Acquisition of control of publicly listed Brazilian corporations
23/12/2008 Latin Counsel
Following the boom in Brazilian capital markets from 2006 to the middle of 2007, there has been a substantial increase of public mergers and acquisitions in the Brazilian market. As a result of this new economic environment, many legal issues have arisen in connection with the indirect or direct change of control of listed Brazilian corporations.
The Brazilian market had little experience in this area. Added to this, the innovative structures of several transactions have increased their complexity and made their implementation under Brazilian law even more challenging.
This article focuses on the issues related to the acquisition of control of Brazilian corporations and the requirements for launching a public offer as a consequence of the acquisition of control of a publicly listed corporation.
2. CONCEPT OF CONTROL
Pursuant to Brazilian Law 6,404 of 15 December 1976 (the “Corporation Law”), the definition of control of a Brazilian corporation refers to two essential aspects: (i) shareholding rights with voting powers and (ii) the effective exercise of such voting rights.
The Corporation Law defines a controlling shareholder as any individual or legal entity, or a group of related individuals or legal entities under a shareholders’ agreement or under common control who:
(i) hold shareholding rights that ensure, on a permanent basis, the majority of votes in the shareholders’ meetings and the power to appoint the majority of members of the board of directors or the executive board; and
(ii) effectively exercises its power to manage the activities of the relevant corporation and to guide the operation of its administrative bodies.
The Corporation Law requires the existence of two elements to determine that there is a controlling shareholder: a legal element (ownership of shares to ensure a majority of votes in a shareholders’ meeting) and a factual element (the effective exercise of such voting rights).
The definition of control of a Brazilian corporation is therefore not simply a mathematical equation. Brazilian law does not establish a threshold. Control must be analysed on a case-by-case basis by reference to the elements mentioned in the previous paragraph.
3. ACQUISITION OF CONTROL
The Corporation Law defines acquisition of control as any acquisition that results (i) in the emergence of an original controlling shareholder (the “Original Acquisition”) or (ii) in the transfer of control from the former controlling shareholder to another shareholder or a third party (the “Secondary Acquisition”).
In all cases, the acquisition of control of a certain corporation must result from the purchase of a certain number of shares that ensure the majority of votes in the shareholders’ meetings on a permanent basis.
3.1. Original Acquisition
In addition to the above, the Original Acquisition requires that the corporate capital of the relevant corporation be widely distributed at the time of the acquisition. In other words, the relevant corporation must not have a controlling shareholder until the relevant acquisition of control over the stock exchange market. The term Original Acquisition is therefore a consequence of the non-existence of a former shareholder (or a group of shareholders) with rights to control the relevant corporation.
According to Luiz Leonardo Cantidiano, there is no flaw in the acquisition by a certain individual or entity of a number of outstanding voting shares of a certain corporation over the market which grants the power to control such corporation. He adds that “an original acquisition of control has as its main characteristic the fact that someone, at a certain time, creates something that did not exist in the relevant corporation: a block of ordinary shares that ensures the exercise of the power of control over the relevant corporation.”
Roberta Nioac Prado adds that “the original acquisitions result from a situation where there is no majority control in place.”
3.2. Secondary Acquisition
On the other hand, a Secondary Acquisition involves a situation in which there was a previously existing controlling shareholder.
A Secondary Acquisition may result from many different structures including (i) a transfer of a controlling block of shares to a third party (whether or not a shareholder) and (ii) a merger in which the shareholders of the merged entity receive a certain number of newly issued shares of the remaining entity as consideration for the merger and which grants the power of control of the entity.
4. TAG ALONG PUBLIC OFFER (“OPA”)
Article 254-A of the Corporation Law establishes that, upon a sale of control, the buyer is obligated to launch an OPA for the acquisition of all outstanding voting shares held by the non-controlling shareholders.
The article was included in the Corporation Law in 2001 as an instrument to provide protection to minority shareholders. Pursuant to the Corporation Law, the buyer of the control must launch an OPA to acquire all outstanding voting shares at 80% or more of the amount paid for each of the shares of the controlling shareholder. The purpose of the requirement is to provide the minority shareholders equal treatment in the event of sale of control.
Luiz Leonardo Cantidiano concludes, in line with Article 254-A of the Corporation Law, that an OPA will only be required if one shareholder of the relevant corporation holding a block of voting shares that grants power to control such corporation, sells the block of shares to someone who subsequently replaces the former controlling shareholder and starts to exercise control over the corporation. If the voting shares of a corporation are dispersed in the market in such a way that the definition of a controlling shareholder cannot be met, there is no possibility of a sale of control. In other words, in the absence of a controlling shareholder, there is no sale of control.
5. OBLIGATION TO LAUNCH AN OPA
As mentioned, launching an OPA is required only in the event of a sale of control.
Accordingly, in the case of an acquisition of a number of shares that grants controlling power over a corporation by means of (i) an acquisition of shares widely dispersed in the market without a defined controlling shareholder, (ii) a merger that results in the change of control without a sale of such control, or (iii) any other structure that would not imply a sale of control, the obligation to launch an OPA will not arise.
This conclusion is based on the fact that the purpose of the Corporation Law is to distribute the premium paid to the controlling shares to all shareholders with voting rights.
In her analysis of Original Acquisition, Roberta Nioac Prado states that “(...) in an original acquisition of control, there is an acquirer, but no seller and, therefore, there is no private acquisition of control.”
In such cases, there is no premium to be paid for the controlling shares, as there is no control in place. Accordingly, the acquisition of control may only result from the acquisition of widely dispersed shares over the market and based on their market value (i.e., the value of the shares as traded on the relevant stock exchange market).
Adriana Josuá states that “in fact, the hypothesis of an original acquisition of control should not be construed as a sale of control, as there is no transfer of a right or of a factual circumstance of control.”
Adriana Josuá’s observation also applies to Secondary Acquisitions that are not a consequence of a sale of control, but rather from other legal structures that result in the acquisition of control (and in a change of control from one party to another) without a standard sale and purchase transaction.
6. OPINIONS OF THE BRAZILIAN SECURITIES AND EXCHANGE COMMISSION AND THE SÃO PAULO STOCK EXCHANGE
The observations stated above have been confirmed//supported by the Brazilian Securities and Exchange Commission (“CVM”) and the São Paulo Stock Exchange (“Bovespa”).
In a consultation made to Bovespa regarding the obligation to carry out an OPA for the acquisition of a corporation listed at Bovespa in the event that a third party acquires control of a corporation which shares are widely spread throughout the market (i.e., without a controlling shareholder), Bovespa stated that if the capital of the controlling shareholder of the relevant listed corporation is widely dispersed in the market, without the existence of a controlling shareholder or a group of them which holds control over the relevant corporation, it seems clear that the mere acquisition by a third party of a certain number of shares that ensure, directly or indirectly, control over a listed corporation would not require the presentation of an OPA. This conclusion is based on the fact that it constitutes an Original Acquisition. Although the Original Acquisition implies the emergence of a new controlling shareholder, it does not obligate the new controlling shareholder to launch an OPA for the acquisition of the shares of the minority shareholders because there was no transfer of control to a third party.
The CVM has also rendered some important decisions on the matter.
6.1. ARCELOR - MITTAL
The first decision on 17 April 2007 was issued by the former president of CVM Marcelo Fernandez Trindade in administrative proceedings CVM RJ 2007/1996 regarding Arcelor’s acquisition of Mittal Steel. The decision states that “the original acquisition of indirect control and the resulting OPA is not regulated by Brazilian law. The original acquisition of control over the market does not require the application of article 254-A of the Corporation Law. Such offer is only required in this case as a result of an express provision of the by-laws of the controlled corporation.”
6.2. ABN AMRO - RFS HOLDINGS
One of the most recent decisions was granted by the board of CVM in administrative proceedings CVM no. RJ-2007-14099 related to the acquisition of ABN AMRO Holdings N.V. (“ABN”) by RFS HOLDINGS B.V., (“RFS”), a vehicle in which The Royal Bank of Scotland Group plc, Fortis SA/NV, Fortis N.V and Banco Santander, S.A (“Santander”) held stakes.
At the time, ABN was the indirect controlling shareholder of two listed Brazilian corporations, namely, ABN AMRO ARRENDAMENTO MERCANTIL S.A. (“ABN Arrendamento”) and REAL LEASING S.A. ARRENDAMENTO MERCANTIL (“Real Leasing” and, together with ABN Arrendamento, the “Corporations”).
RFS acquired more than 95% of ABN’s shares in the market. There was no controlling shareholder of ABN before the acquisition and, therefore, the shares were widely spread throughout the market. After the liquidation of the offer for the acquisition of ABN, RFS became the new indirect controlling shareholder of the Corporations by means of an original acquisition of control over ABN.
In light of the above, RFS filed a petition with the CVM in order to obtain confirmation that no OPA would be required for the acquisition of the shares held by the minority shareholders of the Corporations.
CVM’s decision (the “Decision”) was published on 30 January 2008 and confirmed that an OPA is not required in such scenario. CVM stated that the Corporation Law is very clear in defining the obligation of launching an OPA, which arises only when there is an effective transfer of control, i.e., when the controlling shareholder transfers sufficient shares to permit the acquirer to exert control over the company regardless of whether or not the takeover takes place in Brazil. It is the acquirer’s duty to launch the OPA with a view to providing the non-controlling shareholders with part of the surplus value attributed to the block of controlling shares.
The Decision cited Carlos Augusto Junqueira de Siqueira’s opinion that “article 254-A applies to control transfer transactions, given that someone owns and transfers it onerously. These are the derivative acquisitions.” Luiz Leonardo Cantidiano was also referred to in the Decision for his statement that “in order for the presentation of the public offer referred to in article 254-A to be mandatory, a company shareholder owning a block of shares that ensures control, must alienate such shares to a third party who, once the transaction is concluded, will substitute the former owner and exert power to control the relevant corporation.” He adds that there would also be a sale of control in “a direct or indirect transfer (a) of shares included in the controlling block, (b) of shares linked to a shareholders’ agreement, (c) of securities convertible to voting shares and (d) the assignment of share subscription rights and other securities or rights related to securities convertible to shares that may result in the alienation of the shareholding control of the corporation”.
Analysing this matter in light of CVM instruction 361/02, Fábio Konder Comparato, as quoted in the Decision, states that Corporation Law has “regulated three types of mandatory tag along public offers: OPAs for the cancellation of registration, OPAs for the increase of a stake in the controlling shareholder, OPAs for the sale of control (article 2). All three presuppose the existence of a majority shareholder.”
In the matter at hand, RFS made a public offer in order to acquire shares of ABN, which were spread throughout the market - the highest percentages of shares held by a single shareholder were 3.05%, 2.67% and 2.14%. As there was no shareholders’ agreement regarding control of the company, no shareholder or group of shareholders had effective control. Thus, after acquiring shares in the market, RFS assumed the position of controlling shareholder without any kind of sale or transfer of control, which implies an Original Acquisition and was therefore not subject to the obligation of an OPA.
6.3. TENDA - GAFISA
The recent change of control of Construtora Tenda S.A. (“Tenda”) which took place on 1 September 2008 brought to light an alternative to standard sales of control of publicly listed corporations.
The transaction was implemented by means of a merger of a subsidiary of Gafisa S.A. (“Gafisa”) into Tenda, as detailed below.
The acquisition of the control of Tenda was structured by means of the merger of Fit Residencial Empreendimentos Imobiliários Ltda. (“Fit”), a subsidiary of Gafisa, into Tenda. As consideration, Gafisa received newly issued shares of Tenda representing 60% of its corporate capital and voting shares. The value of the shares assigned to Gafisa was calculated by an independent auditor and were issued at market value without any premium or prejudice to minority shareholders (at least from an economic perspective).
The purpose of the structure of the transaction was to sell control of Tenda to Gafisa while avoiding the obligation of launching an OPA as required by both Brazilian law and the by-laws of Tenda in the event of a sale of control, and substantially reducing the acquisition costs.
As mentioned, the Corporation Law establishes that an OPA is only compulsory in the event of a direct or indirect sale of control, which did not occur in the transaction given that a merger occurred and not a sale of shares.
According to CVM’s superintendent of securities registration, as there was no transfer of securities between the former and the subsequent controlling shareholder, launching an OPA was not compulsory and the utilisation of the structure of a merger as defined in the Corporation Law resulted in an original acquisition of the control of Tenda. We would classify this transaction as a Secondary Acquisition and not as an Original Acquisition as mentioned by CVM, as there was an existing controlling shareholder in place before the implementation of the transaction.
Although the transaction was structured and implemented in accordance with Brazilian law, it raised many issues regarding corporate governance and minority shareholders, which could eventually be considered to be a fraud in law. However, the superintendent of the CVM explained that in “analysing public information concerning the reorganisation of the relevant companies, there is no sign, up to date, of additional advantages being granted to the former controlling shareholders to constitute fraud against the Corporation Law or the company’s by-laws (...).”
While much discussion is expected, the CVM’s opinion will be taken into account for future transfers of control, particularly when the new controlling shareholder intends to avoid tag along offers and, therefore, additional costs.
Two other changes of control - Datasul S.A. to Totvs S.A. and Company S.A. to Brascan Residential Properties S.A. - were structured in a very similar manner to the Tenda/Gafisa deal and have also received a positive response by the CVM.
7. FINAL CONSIDERATIONS
The development of the Brazilian market represents a challenge to the current conventional legal structure which was designed for standard transactions. This can be evidenced in the difficulty lawyers and Brazilian regulators face to accommodate complex and creative structures for public mergers and acquisitions with the current legal rules, without having an unreasonably negative effect on minority shareholders.
Although these innovative structures can be more efficient from an economic standpoint, it is clear that they may have an adverse effect for the minority shareholders and for the market, especially if these structures are designed to circumvent legal obligations.
In light of the above, until the Brazilian authorities issue new and modern regulations in line with international market standards, the CVM will have to undertake the hard task of permitting the development of the market in connection with the current rules, especially with regard to the manipulation of the market and the rights of minority shareholders.
 CANTIDIANO, Luiz Leonardo. Espaço Jurídico Bovespa - Notícias 14.06.2007: Aquisição originária de controle e ‘tag along’, http://www.bovespa.com.br/Investidor/Juridico/070614NotA.asp (visited on 22 October, 2008). Article published in the Jornal Valor Econômico, on June 13, 2007. Loose translation.
 PRADO, Roberta Nioac. Oferta Pública de Ações Obrigatória nas S.A. - Tag Along. São Paulo: Quartier Latin, 2005, p. 222. Loose translation.
 CANTIDIANO, Luiz Leonardo, op. cit. Loose translation.
 PRADO, Roberta Nioac, op. cit., p. 223. Loose translation.
 JOSUÁ, Adriana. Alienação do controle de S.A. por oferta pública (art. 254-A da Lei das S.A.), in Revista de Direito Mercantil nº 126. São Paulo: Malheiros, 2002, p. 148. Loose translation.
 Esclarecimento BOVESPA, de 06 de junho de 2007, subscrito por Gilberto Mifano, Superintendente Geral BOVESPA. Available at http://www.bovespa.com.br/pdf/NovoMercado_Esclarecimento060607.pdf. Loose translation.
 http://www.cvm.gov.br/port/descol/respdecis.asp?File=5443-1.HTM. Loose translation.
 SIQUEIRA, Carlos Augusto Junqueira de. Transferência de Controle Acionário. Niterói: FMF, 2004, p. 264. Loose translation.
 CANTIDIANO, Luiz Leonardo, op. cit. Loose translation.
 Idem. Reforma da Lei das S.A. Comentada. Rio de Janeiro: Renovar, 2002, p. 238. Loose translation.
 COMPARATO, Fábio Konder. O Poder de Controle na Sociedade Anônima. Rio de Janeiro: Forense, 2005, p. 243. Loose translation.
 http://www.cvm.gov.br/port/infos/214%20-%20SRE-SEP%20-%20Incorpora%C3%A7%C3%A3o%20com%20Troca%20de%20Control e%20-%202008-7849%20(FMF)final.htm