Brazil - Mergers & Acquisitions - Reference - Latin Lawyer

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Mergers & Acquisitions - Brazil

Francisco Antunes Maciel Mssnich

1. What is the current level of M&A activity? Have you seen a pick-up in activity? With a steadily growing economy, the current level of M&A transactions in Brazil continues to be very active. It seems that that the slight decrease in M&A activity during the peak of the economic turmoil is behind us and, as the US market and other economies carry on recovering, a continuing rise (both from volume and deal count perspectives) in M&A transactions should be expected. Also, Brazilian companies with solid cash reserves have increased their presence in the global M&A market, taking advantage of under-priced assets resulting from the financial crisis. 2. Please describe some of the most noteworthy recent deals in your country. Plenty of noteworthy M&A deals have occurred lately in Brazil. To name a few deals announced recently: the acquisition by Carlyle Group of a majority stake in health benefits administrator Qualicorp; the execution between Odebrecht, Petrobras, Braskem and Unipar of an investment agreement under which they consolidated their investments in the petrochemical sector; the merger between Sadia and Perdigo resulting in Brasil Foods, one of the ten largest food companies in the world; the acquisition by BP of assets from Devon Energy, including interests in ten exploration blocks in Brazil; the acquisition by Apax Partners of a controlling interest in TIVIT, the leader in integrated IT and BPO services in Latin America; the purchase, by a subsidiary of Tempo Participaes SA, of the totality of the shares of Unibanco Sade Seguradora SA held by Ita Seguros SA and Ita Unibanco SA; and the execution of an investment agreement between So Martinho SA and Petrobras Biocombustvel SA (PBio) (a subsidiary of Petrobras) with the objective of forming a strategic partnership to jointly expand their businesses in the sugar and energy sectors. 3. Which industries will see the most M&A activity this year? Although deals have involved companies with activities in all kinds of industries, activity in the financial, agribusiness, mining and infrastructure sectors is expected to be high. 4. What types of deals do you expect to see? We believe we will continue to see many total acquisitions and joint ventures, as well as minority investments, which assure strong veto rights to the minority shareholder. Mergers involving companies undergoing financial distress are also expected, leading to possible consolidation in several industries. It is also important to note that the economic turmoil in the United States and Europe brought the Brazilian IPO market to a complete standstill from the last two quarters of 2007 through part of 2009. Offerings that were then in course were constantly postponed, and many companies revealed that plans for launching their initial offerings had been, for the time being, discarded. Nonetheless, such scenario seems to have been reversed - indeed, a few high volume offerings were concluded in 2009 and further IPO activity seems reasonably promising for the remainder of 2010, although at a less intense pace in comparison with the pre-crisis IPO boom. 5. Do you expect to see many cross-border deals, whether they involve companies and investors from other countries in Latin America or from outside the region? Until a couple of years ago, cross-border M&A deals involving Brazilian companies were basically characterised by foreign companies purchasing or selling equity interests in Brazilian companies or entering into joint ventures with local partners. Brazilian entities, therefore, were mostly seen as targets in the M&A market, and rarely

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Brazil - Mergers & Acquisitions - Reference - Latin Lawyer

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perceived as potential purchasers. Recent years, however, have revealed a different picture. While the classic cross-border activity remains, it is now more and more common to see acquisitions abroad carried out by local companies acting as purchasers not only in Latin America but also with North American, European and Asian companies as targets. Due to the fact that many local companies with strong financial basis may continue to seek opportunities involving mergers with or acquisitions of financially distressed competitors in the United States and Europe, we expect to see an increase in such type of cross-border deals, possibly including hostile takeover attempts. 6. What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing? Private equity activity has been a particularly vital ingredient in the current M&A market in Brazil. Both domestic and international private equity firms have made relevant investments in several industry segments, in many cases envisaging an initial public offering for the following years. Domestic private equity activity was most likely facilitated after the Brazilian Securities and Exchange Commission (Comisso de Valores Mobilirios (CVM)) published Instruction No. 391 in 2003 (which has undergone several amendments since then) to establish the regulation under which private equity activity can be developed. Considering the recent economic turmoil in the United States and Europe and Brazil's fast growing economy, it is likely that domestic funds will now increase their share in private equity activity in comparison with the past years. 7. Have you seen any easing in the credit crunch's effect on M&A activity? Is financing available for deals? In light of the economic stability that Brazil has been able to maintain over recent years, practice has shown the strength of domestic financing market for M&A deals. Domestic M&A deals have found financing from many sources, but predominantly from local investment banks and aggressive investment funds. The effects of the credit crunch seem to be fading, although still slightly in evidence mainly due to the fact that foreign financing available for M&A transactions in Brazil continues to be scarce. 8. Has there been an increase in M&A activity involving financially troubled companies? Yes, M&A activity involving financially troubled companies has gained importance in the aftermath of the financial crisis. Many companies in financial distress are being analysed as possible targets for acquisition, and many mergers have occurred between healthy players and financially troubled companies. We expect to continue to see an even more incisive increase in such deals in the near future, in particular in cross-border transactions. 9. Does your country's bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? In 2005, the Brazilian federal government enacted a new bankruptcy act, which substantially altered the Brazilian legal system regarding bankruptcy and creditor arrangements. Such act permitted Brazilian companies undergoing economic difficulties to, in accordance with the terms and conditions set forth therein, carry out restructurings aiming for arrangements with its creditors and, therefore, avoiding bankruptcy. Not only does Brazil's new bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy, but it strongly encourages such approach as a manner to avoid bankruptcy and allow the economic recovery of financially troubled companies. 10. What other types of activity are resulting from the economic situation? In addition to the activities mentioned above, the current economic situation has resulted in an increase of restructuring of debt, as well as of sales of non-core business - although with less intensity as seen abroad. Also, in certain situations parties have revisited their merger agreements, postponing payments and renegotiating payment conditions. 11. More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using? Have companies in your country implemented shareholder rights plans or other anti-takeover protections?

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It is important to state that the practice of hostile takeovers in Brazil is still in its early days. Since only a few publicly traded companies lack a defined controlling shareholder, attempts of hostile takeovers are still extremely uncommon, and successful endeavours are yet to be known. Nevertheless, with the IPO boom throughout 2005, 2006 and 2007 and the mounting number of publicly traded companies with broadly held ownership, expectations are high regarding hostile takeover activity. Indeed, several companies have adopted anti-hostile takeover mechanisms in their corporate documents. The most common defences have been the inclusion of provisions in the by-laws setting forth the need to implement a public offer to all the other shareholders, with a pre-established price, in the event a shareholder exceeds a given threshold of equity interest in the company; or constraints on the exercise of the right to vote, limiting the votes to a certain percentage or number of shares, no matter how many shares the holder owns. Other shark-repellent provisions available in foreign jurisdictions (such as the so called poison pills) are likely to be challenged in Brazil. Also, shareholder activism in Brazil still does not have the same strength or resonance as it has elsewhere, specially in the United States and in Europe. In each publicly held company in Brazil, shareholder activism usually remains concentrated with few qualified investors, and most minority shareholders play a very small role in this area. Shareholders' meetings in Brazil still have poor attendance and bear little resemblance to similar events abroad. However, an increase in such activities as a result of the aforementioned IPO boom has been experienced. Publicly held companies have not yet anticipated how they might respond, but the first step might be to restructure the departments responsible for dealing with investors - which publicly held companies in our jurisdiction are legally required to maintain - as well as enhancing their relevance within the company's internal structure. 12. Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters? As a result of our developing economy, and consequently, of the mergers and acquisitions executed in our jurisdiction, directors generally seem to be currently better prepared in leading the transactions. Facing the pressure of our evolving securities market, the directors are nowadays more diligent in the analyses of M&A transactions, commonly engaging investment banks and specialised risk evaluators to endorse business judgements. Indeed, in many situations such independent opinion is required because of possible conflicts of interests between directors and the company, and helps to diminish risks arising out of potential litigation by shareholders aiming to challenge the transaction. 13. Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often? In the past, major differences could be seen in how domestic and cross-border deals were being conducted. However, the gaps have been narrowed in an increasing pattern - not only with respect to the management of the business negotiations but also regarding the legal work, such as due diligence and the way contracts are drafted (in this regard, please also see answer to question 15) - which has helped to transform the M&A market in Brazil into a more dynamic and sophisticated one. Also, the latest technological developments have definitely had an impact on deal making, mostly in a positive manner. Such improvements - such as electronic data rooms and videoconferences - have assisted to expedite both business negotiations and legal procedures, and have also played a relevant role in narrowing down the differences in how domestic and cross-border deals are conducted. 14. For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided? First of all, it is important to agree at the start on arbitration to solve any issues arising from the M&A transaction (in this regard, please see answer to question 15). Although international buyers and investors tend to prefer international arbitration chambers, it is important to note that there are well-known Brazilian chambers as well, with solid reputations and highly qualified arbitrators - such as Cmara FGV de Conciliao e Arbitragem, Centro de Arbitragem da Cmara de Comrcio Brasil-Canad (CCBC) and Centro Brasileiro de Mediao e Arbitragem (CBMA).

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Second, and somewhat obviously: it is highly recommended to hire full-service law firms with recognised experience in similar types of transactions. With the unique legal system found in our jurisdiction, such a simple precaution reveals itself to be particularly useful as negotiations advance and legal difficulties start to appear. Last, regardless of the legal advice, it is important that the investor or buyer understands and gets familiarised with the acts and regulations that rule the target's activities in Brazil, since in certain cases such laws can even influence how the business shall be further conducted. 15. Have there been changes in the process for how M&A transactions are conducted in your jurisdiction? As mentioned above, the M&A market in Brazil is now more dynamic, with many sophisticated deals involving worldwide interests and cross-border activities. In many dual or multi-jurisdiction transactions, clients engage legal counsel from several different jurisdictions to assist them throughout the transaction. This has diminished the differences between the M&A market in Brazil and elsewhere. English is commonly the language that predominates in the negotiations, and also in which the agreements are written. Apparently a minor element, such fact has helped to alter how legal documents are drafted in Brazil: each day to a greater extent, agreements are more complete and extensive, attempting to address all possible scenarios, many of them already set forth in the provisions of our civil law system. Arbitration has been accepted by the Brazilian courts as a legal type of dispute resolution. As in many cases turning to Brazilian courts does not seem the proper way to solve corporate conflicts, electing arbitration as a binding manner to settle disputes is now very common in agreements that regulate M&A transactions, permitting prompt and private decisions from specialised arbitrators. Choice of laws other than Brazilian law to rule M&A deals in Brazil is increasing, although some resistance may be found because of the conflicts of law provisions that must be complied with. 16. Please describe how the competition regime in your country affects M&A transactions. Have there been any significant recent developments or cases? M&A transactions are subject to mandatory merger control review whenever the legal thresholds are met. Merger control review in Brazil is regulated mainly by article 54 of Law 8,884/1994, which sets out that 'any acts, irrespective of their form, that may limit or somehow harm competition or result in the dominance in relevant markets of goods or services must be submitted for review by CADE.' Due to the vague wording of the provision, the notification test (even if viewed together with the objective notification thresholds and if reviewed from the perspective of the recent decisions handed down by CADE and other applicable regulations) still leads to some level uncertainty regarding merger control in Brazil. For this reason, parties to M&A transactions often need to seek for extra advice on how to deal with the applicable rules, even if only to confirm that a notification is or not required. In theory, when assessing whether a transaction is subject to mandatory notification under Brazilian competition law, it should be considered whether: it involves a concentration; it could have effects in Brazil; either of the objective thresholds (20 per cent + market share in an overlapping market or group turnover of at least R$400 million in Brazil) has been met; and the triggering event has occurred. Based on a logical interpretation of the law, these four conditions would all need to be met in order to make notification mandatory. Yet, there is still much difficulty on how to interpret and apply each of these criteria. Not only is the provision in article 54 is somehow unclear, but also some decisions by CADE seem to have increased the level of uncertainty on how to interpret it, even though CADE has been dedicating efforts to increase transparency and predictability by means of guidelines. It should be acknowledged that CADE has endeavoured to limit the number of transactions subject to mandatory notification. Since 2005, the interpretation of the turnover threshold was altered so as to comprise turnover in Brazil only (rather than worldwide), the market share threshold has been deemed applicable to overlapping markets only and some white-lists have been created by means of CADE's decision practice (namely, for some minority shareholding acquisitions and cooperation agreements). Recently, the authorities have declared that these efforts should be taken further. If a transaction is to be notified before the Brazilian antitrust authorities, such a notification is to be made within 15 days as of the execution of the first binding document. Even though CADE has been dedicating large efforts to increase predictability as to which documents are to be considered binding for purposes of assessing the timing of the notification, and in fact the rules are somehow clearer, there is still some uncertainty regarding this matter as well.

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As the Brazilian Law does not impose any waiting period preventing the parties from closing the transactions (as detailed in question 17), M&A agreements do not typically include the antitrust approval as a condition to closing. There is no doubt that the Brazilian merger control regime has evolved substantially in the last 15 years, since the Brazilian Law has been enacted. In any case, there is still some uncertainty and the current merger review scenario ultimately affects business transactions by making specialised advice necessary to exclude any related risks. 17. Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals? Mergers and acquisitions are included in the set of deals that might be subject to merger control review, depending on whether certain specific criteria (turnover or market-share based) are met. This also includes foreign-to-foreign deals with effects in Brazil. Nowadays, there is no legal waiting period or other type of bar on closing that prevents parties from proceeding with the implementation of deals before final antitrust clearance. In very exceptional situations, the antitrust authorities (Conselho Administrativo de Defesa Econmica (CADE)) may issue an injunction or enter into an agreement with the merging parties, aiming at guaranteeing the reversibility of the transaction in case it is not approved, or approved with restrictions, by CADE (those agreements are generally referred to as APRO). However, this scenario may change, as there has been a bill pending in Congress since 2005, aiming at revising substantial matters of the Brazilian Competition Law. Once enacted, such law is likely to dramatically modify the rules for merger control, as it will introduce a pre-merger control system. As a consequence, the implementation of deals will become conditional upon final antitrust clearance. In addition, the thresholds for notification tend to become higher and clearer, and an 'early termination' rule is likely to be created. Even though the adoption of a pre-merger review system would align Brazilian law to the practice of almost all other jurisdictions that have merger control, the legal community is still skeptical about the competition authorities' current institutional ability of processing mergers cases as fast as necessary to prevent delays, even though the bill also defines rules to create a public career in competition law and policy. It remains to be seen to which extent the other changes brought up by the new legislation will reduce the likelihood of said bar on closing negatively, which will affect the timing of certain M&A deals in Brazil.

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