Supreme Court of Justice requires new ruling on late filing fines in the Telco merger

On 10 March 2015, the Supreme Court of Justice revoked a Court of Appeals’ ruling that modified the fines imposed by the Secretary of Domestic Trade (SDT)  in the Telco-Pirelli transaction in 2010 (the “Telco Merger”), and ordered the Court of Appeals to review the amounts of the fines. On 7 January 2010 the SDT imposed economic sanctions totaling AR$ 235,977,000 (approximately US$26,868,760) due to the lack of notification of the Telco transaction, allocated between Telco’s shareholders as follows: (i) Telefónica S.A. AR$ 104,692,500 (approx. US$11,920,455); (ii) Assicurazioni Generali S.p.A AR$43,414,500 (approx. US$4,943,286); (iii) Pirelli & C. S.p.A. AR$35,520,000 (approx. US$4,044,332); (iv) Intensa San Paolo S.p.A. AR$17,649,000 (approx. US$2,009,560); (v) Mediobanca S.p.A. AR$17,437,000 (approx.US$1,985,404); and (vi) Grupo Sintonia AR$17,264,000 (approx. US$1,965,723). 

The fines were imposed based on the CNDC’s interpretation of the substantial influence concept, which was upheld both by the Court of Appeals and the Supreme Court of Justice, which broadens the cases that need mandatory notification in Argentina and demands a thorough analysis of transactions involving minority stake acquisitions, which shall include all of the legal and factual considerations surrounding the acquisition.

The Telco S.p.A. (“Telco”) transaction took place in 2007 when Telefónica S.A., Mediobanca S.p.A., Intesa San Paolo S.p.A., Assicurazioni Generali S.p.A., and Sintonia S.A. teamed up to form Telco, an Italian vehicle to administer the shareholdings these companies held in Telecom Italia S.p.A., which jointly amounted to almost 24% of the Italian telecommunications company. As part of the Telco transaction, Pirelli & C. S.p.A. and some affiliates of the Sintonia Group sold their indirect 17.9% shareholding in Telecom Italia S.p.A. to Telco.

Telco’s share capital was, at that time, distributed among its shareholders as follows: Telefónica S.A. (42.3%), Mediobanca S.p.A. (10.6%), Intesa San Paolo S.p.A. (10.6%), Assicurazioni Generali S.p.A. (28%), and Sintonia S.A. (8.4%).

The Telco merger was approved by the European Commission and by Brazil’s CADE, the latter subject to certain undertakings.

In Argentina, the Telco merger was not notified, as the parties understood that there was no acquisition of control, and thus no obligation to notify the merger. However, the National Commission for Defense of Competition (CNDC) found out of the Telco merger and began a preliminary diligence to analyze whether the transaction should have been reported. In the end, and after several injunctions that were aimed at preventing Telco to exercise its political rights in Telecom Italia and its Argentine subsidiaries, the CNDC understood that the Telco transaction entailed an acquisition of substantial influence of Telefónica S.A. over Telco, which in turn controlled Telecom Italia S.p.A., and that the involved companies should have notified the merger to the CNDC. The CNDC considered that although the Telco transaction did not entail an acquisition of control, due to certain special both de iure and de facto circumstances, it amounted to an acquisition of substantial influence by Telefónica S.A. over the competitive strategy of Telco: (i) Telefónica S.A.’s 42.3% shareholding was close of granting simple majority, which was requested to adopt decisions both at shareholders and board of directors’ level in Telco, together with the fact that the remaining of the share capital was scattered between four other shareholders; (ii) the fact that Telefónica S.A. was Telco’s sole shareholder active in the telecommunications business and that Telco’s Shareholders Agreement prohibited the entrance of another telecommunications company in Telco; (iii) that Telecom Italia S.p.A. and Telefónica S.A. are the two main telecommunications operators in Argentina, the former owning Telecom Argentina and the latter owning Telefónica de Argentina; and (iv) that the contractual ring fences adopted by Telco’s shareholders not to exchange confidential information were irrelevant in the determination of whether the parties had the obligation to inform the merger to the Argentine antitrust authority.

The fined companies appealed the SDT’s decision to the Court of Appeals in Criminal and Economic matters and on 1 February 2010 this court revoked the SDT’s decision. The Court of Appeals agreed with the SDT that there was indeed an acquisition of substantial influence of Telefonica S.A. over Telco, nonetheless, it considered that the fine imposed by the SDT to Telefonica S.A. was excessive and reduced it to ARS 50,000,000 (approximately US$5,692,167). In addition, the Court of Appeals considered that no penalty was applicable to the remainder of Telco’s shareholders since they were foreign companies not active in the telecommunications business, which incurred in an excusable error as to the applicable regulations in Argentina. Both Telefónica S.A. and the antitrust authority appealed the Court of Appeals’ ruling to the Supreme Court of Justice.

The Supreme Court ruling sets forth a relevant precedent regarding how to interpret the acquisition of minority stakes, especially when referred to a competitor since it confirmed the interpretation made by the CNDC on the matter.

For further information on this topic please contact Julián Peña