Antitrust Law Daily Wrap Up, ANTITRUST NEWS: ABA Antitrust, International Sections offer feedback on amendments to Brazil’s merger regulation, (Apr 21, 2014)
By Linda O’Brien, J.D., LL.M.
The American Bar Association Sections of Antitrust Law and International Law on April 17 jointly submitted comments in response to a request by the Administrative Council of Economic Defense (CADE) regarding its Proposed Amendments to the Brazilian Merger Regulation. Commending the CADE for its continued efforts to review, refine, and further improve the Brazilian merger review system, the ABA Sections stated that many of the proposed changes will further improve Brazil’s merger rules and reduce the cost and burden on both the agency and the parties.
The ABA Sections comments addressed four areas for further consideration.
Definition of associative agreements. The first area for consideration was whether the proposed definition of “Associative Agreement” would subject many collaborative agreements to the Brazilian merger control regime that are typically addressed internationally under non-merger antitrust rules. In the ABA Sections’ view, the draft definition remained overly broad, particularly in light of international practice. Moreover, the draft definition appeared to provide for an expansion of the “Associative Agreement” concept vis-à-vis current case law by explicitly referring to “any agreements between competitors.” The language potentially would capture additional types of collaboration arrangements that do not lead to a change of control over a firm or assets. The ABA Sections believe that merger control is not the appropriate vehicle for the review of these transactions, recognizing that such collaboration agreements are best reviewed under a jurisdiction’s general antitrust laws.
Considering the weight of international practice, coupled with the costs and burdens associated with this broad definition, the ABA Sections recommended that CADE revise the proposed definition of “Associative Agreement” to limit such agreements to cover arrangements resulting in the durable change of ownership or the durable combination of previously independent assets that may impact the structure of the market; or, in the alternative, postpone the adoption of a definition of “Associative Agreement” until a time when, based on the further development of case law, CADE will be in a better position to address this important question.
Notification of convertible debentures. Second, the ABA Sections recommended eliminating the proposal to require notifications for acquisitions of convertible debentures or limiting the proposal to transactions that result in a change in control prior to the conversion of the debentures into equity shareholdings. The ABA Sections recognized that CADE may wish to address acquisitions of convertible debentures that are likely to result in the creditor acquiring competitively significant rights to manage or control the affairs of a company, to exercise significant influence over its strategic commercial decisions, or to have access to competitively sensitive information at the time of the acquisition. However, such situations are rather rare. In the vast majority of debenture transactions, the creditor remains neutral in relation to the borrower’s day-to-day business and performance. CADE’s proposal to require firms to notify the acquisition of convertible debentures simply because they may result in the acquirer obtaining such rights in the future is likely to lead to notifications for transactions that have no immediate or even likely long term competitive significance. CADE’s proposed approach is contrary to the approach utilized in the US, European Union (EU), and other major international jurisdictions and raises practical issues, the comments noted.
The ABA Sections recommended that CADE eliminate the requirement as drafted. It will be more appropriate and a better use of CADE’s resources to review such transaction, if and when the creditor firmly decides to convert the debentures into equity shares. In the alternative, if CADE believes it necessary to require notifications for acquisitions of convertible debentures, the ABA Sections recommended that CADE modify the proposal to limit the notification requirement to acquisitions of convertible debentures that, on their own, result in the acquirer obtaining significant pre-conversion control rights or rights to exercise significant influence over the management or affairs of the company.
Definition of economic group. Third, the comments focused on CADE’s proposed definition of the economic group for purposes of calculating the turnover of investment funds and the information requested from such funds as part of the notification. The ABA Sections recommended narrowing the scope of both the definition and the information requested. The proposed definition is designed to use an objective 20% shareholding standard based on legal presumptions that may exist under Brazilian law regarding a shareholder’s ability to influence the management of a company. However, many investment funds, especially those registered in jurisdictions outside of Brazil, typically do not have legal rights or practical means to obtain information regarding the Brazilian revenue of their minority owners or portfolio companies in which they own minority shareholdings. Thus, even under the proposed definition, investment funds often will be unable to obtain the necessary information to assess whether Brazil’s notification thresholds are satisfied, in the ABA Sections’ view.
The proposed definition maintains an overly broad scope of the economic group that will continue to require a number of merger notifications to CADE that have little or no appreciable effect on competition. The comments suggested that CADE should consider the approaches used in other jurisdictions, such as the U.S. and EU, to determine the sales of investment funds for purposes of assessing the applicability of merger notification thresholds. The ABA Sections believed these approaches will better enable investment funds to comply with Brazilian notification requirements and better screen out transactions that may have no appreciable effects on competition in Brazil.
Filing threshold tests. Finally, recognizing CADE’s continuing interest in assessing the effectiveness and efficiency of the current law, the comments suggested that it also address the application of the filing threshold tests to the target’s own sales rather than to those of the seller’s group. Under the current Brazilian rules, a pre-merger filing is required if (1) the corporate group of one of the parties to the transaction had turnover of at least R$750 million in Brazil in the last calendar year; and (2) the corporate group of another party to the transaction had turnover of at least R$75 million in Brazil in the last calendar year. These thresholds are applicable to the sales/assets of the entire corporate group on the seller’s side rather than limited to those attributable to the acquired businesses or assets.
According to the comments, this area merited further reflection and amendment as part of CADE’s efforts to further improve its merger regime. In particular, it was unlikely that applying notification thresholds to the target’s rather than seller’s turnover will impair CADE’s ability to review transactions that have a potential competitive impact in Brazil. The comments suggested that CADE may wish to consider the level at which a target-only threshold might be appropriate. If CADE believes that it lacks authority to revise the threshold, it might consider defining an additional de minimis exception to notification based on an appropriate level of the target’s assets/sales. Such a resolution might be issued to provide guidance on how to interpret the local effects test set forth in the Brazilian merger control regulation, the ABA Sections comments concluded.
News: Antitrust