On April 24, 2012, the Board of Directors of the Central Bank of Brazil (Banco Central do Brasil – Bacen) decided to adopt new rules for merger and acquisition (M&A) transactions involving two or more financial institutions or other similar entities duly authorized to operate in Brazil by Bacen, and from now on Bacen may require that the efficiency gains resulting from this type of operation be shared with the consumers. It is expected that this would result in the reduction of the fees charged by these institutions from their customers, for example.
The new rules have been announced by means of Bacen Circular No. 3950, of April 26, 2012 (Circular 3950/2012), which deals with the analysis by the Brazilian regulator (Bacen) of certain concentration acts in the Brazilian Financial System and the delivery of information by these institutions to Bacen, and such rules are in full force and effect since April 27, 2012, the date of publication in the Official Gazette of the Union (Diário Oficial da União - DOU).
These concentration acts will be examined by Bacen from the point of view of their effect on competition, subject to consideration concerning the stability of the financial system.
For the purpose of Circular 3950/2011, "concentration acts" means any of the following transactions: (i) transfer of controlling shareholding (transferência de controle societário), whereby the shares representing the company´s control are negotiated; (ii) merger (incorporação), whereby one of more companies are absorbed by another, which succeeds in all their rights and obligations; (iii) consolidation (fusão), whereby two or more companies unite to form a new company, which shall succeed the existing companies in all their rights and obligations; (iv) transfer of business (transferência de negócio), whereby only the structure generating the financial operations or services is assigned; and (iv) any other concentration act (outros atos de concentração), which comprises any transaction that results in the increase of participation of the financial institutions or similar entities in the segments of market in which they operate.
These rules do not apply to transactions between institutions of the same conglomerate or credit assignments that do not involve transfer of business.
In order to permit the analysis of the concentration act, the institutions involved in the transaction must indicate one institution (the leading institution) to provide the following information and documents to the Department of Organization of the Financial System (Departamento de Organização do Sistema Financeiro - Deorf) of Bacen:
(i) indication of the markets of financial products and services and customer profile of each institution involved, as well as their geographical areas of operation, demonstrating through comparative tables the respective contribution of each institution, before and after the intended transaction;
(ii) a copy of the contractual instruments signed by these institutions which are related to the transaction;
(iii) a detailed description of the nature, the characteristics and the strategic objectives of the transaction;
(iv) a reasoned description of the financial and economic performance of these institutions in the respective segments of the financial market in which they operate in the past three years, showing: (a) the organizational and operational structures; (b) the offered products and services and the technology used; and (c) the customer profile; and
(v) the factors that motivate the transaction, describing: (a) adherence to the strategic objectives defined in the business plan of the acquiring institution, in the event of transfer of control or merger, or of the other institutions involved in any other case; (b) the characteristics of the transaction that add value to the acquiring institution, in the event of transfer of control or merger, or to the other institutions involved in any other case; and (c) reflections of the transaction on the organizational and operational structures of the acquiring institution, in the event of transfer of control or merger, or of the institutions involved in any other case, and its impact on the products and services offered to customers, indicating possible measures designed as a result of the transaction, including restructuring plans and relocation of dependencies.
In the event of transfer of control or merger, the following additional information shall be provided to Deorf: (a) economic and financial evaluation of the acquired or merged institution, justifying the price paid, the criteria for fixing the value of goods or intangible rights related to the transaction, as well as any adjustments in price arising out of the due diligence (if any); and (b) analysis of the price paid based on market multiples method referenced at least to Net Worth Reference (Patrimônio de Referência - PR) values, credit operations, network of dependencies and customers.
The quantitative information must correspond to the same base date. The information, including any calculations and projections, should be accompanied by study and evidentiary documents, containing the methodology used for the estimates, as well as reference to their sources.
The leading institution is responsible for providing to Deorf documents and information pertaining to all the legal entities involved in the transaction, including those that do not depend on Bacen´s authorization to operate.
Deorf can request other documents and information, including to institutions of the Brazilian Financial System which are not engaged in the transaction but may be deemed relevant to the analysis of the concentration act by Bacen.
According to Circular 3590/2012, a Guide to the Analysis of the Concentration Acts (Guia para Análise de Atos de Concentração) will be issued in due course by Deorf.
Without prejudice to the provisions of the Guide, the analysis by Bacen of the concentration act will cover the following steps: (i) definition of the relevant market of the participating institutions; (ii) determination of the market share under control of the participating institutions; (iii) analysis as to the likelihood of the exercise of market power by the institution or institutions resulting from the proposed transaction; (iv) analysis of the economic efficiencies that can be generated by the transaction; and (v) evaluation of the cost/benefit relationship of the transaction.
At the time of approval of the concentration act, Bacen can establish restrictions in order to mitigate the effects that might reduce the well-being of the users of financial products or services or the economic efficiency. In this regard, Bacen may require that the institutions involved in the transaction sign a formal contract, known as Agreement on Concentration Control (Acordo em Controle de Concentração), setting forth commitments relating to sharing of the efficiency gains resulting from the transaction. The breach of the commitments formalized through this type of contract, which will be available to the public, shall subject the infringing institutions and their administrators to the appropriate administrative penalties to be imposed by Bacen.
Circular 3950/2012 also authorizes Deorf to establish specific procedures for the delivery of information by credit unions (cooperativas de crédito) to enable Bacen to examine concentration acts in this segment.
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.