Paulo Coelho da Rocha of Demarest Advogados assesses the M&A regulatory framework in Brazil
Section 1: GENERAL OUTLOOK
1.1 What have been the key recent M&A trends or developments in your jurisdiction?
Brazil's devalued currency continues to attract investors looking for distressed assets or other acquisitions that were valued too highly, until recently. The lack of liquidity is causing some large Brazilian groups to divest of non-core assets. This includes participation in infrastructure assets, which represent a good opportunity for investors looking to acquire infrastructure assets without the hurdles of public bids.
1.2 What is your outlook for public M&A in your jurisdiction over the next 12 months?
Unless the current political crisis is resolved, the economic environment is likely to deteriorate further over the next 12 months. In this scenario, large public companies will likely divest of non-core assets. Other companies that depend on imports or that have foreign currency-denominated debt may have to sell some of their assets. Again this will create a favourable environment for strategic buyers.
Section 2: REGULATORY FRAMEWORK
2.1 What legislation and regulatory bodies govern public M&A activity in your jurisdiction?
Public M&A is governed by the Brazilian Corporations Law and regulations issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, or the CVM). In particular:
regulation no. 361 of 2002 (public takeovers, covering mandatory or voluntary tender offers for publicly-held companies' shares);
regulation no. 319 of 1999 (mergers, spinoffs and consolidations involving publicly-held companies);
regulation no. 400 of 2003 (public offerings of securities); and
regulation no. 480 of 2009 (registration of a publicly-held company before the CVM).
2.2 How, and by whom, are takeover regulations (or equivalent) enforced?
Takeover regulations are enforced at an administrative level by the CVM, as well as in arbitration chambers and judicial courts.
Section 3: STRUCTURAL CONSIDERATIONS
3.1 What are the basic structures for friendly and hostile acquisitions?
Private negotiations with the controlling or main shareholders are common. This is because most Brazilian companies still have concentrated ownership, with ownership often residing with one controlling shareholder (or a group of shareholders).
Acquisition of equity securities on the stock market is effective in companies with dispersed ownership and a high free float.
Brazilian corporate legislation does not differentiate recommended bids from hostile bids; both are treated as voluntary takeover bids. While permitted, hostile takeover bids are rare, since historically Brazilian companies have had concentrated ownership.
3.2 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. The acquirer may wish to avoid this, since they are generally subject to registration with the CVM.
Public offerings for acquisition of securities or takeover bids are generally required:
for de-listing a publicly-held company (de-listing offering);
as a result of disposal of the controlling interest of a publicly-held company (tag-along offering);
if the increase of the controlling shareholder's equity participation (direct or indirect) affects the company's remaining shares' liquidity, as per the thresholds provided for in the applicable regulation (ownership increase offering); or
as a result of an increase of an investor's equity participation (direct or indirect), as per the thresholds provided for in the target's by-laws (dispersed ownership protection offering).
3.3 How quickly can a bidder complete an acquisition? How long is the deal open to competing bids?
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.
3.4 Are there restrictions on the price offered or its form (cash or shares)?
In a public bid, minimum prices must be observed, according to the offering. As a general rule:
de-listing offering: fair price based on an appraisal report. This may consider: net assets; net assets appraised at market value; discounted cash flow; comparison by multiples; stock prices on the securities market; or be based on any other criteria accepted by the CVM.
tag-along offering: except as otherwise provided in the company's by-laws, the minimum price must be equivalent to at least 80% of the price paid for each controlling voting share (tag-along right). Nevertheless: (i) for companies listed on the level two segment of the stock exchange, the price must be 100% of the price paid for each controlling voting share, either for preferred or common shares; and (ii) 100% of the price paid for each controlling voting share, for companies listed on the Novo Mercado listing segment.
ownership increase offering: fair price based on an appraisal report.
3.5 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?
If the free float following a successful de-listing offering represents less than five percent of the outstanding shares, a shareholders' meeting can approve a mandatory redemption of the 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. If the by-laws are silent, any amendment to include such a provision, or the approval of the redemption itself, would require approval by the shareholders at a general meeting and also a special shareholders' meeting by the affected shareholders.
3.6 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 such as de-listing offering, tag-along offering and ownership increase offering.
3.7 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 can make conditional offers, provided these are not subject to conditions depending on direct or indirect performance of the buyer or related parties.
Public offerings for the acquisition of shares must be intermediated by a broker-dealer, distribution agents or a bank with an investment portfolio. The intermediary institution must guarantee the financial settlement of the offerings and the payment of the purchase price.
Section 4: TAX CONSIDERATIONS
4.1 What are the basic tax considerations and tradeoffs?
There is no taxation for the local investor of the acquisition/investment. Foreign investors may be subject to a 0.38% financial transactions tax levied on foreign exchange transactions at the inflow of funds. If the investment is made through a Brazilian vehicle, the acquisition may generate a good-will subject to tax amortisation under certain conditions.
Regarding the exit, capital gains arising from the sale of stocks are generally taxed by Brazilian income tax (even if the two parties are non-residents) at the following rates:
(i) 15% for non-resident investors not domiciled in a low tax jurisdiction;
(ii) 25% for non-resident investors domiciled in a low tax jurisdiction;
(iii) 34% for companies domiciled in Brazil;
(iv) 15% for individuals with Brazilian residence.
Dividends are exempt from taxes. Interest on equity payments is generally subject to a 15% withholding income tax (or 25% if the investor is domiciled in a low tax jurisdiction). When received by Brazilian companies, interest on equity may trigger additional taxes.
4.2 Are there special considerations in cross border deals?
Brazilian tax law provides for specific exemptions for transactions carried out by non-resident investors in the Brazilian stock exchange. There are also tax benefits for foreign investments made through private equity investment funds. Foreign investors usually take these benefits into account when structuring and evaluating their transactions. International tax treaties with other countries may also be available.
Section 5: ANTI-TAKEOVER DEFENCES
5.1 What are the most important forms of antitakeover defences, and are there any restrictions on their use?
Dispersed ownership protection offering (see 5.2).
5.2 How do targets use antitakeover defences?
In the dispersed ownership protection offering, the by-laws may require an investor reaching a specific percentage of shares issued by the company to launch a tender offer to acquire the free float shares a the price determined by the by-laws.
5.3 Is a target required to provide due diligence information to a potential bidder?
No, except to the extent such information must be disclosed by Brazilian law, (for example, capital markets regulations).
5.4 How do bidders overcome antitakeover defences?
By amending the target by-laws to rule out or change the dispersed ownership protection offering. Since this offering is not required by law, regulation or self-regulation, some by-laws establish that, if the by-laws are amended as described above, shareholders approving the amendment are required to launch the dispersed ownership protection offering.
Provisions conditioning amendments to by-laws on the dispersed ownership protection offering to an offering are not valid under Brazilian law.
5.5 Are there many examples of successful hostile acquisitions?
Section 6: DEAL PROTECTIONS
6.1 What are the main ways for a friendly bidder and target to protect a friendly deal from a hostile interloper?
Through the dispersed ownership protection offering. However, as public offerings for the acquisition of shares are implemented through an auction on the stock exchange, the best price would win the auction.
6.2 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, competition offerings are allowed – according to each type of offering.The best price wins 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.
Lock-up agreements are generally adopted in Brazil following initial public offerings (IPOs) – since the special listing segments on the stock exchange require a one-year lock-up for controlling and majority shareholders. Also, shareholders' and similar agreements may provide for lock-up arrangement during a specific period.
Section 7: ANTITRUST REVIEW
7.1. What are the antitrust notification thresholds in your jurisdiction?
Transactions that reach the following thresholds must be submitted for merger control and await approval from the antitrust agency (Conselho Administrativo de Defesa Econômica, or CADE):
(i) where one of the economic groups involved in the transaction has a turnover in Brazil of BRL750 million (approximately $20.2 million) or more in the latest financial statement; and
(ii) where any other economic group involved in the transaction has a turnover in Brazil of BRL75 million in the latest financial statement.
The thresholds are only applicable when the transaction produces effects within the Brazilian territory, which is assumed when the target has assets or sales into Brazil. There are no de minimis rules for the effects test.
7.2. When will transactions falling below those thresholds be investigated?
Transactions that do not meet the turnover thresholds set out in the Brazilian law may nevertheless be subject to ex officio review by the Brazilian competition authorities. CADE can request parties to notify transactions that have not met the turnover thresholds within one year of the closing date of the transaction, if the agency suspects they may cause disruption to competition.
7.3 Is a notification filing mandatory or voluntary?
If the thresholds are reached, filing is mandatory.
7.4 What are the deadlines for filing, and what are the penalties for not filing?
There is no deadline for filing, and no penalties for failure to timely notify a transaction. However, there are penalties for implementing the transaction before antitrust clearance (so-called gun jumping fines), ranging from BRL60,000 to BRL60,000,000.
7.5 How long are the review periods?
Concentrations below 20% run on the so-called fast track, which currently takes less than 30 days. If CADE declares the transaction complex and initiates an in-depth investigation, a final decision must be rendered in 240 days. This is extendable for an additional 60 days if requested by the parties or for an additional 90 days if required by authorities. If a review takes more than 330 days, it will be considered approved.
7.6 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?
A so-called effects-test is performed before a transaction becomes eligible for antitrust clearance in Brazil. In case a reportable transaction is not notified for antitrust clearance, the Brazilian authorities can impose penalties for gun jumping even in a foreign-to-foreign transaction with minimal local effects.
7.7 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?
Foreign investment is prohibited in: nuclear energy; businesses neighbouring international borders; post office and telegraph services; domestic flight routes; and the aerospace industry.
Other sectors that have foreign investment restrictions include: utility providers; rural land; press and broadcasting; financial institutions; insurance; airlines; railroads; fund managers; and gambling.
Section 8: ANTI-CORRUPTION REGIMES
8.1 What is the applicable anti-corruption legislation in your jurisdiction?
The Brazilian Anticorruption Act establishes strict civil and administrative liability for corporate entities that promise, offer or give undue advantage to a public agent or third persons related thereto. Directors, managers, officers or employees that take part in the act can also be held liable.
Crimes of corruption are described in the Penal Code, and criminal liability can only be held against individuals.
8.2 What are the potential sanctions and how stringently have they been enforced?
Penalties range from fines (0.1% to 20% of the company's gross revenue in the previous year, or R$6,000 to R$60 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.
The application of the sanctions varies from case to case and depends on the nature and severity of the offence. This includes the risk of harm to the society and collateral consequences.
Section 9: OTHER MATTERS
9.1 Are there any other material issues in place in your jurisdiction that might affect a transaction?
First published by our sister publication IFLR magazine. Take your free trial today.
Paulo Coelho da Rocha
About the author
Paulo Coelho da Rocha is a corporate and M&A partner at Demarest Advogados, having joined in 1993. He is a member of the Fiscal Council of Usiminas and Lupo, and is currently the chair of Lex Mundi. Notable transaction experience includes advising CRH on its cement plants acquisition from Lafarge and Holcim, advising Legrand on its acquisition of Daneva Máquinas e Condutores Elétricos, and advising Fibria on the sale of its forestry assets company to Parkia Participações. Chambers describes him as 'highly commended for his all-round expertise', and he has also been nominated as a leading lawyer in his field by the Legal 500, IFLR, Who's Who Legal and Análise Advocacia. He has also been recommended by the Latin American Corporate Counsel Association (LACCA) in M&A.