chevron-down Created with Sketch Beta.

    ARTICLE

    Brazilian Merger Control: CADE’s Tailoring the Size-of-Person

    Jose Carlos Berardo

    May 21, 2024

    2 min read

    Antitrust Mergers
    Brazilian Merger Control: CADE’s Tailoring the Size-of-Person
    Vitor Marigo via Getty Images

    What is the “person” in the “size-of-person” threshold for merger control? In other words, which entities’ annual sales should be considered for the threshold in a potentially complex corporate structure in which a parent company holds different interests in different entities?

    Antitrust regulations around the world traditionally follow corporate accounting principles for determining the entities under the parent company (e.g., subsidiaries with at least 50% interest). Following this principle, the reported consolidated annual sales of a parent company typically reflect the sum of annual sales of such entities (i.e., in which the parent owns at least a 50% interest) under a parent company.

    In Brazil, this concept is not straightforward, as the definition of “person” has been a constant debate. The Brazilian antitrust regulation even adopted a specific concept for “person” for this purpose, which is separate from the Brazilian corporate law and accounting rules: the “economic group (of companies).” Recent developments indicate, however, that the Board of the Brazilian competition authority (“CADE”) may be moving towards the more traditional antitrust approach.

    The current regulation stipulates that in conducting the size-of-person test, parties must include revenues from (i) any company under common (or joint) control and (ii) any entity in which there is a direct or indirect ownership of at least a 20% interest, whether in voting or common stock. The issue is how to define the latter. Previously, the authority literally considered any entities in which the parent company had 20% or more direct or indirect ownership for purposes of the size-of-person test ­– irrespective of controlling shareholder identification.

    On March 20 2024, the CADE adopted a decision affecting the determination of companies required to be included in the size-of-person test. This recent decision marks a significant shift for CADE, as it indicates that 20% of ownership in a company should not be automatically included in the size-of-person test.

    The solution outlined in CADE’s decision (Case 08700.000641/2023-83) relies on identifying shareholder rights sufficient for establishing control under merger regulations, separating them from rights merely necessary for the protection of the investment and thus they presumptively do not entail control rights, making it clear that direct or indirect interest, alone, is insufficient to satisfy (ii) of the current regulation. The chart below outlines both categories of shareholders rights, with the presence of a single one sufficient (together with at least a 20% direct or indirect shareholding) to result in inclusion in the size-of-person test:

    Minority Shareholders Rights
    Presumptions of Control: Merely for Investment Protection:

     

    • •  Board of Directors members nomination (when combined with veto rights over competitively strategic matters)

     

    Veto rights and/or need for qualified quorum for approval in the General Assembly and/or in the in the Board of Directors of:

    • •  Business Plan approval
    • •  Annual Budget approval
    • •  Business Policy approval
    • •  Company Directors’ election and dismissal
    • •  Change in Shareholders’ Rights
    • •  Investments, loans, hiring, and other operations above certain values
    • •  Management reports, financial statements, and the appointment of independent auditors

     

    • •  Board of Directors members nomination (when not combined with veto rights over competitively strategic matters)

     

    Veto rights and/or need for qualified quorum for approval in the General Assembly and/or in the in the Board of Directors of:

    • •  Corporate Transactions (e.g., mergers, acquisitions)
    • •  Issuance of Company Securities
    • •  IPO (obtaining open company registration and trading of shares on the stock exchange)
    • •  Dividends approval (or other forms of profit distribution)
    • •  Maximum Remuneration of the members of the management
    • •  Bankruptcy petitions, judicial or extrajudicial recovery
    • •  Capital Stock (increase or decrease in the authorized capital stock)
    • •  CEO and/or Chairman of the Board election and dismissal
    • •  Audit Committee Members election and dismissal
    • •  Business Plan approval (provided that, in case of a deadlock, the matter is submitted to the deliberation of the Board of Directors and approved by a simple majority)
    • •  Contracts between the company and the controlling shareholder or other companies in which the controlling shareholder has an interest
    • •  Appraisal of assets intended for the capital increase integration

     

    The decision underscores that a mere 20% stake does not automatically require inclusion in the size-of-person calculation for merger control purposes. This clarification, correcting an overly cautious previous stance, implies an additional change to a matter that is already convoluted; less than 18 months ago the authority had issued a decision exactly in the opposite direction.

    Moreover, it refines the transaction type test by specifying rights indicative of joint control, diverging from traditional interpretations of control under Brazilian corporate law. That has an important implication, since the authority has adopted a very restrictive list of rights that presumptively indicate shared control, which goes beyond the typical interpretation of the concept of control adopted based on Brazilian corporate law.

    The decision also strongly emphasized the need to update the Brazilian merger regulations, a decade-old framework. This review, potentially a year-long process, warrants close attention from the antitrust community.

      Author