1. What is the “person” in the “size-of-person” threshold for merger control? In other words, which entities’ annual sales should be considered for the threshold ina complex corporate structure in which a parent company holds different interests in different entities?
2. Antitrust regulations around the world traditionally follow corporate accounting principles for determining the entities under the parent company (e.g., subsidiaries with at least 50% interest). Therefore, the reported consolidated annual sales of a parent company normally reflect the sum of annual sales of entities under a parent company.
3. In Brazil, this concept is not straightforward, as the definition of “person” has been a constant debate.The Brazilian antitrust regulation even adopted a specific concept for“person” for this purpose, which is separate from the Brazilian corporate law and accounting rules: the “economic group (of companies)”. Recent developments indicate, however, that the Board of the Brazilian competition authority (“CADE”) may be moving towards the more traditional antitrust systems.
4. On March 20 2024, the CADE adopted a decision affecting the determination of companies required to be included in the size-of-person test. The current regulation stipulates that in conducting the size-of-person test, parties must include revenues from (i) any company under common (or shared) control and (ii) any entity in which there is a direct or indirect ownership of at least a 20% interest, whether in voting or common stock. The issue is how to define the latter.
5. Previously, the authority literally considered any entities in which the parent company had 20% or more ownership — irrespective of controlling shareholder identification. This recent decision marks a significant shift for CADE, as it indicates that 20%of ownership in a company should not be automatically considered common corporate control. Further, it clarifies that the solution is also not merging two distinct criteria—(i) the presence of common control and (ii) a minimum 20% shareholding—as if they were one.
6. The solution outlined in CADE’s decision (Case 08700.000641/2023-83) relies on identifying shareholder rights sufficient for establishing joint control under merger regulations, separating them from rights merely necessary for the protection of the investment and thus they presumptively do not entail control rights. The chart below outlines both categories of shareholders rights:
7. The decision underscores thata mere 20% stake does not automatically confer joint control for mergerregulation purposes. This clarification, correcting an overly cautiousprevious stance, implies an additional change to a matter that is alreadyconvoluted: less than 18 months ago the authority had issued a decisionexactly in the opposite direction (case 08700.006369/2018-88).
8. Moreover, it refines thetransaction type test by specifying rights indicative of joint control,diverging from traditional interpretations of control under Braziliancorporate law. That has an important implication, since the authority hasadopted a very restrictive list of rights that presumptively indicate sharedcontrol, which goes beyond the typical interpretation of the concept ofcontrol adopted based on Brazilian corporate law.
9. The decision also stronglyemphasized the need to update the local merger regulations, a decade-oldframework. This review, potentially a year-long process, warrants closeattention from the antitrust community.