Uncertainties linger under Brazil’s pre-merger regime

Author: | Published: 26 Sep 2012
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In the last decade, Brazil has received approximately $330 billion in foreign direct investment. A large part of these investments acquisitions of equity interest in Brazilian companies. As in every developing economy, Brazil has faced many challenges over the past few years, including the modernisation of its laws to prepare the country for an overwhelming amount of funds being invested in several areas of Latin America's largest economy.

In connection with such modernisation, Brazil saw its first antitrust law coming into force in June 1994. This law created the Brazilian Antitrust System (Sistema Brasileiro da Defesa da Concorrência) which consisted of three administrative bodies. Two of these had supportive roles, while the Administrative Counsel for Economic Defense (Conselho Administrativo de Defesa Econômica or CADE) was in charge of ruling on any market monopolisation as well as any illegal antitrust conducts. Therefore, CADE had a preventive as well as a repressive role in the Brazilian Antitrust System.

However, the impressive amount of foreign investments captured by the Brazilian economy meant that the country needed to update its antitrust policy. After several years of discussion, on November 30, 2011 the Brazilian Congress passed the new antitrust law that came into force on May 29, 2012. This law modernised the country's antitrust system, bringing it closer to antitrust systems around the world. It also reformulated CADE's performance. The new CADE was restructured to become a competition guardian inside a modern regulator and pro-market state. In connection with such structure, CADE has now a much more preventive, repressive and educating role upon analysing any market monopolisation and illegal antitrust conducts.

Perhaps the most surprising novelty brought by the new antitrust law, when it comes to CADE's preventive role, is the analysis of market monopolisation acts that, as of May 29,I, when the new law came into effect, is previous to the consummation of the transaction and not after it, as the previous law from 1994 stated.

Uncertain implementation

Although the new antitrust law is aimed at modernising the Brazilian Antitrust System, it has brought many uncertainties upon its implementation, specifically with regards to the previous analysis of market monopolisation acts. With the new law, many bureaucratic requirements have been created, which in turn, may delay the analysis procedure and will translate into a cost increase for companies.

Evidently, with such major changes brought by the new antitrust law as well as the uncertainties generated in the market, merger and acquisition transactions in Brazil boomed during the months previous to the entry in force of the aforementioned law, so that the transactions would be judged in accordance with the previous law. The Brazilian Antitrust System's introduction has been preceded by a series of sudden merger and acquisition transactions among companies in Brazil, which amounted to several billions of Reais and involved great participation of foreign capital. During the five days prior to CADE's new role on judging business transactions under its new structure, at least ten very large transactions were accomplished in very different areas of the economy, such as air transportation, energy, food and beverage, logistics and the pharmaceutical industry.

Among the business transactions accomplished during the period prior to the new antitrust law's coming into force, there was the acquisition of the control of Comgás by Cosan, which executed an agreement with British Gas Group to acquire 60.1% of Comgás for an aggregate amount of R$3.4 billion ($1.8 billion). Other major transactions included the acquisition of Brazilian alcoholic beverage brand Ypióca by British multinational Diageo for an aggregate amount of R$930 million the acquisition of Brazilian world-famous steakhouse Fogo de Chão by the American investment fund Thomas H Lee Partners for an aggregate amount of $400 million. As major business transactions are certainly not completed in a few days, the large number of agreements recently accomplished is a good demonstration of the interest by the companies involved in accelerating antitrust procedures in order to avoid the uncertainties of the new antitrust law. Amongst those uncertainties, is the timeframe that the new CADE will take to approve a transaction in light of the new procedures to be followed, as well as the increasing number of documents required.

One should keep in mind that with the antitrust analysis now happening prior to the consummation of the transaction, the parties cannot actually take any practical action (and probably will not want to make any disclosure about the transaction) until CADE has issued its decision. This aspect, combined with the fact that an increment in the number of CADE's technical staff – although approved by the law – will certainly take several years to be a reality, is bringing serious concerns to the parties.

Until now, the Brazilian business community could start implementing changes in their businesses immediately after the execution of the transaction documents. Now businesses are having to deal with a dramatic change, in which they may need to keep the deal confidential (and also wait to start enjoying the benefits derived from it) for several months.

It is clear that Brazilian congress is aware of the country's booming economy and therefore saw the need to modernise the Brazilian Antitrust System. By doing so, the country is now ready to improve the economy's competition and avoid any distortions that may jeopardise consumers, although the cost of passing a new antitrust law is still generating several uncertainties among market players. There is a widespread suspicion that the new CADE is not yet ready to accomplish its promises of accelerating antitrust analysis of mergers and acquisitions and give more transparency to the entire procedure. Only time will tell.

José Ricardo De Bastos Martins
 

Peixoto e Cury Advogados
Rua Mário Amaral, 205
04002-020 – São Paulo – SP

T: +55 (11) 3218-8467
F: +55 (11) 3051-5696
E: josericardo.martins@peixotoecury.com.br
W: www.peixotoecury.com.br

Martins is a partner at Peixoto e Cury based in São Paulo, Brazil, who specialises in corporate and antitrust work. Previously he served as an associate at Sidley Austin Brown & Wood in New York, and an associate at Stairs Dillenbeck Finley & Rendon, also in New York. Martins is a member of the Brazilian Bar Association, the Attorneys Association of São Paulo, the Brazilian-American Chamber of Commerce, and the NY State Bar Association. He holds a Bachelor of Law from the Universidade de São Paulo and a LLM in corporate law from New York University.

Andrés Alejandro Staibano
 

Andrés Alejandro Staibano
Peixoto e Cury Advogados
Rua Mário Amaral, 205
04002-020 – São Paulo – SP

T: +55 (11) 3218-8455
F: +55 (11) 3051-5696
E: andres.staibano@peixotoecury.com.br
W: www.peixotoecury.com.br

Staibano is a junior associate at Peixoto e Cury in São Paulo, Brazil working in the corporate practice with a focus on antitrust issues. Previously, he served as a trainee in other major law firms in São Paulo. Staibano is a member of the Brazilian Bar Association and holds a Bachelor of Law from Fundação Getulio Vargas.

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