Following the new Antitrust Law that came into force in 2011, the merger control executed by Administrative Council for Economic Defence (CADE) has the objective of avoiding the performance of acts characterising the transaction implementation (either fully or partially) prior to the final approval by CADE.
The consummation of a merger without CADE’s consent results in the opening of administrative proceedings, also to invalidity of the accomplished transaction and imposition of fines reaching between 60,000 and 60 million reais.
In order to inhibit the practice related above, known as ‘gun jumping’ in the case law, CADE has issued two institutional measures concerning rules and procedures on Brazilian merger control: the publication of a guideline entitled Guide for Analysis of Prior Acts Consummation of Mergers; and the publication of Resolution No. 13/2015 that regulates the Administrative Procedure for Mergers Determination (APAC).
These guidelines issued by CADE seek to establish the agency’s procedures on antitrust policy in Brazil and removes uncertainty arising from the application of law and the conduct of business by the companies.
Specifically in relation to the gun-jumping guideline, the Brazilian rule is the prior control of mergers executed by CADE. Furthermore, the Antitrust Law also says companies that are facing a merger process should keep their physical structures and competitive conditions unchanged until the final deal evaluation made by CADE.
Considering the scenario in which two companies have concluded a transaction that results in an economic concentration, the guideline issued by CADE clarifies prohibited practices under penalty of a premature integration between the companies.
The gun-jumping guideline considers all the particularities of each case and only directly involved companies could determine the limits in the interaction that is not implied in physical structure changes and competition conditions between the companies.
This guideline establishes conduct rules to be used as a workbook for economic agents in their negotiations and evaluations, and it is divided into three sections. the first is about the gun-jumping concept and activities that in CADE’s view could constitute this conduct; the second regards procedures that could be adopted; and the third relates to the discussions and possible penalties around the matter.
Activities that may involve gun jumping in Brazil
According to the guideline, these activities may create competition concerns and constitute gun jumping: information exchanges between economic agents involved in a transaction; definition of clauses, which will govern the relationship between the agents; and the parties’ activities before and during the merger implementation.
Regarding the exchanges of sensible information between involved companies, the guideline seeks to alert agents regarding unnecessary exchange information. CADE knows that a merger, naturally, involves exchanges of sensible information, but it assumes that only relevant and necessary information can be shared. Agents should avoid excessive information sharing.
As it is aware of this situation, CADE precedents identify some types of information that may involve gun-jumping conduct:
- costs of the companies;
- level of production capacity and increase plans;
- marketing strategies;
- prices and rebates;
- clients list;
- salary of employees and payrolls;
- main suppliers and contracts terms;
- non-public information about trademarks or patents and about research and development;
- plans and future projects; and
- competitive strategies.
In what concerns the terms definition, which should follow the relationship between economic agents involved in the transaction, the guide focuses its discussion on the rules before the antitrust analysis. In this sense, the logic is the same: to keep as intact as possible the competition atmosphere between companies.
CADE’s guide mentions some clauses that, if contained in the contract, can result in the premature integration of activities of the parties involved in the merger, as follows:
- clause of anteriority of effective date before approval by CADE and that implies some alterations to the governance structure;
- prior non-competition clause;
- pre-payment clauses, except escrow and break-up fees, normally accepted by CADE;
- any clauses that allow one company to interfere directly in the other company; and
- any clauses providing for activities that cannot be reversed at a later time, if the act is not approved by CADE, or the reversal involves a large expenditure of resources;
In the end, what are the acts performed by interested companies that may arise concerns in the view of CADE?
CADE understands that the transfer or usufruct of assets; the exercise of the right to vote at assembly or relevant influence on the company’s activities and policies; profit sharing or other payments; development of strategies together by parts; integration of sales teams; and joint development of products, among others, are acts that should be avoided by economic agents who seek a merger.
However, these are example cases and given the large possibilities of conducts that could be executed, CADE should analyse cases separately.
Some important and specific procedures to be adopted by the requesting parties of the merger:
In order to ensure that the necessary exchange information are preserved and does not involve the sharing of sensible information between companies, and understanding that will need some degree of information exchange for the transaction negotiation, the guidelines issued by CADE establish some procedures that could be adopted by the companies, in line with international best practices, as follows.
Clean teams and executive committees
Employees of both companies and independent consultants can form these. Their creation is indicated in complex transactions when the deal will result in a significant merger between the companies and when it is necessary to exchange a large amount of information in order to create serious competitive risks.
The clean teams will be responsible for receiving and processing this information, giving the necessary referral for it. Therefore, CADE suggests that members of the clean team sign confidentiality agreements and work in regime of exclusivity or priority.
The clean team can draw up a report with its opinion about the viability of the deal and submit it to the executive committee, composed of company executives involved in the transaction.
All information exchanged must take place exclusively through the clean team, which must be the only point of contact between businesses, and the data flow should always be formalised through various separate and independent communication channels.
Moreover, the clean team members should be committed to maintaining the confidentiality of information they receive, especially of information classified as commercially sensitive.
In addition, all information exchanged should be summarised, indicating its nature, disposal and place of storage.
Parlour rooms as a suitable place to exchanges of sensible information
A parlour room is a room specifically designed (preferably outside the premises of the companies) for matters in discussion in respect to the transaction.
According to the Gun-Jumping Guidelines, the executive committee members may meet in order to discuss the future merger in specific meetings and places for this purpose.
The meeting in the parlour should be monitored to ensure that no competitively sensitive information is the subject of the discussions and may not result in any interference or partnership between the companies before the merger approved by CADE.
Possible punishments implemented by CADE in case of gun jumping
There are three possible punishments to be implemented by CADE:
- a fine ranging between 60,000 reais and 60 million reais;
- opening of an administrative procedure; and
- nullifying the merger.
To calculate the fine to be applied, CADE will decide the amount based on requirements and evidence such as the situation of the deal (ie, whether it should or should not have been notified to CADE) and at what time during the transaction the gun jumping occurred.
The period of the conduct, the economic size of the offender, the transaction value and the good faith of the parties, and whether the agent’s conduct was recurring, will also guide CADE in its decision.
The opening of administrative procedure
The opening of an administrative procedure for ascertainment of merger (APAC) started with Resolution No. 13/2015.
The aim of the resolution is to check and to investigate mergers that:
- have been notified to CADE, but consummated before approval of the Brazilian antitrust agency;
- have not been notified to CADE when it is a compulsory case; or
- have not been notified to CADE because they did not reach the billing requirement but that imply risks to competition.
In the latter case, CADE may require the merger submission within one year from the consummation of the non-notified transaction.
Thus, only the first two situations represent the practice of gun jumping, since the third case is not, in principle, a notifiable case.
Resolution No. 13/2015 also reintroduced to the current Antitrust Law the Reversibility Preservation Agreement of the Transaction (APRO). The instrument can ensure the competition preservation in situations where there are still doubts about the need for prior approval and the possibility of immediate transaction implementation.
Before May 2016, CADE investigated six mergers for gun jumping and started administrative procedures. The highest fine imposed by CADE was 30 million reais in the case of the global acquisition of a wholly owned subsidiary of Cisco Systems Inc, Technicolor S/A. No mergers were nullified.
In all these cases, CADE considered the following practices to characterise gun jumping:
- communication to the market through an official press release on the company’s website at a date prior to the completion of CADE’s analysis;
- the contract formalising the date of the transactions is before the agreement conclusion date;
- payment of installments prior to the analysis of CADE;
- exchange of sensitive data or effective interference with the assets of the company;
- anticipation of the assets transfer (tangible and intangible), although the ownership has not been formally amended;
- absence of a suspensive clause in contracts, conditioning the approval of the business to the approval of the transaction by CADE; and
- participation in decisions or management of the acquired company.
Finally, even if the transaction is a corporate control consolidation, in which the acquiring company is already included as a shareholder and already has access to the decision-making of the target company before the transaction, the buyer company, in compliance with Brazilian regulations, must await CADE’s approval to assume the rest of the control. In other words, the new company’s shares, rights and other assets obtained from the acquisition can only be effectively transferred after the approval of CADE.
However, when the interference of one company in another is associated with the ordinary management of the company and not related, for example, to the governance structure, the penalty of nullity of the merger should not be applied.
Therefore, few cases in CADE dealt with the gun-jumping matter, which is due to the speed of the merger analysis by the body, especially those who proceed through the summary rite.1
Thus, Brazilian precedents on gun jumping are still insufficient for a deep examination. In all cases discussed, there was not an analysis of concrete situations about practical issues and recurring contract.
Moreover, because of the constantly changing forms of negotiation between companies, the antitrust authorities are always adapting to reality, so case law is not the best option to provide guidance to private agents.
Because of this, effective guidelines are very important. Although there are Guidelines on the subject, it would be beneficial to make them more detailed, with more concrete examples of conduct performed by companies during negotiation, in order to merge without incurring a gun-jumping situation.
- Procedures in fast-track review take 18 days to be analysed, according to the 2015 balance from CADE.
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