CADE publishes new rules regarding merger notifications and reviews

The Administrative Council for Economic Defense ("CADE") has just published important amendments to the current merger review rules.[1]This memorandum discusses the amendments, and how they impact the notification of transactions in Brazil. 

Definition of economic group in the case of transactions involving investment funds 

The new rules amend the definition of "economic group"in the case of transactions involving investments funds. This amendment was made only for the purpose of determining the groups' gross revenues in Brazil, and whether the applicable revenues thresholds are met. According to the new rules, the following entities shall be viewed as part of a single economic group: 

  • The economic group of each investor holding, directly or indirectly, 50% or more of the fund directly involved in the transaction, either individually or by means of an agreement with other investors; and
  • The portfolio companies that are controlled by the fund directly involved in the transaction, as well as the portfolio companies in which such fund holds, directly or indirectly, an interest of 20% or more.

Transactions eligible to the fast track proceeding 

The list of transactions that are eligible to the fast track proceeding has been amended and expanded. Previously, the following transactions were eligible to fast track review:[2]

  1. Transactions that do not result in any horizontal overlap or vertical integration;-       Transactions that result in horizontal overlap, where the combined market share of the parties is below 20%; and
  2. Transactions that result in a vertical relationship between the groups involved, but their shares in the affected markets are below 20%. 

The new rules have increased from 20% to 30% the market share thresholds in cases resulting in vertical relationships between the parties and their groups. Also, the new rules include transactions resulting in horizontal overlaps with combined market shares in excess of 20%, provided that the parties are able to demonstrate that the increase in market share is minor.[3] 

Consolidation of control

According to the new rules, transactions that lead to the consolidation of control are no longer subject to mandatory notification. These are typically transactions by means of which the sole controlling shareholder acquires the remaining shares of the target company.

Notifications regarding bonds, debentures and other securities convertible into shares

The new rules set forth that the subscription or acquisition of bonds, debentures and other securities convertible into shares should be notified whenever the two criteria below are met: (i) the future conversion of the bonds, debentures or other securities will result in the control of the target company, or in a minority shareholding acquisition subject to mandatory notification pursuant to CADE's Resolution No. 2/2012[4]; and (ii) the subscription or acquisition of such bonds, debentures or other securities grants to the acquirer the right to participate in the management or supervisory bodies of the target company, or provides voting or veto rights regarding matters that are relevant from a competition law perspective. 

If the above criteria are not met, the notification is not mandatory at the time of the subscription or acquisition, but it may be mandatory upon the conversion of such bonds, debentures or other securities into shares, provided that the other applicable thresholds are met at the time of the conversion.

The new rules also make clear that, if the parties notify the subscription or acquisition of bonds, debentures or other securities, there is no need to proceed with a new notification upon their conversion into shares.

Notification of transactions carried out in the financial markets 

The new rules clarify that transactions subject to mandatory notification but carried out in the over-the-counter market or in the stock exchange market do not depend on CADE's approval to be completed. In these cases, however, the acquirer is prohibited from exercising any political rights related to the acquired shares before obtaining CADE's clearance. The new rules allow CADE to authorize the exercise of such political rights to the extent necessary to maintain the full value of the investment. This is the same approach that was already adopted in cases involving public takeover bids.