Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Brazil

BRAZILIAN UPDATE – New Brazilian Anti-corruption Law and Regulations

Editors’ Note: This update comes from Francisco Antunes Maciel Müssnich (founding partner) from Barbosa, Müssnich & Aragão Advogados. Francisco Müssnich is a member of XBMA’s Legal Roundtable, and a leading expert on Brazilian corporate and M&A matters. This paper was jointly authored by Adriana Dantas and Eduardo Carvalhaes from Barbosa, Müssnich & Aragão Advogados.

Highlights:

  • New legislation establishes sanctions to legal entities involved in corrupt and other illegal acts. Among the sanctions are fines that range from 0,1% to 20% of the annual gross revenue and prohibition from receiving public benefits.
  • The law provides for the strict liability of the legal entities. The liability remains in case of mergers and acquisitions.
  • The adoption by the legal entities of an effective compliance program that comprises internal mechanisms and procedures of integrity, audit and incentive for the reporting of irregularities will be taken into consideration by Brazilian authorities when imposing sanctions.
  • Decrees to be enacted by the Federal, State, District and Municipal Governments shall establish how a compliance program will be evaluated and clarify the jurisdiction for enforcing the law. The Federal Decree is still pending.

MAIN ARTICLE

On January 29, 2014, Federal Law 12,846 (“Anti-corruption Law”) entered into force. The Anti-corruption Law provides for the administrative and civil liability of legal entities involved in acts against the national or foreign public administration.

The Anti-Corruption Law seeks to fill a gap in Brazil’s legal system by addressing corruption and corruption-related practices with more effective legal mechanisms, such as severe sanctions assessed based on a strict liability concept.

The law expands on certain requirements imposed by the U.S. Foreign Corrupt Practices Act (“FCPA”), and companies doing business in Brazil should closely analyze the differences between the two laws.

The Anti-Corruption Law was designed to address corruption in business transactions carried out by Brazil-based entities, as well as foreign entities that operate through an office, branch or representation in Brazil. Corruption is defined as “to promise, offer or give, directly or indirectly, an undue advantage to a public official or to a third party related to him/her”. Notwithstanding the focus on corruption, the Anti-corruption law prohibits several “acts against national or foreign public administration”, such as:

  1. to hinder of investigations or inspections carried out by public entities;
  2. to thwart or defraud, by means of an adjustment, arrangement or any other method, the competitiveness of a public bidding procedure;
  3. to fraudulently obtain an undue advantage or benefit from an amendment to or extension of an administrative contract, without authorization under the law, or from the notice of public bidding or the related contractual instruments; and
  4. to manipulate or defraud the economic-financial balance of an administrative contract.

The commitment of any of these acts subjects a legal entity to the imposition of severe sanctions. At the administrative level, companies are exposed to fines ranging from 0,1% to 20% of their gross annual revenue, and special public disclosure of the decision in means of communication widely distributed. In case a civil judicial proceeding is initiated, legal entities may be compelled to forfeit assets and rights obtained by means of corrupt practices, their business activities may be suspended, they may be prohibited from receiving incentives, subsidies, subventions, donations or loans from public entities, and they may even be compulsorily wind up. Besides, the Anti-corruption Law created the National Registry of Punished Companies (CNEP in the Portuguese acronym) which will consolidate all sanctions applied.

The Anti-Corruption Law also introduces new risks in merger and acquisitions transactions involving Brazilian companies. It provides for successor liability – liability for the payment of the fine and full compensation of the loss suffered by the public entity still remains after the merger or acquisition. Thus, anti-corruption due diligence will become an even more usual practice in Brazil. Since companies can be liable for the acts of third parties committed for the company’s benefit, anti-corruption due diligence on third parties must also become an important business practice.

Under the strict liability, the legal entity is liable for the performance of these acts in its interest or for its benefit and is subject to the imposition of a sanction, despite whether or not an employee acted in the scope of his employment, whether or not a third party committed the act, or whether or not the compliance program was effective.

The managers and administrators of the companies involved in corruption can also be held liable for their acts, but the liability regime applicable to natural persons is subject to the terms of the culpability of such persons (i.e. it is not a strict liability regime).

When determining the sanction, however, the existence and effectiveness of compliance programs will be evaluated by the sanctioning authority. The Federal Government must still establish standards for evaluating compliance programs. A Decree is currently under scrutiny of the Civil Chief and the Presidency, and is expected to be published soon.

The cooperation of the legal entity to investigate the infractions will also be taken into account in the imposition of sanctions. Therefore, the adoption of an effective compliance program that not just avoids illegal acts but that also includes procedures and mechanisms in support of an eventual investigation can reward the legal entity twice.

The evaluation of a compliance program is not the only important topic that is expected to be regulated by the Decrees. The Anti-corruption Law establishes that, at the administrative level, the highest authority of each public body and entity of will have the authority to investigate and decide the cases occurred. Brazil is divided in 26 States, 1 Federal District and more than 5,000 thousand Municipalities, each one of them with several bodies and entities. Several authorities are potentially capable of imposing sanctions and collecting its economic benefits, what create a risky environment. Therefore, to prevent possible public abuses, it is expected that the Federal Decree will determine the “highest authorities” at the Federal Union level and will provide guidance to the other spheres (States and Municipalities). The Federal Decree shall also provide for mechanisms of coordination between the several authorities responsible for the investigation.

Two States ran ahead and published their own State Decrees. Before the enactment of the Federal Decree, the States of São Paulo and Tocantins published, respectively, Decree 60,106/2014 and Decree 4,954/2013. In general, both States copied the relevant provisions of the Anti-corruption law and determined the “highest authority” that will decide the cases occurred and execute leniency agreements with the legal entities. São Paulo created its own State Registry of Punished Companies (CEEP in the Portuguese acronym) in addition to the nationwide CNEP, created by the Anti-corruption Law.

The Brazilian framework on anti-corruption law and enforcement is evolving, following trends and concepts adopted internationally. Severe sanctions, strict liability and several public bodies and entities responsible for investigating and deciding the acts committed, dramatically increase the risks of committing a corruption act. Consequently, companies doing business in Brazil should carefully measure corruption-related risk with a view not only to past and present perceptions, but also to the signs of change that already point to a much more responsive and strict enforcement environment in the near future.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Changes to the Brazilian Merger Control System

Editors’ Note:  This paper was authored by Tito Amaral de Andrade, partner of Machado, Meyer, Sendacz e Opice Advogados, one of Brazil’s most respected corporate law firms with extensive experience in Brazilian M&A and antitrust matters.

MAIN ARTICLE

I.  Introduction

Law No. 12,529/2011 (the “New Antitrust Law”) has come into force on May 29, 2012.  Several regulations were issued by the Administrative Council for Economic Defense (“CADE”), as well as by the Ministries of Justice and Finance in the last couple of days, bringing significant changes to the Brazilian merger control system.

The main changes to the Brazilian merger control system are summarized below.  Please do not hesitate to contact our team should you require additional clarification.

II.  Filing thresholds

Under the new system, a filing with CADE will be mandatory when (i) the transaction has effects in Brazil; (ii) the transaction constitutes an economic concentration; and (iii) one of the economic groups involved in the transaction had Brazilian gross revenue of at least R$ 750,000,000 and one of the other economic groups involved in the transaction had Brazilian gross revenue of at least R$ 75,000,000 in the last fiscal year. 

Effects

The New Antitrust Law and the above-mentioned regulations do not entail any changes to the so-called effects test, which is met whenever the target has direct presence (subsidiary, branch, distributor, sales agent) in Brazil or indirect presence through export sales to Brazil.  There is still no de minimis rule on the value or volume of export sales that trigger a filing obligation.

Economic concentration

Article 90 of the New Antitrust Law clarifies that an economic concentration is deemed to occur when (i) two or more independent companies merge; (ii) one or more companies acquire, directly or indirectly, by contract or any other means, control or parts of one or more companies by virtue of purchase or exchange of shares, equity interests or convertible securities, or purchase of tangible or intangible assets; (iii) one or more companies take over one or more companies; and (iv) two or more companies enter into an associative agreement, consortium or joint venture, except if such transaction is aimed at participating in public bids or entering into agreements derived from public bids.

Complementing this provision, CADE’s regulations clarify that the acquisition of equity interests or assets described under (ii) above is subject to mandatory filing when:

a)  It entails the acquisition of control over another undertaking;

b)  The buyer already has control over the target and acquires directly or indirectly an additional shareholding equal to or higher than 20% of the target’s total or voting capital stock, from at least one of the sellers individually considered; or

c)  There is no acquisition of control, but:

i)  The buyer becomes the target’s largest individual shareholder;

ii)  In a conglomerate merger, the buyer acquires directly or indirectly 20% or more of the target’s total or voting capital stock, or the buyer already holds 20% or more of the target’s total or voting capital stock and acquires directly or indirectly an additional shareholding equal to or higher than 20% of the target’s total or voting capital stock from at least one of the sellers individually considered; or

iii)  In a horizontal merger or vertical merger, the buyer acquires directly or indirectly 5% or more of the target’s total or voting capital stock, or the buyer already holds 5% or more of the target’s total or voting capital stock and acquires, as a result of one transaction or of a series of transactions, an additional shareholding equal to or higher than 5% of the target’s total or voting capital stock.

Revenue

CADE’s regulations bring a definition of economic group, which is relevant for revenue calculation purposes and also for the preparation of the new filing forms.

Pursuant to such rules, an economic group comprises (i) all the companies that are under common internal or external control; and (ii) all the companies in which any of the companies under common control holds, directly or indirectly, at least 20% of the total or voting capital stock.

CADE’s regulations also clarify that, when dealing with investment funds, an economic group comprises (i) all the funds that are under common management; (ii) the manager itself; (iii) the quotaholders/investors who hold, directly or indirectly, more than 20% of the quotas of at least one of the funds indentified in (i); and (iv) the portfolio companies in which any of such funds holds, directly or indirectly, at least 20% of the total or voting capital stock.

Therefore, whenever one of the economic groups involved in the transaction had Brazilian gross revenue of at least R$ 750,000,000 and the other economic group had Brazilian gross revenue of at least R$ 75,000,000 in the last fiscal year a filing obligation will arise, provided that the effects test is met and that the transaction constitutes an economic concentration.

III.  Pre-merger suspensory regime

The New Antitrust Law has adopted a pre-merger control system, under which parties are prevented from consummating the transaction before CADE’s clearance.  In other words, CADE’s clearance has become a condition precedent to closing.

Under the new system, the merging parties shall keep their facilities and the competitive conditions unchanged before CADE’s clearance.  Further, the merging parties shall not transfer any asset or exercise any type of influence over the target, and the exchange of confidential information shall be limited to the minimum level necessary to execute the binding agreement.  In other words, the merging parties shall not adopt any measure amounting to gun jumping.

Exception

Only in exceptional circumstances the merging parties may be preliminary authorized by CADE to close pending clearance.  To require a such a preliminary authorization the parties will have to prove that (i) the transaction does not entail any risk to the competition environment in the relevant market; (ii) the required closing measures can be totally reversed; and (iii) the target would suffer severe and irreversible financial losses should closing take longer to occur, based on documentary evidence such as financial statements.

CADE will have up to 60 days to issue a decision on such requirement, and CADE’s preliminary authorization may be revoked in the course of the merger review procedure.

Should the parties fail to fulfill the obligations set forth in the preliminary authorization, they will be subject to a daily fine ranging from R$ 5,000 to R$ 250,000 and the revocation of the authorization.

Stock market transactions

CADE’s regulations provide that tender offers may be filed after their issuance and may be consummated pending clearance.  However, buyers shall not exercise their voting rights before CADE’s clearance, except when the exercise of such rights is necessary to protect the investment’s value.

IV.  Penalties

Under the New Antitrust Law there will be no fines for late filing.  However, merging parties that consummate the transaction before CADE’s clearance or engage in gun jumping may have the transaction declared null and void, will be subject to fines ranging from R$ 60,000 to R$ 60,000,000, and will also be subject to prosecution for anticompetitive conduct.

CADE has not issued yet any specific regulation on the method for calculating fines under the New Antitrust Law.  CADE’s Internal Regiment provides in a broad manner that the calculation of the fines will take into account inter alia the size of the companies, whether the measure was taken with malicious intent and the potential anticompetitive effects of the transaction.

V.  Merger review procedure

Merger review will be conducted only by CADE, which will be composed of a Directorate General and an Administrative Tribunal.

Under the New Antitrust Law, the Directorate General and the Administrative Tribunal shall conclude the merger review within 240 days.  Such term may be extended to up to 60 days upon request of the parties, or to up to 90 days upon decision of CADE.  Therefore, the maximum merger review term will be 330 days.  Pursuant to the article 133 of CADE’s Internal Regiment, cases that are not ruled within such term will be automatically cleared.

Merger cases that clearly do not raise antitrust concerns may be reviewed under the fast-track procedure.

Fast track procedure

Pursuant to CADE’s regulations the following transactions are eligible to fast track review, at CADE’s sole discretion:

i)  Non full function/cooperative joint ventures;

ii)  Consolidation of control;

iii)  Substitution of economic agent;

iv)  Horizontal mergers when the parties have a joint market share below 20%; and

v)  Vertical mergers when the buyer does not have a market share above 20% in any upstream or downstream market.

CADE’s regulations do not establish any deadline for the conclusion of the merger review under the fast track procedure.  However, CADE unofficially informed that transactions which clearly do not raise antitrust concerns and are reviewed under the fast track procedure will be cleared in approximately 60 days.

VI.  New merger filing form

Pursuant to CADE’s regulations, there will be different filing forms for transactions that will be analyzed under the ordinary procedure (Annex I) and those that do not raise antitrust concerns and are eligible to be reviewed under the fast track procedure (Annex II).

We provide below an overview of the information and documents that will have to be submitted to CADE under these two scenarios.

Annex I – Ordinary procedure

I.  Summary of the transaction (up to 500 words)

II.  Information about the parties involved in the transaction

III.  Information about the transaction

IV.  Documents (transaction agreements, shareholders agreement, list of documents created by virtue of the transaction, copy of all studies and reports prepared for the internal analysis of the transaction, list of all the documents that were prepared in the negotiation of the transaction, annual reports and financial statements, market studies and researches, business plans, etc.)

V.  Relevant markets

VI.  Supply structure

VII.  Demand structure

VIII.  Buyer power

IX.  Conditions of entry and rivalry

X.  Coordinated market power

XI.  Counterfactual (possible future structure of the relevant markets in the absence of the transaction

XII.  Final comments

Annex II – Fast track procedure

I.  Summary of the transaction (up to 500 words)

II.  Information about the parties involved in the transaction

III.  Information about the transaction

IV.  Documents (transaction agreements, shareholders agreement, list of documents created by virtue of the transaction, annual reports and financial statements, etc.)

V.  Relevant markets

VI.  Supply structure – only in cases that entail horizontal overlap and/or vertical integration

VII.  Final comments

Timing of filing, filing parties and filing fee

The New Antitrust Law does not establish when a merger filing must be submitted to CADE.  Article 108 of CADE’s Internal Regiment provides that it must be submitted at any time preferably after the execution of a formal binding document between the parties and before the consummation of any act associated with the transaction (i.e., before closing or any integration measure).

The parties involved in the transaction (e.g., buyer and seller, parent companies of a joint venture, etc.) are jointly responsible for the merger filing.

In practical terms, until the enactment of the New Antitrust Law the buyer usually took the lead in preparing the filing, counting on the cooperation of the seller to provide the necessary information on its side.  Now this practice will likely change and the seller will be directly involved in the preparation of the filing and the monitoring of the merger review procedure.

A merger filing in Brazil continues to require the payment of a filing fee of R$ 45,000 under the New Antitrust Law.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Debenture financing for infrastructure projects, R&D and innovation – Reduced income tax

Editor’s Note:  This update comes from Francisco Antunes Maciel Müssnich (founding partner) from Barbosa, Müssnich & Aragão Advogados.  Francisco Müssnich is a member of XBMA’s Legal Roundtable, and a leading expert on Brazilian corporate and M&A matters.  This paper was jointly authored by the firm’s Capital Markets and Tax teams.

Highlights: 

  • New legislation reduces the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are deemed “priorities” by the federal government.
  • Legal entities domiciled in Brazil are subject to a 15% tax rate on income earned from Infrastructure Debentures that are issued by December 15, 2015 and meet other conditions.
  • 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 needed infrastructure.

MAIN ARTICLE

In June of last year, Federal Law 12,431 introduced new rules on debentures to encourage the private sector to help finance longer term infrastructure projects.

One of the important changes made by the new legislation was to reduce the income tax applicable to income from debentures issued by special purpose companies (SPCs) incorporated to carry out infrastructure investment projects or projects for intensive economic production in research, development and innovation that are considered to be “priorities” by the federal government (“Infrastructure Debentures”).

Under Law 12,431/2011, the income tax rate for income from Infrastructure Debentures received by individuals resident in Brazil is zero, effectively making it tax-free, while income from Infrastructure Debentures earned by legal entities domiciled in Brazil is subject to income tax at a rate of only 15%, withheld at source.

In order to benefit from these favourable tax rates, the Infrastructure Debentures must be issued by SPCs created to implement “projects for investment in infrastructure or for intensive economic production in research, development and innovation considered to be priorities under regulations issued by the federal government.” In addition, the Infrastructure Debentures must be issued by December 15, 2015, and meet all of the following conditions:

i) the debentures must pay interest at a rate fixed in advance and linked to a price index or reference rate. Post-fixed interest rates are prohibited;

ii) they must have an average weighted term to maturity of more than four years;

iii) they cannot be repurchased by the issuer within the first two years following the issued date, and early redemption and prepayment are prohibited;

iv) the purchaser must not have assumed a commitment to resell the debentures;

v) if interest will be paid periodically under the debentures, the interval between payments must be at least 180 days; and

vi) there must be proof that the debenture was traded on regulated securities markets.

Decree 7603, which was published on November 10, 2011, defines the type of project that will be considered a “priority” by the Brazilian government. According to the Decree, a project will be a “priority” project if it is directed to construction, expansion, maintenance, restoration, adaptation or modernization of facilities in the following sectors:

i)             logistics and transportation,

ii)           urban mobility,

iii)          energy,

iv)         telecommunications and broadcasting,

v)           basic santitation, and

vi)         irrigation.

The priority list is not exhaustive, and in some cases projects in other sectors can be treated as priority.

The Ministries responsible for the various sectors will issue rules setting out the requirements for approval of priority projects, and the mechanisms for overseeing implementation of approved projects.

Each project must be submitted to the appropriate Ministry, together with the supporting documentation listed in the Decree and any other documents the responsible Ministry may require. The various Ministries have discretionary powers to determine if a submitted project meets the requirements to be considered a priority. Projects are approved individually, by publication of the Ministry’s decision in the official gazette.

Decree 7603/2011 provides that any SPC may manage a priority project, as long as it is incorporated specifically for that purpose. Infrastructure Debentures issued by SPCs can be distributed publicly if the SPC obtains issuer registration from the Brazilian Securities Commission, the CVM, although the registration requirement can be waived if the debentures will be placed under a “restricted efforts” offering.

SPCs that fail to implement approved projects are subject to a fine of 20% of the total value of the debenture issue. In order to facilitate inspection and control of SPCs’ compliance with their legal obligations, SPCs are required to:

(i) provide a list of the legal entities that hold interests in the SPC to the responsible Ministry, and keep the list up-to-date;

(ii) in the case of public offerings of Infrastructure Debentures, ensure that the offering documents highlight the number and date of the Ministry’s approval of the priority project, and the commitment to allocate the funds obtained through the offering to the approved priority project; and

(iii) keep all documentation related to the use of the funds available for inspection, for at least five years after the maturity date of the Infrastructure Debentures.

Lastly, the CVM is required to maintain a list of Infrastructure Debentures offerings on its website, showing the amount of each debenture issue and the related priority project.

In addition to the Infrastructure Debentures, Brazil has created other mechanisms to stimulate private investment in large infrastructure projects over the next years, such FIP-IEs, which are private equity infrastructure funds, and the special type of investment fund provided for under Law 12,431/2011, which is designed to acquire Infrastructure Debentures.

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 the demands on public resources.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Tax Rates Applicable to Foreign Investments in the Brazilian Financial and Capital Markets Reduced to Encourage Investment

Editor’s Note:  This update comes from Francisco Antunes Maciel Müssnich, founding partner of Barbosa, Müssnich & Aragão Advogados.  Francisco Müssnich is a member of XBMA’s Legal Roundtable, and a leading expert on Brazilian corporate and M&A matters. This paper was authored by Debora Bacellar, partner, José Otavio Faloppa, partner, and Daniel Abraham Loria, associate, from Barbosa, Müssnich & Aragão – Consultoria Tributária.

MAIN ARTICLE

The Tax on Financial Transactions (“IOF”) is a Brazilian umbrella-type tax comprising different tax modalities, each levied on a different type of financial transaction that is carried out in Brazil. The IOF taxes are regarded as “extrafiscal”, meaning that they have economic and financial purposes other than those strictly related to the collection of tax revenues by the Brazilian government. This enables IOF legislation to be more flexible than the legislation applicable to other Brazilian taxes, and, therefore, more susceptible to changes.

One of the IOF tax modalities is the Tax on Foreign Exchange Agreements (“IOF/Exchange”), which is levied on the liquidation of foreign exchange (“FX”) agreements with the Brazilian Central Bank, related to the conversion of Brazilian currency (reais) into foreign currency, and vice-versa. The rate of IOF/Exchange that is currently imposed on most types of FX agreements is 0.38%, although different rates apply to certain types of FX agreements that are listed in federal regulations.

In particular, rates of IOF/Exchange imposed on foreign investments in the Brazilian financial and capital markets have been modified several times over the past several months. On December 1st, 2011, with the publication of Decree No. 7,632/11 in an extra edition of the Brazilian Official Gazette, the rate of IOF/Exchange applicable to certain FX agreements in connection with investments in the Brazilian financial and capital markets was reduced from 2% to zero percent, as follows:

Line No.

Type of FX agreement

Previously applicable rate of IOF/Exchange

Currently applicable rate of IOF/Exchange

1

Inflow of funds for floating rate investments carried out in a Brazilian stock exchange environment or in a Brazilian future and commodities exchange environment (mainly shares), according to the rules issued by the National Monetary Council, except for transactions that involve derivatives and that result in pre-determined income.

2%

Zero

2

Inflow of funds for the acquisition of shares of Brazilian companies in either (a) a public offer of shares that is registered with the Brazilian Securities and Exchange Commission (CVM) or that is not required to be registered with the CVM, or (b) subscription of shares, provided that, in both cases (a) and (b), the Brazilian company issuing the shares is entitled to trade its shares in a stock exchange environment.

2%

Zero

3

Inflow of funds for the acquisition of quotas in private equity funds (fundos de investimento em participações, or FIP), emerging company fu7nds, or funds that invest in quotas of such funds. This includes investments that are carried out by means of simultaneous FX agreements, without involving any actual flow of funds.

2%

Zero

4

Inflow of funds for investments in shares that may be traded in a stock exchange environment, through the cancellation of depositary receipts that are traded outside Brazil.

2%

Zero

5

Inflow of funds deriving from a change in the modality of the investment registration from a direct foreign investment registered pursuant to the rules of Law No. 4,131/62 to an investment in shares that may be traded in a stock exchange environment pursuant to the rules of the National Monetary Council.

2%

Zero

6

Inflow of funds for investments in long-term bonds or securities (such as debentures) that are issued by Brazilian companies pursuant to the rules of Law No. 12,431/11, or for acquisitions of quotas in funds that invest in such types of bonds or securities also pursuant to the rules of Law No. 12,431/11.

No specific rule

Zero

7

Inflow of funds for investments in the Brazilian financial and capital markets, other than the particular types of investments described in lines 1 to 6 above. This includes investments that are carried out by means of simultaneous FX agreements, without involving any actual flow of funds.

6%

6%
(no change)

8

Outflow of funds related to the exit of foreign investments from the Brazilian financial or capital markets (lines 1 to 7 above).

Zero

Zero
(no change)

 

The Brazilian federal government is permitted to increase the rate of the IOF/Exchange, at any time, without prior notice to taxpayers, by up to 25% of the amount of the FX agreement. Any increase in rates may only apply to FX agreements that are executed after such increase in rates enters into force.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Brazil’s New Antitrust Law To Require Pre-Merger Clearance

Editors’ Note:  This paper was authored by Tito Amaral de Andrade, partner, and Erica Sumie Yamashita, associate, at Machado, Meyer, Sendacz e Opice Advogados, one of Brazil’s most  respected corporate law firms with extensive experience in Brazilian M&A and antitrust matters.

Executive Summary/Highlights:

  • The Brazilian House of Representatives has approved a bill that substantially changes merger review procedures and antitrust investigations in Brazil.  The new law is subject to Presidential approval and will likely become effective in mid-2012.
  • The new law creates a pre-merger review system (clearance will be a condition precedent to closing) and changes the fines applicable to antitrust violations.
  • The old market share threshold is abolished by the new law in favor of a new revenue threshold which will require the mandatory filing of transactions in which one of the groups involved had Brazilian annual gross revenues of at least R$400 million in the past fiscal year  and the other group had Brazilian revenues of at least R$30 million in the past fiscal year.

Introduction

The current Brazilian antitrust law (Law 8,884/94) sets forth the institutional framework of what is known as the Brazilian Antitrust System (“SBDC”), which is composed by the following agencies: the Administrative Council for Economic Defense of the Ministry of Justice (“CADE”), the Secretariat of Economic Law of the Ministry of Justice (“SDE”) and the Secretariat of Economic Monitoring of the Ministry of Finance (“SEAE”).

CADE is composed of 6 Commissioners (lawyers and/or economists) and a Chairman, and is responsible for judging merger review cases and alleged antitrust violations. SEAE is responsible for issuing non-binding economic opinions in all merger cases, and SDE is mainly responsible for the prosecution of violation cases.

Main changes of the new law

The new law changes the institutional framework of SBDC. SDE is abolished and SEAE’s participation is reduced and limited to promoting competition advocacy and issuing non-binding opinions in merger cases when requested. CADE will be restructured and the activities currently carried out by SDE and SEAE will be developed by a new department at CADE – the Directorate General. CADE will also comprise a Department of Economic Studies and an Administrative Tribunal, which will be composed by six Commissioners and a Chairman.

The current term of CADE Commissioners is 2 years, renewable for another 2-year term, and this will be converted to a single mandate of 4 years without the possibility of being reappointed. In addition, the new law establishes a permanent staff by providing for the creation of 200 new positions at CADE.

In relation to merger review, deep changes will be made.

First of all, a pre-merger review will be introduced. Clearance by CADE will become a requirement for the closing of notifiable transactions, subject to a fine ranging from R$ 60 thousand to R$ 60 million. After the filing is made, the Director General has up to 60 business days to issue its decision to approve the transaction without restrictions, or up to 90 business days to issue a decision in a case that requires further investigation (complementary phase). The Administrative Tribunal must review the cases that were blocked by the Directorate General or that were approved with restrictions, and may review, if there is an interest, cases approved without restrictions. The new law establishes that the final decision must be reach within 240 days of the filing, a deadline that can be deferred for up to 60 days at the Applicants’ request, or for up to 90 days based on the Administrative Tribunal’s decision.

The thresholds for the mandatory merger filing have also changed. The market share threshold was abolished, and the new revenue threshold will only require the mandatory filing of transactions in which one of the groups involved had Brazilian annual gross revenues of at least R$400 million in the past fiscal year, and the other group had Brazilian revenues of at least R$30 million in the past fiscal year. Apparently the local revenue of the target is still irrelevant under the new law for the assessment of whether the transaction should be submitted to antitrust scrutiny.

It is important to note that, despite the introduction of a pre-merger review system, it is established that for a period of one year after the new law enters into force the parties to a transaction will be able to request the Administrative Tribunal the immediate closing of the transaction.

For those merger cases that are currently pending CADE’s decision, after its entry into force the new law will be applied only (i) in respect of procedural issues, (ii) if the practice is no longer considered an antitrust violation, or (iii) if the applicable penalty is less severe compared to the old legislation.

Finally, the bill is still subject to eventual amendments by the President Dilma but no major changes to the document approved by the House of Representatives are expected. After presidential approval, the bill will be published in the official gazette, and the new law will enter into force 180 days of its publication.

* Please note that this article reflects our preliminary opinion based on the follow up of the voting session of the Brazilian Congress that passed the new law. Since voting was quite confusing, and the final text of the new law has not yet been made available, adjustments this article may be required and will be made in due time.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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