Certain international transactions still leave parties wondering whether Brazilian approval is required
The (not so new) Brazilian Antitrust Law is currently marching towards its eighth year anniversary, and it is well recognized that Brazil has done a great job in promoting a "competition culture" within the M&A practice. The introduction of the bar-on-closing regime has played a great part in that, and has led the Brazilian merger control to unimaginable quality levels, similar to those in the mainstream antitrust jurisdictions.
This means that undertakings in Brazil are paying close attention to antitrust matters at very early stages of M&A negotiations.
- Issues can arise in the due diligence process, particularly with respect to sharing competitively sensitive information;
- Antitrust-related deal points that can be addressed in the merger agreement itself, particularly where the deal carries antitrust risk;
- The very drafting of the merger agreement clauses that could entail premature integration of the undertakings before antitrust approval, and result in significant fines;,
- The production of documents and the submission of accurate information as part of the filing;
- The proper conduct of the undertakings after the deal has been signed, but before regulatory approval and closing.
The success of Brazilian merger control also means that in international transactions the Brazilian business community truly recognizes the need to carry out a thorough legal assessment of whether a transaction needs to be notified in Brazil to the Administrative Council for Economic Defense (CADE).
The general double-turnover rule triggering a mandatory notification to CADE is already well known: transactions involving one economic group that registered over BRL 750 million and another economic group that registered over BRL 75 million, both of them in Brazil, in the previous fiscal year require a notification to CADE.
However, certain uncertainty still hovers around the legal need to notify CADE of transactions taking place outside Brazil that would have – even if in theory - no effects in this country, although both undertakings would fulfill the general double-turnover rule. Would CADE wish to review a transaction taking place strictly overseas, not affecting Brazil in any way, solely due to the undertakings reaching the double-turnover threshold?
The Brazilian Antitrust Law itself provides for some guidance on how to answer this question, as it only applies "to practices performed, in full or in part, in the national territory, or that produce or may produce effects thereon".
The possible conclusion is that CADE will evocate its jurisdiction whenever effects in Brazil (including potential effects) have been demonstrated ("Effects Theory"). A "local effects test" would follow, and this would be the main aspect in an assessment of whether a foreign transaction should be notified to CADE.
The simple part of identifying effects in Brazil involves situations in which the target entity holds assets or subsidiaries in the national territory, or has registered turnover in Brazil – even if solely through exports, and regardless of their amount.
However, the real issue is that the Brazilian Antitrust Law does not have explicit rules for the application of this test; how to proceed when effects are only potential; or if exceptions and de minimis exemption apply. How, then, would one be able to determine whether a foreign transaction should be notified to Brazil?
For transactions taking place entirely outside Brazil (foreign-to-foreign) or in which joint ventures are created outside Brazil in order to develop products or businesses that will not be offered to Brazil, the analysis of potential effects is related to the market affected by the transaction. The main question is: can this transaction somehow have effects in the Brazilian territory? One should note that answering to this preliminary question is not an assessment of anticompetitive effects – as the latter is actually part of the assessment of the merits of the case. The preliminary question is rather of where the transaction will produce its effects – i.e. where the business involved will be active.
CADE has had the opportunity of analyzing cases in which it indicated situations it should exert its extraterritorial jurisdiction. The cases we have identified allow a few key factors on whether foreign transactions should be notified in Brazil. Especially:
- Are the products, businesses or services involved sold, or have been sold (or offered) in Brazil?
- Would a hypothetical relevant market definition be international?
- Are they merger agreement provisions stating that Brazil is / will be a target territory?
- Do imported products supply the national market?
A transaction resulting in a negative response to most of the questions above probably would not pass the effects test in Brazil, and would have a reasonable chance of having CADE deciding that its jurisdiction would not apply, and notification is not mandatory. However, the absence of an official guidance from the authority means that a thorough assessment by specialized antitrust counsel is still a requirement in each case.
In the United States, the Hart-Scott-Rodino Act (HSR) exempts acquisitions of foreign assets from mandatory notification in case these foreign assets have generated less than USD 84.4 million sales in or to the United States in the previous fiscal year. Thus, in contrast to Brazilian regulations – which adopted an "Theory of Any and All Effects" (any effects could trigger a notification, even if very limited or potential), the United States have in place a "Minimum Effects Theory" of sorts. This is a somewhat more evolved discipline as it sets forth that the antitrust authority does not wish to perform an antitrust assessment of foreign transactions whose assets have not reached a certain level of sales in or to the United States.
Still within the context of merger review, the European Commission – under the terms of Council Regulation (EC) no. 139/2004 – EC Merger Regulation – establishes that EC jurisdiction shall apply to all community-dimension transactions according to quantitative parameters set forth in the regulation. These are based on the undertakings' business volume. There are exceptions exempting some transactions from notification, such as non-"full-function" joint ventures, which are applicable to transactions in general and could be used to justify non-notification of a transaction whose undertakings reached the turnover threshold in the European Union.
Furthermore, a great portion of competition literature and case law defends that effects should necessarily be foreseeable, immediate and substantial, i.e., there must be a real and effective probability of effects.
Meanwhile, the lack in the Brazilian competition legislation of provisions expressly requiring that effects of a certain transaction are concrete and/or reach a certain level of revenues means that Brazil's standing is more extensive than the positions adopted in the United States and the European Union. In our communications with specialized antitrust counsels in these jurisdictions, we notice that transactions of the type that would require a notification to CADE would be often exempt from notification to competition agencies in those jurisdictions.
Even if CADE's case law deserves recognition by having evolved significantly, further predictability based on objective criteria – that does not involve solely the double-turnover rule – is welcome.
Since the Brazilian Antitrust Law did not provide a precise definition for, or attempted to restrict the meaning of "effects", doubts still arise on whether certain international transactions would trigger a notification to CADE.
While the Brazilian antitrust community eagerly awaits for an opportunity for CADE to tackle this issue deeply and publish express guidance or regulation on the matter, an in-depth specialized assessment is still a requirement in each case.
 Law no. 12529/2011, dated November 30, 2011.
 Since the current law came into force in 2012, CADE has consistently analyzed around (or over) 400 merger reviews a year, with average review times that are also consistently low. For instance, in 2018, CADE analyzed 404 mergers averaging 27.4 days per review.
 The Brazilian Antitrust Law heavily punishes premature implementation (gun-jumping) of a transaction before CADE's approval, if such approval is mandatory. Fines may range from BRL 60,000 – 60,000,000 (USD 16,200 – 16,200,000 as of February 2019)
 According to CADE's Gun-Jumping Guidelines, the premature implementation of a transaction can happen even through the exchange of sensitive information between the companies, or any act that could be interpreted as meaning one party is exerting influence over the other before CADE's clearance.
 BRL 202 million and 20,2 million, respectively, as of February 2019.
 "Art. 2. This Law applies, without prejudice to the conventions and treaties of which Brazil is a signatory, to practices performed, in full or in part, on the national territory, or that produce or may produce effects thereon."
 According to this doctrine, one country's competition laws would be applicable to foreign companies and even to domestic companies operating outside Brazil whenever their behavior or transactions taking place outside Brazil produce "effects" in or over the national territory. This Effects Theory thus covers undertakings regardless of their location or nationality.
 (i) Merger Review no. 08700.007305/2018-02 (DENSO Corporation and Aisin Seiki Co., Ltd)., among others in which TozziniFreire acted as counsel for the undertakings; (ii) Merger Review no. 08700.000692/2018-48 (Applicants: ExxonMobil Chemical Gulf Coast Investments LLC and SABIC US Projects LLC); (iii) Merger Review no. 08700.006037/2016-31 (Knorr-Bremse Commercial Vehicle Systems Japan Ltd. and Bosch Corporation), and others. For further reference, IBRAC, Merger Control in Brazil: Frequently Asked Questions, 2018. Beyond The Turnover Thresholds: How Does the Local Effects Test Function in the Context of Merger Control. Vivian Fraga, Patrícia Bandouk Carvalho and Natan Maximiano Munhoz.
 The Hart-Scott-Rodino Act disciplines, at a federal level, the suspensory merger review procedures. On this specific subject, see sections §802.50 and §802.51 of the Hart-Scott-Rodino Act. Available at https://www.ecfr.gov/cgi-bin/textidx?rgn=div5&node=16:220.127.116.11.87#se16.1.802_150. Accessed on January 31, 2019.
 The effects issue has been a topic for discussion for quite some time within the international antitrust community. Since 2005, the Organization for Economic Co-operation and Development (OECD) recommends that antitrust authorities exercise their jurisdiction only over transactions that hold appropriate nexus within that jurisdiction's territory. See the Recommendation of the OECD Council on Merger Review. Available at http://www.oecd.org/daf/competition/mergers/40537528.pdf. Accessed on February 4, 2019.
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.