In recent weeks, CADE issued a relevant decision on the definition of an economic group for the purposes of merger notification. When analyzing the mandatory notification of the acquisition of Digesto by Jusbrasil, Commissioner Victor Fernandes summarized the authority’s understanding:
1. What are the criteria for analyzing mandatory notification?
CADE’s Tribunal concluded that, in transactions involving companies, the respective economic groups must be evaluated based on their controlling entities. In other words, the economic group will be composed of the party directly involved in the transaction, its controlling entities and the companies in which these entities hold control or at least 20% of the share or voting capital.
If one of these entities is an investment fund, specific criteria must be applied. In other words, shareholders with participation (direct or indirect) equal to or greater than 50% of the fund’s shares must be incorporated into the economic group, as well as companies in which the fund holds control or at least 20% of the share or voting capital.
This decision replaces the CADE’s previous guidance that shareholdings equivalent to 20% or higher would presuppose some degree of control.
2. What are the elements that indicate, from the perspective of competition law, control of one company over another?
It was decided that the existence of control relationships for the purposes of characterizing an economic group arises from the rights attributed by the company’s governance documents (such as the shareholders’ agreement). CADE must analyze whether, for example, the rights to veto and appoint members of governance bodies are indicative of control or whether they are intended to merely protect investments. In order to allow greater objectivity in this segmentation, the Commissioner prepared two non-exhaustive lists:
| Minority rights that generate presumptions of shared control | Minority rights of mere investment protection |
| 1. Right of veto or need for a qualified quorum for approval by the General Assembly of matters such as: a. Approval of the business plan; b. Approval of the annual budget; c. Any change in the bylaws that affect the rights of shareholders, regardless of the matter. 2. Right of veto or need for a qualified quorum for approval by the Board of Directors of matters such as: a. Approval of the business plan; b. Approval of the annual budget; c. Election and dismissal of company directors; d. Approval of business policy. 3. Right to appoint members to the Board of Directors, specifically when combined with veto rights on competitively strategic matters. 4. Right to veto decisions related to investments, loans, contracts and other operations above certain values. 5. Right to veto the approval of management reports, financial statements and the appointment of independent auditors.
| 1. Right of veto or need for a qualified quorum for approval by the General Assembly of matters such as: a. Relevant corporate transactions, such as mergers, incorporations, acquisitions and creation of wholly owned subsidiaries; b. Issuance of company securities to third parties; c. Obtaining registration as a public company and trading shares on the stock exchange; d. Approval of dividends or other forms of profit distribution; e. Approval of the maximum remuneration of management members; f. Requests for bankruptcy, judicial or extrajudicial reorganization; g. Increase or reduction in authorized share capital. 2. Right of veto or need for a qualified quorum for approval by the Board of Directors of matters such as: a. Election and dismissal of audit committee members; b. Election and dismissal of the CEO or chairman of the Board of Directors; c. Approval of the general business plan proposed by the Directors, provided that, in the event of an impasse, the matter is submitted for deliberation by the Board of Directors and approved by a simple majority. 3. Right to appoint members to the Board of Directors, as long as it is not combined with veto rights on strategic matters. 4. Right to veto over contracts between the company and the controlling shareholder or other companies in which the controlling shareholder has an interest. 5. Right of veto over the valuation of assets intended for the payment of a capital increase. |
The decision was unanimously approved by CADE’s Tribunal and should be used as a parameter in the analysis of future mergers.
