Brazil’s new Antitrust Law, which entered into force on May 29th, has established a pre-merger notification system and a size-of-the-parties-in-Brazil test for mandatory filing.
In addition, implementing regulations recently issued by the Administrative Council for Economic Defense (CADE) have provided further guidance on notification of partial acquisitions, tender offers, and transactions by investment funds and private equity firms.
We summarize here some of the key features of the new merger control regime and consider its impact on cross-border transactions.
1. The New Merger Control Regime
Revised Thresholds
Having abolished the 20% market share threshold and the post-merger notification system, the new antitrust law has established a size-of-the-parties-in-Brazil test for mandatory pre-merger notifica-tion:
(1) one group involved in the transaction has registered gross turnover or volume of business in Brazil equal to or higher than BRL 750 million (approx. USD 375 million) in the last fiscal year; and
(2) at least one other group involved in the transaction has registered gross turnover or volume of business in Brazil equal to or higher than BRL 75 million (approx. USD 37.5 million) in the last fiscal year1.
(3) For the purposes of the new law, a group encom-passes (i) all companies under control by a same controlling entity and (ii) companies in which the controlling entity or its controlled companies hold, directly or indirectly, 20% or more of the shares.
Investment Funds and Private Equity Firms
CADE Regulation No. 2 establishes that the following entities shall be considered as a single group: (i) funds under the same management, (ii) the managing entity, (iii) investors that hold, directly or indirectly, more than 20% of at least one of such funds, and (iv) portfolio companies in which at least one of the funds holds 20% or more of the shares.
Potentially Covered Transactions
Notifiable transactions include (i) mergers, (ii) direct and indirect acquisitions of control or parts of a company (including minority interest in the cases described below), or its tangible or intan-gible assets, and (iii) joint-ventures, consortia, and association agreements.
Partial Acquisitions
Acquisitions of partial ownership should be notified when
(1) they result in acquisition of control of the target by the acquiring group;
(2) they do not result in acquisition of control but
(a) the acquiring group becomes the major investor in the target; or
(b) there is horizontal or vertical relationship among the groups involved AND the acquiring group either acquires 5% or more of the target’s shares or increases through a series of acquisitions its interest in the target by 5% or more; or
(c) there is no horizontal or vertical relationship among the groups involved, BUT as a result of the transaction the acquiring group will hold 20% or more of the target’s shares OR the acquiring group already holds 20% or more of the target’s shares and acquires from a single seller an additional stake of 20% or more in the target;
(3) even though the acquiring group already controls the target, it acquires, directly or indirectly, from a single seller 20% or more of the remaining shares.
Tender Offers
Tender offers may be issued and consummated before a notification is filed. However, the exercise of the governance rights obtained from the acqui-sition shall be prohibited until CADE reviews and approves the transaction. Nevertheless, in cases in which the exercise of such governance rights is essential for securing the return on investment, parties may request CADE to authorize it before the final decision.
Review Period
CADE’s General Superintendence (GS) has up to 240 days from the date of the filing to issue a decision on whether to (a) clear the transaction, (b) challenge the transaction before CADE’s Administrative Tribunal for Economic Defense (Tribunal)—the adjudicatory commission—or (c) refer the transaction to the Tribunal when it has been unable to reach a conclusion on the transac-tion’s net effects on relevant markets. Parties may request an extension of up to 60 days. In cases of complex transactions that generate unilateral or coordinate effects prima facie, the GS may request the Tribunal an extension of up to 90 days. Transactions will be tacitly approved in case CADE does not reach a decision within 240 days or 330 days in cases of complex transactions.
In case the GS clears the transaction, merging parties must wait to consummate and implement it for an additional period of 15 days in which third parties may appeal the GS’s decision before the Tribunal or any Commissioner may request the Tribunal to review the GS’s decision.
Fast Track
Simple transactions that do not generate antitrust concerns will be reviewed through a fast track procedure expected to take 40 days. Transactions subject to such procedure include:
Following clearance by the GS, parties must wait to consummate and implement the transaction for an additional period of 15 days in which third parties may appeal GS’s decision before the Tribunal or any Commissioner may request the Tribunal to review the decision.
Gun-Jumping
Parties cannot consummate the transaction or change the dynamics of competition in the relevant markets before CADE’s decision. Merging parties shall refrain from (i) modifying their physical structures, and transferring or integrating assets, (ii) influencing the other party’s decisions, (iii) exchanging competitively sensitive information that is not strictly necessary for reaching a preliminary binding agreement.
Fines for failure of notifying or gun-jumping subject the parties, including the seller, to payment of fines from BRL 60 thousand (approx. USD 30 thousand) to 60 million (approx. USD 30 million).
Forms
Following public consultation, CADE has decided to issue an additional simplified form (Form II) for simple transactions that do not generate antitrust concerns and may be reviewed by the fast track procedure. Form I though requires substantial and detailed information on the structure of demand and offer, entry, effective rivalry, buyer power, and coordinated interaction in the relevant markets. CADE has acknowledged that providing all the information required by Form I may be burdensome for parties in cases of transactions that do not result in substantial market concentration. However, the agency has argued that since the law does not allow it to stop the clock if it requests further information, parties should be required to provide detailed infor-mation and market data when filing the notifica-tion.
New Merger Guidelines
CADE has announced that it will issue three new guidelines: (1) Horizontal Merger with Homogeneous Products Guidelines; (2) Horizontal Merger with Differentiated Products Guidelines; and (3) Vertical Integration Guidelines.
2. The Impact on the Dynamics of Cross-Border Transactions
Simple transactions reviewed under the fast track procedure are expected to be cleared in 40 days during the next few months and possibly within a couple weeks after the restructured agency is operating in full force. Analysis of very complex transactions that generate unilateral or coordi-nated effects shall not take more than 330 days. However, it remains to be seen how long CADE will take to review transactions that while resulting in moderate horizontal concentration or vertical integration – and thus not eligible to be reviewed under the fast track procedure – do not generate antitrust concerns. Although providing as much data and information as possible when filing the notification may be burdensome for merging parties in such cases, it will help to obtain approval more quickly. In addition, CADE may enter into hold separate agreements to allow transactions to close outside Brazil before clearance or authorize consummation in Brazil before its final decision in case parties demon-strate imminent and irreversible harm to the target company unless the transaction is imple-mented.
In view of CADE’s enhanced capacity and recent decisions, merging parties are advised to consider (1) conducting antitrust due diligence in Brazil to assess potential risks due to target’s past or on-going unilateral or collusive practices that may lead CADE to impose restrictions or block a trans-action as in recent cases; (2) assessing and allocating potential risks due to increased market concentration in Brazil from the outset of the negotiation process, especially in cases of 4-to-3 or 3-to-2 mergers or transactions that result in substantial market concentration and market share levels of 60% or more; (3) certifying that the MOU, LOI, and global agreement provide that the transaction will not be consummated and the dynamics of competition in the country will not be affected before CADE’s approval.