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09 January 2014
Since the entry into force of the new Competition Law (12,529/2011) in May 2012, practitioners, investors and the competition authority, the Administrative Council for Economic Defence (CADE), have spent much time discussing the review of transactions involving investment funds.
Most issues in connection with these discussions arise as a result of CADE's Regulation 2/2012, which sets forth a broad definition of 'group of companies' whenever investment funds are involved. The provision directly affects the calculation of turnover for reportability assessments and the amount of information that must be submitted to CADE in its notification forms.
Given the relevance of investment funds in M&A transactions in Brazil and the uncertainties that still surround the regulation, it is important that the business community and the authority itself pay close attention to any developments, or lack thereof, regarding this matter.
Since the law was enacted, CADE has reviewed approximately 450 transactions, of which approximately 10% involved investment funds as the direct party. Of these, 61% were acquisitions of control, 17% were minority acquisitions and 22% were asset acquisitions. These funds were invested in industries such as mining, agriculture, food, communications, entertainment, petrochemical, information technology, telecommunications and pharmaceuticals.(1)
Group of companies
The regulation sets out that a 'group of companies' – a concept that is key for assessing whether a transaction is subject to CADE's pre-merger review – comprises:
In transactions involving investment funds, the group of companies will also comprise a number of possible relationships within the investment fund itself, including:
This over-inclusive definition was likely adopted by CADE to prevent a circumvention of the merger control rules, but it has far-reaching implications that may entirely prevent companies and investment funds from complying fully with the regulation.
For instance, there is no clear definition of what constitutes an 'investment fund' under Brazilian law, or under CADE's specific regulations. The Securities and Exchange Commission (the CVM) clearly defines some types of entity as 'investment funds' (eg, private equity investment funds or funds investing in shares) and thoroughly regulates their incorporation, purpose, investment structure and, most importantly, management. However, it is unclear how CADE's rules regarding investment funds apply to other domestic or foreign entities that plan to invest funds from third parties. The fact that CVM imposes strict rules on the management of investment funds also adds to the confusion, as CVM requires an authorisation for every manager. Furthermore, in practice, the majority of the managers and managing companies are banks and investment companies that inevitably provide these services to numerous different investment funds.
The review of a few selected cases confirms CADE's broad interpretation of the already broad concept of 'group of companies' in cases involving investment funds.(2) For instance, CADE ruled that even a manager (and its other managed funds) that does not play a decisive role in the fund's investment policies must be considered as part of the group of companies of the fund.(3) In another case, CADE looked at an independent manager who played a merely formal role as part of a group of companies for the purposes of calculating the turnover, even if this manager was subject to the decision of an independent investment committee which handled the investment decisions.(4)
This broad interpretation has at least two major implications. First, in relation to the calculation of turnover, the law(5) requires that the turnover (revenues) of all the entities of a group of companies be considered, which (according to Regulation 2/2012) includes the turnover of the manager and of its other funds, even if the manager is completely independent from the investors or if the investor has a large influence over the decision-making process. As a result, CADE receives a large number of notifications regarding transactions with a low potential for causing relevant anti-competitive effects, which would not have been filed if it were not for this broad concept of a group of companies.
Second, CADE's notification form itself requires extensive information to be provided about third parties (eg, other funds under the same management and their respective investments, and other investors) even if those third parties are in no way related to the transaction, but for the common fund manager. Even though CADE may be complying with its own regulation, in most cases such information is not even available for the notifying parties. From this perspective, CADE's approach departs from international practices (eg, in the United States and Europe), in which a case-by-case analysis regarding control and the calculation of turnover is required in order to assess notification thresholds and provide information to the authorities.
CADE has already stated that it intends to revisit its rules and issue further regulations on investment funds, in order to better define the notification thresholds, the information to be provided and the competitive issues to be taken into account when reviewing a transaction involving an investment fund. This is good news, and the business community in Brazil is hopeful that this rule will be revised and amended accordingly. It is also hoped that CADE will be able to issue a regulation that allows it to prevent circumvention of the merger rules, while at the same time reducing the burden imposed on notifying parties that are related to investment funds.
For further information on this topic please contact Jose Carlos da Matta Berardo, Bruno Bastos Becker or Rafael Szmid at Barbosa, Müssnich & Aragão Advogados by telephone (+55 11 2179 4600), fax (+55 11 2179 4597) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Barbosa, Müssnich & Aragão Advogados website can be accessed at www.bmalaw.com.br.
(2) The mentioned cases were decided by CADE's general superintendency. Thus far, CADE's tribunal has reviewed none of the cases involving investment funds. Therefore, the decisions do not necessarily reflect the tribunal's understanding on the matter.
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Bruno Bastos Becker