1. REGULATORY FRAMEWORK
1.1. What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
In Brazil, public M&A activity is governed by the Brazilian Corporations Law (Law 6,404/76) and regulations issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM). The following CVM regulations are particularly relevant to M&A involving public companies in Brazil:
1.2. How, and by what measures, are takeover regulations (or equivalent) enforced?
Takeover regulations are discussed or enforced both at an administrative level (the CVM has powers to hear cases and pass judgment in administrative cases), as well as in arbitration chambers and judicial courts. In Brazil, takeover regulations are widely acknowledged and enforced.
2. STRUCTURAL CONSIDERATIONS
2.1. What are the basic structures for friendly and hostile acquisitions?
Basic structures for friendly acquisitions involve private negotiations with the controlling shareholder and the acquisition of shares in the stock market.
Private negotiations with the controlling shareholder or main shareholders:
This mechanism is very common, since most Brazilian companies still have concentrated ownership, mainly a controlling shareholder (or group of shareholders). It requires a previous negotiation between the parties about, among other things, the purchase price, conditions to closing, representations and warranties, and other clauses. As a general rule, the disposal of controlling interest under these terms, either directly or indirectly, entitles the minority shareholders to tag-along rights where the buyer must make a public offer for the acquisition of the non-controlling voting shares of the target company for at least 80% of the price paid for the controlling voting shares. In addition, the potential buyer shall observe the target company's by-laws and shareholders' agreements, which may impose other requirements for the acquisition (such as the extension of tag-along rights to non-voting shares or a right of first refusal).
Acquisition of equity securities in the stock market:
This mechanism is effective in companies with dispersed ownership and high free float and generally does not require previous negotiations between the parties. It can also be combined with private negotiations with strategic shareholders. The mechanism may trigger an obligation by a potential buyer to perform a takeover offer depending on the by-laws of the target and the listing segment on which the securities are listed. In addition, any share acquisition that results in the ownership of five percent or more of a publicly held company's type or class of shares, or rights thereon, must be disclosed by the investor to the target, which in its turn will disclose the information through the CVM's website for public consultation. Takeover bids are also effective in companies with dispersed ownership.
As to hostile acquisitions, Brazilian corporate legislation does not differentiate recommended bids from hostile bids, both being treated as voluntary takeover bids. In practice, the distinction depends on whether or not the bid is welcomed by the management or by the controlling shareholder, sometimes having been subject to previous negotiations with the potential buyer. While permitted, hostile takeover bids are uncommon, since historically Brazilian companies have typically had concentrated ownership, specially defined and stable controlling shareholders.
2.2. What determines the choice of structure, including in the case of a cross border deal?
An important structure driver is the trigger for a public bid, which the acquirer may wish to avoid, since they are generally subject to registration with the CVM.
According to the Brazilian Corporations Law and CVM regulations, public offering for acquisition of securities or takeover bids are generally required:
2.3. How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
The term will depend on the type of public offering. In general, considering the general requirement for registration with the CVM and the minimum 45 day-period an offering must remain open, the procedure takes approximately 90 days.
2.4. Are there restrictions on the price offered or its form (cash or shares)?
In a public bid, there are minimum prices to be observed, according to the offering. As a general rule:
De-listing offering: fair price based on an appraisal report.
Tag-long offering: the general rule establishes that the minimum price must be equivalent to at least, except as otherwise provided in the company's by-laws at least 80% of the price paid for each controlling voting share (tag-along right).
Ownership increase offering: fair price based on an appraisal report, which may consider the following criteria: net assets, net assets appraised at market value, discounted cash flow, comparison by multiples, stock prices on the securities market, or based on any other criteria accepted by the CVM.
There are no restrictions as to the form of the offer (cash or shares), provided that in the case of shares they have their value based on an appraisal report.
2.5. What level of acceptance/ownership and other conditions determine whether the bidder makes the acquisition and can satisfactorily squeeze out or otherwise eliminate minority shareholders?
Should the free float shares following a successful de-listing offering represent less than five percent of the outstanding shares of a given company, then a shareholders' meeting may approve a mandatory redemption of said shares for the adjusted price paid under the de-listing offering.
Other situations allowing for redemption of shares or squeeze out-related structures would require a specific provision in the by-laws of the company.
2.6. Do minority shareholders enjoy protections against the payment of control premiums, other preferential pricing for select shareholders, and partial acquisitions, such as mandatory offer requirements, ownership disclosure obligations and a best price/all holders rule?
Minority shareholders enjoy protections like de-listing offering, tag-along offering and ownership increase offering (please see question 2.4 above). Accordingly, should any of the events required for such offerings to be launched, then the minority shareholders would be able to sell their shares in exchange for the price applicable to each offering.
2.7. To what extent can buyers make conditional offers, for example subject to financing, absence of material adverse changes or truth of representations? Are bank guarantees or certain funding of the purchase price required?
Buyers are allowed to make conditional offers, provided that such conditions are not subject to conditions depending on direct or indirect performance of the buyer or related parties.
3. TAX CONSIDERATIONS
3.1. What are the basic tax considerations and tradeoffs?
There is no taxation for the investor at the moment of the acquisition or investment. In case of investments made through a Brazilian vehicle, depending on the case the acquisition may generate a goodwill subject to amortization under certain conditions.
3.2. Are there special considerations in cross border deals?
Brazilian tax law provides for certain specific exemptions for transactions carried out by non-resident investors in the Brazilian stock exchange. There are also specific tax benefits for foreign investments made through private equity investment funds – FIPs. Foreign investors usually take these benefits into account when structuring and evaluating their transactions.
4. Anti-Takeover Defences
4.1. What are the most important forms of antitakeover defences, and are there any restrictions on their use?
The most important form of antitakeover defence is the use of the dispersed ownership protection offering (please see answer to question 4.2 below).
4.2. How do targets use antitakeover defences?
The most used antitakeover defense is the dispersed ownership protection offering. According to such offering, by-laws of a given company may require an investor reaching a specific percentage of shares issued by the company to launch an offering aiming at the acquisition of the free float shares as per the price ascertained in the by-laws.
4.3. Is a target required to provide due diligence information to a potential bidder?
No, except to the extent such information is required to be disclosed by Brazilian law (eg capital markets regulations).
4.4. How do bidders overcome anti-takeover defences?
Bidders can overcome anti-takeover defenses by amending the target bylaws to rule out or change the dispersed ownership protection Offering.
Since this offering is not required by law, regulation or self-regulation, which means each company is generally allowed to provide for its own rule, some bylaws establishes that, should the by-laws be amended as described above, the shareholders approving the amendment is required to launch the dispersed ownership protection offering.
The CVM decided that such by-laws provision restricting amendments to by-laws on the dispersed ownership protection offering by requiring the offering to be launched are not valid under Brazilian law.
4.5. Are there many examples of successful hostile acquisitions?
Brazilian corporate legislation does not differentiate recommended bids from hostile bids, both being treated as voluntary takeover bids. Although permitted, hostile takeover bids in Brazil are uncommon, since historically Brazilian companies have typically had a defined and stable controlling shareholder. There are no examples of successful hostile acquisitions – a recent successful acquisition (which was actually welcomed by the managerial members of the company) in 2014 was the public offering to acquire shares entitling control over Diagnósticos da América S.A. (DASA) launched by Edson de Godoy Bueno and Dulce Pugliese de Godoy Bueno, former controlling shareholders of Amil, a leading Brazilian healthcare company sold to United Health in 2012.
5. DEAL PROTECTIONS
5.1. What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
The main way to protect a transaction from a friendly buyer is either the dispersed ownership protection offering. However, as public offerings for the acquisition of shares are implemented through an auction on the stock exchange, the general rule is that the best price would win the auction.
5.2. To what extent are deal protections limited, for example by restrictions on impediments to bidding competition, break fees or lock up agreements?
As public offerings for the acquisition of shares are implemented through an auction on the stock exchange, the general rule is that competition offerings are allowed – according to each type of offering – and the best price would win the auction. Thus, except for the requirements on regulation for a competition offering to be launched, restrictions on bidding competition would not generally be adopted.
6. ANTITRUST REVIEW
6.1. What are the antitrust notification thresholds in your jurisdiction?
Transactions that reach the following thresholds must be submitted before the CADE and wait until CADE's final approval to proceed with the closing or any action towards the implementation of the transaction:
(i) one of the economic groups of the parties involved in the transaction has a turnover in Brazil of R750 million ($233 million) or more in the latest financial statement; and
(ii) any other economic group involved in the transaction has a turnover in Brazil of R75 million in the latest financial statement.
6.2. When will transactions falling below those thresholds be investigated?
Transactions that do not meet the turnover thresholds set forth in the Brazilian Law may nevertheless be subject to ex officio review by the Brazilian competition authorities.
6.3. Is a notification filing mandatory or voluntary?
If the threshold is reached, the filing is mandatory.
6.4. What are the deadlines for filing, and what are the penalties for not filing?
There is no deadline for the filing, but because the deal cannot be closed before antitrust clearance is obtained, it is usually in the interest of the parties to file a notification as soon as it is feasible.
6.5. How long are the antitrust review periods?
Timing of the clearance procedure may be affected by the complexity of the transaction. As a general rule, concentrations below 20% have run on fast track, which currently takes between four to six weeks. When investigating a transaction, CADE's general superintendent may declare it to be complex and initiate an in-depth investigation. A final decision must be rendered in 240 days, extendable for an additional 60-day period if requested by the parties or by an additional 90 days period if required by authorities.
Nonetheless, CADE regulations provide that if a review takes more than 280 days, it will be considered approved.
6.6. At what level does your authority have jurisdiction to review and impose penalties for failure to notify deals that do not have local competition effect?
The Brazilian Competition Law does not establish penalties for failure to notify deals irrespective of whether those deals have or local competition effect or not.
6.7. What other regulatory or related obstacles do bidders face, including national security or protected industry review, foreign ownership restrictions, employment regulation and other governmental regulation?
Regulatory (antitrust): transactions reaching specific thresholds must be submitted before the CADE and wait until its final approval to proceed with the closing or any action towards the implementation of the transaction (see question 6.1 below).
Foreign ownership, national security or protected industry review:
Participation of foreign investments is prohibited in nuclear energy, businesses neighbouring international borders, post office and telegraph services, domestic flight routes and the aerospace industry.
Certain other sectors have restrictions regarding foreign investment. Examples of such sectors include: utility providers, rural land, press and broadcasting, financial institutions, insurance, Brazilian airlines, public bus companies or similar public transportation, railroad, securities companies, fund managers and gambling.
7. ANTI-CORRUPTION REGIMES
7.1. What is the applicable anti-corruption legislation in your jurisdiction?
A new Brazilian Anti corruption Act (Law 12,846/13) came into force January 29 2014, establishing strict civil and administrative liability (although not criminal) for corporate entities that "promise, offer or give, directly or indirectly, an undue advantage to a public agent, or third person related to him." According to the Act, if the company's directors, managers, officers, members of the board, administrators or employees act or take part in the act, then he or she can be held liable as well.
As to criminal actions, crimes of corruption are described in the Penal Code, and criminal liability can only be held against individuals.
7.2. What are the potential sanctions and how stringently have they been enforced?
According to the Brazilian Anti-Corruption Act, the administrative and civil penalties facing the company can range from the imposition of a fine (from 0.1% to 20% of the company's gross revenue in the previous year, or R6,000 to R60 million if the revenue is too difficult to calculate), to the dissolution or suspension of the operations of the company, forfeiture and debarment, loss of public contracts, prohibition on incentives and public financing and publication of the publication of the conviction in the media, including the internet.
The Brazilian Anti-corruption Act allows companies to cooperate with investigations and to enter into leniency agreements that can reduce up to two thirds of the fine, and relieve other sanctions. The compliance programs and mechanisms or internal integrity procedures in the company shall also be taken into consideration in order for the sanction to be applied, which increases the companies' interest to update or draft compliance programs.
The Brazilian Penal Code establishes the penalty of imprisonment, from two to twelve years, and fine, but only in case of the offenders are considered culpable.
The application of the sanctions range from case to case and depend on the nature and seriousness of the offense, including the risk of harm to the society and collateral consequences.
8. OTHER MATTERS
8.1. Are there any other material issues in place in your jurisdiction that might affect a transaction?
8.2. What are the key recent M&A developments in your jurisdiction?
Recently-enacted Law 13,097/15 authorises the direct and indirect participation of foreign capital in health services in Brazil, which was prohibited since the enactment of the 1988 Constitution. According to the new law, foreign investors may invest in Brazilian health-related companies such as hospitals, clinics and diagnostic laboratories.
The change also brings positive aspects for the public health service, which now will be allowed to build public-private partnerships in which the foreign private investor may manage an entire hospital, for example.
On another note, the Brazilian real devaluation in face of the US dollar is attracting investors looking for distressed assets or other types of acquisitions that would have been valued too high until recently.
First published by our sister publication IFLR magazine. Take your free trial today.
Paulo Frank Coelho da Rocha
About the author
Paulo Rocha graduated from Universidade de São Paulo Law School in 1993 and earned an LLM in corporation law from New York University school of law in 1997.
From 1997 to 1999, he worked as a foreign associate at Cravath, Swaine & Moore, in New York.
He is currently a member of the Board of Directors of Lex Mundi, and also a member of the International Bar Association, the Brazilian-American Chamber of Commerce and the Advisory Board of the Working Group on Legal Opinions of the American Bar Association.
He has written several articles on corporate law and co-authored the book Business Laws of Brazil (WestThompson, 2013, third edition).
He has been nominated for several years a leading lawyer in his field by directories such as Chambers, Legal 500, International Financial Law Review and Who's Who Legal.