Legal Alert: ERN on the participation of business groups

On September 27, 2009, the Tribunal de Defensa de la Libre Competencia (TDLC) initiated a Regulatory Remedy File (ERN) requested by the Consumers’ Association CONADECUS, with the purpose of evaluating the need to recommend the enactment of legal or regulatory provisions to promote competition or regulate the exercise of certain economic activities, with respect to the following aspects: (i) the imposition of restrictions on pyramidal corporate structures of business groups (ii) the imposition of fines on companies over a certain size; (iii) the imposition of restrictions on the cross-shareholding of business groups between financial and other markets(iii) the consideration of the participation of conglomerates at the time of allocating concessions or rights by the Stateand (iv) the establishment of a registration of business groups above a certain size.

CONADECUS’ request is based on a critical view of the economic and ownership structure of the business conglomerates present in Chile. If the proposed regulatory recommendation materializes, it will significantly limit the way in which individuals and companies can invest and participate in the country’s economic activity, modifying our economic public order.

What is CONADECUS asking for? This association requests the TDLC to propose to the President of the Republic the presentation to the National Congress of a draft “Law for the Reduction of Aggregate Economic Concentration” that limits the market power of significant business groups that have a pyramidal ownership structure or participation in “Important Financial Entities” and in “Companies of Relevant Size” in the economic activity of the real sector at the same time, with the purpose of regulating in a special way the exercise of the economic activities of such groups, so that they are rendered under competitive conditions.

In CONADECUS’ opinion, the regulatory proposal should contain and regulate the following aspects:

a. Reduction of pyramidal holding structures: “The law should establish that those significant business groups with pyramidal structures will not have more than two layers, so that within a given period the current structures should be reduced to only two“.

b. Separation of the financial companies of a “Significant Business Group” from those involved in real economic activity: “The law should prohibit that majority shareholders of a company operating in real economic activity, be at the same time owners of a major financial institution (a financial institution whose assets exceed the limits established by the law itself). In addition, a financial entity may not own, for example, more than 10% of a significant real entity, and the holder of at least 5% of a significant or relevant real entity may not control a significant financial entity.“.

c. Obligation to take into account the levels of “Aggregate Economic Concentration” and conglomerate dominance in specific industries of significant business groups when allocating concessions or rights by the State.

d. Establishment of a registry of “Significant Business Groups”, “Important Financial Entities” and “Companies of Relevant Size”, for the purpose of performing the competition analysis of the objectives set forth in the law to be enacted. In its request, CONADECUS clarifies that the terms Significant Business Groups, Important Financial Entities and Companies of Relevant Size “must be determined based on parameters contained in the proposed Law (sic)“.

In CONADECUS’ opinion, this scenario would have repercussions on the levels of competition and efficiency, generating – among other effects – the difficulty of entry or expansion of competitors due to the existence or imposition of artificial barriers and a decrease in innovation. These reasons would justify the need to regulate the economic activities of “significant business groups” in order to guarantee a free and healthy economic ecosystem in our country.

What is an ERN? A Regulatory Recommendation File is a procedure followed before the TDLC to determine whether there is a need to recommend to the Executive Branch, through the relevant Minister of State, the enactment of a proposal to amend, repeal or enact legal or regulatory provisions necessary to promote competition or regulate the exercise of certain economic activities on competitive terms.

• An RNA is a public proceeding, in which anyone with a legitimate interest can provide background information.

• The regulatory recommendations issued are not binding, but enjoy legitimacy given the technical nature of the TDLC. In any case, the minister receiving the proposal must always express his or her opinion on it, and his or her response will be published on the institutional website of the TDLC, the National Economic Prosecutor’s Office and the ministry concerned.

• This power of the TDLC is contained in Article 18 N°4 of Decree Law No. 211, and the procedure is regulated by Article 31 of the same legal body.

How to participate in the ERN? Anyone with a legitimate interest may participate in this procedure and provide background information within 30 working days from the publication in the Official Gazette of the extract of the resolution initiating this procedure -such publication is still pending as of the date of this legal alert-.

Those who provided background information within this period may participate in the public hearing to be held before the TDLC determines whether or not to issue the recommendation proposed by CONADECUS and its terms. In order to do so, they must be sponsored by an attorney licensed to practice law.

For more information, please contact our partners Claudio Lizana clizana@estudiolizana.cl, Daniela León dleon@estudiolizana.cl and/or Tomás Appelgren tappelgren@estudiolizana.cl.

Author: Thomas Stöcklin