Background
Control Concept in Corporation Law
Control Concept in Telecommunications
Extended Concept of Controlling Shareholder
Affiliated Companies
Comment
The Brazilian Telecommunications Agency (ANATEL) has enacted the Regulation for the Verification of Control and Transfer of Control in Telecommunication Service Provider Companies, annexe to Resolution 101 of February 4 1999.
The General Telecommunications Law (Law 9,472 of July 16 1997) created ANATEL for the purpose of the development of domestic telecommunications. Among its duties, the agency must exercise legal powers (including regulatory powers) in relation to the control, prevention and repression of violations to economic order, with the exception of those belonging to the Administrative Economic Defence Council (CADE).
For the purposes of providing effective competition and avoiding economic concentration, ANATEL may establish restrictions, limits or conditions for companies in respect to the obtainment or transfer of concessions, authorizations or permits for the provision of telecommunications services. Transfers can occur by means of the change of share control of telecommunications companies and ANATEL may enact rules to regulate this practice. It is clear from the General Telecommunications Law that ANATEL will act to preserve a competitive model, in order to offer the lowest prices to consumers and improve services.
The Antitrust Law (Law 8,884 of November 6 1994) regulates competition in the market, giving CADE the authority to decide on the matter. The Corporation Law, in turn, regulates the operation of corporate life and the protection of the interests of minority and preferred shareholders.
For ANATEL, neither of these laws bar anti-competitive practices between companies in the telecommunications sector. Thus, ANATEL enacted Resolution 101 with the purpose of preventing surreptitious transfers of share control. The resolution establishes a new and comprehensive regulatory regime.
Control Concept in Corporation Law
Resolution 101 introduces certain innovations in respect to the corresponding concepts established in the corporation legislation.
The Corporation Law considers the controlling shareholder to be the individual, group or legal entity that has the majority vote in decisions of the general meeting, that has the power to elect the majority of the company's officers, and that effectively uses its power to manage the company's corporate business and influence the operation of the company's bodies.
Thus, in accordance with the law, the person that individually or jointly prevails in corporate decisions, either because it holds the majority of the voting shares or on account of a voting agreement entered into with the other shareholders, and that also has the capacity to elect the majority of the officers (or the officers that hold the majority of the management powers or most relevant powers), is considered to be the controlling shareholder.
Control Concept in Telecommunications
On the other hand, according to Resolution 101, the controlling shareholder is the individual, group or legal entity that individually or jointly holds the power to manage the corporate business or operation of the company in a direct or indirect, internal or external manner, in fact or according to the law, individually or by agreement.
The 'operation of the company' includes, but is not restricted to, business planning and creation of economic-financial, technological, engineering, market and price or tariff discount or reduction policies.
Resolution 101 recognizes the concept of an indirect controller without limitation. Thus, if A is controlled by B, which is controlled by C, which is in turn controlled by D, then B, C and D, and all the companies that control D, are considered to be controllers of A.
External and de facto control concepts
Furthermore, Resolution 101 permits the concept of external control, according to which a person that is not a company shareholder can nevertheless control a company (eg, a creditor that gives a substantial loan to a company may exercises external control over the debtor company).
Resolution 101 also establishes the possibility of exercising de facto control of the company, in addition to direct control. This concept, which is more comprehensive than external control, does not require the formalization of control for its characterization. Proof of its existence is sufficient.
Extended Concept of Controlling Shareholder
Resolution 101 considers the controlling shareholder as not only managing the company's business, but also controlling business planning and creating economic-financial, technological, engineering, market, price or tariff discount and reduction policies (ie, the operation of the company).
Resolution 101 broadens the concept of 'controlling shareholder' to include any shareholder that, in a direct or indirect manner:- has the power to elect a member of the management bodies of any other company or of the controlling company or participates directly in any of the mentioned corporate bodies;
- has the power of veto either by the company bylaws or by agreement in matters of another company;
- is competent to impede, by any means, the verification of a qualified quorum for the installation of a meeting or decision of another company; or
- holds shares that confer to it the right to elect members separately for the management of another company.
It is thought that the agency sought to achieve so-called 'gentlemen's agreements' that establish the exchange of positions or strategic decisions in the companies. Generally, this type of agreement is verified between companies that have an undisclosed alliance or established agreements between distant controllers.
Privatized companies
Regarding telecommunications service provider companies that originated from the denationalization process of companies controlled by the state, Resolution 101 similarly considers the controller to be the person that, individually or by means of a consortium or capital subscription, acquired shares held by the state and has the power to participate in the control of the relevant company.
Transfer of control
Resolution 101 stipulates that any legal transaction resulting in the partial or total assignment of control of the telecommunications service provider must be submitted to ANATEL for approval in advance.
According to Resolution 101 a corporate entity will be considered affiliated to another if it holds directly or indirectly at least a 20% ownership interest in the voting capital of another entity, or if at least 20% of the voting capital of both is held directly or indirectly by one person.
However, according to the Corporation Law, companies are affiliated when at least a 10% stake is held in the capital of the other, without controlling it. The Corporation Law adopts a lower percentage of 10% (rather than 20%) of the capital, and not exclusively of the voting capital. In addition, the Corporation Law only provides for direct affiliation, with no mention of indirect affiliation. Likewise, the law does not classify companies that have 20% of their capital directly or indirectly held by one person as affiliated.
Resolution 101 establishes that, for purposes of the computation of the respective percentage of 20% of the voting capital, where there is ownership interest in a successive manner in various corporate entities, the final ownership percentage will be calculated by means of the total percentage of ownership interests in each corporate entity in the line of succession. Ownership interests of over 50% of the voting capital or control, with any interest in the capital, will be treated as holdings of 100% for the calculation of the composition of successive ownership interests.
In an effort to create mechanisms that impede the concealed, non-declared transfer of the share control of telecommunications service provider companies, in breach of competition principles and/or with a view to market concentration and possible manipulation of prices, ANATEL has established a comprehensive concept of control and control transfer. On the other hand, since the enactment of the resolution mere corporate reorganizations involving telecommunications companies must be submitted to the agency for approval in advance, they may fall within the definition of 'transfer control'. Moreover, a minority shareholder that is capable of indicating a member for an administrative body of the controlling company or for any other telecommunications company, as well as the administrator of the company himself, will be deemed a controlling shareholder for the purposes of the resolution.
For further information on this topic please contact Ricardo Barretto or Nair Veras Saldanha at Barretto Ferreira, Kujawski, Brancher e Gonçalves – Sociedade de Advogados by telephone (+55 11 3066 5999) or by fax (+55 11 3167 4735) or by e-mail ([email protected] or [email protected]).
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