Argentinean Federal Supreme Court clarifies when “substantial influence” implies “control” giving rise to an “economic concentration” subject to authorization as per the Competition Law.

The configuration of “control” by means of the acquisition of “substantial or controlling influence” according to the Argentinean Federal Supreme Court:

Argentinean Federal Supreme Court rendered issued a ruling[1] that according to our point of view is extremely important since it provides certainty about the interpretation of all economic transactions in which no real “control” case arises as is the case provided by paragraphs a) and b) of Article 6 of Law 25,156 (“merger” and “transfer of goodwill”, respectively), which provide no interpretative complexity. [2]

The decision of the Supreme Court shed light upon one of the two cases covered by paragraphs c) and d) of Article 6 of Law 25,156 (“Competition Act “), which undoubtedly recognize more difficulty due to the fact that are cases that refer to the special features of each transaction.

It is worth transcribing literally both paragraphs, since the need for legislation on competition law is evidenced in order to appeal to broad precepts, essential to cover the different and innovative designs that economic transactions may acquire, to prevent that new ways may avoid the controls established by legislation in this matter: [3]

“c) The acquisition of property or any right to shares or equity or debt securities that give any right to be converted into shares or equity or having any influence on the decisions of the person who issued said shares where such acquisitions give the buyer control or substantial influence over an undertaking;

1. d) Any other agreement or transaction that transfers, de jure or de facto, to a person or an economic group, the assets of an undertaking or gives a determinative influence over ordinary or extraordinary business decisions.”

We outlined the phrases designed by the legislator in order to understand the universe of cases in the world of business that cannot be thoroughly defined. The common denominator is given by the “influence” which is qualified in two ways: “substantial“ or “intended“.

The case under analysis highlights on the assumption of “substantial influence[4]” over the following concepts:

1. Theuniverse of assumptions taken bythe concept “substantial influence” includes the two cases covered by paragraphs 1) and 2) of Section 33 of the Companies Act[5].
2. Definesthe first case as “… internal or de iure control, which occurs when a partner holds a stake, for any reason, that gives the necessary votes to constitute the social will in corporate or ordinary meetings…”[6]
3. And the secondas “… the so-called external or in fact control, which occurs when an individual exercises a dominant influence as a result of their shares, quotas or parts of interest held, or due to special existing relations …”[7]
4. But additional case identified, other than those found in section 33 ofthe Companies Act, under the concept of “substantial influence”, whenthe possibility to effectively influence in the strategyand competitive behaviorof a companyis inferred,in the absenceofthe control proceduresprovided for in section33 ofthe Companies Act.[8]
5. This “third supposition” may be based upon the protected legal right by the Competition Act, in order to ensuringfair competitionbetween economic operators, which would beessentialforsuchactors that behaveindependently, free from interference byits competitors, regarding the strategyand the competitivebehavior that may display, which in this casewould be affected byan economic transactionthat fails tobeframed inthe provisions of section33 ofthe Companies Act[9].
6. Such”interference”inthe strategy and in the competitive behaviorcouldbe both positive–when can be established– as well as negative –when blocking its definition- and not necessarilyexercised in order to be deemed verified[10].
7. The Supreme Court understoodthat the arguments ofthe appellant did not touchthegrounds of the decision, so the Supreme Court concluded that the acquisition of “substantialinfluence” over the transaction´s “target company” was verified in the case[11]. The elements considered by the a quo and accepted bythe Supreme Courtare:
   42. Althoughit wasa minority stake, itreached3% ofthe shares with voting rights,the remaining shareholders had less stake: one 28%, other8.4% and two having 10.6%, making itthe firstof thatminority stake as partofa shareholder agreementwhich provided thatdecisions were madeby a simple majority, a fact that allowed the appointment -for example- of 4 out of 10directors[12].
   43. Accordingto the behavior ofthe remaining shareholders, such stake couldallow its owner to positively determinethe corporate will of the company,incase that the remaining shareholders did not voteon the same and only one sense[13].
   44. As such participation of 42.3% gave to its holder the possibility to veto decisions relating with the competitive strategy of the company, in all cases in which a qualified majority is required, as would be the “approval and the amendment of Telco SpA´s budget or the decisions of the vote to be issued at the extraordinary meeting of Telecom Italia SpA” indirect controller of Telecom Argentina[14].
   45. Along withits shareholding, it was also taken under consideration the fact that TelefonicaA. was “… the sole shareholder of Telco SpA in the business of telecommunications, which is the activity of the company that Telco SpA was aimed at control” was taken into account. It also mentioned the contractual provisions aimed to control the entry of other shareholders that may operate in this market[15].
   46. Finally, it was taken into account the conduct ofthe parties that arranged different contractual conditions in order to guarantee the independent administration ofTelefonicaA.andTelecomItalia SpAso thatthe operation would notaffectcompetition, due to the understanding–on the one hand- that said conduct of the parties was considered as one´s act and that can only can only be explainedto the extentthatthe parties haveconsidereda potentialimpositionto competition and, on the other hand,that such”private” control of the absenceof imposition to competition could not replace the “State” control”.

[1] Decision dated March 10, “Pirelli y CSPA y otros s/ notificación art. 8 ley 25.156 incidente de apelación de la Resolución SCI n° 2/10 en concentración 741.”

[2]“a) the merger between companies;

1. b) the transfer of goodwill;”

[3] This was the case in the past, where the law of antitrust recognized an impression of criminal law itself, with a thorough description of the factual requirement of the established legal type, whose satisfaction was practically impossible due to the evolution that recognized the way to carry out business, circumstance allowed to avoid the controls set forth by the first legislators in this matter. The current wording of sections 1st and 2nd of Law 25,156 respond to the same logic.

[4] The High Court, taking into account the opinion of the Attorney General, stated: “In the case, the interpretation of the concept of the acquisition of substantial influence over a company is at stake under Article 6, paragraph c, of Act 25,156.” (opinion of the Attorney General, page 8).

[5] “Both cases provided for in the argentine companies act are covered by Article 6, paragraph c, of the Law 25,156 … “(Opinion of the General Attorney, page 10). Subsections of article 33 of the Companies Act provide as follows: “1) Holds stake, on any capacity, that may to grant the necessary votes to constitute the social will in corporate or ordinary meetings; 2) Exercises a dominant influence as a result of the shares, quotas or parts of interest owned, or by special links between companies.”

[6]Opinion of the General Attorney, page 9 in fine.

[7]Opinion of the General Attorney, page 9 in fine and 10.

[8]0020“…the latter extends the notion of control as a relevant element in order to determine the existence of an economic concentration within the field of antitrust by incorporating the figure of substantial influence. This situation is constituted when an individual acquires the possibility to interfere over the strategy and the competitive behavior of a company, through the acquisition of capital, although not having control under the terms set forth in Article 33, paragraphs 1st and 2nd, of Law 19,550.” (Opinion of the General Attorney, page 10).

[9] “You cannot forget that the purpose of the Antitrust Law is to ensure free competition among the different economic market operators. To that effect, it is important that the actors may behave as free competitors and this may be affected by economic concentrations so that imply that the controlled or participated company may lose autonomy to take their competitive decisions. This mission of the regimen of Law 25,156 explains the reasons why the concept of taking control in the area of antitrust exceeds the notion of corporate control of Article 33 of Law 19,550, to also include the supposition of substantial influence. In order to constitute substantial influence it is enough that the partner may influence to determine the competitive strategy of the company; Also, it is not necessary, that may influence in other decisions of the company.” (Opinion of the General Attorney, p. 10).

[10] “…this possibility of interference can be exercised in a positive way -through the possibility of imposing its own will at the moment of adopting decisions- or in a negative way-through the possibility to veto decisions of the other partners-. The reason for this is that the loss of autonomy of a competitor can take place in all the mentioned cases. In addition, for the purposes of determining the existence of substantial influence, it is not required that the partner has actually exercised its ability to influence the determination of competitive behavior; being reasonable likely to be exercised taking into account all the circumstances of the case (Notari, Mario, “La nozione di “controlo” nella disciplina antitrust”, Published by Giuffré, Milán, 1996, page 258 and following.)” (Opinion of the General Attorney, page 11).

[11] This is the “Telco Operation” carried out by Telefónica S.A. regarding Telco SpA.

[12] Opinion of the General Attorney, page 12, 1st paragraph.

[13] Opinion of the General Attorney, page 12, 1st paragraph.

[14] Opinion of the General, page 12, 2nd paragraph.

[15] “In the shareholders´ agreement, Telco SpA´s partners agreed to that there would not enter new members that were telecommunication operator … “defined as” … any physical or legal entity that has more than 10 percent of the shares of a publicly traded company and operate in that business, or at least entitled to appoint one board member. Furthermore, the shareholders’ agreement, Telefonica S.A. reserved the right to request the corporate brake – up in case Telecom Italy SpA held a strategic alliance with a telecommunications operator.“ Opinion of the General Attorney, page 13, 1st paragraph.