Will the creation of the Brazilian Takeover Panel affect the country’s M&A practice?


Financier Worldwide Magazine

November 2013 Issue

November 2013 Issue

The Brazilian capital market has shown significant development during the last 10 years, with an impressive increase in listed companies and trading volume. It has also attracted a large number of foreign investors from different parts of the globe. Not by coincidence the country has been able to improve dramatically its corporate governance standards during this period, affording minority shareholders the type of protections they are familiar with in their own jurisdictions. 

Nevertheless, there are still improvements to be made, especially in terms of assuring equitable treatment to all shareholders. In recent years we saw the announcement of a few merger transactions involving large companies in which controlling shareholders were given better treatment than minority shareholders. In others, voting shareholders would receive an unjustified advantage compared to non-voting shareholders. In both cases, the Brazilian Securities Commission (CVM) intervened and the transactions had to be redesigned. 

After recognising that the Brazilian legislation still has some gaps in terms of protection for minority shareholders, the CVM decided to encourage auto regulation as a way of improving the Brazilian regulatory framework. 

In this context, with clear inspiration from the British Takeover Panel, the Brazilian Stock Exchange (BM&FBovespa), the Brazilian Investment Banks Association (Anbima) and the Association of Brazilian Public Companies (Abrasca), among others, have recently announced the creation of the Comitê de Aquisições e Fusões – CAF (Committee of Mergers and Acquisitions), which is a not-for-profit private association. 

Since being created, the CAF has already enacted a Code of Best Practices (the ‘Code’) and will function as a board of disputes in mergers and acquisitions transactions. Membership will be voluntary and even non-members may choose to submit a dispute for consideration of its 11 member board. These members are elected by the founding organisations mentioned above and will have a mandate of five years each. 

The CAF may review, upon request, disputes involving tender offers, mergers, mergers of shares, reorganisations, consolidations and spinoffs involving public companies. The CAF may also work as an advisory board, assisting companies in preparing for future transactions in order to ensure compliance with the Code of Best Practices. 

The CVM has recently announced that it will consider that mergers involving controlling and controlled companies that follow the rules of the CAF’s Code of Best Practices have a presumption of validity. 

The Code is composed of general principles of conduct, with the general idea that all shareholders of the same class should be treated equally and shareholders of different classes should have equitable treatment. It also establishes that shareholders should always have the final word in approving M&A transactions, forbidding any mechanism that intends to suppress manifestation of will. For these purposes, the Code emphasises the quality of information disclosed to shareholders in the context of a transaction to be approved. It also imposes on the board of directors a duty to advise shareholders of the benefits and disadvantages of proposed transactions. 

The Code also regulates trading restrictions during tender offers and merger transactions and imposes high disclosure standards for appraisal reports. The role of the appraiser, including restrictions for situations of conflicts of interest, is also a key portion of the Code. 

One of the most controversial provisions of the Code is prohibiting company members from having poison pill mechanisms in their bylaws and the obligation to insert therein provisions setting forth mandatory tender offers by acquirers who purchase between 20 and 30 percent of the company’s corporate capital. The BM&FBovespa recently attempted to include a similar provision in the regulation ofNovo Mercado, one of its listing segments, but ended up withdrawing its proposal after facing strong resistance from the company members. 

Violations to the Code’s rules may result in private or public censure of the company or its exclusion from the CAF. 

The creation of the CAF and the enactment of the Code are without doubt positive and welcome steps towards having a more equitable and developed market in Brazil. If well implemented, they may result in more fair treatment of minority shareholders, increased transparency and higher scrutiny. They may also represent a cornerstone similar to the creation of the Novo Mercado and help Brazil to become one of the largest financial centres in the world. 

Its full adoption remains uncertain, though. One of the biggest challenges is prohibiting company members from adopting poison pill provisions, which is a protection against hostile takeovers that imposes on the acquirer the obligation to launch a tender offer to all shareholders at a high price. With the increasing number of companies in Brazil with no defined controlling shareholder, the issue of hostile takeovers is a growing concern for management in general. By restricting the ability of companies to have this kind of protection, the CAF’s founders have run the risk of low adherence to its rules. 

It is also a question of whether companies will be willing to bear the additional financial costs of being a company member if the benefits arising therefrom are not totally clear. Our recent experience withNovo Mercado is that companies only decided to list in this segment when the market started to demand it, when companies were engaged in capital raising efforts. We will have to wait and see if the same will happen with CAF during the coming years.


Carlos Alexandre Lobo is a partner at Veirano Advogados. He can be contacted on +55 21 3824 4660 or by email: carlos.lobo@veirano.com.br.

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Carlos Alexandre Lobo

Veirano Advogados

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