|Fabiola Cammarota de Abreu||Ricardo Lara Gaillard|
In August 2016, the tribunal of the Brazilian antitrust authority (the Administrative Council for Economic Defense or Cade) reversed a previous decision of its General Superintendence. This previous decision held that down payments violated the so-called gun jumping rules laid down in Cade's guidelines. In doing so, Cade issued its first precedent on the legality of a down payment and the payment of reverse break-up fees in M&A transactions, vis-à-vis the current gun jumping regulations.
In the M&A transaction at hand, the parties had agreed a down payment of 20% of the total purchase price. This would be kept by the seller if Cade disapproved the transaction, and used to offset the amount due by the buyer as a reverse break-up fee. In the opinion of Cade's General Superintendence (the department responsible for initiating the case), the payment of part of the purchase price to the seller in funds immediately available to it, prior to Cade's decision, would amount to a violation of gun jumping rules.
According to Cade's guidelines, a non-refundable payment of the purchase price in full or in part characterises gun jumping and is generally prohibited. However, the guidelines expressly exempt the following from this rule:
- down payments when traditionally expected as part of a typical transaction;
- deposits in escrow accounts; or
- break-up fee clauses.
When deciding the case, the tribunal considered that the legal nature of the down payment was not defined by the name ascribed to it, but rather by the examination of the clause's content and taking into account the context agreed upon by the parties. The tribunal also agreed that the retention of the amount paid as down payment was not only legal but a guarantee payment under article 418 of the Brazilian Civil Code.
The tribunal remarked that the percentage of the purchase price that is acceptable as a down payment should be analysed on a case-by-case basis, depending on the specifics of the transaction, the market involved and the nature of the parties, among other factors. Although the down payment in this case was not deemed a gun jumping violation, Cade has retained its discretionary powers and no objective guidance may be derived from the decision. This means that future transactions will call for careful consideration by counsel when parties agree on down payments.
Fabiola Cammarota de Abreu and Ricardo Lara Gaillard