- Brazil's New Merger Control Law - A New Hurdle for Global M&A
- May 14, 2012 | Authors: S. Wade Angus; Luis Riesgo; Fiona A. Schaeffer
- Law Firms: Jones Day - São Paulo Office ; Jones Day - Palo Alto Office ; Jones Day - São Paulo Office ; Jones Day - New York Office
Brazil's New Merger Law, which enters into force on May 29, 2012, introduces significant structural, procedural, and institutional changes to Brazil's merger review system. While the revised merger control thresholds may reduce filings for pure "foreign to foreign" deals, many cross-border transactions still will require approval in Brazil. But unlike in the past, now companies will have to notify and wait up to 330 days to obtain approval in Brazil before they can close their deal. Companies contemplating deals that may affect Brazil should determine as a priority whether merger approval is required in Brazil. With the longest timetable of any suspensory jurisdiction, Brazil soon may overtake China as the approval most likely to hold up closing. And Brazil's new notification form also makes it one of the most burdensome filings to prepare. In sum, the new merger control regime in Brazil may significantly affect the course and timetable of your deal and must be an early priority in any deal checklist.
Suspensory Regime. Reportable "concentration acts" must be notified to CADE and suspended pending CADE's review and approval.
Consolidation to One Reviewing Agency. The New Merger Law consolidates all merger review responsibilities into a single agency (CADE), made up of three sections: (i) the Superintendent General, which will investigate anticompetitive practices and provide the initial level of review for notified mergers; (ii) the Administrative Tribunal, which will remain the decision-making body in charge of rendering final decisions on notified mergers; and (iii) the Department of Economic Studies (which will be responsible for rendering nonbinding economic opinions and studies).
The New Merger Law provides for the creation of 200 new staff positions within CADE. However, with the hiring of new staff still in the early stages, there are concerns that CADE will have insufficient resources to manage the implementation and operation of the new merger control regime.
New Thresholds Require Greater Connection to Brazil. The prior law's 20 percent market share threshold has been abolished and the new regime has two financial thresholds: (i) the corporate group of one party to the transaction achieved turnover (gross revenue) of at least R$400 million (approximately US$213 million) in Brazil in the last fiscal year (which coincides with a calendar year) and (ii) the corporate group of another party to the transaction achieved turnover of at least R$30 million (approximately US$16 million) in Brazil in the last fiscal year. (Note that the above US dollar conversion is based on the exchange rate for year end 2011 as reported by the Central Bank of Brazil; values may differ depending on the exchange rate used).
By adding a threshold of R$30 million, and therefore requiring at least two groups of companies to have turnover in Brazil, the new thresholds require a greater connection to Brazil than under the previous regime. However, because the thresholds count turnover of the entire group (not just of the target or acquiring company), many foreign to foreign "concentration acts" will continue to meet the thresholds and will need to be notified if they have a local nexus (i.e., take place at least partially in Brazil or have actual or potential effects in Brazil). Companies should be aware that CADE maintains the right to review "concentration acts" that do not meet the thresholds within one year of completion.
Lengthy Review Period (up to 330 days). The statutory review period is 240 days, which may be extended by 60 days at the request of the merging parties or by 90 days if CADE determines the transaction requires further review. There is no shorter timetable (equivalent to the initial HSR waiting period or EU first phase review) to clear transactions that do not raise competition concerns.
Timing of Notification. The Draft Regulation states that parties can notify their deal at any time after execution of a binding document but before the deal has been consummated. This replaces the current requirement to notify the deal within 15 business days of the execution of the first binding document.
Penalties for Noncompliance. Parties that close reportable deals without prior approval from CADE or that engage in "gun jumping" during the suspensory period are subject to fines ranging from R$60,000 to R$60 million. CADE also may declare the deal to be void.
Transition Arrangements. The current nonsuspensory regime will continue to apply to deals in which the parties (i) execute a binding document (e.g., a binding term sheet or LOI) before May 29, 2012, and (ii) file their merger notification by June 19, 2012. All other notifiable transactions will be subject to the new suspensory regime (including deals signed before May 29, but not notified by June 19).
New Notification Form. The new form contains extensive requests for documents and data and is likely to be even more burdensome and time consuming than the EU's Form CO. Although CADE has prepared a short form notification for transactions that pose no competition issues, there is no "fast track" review timetable for these transactions.
Key Elements of the New Merger Law and the Recently Published Draft Regulations
With the effective date of Brazil's New Merger Law just weeks away, many questions remain as to how the law will actually be implemented. With the intention of answering many of these questions, on March 19, CADE published for consultation draft Regulations for the Request of Approval for Mergers and Draft Regulations for Fast Track Review of Merger Cases (collectively, "Draft Regulations"). The Draft Regulations clarified certain questions about the implementation of the New Merger Law but also raised several issues that should be of concern to the business community.
Relevant "Concentration Acts." Article 90 of the New Merger Law defines a "concentration act" subject to merger control as a transaction where:
- Two or more previously independent companies merge,
- One or more companies acquire, directly or indirectly, by purchase or exchange of shares, quotas, convertible bonds or securities, or tangible or intangible assets, by contract or in any other manner, control or parts of one or more other companies,
- One or more companies incorporate another company or companies, or
- Two or more companies execute a joint venture or any other form of association agreement.
Minority Interests. Under the current Merger Law, CADE has determined that minority acquisitions do not require notification unless the acquisition confers the power to exercise a "relevant influence" in the business decisions of the company (such as the right to appoint members of the board, veto rights, or any other power to influence the way the company conducts its business in the market).
"Control" under the New Merger Law also may include the concept of "relevant influence." CADE has not defined "relevant influence" in the Draft Regulations and it is unclear whether it is akin to, or broader than, the "decisive influence" standard in the EU. CADE's current practice suggests that "relevant influence" may be a broader concept than "decisive influence". Notably, CADE recently has intervened in the acquisition of minority interests by one competitor in another where the acquisition did not appear to confer a blocking minority or unilateral veto rights over key decisions. However, CADE officials reportedly have observed that current decisions and practice may not be directly applicable to the New Merger Law given its different statutory language.
Cooperative Agreements. It is also unclear whether CADE will interpret the New Merger Law as covering cooperative agreements, short of traditional mergers and acquisitions (such as licensing, distribution, supply, and other commercial agreements). The statutory basis for CADE's decisions requiring notification of certain cooperative agreements has been eliminated from the text of the New Merger Law. Nevertheless, some commentators have called for CADE to provide more definitive guidance on this issue.
Timing of Review. The New Merger Law sets out a statutory time period for the review of a transaction: A final administrative decision must be issued within 240 days, but this period may be extended by 60 days at the request of the merging parties or 90 days if CADE determines the transaction requires further review, for a maximum of 330 days. While Brazil's President Rousseff vetoed a provision in the draft law that provided for automatic clearance of transactions that had not been cleared within the 330-day period, CADE has stated in the Draft Regulations that it will treat such transactions as automatically approved.
The Draft Regulations state that the waiting period commences only after a filing is deemed "complete." There is no deadline by which CADE must make such a determination.
Waiver of Suspension Period. CADE's Draft Regulations provide that parties may seek a "preliminary waiver" to allow completion of the transaction to take place before CADE approval if (i) the transaction does not irreparably damage competitive conditions, (ii) the implementation of the transaction is fully reversible, and (iii) substantial and irreversible financial harm is imminent if the transaction is not immediately completed. CADE has indicated that preliminary waivers will be granted only in exceptional circumstances.
Ability to "Close Around" Brazil and"Gun Jumping." CADE has not issued any guidance on whether and how companies can close a transaction outside of Brazil before merger approval has been obtained in Brazil. However, given the time-sensitive nature of international transactions and the costs and risks of delaying closing, it is likely that this will be tested at some point in the future. Consideration of the gun jumping rules may be instructive here. The Draft Regulations state that pending approval, the parties must keep the physical structure and the competitive conditions in the market unchanged, and any transfers of assets or any influence of one party over the other, as well as exchanges of competitive information, are prohibited.
New Notification Form. CADE's proposed new notification form requires an extensive amount of information from both filing parties, including:
- Internal company documents, such as market assessment studies, board and committee minutes, as well as ordinary course strategy and marketing reports and business plans.
- Detailed information on all overlapping products, including five years' worth of sales and other financial data and detailed information concerning customers, competitors, suppliers, distribution channels, pricing, customer preferences, coordinated effects as well as a "counterfactual."
- Extensive information about minority interests (5 percent or more) even if they do not overlap with the business of the target company.
- Portuguese translation of all documents submitted.
The burden imposed by the form stems in part from CADE's decision not to use an initial screen (such as the EU Form CO's "affected markets" or the U.S. HSR Form's overlapping NAICS codes) to identify potentially problematic overlaps and request further, targeted information as needed after notification. Instead, the new notification form requires a massive amount of information to be submitted up front, regardless of the significance of the overlap or other competitive issues, or whether the information required is actually relevant to the assessment of the specific transaction. This creates significant burdens for the filing parties and will further strain CADE's already scarce resources.
Short Form Notification. The Draft Regulations also propose a somewhat misnamed "fast track" procedure for transactions that are unlikely to raise antitrust concerns. The "fast track" allows notifying parties to use a short form notification that omits many of the burdensome requirements of the regular form. CADE has identified certain types of transactions that will qualify for the short form—a number of which do not actually appear to qualify as "concentration acts" in the first place—including:
- Franchises: the purchase of franchises by their franchisers, provided there is no change of control.
- Joint ventures or cooperatives: the association of two or more companies to create a new company under common control.
- Corporate restructurings in the same group with no change of control.
- 1Entry into Brazil: acquisition of control of a company in Brazil, provided acquiring company does not already exercise activities in Brazil.
- Substitution of economic player.
- Low market share: transactions that the General Superintendent deems to result in "unquestionably low" market share.
- Other transactions that the General Superintendent determines do not warrant an extended analysis.
Although CADE has indicated it will endeavor to review these transactions in a shorter time period, it has not committed to a specific deadline.
Brazil's New Merger Law creates a new and significant regulatory hurdle to the completion of many cross-border mergers and acquisitions. In many cross-border deals, companies now will have to notify and wait up to 330 days to obtain approval in Brazil before they can close their deal. Brazil now has the longest timetable of any suspensory jurisdiction and one of the most burdensome filings to prepare. Brazil is also a significant market for many global companies, and businesses contemplating transactions that may affect Brazil should start preparing now to navigate this regulatory hurdle.