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Public M&A
2019
Contributing editor
Alan M Klein
© Law Business Research 2019
Publisher
Tom Barnes
tom.barnes@lbresearch.com
Subscriptions
Claire Bagnall
claire.bagnall@lbresearch.com
Senior business development managers
Adam Sargent
adam.sargent@gettingthedealthrough.com
Dan White
dan.white@gettingthedealthrough.com
Published by
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information provided was verified between
February and April 2019. Be advised that
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© Law Business Research Ltd 2019
No photocopying without a CLA licence.
First published 2018
Second edition
ISBN 978-1-83862-110-0
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Tel: 0844 2480 112
Public M&A
2019
Contributing editor
Alan M Klein
Simpson Thacher & Bartlett LLP
Lexology Getting The Deal Through is delighted to publish the second edition of Public M&A,
which is available in print and online at www.lexology.com/gtdt.
Lexology Getting The Deal Through provides international expert analysis in key areas of
law, practice and regulation for corporate counsel, cross-border legal practitioners, and company
directors and officers.
Throughout this edition, and following the unique Lexology Getting The Deal Through format,
the same key questions are answered by leading practitioners in each of the jurisdictions featured.
Our coverage this year includes new chapters on Egypt and Thailand.
Lexology Getting The Deal Through titles are published annually in print. Please ensure you
are referring to the latest edition or to the online version at www.lexology.com/gtdt.
Every effort has been made to cover all matters of concern to readers. However, specific
legal advice should always be sought from experienced local advisers.
Lexology Getting The Deal Through gratefully acknowledges the efforts of all the contribu-
tors to this volume, who were chosen for their recognised expertise. We also extend special
thanks to Alan M Klein of Simpson Thacher & Bartlett LLP, the contributing editor, for his assis-
tance in devising and editing this volume
London
April 2019
Reproduced with permission from Law Business Research Ltd 
This article was first published in June 2019
For further information please contact editorial@gettingthedealthrough.com
www.lexology.com/gtdt	 1
© Law Business Research 2019
Public M&A 20192
Contents
Global overview 5
Alan M Klein
Simpson Thacher  Bartlett LLP
Franchise MA 7
Edward (Ned) Levitt
Dickinson Wright LLP
Cross-border MA: The view from Canada 11
Ian Michael
Bennett Jones LLP
Bermuda13
Stephanie P Sanderson
BeesMont Law Limited
Brazil18
Fernando Loeser, Enrique Tello Hadad, Lilian C Lang and Daniel Varga
Loeser, Blanchet e Hadad Advogados
Canada25
Linda Misetich Dann, Brent Kraus, John Piasta, Ian Michael,
Chris Simard and Beth Riley
Bennett Jones LLP
China33
Caroline Berube and Ralf Ho
HJM Asia Law  Co LLC
Colombia39
Santiago Gutiérrez, Juan Sebastián Peredo and Mariana Páez
Lloreda Camacho  Co
Denmark45
Thomas Weisbjerg, Anders Carstensen and Julie Høi-Nielsen
Mazanti-Andersen Korsø Jensen Law Firm LLP
Egypt52
Omar S Bassiouny and Mariam Auda
Matouk Bassiouny
England and Wales 57
Sam Bagot, Matthew Hamilton-Foyn, Dan Tierney and Ufuoma Brume
Cleary Gottlieb Steen  Hamilton LLP
France66
Anya Hristova and Océane Vassard
Bersay  Associés
Germany75
Gerhard Wegen and Christian Cascante
Gleiss Lutz
Ghana84
Kimathi Kuenyehia Sr, Sarpong Odame and Kojo Amoako
Kimathi  Partners, Corporate Attorneys
India91
Rabindra Jhunjhunwala and Bharat Anand
Khaitan  Co
Ireland100
Madeline McDonnell and Susan Carroll
Matheson
Italy111
Fiorella Federica Alvino
Nunziante Magrone – Law Firm
Japan118
Sho Awaya and Yushi Hegawa
Nagashima Ohno  Tsunematsu
Latvia126
Gints Vilgerts and Vairis Dmitrijevs
Vilgerts
Luxembourg131
Frédéric Lemoine and Chantal Keereman
Bonn  Schmitt
Malaysia137
Addy Herg and Quay Chew Soon
Skrine
Mexico143
Julián J Garza C and Luciano Pérez G
Nader, Hayaux y Goebel, SC
Netherlands148
Allard Metzelaar and Willem Beek
Stibbe
North Macedonia 154
Emilija Kelesoska Sholjakovska and Ljupco Cvetkovski
Debarliev, Dameski  Kelesoska Attorneys at Law
© Law Business Research 2019
Contents
www.lexology.com/gtdt	 3
Norway161
Ole Kristian Aabø-Evensen
Aabø-Evensen  Co Advokatfirma
Poland174
Dariusz Harbaty, Joanna Wajdzik and Anna Nowodworska
Wolf Theiss
Qatar181
Faisal Moubaydeen
Dentons
Romania186
Anda Rojanschi, Adina Oprea and Alexandra Vaida
DB David și Baias
Russia195
Vasilisa Strizh, Dina Kzylkhodjaeva, Philip Korotin,
Valentina Semenikhina, Alexey Chertov, Dmitry Dmitriev
and Valeria Gaikovich
Morgan, Lewis  Bockius LLP
South Africa 202
Ezra Davids and Ian Kirkman
Bowmans
Switzerland211
Claude Lambert, Reto Heuberger and Andreas Müller
Homburger AG
Taiwan220
Yvonne Hsieh and Susan Lo
Lee and Li, Attorneys-at-Law
Thailand225
Panuwat Chalongkuamdee, Akeviboon Rungreungthanya
and Pratumporn Somboonpoonpol
Weerawong, Chinnavat  Partners Ltd
Turkey232
Noyan Turunç and Kerem Turunç
TURUNÇ
United States 239
Alan M Klein
Simpson Thacher  Bartlett LLP
Vietnam245
Tuan Nguyen, Phong Le, Hai Ha and Huyen Nguyen
bizconsult Law Firm
Zambia253
Sharon Sakuwaha and Situlile Ngatsha
Corpus Legal Practitioners
© Law Business Research 2019
www.lexology.com/gtdt	 5
Global overview
Alan M Klein
Simpson Thacher  Bartlett LLP
If MA activity in 2017 was a complicated story, 2018 was not much
simpler. Globally, activity levels overall continued to be strong, remaining
comparable to, or improving on, healthy 2017 levels in many respects.
While major regions such as Europe and the US saw continued growth
over 2017 volumes, certain other regions such as Latin America regis-
tered declines in activity. The total value of announced deals last year
was US$3.9 trillion according to Bloomberg, representing a 15.9 per cent
increase from the previous year. Despite a substantially increased total
value, however, 2018 saw a decrease of approximately 8.5 per cent in
the number of deals as compared to 2017. Notably, 2018 marked the
fifth consecutive year in which MA activity has broken US$3 trillion.
This high level of MA activity was sustained despite increased global
geopolitical uncertainty, including the midterm congressional elections
in the US, continued uncertainty with respect to Brexit and several pres-
idential elections in Latin America. Global MA activity in the first half of
2018 sustained the momentum imparted from the fourth quarter of 2017
but began to slow during the second half of 2018, decreasing markedly
during the fourth quarter when it declined by 5 per cent against the
previous quarter and registered the slowest period since the second
quarter of 2017. Each of the five largest deals in 2018 were announced
in the first half of the year.
The number of blockbuster deals remained strong, increasing from
three deals announced in 2017 exceeding US$50 billion in value to five
such deals in 2018, including Takeda Pharmaceutical’s US$80.9 billion
acquisition of Shire Plc, Cigna’s US$68.4 billion acquisition of Express
Scripts, Energy Transfer LP’s US$59.3 billion merger with Energy
Transfer Partners, T-Mobile’s US$57.8 billion proposed merger with
Sprint and Comcast’s US$50.7 billion acquisition of Sky. More gener-
ally, high-dollar deals dominated compared to 2017, with 36 deals with
announced values in excess of US$10 billion in 2018 – six more than
were announced in 2017 – and deals with announced values in excess
of US$1 billion comprising 61.2 per cent of total deal activity in 2018. As
noted above, this increase in MA volume and mega-deals in 2018 was
coupled with a decrease of approximately 8.5 per cent in the number
of total deals announced worldwide in 2018 as compared to 2017,
reflecting increased activity in the bulge bracket.
Globally, private equity buyouts in 2018 continued to grow,
accounting for 10 per cent of all 2018 MA activity and representing
increases of 29 per cent in value and 4 per cent in the number of
deals, respectively, from 2017; these numbers represent the strongest
year for private equity buyouts in over a decade. Bloomberg reported
regional increases in private equity MA activity in 2018 of 15.3 per cent,
14.2 per cent and 4.7 per cent in the American, EMEA and APAC markets,
respectively. The continued availability of low interest rates and large
corporate cash reserves continued to foster positive conditions for
private equity MA activity in 2018.
The top industry in terms of global MA activity for 2018 remained
the financial sector with US$862.9 billion in announced transactions,
which accounted for 21.6 per cent of deal value in 2018, followed
by consumer non-cyclical (19.8 per cent), energy (11.2 per cent),
communications (10.9 per cent), industrial (10.1 per cent), technology
(9.1 per cent), consumer cyclical (8.4 per cent), basic materials (4.4
per cent), utilities (4.2 per cent) and diversified (0.1 per cent). Cross-
border MA deals reached 38.9 per cent of total MA value in 2018,
surpassing 2014’s previous high of 37.8 per cent while also representing
an increase of 32 per cent compared to cross-border volume in 2017.
By region the Americas continued to lead the global MA market
in 2018 with US$2.4 trillion in activity from 19,249 announced trans-
actions, representing a 25.6 per cent increase in total volume, as
compared with 2017. The US accounted for 43 per cent of the global
value with announced deals worth US$1.5 trillion, increases of 1.4 and
15.4 per cent, respectively, from 2017 and roughly on a par with 2016
levels. Eight of the 15 largest transactions announced in 2018 involved
US targets and nine of the 15 also involved US acquirers. The top three
sectors leading the US market included energy and power, high tech-
nology and healthcare, each of which accounted for 23.6 per cent, 18.8
per cent and 12.5 per cent of the market respectively. Canadian activity
also saw a notable increase, with the US$2.75 billion in announced value
representing a 15.3 per cent increase over 2017 levels. Latin American
2018 total deal value, however, dropped by 25.3 per cent compared to
2017, according to Mergermarket.
MA activity in the Asia-Pacific region posted a notable decline in
volume of 4.3 per cent against 2017 totals, dipping under US$1 trillion to
US$950.4 billion and representing the slowest annual period in the past
three years. Although the US$56.1 billion in China inbound MA repre-
sented a 23.3 per cent increase compared to 2017 and also registered
as the highest amount ever achieved, outbound China activity continued
its slide from 2017 as it fell to US$116.6 billion, a decrease of 5.3 per
cent against 2017 levels. The continued decline in US–China activity was
particularly noteworthy, with US inbound activity from China tumbling
from US$55.3 billion in 2016 to US$8.7 billion in 2017 and even further
to under US$3 billion for 2018, representing annual declines of 94.6 per
cent and 65.8 per cent respectively.
The European MA market, like its American counterpart, saw
deal volume increase in 2018 against a falling deal count, with volume
rising by 18.8 per cent for 2018 to a total of US$983.8 billion. Although
Europe’s 2018 total share of MA value remained comparable to 2017
at 28 per cent, the second half of the year saw MA value fall drasti-
cally by 52.8 per cent in the face of continued uncertainty over Brexit.
Despite this notable slowdown, private equity activity remained strong
in Europe, increasing by 14 per cent over 2017 with average premiums
reaching 26.2 per cent.
Despite the slide in the second half of 2018, the outlook on
deal activity in 2019 is more optimistic than that of the prior year.
About 76 per cent of executives at US-headquartered corporations
and 87 per cent of leaders at domestic-based private equity firms
expect greater deal flow in 2019, compared with 68 per cent and
76 per cent, respectively, for the same time last year, according to
Deloitte. Furthermore, 70 per cent anticipate the size of transactions
in 2019 to increase. Despite evidence of fewer worries regarding global
© Law Business Research 2019
Global overview	 Simpson Thacher  Bartlett LLP
Public MA 20196
economic uncertainty, capital market volatility and deal valuation, there
has been an increase in perceived risks because of business legisla-
tion, interest rate increases, anti-trust issues and activist shareholders.
Additionally, continued uncertainty regarding global trade and tariffs
have both registered as having negative impacts on prospective deal
making. Even so, corporate cash reserves remain healthy with holders
indicating a willingness to put these resources to use, and significant
MA activity in 2019 appears likely to continue at a healthy clip.
For over 15 years, our predecessor publication, Getting the Deal
Through – Mergers and Acquisitions, and now this title, has sought to
provide information of use to practitioners and clients around the world.
The pace of the globalisation of the MA economy has far outstripped
what anyone could have predicted. In that time the global economy has
gone through several cycles and suffered cataclysmic reverses and
huge booms. We hope throughout that time and for some time to come
that this publication has been and will continue to be a resource of great
use to those who seek it out.
© Law Business Research 2019
www.lexology.com/gtdt	 7
Franchise MA
Edward (Ned) Levitt
Dickinson Wright LLP
Introduction
Acquisitions of other businesses, to strategically grow an existing busi-
ness or as a financial investment aimed at earning a good return, have
been around since the beginning of modern commerce. However, histor-
ically, franchise companies grew organically, with traditional financing,
as needed. Exit strategies for the entrepreneur-franchisor were often
very low on the strategic plan. Today, with the increasing number of
boomer-franchisors heading for retirement, the amazing growth of the
franchise sector, the acceptance of franchising as a viable business
model, a great deal of under-deployed capital waiting on the sidelines
for good targets and more and more examples of successful franchise
system growth, it is no wonder that we are witnessing today an incred-
ible increase in franchise mergers and acquisitions. Adding to these
factors is the growth of private equity pools of money and the realisa-
tion by these funds that franchising presents an excellent investment
because of predictable and steady cash flow through royalties, great
leverage from deployed capital and existing assets and almost unlimited
possibilities for rapid growth (domestic and internationally).
The size and sophistication of some of these franchise systems
and the transactions that evolve are impressive and often rival the
traditional businesses as to scope and complexity. Certainly, many of
the issues, challenges and approaches are the same in franchise and
non-franchise MA transactions. However, for a variety of important
reasons, franchise MA has an additional layer of complexity and risk.
Franchise variables
For the uninitiated, franchising might appear fairly uniform and uncom-
plicated in an acquisition, but for the knowledgeable, franchising is
multifaceted and nuanced in the extreme. MA in franchising can
be quite different if: the system is public or private, large or small,
provides services or products, the franchisees have multiple units or
multiple brands, the franchisor has expanded through master fran-
chising or, perhaps, the seller is a large master franchisee itself within
a broader system.
It is rare for a franchise system to have a lot of hard assets, such
as real estate or valuable equipment, even if it has a high valuation. The
value of the system resides primarily in its brand, franchise agreements
with franchisees and the relationship between the franchisor and the
franchisees. The correct value of the system and how the acquisition is
executed needs to take into account the strength, durability and trans-
ferability of these assets. This leads to a unique set of due diligence
issues and choices and, while proper due diligence is important in any
acquisition, it is critical in a franchise acquisition.
The acquisition process
If, as is often the case, a franchise acquisition commences with a letter of
intent type document, an interesting question arises as to whether the
franchisees should be informed about the sale intention at that stage.
There is no legal requirement to do so and most advisors would argue
that, at the letter of intent stage, completion is too uncertain to inform
the existing franchisees. However, if the franchisor does enter into such
a letter of intent it is a strong possibility that this would constitute a
material fact requiring disclosure to any prospective franchisees, if
the prevailing franchise legislation requires such disclosure. Upon the
signing of a binding acquisition agreement, the argument that disclo-
sure is required for prospective franchisees gets more compelling, but
not with respect to existing franchisees. Some franchisors opt to place
a moratorium on new franchise sales during a system sale process
because of this issue. Query what a franchisor should do, if, during a
sale process, disclosure is required because an existing franchisee is
selling its business to a new franchisee or an existing franchisee is
renewing its franchise agreement.
The acquisition agreement
In addition to the usual provisions of an acquisition agreement, the fran-
chise acquisition document will contain a number of specific franchise
oriented provisions. The nature and extent of these types of provisions
will encompass some or all of the following:
•	 the existence of various forms of the system franchise agreements;
•	 a description of the types of franchise arrangements in use in the
system, i.e. area development, master franchise, area representa-
tive, licensing, etc;
•	 the existence of any franchisee associations or councils;
•	 any existing claims by franchisees or facts upon which a claim by
a franchisee is likely;
•	 ongoing litigation, arbitration or mediation;
•	 the status of all leases and subleases;
•	 compliance with all franchise specific statutes, with particular
emphasis on franchise sales during any period of franchisee
rescission rights;
•	 access to all franchise agreements and franchise disclosure
documents;
•	 the economic performance of franchisee operator units and corpo-
rate units;
•	 the status and performance of any existing marketing fund;
•	 strength, durability and suitability of any supply chains;
•	 holdbacks for representations and warranties regarding possible
franchisee disputes.
Due diligence
As mentioned above, while the conduct of thorough due diligence is
important in the acquisition of any business, it is particularly important
in the acquisition of a franchise system. This is so because of the fact
that so much of the value rests on the relationship with the franchisees,
the ability of the franchisor to support the franchisees in the system and
to protect the brand.
At the pre-contractual stage of an acquisition, the acquirer is free
to approach any of the system franchisees, in any manner desired, to
‘take the temperature’ of the system. In order to avoid creating prob-
lems for the existing franchisor, this could be done through professional
© Law Business Research 2019
Franchise MA	 Dickinson Wright LLP
Public MA 20198
contractors or investigators in an innocuous way. Once the existing
franchisor/franchisee relationship is determined, the acquirer could
decide to end its pursuit of the acquisition or to shape its offer to take
that relationship into account. For example, even if the relationship is
troubled, the acquirer might still want to acquire system, at the right
price, in order to solve the problems as the ‘white knight’. This type of
acquirer is often referred to as a ‘strategic purchaser’; being an existing
franchisor of a competitive franchise system or a key supplier to the
system. Financial acquirers (those interested only in a financial return
from the system) are also interested in this critical relationship, but
are less likely to conclude the acquisition if they sense trouble in the
relationship between the franchisor and its franchisees. Whenever or
however the existing franchisees in the system are being approached, it
is valuable to engage with franchisees who have been in the system for
variety of time periods, as this will provide the acquirer with a picture of
the evolution of the system and whether or not the system is trending
up or down.
Some of the typical areas for due diligence, relate to the finan-
cial performance of the franchisor and its franchisees, the content of
all franchise agreements and leases, the status of any marketing fund,
the condition of all accounting and computer systems and the status
of all intellectual property. In addition, however, there are some very
important, but less common due diligence areas an acquirer of a fran-
chise system should consider. For example, what the relationship is like
between key management personnel and the franchise community. If
it is not a good one, then the acquirer will need to be able to readily
replace such people. On the other hand, if the relationship is very good,
then the acquirer will want to know what the likelihood is they can be
retained after the acquisition is completed. Another is the timing of fran-
chise sales. If too many franchises are sold in too short a period of time,
it may indicate trouble in the future because all franchisors have to be
able to ‘service what they sell’ and a quality franchise culture takes time
to grow without the pressure of a constantly and rapidly expanding fran-
chisee population. Conversely, if too many franchises are being resold
by existing franchisees, there may be trouble lurking in the system.
Also, a thorough analysis of what the franchisor spends on site selec-
tion, franchisee selection, initial franchisee training and support will be
very revealing about the health and viability of the system. Franchise
systems that grow quickly and without sufficient resources being
deployed in these very crucial areas may present as very successful on
the surface, when there is really a lot of rot at the core.
Size of the target system
The size of the target system will have a significant impact on many
aspects of an acquisition. The most obvious being the price paid, but
also the need for more or less due diligence and how much money
needs to be spent on it. When the system is large, there may not be
enough time, money and manpower to review all of the existing docu-
mentation. The approach then might be to set up samples of categorised
agreements (ie, the forms of franchise agreement that existed as the
system grew through various stages). Then the task would be to have
a clear and complete list of any special arrangements made with any
and all franchisees. Where the franchisor has expanded through large
franchisee operations such as area developers or master franchisees, it
will be necessary to conduct due diligence on these large franchisees.
Where the franchise system is more modest in size, the task of
reviewing all documentation is more feasible, but the need to examine
the relationship between management and the franchisee community
is more critical. Additionally, with the smaller systems, mere guaran-
tees of individuals for representations and warranties in the acquisition
agreement may not be sufficient comfort for the acquirer and consid-
eration might need to be given to actual holdbacks of a portion of the
purchase price.
Assessing revenue potential
The most obvious and customary source of revenue for a franchisor
are the royalties paid by the franchisees on (usually) their gross
revenue. The evaluation of the strength of this revenue stream, absent
widespread discontent by franchisees, is relatively easy for a prospec-
tive acquirer. More difficult is the evaluation of supplier rebates, the
predictability of which rests on the policies of the suppliers and the
marketplace factors such as competition, quality of goods and changes
in consumer tastes. Similarly, if the franchisor is relying significantly
on revenue from landlord incentives, shifting economies may put such
revenues streams at risk.
Franchise agreements
At the heart of every franchise system are the existing franchise agree-
ments. The content and quality of these agreements, from the point of
view of the acquirer, are key in assessing the acquisition and setting
a price that makes sense. This is true whether or not the acquirer
intends to make changes to the system or how it runs or not. Even If
the acquirer is going to continue running the system as was done in the
past, certain provisions of the franchise agreements are necessary to
allow the system to keep pace of inevitable changes in customer prefer-
ences, technology and demographics to name a few.
Term and renewal
Ignoring other provisions in a typical franchise agreement, which
require the franchisee to keep the unit up to date, often renewal time
is the best opportunity to have franchised units in the system updated
and refurbished. Usually, franchisees who have simply lost their drive
or behave badly, but not in breach of their agreement, cannot be termi-
nated. The only way to remove them from the system, and, therefore,
improve the overall performance of the system, is to not renew them
when the initial term and all renewal terms have ended.
The right of the franchisor to sell
While it is usual to find a clause in a typical franchise agreement that
the franchisor is at liberty to assign the franchise agreement without
the consent of the franchisee and without any conditions, that provision
must be checked early in the process. Otherwise the acquisition may
not be doable.
Changes to the system
Particularly for strategic acquirers, who might be competitors, suppliers
or others who want to bring about a lot or a little change to the target
system, it is very important that the franchise agreements allow the
franchisor to revise how the franchised business is run, what products
and services are offered to the customer and what brand the franchisee
must operate under. While such a provision will not give the franchisor
a complete free hand to make such changes, without such a provision,
any change will be impossible.
Territorial rights
It is not unusual for new franchisors to grant too large territories to
their initial franchisees or to grant rights of first refusal on contiguous
territories to jump start the growth of the system. The acquirer may
then be saddled with some unreasonable obstacles to expanding the
system to its maximum size. If the acquirer is a competing system and
there is overlap in existing territories of franchisees in both systems, the
acquirer will have a business and possibly a legal problem, depending
upon the language of the franchise agreements.
Assignment rights of the franchisee
In order to control who can be a franchisee in a system, it is usual for a
franchise agreement to have extensive language regarding assignment
© Law Business Research 2019
Dickinson Wright LLP	 Franchise MA
www.lexology.com/gtdt	 9
of the agreement. This type of provision usually gives to the franchisor
the right to approve the assignee and the right to require an update
to the unit. It will also usually require that there are no breaches to
the franchise agreement and that the franchisee is up to date on all
payments owed to the franchisor. To the extent this type of clause is
absent or weak, it would affect the value of the system and the acquir-
er’s ability to grow the system well.
Guarantees
It is very common to allow franchisees to purchase the franchise
through a corporation, but then it is equally common to require the
shareholders of the corporation to guarantee all of the obligations of
the corporate franchisee under the franchise agreement. Without such
guarantees, the ability of the franchisor to control the system can be
significantly diminished.
Termination rights of the franchisor
As to substance and procedure, the events of default by the franchisee
should be clear and extensive in a well drafted franchise agreement.
Otherwise, the acquirer may be saddled with poor performing fran-
chisees and a deteriorating system. Post termination, there should be
an enforceable non-competition covenant on the part of the franchisee.
Intellectual property
By far, the most important asset of a franchise system, after the franchise
agreements and franchisor/franchisee relationship, is the intellectual
property of the franchisor. Foremost among this type of property are
the system trademarks. The franchisor should ascertain that the trade-
marks are still viable in the marketplace, are owned by the franchisor
outright, transferable, registered in all jurisdictions where the system
operates and registerable in any jurisdiction the acquirer intends to
expand the system.
These days, important intellectual property of a franchisor extends
to copyright in software, know-how, operating manuals and business
systems. Further, with the increasing importance of the internet in
markets all around the world, the ownership of domain names and
social media sites is a key factor in any acquisition of a franchise system.
Operating manuals
The operating manual for the franchise system is a very important tool
and asset of the franchise system. Its value, both monetarily and practi-
cally, increases with its effectiveness and quality. If the system operates
in non-English speaking countries and has good translations of the
English version, then there is added value for the acquirer.
However, operating manuals can also present or contribute to legal
problems. For example, the topic of joint employer among franchisors
and their franchisees has recently received a lot of attention from the
courts and regulators. Inevitably, an examination will be made of the
system operating manual in any proceeding to ascertain what control
the franchisor exerted over the franchisee’s hiring processes. Similarly,
the operating manual can create issues regarding human rights legisla-
tion and in other areas of regulation and vicarious liability.
Needless to say, the operating manual should be carefully scruti-
nised on any acquisition of a franchise system.
Advertising funds
One of the great attractions of operating as a franchisee is the opportu-
nity to pool funds with the other franchisees to increase the advertising
and marketing power of the entire system. Having said that, one of the
most common areas of disputes in franchising is the advertising fund
and how it is administered. Any potential acquirer of a franchise system
is well advised to examine the structure, usefulness, administration and
franchisee attitudes towards such a fund.
Such an examination would likely entail:
•	 a market study to ascertain the effectiveness of the system
marketing efforts;
•	 a thorough review of the receipts and expenditures of the fund over
several years, including any money charged by the franchisor to
the fund; and
•	 projections of the adequacy of the required franchisee contribu-
tions in the future.
Franchisee associations and councils
Franchisee associations and councils can be a blessing or a curse, or
completely irrelevant to the operation of the franchise system. However,
a prospective acquirer of a franchise system, besides obtaining repre-
sentations about the franchisor’s knowledge of the formation or intended
formation of any such franchisee groups, should communicate with the
leadership of the group and examine the minutes of their proceedings
in recent times. At the appropriate time, the acquirer will want to forge
a good relationship with the group and use it in the most effective ways.
Regulation
Today we are witnessing a steady growth of franchise specific regula-
tion and other regulation which affects franchising, such as business
opportunity laws, agency laws and licensing laws. Some regulation is
heavy in presale disclosure, some regulates the relationship between
the franchisor and the franchisee and some requires the approval of a
government body before a franchise sale can be made.
Once it is ascertained in what jurisdictions the franchisor operates,
then the appropriate professional in each jurisdiction should be selected
to review compliance on the part of the franchisor with the local laws
that govern or influence franchising. Where compliance is flawed or
questionable, either the franchisor should remedy the flaw, if possible,
or some price adjustment or holdback should be instituted to cover the
acquirer’s risk.
Getting comfortable in this area is not easy. For example, it is not
just the content of say a disclosure document that should be checked
for accuracy, but the procedures behind the delivery of the document
should also be examined.
Technology
It is difficult these days to keep up with the rapidly changing technology
that affects our businesses and our daily lives. From the point of view
of the acquirer of a franchise system, it is important to ascertain the
adequacy of the technology employed in the operation of the system
or, more realistically, to ascertain how quickly the technology will
become obsolete.
Additionally, cybersecurity is become a massive problem for all
businesses and institutions and franchise systems are no exception. As
a starting point, the acquirer will want to be assured of the system’s
compliance with the various privacy regulations or make provision to
rectify any deficiencies.
Conclusion
Much of the same considerations, requirements and issues in MA
transactions with businesses generally apply when an entire franchise
system is acquired. Overlaid on all of that is the added franchise specific
considerations, issues and challenges. Most importantly, there is the
reality that the franchisor/franchisee relationship is at the heart of
any successful franchise system and, in an acquisition of the system,
preserving and, hopefully, enhancing that relationship is key. This leads
to the reality that how something is done is equally important as to
what is done. Further, the ability to zero in on the true state of affairs in
a targeted franchise system is more challenging than would be the case
in the acquisition of another type of business. Finally, an acquirer has to
© Law Business Research 2019
Franchise MA	 Dickinson Wright LLP
Public MA 201910
struggle with the legal framework of the business being franchised and
the laws that govern franchising specifically.
It is impossible to include, in just one chapter, all of what needs to
be known in the acquisition of a franchise system. However, it is hoped
and intended that this chapter provide the reader with some valuable
insight and tools to assist in the task.
Edward (Ned) Levitt
nlevitt@dickinsonwright.com
199 Bay Street, Suite 2200
Commerce Court West
Toronto, ON M5L 1G4
Canada
Tel: +1 416 646 3842
Fax: +1 844 670 6009
www.dickinson-wright.com
© Law Business Research 2019
www.lexology.com/gtdt	 11
Cross-border MA: The view
from Canada
Ian Michael
Bennett Jones LLP
Canadian MA by the numbers
To understand Canadian MA market statistics better one should appre-
ciate the relatively small number of large and domestic acquisition
targets. To illustrate this feature, compare the headline MA statistics
for 2018 globally against those for Canada. In 2018, worldwide MA
activity totalled US$4 trillion, representing an increase of nearly 20 per
cent compared to 2017 global deal value. By number, worldwide deal
count actually declined 8 per cent as compared to 2017, a three-year
low in fact. These measurements alone highlight the increasing signifi-
cance of mega and large deals in global MA activity. When you contrast
those global statistics with 2018 deal activity in the Canadian market, a
different, and opposite, theme emerges. In 2018, the total announced
Canadian deal value decreased slightly by 2 per cent from US$253
billion in 2017 to US$247 billion. However, Canadian MA transactions
by number announced in 2018 rose to a new annual record high of 3,415
transactions, an increase of 14 per cent as compared to Canadian MA
transactions (any Canadian involvement) announced in 2017.
The opposite year over year directional changes in the Canadian
MA market as compared to the global MA market by way of deal
count and deal value should not surprise Canadian MA market partici-
pants. The role of mega and large deals in the global MA environment
and their relative importance for large scale investors and financial and
legal advisers alike, contrast with their predictably less common occur-
rence in the Canadian MA market, even after taking into consideration
Canadian involvement in outbound transactions. Consistent with a
generally applicable 1:10 relationship with the US, the Canadian market
often still regards US$1 billion or US$2 billion transactions as mega-
deals as compared to a US$10 billion threshold (if not greater) in US or
global markets. The general observation of note is the relative impor-
tance of mid-market deals in Canadian MA. From a global perspective,
Canadian mid-market deals are more likely to be viewed as lower mid-
market transactions. Transactions with values below US$250 million
routinely makeup an overwhelming majority of the transactions in the
Canadian MA context. For example, in the fourth quarter of 2018, trans-
actions with values less than US$250 million accounted for 90 per cent
of total announced Canadian MA transactions.
Larger transactions do play a role of course in Canadian MA as
well, but recent statistics highlight that they are often more commonly
found in Canadian outbound transactions led by Canada’s experienced,
direct-investing, pension funds, large infrastructure investors and utili-
ties operators who are looking for large-scale investments beyond their
comparatively smaller home markets. In the fourth quarter of 2018 by
way of example, the top 10 transactions with Canadian involvement by
deal value ranged from US$1.35 billion to US$17.5 billion. Of these top
10 transactions, only two were wholly domestic transactions with both
Canadian buyers and sellers of a Canadian asset. Another two of the top
10 were connected to Canada solely by virtue of a buyer or seller being
listed on a Canadian-based stock exchange with the principal assets of
each of the buyer, seller and target all located outside of Canada. Finally
of note, and in keeping with their global reputation, three of the top 10
Canadian MA transactions, and in fact the three largest, were transac-
tions involving Canadian pension fund acquirers of international assets
in the industrial, infrastructure and utilities industries.
The significance of the outbound segment of the Canadian MA
market is highlighted by the fact that in the fourth quarter of 2018,
Canadian companies acquired 281 foreign targets representing
41 per cent of total MA transactions with any Canadian involvement at
all. Furthermore, cross-border deals in the same period represented 70
per cent of total Canadian MA transactions by value.
In terms of country exposure, the US continues to be Canada’s
most common cross-border MA partner with just over 60 per cent of
cross-border transactions occurring between Canadian and US parties.
Given the significant difference in the size of the Canadian and US
markets, it is notable that there is a consistent trend that Canadian–US
cross border MA activity involves far more acquisitions by Canadian
companies of US targets, than US acquisitions of Canadian targets – by
nearly a 2:1 margin.
Political events
2018 presented Canadian businesses with two cross-border issues of
particular significance – Canada’s political relationship with the United
States and the United States’ economic tensions with China. With
the continued impact of tariffs on steel and aluminium from Canada
(imposed on the premise of national security risk) and the public nego-
tiation and settlement (though not yet implemented) of a revised free
trade agreement between Canada, the US and Mexico both creating
economic and political rifts between Canada and the United States in
2018, cross-border acquisition and business development planning was
challenged with uncertainty and political animosity. Though 2019 has
so far been comparatively quiet, steel and aluminium tariffs imposed by
the US, and the broad range of tariffs introduced by Canada in response
remain as inefficient market-place disrupters and also as potential
impediments to the implementation of the revised Canada–US–Mexico
free trade relationship.
Separately, the significant escalation of economic tensions between
the US and China in 2018 has also likely affected the Canadian MA
market. US–China tensions might have normally also created some
opportunities for Canada as an alternative market, but the tensions
unexpectedly swept into Canada at the end of 2018 with the receipt of an
extradition request by Canada from the US for the chief financial officer
of Huawei. The status of Huawei’s CFO, as the daughter of the founder
of Huawei and a senior officer of national technology champion of China,
© Law Business Research 2019
Cross-border MA: The view from Canada	 Bennett Jones LLP
Public MA 201912
already the subject of international debate regarding technology secu-
rity concerns, forced Canada into an international debate that Canada
had certainly hoped to avoid. Canadian MA with Chinese buyers has
fluctuated for a variety of reasons (eg, energy prices, currency controls
and mineral prices) over the past decade, but it has persisted in its
importance and potential. The trade tensions between the US and China,
and technology tensions between China and western based technology
hubs, has likely contributed to a slowing of inbound MA transactions to
Canada from China as compared to prior years. The reduction in these
transactions in the US has been far more dramatic with the tightening
up of CFIUS approvals that had already proven to be difficult. Outbound
investment by China in 2018 fell generally for the third straight year. With
2018 investment in the US totalling just US$13.2 billion as compared to
US$50.9 billion of transactions conducted by Chinese buyers in Europe,
Canada is at some risk of being skipped over on the way to Europe.
Announced transactions from China and Hong Kong into Canada fell
from 34 in number with a value of US$5.65 billion in 2017 to 25 in
number with a value of US$2.64 billion in 2018, but even with this reduc-
tion deal value between Canada and China remains higher than it was
in any year between 2013 and 2016. The ongoing tension over Huawei’s
participation in 5G technology in many western countries coupled with
the ongoing extradition proceedings in Canada involving Huawei’s CFO
will continue to present headwinds, but not barriers, for Canada–China
MA transactions. Canada–China transactions are continuing, and the
appetite of Canadian governments to continue to build economic ties
continues. While the current tensions and their impact on the Canadian
MA market may not be short lived, they will not be permanent.
New industries
In 2018, the rise of two particular new industries materially affected
Canadian MA – cannabis and artificial intelligence. The legalisa-
tion in Canada of cannabis in 2018 stoked the already hot market for
cannabis-driven corporate transactions in Canada. Second, and less
heralded, was the rise of artificial intelligence (AI) start-ups in a number
of technology hubs in Canada. In 2018, building off already considerable
momentum in 2017, there were approximately 60 new public companies
created in the cannabis industry – most born from reverse takeovers
by US businesses finding an opportunity to list on a public market in
Canada using another Canadian market feature – the public company
mining exploration shell. The Canadian RTO playbook for cannabis busi-
nesses was on such a pace in 2018 that market observers noted that the
historical availability of public company shells for proposed RTO trans-
actions was starting to become a barrier. Given the continued status of
cannabis under the federal laws of the US, Canadian stock exchanges
and other financial industry infrastructure in Canada have presented
significant opportunities to serve as an MA catalyst for US and other
international businesses in this industry. The rapid rise in the number of
new Canadian public companies in this industry will inevitably stock the
shelves for future Canadian MA activity – much of which was already
exhibited in 2018.
AI companies have also represented a new segment of the MA
market. The significant investment of government and university
research programmes in this space has spawned world-class AI tech-
nology companies that are the current subject of venture financing
from international sources, with both the US and China at the top of the
cross-border list. The cross-border MA opportunities in AI are begin-
ning to surface and will continue to build in this segment of the market.
Notwithstanding continuing legal challenges to infrastructure
developments of national importance such as pipelines and unresolved
trade uncertainties with the US and China, the Canadian MA market
has proven to be resilient in the face of similar challenges before
and Canadian buyers will continue to be active in the international
marketplace.
Ian Michael
michaeli@bennettjones.com
3400 One First Canadian Place
PO Box 130
Toronto ON
M5X 1A4
Canada
Tel: +1 416 863 5778
Fax: +1 416 863 1716
www.bennettjones.com
© Law Business Research 2019
www.lexology.com/gtdt	 13
Bermuda
Stephanie P Sanderson
BeesMont Law Limited
STRUCTURES AND APPLICABLE LAW
Types of transaction
1	 How may publicly listed businesses combine?
The principal methods of business combination are:
•	 private purchase of shares of a target company;
•	 private purchase of a target company’s underlying business;
•	 public offer for shares in a target company;
•	 statutory merger;
•	 statutory amalgamation; and
•	 statutory scheme of arrangement.
In Bermuda, amalgamations and mergers are the most common ways
to effect an acquisition. The main difference between a merger and an
amalgamation is that an amalgamation involves the convergence of the
amalgamating companies and their continuance as a ‘new’ amalgamated
company, while a merger involves the merging of companies resulting
in a vesting of assets and liabilities into the ‘surviving company’.
Typically, business combinations are structured as triangular
transactions. This type of transaction typically involves the buyer estab-
lishing a subsidiary company in Bermuda that amalgamates or merges
with the target company. The shareholders of the target company
may receive:
•	 cash consideration;
•	 securities or shares; or
•	 a combination of the above.
Statutes and regulations
2	 What are the main laws and regulations governing business
combinations and acquisitions of publicly listed companies?
The Companies Act 1981 is the main statute governing business
combinations in Bermuda and Part VII deals with arrangements, recon-
structions, amalgamations and mergers and provides for:
•	 amalgamations ;
•	 mergers;
•	 schemes of arrangement; and
•	 purchase of shares.
The MA market is generally not regulated in Bermuda; however,
specific regulations may apply depending on the nature of the transac-
tion, including whether the transaction involves public or private entities
and whether there are regulated entities involved. Also, a company may
in its by-laws have provisions regulating takeovers.
Public MA transactions involving listed Bermuda entities will be
regulated by the Bermuda Stock Exchange (BSX) Listing Regulations,
which impose obligations on BSX-listed entities.
Prior approval from the Bermuda Monetary Authority (BMA),
Bermuda’s principal regulator, will generally be required for the issue
or transfer of securities (shares) to foreign buyers, except where a
general permission applies (for example, for listed securities). The BMA
also regulates particular sectors such as insurers, banks and invest-
ment businesses. Certain acquisitions will require a change of control
application to be made to the BMA, such as acquisitions of regulated or
licensed entities, and in those cases the BMA will evaluate the proposed
controllers and senior executives according to the applicable criteria.
Transaction agreements
3	 Are transaction agreements typically concluded when
publicly listed companies are acquired? What law typically
governs the agreements?
Transaction agreements may be governed by either Bermuda law or a
foreign law. In domestic transactions the governing law will be Bermuda
law, but in transactions involving international companies the choice of
governing law for the implementation agreement is a matter for nego-
tiation. Whereas the statutory amalgamation or merger agreement will
be governed by Bermuda law.
A scheme of arrangement is effected by means of a court procedure.
FILINGS AND DISCLOSURE
Filings and fees
4	 Which government or stock exchange filings are necessary
in connection with a business combination or acquisition of a
public company? Are there stamp taxes or other government
fees in connection with completing these transactions?
The necessary filings will depend on the type of business combination
and the nature of a particular transaction.
The following Registrar of Companies filings will attract filing fees:
•	 application and registration of a merger or amalgamation;
•	 filing of a prospectus or information memorandum in connection
with a public offering of shares;
•	 changes to certain constitutional documents or authorised share
capital; and
•	 director filings in relation to changes to the Register of Directors
maintained by the Registrar of Companies.
There are also filing requirements for BSX-listed entities, for example, in
relation to notices, approvals and circulars or announcements.
A scheme of arrangement involves a court process and requires
particular steps to be followed including the originating summons, peti-
tion and court order.
See question 18 in relation to taxes.
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Information to be disclosed
5	 What information needs to be made public in a business
combination or an acquisition of a public company? Does this
depend on what type of structure is used?
The BSX Listing Regulations provide a corporate disclosure policy which
requires BSX-listed entities to keep the BSX, shareholders and holders
of listed securities informed (without delay) by way of public announce-
ments or circulars, of any information relating to the group that:
•	 is necessary to enable them and the public to appraise the financial
position of the issuer and the group;
•	 is necessary to avoid the establishment of a false market in its
securities; and
•	 might reasonably be expected to materially affect market activity in
and the price of its securities.
Disclosure of substantial shareholdings
6	 What are the disclosure requirements for owners of large
shareholdings in a public company? Are the requirements
affected if the company is a party to a business combination?
BSX-listed entities must comply with the disclosure obligations set out
in the BSX Listing Regulations. The BSX Listing Regulations govern
stakebuilding, and notice must be made to the BSX in respect of any
shareholder of a listed entity who directly or indirectly:
•	 acquires the beneficial interest, control or direction of 5 per cent or
more of securities; or
•	 has a beneficial interest or exercises control or direction over
5 per cent or more of securities and acquires, in aggregate, an
additional 3 per cent or more.
In a situation where a listed entity wishes to repurchase in excess of
20 per cent of its listed securities, the entity must obtain prior approval
from the BSX whose mandate is to maintain market integrity and ensure
equality of treatment for all security holders.
DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS
Duties of directors and controlling shareholders
7	 What duties do the directors or managers of a publicly traded
company owe to the company’s shareholders, creditors and
other stakeholders in connection with a business combination
or sale? Do controlling shareholders have similar duties?
Bermuda law does not impose an all-embracing code of conduct on
directors. In practice, a company’s memorandum of association and
by-laws comprise its constitution and together with the Companies Act
1981 prescribe the ambit of the directors’ powers. Many of the duties
and obligations of a director are statutory whereas others are found in
common law.
The Companies Act 1981 requires that directors act honestly and in
good faith with a view to the best interests of the company and exercise
the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances. Directors must disclose their
interest in any material contract or in any person party to a material
contract with the company (or its subsidiaries).
Directors must ensure they act on an informed basis after due
consideration of relevant materials, deliberation of information and
obtaining advice from expert and experienced advisers if appropriate.
Directors are responsible to the company and not directly to the
shareholders. However, in practice the interests of the company are
typically regarded as identical with those of the shareholders as a
whole (as constituted from time to time), therefore avoiding attaching
the company’s interests to the interests of any one specific shareholder.
When a company is approaching insolvency, the directors should
have regard to the interests of the company’s creditors in discharging
their duties. However, the duty to have regard to creditors’ interests is
not a freestanding duty and may only be enforced by the company or by
its liquidator (if in liquidation).
Controlling shareholders do not generally owe other shareholders
any fiduciary duties but should not oppress a minority.
Approval and appraisal rights
8	 What approval rights do shareholders have over business
combinations or sales of a public company? Do shareholders
have appraisal or similar rights in these transactions?
The approval and appraisal rights of shareholders depends on the busi-
ness combination.
Merger or amalgamation
In relation to a merger or amalgamation, the Companies Act 1981
procedure set out in section 106 must be followed. The directors of
each amalgamating or merging company must submit the amalgama-
tion agreement or merger agreement for shareholder approval. A notice
must be sent to each shareholder and include a summary or copy of
the agreement, state the fair value of shares and state that a dissenting
shareholder is entitled to be paid the fair value of his or her shares.
The Companies Act 1981 provides that unless the by-laws
otherwise provide, the resolution of the shareholders approving the
amalgamation or merger must be approved by a majority vote of three-
quarters of those voting at the meeting and the quorum necessary for
such meeting is two persons holding at least more than one-third of the
issued shares.
Any shareholder who did not vote in favour of the amalgamation
or merger and who is not satisfied that he or she has been offered fair
value for his shares can apply to the court to appraise the fair value
of his or her shares within one month of the company’s issuance of
the notice.
Asset sale
In relation to an asset sale, the board will typically have sufficient power
to conduct the sale. However, the company’s constitutional documents
may require the approval of shareholders (or a class) for certain actions.
Share sale
A share sale will require shareholder approval and involvement; account
will need to be taken in this regard of the provisions of the by-laws and
any shareholder agreement.
Scheme of arrangement
A scheme of arrangement requires approval by a majority in number
representing three-quarters of shareholders or class. Once sanctioned
by the court, the scheme is binding on all members or class of members
and on the company.
COMPLETING THE TRANSACTION
Hostile transactions
9	 What are the special considerations for unsolicited
transactions for public companies?
Unsolicited transactions or ‘hostile takeovers’ by way of a takeover bid
are permitted in Bermuda, but they are uncommon.
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The target company’s board of directors must act in good faith and
in the best interests of the company, but the board may try to dissuade
shareholders from accepting a bid and try to take any other action to
prevent the bid from proceeding, including searching for a ‘white knight’
to circumvent the takeover. A company’s by-laws could also contain
anti-takeover protections, including a poison pill or other defensive
provisions. Disputes concerning hostile bids can lead to litigation.
Break-up fees – frustration of additional bidders
10	 Which types of break-up and reverse break-up fees are
allowed? What are the limitations on a public company’s
ability to protect deals from third-party bidders?
The use of deal protection measures such as break fees or reverse
break fees are not specifically regulated in Bermuda, and their use
would be subject to challenge on the basis of the directors’ fiduciary
duties. The quantum of the fee is negotiated and impacted by bargaining
strength and other context-specific factors.
Government influence
11	 Other than through relevant competition regulations, or
in specific industries in which business combinations or
acquisitions are regulated, may government agencies
influence or restrict the completion of such transactions,
including for reasons of national security?
There are restrictions on foreign ownership of shares in local Bermuda
companies such that 60 per cent of the total voting rights in the local
company must be exercisable by Bermudians – this is known as the
‘60/40 Rule’ unless a licence to exceed this limit has been granted.
There are also restrictions governing the ownership of land by busi-
nesses (both local or exempted).
A foreign entity must obtain a special licence from the Bermuda
government if it wants to take control of more than 40 per cent of a local
company and carry on business in Bermuda. Such a licence typically
includes a condition that the prior consent of the minister is required
for a change in control of the licensed company. The criteria that are
considered as part of an application for a licence include:
•	 an assessment of the economic situation in Bermuda;
•	 the nature and previous conduct of the company;
•	 any advantage or disadvantage that may result from the company
carrying on business in Bermuda; and
•	 the desirability of Bermudians retaining control of the economic
resources of Bermuda.
The Companies Act was recently amended with the aim of facilitating
direct foreign investment in Bermuda. A Bermuda company may be
eligible for an exemption to the 60/40 Rule if its shares are listed on a
designated stock exchange (including the BSX) and it engages in busi-
ness in a prescribed industry including:
•	 telecommunications;
•	 energy;
•	 insurance;
•	 hotel operations;
•	 banking; and
•	 international transportation services (by ship or aircraft).
There are also special licensing regimes for a number of key industries
in Bermuda.
There are no restrictions on foreign ownership of exempted compa-
nies. However, for exchange control purposes, the issue and transfer
of any securities in companies involving non-residents must generally
notify or receive the prior approval of the BMA.
Conditional offers
12	 What conditions to a tender offer, exchange offer, mergers,
plans or schemes of arrangements or other form of business
combination are allowed? In a cash transaction, may the
financing be conditional? Can the commencement of a tender
offer or exchange offer for a public company be subject to
conditions?
Under Bermuda law, there are no specific legal restrictions on the
conditions to a tender offer, exchange offer or other form of business
combination and such conditions are subject to negotiation and market
standards.
While conditions are determined by negotiation, typically trans-
actions are subject to limited conditions that include regulatory
approval, no material change and shareholder approval and any restric-
tions under a Shareholder Agreement or internal Takeover Code.
Acceptance thresholds on a takeover bid are often set at 90 per
cent of the target shares so that the applicable Companies Act 1981
squeeze-out procedures can be used. Mergers and amalgamations will
also be conditional on achieving the relevant shareholder approval
thresholds.
In a cash acquisition, a bidder will need to make adequate arrange-
ments to ensure the availability of funds and financing arrangements
may be subject to conditions. Wide-ranging preconditions to closing are
not uncommon in the terms of an offer.
Financing
13	 If a buyer needs to obtain financing for a transaction involving
a public company, how is this dealt with in the transaction
documents? What are the typical obligations of the seller to
assist in the buyer’s financing?
A target company will typically require reassurance or evidence that
committed financing is in place for the purposes of the transaction. In
respect of a cash offer, the offer announcement should include confir-
mation that sufficient funding is in place. If required, the buyer and
target will negotiate regarding the extent that the target is to assist with
the buyer’s financing efforts, including preparation of documentation or
speaking with lenders.
Minority squeeze-out
14	 May minority stockholders of a public company be squeezed
out? If so, what steps must be taken and what is the time
frame for the process?
The Companies Act 1981 provides that if an amalgamation or merger
agreement is approved in the manner set out in section 106 (see
question 8) it is deemed to have been adopted.
Where a merger or amalgamation has been approved by the
requisite majority of shareholders, such approval is binding on all
shareholders (other than shareholders who have commenced an
appraisal action). Section 106 of the Companies Act 1981 contemplates
that a merger or amalgamation approved by a 75 per cent majority of
a quorate meeting is sufficient to bind shareholders to a merger agree-
ment. As noted in question 8, the Companies Act 1981 permits the
shareholders to provide for a smaller quorum and lower voting majority
in the company by-laws.
In relation to a scheme or contract involving the transfer of shares,
where the offeror has been approved by the holders of not less than
90 per cent of the value of shares to which the offer relates, the offeror
may purchase the remaining shares by giving notice to the remaining
‘dissenting’ shareholders.
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Public MA 201916
Where a buyer has successfully acquired 95 per cent or more of
the shares of a company, the buyer can give notice of the intention to
acquire the share of the remaining 5 per cent of the shareholders on
the terms set out in the notice. When such a notice is given, the buyer is
entitled and bound to acquire the shares of the remaining shareholders
on the terms set out in the notice unless a remaining shareholder
applies to the court for an appraisal. If an appraisal is given by the court,
the buyer can either acquire all of the shares at a price fixed by the court
or cancel the notice.
Cross-border transactions
15	 How are cross-border transactions structured? Do specific
laws and regulations apply to cross-border transactions?
Except as otherwise noted in relation to Bermudian ownership and
control, there are no specific laws or regulations that apply to the struc-
turing of cross-border transactions.
Waiting or notification periods
16	 Other than as set forth in the competition laws, what are
the relevant waiting or notification periods for completing
business combinations or acquisitions involving public
companies?
Bermuda does not have competition laws or waiting or notification
periods for completing business combinations. However, regulated or
licensed entities must adhere to notification and approval procedures
and must obtain the BMA’s consent or non-objection (as applicable)
under relevant statutory regimes. This would apply, for example, where
there is a material change or change of control in relation to a licensed
or regulated entity which include insurance companies, trust compa-
nies, banks, fund administrator and regulated investment businesses.
OTHER CONSIDERATIONS
Sector-specific rules
17	 Are companies in specific industries subject to additional
regulations and statutes?
Companies in specific industries, including financial services, broad-
casting, telecommunications and transportation, are subject to
additional regulations and statutes. This includes foreign ownership
rules that may affect business combinations. Also see question 16.
Tax issues
18	 What are the basic tax issues involved in business
combinations or acquisitions involving public companies?
Business combinations do not trigger any specific liability to tax.
A company establishes tax residency when it is incorporated in
Bermuda. However, exempt undertakings are eligible for a tax exemp-
tion certificate, which is an assurance from the Minister of Finance that
for the period up to 31 March 2035 an exempted undertaking is not liable
to pay certain taxes being taxes:
•	 imputed on profits or income;
•	 computed on any capital asset, gain or appreciation; and
•	 in the nature of estate duty or inheritance tax.
Any business with employees physically based in Bermuda, whether
local or exempted, is subject to Bermuda’s consumption tax regime
(whether or not they have a tax exemption certificate). No taxes are
imposed on tax non-resident businesses in Bermuda.
The sale and purchase of a company’s business or assets will
attract ad valorem stamp duty that is payable on the transfer of
Bermuda land and certain other Bermuda property. No stamp duty is
payable on the transfer of any securities listed on the BSX.
Labour and employee benefits
19	 What is the basic regulatory framework governing labour and
employee benefits in a business combination or acquisition
involving a public company?
The Employment Act 2000 generally governs the employee and
employer relationship and minimum standards with which employers
must comply. The Employment Act 2000 provides that where a business
is sold, transferred or otherwise disposed of, the period of employment
with the former employer must be recognised in order to constitute a
single period of employment with the successor employer (as long as
the employment was not terminated with severance). However, there is
no specific regulatory framework in relation to business combinations.
The continuing or surviving company will typically become the
successor employer and assume any associated liabilities.
There is generally no obligation to inform or consult employees
or to obtain employee consent in relation to business combinations.
However, in some cases:
•	 certain employees can have contractual rights to receive this
notice; and
•	 there can be notice requirements for unionised employees under a
collective bargaining agreement.
A share sale does not involve a change in employer and:
•	 employment contracts continue;
•	 collective bargaining agreements remain in effect (unless there is
an applicable change of control provision); and
•	 there are generally no notice or consent obligations.
It is important to note that rights can exist in certain employee contracts
or under any applicable collective bargaining agreement. For example,
certain senior company executives or management staff may be entitled
to resign or be paid an agreed sum on a change of control pursuant to
their contracts.
There may also be options under share option schemes that
become exercisable upon a change of control and holders of stock
options may have the option to take shares in the amalgamated or
surviving company.
Restructuring, bankruptcy or receivership
20	 What are the special considerations for business
combinations or acquisitions involving a target company
that is in bankruptcy or receivership or engaged in a similar
restructuring?
Under Bermuda law, a ‘bankrupt’ company can be put into liquidation.
This authority is contained in Part XIII (Winding- Up) of the Companies
Act 1981. Where an insolvent company is involved, the process will
take the form of a creditors’ voluntary winding up. The company and
board usually cooperate during this process. The procedural steps for a
winding up are contained in the Companies (Winding-Up) Rules 1982. If
the company is uncooperative, it may be necessary for creditors to apply
to the court for the appointment of a provisional liquidator or liquidator.
In all of these circumstances, the party acquiring the company must
deal with the liquidator and determine the best process for acquiring
the company, given the fact that it is in liquidation.
Bermuda law also recognises the appointment of receivers. A
receiver can be appointed by the court or a creditor pursuant to the
© Law Business Research 2019
BeesMont Law Limited	Bermuda
www.lexology.com/gtdt	 17
powers contained in a security instrument. The receiver will take over
control of the company and be the party with which a purchaser must
coordinate various matters (eg, due diligence and discussions regarding
the structure of any acquisition).
The scheme of arrangement procedure is also available to solvent
or insolvent companies under the Companies Act 1981, as amended,
whereby the process is court sanctioned.
Anti-corruption and sanctions
21	 What are the anti-corruption, anti-bribery and economic
sanctions considerations in connection with business
combinations with, or acquisitions of, a public company?
In the context of business combinations, purchasers should generally
consider any potential risks or liabilities arising from non-compliance
with Bermuda’s sanctions, anti-corruption, anti-bribery and anti-money
laundering regimes. These matters should be considered both in rela-
tion to dealings with counterparties and in relation to any pre-existing
deficiencies affecting the target business or otherwise.
Bermuda’s anti-bribery and corruption laws have recently under-
gone a process of modernisation with the introduction of the Bribery
Act 2016, which came into force in September 2017 and was largely
modelled on the United Kingdom (UK) bribery legislation. Certain
bribery and corruption offences previously contained in the Criminal
Code Act 1907 have been superseded by the Bribery Act 2016.
Further, the UK Bribery Act 2010 has extraterritorial effect and
thus has potential direct implications for Bermuda, which is a British
overseas territory, such that Bermuda-based companies with a nexus to
the United Kingdom can possibly be prosecuted in the United Kingdom
if they are involved in bribery anywhere in the world. As a British
Overseas Territory, Bermuda implements the international sanctions
obligations of the UK. The majority of the sanctions in effect in the UK
come from the UN Security Council (UNSC) and the European Union
(EU). The EU measures normally implement in Europe the relevant
UNSC Resolutions (Resolutions), and may also impose additional sanc-
tions. The Bermuda International Sanctions Act Regulations 2013 list
all of the sanctions regime-related orders in force in Bermuda, and are
amended on an ongoing basis to ensure the list remains up to date.
Bermuda has a robust anti-money laundering and anti-terrorist
financing legislative framework. The BMA has powers to monitor
financial institutions for compliance with the Regulations under the
Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing
Supervision and Enforcement) Act 2008, which gives the BMA the
capacity to impose substantial penalties for failure to comply with many
provisions in the Regulations.
Stephanie P Sanderson
spsanderson@beesmont.bm
5th Floor Andrew’s Place
51 Church Street
Hamilton HM 12
Bermuda
Tel: +1 441 400 4747
Fax: +1 441 236 1999
www.beesmont.bm
© Law Business Research 2019
Public MA 201918
Brazil
Fernando Loeser, Enrique Tello Hadad, Lilian C Lang and Daniel Varga
Loeser, Blanchet e Hadad Advogados
STRUCTURES AND APPLICABLE LAW
Types of transaction
1	 How may publicly listed businesses combine?
Under Brazilian law, publicly listed companies may combine in several
different ways. However, the most common types of business combina-
tions are the following:
•	 mergers: two different entities combine to form a new entity, which
absorbs all assets and liabilities of the previous existing entities;
•	 equity purchase and sale: the shares of a target company are sold
to another shareholder or third party;
•	 demergers: spin-off of certain assets and their subsequent merger
into either a pre-existing or a newly incorporated company;
•	 absorptions: the assets and liabilities of an entity are entirely
absorbed by another entity, and the entity whose assets and liabili-
ties were absorbed ceases to exist;
•	 purchase and sale of assets;
•	 joint ventures: two or more legal entities combine their efforts
in order to jointly explore business opportunities. Parties to the
joint venture may incorporate a new company or acquire equity
in an already incorporated company to explore a common busi-
ness (traditionally, but not necessarily, by a 50/50 per cent equity
arrangement), or enter into a joint venture agreement whereby
their rights and obligations are specified, without incorporating a
new company or acquiring equity in an already existing one.
The business combinations provided above, depending on the circum-
stances, may be carried out privately, without the need of a tender offer
to the public. However, Brazilian law provides that a tender offer will
be mandatory in the following circumstances: (i) if the corporation itself
or its controlling shareholder applies for the cancellation of its regis-
tration to trade as a listed company; (ii) if the corporation’s controlling
shareholder increases its equity participation to the extent that the
corporation’s shares may face market liquidity issues, pursuant to the
rules enacted by CVM; and (iii) in case of acquisition of the control of a
public listed company, in which case the new controller will have to place
a tender offer to purchase the remaining shares bearing voting rights. In
all these circumstances, the tender offer must be registered with CVM.
Moreover, a bidder may also voluntarily place a tender offer to
the public (the most common situation being a public takeover bid). In
general, the registration of the voluntary tender offer with CVM is not
mandatory. However, should the transaction involve an exchange for
securities, the registration will be required.
The tender offer requires the engagement of a financial institution,
which must also sign the offering instrument along with the bidder.
The offering instrument must contain the specifics of the offer, such as
the number, class and species of securities being purchased, payment
and other applicable terms and conditions, date, place and time of the
public auction. In addition, the offering instrument must be published in
a newspaper of wide circulation.
Statutes and regulations
2	 What are the main laws and regulations governing business
combinations and acquisitions of publicly listed companies?
The main laws and regulations governing business combinations are:
•	 the Brazilian Civil Code – Law No. 10,406/2002;
•	 the Brazilian Corporations Law – Law No. 6,404/1976;
•	 the Antitrust Law – Law No. 12,529/2011;
•	 the Capital Markets Law – Law No. 4,728/1965;
•	 the Brazilian Securities Law – Law No. 6,385/1976;
•	 the regulations enacted by the Brazilian Securities and Exchange
Commission (CVM);
•	 the Brazilian Employment Law – Law-Decree No. 5,452/1943,
amended by Law 13,467/2017;
•	 the Bankruptcy and Judicial Recovery Law – Law No.
11,101/2005; and
•	 the Anti-Corruption Law – Law No. 12,846/2013.
Transaction agreements
3	 Are transaction agreements typically concluded when
publicly listed companies are acquired? What law typically
governs the agreements?
Although the choice of foreign law is accepted and valid under Brazilian
law, the transactions taking place in Brazil, especially if the parties
entering into the agreement are Brazilians, are usually governed by
Brazilian law. In addition, in order to implement the transfer of shares
and certain types of assets, the parties must comply with certain
formalities required under Brazilian law. If the shares and assets are
of a Brazilian company, the choice of Brazilian law and venue facilitates
the enforcement of the agreement as regards the Brazilian company.
Tender offers for Brazilian listed companies are mandatorily
governed by Brazilian laws. In these cases, the offering instrument will
have to comply with the regulations enacted by CVM and the choice of
foreign law will not be permitted.
© Law Business Research 2019
Loeser, Blanchet e Hadad Advogados	Brazil
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FILINGS AND DISCLOSURE
Filings and fees
4	 Which government or stock exchange filings are necessary
in connection with a business combination or acquisition of a
public company? Are there stamp taxes or other government
fees in connection with completing these transactions?
The corporate acts of mergers, demergers and absorptions of listed
companies are required to be registered with the board of trade of the
Brazilian state in which the company is headquartered.
In public offerings, as a general rule the issuer must register with
CVM a prospectus, along with several other documents and forms.
Similarly, in mandatory tender offers, the offeror usually must register
an offering instrument with CVM.
Should the business combination involve, on one hand, a group
of companies whose total gross income or sales volume in the year
prior to the year the transaction takes place is equal to or above 750
million reais and, on the other hand, a group of companies whose total
gross income or sales volume in the year prior to the year the transac-
tion takes place is equal to or above 75 million reais, the parties shall
seek prior approval of the Administrative Council for Economic Defence
(CADE), Brazil’s antitrust authority.
Although stamp taxes do not exist under Brazilian law, registration
with the board of trade, with the CVM and with CADE are subject to the
payment of fees.
Information to be disclosed
5	 What information needs to be made public in a business
combination or an acquisition of a public company? Does this
depend on what type of structure is used?
Tender offers for the acquisition of a listed company are subject to
specific disclosure requirements. For instance, the offering instrument
must disclose the share capital structure of the target company, its
financial and economic situation, the exposure of the bidder to deriva-
tives whose underlying assets are securities issued by the target
company, and information regarding any agreements and covenants
to which the bidder is a party involving securities issued by the target
company. Should the transaction involve the exchange for stock or
other securities, the disclosure requirements applicable to a public
offering must also apply. As a general rule, a public offering is also
subject to registration. The registration application must be accompa-
nied by a prospectus, where certain information must also be disclosed.
For instance, the prospectus must contain a summary of the offering,
indicating the issuer, the financial institutions involved, the targeted
audience of the offering, as well as the price and quantity of the securi-
ties to be listed. In addition, the prospectus must contain a schedule of
the offering, the justification of the issuing price (in the case of an initial
public offering), the explanation of how the proceeds arising out of the
listing will be applied and the risk factors of the issuer.
Although the disclosure requirements may differ depending on the
type of structure that is used, corporations must disclose to the market
any information that is deemed to be material information. Pursuant
to CVM regulations, material information is any decision of the share-
holders or board of directors of publicly listed companies, or any other
relevant technical, economical or financial facts or transactions related
to the company’s business and activities, which may influence the price
of any shares or securities issued by the company, the decision of the
investors to buy or sell shares and securities of the company, or the
decision of the investors regarding the exercise of any of their rights as
shareholders. CVM regulations also provide examples of what would
be material information: acquisition of control of a company, execution
of shareholders’ agreements involving the corporations’ securities,
mergers, demergers and absorptions are among the material informa-
tion that must also be disclosed. The list of examples provided by CVM
is not exhaustive, so any information that may fall within the definition
of material information will be subject to the disclosure requirements.
It is also worth pointing out that certain business combinations
may be subject to shareholders’ or board of directors’ approval. Given
that the minutes of the meetings of the shareholders and board of direc-
tors are subject to registration with the Board of Trade, the information
provided therein will also be available to the public.
Lastly, business combinations that are subject to CADE’s prior
approval may also be subject to additional disclosures. Although the
economic information submitted to CADE is usually treated as confiden-
tial information, the general details about the combination (such as the
parties involved) are usually made public.
Disclosure of substantial shareholdings
6	 What are the disclosure requirements for owners of large
shareholdings in a public company? Are the requirements
affected if the company is a party to a business combination?
Listed companies are subject to the disclosure requirements of the CVM,
which requires the disclosure of the company’s controlling shareholder
(including the ultimate beneficial owner). In addition, listed companies
are required to disclose the shareholders or group of shareholders,
with a shareholding stake equal to or above 5 per cent of the same
class or species of shares and that have common interests or act jointly
in relation to the company’s affairs.
Business combinations by themselves do not affect disclosure
requirements related to substantial shareholdings. However, should
the business combination result in a shareholding stake that requires
disclosure, such as in the case of controlling shareholder of listed
companies, the disclosure requirements shall apply.
DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS
Duties of directors and controlling shareholders
7	 What duties do the directors or managers of a publicly traded
company owe to the company’s shareholders, creditors and
other stakeholders in connection with a business combination
or sale? Do controlling shareholders have similar duties?
Under Brazilian law, directors must observe the duty of care (diligent
management of the company’s affairs) and the duty of loyalty (refraining
from pursuing personal interests instead of the company’s interests).
In addition, directors must always act within the scope of their powers,
and shall refrain from participating in the company’s affairs in case of
conflict of interest. This is also the case in connection with a business
combination among or involving different companies or companies
within the same economic group.
Although, as a general rule, directors are not liable for the compa-
ny’s obligations, in case of ultra vires acts, as well as in case of breach
of the laws and the company’s by-laws, they may be personally liable.
In addition, although the company’s by-laws may designate different
roles to different directors, under Brazilian law all directors may be held
jointly and severally liable for damages caused to the company and the
shareholders.
Although business combinations as a general rule must be
approved by the shareholders, directors are responsible for providing
accurate information regarding the transaction, so as to enable the
shareholders to make an informed decision.
When it comes to listed companies in mergers, demergers and
absorptions involving its affiliates, the CVM adopts a more stringent
© Law Business Research 2019
Brazil	 Loeser, Blanchet e Hadad Advogados
Public MA 201920
interpretation as to the duty of care and duty of loyalty. In such circum-
stances, the directors are only discharged of their duties if they have
complied with certain specific requirements, such as assuring on an
impartial basis that any proposed business combination is carried out
in the most beneficial form to the shareholders, including the minority
shareholders, and the company. The CVM also requires directors of
publicly listed companies to comply with all applicable capital markets
rules and regulations. One of the statutory directors of a publicly listed
company must be appointed as investor relations director, who will be
the person responsible for submitting all required filings and complying
with all capital markets rules and regulations (eg, publish a relevant
fact of the public company such as a sale or an acquisition), and who
may be held personally liable (without prejudice to the corporation’s
own liability) for failure to do so.
In 2018, the CVM enacted a new (non-binding) guideline (No. 38,
dated 25 September 2018) applicable to indemnity agreements executed
between publicly listed companies and their directors with the aim at
avoiding conflicts of interest, thereby creating new duties to the direc-
tors of public companies.
Under the indemnity agreements, public companies undertake to
compensate directors for damages or losses arising out of arbitration
proceedings, court claims or administrative proceedings in general,
involving acts, facts or omissions committed by the directors in the exer-
cise of their duties or powers. Although in general the parties are free to
negotiate the terms and conditions of the agreement, pursuant to CVM’s
interpretation, the compensation is not due if the director breached
its duty of care and its duty of loyalty. As such, the CVM recommends
expressly providing the hypothesis of exclusion of liability in the indem-
nity agreement. In addition, the CVM recommends that before making
any disbursements, the company must ensure whether the compensa-
tion to the director is due, or if it falls into a hypothesis of exclusion of
liability.
The CVM’s guidelines provide that the directors must implement
governance rules to prevent conflicts of interest in the execution of
indemnity agreements. In order to be discharged of this duty, the direc-
tors must ensure that the indemnity agreements provide which body of
the company will be responsible for assessing whether an exclusion of
liability applies or not, as well as the applicable rules to avoid conflicts
of interest. On specific circumstances, such as the ones that could result
in a material loss for the company, the CVM understands that additional
governance rules must be adopted, without specifying them. Lastly,
it is worth mentioning that the directors are required to disclose the
terms and conditions of the indemnity agreements, so as to allow the
shareholders to properly assess the liabilities that the company may be
exposed to.
Regarding controlling shareholders, Brazilian law expressly states
that they are liable for the abuse of their powers. Examples of abuse of
power include: (i) deviating the company from its scope; (ii) entering into
business combinations that are detrimental to the company; and (iii)
appointing board members who are not suitable for the role.
Approval and appraisal rights
8	 What approval rights do shareholders have over business
combinations or sales of a public company? Do shareholders
have appraisal or similar rights in these transactions?
Business combinations may be subject to the approval of shareholders,
but the quorum for the approval varies depending on the type of
transaction. In publicly listed corporations, mergers, demergers and
absorptions require by law the approval of the majority of the corpo-
rate capital.
The shareholders who voted against the merger, demerger or
absorption may be entitled to withdraw from the company and be
reimbursed for the value of their shares, subject to the following condi-
tions: (i) in mergers and absorptions, the right of withdrawal is only
applicable to corporations with concentrated ownership; (ii) in the event
of demergers, the right of withdrawal applies if there is a change in
the company’s business scope (unless the main activity of the entity
that absorbs the assets of the demerged entity matches the activities
of the demerged entity), if there is a reduction in mandatory dividend
payments, or if the demerger results in the participation in a group of
companies. The company’s by-laws may contain provisions related to
the appraisal methodology for the reimbursement. However, the law
sets forth that the reimbursement value shall reflect at least the compa-
ny’s net worth, pursuant to the company’s latest approved balance
sheet. Should the company’s by-laws authorise, the reimbursement
value may be ascertained by an appraisal report prepared by experts,
in which case the reimbursement value may be above the company’s
corresponding net worth.
Tender offers, in general, require the preparation of an appraisal
report of the target company, pursuant to the regulations enacted by
CVM. If the scope of the tender offer is to delist the company from the
stock exchange, or to increase the controlling shareholders’ participa-
tion up to the point that it may hinder the market liquidity of the shares,
as provided in the rules enacted by CVM, there must be the approval
of more than two-thirds of the corporation’s floating stock. In addition,
the purchase price of the offer must be fair, corresponding at least to
the company’s valuation, ascertained by means of an appraisal report.
Nonetheless, should there be clear indications that the valuation report
was not accurately prepared, at least 10 per cent of the corporation’s
floating stock may request the corporation’s management team to call
a shareholders’ special meeting to resolve on the preparation of a new
report. Should the new report point out a higher valuation, the new
value shall prevail.
In the case of a takeover bid, the new controlling shareholder is
required to place a public offer to all other voting shareholders of the
company. In this circumstance, the offering price must correspond to
at least 80 per cent of the price paid for the acquisition of the control.
The acquisition of control of a company by a listed corporation is
also subject to the approval of the listed corporation’s shareholders in
the following circumstances: (i) if the purchase price of the target is
deemed to be a relevant investment, as defined by law; (ii) if the average
purchase price of the target’s shares is above certain thresholds, as
provided in the law. In such circumstances, the corporation’s directors
are only compliant with their duty of care if they have submitted the
business combination to the perusal of all shareholders, including the
minority shareholders and those with no voting rights
COMPLETING THE TRANSACTION
Hostile transactions
9	 What are the special considerations for unsolicited
transactions for public companies?
In Brazil, hostile takeover bids are not yet as common as they are in
more mature markets, such as the US and the UK. Nonetheless, in the
last decade Brazil has experienced a boost in its capital markets, with
a significant increase in the number of publicly held corporations with
dispersed shareholdings. Because of this fact, hostile takeovers have
gained more attention.
According to the Brazilian Corporations Act, the purchaser in a
takeover bid is required to make a public offer to all other voting share-
holders of the company, for a purchase price of at least 80 per cent of
the takeover bid’s price. In addition, in 2010 CVM introduced new rules
applicable to takeover bids.
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According to the new rules introduced by CVM in 2010, bidders
are required not to disclose any information related to the takeover bid
until it is finally disclosed to the market. Bidders must also ensure that
their managers, advisers and employees also comply with this rule. If
the bidder loses control of the information, the bidder will be required
to immediately place a public offering or, alternatively, disclose to the
market that it intends to place an offer.
The bid must take place in a stock exchange or in another author-
ised organised market. If a third party is interested in interfering in the
public auction for the takeover bid, it must disclose its intention to the
market at least 10 days in advance. Also, the bidder must undertake to
purchase, in a 30-day period following the bid, all shares of the same
class and type that remained unsold, for the same price of the final offer,
thereby giving additional protection to minority shareholders.
Break-up fees – frustration of additional bidders
10	 Which types of break-up and reverse break-up fees are
allowed? What are the limitations on a public company’s
ability to protect deals from third-party bidders?
In Brazil, break-up fees are not expressly set forth in law. The parties
to an MA deal are free to negotiate and agree on a break-up fee for
protection against third-party bidders in the transaction agreements.
Government influence
11	 Other than through relevant competition regulations, or
in specific industries in which business combinations or
acquisitions are regulated, may government agencies
influence or restrict the completion of such transactions,
including for reasons of national security?
Certain business activities are subject to additional regulations from
governmental agencies, which may impact business combinations. This
is especially true for the oil and gas, media/broadcasting, civil aviation,
energy and electricity, security and public services in general. All these
sectors are regulated by federal government agencies, which may enact
enforceable legislation. Another heavily regulated sector is the banking
and financial services industry, whose business combinations are also
normally subject to the authorisation of the Brazilian Central Bank.
The acquisition of land by foreigners (both individuals and compa-
nies) is also subject to restrictions, which are based on the size of the
land and the scope of the activities to be performed by the foreigner. In
addition, some of these restrictions also apply to Brazilian companies
controlled by foreigners.
In privatisation of state-controlled companies, the government may
influence combinations through the use of ‘golden shares’, enabling it to
hold influence due to strategic reasons.
Conditional offers
12	 What conditions to a tender offer, exchange offer, mergers,
plans or schemes of arrangements or other form of business
combination are allowed? In a cash transaction, may the
financing be conditional? Can the commencement of a tender
offer or exchange offer for a public company be subject to
conditions?
In public offerings and tender offers, the issuer or offeror may subject
the offer to certain conditions, as long as the conditions are clearly
stated in a prospectus or equivalent document.
Public offerings must grant equal treatment to all offerees. The
offer must be irreversible and irrevocable, but special conditions may
apply in order to protect a legitimate right of the offeror, as long as the
usual functioning of the markets is not affected, and to the extent that
the fulfilment of the conditions does not directly or indirectly rely on
the offeror itself, or a person related to it. The offering price must be
uniform, but CVM may authorise price variations in specific transactions,
depending on the kind of securities being offered and the qualifications
of the offerees.
CVM may also acknowledge the existence of material adverse
changes following a public offering. If that should be the case, the
offeror may request the cancellation of the offer.
The offeror may change the terms and conditions of the public
offering, without seeking CVM’s prior permission, if the changes are for
the benefit of the investors, or if the offeror waives a benefit of its own.
In the case of a public offering being revoked, the offer becomes
without effect, and any consideration paid by the investors must
be refunded pursuant to the terms of the prospectus. In its turn, the
acceptance of an offer by an investor cannot be revoked by the investor
himself, unless provided otherwise in the prospectus.
A tender offer, once the offering instrument is published, may only
be amended or revoked by the offeror in the following circumstances: (i)
to improve the conditions of the offer; (ii) if previously approved by CVM
(in case of mandatory tender offers); and (iii) in compliance with the
offering instrument (in case of voluntary tender offers).
As previously pointed out, a tender offer will be mandatory if a
controlling shareholder intends to delist a company from the stock
exchange, or increase its, his or her equity participation to the extent
that the security’s market liquidity is hindered, pursuant to CVM regu-
lations. The tender offer must be accompanied by a valuation report,
but should there be clear indication that the report was not accurately
prepared, 10 per cent of the floating stock may request the preparation
of a new report. Should the new report increase the security’s value,
the offeror may revoke the tender offer and the intended delisting or
increase in the equity participation will not be carried out.
Changes or cancellation of a tender offer that is subject to CVM’s
prior approval may only be effected in light of material adverse changes
acknowledged by CVM.
Changes to a tender offer require the publication of a new offering
instrument, which must highlight the amendments that have been intro-
duced, and the new date of the public auction. Should the tender offer
be revoked, its cancellation must be published by means of the same
channels that were used for its original publication.
The law does not provide for any specifics relating to cash trans-
actions conditional upon financing. In such circumstances, the general
rules concerning tender offers must apply.
Financing
13	 If a buyer needs to obtain financing for a transaction involving
a public company, how is this dealt with in the transaction
documents? What are the typical obligations of the seller to
assist in the buyer’s financing?
Although the parties in theory may agree that obtaining financing by
the buyer is a condition precedent to the closing, the seller may be
reluctant to accept such provision. Under Brazilian law, there is no
obligation on the seller to assist in the buyer’s financing. Typically, it is
the buyer’s responsibility to obtain the financing necessary to pay the
purchase price up to the closing of the transaction, and the buyer does
not transfer the burden to sellers.
Notwithstanding, a seller may agree to finance an acquisition by
the buyer in other forms, such as by accepting the delay of the payment
of part of the purchase price until after closing; by agreeing to receive a
portion of the price by means of an earn-out; by means of a consulting
agreement; by the exchange of shares of the buyer for the shares of the
target company, and so on.
© Law Business Research 2019
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Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A
Getting the Deal Through: Public M&A

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Getting the Deal Through: Public M&A

  • 1. Public M&A 2019 Contributing editor Alan M Klein © Law Business Research 2019
  • 2. Publisher Tom Barnes tom.barnes@lbresearch.com Subscriptions Claire Bagnall claire.bagnall@lbresearch.com Senior business development managers Adam Sargent adam.sargent@gettingthedealthrough.com Dan White dan.white@gettingthedealthrough.com Published by Law Business Research Ltd 87 Lancaster Road London, W11 1QQ, UK Tel: +44 20 3780 4147 Fax: +44 20 7229 6910 The information provided in this publication is general and may not apply in a specific situation. Legal advice should always be sought before taking any legal action based on the information provided. This information is not intended to create, nor does receipt of it constitute, a lawyer– client relationship. The publishers and authors accept no responsibility for any acts or omissions contained herein. The information provided was verified between February and April 2019. Be advised that this is a developing area. © Law Business Research Ltd 2019 No photocopying without a CLA licence. First published 2018 Second edition ISBN 978-1-83862-110-0 Printed and distributed by Encompass Print Solutions Tel: 0844 2480 112 Public M&A 2019 Contributing editor Alan M Klein Simpson Thacher & Bartlett LLP Lexology Getting The Deal Through is delighted to publish the second edition of Public M&A, which is available in print and online at www.lexology.com/gtdt. Lexology Getting The Deal Through provides international expert analysis in key areas of law, practice and regulation for corporate counsel, cross-border legal practitioners, and company directors and officers. Throughout this edition, and following the unique Lexology Getting The Deal Through format, the same key questions are answered by leading practitioners in each of the jurisdictions featured. Our coverage this year includes new chapters on Egypt and Thailand. Lexology Getting The Deal Through titles are published annually in print. Please ensure you are referring to the latest edition or to the online version at www.lexology.com/gtdt. Every effort has been made to cover all matters of concern to readers. However, specific legal advice should always be sought from experienced local advisers. Lexology Getting The Deal Through gratefully acknowledges the efforts of all the contribu- tors to this volume, who were chosen for their recognised expertise. We also extend special thanks to Alan M Klein of Simpson Thacher & Bartlett LLP, the contributing editor, for his assis- tance in devising and editing this volume London April 2019 Reproduced with permission from Law Business Research Ltd  This article was first published in June 2019 For further information please contact editorial@gettingthedealthrough.com www.lexology.com/gtdt 1 © Law Business Research 2019
  • 3. Public M&A 20192 Contents Global overview 5 Alan M Klein Simpson Thacher Bartlett LLP Franchise MA 7 Edward (Ned) Levitt Dickinson Wright LLP Cross-border MA: The view from Canada 11 Ian Michael Bennett Jones LLP Bermuda13 Stephanie P Sanderson BeesMont Law Limited Brazil18 Fernando Loeser, Enrique Tello Hadad, Lilian C Lang and Daniel Varga Loeser, Blanchet e Hadad Advogados Canada25 Linda Misetich Dann, Brent Kraus, John Piasta, Ian Michael, Chris Simard and Beth Riley Bennett Jones LLP China33 Caroline Berube and Ralf Ho HJM Asia Law Co LLC Colombia39 Santiago Gutiérrez, Juan Sebastián Peredo and Mariana Páez Lloreda Camacho Co Denmark45 Thomas Weisbjerg, Anders Carstensen and Julie Høi-Nielsen Mazanti-Andersen Korsø Jensen Law Firm LLP Egypt52 Omar S Bassiouny and Mariam Auda Matouk Bassiouny England and Wales 57 Sam Bagot, Matthew Hamilton-Foyn, Dan Tierney and Ufuoma Brume Cleary Gottlieb Steen Hamilton LLP France66 Anya Hristova and Océane Vassard Bersay Associés Germany75 Gerhard Wegen and Christian Cascante Gleiss Lutz Ghana84 Kimathi Kuenyehia Sr, Sarpong Odame and Kojo Amoako Kimathi Partners, Corporate Attorneys India91 Rabindra Jhunjhunwala and Bharat Anand Khaitan Co Ireland100 Madeline McDonnell and Susan Carroll Matheson Italy111 Fiorella Federica Alvino Nunziante Magrone – Law Firm Japan118 Sho Awaya and Yushi Hegawa Nagashima Ohno Tsunematsu Latvia126 Gints Vilgerts and Vairis Dmitrijevs Vilgerts Luxembourg131 Frédéric Lemoine and Chantal Keereman Bonn Schmitt Malaysia137 Addy Herg and Quay Chew Soon Skrine Mexico143 Julián J Garza C and Luciano Pérez G Nader, Hayaux y Goebel, SC Netherlands148 Allard Metzelaar and Willem Beek Stibbe North Macedonia 154 Emilija Kelesoska Sholjakovska and Ljupco Cvetkovski Debarliev, Dameski Kelesoska Attorneys at Law © Law Business Research 2019
  • 4. Contents www.lexology.com/gtdt 3 Norway161 Ole Kristian Aabø-Evensen Aabø-Evensen Co Advokatfirma Poland174 Dariusz Harbaty, Joanna Wajdzik and Anna Nowodworska Wolf Theiss Qatar181 Faisal Moubaydeen Dentons Romania186 Anda Rojanschi, Adina Oprea and Alexandra Vaida DB David și Baias Russia195 Vasilisa Strizh, Dina Kzylkhodjaeva, Philip Korotin, Valentina Semenikhina, Alexey Chertov, Dmitry Dmitriev and Valeria Gaikovich Morgan, Lewis Bockius LLP South Africa 202 Ezra Davids and Ian Kirkman Bowmans Switzerland211 Claude Lambert, Reto Heuberger and Andreas Müller Homburger AG Taiwan220 Yvonne Hsieh and Susan Lo Lee and Li, Attorneys-at-Law Thailand225 Panuwat Chalongkuamdee, Akeviboon Rungreungthanya and Pratumporn Somboonpoonpol Weerawong, Chinnavat Partners Ltd Turkey232 Noyan Turunç and Kerem Turunç TURUNÇ United States 239 Alan M Klein Simpson Thacher Bartlett LLP Vietnam245 Tuan Nguyen, Phong Le, Hai Ha and Huyen Nguyen bizconsult Law Firm Zambia253 Sharon Sakuwaha and Situlile Ngatsha Corpus Legal Practitioners © Law Business Research 2019
  • 5. www.lexology.com/gtdt 5 Global overview Alan M Klein Simpson Thacher Bartlett LLP If MA activity in 2017 was a complicated story, 2018 was not much simpler. Globally, activity levels overall continued to be strong, remaining comparable to, or improving on, healthy 2017 levels in many respects. While major regions such as Europe and the US saw continued growth over 2017 volumes, certain other regions such as Latin America regis- tered declines in activity. The total value of announced deals last year was US$3.9 trillion according to Bloomberg, representing a 15.9 per cent increase from the previous year. Despite a substantially increased total value, however, 2018 saw a decrease of approximately 8.5 per cent in the number of deals as compared to 2017. Notably, 2018 marked the fifth consecutive year in which MA activity has broken US$3 trillion. This high level of MA activity was sustained despite increased global geopolitical uncertainty, including the midterm congressional elections in the US, continued uncertainty with respect to Brexit and several pres- idential elections in Latin America. Global MA activity in the first half of 2018 sustained the momentum imparted from the fourth quarter of 2017 but began to slow during the second half of 2018, decreasing markedly during the fourth quarter when it declined by 5 per cent against the previous quarter and registered the slowest period since the second quarter of 2017. Each of the five largest deals in 2018 were announced in the first half of the year. The number of blockbuster deals remained strong, increasing from three deals announced in 2017 exceeding US$50 billion in value to five such deals in 2018, including Takeda Pharmaceutical’s US$80.9 billion acquisition of Shire Plc, Cigna’s US$68.4 billion acquisition of Express Scripts, Energy Transfer LP’s US$59.3 billion merger with Energy Transfer Partners, T-Mobile’s US$57.8 billion proposed merger with Sprint and Comcast’s US$50.7 billion acquisition of Sky. More gener- ally, high-dollar deals dominated compared to 2017, with 36 deals with announced values in excess of US$10 billion in 2018 – six more than were announced in 2017 – and deals with announced values in excess of US$1 billion comprising 61.2 per cent of total deal activity in 2018. As noted above, this increase in MA volume and mega-deals in 2018 was coupled with a decrease of approximately 8.5 per cent in the number of total deals announced worldwide in 2018 as compared to 2017, reflecting increased activity in the bulge bracket. Globally, private equity buyouts in 2018 continued to grow, accounting for 10 per cent of all 2018 MA activity and representing increases of 29 per cent in value and 4 per cent in the number of deals, respectively, from 2017; these numbers represent the strongest year for private equity buyouts in over a decade. Bloomberg reported regional increases in private equity MA activity in 2018 of 15.3 per cent, 14.2 per cent and 4.7 per cent in the American, EMEA and APAC markets, respectively. The continued availability of low interest rates and large corporate cash reserves continued to foster positive conditions for private equity MA activity in 2018. The top industry in terms of global MA activity for 2018 remained the financial sector with US$862.9 billion in announced transactions, which accounted for 21.6 per cent of deal value in 2018, followed by consumer non-cyclical (19.8 per cent), energy (11.2 per cent), communications (10.9 per cent), industrial (10.1 per cent), technology (9.1 per cent), consumer cyclical (8.4 per cent), basic materials (4.4 per cent), utilities (4.2 per cent) and diversified (0.1 per cent). Cross- border MA deals reached 38.9 per cent of total MA value in 2018, surpassing 2014’s previous high of 37.8 per cent while also representing an increase of 32 per cent compared to cross-border volume in 2017. By region the Americas continued to lead the global MA market in 2018 with US$2.4 trillion in activity from 19,249 announced trans- actions, representing a 25.6 per cent increase in total volume, as compared with 2017. The US accounted for 43 per cent of the global value with announced deals worth US$1.5 trillion, increases of 1.4 and 15.4 per cent, respectively, from 2017 and roughly on a par with 2016 levels. Eight of the 15 largest transactions announced in 2018 involved US targets and nine of the 15 also involved US acquirers. The top three sectors leading the US market included energy and power, high tech- nology and healthcare, each of which accounted for 23.6 per cent, 18.8 per cent and 12.5 per cent of the market respectively. Canadian activity also saw a notable increase, with the US$2.75 billion in announced value representing a 15.3 per cent increase over 2017 levels. Latin American 2018 total deal value, however, dropped by 25.3 per cent compared to 2017, according to Mergermarket. MA activity in the Asia-Pacific region posted a notable decline in volume of 4.3 per cent against 2017 totals, dipping under US$1 trillion to US$950.4 billion and representing the slowest annual period in the past three years. Although the US$56.1 billion in China inbound MA repre- sented a 23.3 per cent increase compared to 2017 and also registered as the highest amount ever achieved, outbound China activity continued its slide from 2017 as it fell to US$116.6 billion, a decrease of 5.3 per cent against 2017 levels. The continued decline in US–China activity was particularly noteworthy, with US inbound activity from China tumbling from US$55.3 billion in 2016 to US$8.7 billion in 2017 and even further to under US$3 billion for 2018, representing annual declines of 94.6 per cent and 65.8 per cent respectively. The European MA market, like its American counterpart, saw deal volume increase in 2018 against a falling deal count, with volume rising by 18.8 per cent for 2018 to a total of US$983.8 billion. Although Europe’s 2018 total share of MA value remained comparable to 2017 at 28 per cent, the second half of the year saw MA value fall drasti- cally by 52.8 per cent in the face of continued uncertainty over Brexit. Despite this notable slowdown, private equity activity remained strong in Europe, increasing by 14 per cent over 2017 with average premiums reaching 26.2 per cent. Despite the slide in the second half of 2018, the outlook on deal activity in 2019 is more optimistic than that of the prior year. About 76 per cent of executives at US-headquartered corporations and 87 per cent of leaders at domestic-based private equity firms expect greater deal flow in 2019, compared with 68 per cent and 76 per cent, respectively, for the same time last year, according to Deloitte. Furthermore, 70 per cent anticipate the size of transactions in 2019 to increase. Despite evidence of fewer worries regarding global © Law Business Research 2019
  • 6. Global overview Simpson Thacher Bartlett LLP Public MA 20196 economic uncertainty, capital market volatility and deal valuation, there has been an increase in perceived risks because of business legisla- tion, interest rate increases, anti-trust issues and activist shareholders. Additionally, continued uncertainty regarding global trade and tariffs have both registered as having negative impacts on prospective deal making. Even so, corporate cash reserves remain healthy with holders indicating a willingness to put these resources to use, and significant MA activity in 2019 appears likely to continue at a healthy clip. For over 15 years, our predecessor publication, Getting the Deal Through – Mergers and Acquisitions, and now this title, has sought to provide information of use to practitioners and clients around the world. The pace of the globalisation of the MA economy has far outstripped what anyone could have predicted. In that time the global economy has gone through several cycles and suffered cataclysmic reverses and huge booms. We hope throughout that time and for some time to come that this publication has been and will continue to be a resource of great use to those who seek it out. © Law Business Research 2019
  • 7. www.lexology.com/gtdt 7 Franchise MA Edward (Ned) Levitt Dickinson Wright LLP Introduction Acquisitions of other businesses, to strategically grow an existing busi- ness or as a financial investment aimed at earning a good return, have been around since the beginning of modern commerce. However, histor- ically, franchise companies grew organically, with traditional financing, as needed. Exit strategies for the entrepreneur-franchisor were often very low on the strategic plan. Today, with the increasing number of boomer-franchisors heading for retirement, the amazing growth of the franchise sector, the acceptance of franchising as a viable business model, a great deal of under-deployed capital waiting on the sidelines for good targets and more and more examples of successful franchise system growth, it is no wonder that we are witnessing today an incred- ible increase in franchise mergers and acquisitions. Adding to these factors is the growth of private equity pools of money and the realisa- tion by these funds that franchising presents an excellent investment because of predictable and steady cash flow through royalties, great leverage from deployed capital and existing assets and almost unlimited possibilities for rapid growth (domestic and internationally). The size and sophistication of some of these franchise systems and the transactions that evolve are impressive and often rival the traditional businesses as to scope and complexity. Certainly, many of the issues, challenges and approaches are the same in franchise and non-franchise MA transactions. However, for a variety of important reasons, franchise MA has an additional layer of complexity and risk. Franchise variables For the uninitiated, franchising might appear fairly uniform and uncom- plicated in an acquisition, but for the knowledgeable, franchising is multifaceted and nuanced in the extreme. MA in franchising can be quite different if: the system is public or private, large or small, provides services or products, the franchisees have multiple units or multiple brands, the franchisor has expanded through master fran- chising or, perhaps, the seller is a large master franchisee itself within a broader system. It is rare for a franchise system to have a lot of hard assets, such as real estate or valuable equipment, even if it has a high valuation. The value of the system resides primarily in its brand, franchise agreements with franchisees and the relationship between the franchisor and the franchisees. The correct value of the system and how the acquisition is executed needs to take into account the strength, durability and trans- ferability of these assets. This leads to a unique set of due diligence issues and choices and, while proper due diligence is important in any acquisition, it is critical in a franchise acquisition. The acquisition process If, as is often the case, a franchise acquisition commences with a letter of intent type document, an interesting question arises as to whether the franchisees should be informed about the sale intention at that stage. There is no legal requirement to do so and most advisors would argue that, at the letter of intent stage, completion is too uncertain to inform the existing franchisees. However, if the franchisor does enter into such a letter of intent it is a strong possibility that this would constitute a material fact requiring disclosure to any prospective franchisees, if the prevailing franchise legislation requires such disclosure. Upon the signing of a binding acquisition agreement, the argument that disclo- sure is required for prospective franchisees gets more compelling, but not with respect to existing franchisees. Some franchisors opt to place a moratorium on new franchise sales during a system sale process because of this issue. Query what a franchisor should do, if, during a sale process, disclosure is required because an existing franchisee is selling its business to a new franchisee or an existing franchisee is renewing its franchise agreement. The acquisition agreement In addition to the usual provisions of an acquisition agreement, the fran- chise acquisition document will contain a number of specific franchise oriented provisions. The nature and extent of these types of provisions will encompass some or all of the following: • the existence of various forms of the system franchise agreements; • a description of the types of franchise arrangements in use in the system, i.e. area development, master franchise, area representa- tive, licensing, etc; • the existence of any franchisee associations or councils; • any existing claims by franchisees or facts upon which a claim by a franchisee is likely; • ongoing litigation, arbitration or mediation; • the status of all leases and subleases; • compliance with all franchise specific statutes, with particular emphasis on franchise sales during any period of franchisee rescission rights; • access to all franchise agreements and franchise disclosure documents; • the economic performance of franchisee operator units and corpo- rate units; • the status and performance of any existing marketing fund; • strength, durability and suitability of any supply chains; • holdbacks for representations and warranties regarding possible franchisee disputes. Due diligence As mentioned above, while the conduct of thorough due diligence is important in the acquisition of any business, it is particularly important in the acquisition of a franchise system. This is so because of the fact that so much of the value rests on the relationship with the franchisees, the ability of the franchisor to support the franchisees in the system and to protect the brand. At the pre-contractual stage of an acquisition, the acquirer is free to approach any of the system franchisees, in any manner desired, to ‘take the temperature’ of the system. In order to avoid creating prob- lems for the existing franchisor, this could be done through professional © Law Business Research 2019
  • 8. Franchise MA Dickinson Wright LLP Public MA 20198 contractors or investigators in an innocuous way. Once the existing franchisor/franchisee relationship is determined, the acquirer could decide to end its pursuit of the acquisition or to shape its offer to take that relationship into account. For example, even if the relationship is troubled, the acquirer might still want to acquire system, at the right price, in order to solve the problems as the ‘white knight’. This type of acquirer is often referred to as a ‘strategic purchaser’; being an existing franchisor of a competitive franchise system or a key supplier to the system. Financial acquirers (those interested only in a financial return from the system) are also interested in this critical relationship, but are less likely to conclude the acquisition if they sense trouble in the relationship between the franchisor and its franchisees. Whenever or however the existing franchisees in the system are being approached, it is valuable to engage with franchisees who have been in the system for variety of time periods, as this will provide the acquirer with a picture of the evolution of the system and whether or not the system is trending up or down. Some of the typical areas for due diligence, relate to the finan- cial performance of the franchisor and its franchisees, the content of all franchise agreements and leases, the status of any marketing fund, the condition of all accounting and computer systems and the status of all intellectual property. In addition, however, there are some very important, but less common due diligence areas an acquirer of a fran- chise system should consider. For example, what the relationship is like between key management personnel and the franchise community. If it is not a good one, then the acquirer will need to be able to readily replace such people. On the other hand, if the relationship is very good, then the acquirer will want to know what the likelihood is they can be retained after the acquisition is completed. Another is the timing of fran- chise sales. If too many franchises are sold in too short a period of time, it may indicate trouble in the future because all franchisors have to be able to ‘service what they sell’ and a quality franchise culture takes time to grow without the pressure of a constantly and rapidly expanding fran- chisee population. Conversely, if too many franchises are being resold by existing franchisees, there may be trouble lurking in the system. Also, a thorough analysis of what the franchisor spends on site selec- tion, franchisee selection, initial franchisee training and support will be very revealing about the health and viability of the system. Franchise systems that grow quickly and without sufficient resources being deployed in these very crucial areas may present as very successful on the surface, when there is really a lot of rot at the core. Size of the target system The size of the target system will have a significant impact on many aspects of an acquisition. The most obvious being the price paid, but also the need for more or less due diligence and how much money needs to be spent on it. When the system is large, there may not be enough time, money and manpower to review all of the existing docu- mentation. The approach then might be to set up samples of categorised agreements (ie, the forms of franchise agreement that existed as the system grew through various stages). Then the task would be to have a clear and complete list of any special arrangements made with any and all franchisees. Where the franchisor has expanded through large franchisee operations such as area developers or master franchisees, it will be necessary to conduct due diligence on these large franchisees. Where the franchise system is more modest in size, the task of reviewing all documentation is more feasible, but the need to examine the relationship between management and the franchisee community is more critical. Additionally, with the smaller systems, mere guaran- tees of individuals for representations and warranties in the acquisition agreement may not be sufficient comfort for the acquirer and consid- eration might need to be given to actual holdbacks of a portion of the purchase price. Assessing revenue potential The most obvious and customary source of revenue for a franchisor are the royalties paid by the franchisees on (usually) their gross revenue. The evaluation of the strength of this revenue stream, absent widespread discontent by franchisees, is relatively easy for a prospec- tive acquirer. More difficult is the evaluation of supplier rebates, the predictability of which rests on the policies of the suppliers and the marketplace factors such as competition, quality of goods and changes in consumer tastes. Similarly, if the franchisor is relying significantly on revenue from landlord incentives, shifting economies may put such revenues streams at risk. Franchise agreements At the heart of every franchise system are the existing franchise agree- ments. The content and quality of these agreements, from the point of view of the acquirer, are key in assessing the acquisition and setting a price that makes sense. This is true whether or not the acquirer intends to make changes to the system or how it runs or not. Even If the acquirer is going to continue running the system as was done in the past, certain provisions of the franchise agreements are necessary to allow the system to keep pace of inevitable changes in customer prefer- ences, technology and demographics to name a few. Term and renewal Ignoring other provisions in a typical franchise agreement, which require the franchisee to keep the unit up to date, often renewal time is the best opportunity to have franchised units in the system updated and refurbished. Usually, franchisees who have simply lost their drive or behave badly, but not in breach of their agreement, cannot be termi- nated. The only way to remove them from the system, and, therefore, improve the overall performance of the system, is to not renew them when the initial term and all renewal terms have ended. The right of the franchisor to sell While it is usual to find a clause in a typical franchise agreement that the franchisor is at liberty to assign the franchise agreement without the consent of the franchisee and without any conditions, that provision must be checked early in the process. Otherwise the acquisition may not be doable. Changes to the system Particularly for strategic acquirers, who might be competitors, suppliers or others who want to bring about a lot or a little change to the target system, it is very important that the franchise agreements allow the franchisor to revise how the franchised business is run, what products and services are offered to the customer and what brand the franchisee must operate under. While such a provision will not give the franchisor a complete free hand to make such changes, without such a provision, any change will be impossible. Territorial rights It is not unusual for new franchisors to grant too large territories to their initial franchisees or to grant rights of first refusal on contiguous territories to jump start the growth of the system. The acquirer may then be saddled with some unreasonable obstacles to expanding the system to its maximum size. If the acquirer is a competing system and there is overlap in existing territories of franchisees in both systems, the acquirer will have a business and possibly a legal problem, depending upon the language of the franchise agreements. Assignment rights of the franchisee In order to control who can be a franchisee in a system, it is usual for a franchise agreement to have extensive language regarding assignment © Law Business Research 2019
  • 9. Dickinson Wright LLP Franchise MA www.lexology.com/gtdt 9 of the agreement. This type of provision usually gives to the franchisor the right to approve the assignee and the right to require an update to the unit. It will also usually require that there are no breaches to the franchise agreement and that the franchisee is up to date on all payments owed to the franchisor. To the extent this type of clause is absent or weak, it would affect the value of the system and the acquir- er’s ability to grow the system well. Guarantees It is very common to allow franchisees to purchase the franchise through a corporation, but then it is equally common to require the shareholders of the corporation to guarantee all of the obligations of the corporate franchisee under the franchise agreement. Without such guarantees, the ability of the franchisor to control the system can be significantly diminished. Termination rights of the franchisor As to substance and procedure, the events of default by the franchisee should be clear and extensive in a well drafted franchise agreement. Otherwise, the acquirer may be saddled with poor performing fran- chisees and a deteriorating system. Post termination, there should be an enforceable non-competition covenant on the part of the franchisee. Intellectual property By far, the most important asset of a franchise system, after the franchise agreements and franchisor/franchisee relationship, is the intellectual property of the franchisor. Foremost among this type of property are the system trademarks. The franchisor should ascertain that the trade- marks are still viable in the marketplace, are owned by the franchisor outright, transferable, registered in all jurisdictions where the system operates and registerable in any jurisdiction the acquirer intends to expand the system. These days, important intellectual property of a franchisor extends to copyright in software, know-how, operating manuals and business systems. Further, with the increasing importance of the internet in markets all around the world, the ownership of domain names and social media sites is a key factor in any acquisition of a franchise system. Operating manuals The operating manual for the franchise system is a very important tool and asset of the franchise system. Its value, both monetarily and practi- cally, increases with its effectiveness and quality. If the system operates in non-English speaking countries and has good translations of the English version, then there is added value for the acquirer. However, operating manuals can also present or contribute to legal problems. For example, the topic of joint employer among franchisors and their franchisees has recently received a lot of attention from the courts and regulators. Inevitably, an examination will be made of the system operating manual in any proceeding to ascertain what control the franchisor exerted over the franchisee’s hiring processes. Similarly, the operating manual can create issues regarding human rights legisla- tion and in other areas of regulation and vicarious liability. Needless to say, the operating manual should be carefully scruti- nised on any acquisition of a franchise system. Advertising funds One of the great attractions of operating as a franchisee is the opportu- nity to pool funds with the other franchisees to increase the advertising and marketing power of the entire system. Having said that, one of the most common areas of disputes in franchising is the advertising fund and how it is administered. Any potential acquirer of a franchise system is well advised to examine the structure, usefulness, administration and franchisee attitudes towards such a fund. Such an examination would likely entail: • a market study to ascertain the effectiveness of the system marketing efforts; • a thorough review of the receipts and expenditures of the fund over several years, including any money charged by the franchisor to the fund; and • projections of the adequacy of the required franchisee contribu- tions in the future. Franchisee associations and councils Franchisee associations and councils can be a blessing or a curse, or completely irrelevant to the operation of the franchise system. However, a prospective acquirer of a franchise system, besides obtaining repre- sentations about the franchisor’s knowledge of the formation or intended formation of any such franchisee groups, should communicate with the leadership of the group and examine the minutes of their proceedings in recent times. At the appropriate time, the acquirer will want to forge a good relationship with the group and use it in the most effective ways. Regulation Today we are witnessing a steady growth of franchise specific regula- tion and other regulation which affects franchising, such as business opportunity laws, agency laws and licensing laws. Some regulation is heavy in presale disclosure, some regulates the relationship between the franchisor and the franchisee and some requires the approval of a government body before a franchise sale can be made. Once it is ascertained in what jurisdictions the franchisor operates, then the appropriate professional in each jurisdiction should be selected to review compliance on the part of the franchisor with the local laws that govern or influence franchising. Where compliance is flawed or questionable, either the franchisor should remedy the flaw, if possible, or some price adjustment or holdback should be instituted to cover the acquirer’s risk. Getting comfortable in this area is not easy. For example, it is not just the content of say a disclosure document that should be checked for accuracy, but the procedures behind the delivery of the document should also be examined. Technology It is difficult these days to keep up with the rapidly changing technology that affects our businesses and our daily lives. From the point of view of the acquirer of a franchise system, it is important to ascertain the adequacy of the technology employed in the operation of the system or, more realistically, to ascertain how quickly the technology will become obsolete. Additionally, cybersecurity is become a massive problem for all businesses and institutions and franchise systems are no exception. As a starting point, the acquirer will want to be assured of the system’s compliance with the various privacy regulations or make provision to rectify any deficiencies. Conclusion Much of the same considerations, requirements and issues in MA transactions with businesses generally apply when an entire franchise system is acquired. Overlaid on all of that is the added franchise specific considerations, issues and challenges. Most importantly, there is the reality that the franchisor/franchisee relationship is at the heart of any successful franchise system and, in an acquisition of the system, preserving and, hopefully, enhancing that relationship is key. This leads to the reality that how something is done is equally important as to what is done. Further, the ability to zero in on the true state of affairs in a targeted franchise system is more challenging than would be the case in the acquisition of another type of business. Finally, an acquirer has to © Law Business Research 2019
  • 10. Franchise MA Dickinson Wright LLP Public MA 201910 struggle with the legal framework of the business being franchised and the laws that govern franchising specifically. It is impossible to include, in just one chapter, all of what needs to be known in the acquisition of a franchise system. However, it is hoped and intended that this chapter provide the reader with some valuable insight and tools to assist in the task. Edward (Ned) Levitt nlevitt@dickinsonwright.com 199 Bay Street, Suite 2200 Commerce Court West Toronto, ON M5L 1G4 Canada Tel: +1 416 646 3842 Fax: +1 844 670 6009 www.dickinson-wright.com © Law Business Research 2019
  • 11. www.lexology.com/gtdt 11 Cross-border MA: The view from Canada Ian Michael Bennett Jones LLP Canadian MA by the numbers To understand Canadian MA market statistics better one should appre- ciate the relatively small number of large and domestic acquisition targets. To illustrate this feature, compare the headline MA statistics for 2018 globally against those for Canada. In 2018, worldwide MA activity totalled US$4 trillion, representing an increase of nearly 20 per cent compared to 2017 global deal value. By number, worldwide deal count actually declined 8 per cent as compared to 2017, a three-year low in fact. These measurements alone highlight the increasing signifi- cance of mega and large deals in global MA activity. When you contrast those global statistics with 2018 deal activity in the Canadian market, a different, and opposite, theme emerges. In 2018, the total announced Canadian deal value decreased slightly by 2 per cent from US$253 billion in 2017 to US$247 billion. However, Canadian MA transactions by number announced in 2018 rose to a new annual record high of 3,415 transactions, an increase of 14 per cent as compared to Canadian MA transactions (any Canadian involvement) announced in 2017. The opposite year over year directional changes in the Canadian MA market as compared to the global MA market by way of deal count and deal value should not surprise Canadian MA market partici- pants. The role of mega and large deals in the global MA environment and their relative importance for large scale investors and financial and legal advisers alike, contrast with their predictably less common occur- rence in the Canadian MA market, even after taking into consideration Canadian involvement in outbound transactions. Consistent with a generally applicable 1:10 relationship with the US, the Canadian market often still regards US$1 billion or US$2 billion transactions as mega- deals as compared to a US$10 billion threshold (if not greater) in US or global markets. The general observation of note is the relative impor- tance of mid-market deals in Canadian MA. From a global perspective, Canadian mid-market deals are more likely to be viewed as lower mid- market transactions. Transactions with values below US$250 million routinely makeup an overwhelming majority of the transactions in the Canadian MA context. For example, in the fourth quarter of 2018, trans- actions with values less than US$250 million accounted for 90 per cent of total announced Canadian MA transactions. Larger transactions do play a role of course in Canadian MA as well, but recent statistics highlight that they are often more commonly found in Canadian outbound transactions led by Canada’s experienced, direct-investing, pension funds, large infrastructure investors and utili- ties operators who are looking for large-scale investments beyond their comparatively smaller home markets. In the fourth quarter of 2018 by way of example, the top 10 transactions with Canadian involvement by deal value ranged from US$1.35 billion to US$17.5 billion. Of these top 10 transactions, only two were wholly domestic transactions with both Canadian buyers and sellers of a Canadian asset. Another two of the top 10 were connected to Canada solely by virtue of a buyer or seller being listed on a Canadian-based stock exchange with the principal assets of each of the buyer, seller and target all located outside of Canada. Finally of note, and in keeping with their global reputation, three of the top 10 Canadian MA transactions, and in fact the three largest, were transac- tions involving Canadian pension fund acquirers of international assets in the industrial, infrastructure and utilities industries. The significance of the outbound segment of the Canadian MA market is highlighted by the fact that in the fourth quarter of 2018, Canadian companies acquired 281 foreign targets representing 41 per cent of total MA transactions with any Canadian involvement at all. Furthermore, cross-border deals in the same period represented 70 per cent of total Canadian MA transactions by value. In terms of country exposure, the US continues to be Canada’s most common cross-border MA partner with just over 60 per cent of cross-border transactions occurring between Canadian and US parties. Given the significant difference in the size of the Canadian and US markets, it is notable that there is a consistent trend that Canadian–US cross border MA activity involves far more acquisitions by Canadian companies of US targets, than US acquisitions of Canadian targets – by nearly a 2:1 margin. Political events 2018 presented Canadian businesses with two cross-border issues of particular significance – Canada’s political relationship with the United States and the United States’ economic tensions with China. With the continued impact of tariffs on steel and aluminium from Canada (imposed on the premise of national security risk) and the public nego- tiation and settlement (though not yet implemented) of a revised free trade agreement between Canada, the US and Mexico both creating economic and political rifts between Canada and the United States in 2018, cross-border acquisition and business development planning was challenged with uncertainty and political animosity. Though 2019 has so far been comparatively quiet, steel and aluminium tariffs imposed by the US, and the broad range of tariffs introduced by Canada in response remain as inefficient market-place disrupters and also as potential impediments to the implementation of the revised Canada–US–Mexico free trade relationship. Separately, the significant escalation of economic tensions between the US and China in 2018 has also likely affected the Canadian MA market. US–China tensions might have normally also created some opportunities for Canada as an alternative market, but the tensions unexpectedly swept into Canada at the end of 2018 with the receipt of an extradition request by Canada from the US for the chief financial officer of Huawei. The status of Huawei’s CFO, as the daughter of the founder of Huawei and a senior officer of national technology champion of China, © Law Business Research 2019
  • 12. Cross-border MA: The view from Canada Bennett Jones LLP Public MA 201912 already the subject of international debate regarding technology secu- rity concerns, forced Canada into an international debate that Canada had certainly hoped to avoid. Canadian MA with Chinese buyers has fluctuated for a variety of reasons (eg, energy prices, currency controls and mineral prices) over the past decade, but it has persisted in its importance and potential. The trade tensions between the US and China, and technology tensions between China and western based technology hubs, has likely contributed to a slowing of inbound MA transactions to Canada from China as compared to prior years. The reduction in these transactions in the US has been far more dramatic with the tightening up of CFIUS approvals that had already proven to be difficult. Outbound investment by China in 2018 fell generally for the third straight year. With 2018 investment in the US totalling just US$13.2 billion as compared to US$50.9 billion of transactions conducted by Chinese buyers in Europe, Canada is at some risk of being skipped over on the way to Europe. Announced transactions from China and Hong Kong into Canada fell from 34 in number with a value of US$5.65 billion in 2017 to 25 in number with a value of US$2.64 billion in 2018, but even with this reduc- tion deal value between Canada and China remains higher than it was in any year between 2013 and 2016. The ongoing tension over Huawei’s participation in 5G technology in many western countries coupled with the ongoing extradition proceedings in Canada involving Huawei’s CFO will continue to present headwinds, but not barriers, for Canada–China MA transactions. Canada–China transactions are continuing, and the appetite of Canadian governments to continue to build economic ties continues. While the current tensions and their impact on the Canadian MA market may not be short lived, they will not be permanent. New industries In 2018, the rise of two particular new industries materially affected Canadian MA – cannabis and artificial intelligence. The legalisa- tion in Canada of cannabis in 2018 stoked the already hot market for cannabis-driven corporate transactions in Canada. Second, and less heralded, was the rise of artificial intelligence (AI) start-ups in a number of technology hubs in Canada. In 2018, building off already considerable momentum in 2017, there were approximately 60 new public companies created in the cannabis industry – most born from reverse takeovers by US businesses finding an opportunity to list on a public market in Canada using another Canadian market feature – the public company mining exploration shell. The Canadian RTO playbook for cannabis busi- nesses was on such a pace in 2018 that market observers noted that the historical availability of public company shells for proposed RTO trans- actions was starting to become a barrier. Given the continued status of cannabis under the federal laws of the US, Canadian stock exchanges and other financial industry infrastructure in Canada have presented significant opportunities to serve as an MA catalyst for US and other international businesses in this industry. The rapid rise in the number of new Canadian public companies in this industry will inevitably stock the shelves for future Canadian MA activity – much of which was already exhibited in 2018. AI companies have also represented a new segment of the MA market. The significant investment of government and university research programmes in this space has spawned world-class AI tech- nology companies that are the current subject of venture financing from international sources, with both the US and China at the top of the cross-border list. The cross-border MA opportunities in AI are begin- ning to surface and will continue to build in this segment of the market. Notwithstanding continuing legal challenges to infrastructure developments of national importance such as pipelines and unresolved trade uncertainties with the US and China, the Canadian MA market has proven to be resilient in the face of similar challenges before and Canadian buyers will continue to be active in the international marketplace. Ian Michael michaeli@bennettjones.com 3400 One First Canadian Place PO Box 130 Toronto ON M5X 1A4 Canada Tel: +1 416 863 5778 Fax: +1 416 863 1716 www.bennettjones.com © Law Business Research 2019
  • 13. www.lexology.com/gtdt 13 Bermuda Stephanie P Sanderson BeesMont Law Limited STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? The principal methods of business combination are: • private purchase of shares of a target company; • private purchase of a target company’s underlying business; • public offer for shares in a target company; • statutory merger; • statutory amalgamation; and • statutory scheme of arrangement. In Bermuda, amalgamations and mergers are the most common ways to effect an acquisition. The main difference between a merger and an amalgamation is that an amalgamation involves the convergence of the amalgamating companies and their continuance as a ‘new’ amalgamated company, while a merger involves the merging of companies resulting in a vesting of assets and liabilities into the ‘surviving company’. Typically, business combinations are structured as triangular transactions. This type of transaction typically involves the buyer estab- lishing a subsidiary company in Bermuda that amalgamates or merges with the target company. The shareholders of the target company may receive: • cash consideration; • securities or shares; or • a combination of the above. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The Companies Act 1981 is the main statute governing business combinations in Bermuda and Part VII deals with arrangements, recon- structions, amalgamations and mergers and provides for: • amalgamations ; • mergers; • schemes of arrangement; and • purchase of shares. The MA market is generally not regulated in Bermuda; however, specific regulations may apply depending on the nature of the transac- tion, including whether the transaction involves public or private entities and whether there are regulated entities involved. Also, a company may in its by-laws have provisions regulating takeovers. Public MA transactions involving listed Bermuda entities will be regulated by the Bermuda Stock Exchange (BSX) Listing Regulations, which impose obligations on BSX-listed entities. Prior approval from the Bermuda Monetary Authority (BMA), Bermuda’s principal regulator, will generally be required for the issue or transfer of securities (shares) to foreign buyers, except where a general permission applies (for example, for listed securities). The BMA also regulates particular sectors such as insurers, banks and invest- ment businesses. Certain acquisitions will require a change of control application to be made to the BMA, such as acquisitions of regulated or licensed entities, and in those cases the BMA will evaluate the proposed controllers and senior executives according to the applicable criteria. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Transaction agreements may be governed by either Bermuda law or a foreign law. In domestic transactions the governing law will be Bermuda law, but in transactions involving international companies the choice of governing law for the implementation agreement is a matter for nego- tiation. Whereas the statutory amalgamation or merger agreement will be governed by Bermuda law. A scheme of arrangement is effected by means of a court procedure. FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The necessary filings will depend on the type of business combination and the nature of a particular transaction. The following Registrar of Companies filings will attract filing fees: • application and registration of a merger or amalgamation; • filing of a prospectus or information memorandum in connection with a public offering of shares; • changes to certain constitutional documents or authorised share capital; and • director filings in relation to changes to the Register of Directors maintained by the Registrar of Companies. There are also filing requirements for BSX-listed entities, for example, in relation to notices, approvals and circulars or announcements. A scheme of arrangement involves a court process and requires particular steps to be followed including the originating summons, peti- tion and court order. See question 18 in relation to taxes. © Law Business Research 2019
  • 14. Bermuda BeesMont Law Limited Public MA 201914 Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? The BSX Listing Regulations provide a corporate disclosure policy which requires BSX-listed entities to keep the BSX, shareholders and holders of listed securities informed (without delay) by way of public announce- ments or circulars, of any information relating to the group that: • is necessary to enable them and the public to appraise the financial position of the issuer and the group; • is necessary to avoid the establishment of a false market in its securities; and • might reasonably be expected to materially affect market activity in and the price of its securities. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? BSX-listed entities must comply with the disclosure obligations set out in the BSX Listing Regulations. The BSX Listing Regulations govern stakebuilding, and notice must be made to the BSX in respect of any shareholder of a listed entity who directly or indirectly: • acquires the beneficial interest, control or direction of 5 per cent or more of securities; or • has a beneficial interest or exercises control or direction over 5 per cent or more of securities and acquires, in aggregate, an additional 3 per cent or more. In a situation where a listed entity wishes to repurchase in excess of 20 per cent of its listed securities, the entity must obtain prior approval from the BSX whose mandate is to maintain market integrity and ensure equality of treatment for all security holders. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Bermuda law does not impose an all-embracing code of conduct on directors. In practice, a company’s memorandum of association and by-laws comprise its constitution and together with the Companies Act 1981 prescribe the ambit of the directors’ powers. Many of the duties and obligations of a director are statutory whereas others are found in common law. The Companies Act 1981 requires that directors act honestly and in good faith with a view to the best interests of the company and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Directors must disclose their interest in any material contract or in any person party to a material contract with the company (or its subsidiaries). Directors must ensure they act on an informed basis after due consideration of relevant materials, deliberation of information and obtaining advice from expert and experienced advisers if appropriate. Directors are responsible to the company and not directly to the shareholders. However, in practice the interests of the company are typically regarded as identical with those of the shareholders as a whole (as constituted from time to time), therefore avoiding attaching the company’s interests to the interests of any one specific shareholder. When a company is approaching insolvency, the directors should have regard to the interests of the company’s creditors in discharging their duties. However, the duty to have regard to creditors’ interests is not a freestanding duty and may only be enforced by the company or by its liquidator (if in liquidation). Controlling shareholders do not generally owe other shareholders any fiduciary duties but should not oppress a minority. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? The approval and appraisal rights of shareholders depends on the busi- ness combination. Merger or amalgamation In relation to a merger or amalgamation, the Companies Act 1981 procedure set out in section 106 must be followed. The directors of each amalgamating or merging company must submit the amalgama- tion agreement or merger agreement for shareholder approval. A notice must be sent to each shareholder and include a summary or copy of the agreement, state the fair value of shares and state that a dissenting shareholder is entitled to be paid the fair value of his or her shares. The Companies Act 1981 provides that unless the by-laws otherwise provide, the resolution of the shareholders approving the amalgamation or merger must be approved by a majority vote of three- quarters of those voting at the meeting and the quorum necessary for such meeting is two persons holding at least more than one-third of the issued shares. Any shareholder who did not vote in favour of the amalgamation or merger and who is not satisfied that he or she has been offered fair value for his shares can apply to the court to appraise the fair value of his or her shares within one month of the company’s issuance of the notice. Asset sale In relation to an asset sale, the board will typically have sufficient power to conduct the sale. However, the company’s constitutional documents may require the approval of shareholders (or a class) for certain actions. Share sale A share sale will require shareholder approval and involvement; account will need to be taken in this regard of the provisions of the by-laws and any shareholder agreement. Scheme of arrangement A scheme of arrangement requires approval by a majority in number representing three-quarters of shareholders or class. Once sanctioned by the court, the scheme is binding on all members or class of members and on the company. COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? Unsolicited transactions or ‘hostile takeovers’ by way of a takeover bid are permitted in Bermuda, but they are uncommon. © Law Business Research 2019
  • 15. BeesMont Law Limited Bermuda www.lexology.com/gtdt 15 The target company’s board of directors must act in good faith and in the best interests of the company, but the board may try to dissuade shareholders from accepting a bid and try to take any other action to prevent the bid from proceeding, including searching for a ‘white knight’ to circumvent the takeover. A company’s by-laws could also contain anti-takeover protections, including a poison pill or other defensive provisions. Disputes concerning hostile bids can lead to litigation. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? The use of deal protection measures such as break fees or reverse break fees are not specifically regulated in Bermuda, and their use would be subject to challenge on the basis of the directors’ fiduciary duties. The quantum of the fee is negotiated and impacted by bargaining strength and other context-specific factors. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? There are restrictions on foreign ownership of shares in local Bermuda companies such that 60 per cent of the total voting rights in the local company must be exercisable by Bermudians – this is known as the ‘60/40 Rule’ unless a licence to exceed this limit has been granted. There are also restrictions governing the ownership of land by busi- nesses (both local or exempted). A foreign entity must obtain a special licence from the Bermuda government if it wants to take control of more than 40 per cent of a local company and carry on business in Bermuda. Such a licence typically includes a condition that the prior consent of the minister is required for a change in control of the licensed company. The criteria that are considered as part of an application for a licence include: • an assessment of the economic situation in Bermuda; • the nature and previous conduct of the company; • any advantage or disadvantage that may result from the company carrying on business in Bermuda; and • the desirability of Bermudians retaining control of the economic resources of Bermuda. The Companies Act was recently amended with the aim of facilitating direct foreign investment in Bermuda. A Bermuda company may be eligible for an exemption to the 60/40 Rule if its shares are listed on a designated stock exchange (including the BSX) and it engages in busi- ness in a prescribed industry including: • telecommunications; • energy; • insurance; • hotel operations; • banking; and • international transportation services (by ship or aircraft). There are also special licensing regimes for a number of key industries in Bermuda. There are no restrictions on foreign ownership of exempted compa- nies. However, for exchange control purposes, the issue and transfer of any securities in companies involving non-residents must generally notify or receive the prior approval of the BMA. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? Under Bermuda law, there are no specific legal restrictions on the conditions to a tender offer, exchange offer or other form of business combination and such conditions are subject to negotiation and market standards. While conditions are determined by negotiation, typically trans- actions are subject to limited conditions that include regulatory approval, no material change and shareholder approval and any restric- tions under a Shareholder Agreement or internal Takeover Code. Acceptance thresholds on a takeover bid are often set at 90 per cent of the target shares so that the applicable Companies Act 1981 squeeze-out procedures can be used. Mergers and amalgamations will also be conditional on achieving the relevant shareholder approval thresholds. In a cash acquisition, a bidder will need to make adequate arrange- ments to ensure the availability of funds and financing arrangements may be subject to conditions. Wide-ranging preconditions to closing are not uncommon in the terms of an offer. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? A target company will typically require reassurance or evidence that committed financing is in place for the purposes of the transaction. In respect of a cash offer, the offer announcement should include confir- mation that sufficient funding is in place. If required, the buyer and target will negotiate regarding the extent that the target is to assist with the buyer’s financing efforts, including preparation of documentation or speaking with lenders. Minority squeeze-out 14 May minority stockholders of a public company be squeezed out? If so, what steps must be taken and what is the time frame for the process? The Companies Act 1981 provides that if an amalgamation or merger agreement is approved in the manner set out in section 106 (see question 8) it is deemed to have been adopted. Where a merger or amalgamation has been approved by the requisite majority of shareholders, such approval is binding on all shareholders (other than shareholders who have commenced an appraisal action). Section 106 of the Companies Act 1981 contemplates that a merger or amalgamation approved by a 75 per cent majority of a quorate meeting is sufficient to bind shareholders to a merger agree- ment. As noted in question 8, the Companies Act 1981 permits the shareholders to provide for a smaller quorum and lower voting majority in the company by-laws. In relation to a scheme or contract involving the transfer of shares, where the offeror has been approved by the holders of not less than 90 per cent of the value of shares to which the offer relates, the offeror may purchase the remaining shares by giving notice to the remaining ‘dissenting’ shareholders. © Law Business Research 2019
  • 16. Bermuda BeesMont Law Limited Public MA 201916 Where a buyer has successfully acquired 95 per cent or more of the shares of a company, the buyer can give notice of the intention to acquire the share of the remaining 5 per cent of the shareholders on the terms set out in the notice. When such a notice is given, the buyer is entitled and bound to acquire the shares of the remaining shareholders on the terms set out in the notice unless a remaining shareholder applies to the court for an appraisal. If an appraisal is given by the court, the buyer can either acquire all of the shares at a price fixed by the court or cancel the notice. Cross-border transactions 15 How are cross-border transactions structured? Do specific laws and regulations apply to cross-border transactions? Except as otherwise noted in relation to Bermudian ownership and control, there are no specific laws or regulations that apply to the struc- turing of cross-border transactions. Waiting or notification periods 16 Other than as set forth in the competition laws, what are the relevant waiting or notification periods for completing business combinations or acquisitions involving public companies? Bermuda does not have competition laws or waiting or notification periods for completing business combinations. However, regulated or licensed entities must adhere to notification and approval procedures and must obtain the BMA’s consent or non-objection (as applicable) under relevant statutory regimes. This would apply, for example, where there is a material change or change of control in relation to a licensed or regulated entity which include insurance companies, trust compa- nies, banks, fund administrator and regulated investment businesses. OTHER CONSIDERATIONS Sector-specific rules 17 Are companies in specific industries subject to additional regulations and statutes? Companies in specific industries, including financial services, broad- casting, telecommunications and transportation, are subject to additional regulations and statutes. This includes foreign ownership rules that may affect business combinations. Also see question 16. Tax issues 18 What are the basic tax issues involved in business combinations or acquisitions involving public companies? Business combinations do not trigger any specific liability to tax. A company establishes tax residency when it is incorporated in Bermuda. However, exempt undertakings are eligible for a tax exemp- tion certificate, which is an assurance from the Minister of Finance that for the period up to 31 March 2035 an exempted undertaking is not liable to pay certain taxes being taxes: • imputed on profits or income; • computed on any capital asset, gain or appreciation; and • in the nature of estate duty or inheritance tax. Any business with employees physically based in Bermuda, whether local or exempted, is subject to Bermuda’s consumption tax regime (whether or not they have a tax exemption certificate). No taxes are imposed on tax non-resident businesses in Bermuda. The sale and purchase of a company’s business or assets will attract ad valorem stamp duty that is payable on the transfer of Bermuda land and certain other Bermuda property. No stamp duty is payable on the transfer of any securities listed on the BSX. Labour and employee benefits 19 What is the basic regulatory framework governing labour and employee benefits in a business combination or acquisition involving a public company? The Employment Act 2000 generally governs the employee and employer relationship and minimum standards with which employers must comply. The Employment Act 2000 provides that where a business is sold, transferred or otherwise disposed of, the period of employment with the former employer must be recognised in order to constitute a single period of employment with the successor employer (as long as the employment was not terminated with severance). However, there is no specific regulatory framework in relation to business combinations. The continuing or surviving company will typically become the successor employer and assume any associated liabilities. There is generally no obligation to inform or consult employees or to obtain employee consent in relation to business combinations. However, in some cases: • certain employees can have contractual rights to receive this notice; and • there can be notice requirements for unionised employees under a collective bargaining agreement. A share sale does not involve a change in employer and: • employment contracts continue; • collective bargaining agreements remain in effect (unless there is an applicable change of control provision); and • there are generally no notice or consent obligations. It is important to note that rights can exist in certain employee contracts or under any applicable collective bargaining agreement. For example, certain senior company executives or management staff may be entitled to resign or be paid an agreed sum on a change of control pursuant to their contracts. There may also be options under share option schemes that become exercisable upon a change of control and holders of stock options may have the option to take shares in the amalgamated or surviving company. Restructuring, bankruptcy or receivership 20 What are the special considerations for business combinations or acquisitions involving a target company that is in bankruptcy or receivership or engaged in a similar restructuring? Under Bermuda law, a ‘bankrupt’ company can be put into liquidation. This authority is contained in Part XIII (Winding- Up) of the Companies Act 1981. Where an insolvent company is involved, the process will take the form of a creditors’ voluntary winding up. The company and board usually cooperate during this process. The procedural steps for a winding up are contained in the Companies (Winding-Up) Rules 1982. If the company is uncooperative, it may be necessary for creditors to apply to the court for the appointment of a provisional liquidator or liquidator. In all of these circumstances, the party acquiring the company must deal with the liquidator and determine the best process for acquiring the company, given the fact that it is in liquidation. Bermuda law also recognises the appointment of receivers. A receiver can be appointed by the court or a creditor pursuant to the © Law Business Research 2019
  • 17. BeesMont Law Limited Bermuda www.lexology.com/gtdt 17 powers contained in a security instrument. The receiver will take over control of the company and be the party with which a purchaser must coordinate various matters (eg, due diligence and discussions regarding the structure of any acquisition). The scheme of arrangement procedure is also available to solvent or insolvent companies under the Companies Act 1981, as amended, whereby the process is court sanctioned. Anti-corruption and sanctions 21 What are the anti-corruption, anti-bribery and economic sanctions considerations in connection with business combinations with, or acquisitions of, a public company? In the context of business combinations, purchasers should generally consider any potential risks or liabilities arising from non-compliance with Bermuda’s sanctions, anti-corruption, anti-bribery and anti-money laundering regimes. These matters should be considered both in rela- tion to dealings with counterparties and in relation to any pre-existing deficiencies affecting the target business or otherwise. Bermuda’s anti-bribery and corruption laws have recently under- gone a process of modernisation with the introduction of the Bribery Act 2016, which came into force in September 2017 and was largely modelled on the United Kingdom (UK) bribery legislation. Certain bribery and corruption offences previously contained in the Criminal Code Act 1907 have been superseded by the Bribery Act 2016. Further, the UK Bribery Act 2010 has extraterritorial effect and thus has potential direct implications for Bermuda, which is a British overseas territory, such that Bermuda-based companies with a nexus to the United Kingdom can possibly be prosecuted in the United Kingdom if they are involved in bribery anywhere in the world. As a British Overseas Territory, Bermuda implements the international sanctions obligations of the UK. The majority of the sanctions in effect in the UK come from the UN Security Council (UNSC) and the European Union (EU). The EU measures normally implement in Europe the relevant UNSC Resolutions (Resolutions), and may also impose additional sanc- tions. The Bermuda International Sanctions Act Regulations 2013 list all of the sanctions regime-related orders in force in Bermuda, and are amended on an ongoing basis to ensure the list remains up to date. Bermuda has a robust anti-money laundering and anti-terrorist financing legislative framework. The BMA has powers to monitor financial institutions for compliance with the Regulations under the Proceeds of Crime (Anti-Money Laundering and Anti-Terrorist Financing Supervision and Enforcement) Act 2008, which gives the BMA the capacity to impose substantial penalties for failure to comply with many provisions in the Regulations. Stephanie P Sanderson spsanderson@beesmont.bm 5th Floor Andrew’s Place 51 Church Street Hamilton HM 12 Bermuda Tel: +1 441 400 4747 Fax: +1 441 236 1999 www.beesmont.bm © Law Business Research 2019
  • 18. Public MA 201918 Brazil Fernando Loeser, Enrique Tello Hadad, Lilian C Lang and Daniel Varga Loeser, Blanchet e Hadad Advogados STRUCTURES AND APPLICABLE LAW Types of transaction 1 How may publicly listed businesses combine? Under Brazilian law, publicly listed companies may combine in several different ways. However, the most common types of business combina- tions are the following: • mergers: two different entities combine to form a new entity, which absorbs all assets and liabilities of the previous existing entities; • equity purchase and sale: the shares of a target company are sold to another shareholder or third party; • demergers: spin-off of certain assets and their subsequent merger into either a pre-existing or a newly incorporated company; • absorptions: the assets and liabilities of an entity are entirely absorbed by another entity, and the entity whose assets and liabili- ties were absorbed ceases to exist; • purchase and sale of assets; • joint ventures: two or more legal entities combine their efforts in order to jointly explore business opportunities. Parties to the joint venture may incorporate a new company or acquire equity in an already incorporated company to explore a common busi- ness (traditionally, but not necessarily, by a 50/50 per cent equity arrangement), or enter into a joint venture agreement whereby their rights and obligations are specified, without incorporating a new company or acquiring equity in an already existing one. The business combinations provided above, depending on the circum- stances, may be carried out privately, without the need of a tender offer to the public. However, Brazilian law provides that a tender offer will be mandatory in the following circumstances: (i) if the corporation itself or its controlling shareholder applies for the cancellation of its regis- tration to trade as a listed company; (ii) if the corporation’s controlling shareholder increases its equity participation to the extent that the corporation’s shares may face market liquidity issues, pursuant to the rules enacted by CVM; and (iii) in case of acquisition of the control of a public listed company, in which case the new controller will have to place a tender offer to purchase the remaining shares bearing voting rights. In all these circumstances, the tender offer must be registered with CVM. Moreover, a bidder may also voluntarily place a tender offer to the public (the most common situation being a public takeover bid). In general, the registration of the voluntary tender offer with CVM is not mandatory. However, should the transaction involve an exchange for securities, the registration will be required. The tender offer requires the engagement of a financial institution, which must also sign the offering instrument along with the bidder. The offering instrument must contain the specifics of the offer, such as the number, class and species of securities being purchased, payment and other applicable terms and conditions, date, place and time of the public auction. In addition, the offering instrument must be published in a newspaper of wide circulation. Statutes and regulations 2 What are the main laws and regulations governing business combinations and acquisitions of publicly listed companies? The main laws and regulations governing business combinations are: • the Brazilian Civil Code – Law No. 10,406/2002; • the Brazilian Corporations Law – Law No. 6,404/1976; • the Antitrust Law – Law No. 12,529/2011; • the Capital Markets Law – Law No. 4,728/1965; • the Brazilian Securities Law – Law No. 6,385/1976; • the regulations enacted by the Brazilian Securities and Exchange Commission (CVM); • the Brazilian Employment Law – Law-Decree No. 5,452/1943, amended by Law 13,467/2017; • the Bankruptcy and Judicial Recovery Law – Law No. 11,101/2005; and • the Anti-Corruption Law – Law No. 12,846/2013. Transaction agreements 3 Are transaction agreements typically concluded when publicly listed companies are acquired? What law typically governs the agreements? Although the choice of foreign law is accepted and valid under Brazilian law, the transactions taking place in Brazil, especially if the parties entering into the agreement are Brazilians, are usually governed by Brazilian law. In addition, in order to implement the transfer of shares and certain types of assets, the parties must comply with certain formalities required under Brazilian law. If the shares and assets are of a Brazilian company, the choice of Brazilian law and venue facilitates the enforcement of the agreement as regards the Brazilian company. Tender offers for Brazilian listed companies are mandatorily governed by Brazilian laws. In these cases, the offering instrument will have to comply with the regulations enacted by CVM and the choice of foreign law will not be permitted. © Law Business Research 2019
  • 19. Loeser, Blanchet e Hadad Advogados Brazil www.lexology.com/gtdt 19 FILINGS AND DISCLOSURE Filings and fees 4 Which government or stock exchange filings are necessary in connection with a business combination or acquisition of a public company? Are there stamp taxes or other government fees in connection with completing these transactions? The corporate acts of mergers, demergers and absorptions of listed companies are required to be registered with the board of trade of the Brazilian state in which the company is headquartered. In public offerings, as a general rule the issuer must register with CVM a prospectus, along with several other documents and forms. Similarly, in mandatory tender offers, the offeror usually must register an offering instrument with CVM. Should the business combination involve, on one hand, a group of companies whose total gross income or sales volume in the year prior to the year the transaction takes place is equal to or above 750 million reais and, on the other hand, a group of companies whose total gross income or sales volume in the year prior to the year the transac- tion takes place is equal to or above 75 million reais, the parties shall seek prior approval of the Administrative Council for Economic Defence (CADE), Brazil’s antitrust authority. Although stamp taxes do not exist under Brazilian law, registration with the board of trade, with the CVM and with CADE are subject to the payment of fees. Information to be disclosed 5 What information needs to be made public in a business combination or an acquisition of a public company? Does this depend on what type of structure is used? Tender offers for the acquisition of a listed company are subject to specific disclosure requirements. For instance, the offering instrument must disclose the share capital structure of the target company, its financial and economic situation, the exposure of the bidder to deriva- tives whose underlying assets are securities issued by the target company, and information regarding any agreements and covenants to which the bidder is a party involving securities issued by the target company. Should the transaction involve the exchange for stock or other securities, the disclosure requirements applicable to a public offering must also apply. As a general rule, a public offering is also subject to registration. The registration application must be accompa- nied by a prospectus, where certain information must also be disclosed. For instance, the prospectus must contain a summary of the offering, indicating the issuer, the financial institutions involved, the targeted audience of the offering, as well as the price and quantity of the securi- ties to be listed. In addition, the prospectus must contain a schedule of the offering, the justification of the issuing price (in the case of an initial public offering), the explanation of how the proceeds arising out of the listing will be applied and the risk factors of the issuer. Although the disclosure requirements may differ depending on the type of structure that is used, corporations must disclose to the market any information that is deemed to be material information. Pursuant to CVM regulations, material information is any decision of the share- holders or board of directors of publicly listed companies, or any other relevant technical, economical or financial facts or transactions related to the company’s business and activities, which may influence the price of any shares or securities issued by the company, the decision of the investors to buy or sell shares and securities of the company, or the decision of the investors regarding the exercise of any of their rights as shareholders. CVM regulations also provide examples of what would be material information: acquisition of control of a company, execution of shareholders’ agreements involving the corporations’ securities, mergers, demergers and absorptions are among the material informa- tion that must also be disclosed. The list of examples provided by CVM is not exhaustive, so any information that may fall within the definition of material information will be subject to the disclosure requirements. It is also worth pointing out that certain business combinations may be subject to shareholders’ or board of directors’ approval. Given that the minutes of the meetings of the shareholders and board of direc- tors are subject to registration with the Board of Trade, the information provided therein will also be available to the public. Lastly, business combinations that are subject to CADE’s prior approval may also be subject to additional disclosures. Although the economic information submitted to CADE is usually treated as confiden- tial information, the general details about the combination (such as the parties involved) are usually made public. Disclosure of substantial shareholdings 6 What are the disclosure requirements for owners of large shareholdings in a public company? Are the requirements affected if the company is a party to a business combination? Listed companies are subject to the disclosure requirements of the CVM, which requires the disclosure of the company’s controlling shareholder (including the ultimate beneficial owner). In addition, listed companies are required to disclose the shareholders or group of shareholders, with a shareholding stake equal to or above 5 per cent of the same class or species of shares and that have common interests or act jointly in relation to the company’s affairs. Business combinations by themselves do not affect disclosure requirements related to substantial shareholdings. However, should the business combination result in a shareholding stake that requires disclosure, such as in the case of controlling shareholder of listed companies, the disclosure requirements shall apply. DIRECTORS’ AND SHAREHOLDERS’ DUTIES AND RIGHTS Duties of directors and controlling shareholders 7 What duties do the directors or managers of a publicly traded company owe to the company’s shareholders, creditors and other stakeholders in connection with a business combination or sale? Do controlling shareholders have similar duties? Under Brazilian law, directors must observe the duty of care (diligent management of the company’s affairs) and the duty of loyalty (refraining from pursuing personal interests instead of the company’s interests). In addition, directors must always act within the scope of their powers, and shall refrain from participating in the company’s affairs in case of conflict of interest. This is also the case in connection with a business combination among or involving different companies or companies within the same economic group. Although, as a general rule, directors are not liable for the compa- ny’s obligations, in case of ultra vires acts, as well as in case of breach of the laws and the company’s by-laws, they may be personally liable. In addition, although the company’s by-laws may designate different roles to different directors, under Brazilian law all directors may be held jointly and severally liable for damages caused to the company and the shareholders. Although business combinations as a general rule must be approved by the shareholders, directors are responsible for providing accurate information regarding the transaction, so as to enable the shareholders to make an informed decision. When it comes to listed companies in mergers, demergers and absorptions involving its affiliates, the CVM adopts a more stringent © Law Business Research 2019
  • 20. Brazil Loeser, Blanchet e Hadad Advogados Public MA 201920 interpretation as to the duty of care and duty of loyalty. In such circum- stances, the directors are only discharged of their duties if they have complied with certain specific requirements, such as assuring on an impartial basis that any proposed business combination is carried out in the most beneficial form to the shareholders, including the minority shareholders, and the company. The CVM also requires directors of publicly listed companies to comply with all applicable capital markets rules and regulations. One of the statutory directors of a publicly listed company must be appointed as investor relations director, who will be the person responsible for submitting all required filings and complying with all capital markets rules and regulations (eg, publish a relevant fact of the public company such as a sale or an acquisition), and who may be held personally liable (without prejudice to the corporation’s own liability) for failure to do so. In 2018, the CVM enacted a new (non-binding) guideline (No. 38, dated 25 September 2018) applicable to indemnity agreements executed between publicly listed companies and their directors with the aim at avoiding conflicts of interest, thereby creating new duties to the direc- tors of public companies. Under the indemnity agreements, public companies undertake to compensate directors for damages or losses arising out of arbitration proceedings, court claims or administrative proceedings in general, involving acts, facts or omissions committed by the directors in the exer- cise of their duties or powers. Although in general the parties are free to negotiate the terms and conditions of the agreement, pursuant to CVM’s interpretation, the compensation is not due if the director breached its duty of care and its duty of loyalty. As such, the CVM recommends expressly providing the hypothesis of exclusion of liability in the indem- nity agreement. In addition, the CVM recommends that before making any disbursements, the company must ensure whether the compensa- tion to the director is due, or if it falls into a hypothesis of exclusion of liability. The CVM’s guidelines provide that the directors must implement governance rules to prevent conflicts of interest in the execution of indemnity agreements. In order to be discharged of this duty, the direc- tors must ensure that the indemnity agreements provide which body of the company will be responsible for assessing whether an exclusion of liability applies or not, as well as the applicable rules to avoid conflicts of interest. On specific circumstances, such as the ones that could result in a material loss for the company, the CVM understands that additional governance rules must be adopted, without specifying them. Lastly, it is worth mentioning that the directors are required to disclose the terms and conditions of the indemnity agreements, so as to allow the shareholders to properly assess the liabilities that the company may be exposed to. Regarding controlling shareholders, Brazilian law expressly states that they are liable for the abuse of their powers. Examples of abuse of power include: (i) deviating the company from its scope; (ii) entering into business combinations that are detrimental to the company; and (iii) appointing board members who are not suitable for the role. Approval and appraisal rights 8 What approval rights do shareholders have over business combinations or sales of a public company? Do shareholders have appraisal or similar rights in these transactions? Business combinations may be subject to the approval of shareholders, but the quorum for the approval varies depending on the type of transaction. In publicly listed corporations, mergers, demergers and absorptions require by law the approval of the majority of the corpo- rate capital. The shareholders who voted against the merger, demerger or absorption may be entitled to withdraw from the company and be reimbursed for the value of their shares, subject to the following condi- tions: (i) in mergers and absorptions, the right of withdrawal is only applicable to corporations with concentrated ownership; (ii) in the event of demergers, the right of withdrawal applies if there is a change in the company’s business scope (unless the main activity of the entity that absorbs the assets of the demerged entity matches the activities of the demerged entity), if there is a reduction in mandatory dividend payments, or if the demerger results in the participation in a group of companies. The company’s by-laws may contain provisions related to the appraisal methodology for the reimbursement. However, the law sets forth that the reimbursement value shall reflect at least the compa- ny’s net worth, pursuant to the company’s latest approved balance sheet. Should the company’s by-laws authorise, the reimbursement value may be ascertained by an appraisal report prepared by experts, in which case the reimbursement value may be above the company’s corresponding net worth. Tender offers, in general, require the preparation of an appraisal report of the target company, pursuant to the regulations enacted by CVM. If the scope of the tender offer is to delist the company from the stock exchange, or to increase the controlling shareholders’ participa- tion up to the point that it may hinder the market liquidity of the shares, as provided in the rules enacted by CVM, there must be the approval of more than two-thirds of the corporation’s floating stock. In addition, the purchase price of the offer must be fair, corresponding at least to the company’s valuation, ascertained by means of an appraisal report. Nonetheless, should there be clear indications that the valuation report was not accurately prepared, at least 10 per cent of the corporation’s floating stock may request the corporation’s management team to call a shareholders’ special meeting to resolve on the preparation of a new report. Should the new report point out a higher valuation, the new value shall prevail. In the case of a takeover bid, the new controlling shareholder is required to place a public offer to all other voting shareholders of the company. In this circumstance, the offering price must correspond to at least 80 per cent of the price paid for the acquisition of the control. The acquisition of control of a company by a listed corporation is also subject to the approval of the listed corporation’s shareholders in the following circumstances: (i) if the purchase price of the target is deemed to be a relevant investment, as defined by law; (ii) if the average purchase price of the target’s shares is above certain thresholds, as provided in the law. In such circumstances, the corporation’s directors are only compliant with their duty of care if they have submitted the business combination to the perusal of all shareholders, including the minority shareholders and those with no voting rights COMPLETING THE TRANSACTION Hostile transactions 9 What are the special considerations for unsolicited transactions for public companies? In Brazil, hostile takeover bids are not yet as common as they are in more mature markets, such as the US and the UK. Nonetheless, in the last decade Brazil has experienced a boost in its capital markets, with a significant increase in the number of publicly held corporations with dispersed shareholdings. Because of this fact, hostile takeovers have gained more attention. According to the Brazilian Corporations Act, the purchaser in a takeover bid is required to make a public offer to all other voting share- holders of the company, for a purchase price of at least 80 per cent of the takeover bid’s price. In addition, in 2010 CVM introduced new rules applicable to takeover bids. © Law Business Research 2019
  • 21. Loeser, Blanchet e Hadad Advogados Brazil www.lexology.com/gtdt 21 According to the new rules introduced by CVM in 2010, bidders are required not to disclose any information related to the takeover bid until it is finally disclosed to the market. Bidders must also ensure that their managers, advisers and employees also comply with this rule. If the bidder loses control of the information, the bidder will be required to immediately place a public offering or, alternatively, disclose to the market that it intends to place an offer. The bid must take place in a stock exchange or in another author- ised organised market. If a third party is interested in interfering in the public auction for the takeover bid, it must disclose its intention to the market at least 10 days in advance. Also, the bidder must undertake to purchase, in a 30-day period following the bid, all shares of the same class and type that remained unsold, for the same price of the final offer, thereby giving additional protection to minority shareholders. Break-up fees – frustration of additional bidders 10 Which types of break-up and reverse break-up fees are allowed? What are the limitations on a public company’s ability to protect deals from third-party bidders? In Brazil, break-up fees are not expressly set forth in law. The parties to an MA deal are free to negotiate and agree on a break-up fee for protection against third-party bidders in the transaction agreements. Government influence 11 Other than through relevant competition regulations, or in specific industries in which business combinations or acquisitions are regulated, may government agencies influence or restrict the completion of such transactions, including for reasons of national security? Certain business activities are subject to additional regulations from governmental agencies, which may impact business combinations. This is especially true for the oil and gas, media/broadcasting, civil aviation, energy and electricity, security and public services in general. All these sectors are regulated by federal government agencies, which may enact enforceable legislation. Another heavily regulated sector is the banking and financial services industry, whose business combinations are also normally subject to the authorisation of the Brazilian Central Bank. The acquisition of land by foreigners (both individuals and compa- nies) is also subject to restrictions, which are based on the size of the land and the scope of the activities to be performed by the foreigner. In addition, some of these restrictions also apply to Brazilian companies controlled by foreigners. In privatisation of state-controlled companies, the government may influence combinations through the use of ‘golden shares’, enabling it to hold influence due to strategic reasons. Conditional offers 12 What conditions to a tender offer, exchange offer, mergers, plans or schemes of arrangements or other form of business combination are allowed? In a cash transaction, may the financing be conditional? Can the commencement of a tender offer or exchange offer for a public company be subject to conditions? In public offerings and tender offers, the issuer or offeror may subject the offer to certain conditions, as long as the conditions are clearly stated in a prospectus or equivalent document. Public offerings must grant equal treatment to all offerees. The offer must be irreversible and irrevocable, but special conditions may apply in order to protect a legitimate right of the offeror, as long as the usual functioning of the markets is not affected, and to the extent that the fulfilment of the conditions does not directly or indirectly rely on the offeror itself, or a person related to it. The offering price must be uniform, but CVM may authorise price variations in specific transactions, depending on the kind of securities being offered and the qualifications of the offerees. CVM may also acknowledge the existence of material adverse changes following a public offering. If that should be the case, the offeror may request the cancellation of the offer. The offeror may change the terms and conditions of the public offering, without seeking CVM’s prior permission, if the changes are for the benefit of the investors, or if the offeror waives a benefit of its own. In the case of a public offering being revoked, the offer becomes without effect, and any consideration paid by the investors must be refunded pursuant to the terms of the prospectus. In its turn, the acceptance of an offer by an investor cannot be revoked by the investor himself, unless provided otherwise in the prospectus. A tender offer, once the offering instrument is published, may only be amended or revoked by the offeror in the following circumstances: (i) to improve the conditions of the offer; (ii) if previously approved by CVM (in case of mandatory tender offers); and (iii) in compliance with the offering instrument (in case of voluntary tender offers). As previously pointed out, a tender offer will be mandatory if a controlling shareholder intends to delist a company from the stock exchange, or increase its, his or her equity participation to the extent that the security’s market liquidity is hindered, pursuant to CVM regu- lations. The tender offer must be accompanied by a valuation report, but should there be clear indication that the report was not accurately prepared, 10 per cent of the floating stock may request the preparation of a new report. Should the new report increase the security’s value, the offeror may revoke the tender offer and the intended delisting or increase in the equity participation will not be carried out. Changes or cancellation of a tender offer that is subject to CVM’s prior approval may only be effected in light of material adverse changes acknowledged by CVM. Changes to a tender offer require the publication of a new offering instrument, which must highlight the amendments that have been intro- duced, and the new date of the public auction. Should the tender offer be revoked, its cancellation must be published by means of the same channels that were used for its original publication. The law does not provide for any specifics relating to cash trans- actions conditional upon financing. In such circumstances, the general rules concerning tender offers must apply. Financing 13 If a buyer needs to obtain financing for a transaction involving a public company, how is this dealt with in the transaction documents? What are the typical obligations of the seller to assist in the buyer’s financing? Although the parties in theory may agree that obtaining financing by the buyer is a condition precedent to the closing, the seller may be reluctant to accept such provision. Under Brazilian law, there is no obligation on the seller to assist in the buyer’s financing. Typically, it is the buyer’s responsibility to obtain the financing necessary to pay the purchase price up to the closing of the transaction, and the buyer does not transfer the burden to sellers. Notwithstanding, a seller may agree to finance an acquisition by the buyer in other forms, such as by accepting the delay of the payment of part of the purchase price until after closing; by agreeing to receive a portion of the price by means of an earn-out; by means of a consulting agreement; by the exchange of shares of the buyer for the shares of the target company, and so on. © Law Business Research 2019