China is Peru's main trading partner, the largest destination of exports and the main source of imports for Peru. Peru is China's second largest investment destination in South America. The two countries have established a comprehensive strategic partnership and signed a free trade agreement. In the next five to 10 years, Peru will become another destination for Chinese enterprises going global. More Chinese companies will enter Peru and expand into the broader South American market through Peru. AllBright Law is actively exploring the legal service market in South America, providing reliable host country legal service resources and doing legal research on various host countries for Chinese enterprises going to South America, so as to provide legal protection for serving China's high-level opening-up and the "the Belt and Road" strategy. To this end, AllBright Law, together with Rodrigo, El í as &Medrano Law firms in Peru, launched this Series of Articles on Peru Business Environment, including Peru's going global, Peru's corporate structures, Peru's promotion of investment and legal stability, operational legal environment, business winding up and restructuring a business.
I. Antitrust and Competition
Anti-competitive conduct is prohibited and sanctioned by the Law for the Repression of Anti- competitive Conduct (LRCA) and the Criminal Code (CP).
Administrative penalties are determined and executed by INDECOPI for each case that is presented before it. The LRCA comes into effect and, if applicable, sanctions individuals and entities that participate in the investigated market. However, in the case of infractions classified as absolute prohibitions, it may also sanction those individuals or entities that, without participating in said market, act as planners, intermediaries or facilitators of an anti-competitive conduct.
Three main types of conduct are sanctioned by the LRCA:
1. abuse of dominant position,
2. horizontal collusive practices, and
3. vertical collusive practices.
Criminal sanctions are determined and executed by the Judiciary, without the previous opinion of INDECOPI. Likewise, it is not necessary for INDECOPI to declare or sanction anticompetitive conduct to initiate criminal proceedings. Unlike the LRCA, the CP does not delimit the market agents or entities. It may be considered an author of the crimes of Abuse of Economic Power.
The CP penalizes the following 2 types of conduct, already covered by the LRCA:
1. abuse of market dominance and
2. participation in practices and agreements restrictive in the production, commercial or service activities in order to prevent, restrict or distort free competition (e.g., cartels or collusive practices).
II. Abuse of Dominant Position
According to the LRCA Law, an economic agent enjoys a dominant position in a relevant market when it has the possibility of substantially restraining, affecting, or distorting the supply or demand conditions in that market, without its competitors, suppliers, or customers being able to counteract it.
Holding a dominant position, with or without affecting real or potential competitors, does not constitute an illegal conduct. Neither monopolies nor dominant positions are prohibited per se, what is considered to be anti-competitive conduct is the abuse of that position. The CP agrees to sanction only the abuse of dominant position and not its holding.
The LRCA Law provides that abuse of a dominant position is verified when an economic agent that holds a dominant position in the relevant market uses this position to unduly restrain competition, obtaining benefits and harming other competitors, in a way which would not have been possible had it not held said position.
Such conducts are sanctioned even when the dominant position derives from a legal provision or from an administrative act, contract or regulation. It is important to note that all conducts of abuse of dominance constitute relative prohibitions.
It is worth mentioning that, unlike the LRCA, the CP does not contain a definition of abuse of dominance.
III. Horizontal Collusive Practices
Horizontal collusive practices imply the joint action of several competitors as one. The reason for this is that companies sometimes find that cooperating with other competitors is more beneficial than competing with them. This undue cooperation occurs when companies coordinate to reduce the volume of their production, raise their prices, and increase the benefits to each company.
According to the LRCA Law, such practices may consist of agreements, decisions, recommendations, or concerted practices among competitors with the aim or effect of restraining, preventing, or distorting competition. The LRCA is not limited to sanction those legally enforceable agreements, but also prohibits cooperative activities, decisions or recommendations made through business partnerships, and even understandings between parties.
Collusive practices are regulated by absolute prohibitions or regular prohibitions. Absolute prohibitions relate to practices that are illegal per se, while relative prohibitions relate to practices that require examination to verify whether they have anticompetitive effects. The LRCA considers as absolute prohibitions those concerted practices between parties (inter brand), which are not complementary or ancillary to other lawful agreements and whose purpose is to set wrecks, commercial conditions, limit production or sale, distribute customers, suppliers or markets, or establish positions or abstentions in bids (bid-rigging).
IV. Vertical Collusive Practices
According to the LRCA, these are collusive practices among economic agents operating at different levels of the production, distribution, and marketing whose purpose or effect is to restrict, prevent, or distort free competition. These types of practices require at least one of the parties to have a dominant position in the relevant market prior to engaging in the collusive arrangement.
Illegal vertical practices may consist of alleged abuse of a dominant position and horizontal collusive practices. All vertical collusive practices constitute relative prohibitions. In all such cases, INDECOPI must demonstrate that the practice has or may have a negative impact on competition.
For its part, the CP does not distinguish between horizontal and vertical collusive practices, and therefore, by virtue of the general classification, penalizes participation in practices and agreements restrictive in the productive, mercantile or service activity with the purpose of preventing, restrict or distort free competition.
V. Proving Collusive Practices
Given that collusive practices are difficult to prove, the competition agency may resort to indications and presumptions in order to verify whether similar behavior exists among competitors, and that the similarity is not naturally explained by the competitive operation of the market, such as simultaneous price fluctuations, similar quality of the product offered, and comparable indications.
In this sense, the competition agency must make a careful and restrictive analysis of the alleged uncompetitive practice. For example, it must make sure that the similarity in behavior is not the result of a mere suspicion, but that it has been absolutely proved and that there is no rational alternative explanation for the concerted practice which is capable of justifying such identical behavior.
This analysis carried out by INDECOPI will not be considered as a necessary procedural requirement for criminal proceedings.
VI. Sanctions and Corrective Measures
The anti-competitive practices sanctioned by the LRCA are of an administrative nature, therefore, such breaches result in the imposition of fines by INDECOPI. Depending on the seriousness of the infringement, fines may be up to 12% of the gross sales or revenues collected by the offending companies.
In addition, INDECOPI is empowered to order corrective measures aimed to restore the competitive process. Corrective measures are additional to the sanctions that may be imposed for infringing the provisions contained in the LRCA.
Likewise, INDECOPI often punishes individuals who participated in anti-competitive conduct on behalf of sanctioned companies.
As of August 2020, anti-competitive practices are covered by the CP as offences of a criminal nature, therefore, such offences result in sentences of imprisonment by the Judiciary. Depending on the seriousness of the offence, custodial sentences of not less than 2 years, nor more than 6 years may be imposed. In addition, the penalty of disqualification for the perpetrator of the crime, as well as fines ranging from 180 to 365 days, may also be applied.
VII. The Leniency Program (Leniency)
According to the LRCA, and provided that certain requirements are met, any of the persons, natural or legal, involved in a horizontal collusive agreement may request INDECOPI to be totally or partially exempted from the fine in exchange for providing evidence to help identify and establish the existence of the conduct and to punish parties.
The leniency program does not eliminate or limit any civil liability that the applicant may have, as regards the damage that the anti-competitive conduct may have caused.
VIII. Control of acts of corporate control structure
In Peru, since 2021, the regime of prior control of corporate control structure operations is in force. The legal basis that regulates this regime is formed by Law 31112, “Law that establishes the prior control of corporate control structure operations”; its Regulation, approved by Supreme Decree 039-2021-PCM; and, the “Guidelines for the Calculation of Notification Thresholds”, approved by Resolution 022-2021/ CLC-INDECOPI.
This regime, which is applicable to all economic activities (and not only to the electricity market as it was before), obliges economic agents to request prior approval from the National Institute for the Defense of Competition and Protection of Intellectual Property (INDECOPI) for corporate control structure operations that comply with the requirements set forth in the regime.
The main aspects of the corporate control structure regime are as follows:
1. Corporate control structure operations: the following are corporate control structure operations, and therefore could be subject to prior control by INDECOPI:
a. A merger of two or more economic agents, which were independent before the operation, whatever the form of corporate organization of the merging entities or of the entity resulting from the merger.
b. The acquisition by one or more economic agents, directly or indirectly, of rights that allow them, individually or jointly, to exercise control over all or part of one or more economic agents.
c. The formation by two or more independent economic agents of a joint venture or any other analogous contractual modality that implies the acquisition of joint control over one or more economic agents, in such a way that said economic agent performs the functions of an autonomous economic entity.
d. The acquisition by an economic agent of direct or indirect control, by any means, of operating productive assets of one or more other economic agents.
It should be noted that not only the four (4) types of transactions described in the preceding paragraph are the only ones subject to the prior authorization procedure. As long as there is a change of control, and the requirements are met, an operation could be subject to the regime.
For the purposes of analyzing a corporate control structure operation, INDECOPI also considers as a single business concentration operation the set of acts or operations carried out between the same economic agents within a period of two (2) years, and the concentration operation must be notified prior to the execution of the last transaction or act that allows the thresholds to be exceeded.
2. Corporate control structure acts subject to the authorization procedure: In order to determine whether or not a transaction must go through the merger control regime, three (3) conditions must be verified simultaneously:
(i) That the transaction be executed or have effects in Peru.
(ii) That the transaction involves a transfer of control. According to the Law, control “Is the possibility of exercising a decisive and continuous influence over an economic agent through
- rights of ownership or use of all or part of the assets of an enterprise, or
- rights or contracts that allow decisive and continuous influence over the composition, deliberations or decisions of the bodies of an enterprise, directly or indirectly determining the competitive strategy”.
(iii) That both parties jointly exceed the two (2) thresholds described in the following numeral:
3. Thresholds: The economic corporate control structures are subject to the procedure of prior control when the parties comply, concurrently, with the following thresholds:
(i) The total sum of the value of sales or annual gross income or value of assets in the country of the companies involved in the corporate control structure operation has reached during the fiscal year prior to that in which the operation is notified, a value equal to or greater than 118,000 Tax Units (“UIT” and the “Joint Threshold”).
(ii) The value of the annual sales or gross income or value of assets in the country of at least two of the companies involved in the corporate control structure operation have reached, during the fiscal year prior to the one in which the operation is notified, a value equal to or higher than 18,000 UIT each (the “Individual Threshold”).
The Guidelines state that the UIT to be used must be “the UIT in force as of the last day of the fiscal year prior to the date of notification of the transaction, that is, as of December 31 of the previous year”. Accordingly, the amount of the thresholds applicable to all operations carried out in the year 2023 is as follows:
4. Operations that do not comply with the requirements: In the event that a corporate control structure operation is not subject to the merger control regime, the parties must submit a sworn statement in this regard. Likewise, INDECOPI may initiate an ex officio prior control procedure when there is prima facie evidence that it may generate a dominant position or affect effective competition in the relevant market, even if the aforementioned thresholds are not exceeded. This power may be exercised by INDECOPI up to one (1) year after the formal closing of the transaction.
5. Term and duration of proceedings: The authorization procedure by INDECOPI is one of two phases, depending on the transaction to be analyzed and the possible effects that it may have on the relevant market.
The first phase culminates with the authorization of INDECOPI in cases that do not involve competition concerns. This phase lasts a maximum of fifty-five (55) working days and concludes with the approval of the transaction by INDECOPI. In case the authority does not issue a decision within the term, the transaction shall be deemed to be approved by the application of the positive administrative silence. Only when a corporate control structure operation has competition concerns, or involves companies with a significant participation in the relevant market, INDECOPI initiates the second phase of the analysis, which lasts a maximum of ninety (90) working days (extendable for an additional thirty (30) working days, with prior justification).
6. Termination of proceedings: Once the corporate control structure operation has been analyzed, the Law states that INDECOPI may:
(i) authorize the transaction;
(ii) authorize the transaction with conditions aimed at avoiding or mitigating the possible effects that could arise from the corporate concentration transaction; or
(iii) not authorize the transaction. INDECOPI’s decisions may be appealed.
7. Fines and non-compliance: Failure to comply with the regime leads to fines and corrective measures. The amount of these fines could be up to a maximum amount equivalent to 12% of the gross sales or income received by the infringer, or its economic group, related to all its economic activities, corresponding to the fiscal year immediately prior to the issuance of INDECOPI’s resolution.
INDECOPI may impose corrective measures aimed at undoing the economic corporate control structure operation when possible. Notwithstanding the foregoing, the Law indicates that a corporate control structure operation that must be submitted to the prior control procedure has no legal effect whatsoever as long as it does not have the prior authorization of INDECOPI.
At this point, it must be noted that formally closing a transaction before obtaining INDECOPI’s authorization is not the only case of infringement to the corporate control structure operation. Thus, actions such as sharing sensitive information between the parties, integrating operations or influencing in any way the company’s competitive strategy (exercising some kind of control, even de facto) before obtaining INDECOPI’s authorization may be considered as a punishable infringement.
Source: AllBright Law Offices
Contributor：Peru Rodrigo, Elías & Medrano Law Office
Chinese Translation: WANG Liang, E-mail: wangliang@allbrightlaw.com
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