By: Rafael Urday.

Merger control is an essential element for any effective competition system, regardless of geography. Although recommended by the Organization for Economic Co-Operation and Development (OECD) on several occasions,[1]  a merger control regime eluded the Peruvian market up until 2021,[2] when – after several bills failed in Congress – Law N° 31112 was finally enacted in January 2021. This law and its regulation approved by Supreme Decree N° 039-2021-PCM comprise the merger control framework for Peru.[3] 

Alongside other merger control regimes in Latin America, such as the ones implemented in Brazil and Chile, the Peruvian government adopted a pre-merger notification system, which combines a turnover and assets threshold (the Thresholds). This system is intended to guarantee effective control from both the prevention and the resource perspectives.

In an attempt to protect competition and consumers from concentration operations that fall below the Thresholds but may create a dominant position, or have the potential to restrict competition in the market, the Peruvian legislature introduced ex-officio investigation powers for the National Institute for the Defense of Free Competition and the Protection of Intellectual Property (Instituto Nacional de Defensa de la Competencia y de la Protección de la Propiedad Intelectual or INDECOPI, the Peruvian competition authority).

The tool allows INDECOPI to scrutinize ex-officio concluded transactions up to one year after formal closing, even if the Thresholds have not been met, in the following scenarios:[4]

  • Horizontal concentration operations in concentrated markets
  • Horizontal concentration operations that involve the acquisition of (1) an economic agent with a small market share and growth potential or (2) an innovative agent that has recently entered the market
  • Horizontal concentration operations involving successive acquisition of competitors
  • Other concentration operations that may have similar characteristics

While this tool brings certain advantages to merger oversight in Peru, it also poses some problems.  Below, we examine these concerns and then propose an alternative tool for the supervision of situations described in item (ii) above, so-called nascent or killer acquisitions.

Under the current Peruvian merger control regime, INDECOPI, by employing its ex-officio powers, may investigate concentration operations that, due to their small financial stature, may fail to trigger the merger notification Thresholds but are of relevance for maintaining competition.

Further, if INDECOPI – as a result of the ex-officio investigation – determines that the concentration operation can create a dominant position or potentially restrict competition in any way, it may order the dissolution of the transaction and transfer of the acquired shares or assets.[5] This issue is particularly important in the current global marketplace, where, to deliberately avoid antitrust scrutiny, incumbents often undertake acquisition deals that fall slightly short of triggering the thresholds.[6]

Even though control over nascent or killer acquisitions is important,[7] one may wonder if alternative, less invasive tools might be available for a competition authority such as INDECOPI – tools that accomplish the same results while reinforcing certainty among market participants.

The power to conduct ex-officio investigations raises the following three main issues:

  • First, this tool may create uncertainty among the agents of the market. Under the current law, concentration operations may be investigated by INDECOPI up to one year after formal closing.
  • Second, economic agents, in order to obtain certainty on whether their merger operation is safe from further scrutiny, may opt to voluntarily notify the transaction to INDECOPI even if it does not reach the Thresholds. This voluntary notification will generate extra workload and resource requirements for INDECOPI, which in turn may affect the many functions INDECOPI already performs[8] in the Peruvian market.
  • Third, ex-officio investigations that do not need to reach the Thresholds may incentivize the government to push a political agenda on INDECOPI and force it to investigate those transactions that may not suit the government currently in office – for example, operations that involve the acquisition of a national champion [9]by a foreign company.

For these reasons, the Peruvian government may wish to consider incorporating ideas currently being discussed in more experienced competition regimes around the world. For instance, the concept of the Economic Goodwill Threshold, which consists of a new proportion-based test concerned with a target’s net tangible assets as a proportion of transaction value, could be a viable option. Under this new threshold, INDECOPI would be able to identify the gains the acquirer expects to obtain from its strengthened position and conduct a prior analysis of those transactions that may be considered troublesome.

By way of example, consider an acquisition where the purchase price for a firm is US$600 million, and the net tangible assets of the target are only worth US$6 million. In this case, the difference between acquisition price and net tangible assets of the target, or the Economic Goodwill of the transaction, would be US$594 million.

As explained above, this transaction may not trigger the revenue or assets threshold but, if properly implemented, may surpass the Economic Goodwill Threshold, allowing the competition authority the opportunity to review the effects of the transaction.

In addition to achieving the new threshold’s original intent to reflect the logic that drives killer acquisitions, it also achieves the goal of enabling competition authorities to subject potentially anticompetitive transactions to review, in turn protecting consumers and promoting innovation.[10]

Considering the Goodwill Threshold as an alternative to the ex-officio investigation may address some of the issues discussed above, while also addressing the threats that nascent and killer acquisitions pose. Similar tools may also be available which could be more suitable for a developing country like Peru.

[1] OECD (2004). Competition Law and Policy in Peru – A peer Review; OECD (2018). Peer reviews of Competition Law and Policy – Peru.

[2] Previously merger control legislation in Peru only applied to the electricity sector.

[3] The new merger control regime came into force on June 14, 2021.

[4] This is not an exhaustive list, but represents some scenarios listed by the regulations to Law N° 31112.

[5] Fortunately, as of July 2022, INDECOPI having issued nine merger control decisions, has not employed its ex-officio powers.

[6] Cunningham, Colleen and Ederer, Florian and Ma, Song, “Killer Acquisitions” (April 19,2020), Journal of Political Economy, Vol. 129, No.3, pp. 649-702, March 2021.

[7] OECD “Start-ups, Killer Acquisitions and Merger Control”; Mark A Lemley and Andrew McCreary “Exit Strategy” (2020).

[8] Indecopi is in charge of supervising economic agents in the following areas: (a) intellectual property, (b) bankruptcy, (c) bureaucratic barriers, (d) antitrust, (e) consumer protection, (f) unfair competition, among others.

[9] A national champion is a domestic privately owned corporation that operates in a strategic sector for the country and is usually protected by the government from foreign competition.

[10] Andrew McLean, “A Financial Capitalism Perspective on Start-up Acquisitions: Introducing the Economic Goodwill Threshold Test” (Center for Law, Economics and Society Research Paper Series: 2/2020).