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Bad Documents under an antitrust perspective in Brazil – Consequences and how to avoid their creation

The competition law (Law 12529/2011), in effect since May 29, 2012, brought about profound changes in the Brazilian competition system, particularly in merger control cases. These changes comprise the structural reform in Brazil's competition authority (the Administrative Council for Economic Defense, CADE, also currently known as the "New CADE"), new criteria for the notification of merger cases1, and the legal requirement for CADE's prior approval as a condition precedent for consummation of deals.

Business persons, lawyers and the New CADE authorities have been faced with challenges to keep up with those changes. Merger filings to New CADE now call for delivery of a wide range and robust volume of documents and information when compared to those under the previous system.

The volume of information and documents provided by the parties will depend on the complexity of deals from an antitrust perspective. In this respect, depending on the procedure to be adopted, there are two types of "notification forms". When it comes to the fast-track review procedure form (i.e. the form for non-complex deals that are likely to have minor potential to harm competition2, as set forth in the New CADE rules), in addition to submitting the relevant contracts, as already required under the former system, the parties must provide a "list of all other documents produced in connection with the deal".

The form to be completed if the deal falls within the ordinary review procedure, i.e. a complex deal likely to cause a more significant impact on the market3, goes much further and requires delivery of the following documents:

i. Copies of all documents prepared to evaluate or assess the proposed deal (in terms of market competition patterns, market share, competitors, projected sales growth rates, projected expansion to new geographic markets, and other significant competition matters);

ii. List of all other documents prepared in connection with the deal, such as input supply agreements, draft minutes of meetings concerning the deal, public offering documents sent over to the Brazilian Securities Commission (CVM), and other documents; and

iii. With respect to the activities carried out by the parties, they must submit all documents on the competitive positioning of the company and of its competitors; supply and demand conditions; dispute for clients; strategic behavior (price, sale, launching, innovation, entries/exits etc.); reporting on anticompetitive behavior of companies in the relevant market; effects on supply, demand, cost, price, product/service attributes caused by another directly and potentially competing product or service; industry estimations, market assessment studies; marketing report, business report, brand promotion plans and strategies, product positioning or other similar report; and strategic planning, business plan, expansion plan, downsizing plan, and any other similar plan. Under the previous law, the Brazilian competition authorities did not require such a type and range of documents.

This change, however, is in keeping with the practice adopted in more advanced jurisdictions, as it happens in the United States of America. In other words, where complex deals are involved, the parties must submit a wide range of documents on the deal and/or on the affected market, including information memoranda, presentations, e-mails, documents submitted to public bodies (such as the Securities and Exchange Commission - SEC) and other strategic planning and marketing documents. This also occurs in the European Union.

Within this scenario, companies, investment banks, external advisers and other agents involved must, especially in the course of negotiating M&A deals, be even more careful in drafting not only the relevant contracts, but also other documents substantiating the deal and the market involved.

Poorly written documents containing a language which defines market more restrictively or which defines market competitors improperly in a manner inconsistent with the truly existing competitive scenario, or otherwise containing expressions used oftentimes for marketing and promotion of the deal, suggesting, for instance, that this deal will "hamper competition" or will enable "price stabilization or increase" etc, may be viewed by the competition authorities as indications that the notified deal is likely to limit or lessen free competition, especially when considering that the parties themselves made this inference.

In addition, poorly written documents might increase the review timeline for mergers as a more detailed investigation will be required, strongly impacting upon the pre-merger approval mechanism introduced by the new law, more so when it comes to transactions actually falling within the meaning of non-complex deals.

Another risk involved in poorly drafted documents is to expose the parties to gun jumping issues. For example, contractual clauses that could be interpreted as indication of some integration between the parties prior to CADE`s approval or any type influence of one party over the strategic business aspects of the other party, could constitute gun jumping. Sanctions for gun jumping under the Competition Law may include a fine between R$ 60 thousand and R$ 60 million, the commencement of administrative proceedings and nullity of acts prior to CADE`s review4.

Finally, one cannot disregard the risk that poorly drafted documents may subject companies and individuals to investigations into potentially anticompetitive practices which may culminate in substantial penalties, in the administrative sphere (fines) as well as in the civil and criminal spheres. Moreover, one must take due account of questions involving disclosure of sensitive information pertaining to the parties or to the deal (even if the confidentiality of certain documents may be ensured by CADE under applicable laws).

In other jurisdictions, documents containing sensitive or doubtful wording were actually used by the competition authorities as indications that the notified deals would generate negative effects (this is illustrated by the US cases involving Whole Foods/Wild Oats; Office Depot/Staples; and AT&T/T-Mobile). In those deals, analysis of market-related matters conducted internally by the companies supported the competent authorities' conclusion that the deals were likely to limit competition in the markets involved.

What precautions should be taken in practice to avoid creating bad documents? First and foremost, preventive work (via compliance program) is essential to train executives and executive professionals of companies, investment banks and external advisers and consultants in general about the risks involved in poorly written communications. By doing so, companies can rest assured that all parties involved in a potential deal are aware that poorly drafted documents might impair the approval process of a certain deal or create (in more extreme circumstances) other contingencies arising out of potential investigations into practices in restraint of trade.

The involvement of a team of lawyers and economists knowledgeable in competition matters since the inception of negotiations, specifically in drafting strategic documents on market-related aspects of the deal, will ensure that the language of the documents offer a true picture of the market competitive conditions actually in place5.

The company must also establish a well-defined record-keeping policy in connection with retention of drafts, mark-ups and personal notes taken at meetings containing potentially ambiguous wording.

In conclusion, as a result of the change in merger filing criteria in Brazil, the implementation of the pre-merger review process, and the requirement for a large volume of documents on the deal and on the market involved, Brazil's competition authority has raised the bar for review of M&A deals, with greater focus on the "facts" potentially disclosed in the documents submitted by the parties (to the detriment of purely economic theories), in line with the merger review guidelines adopted in more advanced jurisdictions in this matter.

Shifting of this merger review focus exposes companies to greater risks, thereby calling for a stricter control over the whole process of drafting documents both by in-house professionals and external advisers/ consultants. ***


  1. Deals must be notified for CADE's prior approval if, on a cumulative basis: (i) at least one of the groups involved in the deal has posted, on the latest balance sheet, an annual gross turnover in Brazil that is equal to or above R$ 750 million, in the year before that of the deal; and (ii) at least another group involved in the deal has posted, on the latest balance sheet, an annual gross turnover in Brazil that is equal to or above R$ 75 million, in the year before that of the deal. In these events, the parties cannot consummate/close the deal until CADE's clearance.
  2. They mainly comprise deals not creating market concentration or where horizontal concentration is below 20% of a certain relevant market and/or vertical integration is below 30%.
  3. For instance, deals resulting in market concentration of 20% or more of a certain relevant market.
  4. In this respect, CADE has recently issued some guidelines on gun jumping in an attempt to lay down rules to avoid gun jumping and reduce the uncertainly created in the market.
  5. Phrases and expressions causing "impact" and aggressive marketing language, such as "dominate", "control", "monopo¬lize," must be used carefully. Some precaution must also be taken about using the word "market" incorrectly, when actually intending to describe sales of a certain product, a business unit or a market segment and not a relevant market as such is defined by the competition authorities. This generally creates overestimated market shares that are unrelated to the competitiveness in fact existing in a given market.