Main rules on M&A involving publicly-held companies in Brazil
June 2014 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
It is important for companies interested in carrying out M&A transactions involving Brazilian publicly-held companies to be familiar with some particularities of the Brazilian legal system in this respect. Indeed, Brazilian public companies are extensively regulated either by the Brazilian Corporations Law or by the Comissão de Valores Mobiliários (CVM). It is our intention in this article to present a broad overview of the main rules that could impact (financially and legally) M&A transactions which have as a purchaser or as the target a Brazilian public company.
In Brazil, takeovers of listed companies must be preceded by a tender offer for the acquisition of shares, to be performed by the acquirer of control. The purpose of this regulation is to ensure that all shareholders of the target company are able to leave the company and sell their shares at a fair price whenever control of the company changes hands.
There are two types of tender offers designed to regulate takeover bids. The first is the mandatory tender offer for the transfer of control of a company. This concerns takeover bids for the acquisition of companies with a controlling shareholder. The second type is the voluntary tender offer for the acquisition of control of a company with dispersed control.
Whether mandatory or voluntary, the tender offer must observe some general principles, such as: (i) equality of treatment to all holders of the shares which are the subject of the offer; (ii) mandatory offers must always be previously registered with the CVM; (iii) it must be guaranteed by a financial institution; (iv) in certain cases, it must be accompanied by a valuation report prepared by an independent audit company; and (v) it must be carried out through an auction procedure whether in a Stock Exchange or in entities of the organised ‘over-the-counter’ market.
Mandatory tender offer for the transfer of control of a company
In this hypothesis, transfer of control will be accomplished through private negotiations between the controlling shareholder and the acquirer of the control, in which the former agrees to sell and the latter agrees to buy shares that represent the control at a certain price. The accomplishment of this operation is subject to the obligation of the acquirer of the direct or indirect control of the target company to make a tender offer to all of the remaining shareholders of the company, giving them the opportunity of selling their shares together with the controlling shareholder (‘tag-along’).
According to the Law of Corporations, the tag-along applies solely to voting shares. Hence, holders of non-voting preferred shares will not have tag-along rights, unless the articles of association regulates otherwise.
In addition, the consideration to be paid to minority shareholders must be at least 80 percent of the amount paid for the controlling shareholders and, if the target company is listed within the New Market special listing segment of the São Paulo Stock Exchange (Bovespa), the consideration to be paid to the minority shareholders shall be equal to 100 percent of the price paid to the controlling shareholder.
Voluntary tender offer for the acquisition of control of a company
This tender offer regulates hostile takeovers of companies with no previous controlling shareholder or group of control (the so-called original acquisition of control). Hence, in the cases of tender offers for acquisition of shares, there is no mandatory bid rule or tag-along.
Except for tender offers which involve the exchange of shares, the offer does not need to be registered previously with the CVM. However, the offer must be communicated to the CVM in the 24-hour period after the first publication of the prospectus in the press.
It is known that M&A transactions are not always carried out through a typical Share and Purchase Agreement, whereby one of the parties acquires the totality of the shares of the target. Indeed, an M&A could be structured as a corporate reorganisation which, ultimately, would give the purchaser the control of the shares. Thus, depending on the alternative chosen for the reorganisation, special rules must apply.
Merger of companies
The merger of companies is a corporate reorganisation process whereby one or more companies (or just a part of it, in the cases of partial mergers) are absorbed by another company, which survives and succeeds the merged companies in all their rights and obligations. A merger causes the termination or extinction of the merged companies (or of part of it, in the case of a partial merger) and involves the so-called universal succession, consisting on the assumption of all rights, obligations (including contractual and non-contractual obligations) and liabilities of the merged companies by the merging (or surviving) company.
The approval of the merger of one or more companies into another company may entitle dissenting shareholders to withdraw from the merged companies, upon the payment of the value of the shares which they hold in such companies prior to the merger (book value), except as otherwise provided in their by-laws or in the event of merger of controlled companies, as described below. It is important to mention that in the merger of companies, differently from the merger of shares, the only shareholders entitled to exercise the right to withdraw are the shareholders of the company to be merged. The dissenting shareholders may exercise the right to withdraw the merged companies even if they failed to attend or abstained from voting under the shareholders’ meetings in which the merger is approved. The dissenting shareholders shall exercise such right within 30 days as of the date the minutes of the shareholders’ meetings in which the merger was approved are published.
Merger of shares
The merger of shares is a corporate reorganisation whereby a company merges all the shares of another company, which becomes a wholly owned subsidiary of the merging company. As opposed to the merger of companies, the merger of shares does not cause the termination or extinction of the company which shares are merged, which continues to hold the same rights, obligations (including contractual and non-contractual obligations) and liabilities held by it prior to the merger of its shares.
The approval of the merger of shares entitles the dissenting shareholders to withdraw from the companies involved, that is, from the company in which shares are being merged and from the merging company, upon the payment of the value of the shares which such shareholders hold in such companies prior to the merger of shares (book value), except as otherwise provided in their by-laws or in the event of merger of controlled companies, as described below.
Merger of controlled companies
In the case of a merger of companies and the merger of shares between controlling and controlled companies or companies under the same control, special rules shall apply, due to the fact that these companies are under a common control and therefore, there is a risk that the controlling shareholder might establish an exchange ratio (according to which the number and type of shares of the merging or surviving company shall be attributed to the shareholders of the merged companies) unfavourable to the minority shareholders.
In such cases, the valuation of the merged and merging companies, in order to determine the exchange ratio, shall be calculated, in addition to the valuation freely determined by the companies, also in accordance with the net worth at market value criteria (as provided in article 264 of Corporations Law).
If the conditions for the exchange of shares previously offered to the minority shareholders by the management are less advantageous than those resulting from the comparison with the net worth at market value, the shareholders dissenting from the resolution of the general meeting of the controlled company which approved the transaction shall be entitled to choose between the refund value of their shares based on the book value and the refund based on the book value at market price criteria.
In addition, CVM Instruction 34/2006 determines that, in cases in which the valuations attribute different values for the shares of the company to be merged which are held by the controlling shareholder of such company and the shares held by minority shareholders, the controlling shareholder shall be prevented from voting the exchange ratio in such cases.
In addition, CVM Instruction 35/2008 recommends that the merger exchange ratio is determined by independent committees established specifically for this purpose in each of the companies. Such committees shall negotiate the operation and submit their recommendation to the board of directors of the companies. The purpose of this procedure is to negotiate, in an independent manner, the exchange ratio. The final decision on the exchange ratio, however, will depend on the approval of the board of directors and to final approval of the general shareholder’s meeting of the companies involved in the transaction.
Takeovers shall be preceded by a bid procedure, which is an expensive and burdensome process, especially considering the mandatory tag-along rule. The merger process, on the other hand, although not triggering mandatory bid rules or tag-along rights, must observe other minority protections, such as withdrawal rights and, in the cases of merger of controlling and controlled companies, the issuing of an appraisal report based on the market value of the company and the formation of independent committees in order to negotiate a fair exchange ratio for the shares to be exchanged as a consequence of the merger transaction.
Antonio Correa Meyer and José Samurai Saiani are partners, and Clarissa Figueiredo Freitas is an associate, at Machado, Meyer, Sendacz e Opice Advogados. Mr Meyer can be contacted on +55 11 3150 7030 or by email: firstname.lastname@example.org. Mr Saiani can be contacted on +55 11 3150 7008 or by email: email@example.com.
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Antonio Correa Meyer, José Samurai Saiani and Clarissa Figueiredo Freitas
Machado, Meyer, Sendacz e Opice Advogados