The Tribunal of the Brazilian Antitrust Authority (CADE) has recently made available an important decision that deals with the rules for defining the composition of economic groups. This definition is essential to calculate the gross revenues registered in Brazil by these groups and determine the need for prior filing of transactions with CADE.
The antitrust authority has also decided when to observe the rule on economic groups for companies or the rule on investment funds.
The case
The case referred to an investigation into the acquisition of Digesto by Jusbrasil. Both companies operate in the online legal information market. At trial, CADE’s Tribunal unanimously followed the vote of Reporting Commissioner Victor Oliveira Fernandes, deciding that the transaction was implemented without CADE’s prior authorization, a gun jumping violation, although it did not impose a penalty.
Conventional interpretation prior to the decision under analysis would define an economic group by including all ownership interests of at least 20% in companies. Furthermore, the applicable rule for investment funds would prevail whenever there were funds in the group structure.
According to the decision, however, the determination of the composition of an economic group must always start from the examination of the legal nature of the parties directly involved in the transaction.
As the parties in the case were companies, the Tribunal decided that the composition of economic groups should follow the specific rule applicable to companies. This decision contradicted CADE's General Superintendence, which had decided for the prevalence of the rule on investment funds, given the presence of two funds in the corporate structures of the companies directly involved in the transaction.
Rule on economic group for companies
The first step towards defining an economic group when a company is a party directly involved in the transaction is to identify the group of companies under common control to which that company belongs, according to the decision. This identification must consider the powers that indicate these control relationships, and not necessarily the ownership interest percentages involved.
Afterwards, one must identify companies in which these companies under common control hold 20% or more of the stock or voting stock.
Rule on economic group for investment funds
The economic group rule for investment funds only applies when a fund is a party directly involved in the transaction, according to the decision.
In this case, one must consider, on the one hand, the economic group of each unitholder that directly or indirectly holds a stake of at least 50% of the fund's units, individually or through a unitholder’s agreement; on the other hand, companies controlled by the fund and companies in which it holds, directly or indirectly, a stake of at least 20% of the stock or voting stock.
Thus, according to the decision, a fund must have control over a company directly involved in the transaction to be considered part of its economic group.
Common control vs. mere investment protection
The decision then structured CADE's understanding of the concept of “common control.” It identified the main rights attributed to minority shareholders that can constitute shared control from a competitive perspective by allowing interference in the business and management of the controlled company. This is the case of veto rights or qualified quorum to decide on the business plan, annual budget, the right to appoint members to the Board of Directors when combined with veto rights on competitively strategic matters, among others.
The decision also points to rights relating to the mere protection of investment, which do not imply control, such as veto rights or qualified quorum to decide on the approval of dividends, bankruptcy filing or reorganization petition, the right to appoint members to the Board of Directors when not combined with veto rights on matters competitively strategic, among others.
Case ruling
Even though the Tribunal found that a gun jumping violation occurred in this case, it did not fine the parties to the transaction given the existence of a reasonable controversy over the notification criteria applicable to the specific case. The Tribunal recognized that the parties had reasonable grounds to believe that the transaction was not subject to mandatory notification, repeating in this aspect a decision of CADE’s Tribunal of 2021 in another gun jumping investigation[1].
Due to the controversy, the decision also recommends a broad review of the notification criteria based on objective and quantitative criteria, especially for cases involving the rights of minority shareholders.
Given that this is a recent decision, with impacts on the interpretation of the rules on economic groups, and which recommends changing the specific regulation, TozziniFreire’s Antitrust Law team is closely monitoring the development of the topic with CADE and is readily available to answer any questions.
