On November 25, 2010, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) issued CVM Instruction No. 487, which amends and updates CVM Instruction No. 361, of March 5, 20021, and introduces specific provisions to regulate the hostile takeover bids in Brazil, regarding the control acquisition of publicly-held corporations with dispersed shareholding and undefined ownership (i.e., without a controlling shareholder or group of control2).
In 2002, at the time that the rules of CVM Instruction 361/2002 were drawn up, the possibility of hostile takeover bids, which were common in developed markets like the USA and England, seemed rather remote and were unusual in Brazil because the control of Brazilian publicly-held corporations was concentrated in hands of family groups that owned the majority of the voting shares of such companies and tender offers were only made by the current or new controlling shareholder(s). After eight years, however, the situation is completely different. The Brazilian capital markets have expanded rapidly, both in terms of volume and number of companies with shares quoted in the stock exchange, there are more than 50 publicly-held corporations with dispersed shareholding3 and market takeovers begin to appear.
The first attempted hostile takeover in Brazil was made by Sadia, a food processor company, that in 2006 launched an ultimately unsuccessful bid for its rival Perdigão. The case that changed everything and was instrumental to induce CVM to revise and change the rules adopted in 2002 was the successful and controversial bid made in 2009 by Vivendi, the French telecom and media conglomerate, that acquired the GVT Holding, a Brazilian telecom operator. Vivendi was the winner of a dispute involving Telefonica, the Spanish carrier, which was also very interested in GVT. It all started when Vivendi made a tender offer for all the shares of GVT, Telefonica responded with a counter offer and the BM&FBovespa, the Brazilian stock exchange, set an auction. Before the auction took place, however, Vivendi negotiated with funds that held shares and options on shares in GVT. Using derivatives instruments, Vivendi obtained the right to acquire more than 50% of GVT´s common shares through stock exchanges purchases and direct negotiations. Therefore, Vivendi achieved its objective of acquiring the control of GVT without having to make a tender offer.
The new rules approved by CVM aim to avoid "surprises" like the GVT episode and give more transparency to tender offers and also intend to protect the minority shareholders, that many times are forced to accept a tender offer with fear of staying with shares without any liquidity.
The main changes introduced by the new rules are outlined below.
The duty of confidentiality that the offerer must obey before making the tender offer is more detailed and includes the procedures to be observed in case the information about the launching of the offer escapes to his/her/it control.
Pursuant to the provisions of new article 4-A, the offerer must keep confidentiality regarding the takeover bid until its release to the market as well as ensure that his/her/its administrators, employees, advisors and third parties he/she/it trusts do the same. This obligation is valid: (i) until the date in which the material fact regarding the tender offer is disclosed, when the offer is subject to registration with CVM, as required under the terms of article 9 of CVM Instruction No. 358, of January 2, 2002; or (ii) the date of publication of the notice (edital) of the tender offer in the newspapers of large distribution normally used by the target company to divulgate its announcements to the public, when the offer is not subject to registration with CVM.
If the information escapes to the offerer´s control, then the prospective offerer shall immediately: (i) publish the notice of the tender offer; or (ii) inform to the market that he/she/it is interested in making the takeover bid, or is considering such possibility, even though is not yet sure whether he/she/it will make it or not. In this later case, CVM may define a term for the offerer to publish the notice or announce clearly to the market that he/she/it does not intend to make the tender offer within a six month-period.
II. Mandatory Requirements for Third Parties
Any third party that is interested in interfering in the auction of a takeover bid will need to identify himself/herself/itself with a 10 days written notice of the auction date.
By force of paragraph 4 of article 12, any interested person that would like to interfere in the auction of a takeover bid as another offerer must announce his/her/its intention by publishing a notice, disclosing the following information:
- identification of the target company, the intermediary institution, and the offerer, including, in relation to the later, when it is the case, the identification of his/her/its controller, with the description of its business purpose, sector where it acts, and activities developed by it;
- number, class and kind of the shares to be acquired;
- number, class, kind and type of securities of the target company that are held by the offerer or any person entailed to the offerer;
- number, class, kind and type of securities of the target company used as a loan, having as borrower or lender either the offerer or any person entailed to the offerer;
- exposure of the offerer or any person entailed to the offerer in derivatives referenced in securities of the target company;
- detailed information about contracts, pre-contracts, options, letters of intent or any other legal acts disposing about the acquisition or alienation of securities of the target company, whereby the offerer or any person entailed to the offerer is a party or beneficiary; and
- detailed description of contracts, pre-contracts, options, letters of intent or any other similar legal acts entered within the last six months between: (i) the offerer or any person entailed to the offerer; and (ii) the target company, its administrators or shareholders holding shares representing more than 5% of the shares to be acquired pursuant to the tender offer or any entailed person.
III. - Auction Rules for Control Acquisition
Adaptation of the auction rules for takeover bid of the target company, with express prohibition of: (a) interference by third parties for a lot inferior to the one that the offerer intends to acquire, and (b) increase of the price in the auction by the bidder if a competitor bid has been launched.
According to article 12, the tender offer shall be necessarily made in auction in the stock exchange or in the organized-over-the counter market in which the shares object of the tender offer are admitted for negotiation.
Paragraph 1 of the same article 12 establishes that the auction shall adopt procedures that necessarily assure: (i) the possibility of increasing the price to be paid for the shares during the auction, being the new price extended to all shareholders that accept the previous calls, by observing the differentiation of prices among the several classes or kinds of shares, if existing, an the possibility of increasing the price of just one or some classes or kinds of shares, and also complying with the provisions of paragraph 7 of the same article 12 (see comment below); and (ii) the possibility of buyer interferences, which can comprise a lot of shares inferior to the respective tender offer, proceeding the apportionment, except for the tender offer for the cancellation of registration, for increase of participation and for control acquisition (takeover bid), in which the interferences shall comprise the total lot.
Pursuant to paragraph 6 of said article 12, at the request of the offerer CVM may authorize the offer to be made through different means other than the auction.
Paragraph 7 of article 12 clarifies that, in case of control acquisition, the offerer cannot increase the price in the auction, in the event that the notice has been published or if registration for competitor control acquisition has been applied with CVM.
IV. Total Takeover Bid
New article 32-A determines that, in case of total takeover bid to acquire the controlling interest, the addressees of the offer are not compelled to sell immediately and they will have the sale option for the next 30 days after the auction. In practice, this provision gives the minority shareholders the opportunity to accept the offer after the auction, preventing them from being coerced to sell their shares at a price they deem inappropriate when the auction is made.
V. Partial Takeover Bid
In case of partial takeover bid, the new Article 32-B creates an auction procedure that allows the addressees of the offer to accept it conditionally. They will only sell their shares if the offer is successful. For this to happen, the offer must be unconditionally approved by holders of a number of shares which ensures to the offerer the control of the company. Again, the purpose of this procedure is to guarantee freedom of shareholders to choose whether to accept or refuse the offer.
VI. More Transparency
In new articles 32-C to 32-G, there is a substantial increase in the quantity and quality of information to be disclosed in case of takeover bid by the offerer, the target company, its administrators and principal shareholders, especially as the businesses they conducted involving shares and derivatives during the tender offer period.
There are also improvements in the rules governing the appraisal reports to be hired by the offerer in some of the modalities of tender offer, about the work and responsibility expected of the evaluators, which from now on are obliged to require consistency from the information they receive to prepare their appraisal reports.
These new rules are already in full force and effect and bring more transparency for the entire takeover bid process, not only for the investors but also for the administrators of the target company. The reform made by our regulator through CVM Instruction 487/2010 is particular important at this stage of the Brazilian capital markets because the number of our publicly-held corporations with no defined controller and dispersed capital has increased.
1 CVM Instruction 361/2002 regulates the procedure applicable to any tender offer (in Portuguese, Oferta Pública de Ações - OPA) for publicly-held corporations shares, and also the process of registering tender offers for cancellation of registration for negotiation of securities in regulated markets, through the increase of participation of a controlling shareholder, through the alienation of publicly-held corporation control, for the control acquisition of a publicly-held corporation when involving securities exchange, and exchange for securities.
2 For the purpose of current regulations, "controlling shareholder" is the person, individual or legal entity, fund or universality of rights or the group of people entailed by vote agreement, or under common control, direct or indirect, that: a) is titular of partnership rights that assure him/her/it in a permanent way, the majority of votes in the decisions of the general meeting and the power of electing the majority of officers in the company; and b) effectively uses his/her/its power to coordinate the social activities and to orient the operation of the company bodies (as defined by item IV of article 3 of CVM Instruction 361/2002).
3 This change occurred during the last few years, with the adoption of the "100% common shares model" (i.e. all shares must have voting rights), which is a demand from the New Market (Novo Mercado), the listing tier on the BM&FBovespa that requires high corporate governance standards. Several entrepreneurs chose to become part of this select group in order to attract the interest of investors in their public offerings. Consequently, without the possibility of issuing preferred shares with nonvoting rights, these entrepreneurs had to find funding by issuing common shares, giving up in some instances majority control. Therefore, the corporate capital of those companies that adhered to the Novo Mercado became more dispersed.
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