M&A: unravelling Portugal's red tape

Author: | Published: 1 Sep 2005
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Mergers and acquisitions occur when two companies become one. When the largest company buys the smallest, an acquisition occurs; when the two companies are of equivalent size, a merger takes place. This is the commonplace definition for a complex and sometimes troublesome process, not only in corporate terms, but also from a legal point of view. The documents that constitute a merger file should be produced with great care and compliance to the applicable rules, which vary from jurisdiction to jurisdiction, to avoid unnecessary or disturbing litigation surrounding a usually delicate negotiation between companies and shareholders.

The notion of a company takeover within the Portuguese legislation refers only to a total or partial acquisition of a company. Partial because the acquisition can target only a minor holding or represent a controlling interest. So when Portuguese speak of mergers and acquisitions (M&A) they are usually referring to acquisitions that will lead to the takeover and full control of a company. Management control comes with majority shareholding, as the majority shareholder is empowered to appoint both the management and the supervisory bodies of the company.

In Portugal, where the main stages of business consolidation are already over – mainly in financial services, where M&A was constant in the nineties – the set of rules is both complex and demanding. Complex, because a merger necessarily involves all bodies of a certain company in the decision-making process, from the management (which is responsible for handling negotiations and for submitting the merger to the shareholders) to the supervisory bodies (who must watch over the merger, ensuring shareholders and creditors alike of their rights) to the general meeting (responsible, in the end, for the approval of the merger). And demanding, because a merger is strictly regulated by law, with timetables to be fulfilled and documents to be submitted. These documents – the most important of which is the merger project – will allow shareholders and third parties to study the proposed merger, to decide whether or not the project is viable and to determine whether or not the merger damages any of their rights. Considering the potential for litigation arising from a merger, with clashes between majority and minority shareholders, between management and shareholders and concerns for the survival of jobs, it is essential to ensure strict compliance.

Legal framework

The Portuguese rules never mention acquisitions. An acquisition is one of the types of mergers established under the Portuguese Companies Code of 1986, although it can also identify a process by which a company buys all or the majority of voting rights in another company, without carrying out any corporate changes. M&A is established under the Portuguese law as a lengthy process through which two or more companies can become one.

The outcome – a new company formed by two same-sized companies (merger), or the absorption of a company's assets, business and equity by another company (acquisition) – can take place in two different ways: (a) the global transfer of one or more companies' assets to another company (the buying company), in return for granting to the target company's shareholders a stake in its own share capital; and (b) the incorporation of a new company, to which the assets and businesses of two or more existing companies are transferred.

With the merger or acquisition, shares of the buying company or of the newly incorporated company are allotted to the previous shareholders of the previous existing companies, who will cease to exist as legal entities. As a compensation for eventual losses in the merger process, the law also allows shareholders to have a money compensation of up to 10% of the nominal share value of their new holding.

The Portuguese set of rules concerning M&A is both complex and bureaucratic, devoted mainly to the protection of minority shareholders and lenders. This is found in several rules establishing an independent evaluation of the companies involved, the strict regulation of the withdrawal of minority shareholders, the right given to lenders to oppose the merger, and the responsibility carried both by management and by supervisory bodies concerning a merger or an acquisition.

Statutory timetables mean it be several months before a merger is complete. The cornerstone of any merger lies with the evaluation reports and their ratio. This will allow the management of the merging companies to establish the allotment rights to shareholders and their future stakes in the new or buying company.

Concerning formalities, the first stage for a merger is the merger project, prepared by the management of the merging companies. The project must contain all elements needed for shareholders and third parties to have a perfect knowledge of the merger, its objectives and risks. As usual in Portugal, the lawmaker established strict rules concerning the elements that the merger project needs to contain:

  • the type of proposed merger, its reasons and objectives for all of the participating companies;
  • any stakes the participating companies already have in each other's share capital;
  • the balance sheets of the participating companies, with special mention of the companies' assets and liabilities to be transferred to the new or buying company;
  • the shares to be allotted to the target company and – if any – the amount of money to be paid as compensation;
  • the draft changes to the buying company's articles of association or the draft articles for the new company;
  • measures adopted to protect third parties who are entitled to share in the company's profit-sharing schemes;
  • measures adopted to protect lenders and other creditors;
  • the date from which all operations of the target company or the merging companies will be registered as operations of the buying company or of the new company;
  • rights entitled to the shareholders of the merging companies by the buying company or the new company;
  • any special rights or advantages granted to experts intervening in the merger or to the management and supervisory bodies; and
  • the evaluation criteria and the basis exchange ratio.

The role of the independent chartered accountant

The merger project must be submitted to the supervisory body of the companies involved and to independent chartered accountants – that is, accountants without a relationship to any of the companies involved. The independent chartered accountants must be designated by all the companies or, if they agree, by the Chartered Accountants Association, which regulates this profession in Portugal.

The independent chartered accountant must submit an opinion, based on the management's project and the companies' accounts, containing the following elements:

  • the methods applied to establish the exchange ratio,
  • the reason these methods were used, the different values resulting from different evaluation methods, their importance when establishing the definitive value and any difficulties concerning the evaluation procedure.


The merger project must be registered in the Commercial Registry before the shareholders' meetings of the participating companies are summoned to discuss and approve the merger. The law imposes a 30-day interval between the publication of the summons and of the notice of the merger project's registration and the actual meeting. During that interval – which can be extended – all documents concerning the merger must be available to the shareholders and lenders at the participating companies' headquarters.

All publications (concerning the project's registration and the notice of meeting) must be made in the Diário da República (Portugal's official journal) and in a local or national newspaper.

The documents that must be made available to shareholders and lenders (including copies free of charge) are:

  • the merger project;
  • the report and opinions submitted by the company's bodies and experts;
  • any accounts, management reports, supervisory reports and opinions, and shareholders' decisions concerning the companies' accounts of the previous three years.

The general meeting

Once this timetable is fulfilled and all necessary formalities are met, the following step to a merger concerns the general meeting of shareholders.

In these general meetings, the directors or managers must declare that no changes have occurred between the merger project drafting and its submission to the general meeting or, if any changes have occurred, what modifications are needed to the proposed documents.

All decisions concerning the merger must be taken by the same majority of votes needed to change the articles of any of the participating companies.

Nevertheless, if the buying company already holds a stake in the target company's share capital, it cannot have more voting rights than all other shareholders. This measure – similar to blocking voting rights – has been established to protect minority shareholders facing mergers between their company and a majority shareholder.

Public deed

If the general meeting approves the merger, it will be necessary to make a public deed of merger in a notary public. This deed, together with the general meeting's minutes, are registered and published (not to be mistaken with the merger's registration and publication, to occur at a later stage).

Third parties

Lenders and creditors to any of the participating companies can oppose the merger in a court of law claiming damages caused by the merger. They can submit an opposition to court within 30 days of the last publication (for instance, the publication of the public deed of merger).

This opposition procedure is established under the Civil Procedure Code, and in the end, if the court concedes to the plaintiff, the participating company will either be forced to repay the debts or settle its liabilities, or be forced to produce sufficient guarantee to its creditors.

Registration and effects

If no opposition is submitted – or, having been submitted, is found groundless – the participating companies must request the merger to be registered in the Commercial Registry.

Broadly speaking, two main effects follow the merger's registration:

  • Firstly, the merged companies are extinguished, and all assets, liabilities and business are passed on to the buying company or to the new company.
  • Secondly, the participating companies' shareholders become shareholders of the new company or of the buying company.

During this eventful and long process, some mistakes or procedural flaws are bound to occur. Some are of no importance, but others can hinder the complete merge. Some procedural flaws can be so damaging that the entire process can be cancelled by a court of law.

This is, of course, a complex procedure, requiring a preliminary court decision on the validity of the general meeting's decisions and, because it could damage companies and shareholders alike, the law establishes a short period of time during which any plaintiff can submit a request to cancel the merger: six months after any court decision that deems null the decision of the shareholders to merge the companies.

Mergers and competition: the Portuguese market

Large mergers and acquisitions require prior review for competition concerns. As part of its review, the Portuguese Competition Authority may prohibit mergers or approve them subject to conditions.

Mergers will be prohibited or subjected to conditions only when the Authority finds that the merger will substantially harm competition in a given market, so it is important that any merger between two or more large market stakeholders is assessed by competition law experts, to prevent unnecessary delays or problems arising from competition oversights.

Since the overhaul in 2003 of the Portuguese Competition Act and the establishment of the Competition Authority that same year, competition issues in Portugal have gained serious momentum. Several investigations are under way concerning cartels and price-fixing agreements. The Competition Authority's position on mergers is still not based on published guidelines, although it expected that a much anticipated opinion on a takeover of Portuguese media company Lusomundo would clarify the Authority's frame of mind.

Relevant information for the Competition Authority

It is standard practice to require participating companies to submit advance notice of the proposed transaction. The information disclosed in the pre-merger notification will normally be used by a competition authority in the first stage of merger review, to determine if any anti-competitive concerns are present and whether to proceed with a more detailed review of the proposed transaction.

The content of pre-merger notifications generally defined by the law or regulation typically includes:

  • the identity of the companies involved in the proposed transaction;
  • a description of the nature and commercial terms of the transaction;
  • the timing of the transaction;
  • financial information on the companies (including revenue, assets and copies of annual or other financial reports);
  • identification of related ownership interests and the organization structure of the companies; and
  • a description of the relevant product and service markets in which the companies operate.

The initial supply of information triggers a waiting period, during which the Competition Authority is entitled to request further information. This process concludes with a decision by the Competition Authority whether or not to proceed with a more detailed investigation. If it decides to proceed, the Authority will require more information not only from the participating companies, but also from third parties such as competitors and customers.

In assessing the potential adverse effects of a proposed merger, attention will typically focus on the establishment or the increase of a dominant position. Concerns also arise that the merger will create conditions that make anti-competitive agreements among them more likely by reducing the number of firms participating in a market.

The competition analysis of any merger concludes with an assessment of efficiencies to be realized as a result of the merger. In this stage, the objective is to assess efficiency and other welfare gains resulting from the merger. These will be balanced against any anti-competitive effects that have been identified in the earlier stages of the competition review.

In exceptional circumstances, a merger that would have anti-competitive effects may be permitted if one of the merging entities is in severe financial distress – which is also common when one of the participating companies seeks tax relief. The Competition Authority might be persuaded that the public interest is better served by a merger than by the failure of one of the merging entities. However, transactions of this sort should be carefully balanced. For instance, it might be that another firm could expand productive capacity using the assets of the failing firm and that public welfare would be better served by this solution.

In the end, decisions by the Competition Authority can be appealed to court.

Author biographies

João Pateira Ferreira

Raposo Bernardo & Associados

Having joined Raposo Bernardo & Associados in 2002, João Pateira Ferreira is one the firm's senior associates, dealing with all areas involving banking and securities, tax law and foreign investment.

João Pateira Ferreira holds a masters degree from the University of Lisbon, and is the author of essays on the automobile and tourism sectors, international tax law, fiscal policy, European Community law and several articles on the Spanish tax system.

Fluent in English and French, João Pateira Ferreira is a member of the Portuguese Bar Association.

Sofia Ferreira Enriquez

Raposo Bernardo & Associados

Sofia Ferreira Enriquez is a senior partner at Raposo Bernardo & Associados, dealing with all areas of labour law, civil litigation and maritime law.

A lecturer at the University of Lisbon since 1999, she is author of essays on maritime law and civil procedure.

Sofia Ferreira Enriquez has completed postgraduate studies in labour law and holds a masters degree from the University of Lisbon. She is a member of the Portuguese Bar Association.

She is fluent in English, French, and Spanish.

Joana Andrade Correia

Raposo Bernardo & Associados

Joana Andrade Correia is a senior associate at Raposo Bernardo & Associados dealing with corporate law and international operations. She joined the firm in early 2002 and has recently been appointed to head the law firm's new offices in Cape Verde.

Joana Andrade Correia is a full member of the Portuguese Bar Association and holds postgraduate qualifications in tourism.

Rita Tavares de Almeida

Raposo Bernardo & Associados

Rita Tavares de Almeida is senior associate at Raposo Bernardo & Associados, having joined the firm in early 2004.

Dealing with all areas of commercial law, tax law and foreign investment, Rita Tavares de Almeida undertook postgraduate studies in tax law and tax planning and is a member of the Portuguese Bar Association. She is the author of essays on taxation and several articles on the Spanish tax system.

Rita Tavares de Almeida speaks English and French fluently.