Wednesday, 17 October 2012 (1 week ago) by Marieke Breijer

In the long run-up to completing their merger, Chilean airline LAN and Brazil’s TAM regularly hit the headlines for the external threats they faced in the process. Here Marieke Breijer looks at the core complexities that lawyers faced in the transaction that created Latin America’s largest airline.

One could be forgiven for mistaking LAN and TAM’s leading external lawyers for full-time employees of the airlines during their US$3.8 billion merger, given they dedicated almost two years to working alongside their in-house teams in order to create the world’s second-largest airline by market value. In June this year LATAM was born, after one of the most ambitious and innovative merger processes the aviation sector has ever seen.

The reasons behind the merger between Chile’s flag carrier LAN and Brazil’s national airline TAM were obvious: improved synergy, cost-saving, and an extended reach both in the number of customers and destinations, among other factors. Airlines around the world are looking to improve their business operations and customer offering through partnerships that are a cut above the code-sharing agreements and alliances already widely exploited, hence the significantly accelerated trend in airline consolidation over the last decade. Take the 2004 combination between Air France and Dutch airline KLM – creating the biggest carrier in Europe – and Delta Air Lines’ merger with Northwest Airlines announced in the US in 2008. Then, in 2011 British Airways combined with Spain’s Iberia, while other members of the Latin American aviation sector have embarked on the same path; Colombia’s largest airline Avianca merged with El Salvador’s Grupo TACA in early 2010 – just as the LAN-TAM deal was getting underway.

The lawyers working on the LAN-TAM deal like to think their transaction was in a league of its own. “This transaction sets a precedent and it undoubtedly will stand as a landmark in the regional expansion of Chilean business abroad,” says José Maria Eyzaguirre of Claro y Cía, counsel to LAN, adding that the deal’s greatest merit is that it represents the first truly cross-border merger in the aviation sector, between two companies with global reach. “This merger is a model to follow, not only in Chile, but, definitely, also the world over. The transaction has the beauty of satisfying both countries’ ownership restrictions on national airlines, which is really novel in the industry, and may even apply to other businesses with similar restrictions. Definitely that hasn’t been the case in any other airline transaction in the world.”

The Chilean carrier had toyed with the idea of a regional combination for several years. During its search for the best possible partner, all arrows gradually came to point in the same direction, and TAM soon became LAN’s prime target. Attracted by the carrier’s position as the main player in Brazil and further spurred on by other benefits it had to offer, LAN saw that TAM could be its ideal partner. Luckily, TAM was interested too, and the two companies started discussing the possibilities and potential structure of a combination.

The two airlines made the necessary calls to their legal teams. LAN instructed its long-time adviser Claro y Cía (which had helped identify TAM as the best match), with Eyzaguirre providing primary legal counsel to CEO Enrique Cueto Plaza, COO Ignacio Cueto Plaza and senior VP of strategic planning Roberto Alvo – the main team at LAN putting the merger together. Flávia Turci of Turci Advogados led the representation of TAM and its shareholders, having built a solid relationship with the controlling shareholders through working with them for more than 15 years. Both firms, and especially the lead partners, have been extensively credited for their pivotal roles in bringing the companies together. Based on recommendations from Claro, LAN also called in Sullivan & Cromwell LLP for US advice and Pinheiro Neto Advogados in Brazil, while TAM sought the advice of Clifford Chance LLP for US matters, Cariola, Díez, Pérez-Cotapos & Cía Ltda in Chile and Machado, Meyer, Sendacz e Opice Advogados and Barbosa Müssnich & Aragão in Brazil. General counsel for both sides also participated.

For all involved, it was evident from the start that this was going to be far more than a cookie-cutter deal. “I think in many ways this was even more complicated than the average, even by the standards of cross-border M&A [deals],” says Clifford Chance partner Anand Saha. “This was a very bespoke deal, tailored to reflect very particular requirements and commercial objectives.” For one, the companies were both publicly traded, locally and in the US, while also controlled by a main group of shareholders: TAM by the Amaro family, and LAN by the Cueto family. Added to that, due to the global nature of the aviation business, the merger also raised a barrage of international regulatory questions alongside the inevitable local antitrust investigations.

A common view
The exploratory talks between LAN and TAM focused on whether the companies would match: if they held common views of the business on the operational as well as on the commercial side. Once it was clear their interests were aligned, they formally started the combination process by signing a non-binding memorandum of understanding in August 2010, after which the lawyers’ attention turned to devising the legal structure – something that was more easily said than done.

If bringing together private and public components of two companies listed in three different markets wasn’t complicated enough, local Brazilian aviation regulation caused further complexities, requiring that at least 80 per cent of TAM remained under Brazilian control. This meant creating a merger structure that aligned the companies’ and shareholders’ economic interests while still satisfying ownership requirements.

Previous airline combinations provided inspiration to Claro and the team from LAN in their search for the perfect plan, which they then presented to the other lawyers and TAM. The legal engineering of the structure was done mostly by Claro, though Sullivan & Cromwell also played a major role. LAN’s Alvo especially credits Claro’s Eyzaguirre and Sullivan & Cromwell partner Duncan McCurrach as the “pillars of the transaction.

It was decided that LAN would absorb TAM via a share swap tender offer through which the Chilean airline needed the approval of at least 95 per cent of its shareholders. The lawyers created an elaborate acquisition scheme involving several holding companies, which, upon reaching the required number of participants in the tender offer in the US and Brazil, would allow the merged company to sufficiently separate TAM ownership and voting control, without affecting its overall global political and economic interests. Through the new ownership structure, LAN and TAM both hold 50 per cent voting power in the new company, while the Amaro family still holds 80 per cent of voting power over TAM.

Sullivan & Cromwell’s Sergio Galvis says devising the share swap took a lot of advance planning and research. “This was a hugely complicated, ambitious and strategic transaction between two sophisticated companies. The Claro team showed great insight in using the Chilean holding company, and that was really at the core,” he says, crediting Claro’s work in the deal as “very creative”, while also praising Pinheiro Neto (unable to comment on the transaction for this article) for the way in which they handled their duties, noting that the deal was a politically sensitive matter in Brazil.

Sullivan & Cromwell’s main role was to ensure the structure was compatible with New York law (under which all the documents are governed), and then implement the strategy in the US. “They [Claro] had an idea on deal structure and came to New York. As both companies were listed in the US, we had to handle that part,” says McCurrach, speaking of how his team was responsible for finding a way to allow US-based TAM shareholders to participate in the tender offer.

“Conciliating the tender offer requirements in accordance with US and Brazilian procedures provided for a very rich learning experience, says Eliana Chimenti, capital markets partner at Machado Meyer, who says the deal was so innovative that even the regulators learned new things. Galvis agrees the joint share swaps were difficult to organise and provided the firms with a mutual educational experience.

When the time came to present and negotiate the structure with TAM, Sullivan & Cromwell invited the parties and their representation to New York for a series of meetings, where the process of agreeing on the definitive agreements was aided by everyone being in the same place. “It was critical to get everyone in the same room, this could not be done by email or conference call,” says McCurrach. The combined brain power and stamina shown by the lawyers around the negotiating table helped when drawing up the merger documents, says Galvis, who added that “nothing is worse when you have good negotiations and then the drafts come back not reflecting the conversation.”

Turci, in charge of coordinating TAM’s legal and business consultants, personally negotiated the terms of the merger with LAN and its lawyers. She dedicated the majority of her time over the past two years to making sure the deal would preserve the commercial goals and efficiency of her clients’ company. She was the main point of contact in conversations with LAN regarding the corporate structure as well as the merged company’s corporate governance model, while Clifford Chance helped TAM with the US documentation and share exchange offer, mainly through São Paulo-based Saha, who had previously acted for TAM in several capital markets deals including its debut on the New York Stock Exchange.

Counsel to TAM

General counsel to TAM – Luiz Claudio Aguiar


Turci Advogados

Partners Flávia Turci and associates Carlos Fujita and Ana Matsuda

Machado, Meyer, Sendacz e Opice Advogados

Partners Antonio Corrêa Meyer, Carlos José Rolim de Mello, Raquel Novais, Fernando Tonnani and Eliana Chimenti, and associates Fabio Falkenburger and Alessandra de Souza Pinto

Barbosa Müssnich & Aragão

Partner Barbara Rosenberg and associates José Inácio de Almeida Prado Filho and Rafael Szmid


Clifford Chance LLP

Partners Anand Saha, Anthony Oldfield and Sarah Jones, and associate Nari Na


Cariola, Díez, Pérez-Cotapos & Cía Ltda

Partners Francisco Illanes, Juan Cristóbal Gumucio and Juan Pablo Orellana, senior counsel Pedro Deutsch, and associates Carolina Flisfisch, Agustín Fracchia, Claudia Méndez and Guillermo Frene.

(Latin Lawyer 17.10.2012)

(Notícia na Íntegra)