Top Ten Things Investors Should Know About M&As in Latin America Dec 01, 2011 Top Ten By Jinna Pastrana, Latin America Consultant, Association of Corporate Counsel The steady rise in worldwide merger and acquisition (M&A) activity is a direct outcome of increasing globalization, a process which, despite significant business-related barriers posed by developing countries, has found a way to keep its pace and progressively integrate developing economies into the global marketplace. Keeping with this trend, several Latin American countries have adopted M&A control regimes that seek to promote business integration efficiencies while at the same time protect competition by preventing the creation of monopolies, dominance abuses, and the rise of market penetration barriers. In parallel development to these control regimes, Latin American countries are gradually adopting and implementing additional regulations, such as antitrust, customs, securities, and telecommunications regulations that foster a better economic and legal environment from which to retain and attract current and new investors. Consequently, there are several aspects that investors should assess prior to pursuing any M&A transaction in Latin America. This Top Ten focuses on key M&A concerns, including specific regulations and controls associated with several countries in this region. 1. M&A control regimes have been increasing along with M&A activity in several Latin American jurisdictions. There are many noteworthy illustrations of the growing size, complexity, and international scope of M&A transactions involving the Latin American region. Over the course of the past several years, Latin America has evolved into a staging ground for some of the largest consolidation transactions in the world. In 2010, America Movil s $27.4 billion acquisition of 100 percent of Carso Global Telecom s stock (both Mexican companies) ranked as one of the largest global acquisitions that year. Other pivotal transactions carried out during 2010 were those undertaken by Chinese companies, including the $7.1 billion acquisition by the petrochemical company Sinopec of the assets of the Brazilian energy firm Repsol and the $2.5 billion acquisition by Sinopec of the United States-based assets of Occidental Argentina E&P. As a reaction to the rise of consolidation transactions, the 1990 s witnessed the adoption and implementation of antitrust M&A control regimes by several Latin American countries: Colombia in 1992 with Decree 2153 (recently amended by Law 1340 of 2009); Argentina in 1999 with Law 25.156; Brazil in 1994 with Law 8,884 (a Brazilian antitrust reform was approved on October 5th, 2011, and is expected to become effective in April 2012); Costa Rica in 1994; Mexico in 1992; Panama in 1996; Peru in 1991; and Venezuela in 1991. 2. Investors should conduct robust risk analyses prior to undertaking any M&A transaction in Latin America Once companies determine the benefit of a consolidation transaction (either horizontal or vertical) from a business standpoint, they must assess the viability of completing such a transaction. This should be done by taking into account the regulations for each of the jurisdictions upon which the transaction is likely to cause effects. It is imperative that businesses conduct this analysis prior to taking any further steps in the transaction process (e.g., approaching the target, making a public bid, etc.) in order for all possible outcomes to be considered during each stage of negotiations. If a determination is made that the transaction will produce consequences in any country in Latin America, M&A control regulations should be the first and foremost concern for target and acquirer advisers. In addition to such regulations, the following aspects should be analyzed: a. - The authority of governmental agencies to enforce control regulations; b. - Prior decisions and investigations conducted for similar transactions;
c. - Filing obligations; d. - Critical timelines; e. - Conditions to which the transaction s completion may be subject and their practical effects; and f. - The viability of objecting governmental agency decisions. 3. Investors should pay particular attention to certain M&A control regulations M&A control regulations adopted by individual countries in Latin America are analogous to those adopted by many developed economies, such as the United States and the European Union. However, despite similarities in the general nature and intent of these controls, particularly when comparing countries within Latin America, there are some noteworthy variations in their composition that reflect the unique socio-economic realities of these countries. Investors and legal professionals involved in M&A transactions should be aware of these differences when analyzing the specific regulations each country adheres to. The following control regulations (detailed in 4 through 8) have been adopted by Latin American countries that currently have antitrust regimes (e.g. Brazil, Chile, Colombia, Argentina, and México): - Pre/Post Closing Clearance - Clearance subject to conditions - Objection to transactions - Fines Please Note: Certain Latin American countries, such as Bolivia and Ecuador, have yet to adopt formal antitrust regimes. 4. Investors should be sure to thoroughly understand Pre/Post closing clearance requirements in Latin America and their potential implications In the M&A context, clearance is the official acquiescence to a business consolidation that, in principle, raises competition-related concerns due to the specific characteristics of the firms participating in the transaction, the transaction itself, and the likelihood that the firms consolidation would affect competition within the markets in which they operate. The majority of countries in Latin America require official clearance before any M&A transaction can take effect. Some examples of countries requiring this type of pre-closing clearance are Colombia, Argentina, and Mexico. Conversely, Brazil currently does not require a pre-closing but rather a post-closing clearance, meaning the parties can file a clearance request with the country s antitrust authority (the Administrative Council for Economic Defense CADE ) after having already closed the transaction and after the transaction has started to take effect (except for some specific sectors such as telecommunications, electric, oil and gas and infrastructure industries, which require pre-closing clearance.) This post-closing clearance, which will be eliminated as of April 2012, may have serious consequences for investors. Under this regime, if CADE, at initial review, determines that there are significant anti-competitive concerns before analyzing the transaction, it may suspend the effects of the transaction or invite all parties involved to negotiate a reverse agreement (acordo de reversibilidade de operação). In practice, CADE has suspended several transactions, including the merger of Sadia SA and Perdigão SA (2009) Following the analysis of a specific consolidation transaction, CADE has the authority to decide whether to object it and, if it does so, it may order involved parties to take necessary measures aimed at eliminating the effects of the transaction in Brazil. This was the case with respect to the acquisition of Chocolates Garoto S.A. by Nestle Brasil Ltda. This specific acquisition caused controversial reactions due to the fact that in 2004 CADE ordered the reversal of this transaction, which had already been completed in 2002. As a result of these types of cases, post-closing clearance in Brazil will be eliminated as of April 2012. Under the new Brazilian antitrust regime pre-closing clearance will be required for M&A transactions that meet certain thresholds (see 5 for more detail).
5. Not all M&A Transactions require clearance Not all M&A transactions need to fulfill filing requirements before antitrust authorities. Once a specific transaction meets certain thresholds adopted by an individual country, the involved parties shall be required to fulfill the filing requirements set forth by antitrust law in order for the transaction to be cleared. Transactions that do not meet such thresholds are automatically authorized and the parties do not need to proceed with any filings. Several Latin American countries, with the exception of Mexico, have adopted such thresholds based specifically on market share and size of the consolidating companies. Mexico, however, focuses more on the size of the transaction itself rather than on the size of the participating companies. Below are the specific thresholds for M&A transactions that have been adopted by certain countries in Latin America: Argentina Companies must request clearance from the antitrust authority if the business volume of all companies involved in the transaction amounts to ARS $200 million or more (approx. USD $50 million). Brazil Currently, participating companies need to request clearance from the antitrust authority if the resulting company or group of companies have a market share of 20% or more; or if any of the participating companies annual gross turnover in Brazil amounts to BRL $400 million (approx. USD $220 million) or more at the end of the most recent financial year. As of April 2012, the market share threshold will be eliminated and the Brazilian gross turnover threshold will be BRL $ 400 for any of the applicants and BRL $30 million (approx. USD $16 million) for the other applicant. Colombia Thresholds are met if a transaction is a horizontal integration (participants in the same market) or vertical integration (same value chain); the firms participating in the transaction have a market share of 20% or more jointly or individually and are not under common control; and if any of the firms participating in the transaction have assets or income directly related to the normal course of business superior to the amount set forth annually by the Superintendence of Industry and Commerce (COP $80,340 million for 2011 USD $45 million approx.) Mexico Thresholds are met if the transaction is valued at 12 million times the daily minimum wage (DMW) (MX $718 million for 2011 USD $51 million approx.) for the Federal District; or the transaction involves the accumulation of more than 35% of the assets or shares of an entity with assets or sales exceeding 12 million times the DMW (MX $718 million for 2011 USD$51 million approx.); or the transaction involves entities whose assets or sales exceed 48 million times the DMW (MX $28,713 million for 2011 USD $2.5 billion approx.) and an accumulation of assets or capital exceeding 4.8 million times the DMW (MX $287 million for 2011- USD $20 million approx.) A specific reform that took effect in May 2011 exempts some financial market transactions and internal corporate reorganization transactions from filling requirements. 6. M&A transactions may be subject to certain conditions When Latin American antitrust authorities determine that a specific consolidation may give rise to the creation of monopolies, facilitate dominance abuses, or create barriers to market entrance, such authorities may impose certain conditions over the firm or group participating in or resulting from the transaction in question. Examples of such conditions to deter anticompetitive practices include: the divestiture of one or more trademarks, production plants or business lines to current or potential competitors who possess a certain market share (e.g. 20%) and are likely to use such assets; and, the prohibition to put into effect exclusivity agreements with suppliers and/or duration clauses in supply agreements with clients. These and other types of conditions intend to provide antitrust M&A control regimes with increased flexibility not only in Latin America but also in the United States and the European Union. Specifically, such conditions seek to maintain the pre-transaction status quo of the market in question and also permit the efficiencies of the transaction to benefit the market as well as the consumers.
When deciding whether or not to engage in a consolidation transaction, planners should attempt to foresee these clearance conditions as well as the consequences of violating such conditions. In many Latin American countries, whenever companies determine that a condition that may be imposed could significantly affect a transaction, they have the option to approach the antitrust authorities and attempt to reach an agreement. This approach however carries with it certain inherent risks, such as having to disclose information on the transaction before closing the relevant deals. Generally, as has been the case in Colombia, clearance conditions must be complied with after the transaction has been cleared and completed by the parties. This rule facilitates the transaction closing and, since authorities follow-up on the fulfillment of the conditions and can impose severe penalties in cases of noncompliance, ensures the markets are protected against anticompetitive practices. 7. Objections to transactions may occur in certain cases In the event that the domestic antitrust authority determines that the transaction under examination will facilitate monopolistic behavior and abuse of a dominant position, and that, given the circumstances, it is not possible to impose any condition that would deter such behavior, the antitrust authority can object the transaction in its entirety and thus block it before it is completed (with the exception of post-closing clearance in Brazil, where, until April 2012, parties to a transaction may complete it before CADE decides whether or not to object it). 8. Fines may be imposed upon participating parties The following are specific examples of fines that may be imposed upon parties participating in consolidating transactions that have failed to fulfill the filing requirements set forth by antitrust authorities: - Argentina: ARG$1,000,000 daily until fulfillment of the requirements (approx. USD$250,000 daily) - Brazil: 1 to 30% of a company's pre-tax revenues and 10 to 50% of the fine applicable to the company for individuals who participated in the transaction. With the amendment mentioned above, as of April 2012, penalties will range from BRL $ 60,000 to BRL $ 60 million (approx. USD $33,000 to USD $33 million) - Colombia: for the companies participating in the transaction, the fine will be the greater amount between 100,000 times the monthly minimum wage (COP $53,560 million for 2011 USD $30 million approx.) and up to 150% of the profit derived from the transaction. For individuals who represented the participating companies, the fine is up to 2,000 times the monthly minimum wage (COP $1,071 million for 2011 US$ 800,000 approx.). 9. Certain control regimes may present significant challenges that should be considered by both acquirer and target companies when negotiating M&A agreements As mentioned above, control regulations specific to each country where a transaction will likely produce effects should be considered along with the range of decisions competent control authorities may make regarding any given transaction. In countries such as Colombia, where clearance (explained in 4 and 5 above) is required from the competent authority before closing certain transactions, the acquirer and target may not agree on a specific closing date without first taking into account the time the clearance process may take. This and other aspects, though seemingly obvious, can often place both the acquirer and the target s interests at substantial risk. Such is the case when the acquisition price is agreed upon in a certain currency, without contemplating the possible exchange volatility of that currency from the moment the price is agreed upon to the moment in which clearance is obtained and the respective price is paid. Another potential challenge involves the possibility that a transaction might be objected by the antitrust authority. In these types of cases, the target s stock price is inevitably affected and the acquirer has no other choice but to abandon the transaction (at least with respect to the jurisdictions where the transaction is blocked). This leaves the target shareholders with a devalued investment and may cause them to seek remedy under jurisdictions where the transaction can be completed. As a result the integration costs for both the acquirer and the target firms would increase substantially. This risk is also present in other jurisdictions that have adopted M&A control regimes such as the United States, where, for
instance, the Department of Justice may decide to challenge deals that, as result of a thorough analysis, are considered to lessen competition. The awareness of these particular challenges would provide the acquirer and target companies with better support when negotiating M&A deals, particularly with regard to the terms of walkaway and break-up fee clauses. 10. Time should be a consideration for investors Although Latin American countries have been making significant strides toward adapting their antitrust regulations to the increasing needs of domestic and global markets, timeframe issues are still a matter of concern among the global business community. The average timeframe established in some Latin America countries for antitrust agencies to decide on transactions clearance is alarmingly long. In cases where parties are not satisfied with an agency s decision and thus decide to challenge it before courts, the timeline to obtain a final resolution from courts will be significantly longer. In principle, Latin American antitrust authorities must follow a specific timeframe when making a decision on clearance requirements. If they do not decide within this time period (typically 60 days), as provided by the statutes, it is deemed that the transaction has been approved. However, the time period begins from the moment the involved parties submit all required information to the antitrust authority. Therefore, authorities can spend years requesting information and, only when they deem they have enough information to make a decision, will the timeframe for making that decision commence. In the case of Brazil, with respect to transactions that raise no concerns, it can take 2 to 3 months to obtain clearance. However, according to expert legal practitioners in Brazil, if a transaction raises competition concerns, it can take two to three years. This should be a matter of concern for the Brazilian government since this lengthy timeframe may drastically affect the successful completion of many transnational transactions. Further compounding the issue, Brazilian antitrust authorities lack adequate staff necessary to address the high number of mergers that take place in this country each year. In Colombia, if a particular transaction does not raise competition concerns, clearance may be obtained in approximately two months. If the Superintendence of Companies (Colombian antitrust agency) deems a transaction requires deep analysis, the entire process lasts six months to one year. In Chile, expert practitioners in that country have stated that, in complex cases, decisions made regarding the clearance of a transaction can take 7 to 10 months, and if the decision is appealed before the Supreme Court, the final decision may be obtained in approximately 13 months. In certain countries in Latin America, such as Brazil and Colombia, if a decision made by the antitrust authority regarding the granting of clearance is challenged and thus taken to court, a final decision can be delayed for a period up to 8-12 years. The Brazilian Nestle Brasil Ltda./Chocolates Garoto S.A. case mentioned in #5 above illustrates this lengthy type of delay. In this case, the transaction was blocked by CADE in 2004 on account of, according to CADE, high concentration levels and the creation of barriers to entry into the chocolate market. As a result, Nestle brought a lawsuit against the antitrust authority in May 2005 and after 6 years a final decision has yet to be delivered. In conclusion, pursuing a transaction hastily in Latin America, without prior calculation of the risks associated with M&A activity, may lead to disastrous business consequences. Therefore, in order to take full advantage of the favorable business environment in some Latin American countries, businesses must be aware of regulations imposed upon consolidation transactions that have significant effects on the markets in these countries. Clearance requirements and timelines for M&A transactions as well as dispute resolution at the central government and judicial levels must be considered when planning business consolidations in this region.
The information in this Top Ten should not be construed as legal advice or legal opinion on specific facts and should not be considered representative of the views of its authors, its sponsors, and/or the ACC. This Top Ten is not intended as a definitive statement on the subject addressed. Rather, it is intended to serve as a tool providing practical advice and references for the busy in-house practitioner and other readers. Reprinted with permission from the Association of Corporate Counsel (ACC) 2011 All Rights Reserved. http://www.acc.com/legalresources/publications/topten/iskamaila.cfm