Brazil: New Rules For M&A Transactions Involving Category A Securities' Issuers

On June 15, 2015 the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) issued CVM Instruction No. 565 (Instr. 565/2015), containing new rules applied to merger and acquisition transactions (m&a transactions) involving issuers of securities registered under category A, comprising amalgamation (fusão)[1], split-up (cisão)[2], merger (incorporação)[3] and merger of shares (incorporação de ações)[4].

I. Introduction

Under the current regulations there are two different categories of registry: (i) category A, which authorizes the trading of any types of securities; and (ii) category B, which excludes shares and share certificates of deposit as well as securities which attribute to the holder the right to acquire shares and share certificates of deposit as a result of the conversion or the exercise of inherent rights, provided that these securities are issued by the same issuer or by a company belonging to its economic group.

Instr. 565/2015 updates and optimizes certain provisions regulating: (i) the minimum content of the communications from the company to the market on m&a transactions; (ii) the fiduciary duties of administrators of companies that go through m&a transactions; (iii) the financial statements and pro forma financial information to be disclosed on the grounds of m&a transactions; and (iv) the criteria and content of evaluation reports produced for the purposes of article 264 of Law No. 6404 of December 15, 1976 (the Brazilian Corporation Law – BCL).

Article 264 of the BCP establishes that in the merger of a controlled company into its controlling company, the justification presented to the general shareholders´ meeting of the controlled company shall contain, among other information, a calculation relating to the exchange ratio of shares owned by the non-controlling shareholders of the controlled company. This ratio is based on the net value of the shares of both the controlling and the controlled companies, the assets and liabilities of both companies being valued according to the same criteria and on the same date, at market prices, or according to another criteria indicated by CVM for publicly-held corporations. The appraisal of the assets and liabilities of a publicly-held corporation must necessarily be carried out by a specialist firm.

According to the provisions of sub-item (a) of item II of article 137 of the BCL, in the cases of amalgamation of the company or its merger into another company, as well as its participation in a group of companies, the holder of shares of a class or type that has market liquidity and dispersion shall not have the right of withdrawal.

Upon the occurrence of certain limited events which fundamentally change the company or adversely affect its shares, dissenting shareholders may withdraw from the company and have their shares redeemed. The redemption of shares is made at the book value per share, unless the company bylaws provide for their evaluation at economic value. The right of withdrawal expires 30 days after publication of the minutes of the relevant shareholders' meeting. Additionally, shareholders are entitled to reconsider (by a majority vote of shareholders attending a meeting called by the board of directors) any decision giving rise to withdrawal rights within 10 days after the expiration of that 30-day period, if the redemption of shares of dissenting shareholders would jeopardize the company's financial condition.

The relevant provisions of Instr. 565/2015 are commented below.

II. Minimum content of communications

This issue is regulated by articles 3 and 4 of Instr. 565/2015.

Without prejudice to the information and documents necessary for the exercise of voting rights at the general meeting provided for in specific standard, to the extent that such information is known, the relevant fact about any transaction must contain at least the following information:

  1. identification of the companies involved in the transaction and short description of the activities carried out by them;
  2. description and purpose of the transaction;
  3. main benefits, costs and risks of the transaction;
  4. exchange ratio of shares;
  5. criteria for determining the exchange ratio;
  6. assets and liabilities that will form each portion of the net worth, in the event of the split-up;
  7. if the transaction has been or will be subject to approval by Brazilian or foreign authorities;
  8. in transactions with controlled or controlling companies or companies under common control the exchange ratio of shares calculated in accordance with the procedure laid down in article 264 of the BCL;
  9. applicability of the right of withdrawal and reimbursement amount;
  10. other relevant information.

If the controlling shareholder or the company discloses to the market the proposed exchange ratio of shares or the criteria for determining such ratio before the conclusion of the negotiations, the following information must be provided to the market: (i) the reasons for the disclosure before the conclusion of the negotiations; (ii) the current status of the negotiations; (iii) the circumstances under which the exchange ratio of shares or the criteria disclosed may still be changed; and (iv) if the controlling shareholder's proposal has not yet been evaluated by the company´s management: (a) whether the proposal is binding; (b) the time limit for acceptance, if any; (c) other terms and conditions; (d) the measures that the management intends to take in order to evaluate the proposal; and (e) the date set for the conclusion of the negotiations, if it is possible to estimate it.

III. Fiduciary duties of the administrators

The fiduciary duties of the administrators are mentioned in article 5 of Instr. 565/2015. The administrators of the publicly-held corporations involved in the transaction shall take all precautions and act with due diligence to ensure that all information supplied by the other companies observe the applicable regulations.

IV. Financial statements and pro forma financial information

This matter is regulated by articles 6 and 7 of Instr. 565/2015.

For the purposes of the transaction, the companies involved must disclose financial statements whose base date: (i) is the same for all the companies involved; and (ii) is not earlier than 180 days from the date of the general shareholders ' meeting which will deliberate on the transaction. Even though some of the companies involved in the transaction are not corporations or are not subject to the regulations issued by CVM, the financial statements must be: (i) prepared in accordance with the BCL and CVM standards; and (ii) audited by an independent auditor registered with CVM. The publicly-held corporations may use the end-of-year financial statements and quarterly information forms regularly required to meet their periodic obligations vis-à-vis CVM.

Such financial statements are used by shareholders to mark out their vote,  accepting or not the conditions proposed by the management, including the exchange ratio, so the information is all the more useful as portraying the current conditions of the companies involved in the transaction. To avoid that shareholders have to make decisions based on old financial information, especially when there are companies that are not required to follow a regime of transparency, CVM requires the updating of financial information when they exceed 180 days. On the other hand, when the companies involved have securities issuers´ registry, either in category A or category B, CVM enables them to use the end-of-year financial statements and quarterly information forms regularly required by CVM.

This time limit (180 days) may be extended for up to 360 days at the discretion of the administrators of the publicly-held corporations involved in the operation, provided that: (i) the economic and financial situation of these companies  has not changed in a manner relevant after the base date of the financial statements; and (ii) the administrators of the company involved in the operation who are responsible for the preparation of financial statements whose base date exceeds 180 days execute a statement, to be disclosed along with the financial statements, confirming that there was no relevant change in the economic and financial situation of these companies.

The companies involved in the transaction shall prepare pro forma financial information of the companies that remain or result of the transaction, as if they existed on the base date, which will be the same for all companies involved. This financial information shall be: (i) prepared in accordance with the BCL and CVM standards; and (ii) subject to reasonable assurance by an independent auditor registered with CVM.

CVM believes that pro forma financial information are commonly required and disclosed in other jurisdictions with comparable securities markets to the Brazilian market in the event of relevant corporate transactions, and that they constitute an important information and able to mark out the exercise of voting rights by shareholders at the time of approval of such transactions.

V. Liquidity criteria for exclusion of the right of withdrawal

The liquidity condition referred to in sub-item (a) of item II of article 137 of the BCL is met when the class or type of share, or certificate that represents it, integrates the general equity index portfolio of securities issued by BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF) known as Bovespa Index – IBOVESPA[5]. The existence of liquidity will be checked on the date of the general shareholders´ meeting that approves the transaction.

Therefore, companies whose securities are included for the purpose of calculation of  IBOVESPA on the date of the general shareholders´ meeting that approves amalgamation of the company or its merger into another company, as well as its participation in a group of companies, will be automatically dispensed to confer the right of withdrawal to holders of the securities that effectively integrate these indexes.

VI. Evaluation Reports

The evaluation reports produced for the purposes of article 264 of the BCL may use one of the following criteria: (i) value of the net worth at market prices; or (ii) discounted cash flow. The criteria provided for in item (ii) can only be chosen when it has not been used to establish the proposed exchange ratio of shares.

These reports must comply with the applicable requirements of the regulations issued by CVM regarding the evaluation of tender offers for publicly-held corporations´ shares (oferta pública de aquisição de ações – OPA).

CVM may also authorize, on a case-by-case basis and provided that the request is duly justified, other criteria for producing these evaluation reports.

VII. The 5% Threshold

CVM has sought to restrict the requirements of greater transparency, when these involve costs for companies, to those transactions that are most relevant to the shareholders, electing as a criterion the dilution effectively caused.

The obligations related to minimum content of communications and the required financial statements and pro forma financial information do not apply to merger or merger of shares of a closely-held company by issuer of securities registered under category A, if the transaction does not represent a dilution of more than 5%. The dilution will be deemed to be of more than 5% when the result of dividing the number of shares issued as a result of the transaction by the number of total shares after the issuance is above 0.05.

The pro forma financial information will be due on transactions considered relevant by the criteria established by the accounting rules, interpretations and guidelines about pro forma financial information, even if it does not involve a dilution of more than 5%.

A merger or merger of shares of the parent company by the subsidiary when the parent company is a publicly-held corporation is deemed to be a reverse operation. In the case of a reverse operation or in the split-up involving at least one publicly-held corporation, dilution is assumed to be greater than 5% when the result achieved after the operation is less than 0.95. This percentage is obtained with the division of the number of shares issued by the merged company or the company resulting from the split-up owned by the original shareholders of the publicly-held corporation by the total number of shares issued by the merged company or the company resulting from the split-up.

The above-mentioned financial information must be given in any transaction considered relevant by the criteria established by the accounting rules, guidelines and interpretations about pro forma financial information, even though the operation does not involve a dilution above the 5% threshold.

VIII. Final Considerations

Whenever the general shareholders' meeting is convened to deliberate on any of the m&a transactions analyzed here, the company should provide at least the following information and documents:

  1. The Protocol and justification for the transaction, in accordance with articles 224 and 225 of the BCL.
  1. Other agreements, contracts and preliminary instruments regulating the exercise of voting rights or the transfer of shares issued by the companies remaining or resulting from the transaction, filed at the head office of the company or of which the controller of the company is a party.
  1. Description of the transaction including: (a) terms and conditions; (b) obligations to indemnify the administrators of any of the companies involved in the operation, if the operation does not come true; (c) comparative table of the rights, advantages and constraints of the shares of the companies involved or arising before or after the transaction; (d) the possible need for approval by debenture holders; (e) assets and liabilities elements that will form each portion of equity, in the event of split-up; and (f) intention of the companies resulting from the transaction to get securities issuer registration.
  1. Plans for the conduct of social affairs, notably with regard to specific corporate events to promote.
  1. Analysis of the following aspects of the transaction: (a) description of the main expected benefits, including: (i) synergies[6]; (ii) tax benefits; and (iii) strategic advantage; (b) costs; (c) risk factors; (d) if the transaction is made with a related party, possible alternatives that could have been used to achieve the same objectives, indicating the reasons why these alternatives were discarded[7]; and (e) exchange ratio of shares.
In transactions with controlling or controlled companies or companies under common control, it is necessary to submit: (i) exchange ratio of shares calculated in accordance with the procedure laid down in article 264 of the BCL; (ii) detailed description of the process of negotiating the exchange ratio and other terms and conditions of the transaction; (iii) if the transaction has been preceded in the last twelve months for an acquisition of control or acquisition of participation in control block, comparative analysis of the exchange ratio and the price paid in the acquisition of control, as well as reasons for any differences in evaluation in different transactions; (iv) justification of why the exchange ratio is commutative[8], with a description of the procedures and criteria adopted to ensure the commutability of the transaction, with payment details or equivalent measures adopted to ensure appropriate compensation.

  1. A copy of the minutes of all meetings of the Board of Directors (Conselho de Administração), Audit Committee (Conselho Fiscal) and special committees in which the transaction was discussed, including any dissenting votes.
  1. A copy of studies, presentations, reports, opinions, advice or evaluation reports of the companies involved in the transaction used or placed at the disposal of the company or controlling shareholder at any stage of the transaction. Identification of possible conflicts of interest among financial institutions, companies and professionals that have prepared these documents and the companies involved in the transaction.
  1. Drafts of the by-laws or amendments to the by-laws of the companies resulting from the transaction.
  1. Financial statements used for the purposes of the transaction.
  1. Pro forma financial statements prepared for the purposes of the transaction.
  1. Document containing information about companies directly involved that are not publicly-held corporations, including[9]: (a) risk factors and market risks; (b) description of the main changes in risk factors that occurred in the previous year and expectations in relation to the reduction or increase in exposure to risk as a result of the operation; (c) description of its activities; (d) economic group description; and (e) description of the share capital.
  1. Description of the structure of capital and control after the transaction.
  1. Number, class, species and type of securities of each company involved in the transaction held by any other companies involved in the transaction, or by persons linked to such companies.
  1. Exposure of any of the companies involved in the transaction, or persons linked to them, in derivatives referenced in securities issued by other companies involved in the transaction.
  1. Report covering all trades carried out in the past six months by persons listed below with securities of the target company, stating the nature, price, quantity, and other relevant conditions: (a) companies involved in the transaction; and (b) related parties to companies involved in the transaction.
  1. Document by means of which the Independent Special Committee (Comitê Especial Independente) submitted its recommendations to the Board of Directors, if the transaction has been negotiated pursuant to CVM Guidance Opinion (Parecer de Orientação) No. 35, of September 1st, 2008 (PO 35/2008), which is commented below.

PO 35/2008 establishes the fiduciary duties of the administrators in m&a transactions involving the controlling company and its controlled companies or companies under common control. The administrators must defend the interests of the company that they manage and of all its shareholders, ensuring the establishment of a fair exchange ratio. In this regard, the administrators must adopt the following procedures in such m&a transactions: (i) the exchange ratio and other terms and conditions of the transaction must be subject to effective negotiation among the parties of the transaction; (ii) the opening of negotiations must be disclosed to the market immediately as a material fact, unless the social interest requires that the transaction be kept confidential; (iii) administrators must seek to negotiate the best exchange ratio and the best terms and conditions possible for the shareholders of the company; (iv) administrators must get all the information needed to perform their function; (v) administrators must have enough time to perform their function; (vi) the deliberations and negotiations shall be properly documented, for further investigation; (vii) administrators must consider the need or desirability of hiring legal and financial advisors; (viii) administrators must ensure that the contracted advisors are independent in relation to the controller and properly remunerated by the company; (ix) the work of the advisors must be properly supervised; (x) any evaluations produced by the advisors must be duly substantiated and the respective criteria specified; (xi) administrators must consider the possibility of adopting alternative ways to completion of the transaction, as offers of purchase or exchange of shares; (xii) administrators must reject the transaction if the exchange ratio and the other terms and conditions proposed are unsatisfactory; (xiii) the final decision of the administrators on this matter, after reviewing it with loyalty to the company and with the diligence required by law, shall be duly reasoned and documented; and (xiv) all documents that based their decision must be made available to the shareholders.

In addition, following the international experience concerning the interpretation of the fiduciary duties of administrators, by means of PO 35/2008 CVM recommends that: (i) an Independent Special Committee be set up to negotiate the operation and submit its recommendations to the Board of Directors, in accordance with the guidelines contained in the previous paragraph; or (ii) the operation is subject to the approval of the majority of  non-controlling shareholders, including holders of shares without voting rights or with restricted vote.

For the formation of an Independent Special Committee, CVM recommends the adoption of one of the following alternatives: (i) the Committee made up exclusively by the company's administrators, mostly independent; (ii) Committee composed of non-administrators of the company, all independent and with remarkable technical ability, provided that the Committee is contemplated in the bylaws; or (iii) the Committee consisting of: (a) an administrator chosen by the majority of the Board of Directors; (b) a counselor elected by the non-controlling shareholders; and (c) a third party administrator or not, chosen jointly by the other two members. The independence of the members of the Committee cannot be determined in advance, and should be examined on a case-by-case basis. In any event, CVM assumes independence if the members of the Committee meet the definition of "independent counselor" referred to in the Regulation of Novo Mercado of the BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF).

According to this Regulation, the person is deemed to be an "Independent Counselor" if he/she: (i) does not have any ties with the Company, except participation in the capital stock; (ii) is not the controlling shareholder, spouse or relative up to the second degree of that, or is not or has not been, in the last 3 years, linked to a company or entity related to the controlling shareholder (individuals linked to public institutions or education research are excluded from this restriction); (iii)  has not been, in the last 3 years, employee or Director of the Company, the controlling shareholder or other company controlled by the Company; (iv) is not a supplier or buyer, direct or indirect, of the Company's products or services, in magnitude involving loss of independence; (v) is not an employee or administrator of a company or entity that is offering or providing services or products to the Company; (vi) is not spouse or relative up to the second degree of any administrator of the Company; (vii) does not receive another remuneration from the Company in addition to compensation as counselor (cash proceeds from participation in the capital stock are excluded from this restriction).


[1] Amalgamation is a transaction whereby two or more companies unite to form a new company, which shall succeed them in all their rights and obligations.

[2] Split-up is a transaction whereby a company transfers part of its asserts and liabilities to one or more companies already in existence or formed for this purpose, the divided company being extinguished if all its assets and liabilities are transferred, or its capital being divided if the transfer is only in part.

[3] Merger is a transaction whereby one or more companies are absorbed by another, which succeeds to all their rights and obligations.

[4] The procedure known as merger of shares (incorporação de ações) is the transfer of all of the shares of one company to another company or the receipt of the shares of another company in order to make the company whose shares is transferred a wholly owned subsidiary.

[5] IBOVESPA is the main indicator of the Brazilian stock market's average performance. Ibovespa's relevance comes from two facts: it reflects the variation of BVMF´s most traded stocks and it has tradition, having maintained the integrity of its historical series without any methodological change since its inception in 1968. It is the current value, in Brazilian currency, of a theoretical stock portfolio constituted in February 1st, 1968 (base value: 100 points), by a hypothetical investment. No additional investment has been made since this date, apart from the reinvestment of the distributed benefits (such as dividends, subscription rights and stocks bonuses). In that way, the index reflects not only the variation of the stock prices but also the impact of the distribution of benefits, and is considered an indicator that evaluates the total return of its components stocks. Extremely reliable and with a methodology easily understandable by the market, IBOVESPA represents faithfully the average performance of the main traded stocks and the profile of the cash market operations carried out on BVMF. IBOVESPA´s basic objective is to be an average indicator of the market performance. For that purpose, its composition aims at reflecting as close as possible the real configuration of the cash market operations (round lot) on BVMF. In terms of liquidity, the stocks that integrate IBOVESPA´s theoretical portfolio represent more than 80% of the number of trades and the financial value registered on BVMF´s cash market (round lot). In terms of market capitalization, the issuing companies of the stocks that compose the IBOVESPA theoretical portfolio are responsible, in average, for approximately 70% of the sum of all BVMF´s companies' capitalization. BVMF calculates IBOVESPA in real time, considering the prices of the last trades carried out in the cash market (round lot) with the stocks that compose its portfolio. Its disclosure is made through BVMF´s diffusion system and is also retransmitted by many "vendors", thus making it possible to monitor the index performance "on line" in any part of Brazil or of the world. IBOVESPA´s reliability comes from its simple calculation methodology, and also from the availability of its data to the investor public. The market recognizes the index's positive characteristics, and this recognition is expressed by the fact that IBOVESPA is the only performance indicator of the Brazilian stocks that has a liquid future market. BVMF is responsible for IBOVESPA´s management, calculation, disclosure and maintenance. This responsibility assures the strict compliance with the rules and technical procedures contained in the index methodology.

[6] Whenever the synergy gains are estimated by the administrators, such estimates must be disclosed.

[7] In a transaction involving a controlled company, for example, it is necessary to explain the reason of the option for an offer to purchase or exchange of shares or other corporate transaction mode.

[8] Commutative means that each party receives an equivalent to or in consideration of what is done, given, or promised by the other.

[9] It is unnecessary to provide the information referred to in item 11 above for companies which meet the following conditions: (i) do not have liabilities of any nature whatsoever; and (ii) whose only asset is formed by shares of other companies involved in the transaction.

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.

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Walter Stuber
Adriana Maria Gödel Stuber
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