B. Alterations to Corporate Laws
The enactment of Law no. 14.195/21, on August 26, 2021, not only altered provisions of the Brazilian Civil Code and the Brazilian Corporations Law, but also facilitated the process of incorporating a business by allowing automatic issuance of operating licenses for medium risk companies and the registration of entrepreneurs and legal entities without a physical head office, as well as exempting from notarization documents filed before the Boards of Trade, among others. Alterations include the following:
(1) Starting with the amendment to the Corporations Law, allowing the election of non-resident officers, provided that they appoint a representative in Brazil to receive service of process, which is of particular interest to foreign shareholders;
(2) Protecting the minority shareholder by modifications to the Corporations Law, including the possibility of creating classes of preferred or common shares for publicly held and closely held corporations and of attributing plural voting to one or more classes of shares, subject to certain conditions and minimum quorums;
(3) Allowing closely held corporations to replace traditional corporate books by mechanized or electronic records under the terms of regulations still pending; and
(4) Regulating commercial notes, a security under the terms of Law No. 6385/76, with the possibility of their issuance by limited liability companies and cooperatives. The private offer of a commercial note may contain a clause allowing its conversion into equity interest, except in relation to corporations, which may be a useful instrument for operations in limited liability companies.
II. Canada
A. Introduction
Canadian M&A activity reached new heights in the third quarter of 2021, soaring to its highest level since 2016, riding historically low interest rates and strong equity markets. Returning to pre-pandemic levels, the aggregate deal value in the second quarter of 2021 was 93 billion Canadian Dollars (CAD). This surge in Canadian M&A activity has been propelled, in part, by continuing growth in the infrastructure and technology sectors. In addition, environmental, social, and governance (ESG) factors continue to grow as serious considerations for many market participants in M&A transactions.
B. Infrastructure
There have been over fifteen mega deals in fiscal year 2021, with the announced acquisition of Kansas City Southern by Canadian Pacific Railway Ltd. leading the group. In the bidding war between railways, Canadian Pacific beat out Canadian National (CN) Railway in a $27 billion deal to acquire Kansas City Southern, after U.S. regulators rejected a provision in CN Railway’s acquisition proposal to use a voting trust structure. The merger will create the first continental railroad to operate across Canada, the United States, and Mexico, allowing for unparalleled market reach, transportation alternatives, and economic growth.
C. Technology
The year kicked off with Rogers Communication’s announcement of its $25 billion takeover of competitor Shaw Communications Inc. on March 15, 2021. Rogers agreed to acquire all of the issued and outstanding Class A and B shares of Shaw for a price of $40.50 per share in case, reflecting a premium of approximately seventy percent to Shaw’s Class B share price. The transaction is expected to accelerate the delivery of 5G services across western Canada and will lead to the formation of Canada’s largest wholly owned national network. The deal is contingent on regulatory approval and is expected to close in the first half of 2022. In the pendency between signing and closing, Rogers has attracted significant attention in relation to dissension among board members. It is unclear whether the conflict will have a material impact on the transaction moving forward.
D. Environmental, Social, and Governance
Over the past few years, ESG has attracted significant attention in M&A transactions, and COVID-19 has accelerated market interest in implementing ESG practices in 2021. Atin Prakash, senior manager of Sustainability Services at KPMG Canada, emphasized the recent desire for companies to integrate ESG factors into their corporate governance: “the last 12-18 months have been an almost watershed moment for ESG. It has expanded from what used to be a niche area for a few highly impact industries and social driven companies to something adopted across industries and geographies.”
Issuers need to be prepared for potential acquirers or investors to ask due diligence questions relating to the issuer’s ESG practices. Some market participants may not be willing to acquire an issuer with poor ESG policies or practices or may discount the price they would otherwise pay.
Deal financing can also be challenging and more costly for issuers with poor ESG track records. Some rating agencies will consider ESG practices when assigning a rating. If an issuer receives a lower rating, financing is likely to be harder or more expensive to obtain. ESG ratings can also affect an issuer’s ability to access capital markets, which can lead to a higher market valuation. By incorporating ESG practices, companies may be able to demonstrate their attentiveness to global issues while shielding against business liabilities, such as climate change. The growing trend towards adopting ESG practices provides insight into the demands companies can expect from potential buyers and investors. Failure by a company to integrate ESG into their corporate governance presents many risks, such as negative publicity or shareholder disapproval, which may affect a proposed or completed transaction.
E. Conclusion
M&A activity continues to progress as companies work beyond the pandemic. Infrastructure and technology focused deals have represented significant transactions in 2021. In addition, we expect to continue seeing that issuer ESG practice will be a factor in the success of potential M&A deals.
III. Chile
By the end of 2021, the number of disclosed M&A deals in Chile totaled 349, representing a total aggregate value of $18 billion.
A. New Merger Control Regulation
A new regulation regarding the mandatory or voluntary merger control notification, which is required under Title IV of Decree Law No. 211, came into force on November 2, 2021 (New Regulation). The New Regulation streamlines the information requested by the National Economic Prosecutor’s Office (FNE, by its Spanish acronym) to analyze transactions that do not raise significant antitrust risks, to focus the agency resources on complex transactions.
Further, new transactions subject to the simplified notification procedure are incorporated: (1) transactions involving the acquisition of individual control over an economic agent in which the acquirer already had joint control and (2) transactions consisting in a joint venture in which the new entity competes in a different market than the one where the joint venture’s parties and their related parties are active, among others.
B. Registration Exemption for Public Offerings of Securities
On February 22, 2021, the Financial Market Commission (CMF, by its Spanish acronym) issued General Rule No. 452 (NCG 452). The new rule provides that some public offerings of securities are exempted from the requirement of registration of the issuer or the security, as the case may be, regardless of whether such public offerings are carried out on or off-exchange. According to NCG 452, the following public offerings are exempted from the registration requirement: (1) offerings whereby the securities may only be purchased by qualified investors; (2) offerings carried out on national stock exchanges, provided that the total accumulated amount to be raised by the issuer or offeror in the twelve months following the first offer made on a stock exchange does not exceed the equivalent of 100,000 Chilean pesos (approximately $3,800,000) and that the offeror or the issuer complies with the information requirements that the respective stock exchange has established for the protection of investors in order to make the corresponding offering; (3) offerings whereby each transaction is perfected only if the investor acquires at least two percent of the capital of the issuer of the securities; (4) offerings whose sole purpose is employee compensation; and (5) offerings of securities that grant their acquirors a right of membership, use or enjoyment of facilities or infrastructure of educational, sport or recreational establishments.
C. Amendments to the Stock Corporations and Securities Market Regulations
On April 13, 2021, a new law promoting transparency and reinforcing the responsibilities of market agents introduced several amendments to Law No. 18,045 on Securities Market and Law No. 18,046 on Corporations (New Law). The New Law covers multiple topics related to market agents and pension advisors. Some of the most relevant amendments are: (1) the integration and interconnection, in real time, of local stock exchanges; (2) the requirement to implement control policies, procedures, and systems intended to timely disclose material events and to avoid any leakages, increasing penalties, creating new sanctions, and expanding the list of people subject to these rules; (3) the reinforcement of the oversight powers of the CMF, authorizing the commission to request information from subsidiaries of a listed corporation; (4) the adoption of a thirty-day blackout period for certain insiders prior to the disclosure of the financial statements; (5) the presumption of liability of directors of a corporation who approve related party transactions in contravention of the law; (6) changes to the regulation of independent directors and the audit committee, including the duty of said committee to provide its opinion on the company’s policy of regular operations; and (7) the creation of the “anonymous whistleblower” to facilitate voluntary collaboration with investigations carried out by the CMF, being entitled to receive a percentage of the fines imposed by the CMF in the corresponding investigation.
IV. Italy
A. Golden Power Enforced in Italy
The Italian Government has been quite busy enforcing the Golden Power legislation in late 2021. First, it blocked the acquisition of the Italian semiconductor manufacturer, LPE SpA, by the Chinese company Shenzhen Investment Holdings Co. The second case, discussed below, “is far more intriguing and looks like a spy story.”
The Italian company involved is Alpi Aviation Srl (Alpi)—a company based in Northeast Italy operating in the light and ultralight aircrafts business and, more importantly, in the unmanned aerial vehicle (UAV) business, also known as the drones business—is a supplier of military UAVs to the Italian Department of Defense. “In addition, Alpi has executed a joint venture with a state-owned company for the supply to Italian Department of Defense of other military products.” As such, Alpi became subject to not only the Golden Power rules but also other quite stringent rules applicable to suppliers of military products, including mandatory communications as to the company and shareholders structure and any changes to the same, as well as sharp limitations and the need of specific authorizations for any kind of export of military products on a temporary basis.
While investigating an allegedly improper use of a small airfield belonging to the Italian armed forces, the Italian investigators, led by the Pordenone District Attorney Office, discovered that a seventy-five percent controlling participation in Alpi was sold in 2018 to a Hong Kong based company called Mars Information Technology Co. for a substantial price (45 thousand Euros par value shares sold for 3.9 million Euros per share). Moreover, according to the Italian investigators:
(i) [T]he two ultimate owners of the participation are two Chine state owned companies, something that was not disclosed and masked by means of an elaborate corporate “smoke screen,” and (ii) it was the intention of the new management of Alpi to transfer the production to Wuxi, the alleged center of the research and development of the Chinese artificial intelligence.
This means that the transaction was not an investment in Italy, but rather an acquisition of know-how and a transfer of technology from Italy to China. Last but not least, in 2019, Alpi had illegally exported a drone to the Shanghai Import Fair by declaring in the customs documentation that it was a radio-controlled plane.
Currently, there are six persons under criminal investigation (three Italians and three Chinese nationals) for (1) failure to request the mandatory prior authorization required by the Golden Power legislation before implementing the share transfer, (2) failure to provide true and accurate information and documentation in respect of the transaction, and (3) violation of the laws and regulation regarding Department of Defense suppliers and experts of military products and equipment.
In addition to the criminal investigation, an administrative file is now before the Italian Government for an alleged violation of the Golden Power rules and regulations because it appears that no prior authorization has been filed or requested and required information and documentation was not filed, has been purposely filed late, or has been filed incomplete or unclear.
The sanction that could be imposed and enforced by the Government, pursuant to Articles I and II of Law Decree 21/2020, could be quite stiff, namely: (1) declaring the whole transaction, including any resolution, agreement, or deed executed in connection therewith, null and void; (2) suspending voting rights; (3) imposing the parties to restore—at their cost and expense—the status quo ante, that is, in this case, the shareholding and corporate situation of Alpi before the implementation of the voided transaction; (4) imposing a fine of up to twice the value of the voided transaction (in the Alpi case, up to nearly 8 million Euros) with a minimum of at least one percent of the sales generated by the companies involved as resulting from the latest financial statements; and (5) imposing sanctions upon the company (in this case, Alpi) who had approved the transactions. At the time of the writing of this article, the Italian Government had not issued its decision. But, on March 11, 2022, the Italian Government decided to declare the whole transaction null and void, thereby imposing the return to the status quo ante, which is the harshest of the sanctions available under the law. It is not clear whether any monetary sanctions have been imposed (from 8 up to 280 million Euros), although it is seems quite likely in light of the sanction imposed.
The decision is in line with the Golden Power policy pursued by the Draghi-led Italian Government, which has exercised the Golden Power four out of the six times, enforcing the same since the enactment of the legislation. It is a clear indication of the government’s willingness to protect Italian “strategic assets” from foreign acquisitions.
V. Poland
A. The New Form of Capital Company
The provisions introducing the new form of capital private company—a simple joint-stock company (JSC)—to the Polish Commercial Companies Code entered into force on July 1, 2021. A key goal of the amended act was to fill the gap in the Polish legal system resulting from the lack of adequate, available forms of doing business, which would fully respond to the practical requirements of start-up companies and special purpose vehicles (SPV) and facilitate developing joint venture investments due to an extensive mechanism for raising capital through the issuance of shares.
The fundamental aspect of a simple JSC is the minimal amount of share capital of one Polish zloty, which shall not be determined in a company deed. Remarkably, investors have the convenience of possibly taking up the shares in exchange for non-cash contributions, particularly for the performance of work or services. Shares shall not have a nominal value, will not constitute part of share capital, and will be indivisible. The shareholders of a simple JSC are not statutorily obliged to make their contributions in full prior to the registration of the company. In order to establish the company, the shareholder is only required to make a contribution to cover the share capital in the minimum amount, and the rest of the contributions may be made within three years from the date of entry of the company in the register. This applies to both cash and non-cash contributions, regardless of whether they are allocated to the share capital.
Another significant advantage of a simple JSC, compared to the prior existing forms, is simplified liquidation. According to Article 300, paragraph one, in the event of liquidation, the entire company’s assets may be taken over by a designated shareholder, upon whom a duty to satisfy creditors and the remaining shareholders is imposed. The procedure is also significantly shorter, as the liquidators shall give the announcement about the liquidation of the company and the opening of liquidation only once, summoning creditors to present their receivable debts within three months from this date. (In a JSC, two announcements are required, and the period for the creditors to file their claims is six months from the last announcement.)
B. Developments in M&A and the Transformations of Companies
The Amendment to the Polish Commercial Code that put forward the field of mergers came into force on January 1, 2021. Importantly, the regulation relates to mergers of companies by acquisition (per incorporationem) and simplifies merger proceedings by excluding the mandatory increase of share capital by the acquiring company. The purpose of the regulation was to expand the possibility of a merger by taking into consideration the new type of capital company—a simple JSC—and to improve the performance of reverse mergers, in which the acquiring company is a subsidiary and the acquired company is a parent company. Moreover, the amendment provides the possibility for the acquiring company to grant shares without a nominal value (no-par value stock). Pursuant to Article 515, paragraph two, the acquiring company is allowed to acquire its own shares or stocks for the purpose of issuing them to the shareholders of the acquired company, if the total nominal value of the shares acquired for that purpose does not exceed ten percent of the acquiring company’s share capital.
The novelty in the area of transformations of companies is that a shareholder may not complain against a resolution on the transformation of company solely on the grounds of objections concerning the value of shares determined for the purpose of a repurchase but is still entitled to assert his rights pursuit to Article 576. The ratio of such regulation is the maximum prevention from slowing down the process of companies’ transformation.
VI. Russia
Continuing the trend of bringing the Russian legislation in line with the world’s best practices in the M&A and joint ventures sphere and making investments in Russian companies more economically advantageous and statutorily protected, a new unified mechanism of convertible loans has been implemented, and the Russian Supreme Court came up with clarifications on the status of ex-spouse following division of marital property, which includes participatory interest in a limited liability company (LLC).
Starting from July 13, 2021, investors may eventually use a convertible loan agreement (CLA) to structure M&A deals, requiring investments to a Russian target company under a debt-to-equity conversion model. CLA is defined as a loan agreement, under which the lender is entitled at its discretion, instead of claiming the repayment of money or part thereof to order the non-public company (debtor) to increase its charter capital or existing lender’s equity ratio.
Implementation of a CLA is aimed to replace various mixed constructions that used to be popular in the Russian market and involved a standard loan agreement accompanied by contractual obligations under a corporate agreement to provide the lender with an equity interest or call options with further set-off against the company’s debt. Automatic conversion of debt to equity is an essential aspect of the new mechanism, which decreased risks associated with outdated models and is performed by notary filing (for LLCs) or registrar filing (for JSCs) without any input by the debtor or its participants/shareholders. This is reached by the necessity to obtain the preliminary unanimous consent of the debtor’s participants or shareholders at the stage of CLA execution. Nevertheless, the notary or registrar filing may not be used in case the debtor objects against the debt-to-equity conversion, which may still eventually lead the parties to litigation. Also, with respect to LLCs, CLAs are subject to notarization and disclosure in the Russian corporate register.
A CLA is an economically useful tool for venture investments into, for instance, start-ups, where the real value of the company cannot be estimated at the moment the investments are made. And, to a certain extent, the purpose of the Russian CLA may be compared to an analogous foreign instrument, where “[it] is not really a debt instrument so much as it is a means of making deferred equity investments in early-stage technology companies.” Thus, a CLA is a way to structure the cash-in for participants or shareholders, as well as for third parties in spheres, where primarily (but not exclusively) the value of the company depends on future development of their products (for instance, information technology and medicine).
In terms of ex-spouse status, the Supreme Court of the Russian Federation eliminated previously existed uncertainty and clarified that, when, according to a LLC’s charter, third persons may acquire participatory interest only subject to participants’ approval, the ex-spouse does not acquire the corporate rights in that LLC and does not became the participant automatically upon the court’s decision on division of marital property, which includes participatory interest in such LLC. It was further stated that ex-spouses only have property rights to their respective portions of participatory interest (meaning their right to monetary value thereof) and shall comply with corporate formalities prescribed by the LLC’s charter and corporate law in order to become participants of the company.
VII. Spain
A. The New Regime of Loyalty Shares for Listed Companies
Spanish Law 5/2021, of April 12, 2021, introduced a new regime of shares with double voting for loyalty in listed companies, namely “loyalty shares.” Under Article 96.2 of the Spanish Companies Act (Ley de Sociedades de Capital), it is not possible to issue shares that directly or indirectly alter the proportionality of the nominal value and the right to vote. In an exception to the general principle of proportionality, this new regime allows the bylaws of listed companies to provide for double voting shares that have been held by the same shareholder for at least two consecutive years. It is not possible to implement loyalty in non-listed companies. But companies requesting admission to trading may implement this regime from the date of admission to trading, in which case shareholders who can prove uninterrupted ownership of the shares during the loyalty period may register their shares before the date of admission to trading and will enjoy double voting rights from the date of admission to trading.
Loyalty shares seek to (1) create an incentive for shareholders to hold long-term interests and (2) prevent short-term investment strategies and management policies that destroy value and adversely affect the good corporate governance of listed companies. Many authors have questioned the effectiveness of these loyalty shares in preventing short-termism, which is rare in the concentrated shareholding structures that is common to Spanish companies and European Union member states. They also draw attention to the risks to minority shareholders because these shares may result in the control of the company ending up in the hands of a minority close to the administrative body.
Broadly speaking, loyalty shares work as follows:
(1) Loyalty shares are not linked to share certificates but depend entirely on the same shareholder owning them uninterruptedly throughout the loyalty period. Therefore, loyalty shares are not a special class of shares;
(2) Loyalty double voting rights are subject to the registration of the affected shares in a special registry book;
(3) They require a resolution of the general meeting of shareholders to amend the bylaws, which must be approved by a qualified majority higher than that required for the approval of any other amendment to the bylaws;
(4) Five years after its approval, the general meeting of shareholders must renew the bylaw provision for loyalty double voting;
(5) In listed companies providing for loyalty double voting rights in their bylaws, the quorum for shareholders’ meetings under Articles 193 and 194 of the Spanish Companies Act will be calculated based on the total number of votes corresponding to the subscribed voting capital, including double voting rights;
(6) As a rule, loyalty double voting rights lapse in the event of a direct or indirect assignment or transfer of the relevant shares, even if free of charge, from the date of the assignment or transfer. The Spanish Companies Act establishes exceptions to this general rule in certain cases of transfers between family members, between companies of the same group, and in the event of structural modifications; and
(7) With the incorporation of the loyalty shares, the thirty-percent threshold for the purposes of mandatory takeover bids will be calculated based on the total number of votes attributed to the company’s shares, including loyalty double voting rights.
B. Reform of the Companies Act As It Regards Conflicts of Interest in Joint Ventures
Spanish Act 5/2021 transposed the Shareholders Rights Directive (SRD II) into Spanish law. One of the most important issues is the reform of the legal treatment of directors’ duty of loyalty and conflicts of interest, which are particularly relevant in joint venture agreements.
According to this act, so-called “proprietary directors” are affected by conflicts of interest involving the shareholder that appointed them. Thus, they must refrain from participating in any board decisions in which that shareholder has a conflict of interest with the company, unless they have been appointed by the parent company. Therefore, the rules regarding conflicts of interest of proprietary directors must be carefully analyzed when negotiating joint venture agreements involving Spanish companies, with particular regard to whether the parties hold a majority or a minority shareholding in the target company, to ensure that the parties’ interests will be correctly covered in the future in case a conflict of interest arises.
VIII. United Kingdom
The National Security and Investment Act 2021 (NSI Act) received royal assent on April 29, 2021, and certain commencement provisions came into force on July 1, 2021. The new regime will come fully into force on January 4, 2022, but with retrospective application in relation to transactions completed in the period after introduction of the National Security and Investment Bill on November 11, 2020. The NSI Act establishes a new regime for the review of mergers, acquisitions and other types of transactions that could threaten national security. The new NSI Act will:
(1) Require mandatory notification of certain types of acquisitions of shares or voting rights in companies and other entities operating in sensitive sectors of the economy. In such cases, completion of the acquisition will be prohibited unless and until approval has been given by the Government; and
(2) Enable the Government to call in and “investigate transactions which involve the acquisition of control or influence over an entity or asset, whether or not the transaction has been notified to the Government.”
A. Mandatory Notification Regime
The NSI Act makes several new changes to the mandatory notification regime. The NSI Act provides the following:
The mandatory notification regime will apply to acquisitions of companies or other entities operating in certain sensitive sectors, where the acquirer will acquire at least 25% of the votes or shares of the target—or sufficient voting rights to enable or prevent the passage of any class of resolution.
The Government had originally proposed that any stake of 15% or more would be caught, but increased this to 25% in view of concerns that the lower level would bring too many transactions within the scope of the mandatory notification regime.
The seventeen areas of the economy designated as sensitive are the following: (1) advanced materials; (2) advanced robotics; (3) artificial intelligence; (4) civil nuclear; (5) communications; (6) computing hardware; (7) critical suppliers to government; (8) cryptographic authentication; (9) data infrastructure; (10) defense; (11) energy; (12) military and dual-use; (13) quantum technologies; (14) satellite and space technologies; (15) suppliers to emergency services; (16) synthetic biology; and (17) transport.
B. Call-In Power Regime
Qualifying acquisitions across the whole economy are in the scope of the NSI Act but the call-in power may only be used for qualifying acquisitions that the government reasonably suspects give rise to or may give rise to a risk to national security. The NSI Act is not a system for screening all acquisitions in the economy.
For example, while not subject to mandatory notification, acquisitions of control through material influence over target entities operating in the seventeen sensitive sectors may be subject to call-in. “In addition, qualifying acquisitions of entities which undertake activities “closely linked” to the activities in the seventeen sensitive areas of the economy are more likely to be called in than those that are not closely linked.” Importantly, the NSI Act provides the following:
Decisions on whether to exercise the call-in power will be made on a case-by-case basis. In order to assess the likelihood of a qualifying acquisition giving rise to a risk to national security (and therefore whether to call in the acquisition), the Government expects to consider primarily the three risk factors, explained below.
C. Target Risk
This concerns whether the target of the qualifying acquisition (the entity or asset being acquired) is being used, or could be used, in a way that raises a risk to national security.
D. Acquirer Risk
This concerns whether the acquirer has characteristics that suggest there is, or may be, a risk to national security from the acquirer having control of the target.
E. Control Risk
This concerns the amount of control that has been, or will be, acquired through the qualifying acquisition. A higher level of control may increase the level of national security risk.
The U.K. Government has said that, “when calling in an acquisition, all three risk factors will be present, but [that] does not rule out calling in an acquisition on the basis of fewer risk factors.”
