Public mergers and acquisitions in Brazil: overview
A Q&A guide to public mergers and acquisitions law in Brazil.
The country-specific Q&A looks at current market activity; the regulation of recommended and hostile bids; pre-bid formalities, including due diligence, stakebuilding and agreements; procedures for announcing and making an offer (including documentation and mandatory offers); consideration; post-bid considerations (including squeeze-out and de-listing procedures); defending hostile bids; tax issues; other regulatory requirements and restrictions; as well as any proposals for reform.
To compare answers across multiple jurisdictions, visit the Country Q&A tool. This Q&A is part of global guide to public mergers and acquisitions law. For a full list of jurisdictional Q&As visit www.practicallaw.com/acquisitions-guide.
Historically, share ownership was concentrated in the hands of a small group of shareholders. However, following the boom in initial public offerings (IPOs) between 2004 and 2008, many companies went public (although in the majority of cases the former shareholders with large shareholdings still retained control). This concentrated ownership created an environment that fostered private M&A transactions, to the detriment of hostile takeover bids.
A recent sharp devaluation in the Brazilian Real (especially in relation to the Dollar and the Euro) resulted in 2015 being a relatively strong year for M&A transactions. The purchase and sale of assets and equity investments totalled BRL241.6 billion, an increase of 53% compared to figures in 2014.
In terms of absolute numbers of transactions, however, the variation was far more modest and represented only a 4% increase compared to 2014 figures (1,071 agreements were announced) according to data published by the Transnational Track Record in partnership with Merrill Date Site.
Although recent corruption scandals (particularly those involving large Brazilian enterprises in the oil and gas and construction sectors) may have had some impact on the Brazilian economy's image abroad, there are clear patterns indicating that Brazil will remain fruitful for M&A transactions. There is an increasing foreign investor presence and more acquisition and investment activity.
A transfer of corporate control commonly occurs when a controlling shareholder directly or indirectly assigns (in a single transaction or a series of transactions) voting shares, securities convertible into voting shares or subscription rights to voting shares (or any similar securities) resulting in a third party acquiring a majority stake in a publicly held corporation.
These transactions generally occur through:
Private negotiations with the controlling shareholders and/or main shareholders of the target company.
Voluntary takeover bids.
The most common way to acquire control of a publicly-held Brazilian company is still through private negotiations with the controlling shareholders. This is a result of the prevalence of concentrated share ownership in the Brazilian capital market.
There are no provisions in Brazilian law that prohibit hostile bids, but they are not as common as in more mature markets such as the US and the UK.
Regulations issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários) (CVM) and the Brazilian Stock Exchange (Bolsa de Valores, Mercadorias e Futuros) have increasingly aimed to create regulatory conditions and incentives for corporations to have a more dispersed shareholding. These measures appear to have generated positive effects for new players in the capital markets (especially for companies joining special listing segments such as the Novo Mercado and Nível 2 of the Brazilian Stock Exchange) and, in the long and medium-terms, should result in an environment more favourable to hostile takeover bids.
Regulation and regulatory bodies
Public takeovers and mergers are regulated by the following authorities:
Securities and Exchange Commission (CVM).
Brazilian Stock Exchange.
Brazilian Anti-trust Authority (Conselho Administrativo de Defesa Econômica) (CADE).
Central Bank of Brazil (Banco Central do Brasil).
Self-regulating institutions such as the Brazilian Association of Capital and Financial Markets Entities and the Mergers and Acquisitions Committee also issue specific regulations on tender offers and public M&A transactions.
The main statutes regulating public takeovers and mergers are (among others):
Brazilian Corporations Law (Law No 6,404/76).
Brazilian Capital Markets Law (Law No 6,385/76).
CVM Regulation No. 358/2002.
CVM Regulation No. 361/2002 (which specifically regulates public tender offers).
CVM Regulation No. 400/2003.
CVM Regulation No. 480/2009.
CVM Regulation No. 481/2009.
Brazilian Stock Exchange listing rules (Novo Mercado, Level 2, Level 1, Bovespa Mais and Bovespa Mais Novo Mercado).
The Anti-trust Authority and the Central Bank of Brazil also have great importance in public takeovers and M&A dealings because certain transactions will be subject to their scrutiny and analysis. This will depend on a variety of factors (for example, transaction financial volume, relevant market, participation of foreign entities, transactions involving financial institutions and so on).
Furthermore, depending on the business sector of the entities involved in the public takeovers and M&A transactions, other authorities must be consulted, such as the:
National Civil Aviation Agency, for transactions involving aviation companies.
National Telecommunications Agency, for telecom entities.
See also Question 25.
Most of the due diligence procedure is based on publicly available information. Arrangements between the bidder and the target company can be made to organise a due diligence procedure (which is usually very limited in scope and relies mostly on clarifications presented by the management in relation to specific publicly available information gathered by the bidder and considered sensitive to the target company's business). In these circumstances, bidders and target companies can enter into confidentiality agreements to safeguard information that is not available to the public in general.
Under the Brazilian Stock Exchange Novo Mercado listing rules, the board of directors of a publicly-held company must express its opinion in relation to a takeover bid within 15 days from the launch of the bid (from publication of the takeover notice). This opinion is not binding on the target and the potential selling shareholders and must be issued considering the best interests of the company, its shareholders and the fiduciary duties of the managers.
Until publication of the bid, the bidder, the intermediary financial institution and the Securities and Exchange Commission (CVM) should maintain the confidentiality of the tender.
In the event of an information leak, the bidder must either (CVM Regulation No. 361/2002):
Publish the bid notice.
Publish a notice of material fact with information to the market and investors in general relating to the bid and its intentions with regard to the offer.
Agreements with shareholders
Executing preliminary agreements (such as memorandums of understanding or letters of intent) are common preparatory measures in the context of private or public M&A transactions and the documents follow a similar structure to those executed in the US and Europe. Disclosure of the agreements will depend on several factors such as the covenants contained in them and whether they are binding or non-binding.
In the context of takeover bids, it is more common for the bidder to make its tender offer under the condition what it will acquire a certain percentage of shares of the target.
Any acquisition or disposal of "relevant shareholdings" must be disclosed to the company. In turn, the company must disclose such acquisition to the market and to investors in general (CVM Regulation 358/2002).
A "relevant shareholding" under the CVM Regulation is one that reaches or exceeds 5% of shares of a certain class (with one person or group of persons representing the same interest). The disclosure notice must immediately be available to the market after settlement of the transactions and must contain at least the following information:
The name and qualification of the relevant shareholder and their tax number.
The purpose of holding the equity interest, including (if applicable) a statement by the relevant shareholder that it is for investment purposes only and that there is no intention to change the company's control composition or its managerial structure.
The number of shares, warrants, subscription rights and stock option plans that the relevant shareholder (or any related party) currently holds or has held.
The number of convertible debentures and any other securities convertible into shares issued by the company that are held by the relevant shareholder.
An indication of any agreement or contract regulating the exercise of voting rights or the purchase and sale of securities issued by the company that has been executed by the relevant shareholder.
Agreements in recommended bids
Although agreements can be entered into between the bidder and the target, they are not common in Brazil.
Under the Novo Mercado listing rules, the board of directors of a publicly-held company must offer its opinion on a bid within 15 days from disclosure of the takeover notice. The opinion must expressly address all "relevant aspects" of the takeover bid, including (CVM Regulation No. 361/2002):
Anything capable of influencing the investors' decision-making process.
Any material changes in the financial condition of the company that have occurred since the last financial statements or interim financial information disclosed to the market.
Announcing and making the offer
Making the bid public
As a general rule, the intention to launch a tender offer must be kept private until publication of the tender offer notice and can only be disclosed before that if there is an information leak.
When a prior announcement is required, the bidder must either (CVM Regulation No. 361/2002):
Publish the bid notice.
Publish a notice of material fact with information to the market and investors in general related to the bid and its intentions with regard to the offer.
The exact timing and manner for a tender offer to be made public depends on a series of legal and strategic factors that must be carefully considered on a case-by-case basis.
Pre-conditions to the settlement of the takeover bid are permitted provided that they are expressly stated in the takeover notice and that their fulfilment is not, directly or indirectly, dependent upon the offeror (or its related parties).
The main condition that a takeover offer must observe is that the bidder acquires enough shares to ensure its position as controlling shareholder of the target.
Other conditions precedent usually include:
Concluding a limited due diligence procedure.
The waiver (by the target's shareholders) of the application of poison pill provisions in the bye-laws of the target.
A bid notice must contain the main terms and conditions of the bid including (CVM Regulation No. 361/2002 and its Exhibit II):
The number, type and class of shares targeted by the bid.
The price per share and applicable payment conditions.
The date, place and time of the auction.
Certain representations and warranties by the offeror and the financial institution concerning the performance of their obligations under the bid and that no undisclosed material facts exist that may influence the decision of the target shareholders.
A mandatory offer must be made whenever (Brazilian Corporations Law and CVM Regulation 361/2002):
A company goes private.
There is a shareholding increase (in the event the controlling shareholder acquires a certain number of shares of the controlled company, significantly reducing the liquidity of the company's shares).
There is a sale of control (or tag-along offer, applicable in case of direct or indirect sale of control, represented by a transaction, or a series of transactions, in which the controlling shareholder, or members of the controlling group, sell voting securities to a third party who, as a result, acquires control of the target company).
The voluntary tender offer regulation establishes no minimum consideration requirements.
However, the bye-laws of listed companies can provide for minimum consideration amounts as defensive measures against unsolicited bids (poison pills). In certain mandatory tender offers (such as offers on change in control) minimum consideration applies and can be the same as that received by the former controlling shareholders that sold their shares.
Compulsory purchase of minority shareholdings
The compulsory purchase of shares held by minority shareholders is only allowed where the tender offer takes the company private (de-listing). In this situation, if shares tendered exceed 95% of the target company's capital stock, the remaining shares can be redeemed for the same price as in the tender offer (squeeze out).
Restrictions on new offers
In principle, a third-party bidder faces no restrictions on launching a new offer or buying shares in the target company if it fails to complete a takeover offer. However, the controlling shareholder and the target company may:
Face a lock-up period of one year.
Be obliged to pay any price difference in tender offers launched within a one year period.
It is important to differentiate between a de-listing tender offer and a tender offer for cancellation of a company's registration as a publicly traded company:
A de-listing tender offer is a voluntary tender offer, established by the Brazilian Stock Exchange listing rules, to effectively de-list a publicly-held company from one of the private listing segments of the stock exchange. Because a de-listing tender offer is a voluntary tender offer, it is not subject to prior registration with the Securities and Exchange Commission (CVM).
A tender offer to cancel a company's registration as publicly-held company is established by the Brazilian Corporations Law and CVM Regulation 361/2002 and is subject to prior registration with the CVM.
Once successfully performed, a mandatory registry cancellation tender offer de-lists a company because it cannot be listed without being registered as a publicly-held company with the CVM. However, the opposite is not applicable, and a de-listing tender offer can be performed independently of a registry cancellation tender offer (which happened recently to Cremer SA and Diagnósticos da América SA).
Both tender offers have similar requirements, the main one being that in both offers, it is necessary that the price per share is considered "fair". A fair price must be based on an appraisal report, drafted by an appraisal company with recognised experience in transactions of this nature.
A de-listing tender offer must be approved by the majority of shareholders during a specially convened general shareholders' meeting. A registry cancellation tender offer must in addition be accepted by shareholders representing at least two-thirds of the company's free floating shares.
CVM Regulation No. 361/2002 and the Brazilian Stock Exchange listing rules set out other minor requirements for de-listing and registry cancellation tender offers and the requirements should be checked on a case-by-case basis.
Regardless of the prevalence of concentrated share ownership in Brazil and of the relatively small number of hostile bids, a great number of publicly-held companies have bye-laws that provide poison pill provisions as a defence mechanism against unsolicited takeover bids.
However, the meaning of poison pill in Brazil is not necessarily the same as in the US. In the Brazilian context, the term "poison pill" has a broader meaning and usually refers to a provision providing that when a certain shareholder acquires a certain number of shares exceeding a determined threshold, that shareholder must launch a tender offer to acquire the remainder of the shares issued by the target company either
At a pre-determined price.
At a price to be calculated using pre-determined assumptions.
Apart from poison pill provisions, there are not many defensive mechanisms (apart from launching a competing tender offer) that can be used by a company or the controlling shareholders to defend against hostile takeover bids.
It is worth mentioning that although the opinions of the board of directors on takeover bids are not binding, they can influence small shareholders' opinions with regard to takeover bids (especially when the takeover bid has a share swap component).
Other regulatory restrictions
M&A transactions are generally subject to approval by the Anti-trust Authority and some sectors have specific regulations and require prior authorisation where the parties agree on a transaction that would result in a transfer of control (including banking, insurance, telecommunications, aviation, energy, gas and oil).
Brazilian statutes provide for certain restrictions in specific sectors with regard to the ownership of shares of national companies by foreign investors (such restrictions may be found in sectors such as banking, insurance, telecommunications, media, oil and gas and civil aviation). Some restrictions only need pre-approval from government authorities, others represent a prohibition or limitation on the percentage of shareholding by a foreign investor.
All foreign investments must be registered with the Central Bank of Brazil for investors to be able to transfer their profits, dividends and the price received by selling their respective securities. In principle, this is the only requirement for repatriation of profits in Brazil.
In addition, apart from entering into an exchange transaction with an institution authorised by the Central Bank of Brazil and recording the transaction in the Central Bank of Brazil's Electronic Declaratory System, there are currently no exchange control rules for foreign companies.
During the takeover period (after publication of the takeover bid notice and until the auction date) the offeror and its related parties must not (CVM Regulation No. 361/2002):
Dispose of, directly or indirectly, shares of the same type and class of shares subject to the tender offer.
Acquire shares of the same type and class of shares of the takeover bid, if it is a partial takeover bid.
Use derivatives referenced to shares of the same type and class of shares subject to the tender offer.
All transactions with securities and/or derivatives of the target company must be communicated to the market by the offeror and its related parties, including:
Purchase and sale.
Memorandums of understanding.
Any other agreement documents.
Any shareholder or group of shareholders representing the same interests or party to a shareholders' agreement which owns, directly or indirectly, at least 2.5% of the total capital stock of the target company must disclose to the market any and all transactions with securities and/or derivatives, including:
The date on which the negotiations were completed.
The quantity traded grouped by date.
The average price on each trading date.
The regulatory authorities
Comissão de Valores Mobiliários (CVM)
Main areas of responsibility. Regulation and supervision of the Brazilian securities market.
Brazilian Stock Exchange
Main areas of responsibility. Most relevant stock exchange in Brazil with self-regulation and supervision powers within its organised markets.
Banco Central do Brasil
Main areas of responsibility. Brazilian Central Bank, responsible for the regulation and supervision of Brazilian financial markets, as well as for the implementation of the policies issued by the Brazilian Monetary Council (Comitê Monetário Nacional).
Conselho Administrativo de Defesa Econômica (CADE)
Main areas of responsibility. Brazilian Anti-trust Authority, responsible for merger control and establishing the Brazilian anti-trust policy.
Brazilian Corporations' Law (Law No 6,404/76) and regulations of the Brazilian Securities Commission (Comissão de Valores Mobiliários) (CVM)
Description. The official website maintained by the CVM containing Brazilian corporate law and the regulations of the CVM. The entire content of the laws and regulations available through this website may not be up-to-date.
Brazilian Stock Exchange Operational Regulations
Description. Official website maintained by the Brazilian Stock Exchange containing the operational regulations for listing and de-listing a company. The entire content of the laws and regulations made available through this website may not be up-to-date.
Regulations regarding the Brazilian Financial System and foreign investment
Description. Official website maintained by the Central Bank of Brazil containing regulations on the Brazilian Financial System and foreign investment. The entire content of the laws and regulations on this website may not be up-to-date.
Sérgio Machado, Partner
Professional qualifications. Brazil (OAB/SP) 2002; Bachelor in Law, Mackenzie University, Brazil; Masters in Law, University of Chicago, US
Areas of practice. Corporate; M&A; capital markets.
André Ziccardi, Associate
Professional qualifications. Brazil (OAB/SP) 2010; Bachelor in Law, University of São Paulo, Brazil; Masters in Law, Ludwig-Maximilian-University of Munich, Germany
Areas of practice. M&A; capital markets; banking.
Douglas Ogata, Associate
Professional qualifications. Brazil (OAB/SP) 2014; Bachelor in Law, Mackenzie University, Brazil
Areas of practice. Corporate; M&A; capital markets.