Strengthened M&A and antitrust legislation
Dennis Matamoros Batson and Paul Handal
Arias & Muñoz
Tegucigalpa
Before February 2006, Honduras was missing a Law which could be used to effectively enforce the economic principle set forth in Article 339 of its Constitutional Law, which prohibits the monopolisation of trade and industry and declares as illegal all those business practices that in any way obstruct trade and commerce. This constitutional disposition is the fundamental legal base upon which the recently enacted Honduran Competition Law is now founded.
On February 4 2006, the Honduran Congress addressed the abovementioned constitutional mandate and enacted Decree 357-2005. Before the decree, a few legal bodies regulated business conduct in the sense mostly found in our Commerce Code, but no governmental agency had been empowered with sufficient legal means to enforce any of these dispositions. Therefore, Honduran consumers and the economy at large remained unprotected against the abuses of large corporations with monopolistic business practices that negatively affected trade, free competition and consumer rights.
Efforts are now being made to break up existing obstructive practices and agreements and prevent the formation of new ones. Congress did consider the fact that, as a consequence of the absence of a Competition Law, companies had been conducting business regardless of any consideration of whether such operations obstructed trade or commerce in any way.
Therefore, the new Law granted a period of time for companies to consider such a possibility and voluntarily cease any obstructive conduct. This period of adaptation has now ended, and any obstructive business practices will be punished accordingly.
We might expect Honduras to eventually enjoy a healthier and more competitive economy. Naturally, this will be a continuing process: the market, as well as the entity responsible for enforcing the Law, are both new to the application of these terms, so we imagine that for the first years some mistakes, confusions and difficulties in the application will accompany the learning period.
Obstruction of trade: illegal agreements and conduct
The Competition Law considers as illegal and unenforceable any contract, combination, conspiracy or conduct that has the effect of obstructing trade.
With the goal of preventing and eliminating these types of obstruction from our economic community, the Competition Law has adopted two different standards.
(i) A flexible standard, also known as the rule of reason test, which requires, in the determination of whether a challenged practice restricts competition, the consideration of several factors such as if the defendant has a dominant position within the relevant market, the ability of the defendant's competitors to respond to or neutralise the challenged practice and the existence of an actual obstructive effect on trade. Among practices made unlawful under this standard are vertical price-fixing agreements, tying agreements, production limitation agreements and market allocation agreements between non-competitors.
(ii) Illegal per se (that is, without any flexibility). Those practices listed by the law of certain contracts, practices, combinations and conspiracies that are considered to be illegal by their very nature. These include horizontal price-fixing agreements, market allocations and boycotts.
Dominant position in market share
Honduran law does not prohibit the acquisition of a dominant position within a certain market, but it will intervene in those cases in which it is determined that the position was obtained unfairly or if there is abuse of such.
Antitrust control of M&A of stocks or assets, takeovers and other types of concentrations
In the past few years, the Honduran economy and markets have shown a significant rise in corporate M&A, especially within the financial sector. Before the enactment of the Competition Law, none of these transactions were controlled and were entirely regulated by contractual agreements among the parties, with certain limited authorisations imposed by special Laws (for example, authorisation for the sale of shares of banks, related more to aspects of the origin of funds and anti-money laundering dispositions than to market concentration).
The core objective of the antitrust control of concentrations contained in our law is to maintain free competition, with a special focus on consumers' rights and their ability to choose a provider of goods or services. Our law does not distinguish between horizontal, vertical or conglomerate mergers: all of them are equally likely to be examined and either approved or rejected.
Two types of merger control regimes
First, there is a mandatory regimen, where the parties are prevented from closing a deal until they have received merger clearance. In this case, a legal review of the concentration is made. This review will mainly focus on the market share of each party and the effects such concentration will have in respect to other competitors and on clients of the products and services, the possibility that such concentration will promote or permit anti-competitive practices, and the creation of entry barriers to new competitors, among others.
Second, there is a voluntary regimen. This applies to cases in which, according to the terms of the Competition Law, the parties are not prevented from closing the deal in advance of having applied for and received prior merger clearance. A prior notification of the intended transaction is required which can be subject to review.
To distinguish between cases of mandatory and voluntary review, the Law uses certain market thresholds. Even though many transactions have been executed, notified and approved since the enactment of the Competition Law, it was not until June 11 2008 that the regulatory agency, the Commission for the Defense and Promotion of Competition, through a resolution, established the thresholds that will accordingly determine the applicable process. According to Resolution 18-CDPC-2008, any concentration transaction will have to be legally revised in the event that the following market thresholds are exceeded: (i) if it involves assets valued over La10,000 ($1.72 million); (ii) if it implies a participation in the relevant market of over 20%; or (iii) if the companies involved have sales volumes equal to or in excess of La15,000 on a daily average.
In summary, new M&A rules apply in Honduras. As the country lacked regulations covering monopolies and antitrust principles in the past, we envision a period of several years during which the markets and their participants, as well as the Commission, will have to adapt and learn. The Commission is making efforts to take on additional staff with the appropriate expertise, but the issues of limited budget and human resources in Honduras will need to be overcome before these processes come to fruition. The Law is now in effect, but we are still in uncharted waters for the time being.