- 1.Has the level of M&A activity picked up slowed, and what are conditions like today? In general terms, what level of activity is foreseen for 2012?
Despite the economic uncertainty and the recent financial turmoil rumours from Europe, the current level of M&A transactions in Brazil continues to be very active. The slight decrease in M&A activity during the peak of the economic crisis is definitely behind us and a continuing rise (both from volume and deal count perspectives) in M&A transactions should be expected. In addition, Brazilian companies with solid cash reserves have increased their presence in the global M&A market, taking advantage of underpriced assets resulting from the financial crisis. In general terms, it is expected that the M&A market in Brazil will remain highly active, with an increasing number of transactions, continuing the upward trend. In particular for 2012, a consolidation trend is expected, with many M&A deals outside the Rio de Janeiro – São Paulo axis, such as the northeast and central regions of Brazil.
- 2.Which industries do you expect will see the most M&A activity in 2012?
Although deals have involved companies with activities in all kinds of industries, activity in the financial, agribusiness and mining sectors is expected to remain high. Also, there will be great investment opportunities in infrastructure, in specific sectors such as oil and gas, logistics and transportation, in particular due to the 2014 FIFA World Cup and the 2016 Rio de Janeiro Summer Olympic Games. Indeed, in order to successfully host such events, the country will need to substantially invest in the development of monorail lines, subways, light rail transit systems, the construction and renewal of stadiums, the construction of new hotels, the revitalisation of ports and the enhancement of airports. As the government announces the privatisation of many airports, in an effort to deflect concerns that the nation’s transport infrastructure will not be ready to deal with the excessive influx of visitors for the 2014 FIFA World Cup and the 2016 Rio de Janeiro Summer Olympic Games, joint ventures are expected in this industry, which is fairly new for the private sector. It is also expected that the privatisation of airports represents new business openings for small and medium sized companies.
- 3.What types of deals do you expect to see?
We believe we will continue to see many total acquisitions and joint ventures, as well as minority investments, which assure strong veto rights to the minority shareholder. Mergers involving companies undergoing financial distress are also expected, leading to possible consolidation in several industries.
It is also important to note that the economic turmoil in the United States and Europe brought the Brazilian IPO market to a complete standstill from the last two quarters of 2007 to part of 2009. Offerings that were then on course were constantly postponed, and many companies revealed that plans for launching their initial offerings had been, for the time being, discarded.
Nonetheless, such scenario seemed to have been reversed – indeed, a few high volume offerings were concluded in 2009 and 2010. However, current expectations for 2012 are not that optimistic, and a decrease in the Brazilian IPO market is forthcoming as a consequence of the risk-averse philosophy adopted fearing the double dip as well as of the dampening effects of the European crisis.
- 4.Discuss the level of M&A activity you have seen over 2011 and expect to see in 2012.
(i) pure domestic deals;
(ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
(iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.During the past couple of years, the Brazilian M&A market has experienced a constant and solid development that resulted in an extremely dynamic and exciting scenario. Many cross-border transactions and major acquisitions abroad by local companies were concluded, not only in Latin America but also on a worldwide basis. Also, pure domestic deals continue to be very common, with a strong consolidation trend in many industries. The number of pure domestic deals represented an important level of activity in 2011, being partially responsible for keeping the M&A industry in Brazil active.
Until a few years ago, cross-border M&A deals involving Brazilian companies were basically characterised by foreign companies purchasing equity interests in Brazilian companies, entering into joint ventures with local partners or divesting. Brazilian entities, therefore, were mostly seen as targets in the M&A market, and rarely perceived as potential purchasers.
Recent years, however, have revealed a different picture. While the classic cross-border activity remains predominant (mostly with foreign acquirers from outside Latin America), it is now more and more common to see acquisitions abroad carried out by local companies acting as purchasers including hostile takeover attempts – not only in Latin America but also with North American, European and Asian companies as targets.
- 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
Private equity activity continues to be a particularly vital ingredient in the current M&A market in Brazil. Both domestic and international private equity firms have made relevant investments in several industry segments, in many cases envisaging an initial public offering for the following years, as it reflects the expectations of a global financial stability.
Domestic private equity activity was most likely facilitated after the Brazilian Securities and Exchange Commission published Instruction No. 391 in 2003 (which has undergone several amendments since then) to establish the regulation under which private equity activity can be developed.
Considering the recent economic turmoil in the United States and Europe and Brazil’s fast growing economy, it is likely that domestic funds will now increase their share in private equity activity in comparison with past years.
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
In light of the economic stability that Brazil has been able to maintain over recent years, practice has shown the strength of the domestic financing market for M&A deals involving both strategic buyers and private equity buyers. Domestic M&A deals have found financing from many sources, but predominantly from local investment banks and aggressive investment funds. However, in terms of the international financing market, Brazilian companies are facing a lack of financing from their foreign parent companies.
- 7.Do you expect more M&A activity involving financially troubled companies?
Yes, M&A activity involving financially troubled companies has gained importance since the financial crisis in 2008. Many companies in financial distress are being analysed as possible targets for acquisition, and many mergers have occurred between healthy players and financially troubled companies. We expect to continue to see an increase in such deals in the near future, although at a less intensive pace compared to 2008 and 2009. In particular, such a trend is expected in cross-border transactions, such as acquisitions by Brazilian companies of US and European based companies, reflecting the consequences of the worldwide financial slowdown.
- 8.Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy?
In 2005, the Brazilian federal government enacted a new bankruptcy act, which substantially altered the Brazilian legal system regarding bankruptcy and creditor arrangements. This act permitted Brazilian companies undergoing economic difficulties to, in accordance with the terms and conditions set forth therein, carry out restructurings aiming for arrangements with its creditors and, therefore, avoiding bankruptcy.
Not only does Brazil’s new bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy, but it strongly encourages such an approach as a manner to avoid bankruptcy and allow the economic recovery of financially troubled companies.
- 9.What other types of activity are resulting from the economic situation?
In addition to the activities mentioned above, the current economic situation has resulted in an increase of restructuring of debt, as well as of sales of non-core business, although with less intensity than seen abroad. Also, in a few situations parties have revisited their merger agreements, postponing payments and renegotiating payment conditions.
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
It is important to state that the practice of hostile takeovers in Brazil is still in its infancy. Since only a few publicly traded companies lack a defined controlling shareholder, attempts of hostile takeovers are still extremely uncommon, and successful endeavours are yet to be seen.
Nevertheless, with the IPO boom throughout 2005, 2006 and 2007 and the mounting number of publicly-traded companies with broadly held ownership, expectations are high regarding hostile takeover activity. Indeed, several companies have adopted anti-hostile takeover mechanisms in their corporate documents. The most common defences have been the inclusion of provisions in the by-laws setting forth the need to implement a tender offer to all the other shareholders, with a pre-established price (normally a large EBITDA multiple), in the event
a shareholder exceeds a given threshold of equity interest in the company; or constraints on the exercise of the right to vote, limiting the votes to a certain percentage or number of shares, no matter how many shares the holder owns. Other ‘shark-repellent’ provisions available in foreign jurisdictions (such as the so-called ‘poison pills’) are highly likely to be challenged in Brazil.
Additionally, shareholder activism in Brazil still does not have the same strength or resonance as it has elsewhere, especially in the United States and in Europe. In each publicly held company in Brazil, shareholder activism usually remains concentrated with a few qualified investors, and most minority shareholders play a very small role in this area. Shareholders’ meetings in Brazil are still poorly attended and bear little resemblance to similar events abroad.
However, an increase in such activities as a result of the aforementioned IPO boom has been experienced. Publicly held companies have not yet anticipated how they might respond, but the first step might be to restructure the departments responsible for dealing with investors, which publicly held companies in our jurisdiction are legally required to maintain, so as to enhance their relevance within the company’s internal structure and review their disclosure policies. It is worth noting that the ‘Novo Mercado’, one of the listing segments of the São Paulo Stock Exchange (BM&F Bovespa), is still attracting a growing number of companies and has helped to transform the Brazilian capital market, with companies voluntarily committing to such a special corporate governance listing segment (along with the ‘Level 1’ and ‘Level 2’ segments). In addition, following the initial trend of mainly newly listed companies signing up to the ‘Novo Mercado’ guidelines, currently we have noticed more and more companies already publicly listed shifting to the São Paulo stock exchange special corporate governance levels.
- 11.Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters?
As a result of our developing economy (with the stability of our investment grade status), and consequently, of the mergers and acquisitions executed in our jurisdiction, directors and officers generally seem to be currently better prepared in leading the transactions. Facing the pressure of our evolving securities market, the directors are nowadays more diligent in the analyses of M&A transactions, commonly engaging investment banks and specialised risk evaluators to endorse business judgements. Indeed, in many situations such independent opinion is required because of possible conflicts of interests between directors and the company, and helps to diminish risks arising out of potential litigation by shareholders aiming to challenge the transaction.
- 12.Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
In the past, major differences could be seen in how domestic and cross-border deals were being conducted. However, the gaps have been narrowed in an increasing pattern – not only with respect to the management of the business negotiations but also regarding the legal work, such as due diligence and the way contracts are drafted (in this regard, please see answer to question 14) – which has helped to transform the M&A market in Brazil into a more dynamic and sophisticated one.
Also, the latest technological developments have definitely had an impact on deal making, mostly in a positive manner. These improvements – such as electronic data rooms and video conferences – have assisted in expediting both business negotiations and legal procedures, and have also played a relevant role in narrowing down the differences in how domestic and cross-border deals are conducted.
- 13.For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided?
First of all, it is important to agree at the start on arbitration to solve any issues arising from the M&A transaction (in this regard, please see answer to question 14). Although international buyers and investors tend to prefer international arbitration chambers, it is important to note that there are well-known Brazilian chambers as well, with solid reputations and highly qualified arbitrators – such as Câmara FGV de Conciliação e Arbitragem, Centro de Arbitragem da Câmara de Comércio Brasil-Canadá (CCBC), Centro Brasileiro de Mediação e Arbitragem (CBMA) and Câmara de Mediação e Arbitragem do Centro das Indústrias do Estado de São Paulo (CIESP).
Secondly, and somewhat obviously, it is highly recommended to hire full-service law firms with recognised experience in similar types of transactions. With the unique legal system found in our jurisdiction, such a simple precaution reveals itself to be particularly useful as negotiations advance and legal difficulties start to appear.
Lastly, regardless of the legal advice, it is important that the investor or buyer understands and gets familiarised with the acts and regulations that rule the target’s activities in Brazil, since in certain cases such laws can even influence how the business shall be further conducted.
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
As mentioned above, the M&A market in Brazil is now more dynamic, with many sophisticated deals involving worldwide interests and cross-border activities. In many dual or multi-jurisdiction transactions, clients engage legal counsel from several different jurisdictions to assist them throughout the transaction. This has diminished the differences between the M&A market in Brazil and elsewhere.
English is commonly the language that predominates in the negotiations, and usually, but not always, in which the agreements are written. Apparently a minor element, such a fact has helped to alter how legal documents are drafted in Brazil: each day to a greater extent, agreements are more complete and extensive, attempting to address all possible scenarios, many of them already set forth in the provisions of our civil law system.
Arbitration has been accepted by the Brazilian courts as a legal type of dispute resolution. As in many cases turning to Brazilian courts does not seem the proper way to solve corporate conflicts, electing arbitration as a binding manner to settle disputes is now very common in agreements that regulate M&A transactions, permitting prompt and private decisions from specialised arbitrators. Choice of laws other than Brazilian law to rule M&A deals in Brazil is increasing – in particular in purchase and sale agreements and other similar agreements – although a growing resistance may be found because of the conflicts of law provisions that must be addressed.
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
In June 2011, Brazilian Federal Law No. 12,431 was enacted to establish, among other issues, new rules on debentures, so as to encourage the private sector to help finance longer term infrastructure projects through special purpose companies – such as tax incentives for Brazilian residents and legal entities. In addition, other mechanisms to stimulate private investment in large infrastructure projects over future years were created, such as FIP-IEs, which are private equity infrastructure funds. With these initiatives, the equity market should become an important source of funding for infrastructure projects, giving not only entrepreneurs but also private investors a greater role in developing Brazil’s infrastructure, and consequently reducing certain demands from public resources.
Another rule that deserves to be highlighted is Instruction No. 480 issued by the Brazilian Securities and Exchange Commission (CVM) in December 2009, to implement new procedures to be followed by publicly held companies in the Brazilian regular stock market. This rule established several compliance requirements and information disclosures not previously instituted by the rules on the subject.
The main purpose of CVM with this rule was to create an online summary of public companies in order to provide accurate and updated information to the investors and the general public. The CVM is continuously issuing official orientations and promoting modifications to the system where the information is updated to address the concerns perceived by the publicly held companies.
- 16.Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals?
In 2012, significant developments will occur in the antitrust area which will substantially affect M&A. On 29 November 2011, Brazilian Federal Law No. 12,529 was enacted to introduce extensive changes to the current Brazilian antitrust framework (as defined by Federal Law No. 8,884/1994). Among the several modifications introduced by the new antitrust law, which will enter into force on 29 May 2012, the most relevant ones for M&A transactions are the introduction of a pre-merger review system, and the changes in the thresholds for submission of mandatory filings. With the introduction of a pre-merger review system, Brazil is adopting a suspensory regime, meaning that the decision of the competition authority becomes a condition for closing as it is in the US and EU. In relation to the thresholds, the new antitrust law establishes that a transaction must be filed when the gross turnover of one of the economic groups involved in the transaction reaches 400 million reals or more in Brazil in the financial year prior to the transaction, and the gross turnover of the other economic group involved in the transaction reaches, in Brazil, at least 30 million reals in the financial year prior to the transaction. In practice, with the new rule, the turnover of both parties to the transaction will be considered and the current market share criterion will be excluded. The new law also unifies the structure of the current three Brazilian antitrust authorities under one authority, and modifies the rules pertaining the investigation of conducts, such as a revamped leniency programme and settlement rules and improved criminal sanctions.
Contributing Authors
Contributing Editor
Paul Schnell
Skadden, Arps, Slate, Meagher & Flom LLP
Questions
- 1.Has the level of M&A activity picked up slowed, and what are conditions like today? In general terms, what level of activity is foreseen for 2012?
- 2.Which industries do you expect will see the most M&A activity in 2012?
- 3.What types of deals do you expect to see?
- 4.Discuss the level of M&A activity you have seen over 2011 and expect to see in 2012.
(i) pure domestic deals;
(ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and
(iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America. - 5.What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?
- 6.Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From which domestic or international sources?
- 7.Do you expect more M&A activity involving financially troubled companies?
- 8.Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy?
- 9.What other types of activity are resulting from the economic situation?
- 10.More generally has there been any increase in hostile takeovers and shareholder activism? What defences and responses are target companies using?
- 11.Have directors changed how they conduct themselves in M&A deals? Should directors and management be more concerned today about negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation? From your experience, are directors more diligent today in their review of M&A transactions and other matters?
- 12.Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?
- 13.For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the pitfalls that should be avoided?
- 14.Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?
- 15.Have there been any significant developments in the regulatory area – your country’s security exchange commission, antitrust regulators, etc?
- 16.Describe recent and forthcoming regulatory developments that affect M&A, whether involving the securities and markets regulator, competition agency or other regulatory agencies that review deals?
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