From 2004 to 2008, the Brazilian stock market experienced an unprecedented period of growth and expansion. During this period, the average daily trading volume of BOVESPA (the former name of BM&FBOVESPA, the Brazilian stock exchange market) increased from R$ 1.4 billion in January 2004 to R$7 billion in May 2008, just before the international financial crisis reached Brazil. From 2004 to 2008, 110 companies, including Bovespa Holding S.A. (the holding company which controlled BOVESPA), filed their IPOs with CVM, the Brazilian securities and exchange commission.
The “boom” of the Brazilian stock market resulted mostly from the recent success of the Brazilian economy within the context of a favourable international environment, combined with heightened regulation and corporate governance practices.
By the beginning of the last decade, many of the companies which would become public within the following few years were family-owned companies, without a professional management or a well defined corporate governance structure. At that time, BOVESPA started to implement measures to avoid the abuse of power by the controlling shareholders and to increase transparency in the management of the publicly-held companies. The creation of special segments where shares were traded, such as BOVESPA’s Novo Mercado (in Portuguese, “New Market”), required listed companies to comply with new corporate governance standards, creating a safer investment environment for small investors and increasing their importance in the Brazilian publicly-held companies.
In this context, the Brazilian poison pills were intended to be an additional initiative to increase the importance of the small investor in Brazilian stock market newcomers. As opposed to the poison pills adopted in the United States, the typical Brazilian poison pill provision is implemented in the company’s by-laws as a restriction for the acquisition of the company’s issued and outstanding shares. Each company decides whether or not to adopt the poison pill provisions, since there is no law or rule which requires their adoption by the publicly-held companies.
Pursuant to the wording commonly adopted in the by-laws of Brazilian public companies, the poison pill provision requires any person who acquires more than a certain percentage (usually between 15% and 30%) of the company’s issued and outstanding shares to file a public tender offer to acquire up to 100% of the remaining company’s shares. The calculation of the price to be paid by the acquirer is also determined in the by-laws and takes into consideration an independent valuation of the price per share plus a premium, usually resulting in a price per share significantly higher than the market value of the share.
In addition, most by-laws have restricted the removal of, or amendment to, the poison pill provisions. The restrictive wording commonly included in the by-laws requires any shareholders who vote in favour of the amendment or removal of the relevant provision to file a public tender offer in the same terms and conditions as the public tender offer triggered by the poison pill provision.
Similarly to the American poison pills, the purpose of the Brazilian poison pill is to avoid hostile takeovers or other large-scale share purchases which could lead companies to a concentrated shareholding structure. Particularly in Brazil, avoiding such a concentrated structure could show to potential investors the companies’ commitment to enhancing the value of the small investor, in contrast to the family-owned structures prevailing in some companies up to the beginning of the “IPO boom”.
Some of the first companies to adopt poison pill provisions in their by-laws were Natura S.A., Lojas Renner S.A., Submarino S.A., Embraer – Empresa Brasileira de Aeronáutica S.A., Diagnósticos da América S.A. and Idéiasnet S.A. Thereafter, many companies going public adopted similar structures. As an example, Bovespa Holding S.A. itself has adopted poison pill provisions in its by-laws.
After the “IPO boom”, the first negative effects of the poison pill provisions began to impact the new public companies and their shareholders. In some cases, transactions for the sale of 15% of the capital stock were compromised by the restriction which would require the potential acquirer to purchase up to the totality of the companies’ shares, through a complex and expensive tender offer proceeding. Even in the event the acquirer would agree to file the tender offer, the price per share resulting from the formula set forth in the companies’ by-laws led the acquisition prices to out-of-market levels. Finally, other restrictions provided in the by-laws would prevent the general shareholders’ meetings to amend or delete the poison pill provisions.
The poison pill restrictions, however, have not prevented all M&A transactions involving the new public companies. Although in most companies the acquisition of shares were subject to severe restrictions, most by-laws do not prohibit other transactions, such as mergers or mergers of shares. The lack of restrictions on mergers created some sort of loophole, which has enabled companies to carry out genuine merger transactions aiming to combine activities or, in certain cases, to disguise acquisition transactions in order to avoid the application of the poison pill restrictions.
Since May 2008, several merger transactions involving publicly-held companies with poison pill provisions have taken place. The structure commonly used to implement such transactions was:
- mergers between two companies resulting in the creation of a newly formed company (fusão);
- mergers under which one company absorbs another company, resulting in latter ceasing to exist (incorporação); and/or
- mergers of shares, under which one company: (i) absorbs all the issued and outstanding shares representing the capital stock of another company, which becomes a wholly-owned subsidiary of the first company; and (ii) issues shares for subscription by the former shareholders of the second company.
In certain cases, the transactions mentioned above were combined to achieve the final corporate structure sought by the parties.
In response to the popularisation of merger transactions involving public companies with poison pills, in September, 2008 CVM issued an opinion in connection with three recent transactions involving the following publicly-held companies:
- Datasul S.A. and Totvs S.A.: a transaction aimed at combining the activities of Totvs and Datasul through both a merger and merger of shares, resulting in Datasul becoming a wholly-owned subsidiary of Totvs;
- Construtora Tenda S.A. and Gafisa S.A.: a transaction aimed at combining the activities of Tenda and Fit Residencial Empreendimentos Imobiliários Ltda., a subsidiary of Gafisa, through a merger; and
- Company S.A. and Brascan Residential Properties S.A.: a transaction aimed at combining the activities of Company and Brascan, through a merger and merger of shares.
The main purpose of CVM’s opinion was to review whether Article 254-A of the Brazilian Corporations Law, which determine the obligation to file a public tender offer in case of acquisition of control of a publicly-held company, would apply to the above mentioned transactions. However, in order to make a final determination, CVM has reviewed the poison pill provisions of the companies’ by-laws and the applicability of the restrictions set forth thereby to the merger and merger of shares carried out by the parties. According to CVM’s opinion, neither Article 254-A nor the poison pill provisions required these companies to file a public tender offer as a result of the transactions implemented. The rationale for such conclusion is that the mentioned transactions were substantially different than an acquisition of shares which, pursuant to Article 254-A and the companies’ by-laws, would trigger the obligation to pursue a public tender offer.
CVM’s opinion granted comfort to the public companies which pursued or desired to pursue mergers or mergers of shares, irrespective of the poison pill provisions in their by-laws. Notwithstanding, the poison pills are still an obstacle for acquisitions of shares of the public companies with restrictive by-laws.
In June 2009 an initiative of CVM challenged the legality of the poison pills in Brazil. After reviewing the restrictive provisions generally adopted by the public companies’ by-laws, CVM considered the provisions which required the shareholders who vote in favour of the amendment or removal of the poison pill provisions to file a public tender offer to be illegal. Among other arguments, CVM understood that such provisions established a penalty which, in practical terms, could represent an increase in the maximum quorum for shareholders’ decisions permitted by the Brazilian Corporations Law.
Based on such understanding, CVM issued a ruling (Parecer de Orientação No. 36) informing the public companies and the market that it would refrain from instituting administrative proceedings to punish the shareholders who vote in favour of the amendment or removal of the poison pill provisions set forth in the by-laws. Even though CVM’s ruling has not invalidated the restrictive provisions set forth in the by-laws (CVM is not legally entitled to invalidate the companies’ by-laws), it provides the market with an important opinion which could serve as reference for judicial decisions in connection with the legality of such restrictions.
Notwithstanding the foregoing, the general shareholders’ meetings which eventually approve the amendment or removal of the poison pill provisions, without requiring the shareholders who voted in favour of the relevant matter to file a public tender offer, may still be challenged by any interested party in arbitration proceedings (which decision may never become public, due to confidentiality obligations) or in the Brazilian courts. Until Brazilian courts formally issues their awards, a definitive answer on the matter will be still pending. In the meantime, the mergers and mergers of shares are still the safest way to carry out M&A transactions involving public companies with poison pills in their by-laws.
Originally published at “Mergers, Acquisitions & Joint Ventures – 2010 Digital Guide”, electronic publication Executive View Media Limited and available on http://www.executiveview.com/digital_guides.php?