1. JOINT VENTURES FROM BIRTH TO DEATH: AN ANALYSIS OF HOW M&A REQUIREMENTS AND ANTITRUST ISSUES BRIEF SUMMARY
The present report intends to give legal information, practical decisions taken in actual cases, jurisprudence situation and administrative decisions taken under joint venture agreements and the respective Antitrust Regulation aplicable to the case.
In Brazil there are varius forms to implement a Joint Venture, the option shall be based in the scope of the venture, parties interest and any regulation applicable to the specific case. Since some regulations have specific provision to certain types of core bussines that will need to be verified and complied with, as well as the Antitrust issues will need to be identified.
We understand that the following important issues should be mentioned in the Joint Venture Agreement: (a) confidenciality conditions; (b) management and powers to take decision during the operation of the Joint Venture; (c) termination conditions; (d) assets distribuition; (e) tranferes of interest to thierd parties; (f) activities to be developed between the notification to the Antitrust Commission and clearence; and many others according to each case.
The Antitrust regulation provides (Law 8884/94) that the parties have to notify the commission when one out of the three situations is present in the relevant case, such as any kind of M&A, joint venture or agreement between legal entities: i) one of the parties solely holds or the two jointly hold more than thirty percent of the market share; ii) one of the parties solely has had or the parties involved in the transaction have had in the precedent year revenues above US$ 150.000,00 (one hundred fifty million American dollars); iii) the transaction may cause competitive restrictions in the market.
2. DETAILED QUESTIONS RELATING TO THE LAW IN YOUR JURISDICTION
2.1 Creation
2.1.1 Preliminary contacts
Companies planning to establish a joint venture normally need to exchange sensitive information and plan the business of the company.
A. M&A
Dealing with confidential information:
How is the exchange of confidential information normally organised in your jurisdiction? Is it usually covered by a confidentiality undertaking? What happens if the negotiations fail? Is there a duty to destroy confidential information? Any control mechanisms? Any case-law? Is it customary to provide for break-up fees at this stage? Is it possible? Any examples? Any case-law on break-up fees? How is the question of advisors' confidentiality undertaking treated? Do you usually sign the confidentiality agreement yourself also?
The exchange of information is organised accordingly with the nature of the joint venture. If it deals with technology or technical qualification a committee formed by the two parties shall be organized. If the transaction shall involve joint investments from both parties disregarding the need for any sort of disclosure a committee as such will not be necessary.
Usualy the parties sign a confidentiality undertaking covering any sort of information accessed due to the planned M&A or Joint Venture. Such confidentiality agreement covers also the recognition from both parties of rights on patents, trademarks, designs, trade and industrial secrets, financial and fiscal information and other types of protected data.
When negotiations fails the parties simply declare the termination of the planned transaction and ratify the undertaking of confidentiality. Usually the parties do not have this practice of of destroying the confidential information exchanged during the negotiation. In fact the parties exercise the preventive protection of rights by formally communicating to the other other party or parties involved in the transaction the right to access the confidential information or data related to the deal.
Despite possible under the Brazilian Law, at this stage of the negotiation the parties do not accept to establish break-up fees. It will certainly be considered a restrictions to freely decide about the transaction. We can not provide any example of break-up fees case-law as the transactions we have been involved the parties have never accepted to lay down any penalty for terminating the transaction.
The professionals working as advisors are in general the lawyers, in-house or not, or technincal consultants. With respect to the lawyers they are subject to confidential clause by ethical regulations provided by the law. Other professionals working as advisors in a transaction are usually subject to service agreement regulations including confidentiality clause. Further, each party involved in the transaction is responsible, before the disclosing party to any disclosure done by its own advisor or representatives. This is a way to make the disclosing party sure that the other party will take care of the confidentiality undertaking with its advisors or representatives working in the transaction.
B. Antitrust
Limitations on preliminary discussions:
Are there any legal limitations on preliminary discussions between competing companies regarding the creation of a joint venture? If yes, what are the limitations and the potential consequences if these limitations are not adhered to? Is there any way to overcome these limitations?
No, the Brazilian Antitrust Law do not provide any limitation on preliminary discussions regarding the formation of a joint venture.
Nizzo: And about the the M&A. The agreements don't have to be informed to the CADE, as they are signed?
2.1.2 Letter of Intent, MOU, etc.
A. M&A
i) Describe shortly the main types of joint ventures that are most often set up in your country (contracts, corporations, …) Are there form of corporations which are preferable?
There are basically two types of Joint Venture structures used in Brazil: a) the contract, named in Brazil as "Consortium", when parties work jointly one specific object such as a power station or the premises for an industry; b) another usual format of a Joint Venture is the formation of a company. This structure is usually preferable for a long term project.
The item b above can be implemented through the various types of companies mentioned in the Brazilian regulation, following we mentioned the most common types, such as Limited Liability Company (Sociedade Limitada), Joint-Stock Company (Sociedade Anônima) and General Partnership (Sociedade em Nome Coletivo).
ii) Will the letter of intent traditionally be binding? Will it contain conditions precedent?
The binding or not biding character of a LoI has been discussed outside and in Courts. It is not possible of affirm that there is a jurisprudence formed on this matter due to many nuances of each case. It is possible however to say that when parties establish conditions precedente and such conditions are fulfilled, there is no legal restrictions to the transaction and the parties expressly establish the irrevocability of the LoI such LoI may be considered binding by Court decision.
iii) How do you cope with the parties strong desire to start implementing their project as from the signing of the LoI or equivalent?
If such situation takes place the best to be done is to antecipate the execution of the Joint Venture Agreement and not rely simply in the LoI.
iv) Do you advise to highlight the antitrust issues immetiatly in the MOU?
There are some very strong discussions on this topic in Brazil. The Antitrust Commission understands that the parties are obliged to notify the transaction within fifteen days after the signature of the first document related to the transactions. Such understanding is beeing discussed due to the reality that a MOU do not necessarily represents the execution of the transaction. Nevertheless, it is recommendable that the parties perform the notification when the decision to create the Joint Venture is made and before it is disclosed to thierd parties.
B. Antitrust
i) When should you examine whether there is an obligation to notify Regulators of the creation of the joint venture in your country (either under merger control or other regulation)? What kind of information do you need for the examination?
The Antitrust regulations are provided in Law 8884/94, which establishes in article 54, paragraph 4, that the parties have to notify the commission when one out of the three situations is present in the relevant case, such as any kind of M&A, joint venture or agreement between legal entities: a) one of the parties solely holds or the two jointly hold more than thirty percent of the market share; b) one of the parties solely has had or the parties involved in the transaction have had in the precedent year revenues above US$ 150.000,00 (one hundred fifty million American dollars). c) the transaction may cause competitive restrictions in the market.
It is important to highlight that for the terms "parties" for the purpose of this regulation it is not only one company or another subsidiary but the whole economic group, information to be given to the commission is the structure of the group in Brazil and outside Brazil, the total revenue of the group, the number of transactions realised in Brazil, the number of subsidiaries, the direct and indirect commercial interest in respect equities in different companies, the market share of each company, when each transaction has been executed and when negotiations have started. These are the basic information to be given to the commission but the parties are subject to other questions presented during the procedure of approval by the antitrust commission.
ii) Does a letter of intent, memorandum of understanding or similar preliminary (non-binding) agreement establish an obligation to notify and/or do you have the right/possibility to notify at this stage (either under merger control or other regulation)?
This has been a continuing discussion between parties involved in a transaction and the Antitrust Commission. There are precedents from Court declaring the nullity of penalties imposed by the commission based on the theory that a MOU or a LoI can not be taken as the formation of a Joint Venture of the execution of the M&A, however the debates still exists and the end of the discussion is far from the end
iii) When shall you notify (either under merger control or other regulation) and when can/should you contact the relevant competition authority?
Notification is to be made when the transaction clearly produces one of the results laid down in article 54 of Antitrust Act. There are some unclear results and the parties do not want to risk the application of any penalty. In such situation they are entitle to consult the commission about the need to notify the details of the transaction.
One example has become very common in Brazilian jurisdiction. When a international corporation enter into a first transaction in Brazil and acquire a very small company. Is there a need to notify the commission taking into consideration that such transaction does not meet any of the conditions provided in article 54 of Antitrust Law!!! The jurisprudence of the Commission may clash with the understanding of the parties and most of other countries antitrust commissions. The consultation may be the solution in occasions such as this one.
Besides, if the transaction is not informed to the commission and latter the Brazilian company dicides to be incorporated by another company in Brazil, that meets the requirements of the law, filing for approval before the Antitrust Commision, during the analyses of the documents the previous transation may be verified the and sugject to penalty.
2.1.3 Due diligence review and drafting agreements
A. M&A
How is confidentiality protected? Is it possible to reserve for a later stage certain key business information? Would you advise to limit the scope of due diligence to avoid antitrust issues?
Due to the fact that parties prefer to reserv in their favor the right to break-up the MOU combined with the current understanding of the commission of the parties obligation´s to notify the transaction, it is advisable to structure the proceedings in way that each stage crossed confirms the interest of effectiveness of the deal and leads to the next stage. A scheme such as this will assure that parties the confidentiality and further that most important information will be provided only in more advanced stages of the transaction. This sort of procedure also helps against occasional intention of the antitrust commission to apply penalties due to delay of notification.
B. Antitrust
i) When examining an existing company, which will become the jointly owned company, you normally conduct a due diligence review. What are the potential antitrust issues that should be reviewed during due diligence?
Analysis of the annual revenues, market share of the parties, structure of distribution network, intelectual property rights, margin of concentration of the market resulting from the transactions, are examples of subjects reviewed in a due dulicence and importante for the analyses of the antitrust requirements issues.
ii) If you find any potential problems during the due diligence review, how can you protect yourself under national law against possible liability for competition infringements in the future? Is there succession of liability for competition infringements committed in the past? Is there a duty to inform the antitrust authorities of infringement discovered in the due diligence process?
If the due diligence conducted by the parties reveals any antitrust infringement commited by the parties involved in the transaction such parties can agree that only the infriging party shall be liable for any damages and penalty established by the commission. However, there will be a succession of liability if the new company benefits from the antitrust infringiment. The commission may understand that such violation continued and has been successed and penalyse the new company.
The antitrust violations are not classified under Brazilian Law as a crime, therefore the parties are not obliged to inform the authorities when infringiments are discorvered. On the other hand the parties are subject to confidentiality provisions existing in the contract, therefore are not allowed to disclosure the results of the due diligence.
2.1.4 Set-up-Documentation-Signing
A. M&A
i) How to manage the form, the management and the control of the joint venture: Describe main agreements that would normally be used to form a joint venture. Please identify, and describe various solutions used in your jurisdiction to cope with M&A issues (e.g. control of management, business plan, management appointment/dismissal, capital requirements, acquisitions, …). What solutions are the most often put in place in terms of share of control? How detailed will the sharing of control be described? Will certain functions be reserved to one party? What decisions are subject to a joint decision process? Joint decision is normally carried out through a specific entity (executive committee or board) or by a shareholder's vote?
The joint venture agreement in Brazil usualy determines the creation of a Consortium, a Limited Liabily Company, Joint-Stock Company or General Partnership, since in Brazil only national entities can act or explore the Brazilian Market. The management control, business plan, management appointment or dismissal, capital requirements and acquisitions shall be established in the articles of association and depending on the type of company adopted there are or not legal limits and requirements.
Usualy in Brazil the solution adopted to implement the joint venture agreement is a Limited Liability Company or Consortium, where in the first case we have a creation of a Brazilian limited liability company and the second is an agreement between two or more companies, that does not creat a legal entity, to implement a project.
In both options the Articles of Association or the Consortium Agreement shall indicate the share of control in all its aspects. For Limited Liability Companies there are legal limitations for the election of the Administrador and corporate decisions as established in the Civil Code. The Consortium in the other hand has to be created by two or more Brazilian companies.
ii) Other documentation:
Often a joint venture will not be limited to the by-laws and shareholders agreements. Ancillary contracts which can be as essential as the aforementioned ones need to be negotiated, for instance, for the provisions of services or employees' secondment by the mother company, for the use of third party (or affiliated companies) technology or resources, or for relations with key customers. Please describe what issues are most often dealt with in this respect from an M&A point of view and how this may influence the antitrust analysis.
The most common issues are the transfer of technology from a mother company or another subsidiary member of the company, also licensing of trademarks, patent rights, financing resources, administration expertise, and special equipment.
The impact of these items to antitrust analysis will depend of the position of the companies in the existing market. For instance should the parties have any previous position in the Brazilian market the terms and conditions of the transaction may be understood as causing concentration.
iii) Conversely, please describe how certain M&A issues may be treated differently to avoid antitrust problems.
There are many alternatives that may be applied by the parties in the transaction, for instance the clause of non exclusivity or establish the policy of non discrimination between the customers and suppliers. In general any sort of provision that informs and confirms the absence of any anti competition measure resulting from the transaction.
iv) A good example thereof relates to the nature of the joint venture as such. In some cases, the parties may not wish to notify a joint venture to the merger control authorities and will therefore try to amend the joint venture by limiting its autonomy or avoiding a situation of joint control.
Agree that this may provide grounds to the approval by the antitrust authorities, but any way the parties shall be subject to notification should they meet any of the hypothesis established in article of the law above mentioned.
v) In other cases, the parties may conversely wish to make sure their joint venture is of a concentrative nature so as to be in a position to notify it to the relevant authority(ies). In such case, the parties will aim at making sure that the joint venture has sufficient autonomy and that both parties have significant, if not balanced, control power over its management. Please give examples of similar situations encountered in your jurisdiction.
There are examples of transactions that the parties confirmed the concentrative nature by concentrating the distribution capacity in the market share, by reducing the number of trademarks used to market the products or by not beeing able to request exclusivity n the market.
vi) The risk of undertakings forced on the parties by the antitrust authorities can also play an active role in the M&A structuration. Is that the case in your jurisdiction? Any examples?
Yes, this is the case in Brazilian Law. The antitrust authorities may impose on the companies the " Performance Commitment", which shall establish special conditions to the approval of the M&A transaction. Such condition may vary from the compulsory offering of excedent production to the market or reduction of market share in less competitive regions in order to estimulate new producers.
vii) Time being often of essence, are there any solutions available to speed up the process despite the merger control/antitrust procedures? Is it advisable to have preliminary contacts with the antitrust authorities? Any risk attached therewith?
The Antitrust Commission has developed a special procedure to enshorten the time of approval of a transaction. The parties are to provide the information filling up a questionaire where answers are given in accordance to the format, terms and conditions of the negotiation. The earlier the parties notify the authorities and provide this questionaire the earlier the decision will be granted. Within the period between the notification and the decision the parties may implement the Joint Venture or the contract, however if the authorities disapprove the transaction the parties shall terminate it compulsory.
B. Antitrust
i) When drafting the joint venture agreement(s), are there specific clauses/agreements between the parents or the joint venture and the parents (e.g., non-competition clauses, distribution agreements, joint production agreements) requiring antitrust review? What clauses in the agreement(s) are considered to affect or restrict competition and be prohibited/need clearance or exemption in your country? What should you keep in mind to avoid regulatory control?
Any contract clause which infringes the restrictions provided in article 20 and 21 of Antitrust Act.
ii) How is a joint venture defined under the competition rules in your country? Is there, and what is the difference between full-function/partial-function joint ventures, concentrative/co-operative joint ventures, strategic alliances etc.? How is control and joint control defined? What kind of antitrust regulatory control applies to joint ventures/jointly owned companies?
The Antitrust Authorities do not limit or restric their investigative power for the nature of the joint venture. Investigations are conducted by the results of the joint venture, if in any case stablished by the law the joint venture (whaterver format it was establhised) meets the legal requirements the transaction will be subject to regulatory control.
iii) What kind of joint venture transactions shall or can be notified under merger control and what requires a notification and clearance (e.g., individual exemption) under other rules? Could there be an obligation to both file a merger notification and apply for an individual exemption for the joint venture?
In the case of a Joint Venture creating a new company such new company shall notify and request the approval and in the case of an operative Joint Venture companies involved shall jointly request the approval. There are no examples of one party receiving the clearence and the other party don´t, but in theory in transactions involving more the two companies of different economic groups it might be possible the authorities could decline one of them which could be causing anti competitive violations.
iv) Referring back to the above questions ii) and iii), what constitutes horizontal and vertical co-operation in connection with a joint venture under national law? Does it have any relevance in this respect that the (possibly competing) parent companies are represented in the board of directors (or similar body) of the joint venture? What kind of co-operation underlies regulatory control and/or is prohibited as such? Does the law provide for any legal exemptions and/or have the authorities issued block exemptions or similar regulations?
The Brazilian antitrust law does not lay down any specific provision definying horizontal or vertical co-operation in connection with a joint venture. The concept of the Brazilian Law, different from other legislation, is addressed more to the result of the agreement (or any sort of transaction) executed by the parties as opposed to a framed definition provided in the law. Therefore, it will be subject to antitrust investigation any sort of co-operation that can possibly reduce competition or result in market dominance of the relevant activities. (market share equal or higher than 20%).
The Commission has exercised some exemptions in relevant cases, in order to allow the formation of national companies capable to compete in the international market. The theory of global competitors (competitors in the international market), or national competitors (competitors in the national market) to compete with international companies has been the grounds for antitrust regulation exemptions. Nevertheless, even in these cases where exempions are applied, the Commission tends to enforce conditions to be performed by the parties to the agreement aiming the reduction of the competition capacity between the market competitors.
v) In which cases do you go free from any regulatory control? What can you do if there is no possibility to notify and get regulatory clearance, but there is a risk that the co-operation in connection with the joint venture is subject to national competition rules? Is the competition authority available for informal discussions? How can you prepare yourself against possible future liability?
There is a possibility to make previous consultation to antitrust authority about the transation. Informal discussions are possible however they do not exempt the parties of any liability. Conversely the consultation provides the certainty of clearence should the terms and conditions of the transaction are exactly those provided by the consulting party.
vi) Who is obliged to notify the creation of the joint venture?
The parties involved in the transaction or the new company if the joint venture has resulted in incorporation of a new legal entity.
vii) How much time do you normally need to prepare a merger or other notification?
The law provides that notification has to be filed within fifteen days from the first protocol or memorandum or agreement signed by the parties. Extensive documentation is required to file such notification, which normally takes about thirty to forty days to be prepared by the parties (maily when the transactions has foreign participants). Conclusively, when antitrust analysis is an evident outcome from the transaction, the parties have to prepare the documentation very early in the negotiations.
viii) What are the possible competition concerns (for example, monopoly issues, horizontal, vertical or other effects) that need to be taken into account when preparing a merger or other notification to safeguard clearance?
A margin of market share higher than twenty percent of the relevant market and horizontal effects.
ix) What are the consequences or sanctions if you fail to notify?
The parties are subject to financial penalties which vary according to the size of the transaction.
2.1.5 Closing
A. M&A
i) Assuming antitrust notification is required, how do you normally solve the question of the time period between notification and clearance? Do the parties want to initiate their cooperation? Any solution in this respect?
Traditionaly the parties initiate their cooperation and work on the clearance. There are examples where clearance has not been given and the parties were forced to undo the agreement.
ii) Can the parties carry out due diligence after notification? Can they access confidential material? Can there be direct contact at management level to set up the cooperation procedures and joint venture operations for after clearance?
The question seems to propose a conditioned co-operation or joint venture. There is not a specific provision in the law denying the right of the parties to work in this way. However, in normal conditions the parties notify the commission after the closing without conditional provisions.
iii) In case of veto from the antitrust authorities, what can be the consequences? Is this normally covered in the documentation?
The legal consequences are provided by the law. The transaction is supposed to produce no effect, therefore parties shall be forced to return to the status quo ante.
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