íconos: Vectors Market

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