A Brazilian Securities and Exchange Commission (CVM) edited, on December 03, 2019, CVM Instruction No. 616, promoting specific changes to CVM Instruction 361, of March 05, 2002 (ICVM 361), which deals with the rules relating to public takeover bids (POAs) of shares in publicly-held companies.
Despite being specific, the innovations brought by ICVM 616 were relevant to market participants. As an example, we can mention the new wording of art. 11, which makes the publication of the notice relating to the OPA optional in the official gazette and in a newspaper with wide circulation in the location where the company's headquarters are located, in accordance with the rule set out in art. 289 of Law No. 6.404/1976, except for the OPA for the acquisition of corporate control, whose publication remains mandatory. This change will allow the reduction of costs attributed to the OPA offeror, which is in line with the CVM's tendency to reduce market participants' expenses related to regulatory compliance¹.
However, one of the innovations brought by ICVM 616 draws attention, especially if we consider that the justification for its creation was, in part, due to the recent experience experienced by the CVM². Before dealing with the innovation itself, it is necessary to explain the specific case that supported it so that it is possible to identify the regulatory problems that existed and the consequences of the changes promoted by ICVM 616.
The specific case in question refers to the dispute that occurred over the acquisition of all shares issued by Eletropaulo Metropolitana Eletricidade de São Paulo S.A. (Eletropaulo). In April 2018, shareholder Energisa S.A. launched a Tender Offer for the acquisition of corporate control of Eletropaulo. Subsequently, the shareholders Enel S.A. and Neoenergia S.A. launched a competing OPA, in accordance with art. 13 of ICVM 361. After the launching of the competing OPAs, the shareholder Neoenergia S.A. and B3 – Brasil, Bolsa, Balcão S.A. requested clarifications and made requests regarding the procedure that would be adopted in the case.
Among the requests and clarifications, the CVM was provoked to comment on the possibility of (i) price increases by competing bidders and (ii) purchasing interference in the auction relating to the OPA. This doubt arose due to the wording presented in art. 12, § 2, item II, of ICVM 361, which authorized purchasing interference in OPA for acquisition of control, and in § 7 of the same article, according to which the offerer of OPA for acquisition of control could not increase the offer price in the auction if there was a competing OPA.
According to the previous wording of ICVM 361, bidders for the OPA could not change the price of their offer during the auction and, therefore, would be restricted to the value they set in the published notice (or last addition to the notice). If this were not enough, an interested third party could submit a bid during the auction, the content of which would be completely unknown to the OPA's competitors, benefiting from the latent informational asymmetry³. This represented an inequality in the process because, in fact, the OPA's competitors could not compete with the interfering buyer for the price he offered (since they would be prohibited from increasing their prices during the auction).
In May 2018, the CVM decided4 in the sense that there could be buyer interference in the Eletropaulo OPA auction and, if an interfering buyer presented the information required by ICVM 361 and effectively made his offer during the auction, competitors would be authorized to increase their prices during the auction, which would rule out the application of § 7 of art. 12 of ICVM 361. However, if there was no interest in participating in the auction as an interfering buyer, or any registered interfering buyer did not submit his bid during the auction, § 7 of art. 12 of ICVM 361 would be applied and competitors would not be able to change their prices during the auction.
In view of the discussions taking place at the time, within the scope of Eletropaulo's OPA, the CVM considered it relevant to promote some changes to ICVM 361 related to the OPA for the acquisition of corporate control. The innovation brought by ICVM 616 consists of the express prohibition of purchasing interference in takeover bids. Therefore, as of the edition of ICVM 616, disputes involving the acquisition of shares within the scope of a control takeover bid must be restricted to competing takeover bids, provided for in art. 13 of ICVM 361.
The prohibition against buyer interference in the takeover bid removed a situation that clearly violated equitable conditions in these processes — in view of the informational asymmetry and the prohibition imposed by § 7 of art. 12 — as well as making the definition of players involved in the OPA. However, some negative consequences may arise from this prohibition, which have not received adequate treatment by ICVM 616 (at least, not explicitly).
In this sense, it is important to highlight that purchasing interference brings benefits to the OPA procedure, especially for the company's shareholders, as it allows for a dispute over prices and conditions between those interested in acquiring the stake. Therefore, restricting the OPA for the acquisition of control to possible competing OPAs may limit the intensity of the dispute and the conditions of the offers.
Furthermore, the rule in § 7 to art. 12 of ICVM 361 was kept intact. This means that, if there is a competing OPA within the scope of the OPA for acquisition of control, the participants in the dispute will not be able to change their prices during the auction, but only through amendments to their published notices, respecting the maximum deadlines set out in art. 5 of ICVM 361. Thus, without possible interfering buyers, who could foment a dispute during the OPA auction, there would be no reason to increase the acquisition price informed in the notice, unless there is a competing OPA, which ratifies the rationale of limiting the intensity of the dispute.
Another important point is that access to making offers during the takeover bid would be limited. This is because, given the difference in participation between the shareholders of a publicly-held company, the launch of an OPA for a certain number of shares may mean, for a certain shareholder, the acquisition of control, and for another shareholder, the mere acquisition of a relevant stake. In this scenario, the competing OPA would be harmed and the shareholder who does not intend to acquire control would not be able to take advantage of the process, as purchasing interference was prohibited.
Ultimately, we believe that ICVM 616 brought important innovations to the OPA procedure, especially for OPA to acquire corporate control, if we consider that there will be more predictability in procedures of this nature. However, the possible stagnation of the dispute over prices and offer conditions could result in a “war of notices” between those interested in the OPA, ultimately harming the shareholders of the company that is the subject of the OPA. At this point, we believe that the CVM should adopt a more active stance, especially based on the prerogative contained in art. 13-A of ICVM 361, seeking to structure a more beneficial and equitable procedure for companies, offerors, shareholders and the market in general.
Source: Legislation & Markets (Open Capital)
¹In this sense, see the Strategic Regulatory Compliance Cost Reduction Project, initiated by the CVM in November/2017.
²The CVM itself stated in the SDM Public Hearing Analysis Report No. 02/2019 (http://www.cvm.gov.br/audiencias_publicas/ap_sdm/2019/sdm0219.html), which occurred within the scope of the ICVM 616 editing process, that “the experience of this case highlighted the importance of the adjustments proposed [in the instruction]” (p. 11).
³The interfering buyer knows the prices offered by competitors in the OPA, because they were published through a notice in advance of the auction date. On the other hand, competitors do not know the price that the interfering buyer will present during the auction, as this does not need to be previously disclosed to the market (what is disclosed to the market is only the third party's intention to participate as interfering buyer).
4Administrative Case No. 19957.003818/2018-41, judged on May 02, 2018.