The General Superintendence of the Administrative Council of Economic Defense (Cade) established a new understanding in a recent decision, in line with two other precedents from the end of last year, regarding the turnover calculation applicable to economic groups when assessing whether a transaction is subject to mandatory merger filing with Cade.
According to the Brazilian Competition Law (Law No. 12,529/11), transactions that entail an economic concentration with effects in Brazil must be subject to Cade’s review and prior approval when one of the economic groups involved in the transaction has registered annual gross turnover or volume of sales in Brazil of at least BRL 750 million in the year before the transaction, and another group involved in the transaction has registered annual gross turnover or volume of sale in Brazil of at least BRL 75 million in the same period. The parties shall follow the criteria provided by Cade’s Resolution No. 02/2012 in order to identify which companies shall be considered as part of their economic groups.
In such context, it is important to determine when is the right moment to identify the companies of an economic group and, as a second step, calculate their turnover in the previous year. Should it be on the last day of the year before the transaction? On the transaction agreement signing date? Sometime before closing the transaction?
In the past, the turnover of an economic group was calculated based on its composition at the end of the year before the transaction. A few years ago, Cade’s General Superintendence had reviewed its interpretation and started to consider the composition of the economic group on the date of the transaction, i.e., the signing date of the agreement to be potentially notified to Cade. However, Cade’s General Superintendence has recently stated that the date of submission of the transaction to Cade is the relevant moment to be considered in order to identify the composition of the economic groups to then calculate their turnover.
Whereas, under the applicable rules, the notification may be submitted at any time before closing, it is necessary to be aware of situations in which the turnover threshold in the previous year is not met at signing but may be met before closing - either by the increase in turnover of companies that were already part of the economic group, or by the acquisition of new companies.
For instance, in a transaction between Group A and Group B with the signing in October 2021, both groups will consider their turnover on December 31, 2020. If Group A met the turnover of BRL 750 million, but Group B did not meet the turnover of BRL 75 million that year, the submission of the transaction to Cade is not required. However, if closing occurs only in February 2022, it is recommended to additionally check the economic groups’ turnover in 2021. If, throughout 2021, the companies that were part of Group B in 2020 increased their turnover or the parent of such group bought a new company whose turnover, added to the other companies of the group, reaches the threshold of BRL 75 million, the merger filing will be considered mandatory by Cade, according to the current understanding.
Thus, although the understanding of Cade’s General Superintendence may be questioned or even reviewed in future cases, it is recommended to carry out the assessment of the need to submit the transaction to Cade’s review both at signing and sometime before closing, if such measures do not take place simultaneously or in a short period of time.