On 29 May 2012, new merger control rules came into force in Brazil. These introduce fundamental changes, including a mandatory suspension requirement under which notifiable transactions must be cleared prior to closing.
All companies contemplating global transactions should take careful note and ensure that they assess as early as possible the new Brazilian rules in their review of multi-jurisdictional merger filing requirements and risks.
Key points of the new regime include the following.
Different thresholds. Transactions will require notification if they fulfil the following two-part test:
- the group of one party achieves a turnover of more than 750 million reais in Brazil in the last fiscal year (approximately USD 375 million), and
- the group of at least one other party to the transaction achieves a turnover of 75 million reais in Brazil in the last fiscal year (approximately USD 37 million).
The following entities shall be viewed as part of one single economic group: (i) entities subject to common control; and (ii) all the entities in which any of the companies subject to common control holds, directly or indirectly, at least a 20% share.
The market share threshold test (where a transaction required notification if it led to an overlap in excess of 20%) has been abolished.
While more foreign-to-foreign transactions are likely not to fulfil the new thresholds, there is still the possibility that the new thresholds will catch completely innocuous transactions since the thresholds are based by reference to the turnover of groups and the turnover of the seller is taken into consideration.
Acquisition of control. The following transactions shall amount to an acquisition of control that may be subject to mandatory filing with CADE: (i) an acquisition of a 20% stake when the parties are neither competitors nor vertically related to each other; and (ii) an acquisition of a 5% stake, if the transaction involves competitors or vertically related companies (this includes the situation under which a current shareholder acquires a further stake in the target company of at least 5% either individually or in aggregate).
Suspensory regime. Brazil used to have a non-suspensory regime under which parties to a notifiable transaction were free to close prior to receiving approval. The new rules introduce a suspensory regime, under which transactions which fulfil the thresholds must be notified and cleared prior to completion. Completion prior to clearance may now be void and lead to significant fines (up to 60 million reais – approximately EURO 26 million).
There is only a limited waiver from this suspension requirement. CADE may authorise a transaction to be closed before clearance if (i) there would be no irreparable harm to competition resulting from such a derogation; (ii) the situation would be easily reversible in the future if the authority concludes that the transaction harms competition; and (iii) the target company will face serious financial losses in the absence of the requested derogation.
Long review period. The review period for notified transactions will be 240 days, extendible to a maximum of 330 days. While CADE has said that it expects to clear non-complex transactions in approximately 60 days, it has not committed to any intermediate deadlines.
Restrictive notification deadline. CADE has stated that it will prefer for notifications to be made after the execution of the formal document binding the parties to the transaction. Whilst there is no provision under the new law which prohibits CADE from accepting a filing on the basis of preliminary documents, if CADE applies this preference strictly, notifying parties will have significant difficulty in engaging the Brazilian authority early and starting the review period clock.
Detailed notification forms. More detailed information and documents are required than in the former regime. There are two filing forms: (i) a short form for non-complex transactions, and (ii) a full form for transactions which raise competition issues. Whilst the information burden has been reduced from earlier proposals, there is still a considerable amount of information required for a short form filing.
Single competition authority. The functions of the existing competition agencies (CADE, SDE and SEAE) have been merged into one single competition authority (CADE). The creation of 200 new staff positions has been contemplated, but until all these posts have been filled, we can expect the authority not to be at full operational speed and efficiency.
Claw-back. Even if the merger control thresholds are not met, a transaction will still be subject to an ex officio review within one year of completion. Parties should therefore be cautious about entering into transactions which raise competition issues in Brazil irrespective of the turnovers involved.
Transitional period. Transactions entered into before 28 May 2012 (based on the signature of a binding document) are subject to the old rules and can be closed prior to clearance from CADE (regardless of the date of notification to CADE). However, if there has only been a non-binding agreement signed before 29 May, the new rules apply.