On March 20, 2024, CADE’s Tribunal decided on the occurrence of gun jumping in a transaction carried out by IT services companies but did not impose penalties due to jurisprudential controversies concerning the notification of merger cases involving investment funds and shared control situations.
On March 20, 2024, during the judgment of a gun jumping investigation (APAC), initiated by CADE’s General Superintendence to investigate whether there was premature consummation of a transaction subject to CADE’s approval, CADE’s Tribunal issued an important precedent that addressed issues related to the concept of economic group applicable to companies and investment funds based on current competition regulations. It also provided an extensive systematization of CADE’s decision-making practice regarding shared control and, ultimately, emphasized the importance of updating applicable rules, considering the "need to provide greater legal certainty, efficiency, and rationality to the Brazilian competition defense system"¹.
The transaction under review involved the acquisition of the totality of Digesto’s shares by Jusbrasil. The companies argued that, at the time of the transaction, they did not belong to economic groups that met the revenue criteria provided in competition law, namely, that one of the involved groups registered gross revenue in the year prior to the transaction of at least R$750 million, and that another group registered gross revenue in the year prior to the transaction of at least R$75 million.
Pursuant to the investigated parties, the concept of economic group applicable to companies is set forth in Article 4, §1 of CADE Resolution No. 33/2022, according to which only the following will be part of their economic groups: (i) companies that are under common control, either internal or external, in the terms of item I of §1, and cumulatively, (ii) companies in which any of the companies mentioned in item (i) holds, directly or indirectly, at least 20% of their share capital or voting rights, according to item II of §1.
In the companies’ understanding, Jusbrasil (buyer) and Digesto (target company) were the parties directly involved in the transaction. Jusbrasil had its share capital divided among three institutional investors (including an investment fund) and three individuals, with no defined control, and it should be considered part of its own economic group, which, in turn, did not meet the R$75 million revenue criteria.
In turn, Digesto’s share capital was held by four individuals holding 80% of the shares and a minority investor (investment fund) holding 20% of the target company’s shares.
The General Superintendence disagreed with the parties’ arguments and understood that the transaction would be subject to mandatory notification based on Article 4, §2 of CADE Resolution No. 33/2022, which provides the concept of an economic group applicable to investment funds. This is because there were investment funds in the corporate structures of the companies involved in the transaction that, in turn, belonged to economic groups that met the R$750 million revenue criteria.
Given the peculiarities of the case and the lack of clear guidance in the General Superintendence’s precedents, Reporting Commissioner Victor Fernandes understood that the application of Article 4, §2 of CADE Resolution No. 33/2022 should be dismissed, since the parties directly involved in the legal transaction were companies and not investment funds², and therefore, their respective economic groups should be evaluated under the rule provided in §1 of Article 4, that is, the concept of economic group applicable to companies.
At this point, the Commissioner’s vote provides a relevant jurisprudential contribution by recognizing that the group approach applicable to companies privileges the analysis of the existence of common control, unlike the group approach applicable to investment funds where one must look (i) "upward": if there is a quotaholder with an individual participation equal to or greater than 50% of the fund involved in the transaction, whether via individual ownership or through any type of quotaholder agreement, and (ii) "downward": (ii.1) the companies controlled by the fund involved in the transaction; and (ii.2) the companies in which such fund holds directly or indirectly 20% or more of its share capital or voting rights.
Thus, given the investigated companies’ arguments that they did not belong to an economic group with revenues exceeding R$750 million (the buyer for being considered the controller of its own economic group and the target company for having majority shareholders who exercised control without the minority shareholder being considered a co-controller), the Commissioner’s vote began to analyze the "thorny" issue of how CADE has being interpreting the concept of control power for the purpose of defining economic groups.
The vote then systematizes all of CADE’s case law on control power and shared control and relevant influence. In this analysis, three distinct approaches to identifying shared control were verified, namely (i) the concrete verification of the exercise of control power; (ii) the analysis of the minority rights provided in the shareholder agreement; and (iii) the inference of control from the mere ownership of 20% or more of the share ownership. According to the vote, the second approach is the most adopted methodology by CADE’s General Superintendence.
According to CADE’s precedents on the subject, the minority shareholder rights that have been considered for the definition of shared control are the following, according to the table extracted from Commissioner Victor Fernandes’ vote:
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Minority shareholder rights that generate presumptions of shared control 1. Right of veto or requirement of qualified quorum for approval in General Meeting of matters such as:
2. Right of veto or requirement of qualified quorum for approval in Board of Directors of matters such as:
3. Right to appoint members to the Board of Directors, specifically when combined with veto rights over competitively strategic matters. 4. Right of veto over decisions related to investments, loans, contracts, and other transactions above certain values. 5. Right of veto over the approval of management reports, financial statements, and the appointment of independent auditors. |
Source: Prepared by the Reporting Commissioner’s Office
After systematizing the case law, the focus of the vote returned to the specific case to analyze whether the investment funds holding share ownership in the buyer and target company could be considered co-controllers of such companies. The analysis of the companies’ governance instruments revealed that the rights were not typical of mere protection of minority investment. Although the exact content of the clauses establishing the rights is confidential, it is possible to note that there were certain rights already recognized in CADE’s case law as capable of qualifying as shared control, such as (i) appointment of board members, (ii) existence of qualified quorum at the general meeting, and (iii) existence of qualified quorum at board meetings, which apparently were present in the specific case.
Thus, both Jusbrasil and Digesto were considered as belonging to economic groups of investment funds that met the revenue criteria provided in competition law. In this sense, the gun jumping violation was characterized. However, because the companies had reasonable grounds to understand that the transaction was not subject to mandatory notification, for not having to anticipate and comply with the expansive interpretation advocated by the General Superintendence, and acted in good faith by subsequently notifying the merger case to CADE, CADE’s Tribunal refrained from applying a pecuniary fine, exceptionally excluding the fine methodology provided for APACs in Article 22 of CADE Resolution No. 24/2019, based on the principles of reasonableness and proportionality.
The Commissioner also based its decision on the provision of Article 23 of the Introductory Law to the Brazilian Rules (LINDB), which provides that "an administrative, regulatory, or judicial decision establishing a new interpretation or orientation on a norm with indefinite content cannot be applied immediately or retroactively, imposing a new duty or new legal condition".
It is worth noting that, at the end of his vote, the Reporting Commissioner urged CADE’s Tribunal to review the criteria for identifying mandatory notification cases, with the purpose of providing more straightforward requirements and, consequently, simplifying and making the notification process more transparent, as well as reducing administrative costs and the risks of under-notification or over-notification.
The Commissioner also suggested amending CADE’s Resolution No. 33/2022 or developing a guideline on the scenarios requiring mandatory notification of transactions involving minority rights, as well as the parameters used by CADE for the analysis of these cases, based on jurisprudence, international best practices, and the specific challenges of the Brazilian market.
The Tribunal unanimously followed the Reporting Commissioner’s vote and decided to recognize the gun jumping violation committed by the investigated companies, exceptionally refraining from imposing the pecuniary fine provided for in Law No. 12,529/2011 due to reasonable controversy in the administrative precedents related to the case.
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[1] See §221 of Commissioner Victor Oliveira Fernandes’ vote in the Gun Jumping Investigation (APAC) No. 08700.000641/2023-83.
[2] This is a controversial point that was not addressed by CADE’s Tribunal. According to available documents on the case, the minority investor of Digesto holding a 20% equity stake (investment fund) sold its stake along with the shareholders owning 80% of the shares, through a single Share Purchase and Sale Agreement and Other Covenants, having acted as a contracting party.
