2014: A SURPRISING YEAR FOR MERGERS AND ACQUISITIONS, by Arthur B. Penteado and Vinicius Bernardes

The inventors’ perception for what will occur in the country and in the world is significantly reflected in the mergers and acquisitions market. When the outlook is positive and trends are of greater stability and security for those involved, the conclusion of a greater number of M&A transactions may be expected, especially if such a scenario is accompanied by good economic grounds.

CORPORATE AND M&A - Arthur B. Penteado and Vinicius Bernardes


The investors’ perception for what will occur in the country and in the world is significantly reflected in the mergers and acquisitions market. When the outlook is positive and trends are of greater stability and security for those involved, the conclusion of a greater number of M&A transactions may be expected, especially if such a scenario is accompanied by good economic grounds. In times of uncertainty, many choose to avoid making relevant decisions and seek to bargain values or grow organically by expanding their own businesses.

From this perspective, the unstable scenario and slowdown of the Brazilian market initially planned for 2014, coupled with possible negative economic and political effects arising from such events as the World Cup and presidential elections, anticipated a more pessimistic forecast both from investors and the market in general, for Brazilian M&A transactions.

Earlier this year, the expectation in the Brazilian mergers and acquisitions market was of a slightly greater number of transactions in the first six months, followed by a significant slowdown in the second half of the year, starting from the World Cup. 

However, according to recent numbers divulged by the Transactional Track Record - TTR, the results presented in the first semester exceeded the expectations for the first half of 2014. In the first quarter, for example, 167 transactions were announced in the country, involving more than US$20 billion (a value far above the roughly US$5.2 billion recorded in the same period in 2013). Between April and 

June, despite the drop in the number of reported transactions, the total value was about 40% higher than in the same period of 2013, involving approximately US$21.8 billion. It is important to highlight that M&A activities maintained their multi-sector characteristics, with greater impact on the information technology, financial and retail industries.

Despite the reduction in total operations as compared to 2013, the figures presented in early 2014 suggest a maintenance in the average transactions reported over the last four years in Brazil, which is around 784 annual operations. This forecast, of course, depends on atypical factors of 2014 and on the reaction of the players in this scenario. The forecasts, however, are optimistic.

Forecasts from international organizations for the second half of the year are also optimistic in relation to the global M&A market. Recent figures show that international operations involved US$1,571 billion in the first half of 2014, the greatest value in the period since 2007. Cross-border transactions stood out in this context, totaling, according to specialized surveys, US$245 billion only in the first semester (Thomson Reuters – Mergers and Acquisitions Review). In this context, pharmaceutical, medical and biotech sectors emerged as the most promising businesses, with transactions involving more than US$258 billion between January and July (Mergermarket – H1 2014 Global M&A Trend Report).

If, on one hand, at the beginning of the year the mergers and acquisitions market, especially from a domestic standpoint, aspired uncertainties, on the other, these uncertainties were not consistent with the good results in the first half of 2014. Depending on a less unstable economic and political environment and on market conditions more favorable to the conclusion of future M&A transactions, the volume and number of transactions will probably be even more significant in the second half of the year.

MINING - Flavia Möller and Andre Gomes

New mining regulatory framework and 2014 elections

Most likely, the new Mining Regulatory Framework will not be voted in 2014 and the upcoming elections have certainly contributed to this delay. Expected for more than five years, the new code for this sector covers certain sensitive aspects, on which those involved in the discussions, such as government authorities, mining companies and environmentalists, must still reach an agreement.

In June of last year, Bill No. 5,807/13 was submitted by the Executive Branch to replace the current Mining Code. At the end of 2013, the bill’s overseer, congressman Leonardo Quintão, presented a preliminary replacement text for the proposed bill, containing a series of changes to the draft initially submitted. In

April of this year, the final replacement text was finalized, providing, among other aspects, the creation of two new regimes for mineral usage, in addition to an increase in the rates of Financial Compensation for the Exploration of Mineral Resources (CFEM) and greater detail on the encumbrance of mining rights.

Regardless of whom it may be, the new leader of the Executive Branch shall have a direct influence in the processing speed and direction of the new Mining Code. While the new rules are not defined, the sector continues to operate. We may simply observe, for instance, the fact that Vale’s net profits have increased by 237% in relation to the same period last year. It will be interesting to see how the new political scenario will impact this matter.

LABOR – Carolina Tavares Rodrigues Davies and Murilo Caldeira Germiniani

The hidden impact of providing health insurance to employees in Brazil

In the past decades it became a market practice to offer private health insurance to employees, despite the inexistence of any statutory provision establishing such obligation. Once the employer decides to provide it, the provisions established by Law 9,656/1998 and Resolution 279/2011 of the Health National Agency, must be complied with.

According to such legislation, if the employer decides to attribute to its employees part of the monthly premium, they may be entitled to maintain their coverage after dismissal without cause or retirement, in the same conditions previously agreed, provided that they pay the entire monthly premium. Sometimes, the coverage may last for life!

But such possibility may affect the annual adjustment percentage of the monthly premium and increase the amounts disbursed by the employer, since (a) the monthly premium’s value is annually adjusted based on the risk profile of the insured group; (b) the higher the claims ratio is, the higher the risk profile of the group will be; and (c) if employees partially contribute to the monthly premium, more and more employees will eventually become entitled to maintain their coverage.

Thus, it is possible to conclude that more than superficially analyzing the shortterm direct costs and benefits related to the provision of health insurance, companies in Brazil should consider all legal alternatives to avoid the negative effect that the increase of the risk profile of former employees will cause in the annual adjustment of the monthly premium.

REORGANIZATION AND RESTRUCTURING – Gláucia Coelho and Renata Oliveira

Economic group and reorganization and bankruptcy law

The concept of economic group is not covered by the Reorganization and Bankruptcy Law (RBL). Therefore, the courts have started to judge all issues in this respect, whether by reason of a single petition for court reorganization filed by companies of the same group, even including foreign companies (court reorganization of OXG Group), or by virtue of an attempt of creditors or court receivers to, in case of bankruptcy of a given entity, extend the effects to third parties.

With regard to the example provided above, despite the Court of Justice of Rio de Janeiro (“TJRJ”) having permitted the existence of a single petition for court reorganization, it ordered each company to file its own reorganization plan to be voted by its respective creditors. Moreover, in spite of the absence of regulation in the RBL about transnational bankruptcy, the TJRJ authorized the participation of foreign companies, as explained in Litigation Issue of LEXpress, released on May, 2014.

In case of bankruptcy, case law has already consolidated the possibility of reaching, by piercing the corporate veil, extending the effects of bankruptcy or preliminary unavailability of assets, the assets of the controlling entities in case of bankruptcy of a controlled entity or existence of elements supporting corporate veil piercing (fraud to law, breach of contract, abuse of rights or misuse of legal identity)

This possibility is also defended by the courts as susceptible to occur without prior notice of the person to suffer the consequences of such decision. Without the possibility of exercising the previous right to full defense and adversarial proceeding in a specific action, a third party may be surprised with the preliminary unavailability of its assets, incidentally declared in a bankruptcy proceeding.

In addition, such measures have been determined without identifying the participation of each of the companies affected, thus hindering, for instance, the definition of the amount of the portion applicable to each one, and making the resolution of the case and the daily life of the third parties affected even more difficult, given that, for instance, an environment prone to the conclusion of agreements is not created.

Some cases are emblematic (i.e., Petroforte and Fazendas Reunidas Boi Gordo) where similar measures were adopted to affect third parties (offshore entities), without any apparent corporate connection with the bankrupt company.

In light of this scenario, we may conclude that, in transactions involving companies presenting financial difficulties, it is advisable to analyze the matter from not only the perspective of fraud to creditors and to execution proceedings, but also from the perspective of bankruptcy laws. Therefore, we recommend that the structure of the transaction be well outlined, based on a joint and deep evaluation of the various areas of expertise.