Brazil's Administrative Council of Economic Defense –CADE approved on 1 October 2014 changes in its internal regulations. The aim was to provide better guidance on Brazil's merger control review. The outcome is the result of three Public Consultations issued last February. The changes came into effect on 7 October.
The main changes were made in Resolution No. 2/2012, which regulates the acquisition of corporate participations and defines transactions eligible to the fast-track procedure, as per the following:
1. New criteria for the definition of "economic group" when investment funds are concerned
According to the previous wording of Resolution No. 2/2012, there was a single concept for economic group to be used for purposes of calculating turnover thresholds and for submitting information in the CADE filing form. As per the new wording of Resolution No. 2/2012, from now on there will be two different concepts: (i) one concept of economic group for purposes of calculating turnover thresholds and (ii) another concept for purposes of submitting information in the antitrust filing form.
1.1 Turnover Calculation. The following entities will be treated as being part of the same economic group for purposes of the turnover calculation when an investment fund is the acquiring/selling entity:
- The turnover of all companies of the economic group of each investor/shareholder which holds directly or indirectly at least 50% of the quotas of such investment fund (which takes part in the transaction) via individual participation or by means of any type of shareholders' agreement; plus
- the turnover generated by companies controlled by such an investment fund (which takes part in the transaction) if such investment fund holds directly or indirectly a participation of at least 20% of the corporate or voting capital.
1.2 CADE Form. For purposes of submitting information in the CADE filing form that allows the antitrust assessment of merger filings (merit analysis), the following entities will be treated as being part of one single economic group:
- investment funds involved in the transaction;
- investment funds under the same management as the funds involved in the transaction;
- the fund's manager;
- economic groups of the investors holding, directly or indirectly, over 20% of the quotas of funds involved in the transaction;
- companies controlled by the funds involved in the transaction and the companies in which such funds hold, directly or indirectly, participation of at least 20%; and
- companies controlled by the investment funds under the same management of the funds involved in the transaction and the companies in which these funds under the same management hold, directly or indirectly, participations of at least 20%.
In any case, information on other funds under common management and their portfolio companies must only be provided in the filing form when their activities horizontally overlap or when they are vertically integrated with the activities of the target.
2. Exclusion and/or alteration of some of the alternatives of mandatory notification
Pursuant to the previous wording of Resolution No. 2/2012, the following transactions were subject to mandatory notification: (i) acquisitions of shares that provide the acquirer with the status of a major individual investor; and (ii) consolidation of corporate control (when an additional stake is acquired by an already controlling entity and the acquired interest is equal or higher than 20% of the seller's capital).
The new wording of Resolution No. 2/2012 excludes the alternative provided for in item "i" above. This means that a filing is no longer required for acquisitions of shares that provide the acquirer with the status of a major individual investor.
Moreover, CADE has changed the alternative dealing with consolidation of corporate control provided for in item "ii" to exclude transactions that result in acquisitions of shares by the unitary controlling shareholder.
Moreover, the new wording expressly clarifies that both acquisitions of unitary control and shared control have to be notified for approval by CADE.
3. Mandatory filing for acquisition of bonds convertible into stock
CADE included a new rule in Resolution No. 2/2012 setting forth that the acquisition of convertible bonds has to be notified at the time when such convertible bonds are granted provided that:
- such bonds can in the future be converted into stock;
- result in the transfer of corporate control or may result (upon conversion) in the transfer of (i) 20% or more of the corporate capital or voting capital, if the parties are not competitors nor operate in vertical related markets, or (ii) 5% or more in case the parties are competitors or active in vertical related markets. A filing is in such case required upon subscription of the bond, not upon its conversion into shares.
Moreover, the acquisition of bonds that grant the subscriber (i) the right to appoint officers or directors, or (ii) affirmative voting or vetoing rights over competitively sensitive matters must mandatorily be filed with CADE for approval, unless the bondholder already enjoys such voting or veto rights under Brazilian law.
The new rule further clarifies that when it comes to a public offering of convertible bonds, the corresponding acquisition would not be subject to CADE's prior approval. However, the acquirer would be prohibited to enforce any political and voting rights linked to the acquired securities until approval by CADE.
Finally, the new rule expressly sets forth that the actual conversion of the bonds into stock is not subject to a new notification.
4. Amendments to the definition of transactions eligible to fast-track procedure
Transactions which raise no substantive concerns are eligible for the fast track procedure. A short version of the notification form is submitted to the authorities in fast track cases, which require less information than the ordinary notification form. The decision on whether a case should be reviewed on fast track is at the discretion of CADE's General Superintendence ("GS").
According with the new wording of Resolution No. 2/2012, the following transactions will be eligible to fast track proceedings:
- Creation of a concentrative or cooperative joint ventures, under joint control, to offer products and/or services that are not horizontally or vertically related to the activities developed by the parents
- Mere substitution of an economic agent (i.e. transactions that do not result in any actual or potential horizontal overlap or vertical link);
- Transactions resulting in only minor horizontal overlaps, with combined market shares below 20%;
- Transactions resulting in only minor vertical links, in which none of the parties involved has over 30% market share in any of the vertically related markets;
- Horizontal overlaps resulting in variation of HHI below 200, provided that the transaction does not result in the control of at least 50% of the relevant market (i.e. horizontal overlaps above 20% market share, provided that the market share accrual resulting from the transaction is not relevant); and
- Other transaction that the GS concludes that do not merit a detailed review.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.