On May 20, 2015, the Administrative Council for Economic Defense ("CADE") issued guidelines on gun jumping ("Guidelines"). These Guidelines are not binding on parties involved in transactions that require antitrust approval in Brazil, but they serve as an important guidance for companies and individuals seeking to avoid engaging in gun jumping, a violation pursuant to the Law 12,529/2011 (the "Brazilian Antitrust Law").
I) General overview
The Guidelines cover three main topics: (i) information exchange between the parties involved in a transaction; (ii) contractual provisions that govern the relationship between parties; and (iii) the conduct of parties prior to, and during, the negotiation of a transaction.
CADE acknowledges that the negotiation of a deal will necessarily lead to the exchange of information between the parties involved in the deal, especially for the purpose of evaluating the company and due diligence, but it notes that, under certain circumstances, there might be a risk the parties will exchange commercially sensitive information that goes beyond that strictly necessary for the closing of a transaction.
In view of the foregoing, the Guidelines provide a non-exhaustive list of what CADE views as "commercially sensitive information" that, if shared between the parties, could potentially give rise to gun jumping issues. This list includes information on costs, marketing strategies, and employees' salaries. In order to minimize this type of risk, the Guidelines suggest the use of historic data or a compilation of commercially sensitive information to avoid identification of specific information. In addition, the Guidelines recommend the use of "clean teams" and "parlor rooms", if appropriate (please see below for further details).
As for contractual provisions that govern the relationship between the parties to a transaction subject to approval by CADE, the Guidelines focus on ensuring that the parties' conduct will not impact the current competitive environment until CADE's final clearance decision is issued. Therefore, the Guidelines provide another non-exhaustive list of particular sections in the parties' agreement that could imply that the parties jumped the gun in violation of the Brazilian Antitrust Law. This list includes, amongst others:
- Clauses stipulating that the agreement will be effective as of a certain date that is prior to its signature, which results in certain integration between the parties;
- Prior non-compete obligations;
- The non-refundable upfront payment of consideration, in full or in part, except for: (i) down payments commonly used in commercial transactions; (ii) any deposit of the payment into an escrow account; or (iii) break-up fees; and
- Clauses that allow direct interference by one party in respect of strategic aspects of the counter-party's business, such as pricing decisions, customers, commercial/sales/marketing strategies, amongst other sensitive decisions, except for those aimed at protecting against deviations from the ordinary course of business so as to protect the value of the business being acquired.
Lastly, the Guidelines furnish certain examples of conduct that may raise concerns. These examples include transfer or sharing of assets between the parties, exercise of voting rights or other relevant influence in relation to the counter-parties' companies and integration of sales efforts between the parties.
II) Mitigating the risk of gun jumping
Brazilian merger regulations acknowledge that the parties to a transaction can exchange commercially sensitive information to the extent strictly necessary for the closing of a certain transaction. With this in mind, the Guidelines suggest mechanisms to mitigate against the risk of gun jumping between the negotiation phase and CADE's clearance. These mechanisms include:
A) Antitrust Protocol: a document prepared by the parties to formalize specific procedures that will govern the exchange of commercially sensitive information between them prior to obtaining CADE's clearance.
B) Clean Team and Executive Committee: creation of independent committees that may be formed by the company's employees, independent consultants or both (i.e. a "clean team") or by executives from both companies (i.e. an executive committee). The use of a clean team is recommended in complex transactions. This team should be responsible for sending, receiving, gathering, reviewing and dealing with relevant commercially sensitive information.
The Guidelines propose procedures to be followed by the members of the clean team, including: (i) signing of a confidentiality agreement and compliance with the agreed antitrust protocol; (ii) refraining from disclosing commercially sensitive information from one party to another; (iii) exclusive or preferential dedication by an individual member of the clean team, if this member is an employee of one of the parties to the transaction; and (iv) recording of all communication, requests for or submission of information.
The Guidelines further recommend that the clean team report directly and exclusively to the members of the executive committee, recording all the exchanges of information with this committee and ensuring that they undertake to keep the information exchanged confidential. Pursuant to the Guidelines, the members of the clean team cannot be part of the executive committee and vice-versa.
C) Access to information and confidentiality: the exchange of commercially sensitive information must take place exclusively through the clean team. The information the clean team requests from the parties must be limited to what is necessary to carry out the transaction. All the members of these independent committees must commit to keep confidential all the information they exchange.
D) Dealing with confidential information: when the clean team receives commercially sensitive information, it may not directly pass this on to the executive committee. The members of the team must first review this information and, only if they deem it appropriate to share the information with the executive committee, they must then process such information by compiling it to make it unidentifiable or ensuring that the information is at least three months old before sharing it with the executive committee members.
E) Parlor Rooms: members of the executive committee may discuss the future integration between the companies involved in the transaction in meetings with this specific purpose ("parlor rooms"). In addition, these meetings must be monitored to ensure that no commercially sensitive information is disclosed.
III) Potential sanctions
Pursuant to the Brazilian Antitrust Law, gun jumping exposes the parties to the following sanctions: (i) fines ranging from R$60,000 to R$60 million; (ii) investigation into the parties' behavior prior to obtaining CADE's clearance for potential antitrust infringements; and (iii) administrative or judicial remedies, or both, which may result in any act implemented in violation of the standstill obligation being declared null and void.
The Guidelines stipulate that, when examining potential fines, CADE must observe the rules stipulated in the Brazilian Antitrust Law, such as the status of the transaction (e.g., if the transaction was submitted to CADE after its closing or if gun jumping occurred during CADE's review); its own review of the merits of the investigation (e.g. unconditional clearance, clearance with remedies, prohibition); and the financial situation of the parties involved.
As indicated above, CADE may seek remedies to have acts implemented in violation of the standstill obligation declared null and void. In this regard, the Guidelines provide that this sanction may be used by CADE taking into account the timing and extent of the conduct, the proportionality of the sanction compared to the conduct, and the possibility of the parties reversing the acts to be declared null and void.
The official text of the Guidelines, in Portuguese, can be accessed by clicking here.