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back to index backLATINtalk December,  2016

Worst Case Scenario: How Mergers Go Wrong In Brazil

With merger reviews worldwide, the hoped-for best-case scenario is generally the same: a speedy review and either the all-clear sign or divestitures limited to what the companies have already identified and proposed.

But the worst-case scenario, particularly for potentially problematic deals, can vary from country to country.

When Brazil overhauled its competition law in 2012, the Council for Economic Defense, known by its Portuguese acronym CADE, faced an unenviable task. The agency had to transition from an old system, under which merger reviews could linger for years because transactions could close without receiving antitrust approval, to a new premerger review system where they would be battling the clock to avoid holding up transactions.

So far, CADE has fared well, experts say, clearing simple deals in 30 days or less, and no complex transaction has yet taken the full 330 days the watchdog is allotted under Brazilian law. But at the same time, the number of transactions requiring remedies or being blocked is still well above what it was under the old system; some companies have been caught off guard by about-faces in how the watchdog defines geographic markets; and the merger regime does sweep up some kinds of agreements that wouldn't face scrutiny in the U.S., Europe and elsewhere.

"CADE's becoming more and more experienced," Mattos Filho partner Amadeu Ribeiro said. "It is true that sometimes you'll hear from clients, 'Well, CADE is not being, say, professional enough' or could say, 'There's still room for improvement as an agency,' but overall I think the work they do I don't think is a lot different than what the European Commission does in terms of the time that it takes, the requests that they make, etc."

Here Law360 looks at how bad things can get and what attorneys and their clients can do to minimize some of the risks.

Reviews in Complex Deals Can Take Nearly a Year

As part of the overhaul of the country's merger system that took effect in 2012, lawmakers gave CADE a deadline to complete merger reviews. The downside for companies is that CADE effectively has up to 330 days under the law to make a decision, and that clock only starts ticking once the watchdog has concluded that the filing is complete.

"You can go anywhere from 30 days to 330 days, and this wide variation that you can observe I think gives a lot of room for questions on the part of clients," Ribeiro said.

In most cases that raise enough competitive issues to require filing under the long form rather than under CADE's fast-track procedure, companies will get merger clearance in two to three months, experts said.

"It is really only in those cases that are truly complex, that create significant issues that you will have a total review period exceeding, say, 120 days, and in some rare cases you will find the total review period getting to something over 200 days ... only in cases that involved remedies," Ribeiro said.

So far, the longest review has been a tie-up of two Brazilian educational companies, Kroton Educacional SA and Anhanguera Educacional Participacoes SA, which took close to 300 days, according to Ribeiro, who worked on the deal and said the team always knew the review would take a significant amount of time.

"It's always a function of how many concessions the clients are willing to make," he said. "If you have an issue and you admit to having an issue ... and you fix it, then you can have a much shorter review period. In those cases where either you have a different view ... than the one of the authorities or you're just not willing to make concessions ... those cases may last longer."

And companies should also factor in additional time before the clock starts ticking for consultations with the agency about the notification form, experts said. Typically that process will only take up to a month or so as CADE examines the draft filing to determine whether they have all the information needed to review the deal, but it can take two months or more depending on how familiar the agency is with the markets involved and how well-prepared the parties are.

"It is always useful to be upfront and when there are issues handle them expeditiously and be upfront about them," Ribeiro said. "If you're upfront about the issues, then take a strong position why you think the way you look at the market is the more appropriate one, then you present all data and present solid grounds for your position, [you have] a better chance at getting a short prenotification phase."

Likewise, the long form requires a variety of information not just about the companies but about market shares and concentration, meaning that it can take up to two months just to prepare the draft filing, according to Trench Rossi e Watanabe's Francisco Todorov.

"The key ... is to make sure that the draft is in very good shape when you go to prenotification," Todorov said.

Brazil Fines Companies that Jump the Gun

Companies should also be aware that Brazil requires approval for some kinds of transactions that wouldn't necessarily trip filing thresholds elsewhere based on both the size and nature of the arrangements.

For example, Brazil considers not just the revenue of the company or business unit being acquired in a transaction when deciding whether a deal crosses the filing threshold but also the revenue of the entire corporate group in which the target company is a part. That means that deals that would be too small to require notification in other jurisdictions would still have to be reviewed by CADE.

CADE also looks at a number of deals beyond traditional mergers and acquisitions that it terms "associative agreements," like exclusive licenses or distribution agreements that run for more than two years or where the companies have large enough market share.

"They're quite controversial, one, because I don't think any other regime imposes a premerger filing obligation and review of these types of agreements," Milbank Tweed Hadley & McCloy LLP's Fiona Schaeffer said. "Secondly, the definition of 'associative agreements' includes a market share criterion, which means whether or not it is notifiable is going to depend what you think the relevant product and geographic market is.

"I'm not sure a lot of companies outside of Brazil even realize that this is now a requirement, [and] for international companies this is a trap for the unwary."

At the same time, CADE has not been shy about fining companies for jumping the gun and closing a transaction without first receiving approval.

Fines for doing so can range from about $18,800 to $18.8 million depending on the circumstances of the violation, whether CADE opts to impose antitrust fixes or block the deal and how big the companies are, according to guidelines CADE issued on the topic in late May.

So far, the penalties have not gone much above $1 million in the five cases with gun-jumping fines. Both OGX Petroleo e Gas Participacoes SA, which was fined for buying a 40 percent stake in an offshore oil block without approval, and Goias Verde Ltda., which faced penalties for buying the assets of Brasfrigo Ltda. without preclearance, were fined 3 million reais. That's about $940,000 at current exchange rates but was worth about $1.3 million when OGX was fined in 2013.

And those penalties haven't been limited to traditional mergers and acquisitions. The most recent fine of about $28,000 came in late June against GNL Gemini Comercializacao e Logistica de Gas Ltda. and Companhia de Gas de Minas Gerais, known as GasLocal and Gasmig, for failing to alert CADE to an agreement calling for GasLocal to supply Gasmig with natural gas to help meet demand in a city that doesn't yet have distribution pipelines.

"If you're someone who's doing business in Brazil and you're going to be before the agency — you're a repeat player — I think it's prudent to take a conservative course," Schaeffer said. "But if you do have a reasonable basis for not notifying based on what you think the relevant market is, I think you could rely on that."

Todorov likewise cautioned against companies taking too conservative of an approach when deciding whether to notify a deal, though he said in general best practices worldwide for avoiding gun-jumping penalties apply to Brazil.

"Once you do that, you create precedent," Todorov said. "If you have a borderline case and file, and CADE confirms the filing, then it's no longer borderline. Only do notifications where technically you really have to do it."

CADE May Force Minority Divestitures and Upend Market Definitions

By and large, CADE has been restrained in imposing remedies on transactions. In 2012, the watchdog's imposed restrictions on just one transaction. Two conditional clearances on competition grounds followed in 2013, eight in 2014 and five so far in 2015, according to a recent CADE report.

And it has only blocked one transaction under the new law, preventing Solvay Group from selling its majority stake in Solvay Indupa SAIC to Brazilian chemical giant Braskem SA in 2014. The watchdog said the deal would have given Braskem a monopoly over two products, but Ribeiro cautioned against thinking CADE would only challenge such extreme combinations in the future.

"It may want to block a deal that's just 3-2 if the parties are not willing to make any concessions," Ribeiro said. "It's always a function of how much the parties are willing to offer."

That case also illustrated a shift in the way CADE looks at geographic markets in merger reviews, according to Todorov.

In previous deals, the watchdog has been willing to define a market as international and consider not just local competitors for a particular product but also foreign imports if those imports amounted to at least 30 percent of the market. But CADE refused to do so in the Solvay case, Todorov said.

"That was a big signal ... because CADE in the past for this type of petrochemical commodities, they were keener on international definitions, but now they're becoming more strict," Todorov said. "In many cases, the geographic definition is going to be the key because you have high market shares of local products but then if you face competition from imports, you don't have a dominant position."

CADE generally takes a similar approach to remedies as its counterparts in the EU and U.S., favoring structural remedies to take on horizontal issues and using behavioral fixes more often in cases of problematic vertical mergers, attorneys said.

But Brazil is more likely than other jurisdictions to pursue divestitures of merging parties' minority interests when it finds overlap in those kinds of smaller holdings.

For example, in March CADE required Telefonica Brasil SA to sell its 6.5 percent voting stake in Telecom Italia as part of a settlement to win approval for a pair of deals to acquire Vivendi SA's sought-after Brazilian broadband unit for €7.2 billion ($7.9 billion) and spin off the holding company for the Telecom Italia stake.

"The difference is in Brazil they can be concerned about these minority interests at a lower level of shareholding than you see in the U.S. or EU," Schaeffer said. "Shareholdings as low as 5 percent have been problematic."

Minority stakes may be particularly likely to raise concern for CADE at lower levels if the transaction involves concentrated industries that have faced cartel concerns, such as its 2014 decision forcing Companhia Siderurgica Nacional to shed part of its 17 percent stake in rival steelmaker Usinas Siderurgicas de Minas Gerais SA.

At the time, CADE noted that the fact that CSN didn't have control over Usinas didn't mean the deal couldn't have anti-competitive effects given the limited number of players in the flat steel market — an area where CADE had fined CSN, Usiminas and a third competitor for fixing prices in the past.

"In concentrated industries where possibly there's a history of collusion, I think the obvious kind of industries are telecoms, airlines, some of these commodity products like cement ... they're going to look at those more seriously," Schaeffer said.

Source: Law360 - GAI

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