New rules for merger control in BrazilToday (7 October 2014) a revised version of the merger regulation enters into force in Brazil, implementing amendments to the merger rules approved by the Brazilian antitrust watchdog (CADE). The new rules include:• A new approach to the concept of economic group in the context of transactions involving investment funds• The reportability criteria of transactions involving convertible securities• The possibility of closing transactions in the stock market without violating gun jumping rules• Clarifications about acquisitions of sole control, joint control and exemptions of acquisitions made by the controlling shareholder (holding sole control)• Adjustments to the fast track rules, in order to capture a larger volume of casesThe new rules are generally welcome and reflect the learning curve of two years of enforcement of the new Competition Law, which introduced the suspensory regime in Brazil in May 2012. NEW APPROACH ON THE DEFINITION OF ECONOMIC GROUP FOR INVESTMENT FUNDSThe merger regulation was strongly criticized by practitioners and investors since its enactment in 2012 for having adopted a very broad concept of economic group for investment funds, which ended up capturing virtually almost every transaction in which an investment fund was involved.The definition of economic group of investment funds formerly included for all purposes:(i) the fund manager(ii) the funds under the same management(iii) the quotaholders holding (directly or indirectly) at least 20% of the funds in item (ii)(iv) the portfolio companies of the funds considered in item (ii) above in which the fund in question has at least 20% of the company's capital or voting stockWith such a broad definition of group, the turnover thresholds established by the Competition Law to trigger a merger notification were easily met and, more frequently, transactions involving investment funds became reportable to the competition authorities.The mostly criticized of the elements forming the concept of the economic group has been the fund manager. For one, because the manager of the fund is an outsourced, non-related party in the equity chain of the investment fund involved in the transaction. Second because this is very frequently a financial institution, which virtually always meets the turnover thresholds established by the regulation. As a result, CADE ended up having to allocate its resources to review loads of transactions involving investment funds where hardly any real competition concerns would arise.What's new?For the sake of turnover calculation of its economic group, investment funds will now take into account:• the turnover of the economic group of each quotaholder that holds, directly or indirectly, 50% of the fund involved in the transaction (through direct stake ownership or via quotaholders agreement) and• the turnover of the companies controlled by the investment fund and the companies in which the fund holds, directly or indirectly, ownership interest equal to or higher than 20% of its capital or voting stock.However:Parties will still need to take into account the activities of all the entities under the broad definition of economic group (that is, including fund manager and all entities managed by it) for the purpose of:• filing out the notification form and• checking overlaps / vertical linksConsidering that the fund manager and its managed entities will no longer be taken into account for the purpose of the calculation of the economic groups' turnovers, the number of filings involving investment funds that raise no competition concerns is likely to drop. But for those deals that are still caught, the burden of gathering a significant amount of information when preparing the draft notification form remains unchanged.ACQUISITIONS OF CONVERTIBLE SECURITIES: CLEAR RULESThe new regulation shed light on the criteria for the reportability of acquisition of convertible securities. From now on, acquisitions of convertible securities are of mandatory submission whenever:(i) they are attached to rights to appoint members to the managing board, board of directors, supervisory board or voting/veto rights over competitively sensitive issues (except rights mandatorily provided by law) and(ii) Upon future conversion into equity, they will result in holding of (a) either joint or sole control; (b) 20% or more of the capital or voting stock of the target, or (c) 5% or more if the companies involved are competitors or active in vertically related markets.The regulation says that the calculation of the number of shares the acquired securities represent must be made on the basis of the hypothetical exercise as if they were to be converted on the date of subscription. It is clearly a fiction, which may have no correspondence whatsoever to the reality of the date when conversion indeed takes place.Moreover, once the acquisition of the convertible securities is cleared, the actual conversion of the securities into equity is exempted from merger control. ACQUISITIONS MADE IN THE STOCK MARKET: IMMEDIATE IMPLEMENTATIONThe authorities now took the opportunity to fill in an important gap of the regulation in force since 2012. Although the regulation was clear about the possibility of closing transactions in public offers, it was silent with respect to other transactions that took place in the stock market.Now, similarly to the rules already applied for public offers, acquisitions made in the stock exchange may be implemented before antitrust clearance under the condition that purchasers refrain from exercising any governance rights attached to the acquired interest until CADE's final decision on the transaction. Convertible securities can also be acquired and transferred, following the same condition.Parties may ask for an authorization for exercising such rights before clearance is granted, if proved necessary to protect the investment.SOLE AND JOINT CONTROL ACQUISITIONSThe former merger regulation established that the acquisition of control was of mandatory notification. The amendment has now clarified that the acquisition of both sole and joint control are reportable. The regulation however fell short on the definition of control for merger control purpose, a grey zone that still brings a significant level of uncertainty.The revised merger regulation exempts the notification of acquisitions of stake made by the controlling shareholder holding sole control of the target. The controlling shareholder was already exempted from notification of minority stake acquisitions if not held by a single vendor holding 20% or more of the company’s corporate capital.Transactions that turn the shareholder into the 'major individual investor' - which used to be of mandatory notification irrespective of the significance of the increase in the shares or governance rights - are no longer reportable. TRANSACTIONS ELIGIBLE TO THE FAST TRACK PROCEDURETwo new situations are now also eligible for the fast track procedure:• On horizontal mergers, the fast track maybe applicable whenever the HHI variation is below 200 points and the transaction does not lead to a combined market share above 50%.• For cases involving vertical integration, the threshold for the application of the simplified procedure has been raised from 20% to 30%.The other situations remain unchanged:(i) Joint ventures: cooperation in markets where the parties are not active and do not have a vertical relationship;(ii) Substitution of an economic agent: entry in Brazil by an acquisition;(iii) Horizontal concentrations below 20%;(iv) Other cases at the discretion of the General Superintendent.The fast track procedure is applied for cases that raise no substantive concerns - such as the ones appointed above. A short version of the notification form is submitted to the authorities, which have an informal commitment to decide the filing in 30 days.INTERNAL PROCEDURESIn addition to the above, the amendments to CADE's internal regulation has also included some procedural refinement, especially on the so called "Arrogation Procedure" - which is the ex-officio request made by the Tribunal to review a clearance decision issued by the General Superintendence - the unit in charge of reviewing merger filings. WHAT'S NEXT?CADE is pursuing to enhance and modernize its methods, internal procedures and rules. In addition to the above amendments, new changes are expected especially in relation to:• The definition of Associative Contracts and reportability criteria for those contracts.• Implementation of the electronic system, which shall bring, for instance, the electronic filing of notifications and a more efficient access to the case records and other documents, following the system already adopted in Brazilian Federal Judicial Courts. To obtain a wider perspective on how these changes will impact your business or current internal instructions and proceedings, please feel free to reach us by using the contact information below.
¹ In today’s currency, roughly USD 300 million of any economic group sitting on one side of the deal and USD 30 million of any economic group on the other side of the deal.