As from May 29, 2012, merger and acquisition (m&a) transactions which are deemed to be acts of economic concentration (concentration acts) and meet certain thresholds set forth in the applicable law and regulations cannot be closed without the prior authorization of the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica – Cade) has been duly obtained by the parties.
The matter is now governed by Law No. 12,529, of November 30, 2011 (Law 12,529/2011), which structures the Brazilian System for Protection of Competition (Sistema Brasileiro de Defesa da Concorrência – SBDC, sets forth preventive measures and sanctions to the violations against the economic order and amends the Brazilian antitrust legislation.
The SBDC is comprised of CADE and the Economic Monitoring Department of the Ministry of Finance. CADE become the sole Brazilian antitrust agency and consists of three bodies: (i) the Administrative Court of Economic Defense (Tribunal Administrativo de Defesa Econômica) - comprised of seven duly appointed Commissioners, which is the decision-making body in charge of rendering final and binding administrative decisions in both m&a and conduct cases; (ii) the General Superintendence (Superintendência-Geral) - empowered to approve m&a transactions that do not raise competitive concerns and to provide non-binding opinions in m&a cases that could not be unconditionally cleared, and will be responsible for conducting investigations of anticompetitive practices; and (iii) the Department of Economic Studies (Departamento de Estudos Econômicos) - in charge of providing non-binding economic opinions and preparing economic studies. From now on, any transaction subject to clearance will have to wait for CADE´s final approval before it can be closed so that its consequences can be verified before they potentially become irreversible. This is expected to give more legal certainty to the market in general.
Law 12,529/2011 applies to any concentration act performed in full or in part within the Brazilian territory or that produces or may produce effects thereon. Any foreign company that performs transactions or has its branch, agency, subsidiary, office, establishment, agent or representative in Brazil shall be considered domiciled in the Brazilian territory will be subject to the rules contained in Law 12,529/2011.
The concentration acts that are subject to Cade´s prior approval are the following transactions: (i) merger - when two or more previously independent companies merge; (ii) acquisition - when one or more companies acquire, directly or indirectly, by purchase or exchange of stocks, shares, bonds or securities convertible into stocks or assets, whether tangible or intangible, by contract or by any other means or way, the control or parts of one or other companies; (iii) consolidation - when one or more companies incorporate one or other companies; or (iv) association - two or more companies enter into an associative contract, consortium or joint venture (other than when destined to biddings promoted by direct and indirect public administration and to contracts arising therefrom, which shall not be considered concentration acts and are allowed).
An important issue which is examined by Cade is whether the transaction involves a "dominant position", i.e. the control of the relevant market of goods or services, which is considered a violation to the economic order. Obviously, the conquest of the market resulting from the natural process of the most efficient economic agent in relation to its competitors is admitted and does not characterize a violation to the economic order. A dominant position is assumed whenever a company or a group of companies is able to unilaterally or jointly change market conditions, or when it controls 20% or more of the relevant market.
Therefore, the concentration acts involving elimination of competition in a substantial portion of the relevant market, which could create or strengthen a dominant position or result in the domination of the relevant market of goods or services shall be prohibited. However, this prohibition does not apply if the transaction is within the limits strictly necessary to achieve the following objectives: (i) cumulatively or alternatively: (a) increases productivity or the competitiveness; (b) improves the quality of goods or services; or (c) encourages efficiency and technological or economic development; and (ii) a relevant part of the resulting benefits are transferred to consumers.
According to the Inter-ministerial Ordinance No. 994, of May 30, 2012, of the Ministries of Finance and Justice, the parties must submit the transaction to the prior approval of Cade, when the concentration act cumulatively meets the following thresholds:
(a) at least one of the groups involved in the transaction has registered, in the last balance sheet, annual gross sales or total turnover in the country, in the year preceding the transaction, equal to or greater than R$ 750 million; and
(b) at least one of the other group involved in the transaction has registered, in the last balance sheet, gross annual sales or total turnover in the country, in the year preceding the transaction, equal to or greater than R$ 75 million.
Cade Resolution No. 2, of May 29, 2012 (Res. 2/2012) regulates summary proceedings for the analysis of certain concentration acts, as follows:
(i) cooperative or classic joint ventures - the association of two or more separate companies for the formation of a new company under common control which seeks solely to participate in a market whose products/services are not related either horizontally or vertically;
(ii) control consolidation - the direct or indirect acquisition of any equity investment made by the controlling shareholder when the transaction involves at least one individual seller holding 20% or more of the capital stock;
(iii) replacement of economic agent – when the acquirer or its economic group did not participate before the concentration act of the affected market or either of the vertically related markets and other markets where the recipient company or its economic group operates;
(iv) low market share with horizontal overlap - when the transaction raises the controlling share of the relevant market below 20%, at the discretion of the General Superintendence, so as to leave no doubts about the irrelevance of the transaction from the competition standpoint;
(v) low market share with vertical integration - when the acquirer or its economic group does not demonstrably hold 20% more participation in the vertically integrated relevant markets before the transaction;
(vi) other cases - any case which is not covered by the previous categories but it is considered to be simple enough, at the discretion of the General Superintendence, so that it does not deserve a more deep analysis.
Res.2/2012 also clarified the various situations that require prior notification to Cade and are outlined below.
For the purposes of calculating the turnover, "economic group" means: (a) the companies that are under common control with, either internal or external; and (b) the companies in which any of the companies referred to in item (b) holds directly or indirectly an equity investment of at least 20% of the capital stock.
In the case of investment funds, the following persons belong to the same economic group cumulatively: (i) the investment funds that are under the same management; (ii) the manager; (iii) the unit holders (cotistas) holding directly or indirectly more than 20% of the units (cotas) of at least one of the investment funds that are under the same management; and (iv) the companies that form the portfolio of the investment funds where the direct or indirect unit holding of the investment fund is equal to or greater than 20% of the capital stock of such companies.
The acquisition of an equity investment must be mandatorily notified to Cade, whenever it involves the company´s control and gives to the acquirer the status of larger individual investor, or if it falls in any of the following hypothesis:
I - where the recipient company is not a competitor nor operates in any vertically related market:
(a) if the transaction grants to the acquirer the direct or indirect ownership of 20% or more of the capital stock of the recipient company; and
(b) if the transaction is made by someone who already owns 20% or more of the capital stock of the recipient company, provided that the direct or indirect equity investment so acquired involves at least one individual seller holding 20% or more of the capital stock;
II – where the recipient company is a competitor or operates in any vertically related market:
(a) if the transaction grants to the acquirer the direct or indirect ownership of 5% or more of the capital stock of the recipient company; and
(b) if the last acquisition that, individually or jointly with others, results in a increase of 5% or more, when the investor already owns 5% or more of the capital stock of the recipient company.
In order to classify the transaction in the hypothesis provided for in items I and II above, it is necessary to consider the activities of the acquirer as well as of all of the other companies of the same economic group.
Furthermore, the control consolidation must also be mandatorily notified to Cade and will be subject to summary proceedings.
In addition to the obligation of the parties to submit the transaction to the prior approval of Cade, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) and the National Registry of Commerce of the Ministry of Development, Industry and Foreign Trade (Departamento Nacional do Registro do Comércio do Ministério do Desenvolvimento, Indústria e Comércio Exterior - DNRC) must report to Cade any changes in equity control of publicly-held companies and records of merger, respectively, within five business days, if necessary, to be examined.
With respect to the statutory time periods for the review of m&a transactions by Cade, Law 12,529/2011 establishes a maximum term of 240 days from the date of notification for the issuance of a final administrative decision. In the case of complex transactions, this 240 day-period can be extended: (i) for up to sixty days, upon request of the parties involved in the transaction; or (ii) up to ninety days, upon a reasoned decision rendered by the Administrative Court of Economic Defense, specifying the reasons for this extension, the period of extension, and the measures which are necessary for the submission of the case to trial. Both extension periods may not be renewed. Consequently, the review by Cade must be concluded within 330 days from the date of notification.
Cade´s approval may be reviewed by the Administrative Court of Economic Defense, ex officio or upon request of the General Superintendence, if the decision is based on false or misleading information provided by the interested party, in case of non-compliance with any of its obligations of if the intended benefits are not achieved. The falsity or deceitfulness shall be punished by a pecuniary fine, equivalent to not less than R$ 60 thousand nor more then R$ 6 million to be applied according to the rules of Cade, without prejudice to the opening of administrative proceedings and the adoption or any other appropriate measures.
Until the final decision on the transaction, the conditions of competition shall be preserved between the companies involved, under penalty of nullity. A pecuniary fine may also be imposed, in a value not less than R$ 60 thousand nor more than R$ 60 million to be applied under the regulations, without prejudice to the opening of an administrative proceeding.
Finally, it should be mentioned that there is a conflict of jurisdiction between Cade and the Central Bank of Brazil (Banco Central do Brasil – Bacen) to analyze concentration acts related to the banking sector. The Brazilian Superior Court of Justice (Superior Tribunal de Justiça - STJ) decided that Bacen has exclusive jurisdiction to analyze m&a transactions involving institutions that are members of the Brazilian Financial System but Cade Resolution No. 3, of May 29, 2012, expressly lists "financial services" as one of the activities subject to Cade´s approval.
1 Law 12,529/2011 was published in the Official Gazette of the Union (Diário Oficial da União – DOU) on December 1st, 2011 and came into full force and effect 180 days thereafter.
2 This percentage may be modified by Cade for specific sectors of the economy.
3 Within one year as of the date of the respective fulfillment, Cade may require the submission of the concentration acts that do not fall within these provisions.
4 Previously this value was R$ 400 million.
5 Previously this value was R$ 30 million.
6 The period for analysis of concentration acts that will be subject to summary proceedings has not yet been defined. It is expected that they will take between thirty to sixty days.
7 This 240 day-period is counted as of the application protocol or amendment thereto.
8 Bacen is in charge of applying the legislation about financial matters, implementing the policy established by the Brazilian Monetary Council (Conselho Monetário Nacional – CMN) and overseeing the financial institutions or other similar entities duly authorized to operate in Brazil by Bacen, which are members of the Brazilian Financial System. By means of Bacen Circular No. 3,950, of April 26, 2012, new rules for m&a transactions involving two or more financial institutions or similar entities have been announced. In this regard, please see the article "New Rules on M&A Transactions Involving Brazilian Banks" of the same author and Adriana Maria Gödel Stuber, which discusses such rules.
9 In the banking sector, there has been a conflict of jurisdiction between Cade and Bacen on merger control, after an opinion (Opinion No. GM-020, of March 28, 2001) issued by the General Attorney of the Federal Government (Advogado Geral da União – AGU) defending exclusive authority of Bacen to analyze concentration acts involving institutions of the Brazilian Financial System. Cade challenged the decision and ordered the banks to present transaction for Cade analysis. The case at hand concerns the acquisition of Banco de Crédito Nacional S.A. (BCN) by Banco Bradesco S.A. (Bradesco). A decision by a Federal Circuit Court from September 2007 ruled in favor of Cade. The discussion started with a petition for writ of mandamus filed by the banks before the Federal Court, against Cade chairman´s determination that the financial institutions report to Cade the transaction involving Bradesco´s acquisition of BCN´s controlling interest. On August 25, 2010, the STJ decided by majority for the exclusive authority of Bacen while Opinion No. GM-020/2001 is still in force and annulled the fine imposed on Bradesco.
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.