Hostile Takeover Bids In Brazil

On November 25, 2010, the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) issued CVM Instruction No. 487, which amends and updates CVM Instruction No. 361, of March 5, 20021, and introduces specific provisions to regulate the hostile takeover bids in Brazil, regarding the control acquisition of publicly-held corporations with dispersed shareholding and undefined ownership (i.e., without a controlling shareholder or group of control2).

In 2002, at the time that the rules of CVM Instruction 361/2002 were drawn up, the possibility of hostile takeover bids, which were common in developed markets like the USA and England, seemed rather remote and were unusual in Brazil because the control of Brazilian publicly-held corporations was concentrated in hands of family groups that owned the majority of the voting shares of such companies and tender offers were only made by the current or new controlling shareholder(s). After eight years, however, the situation is completely different. The Brazilian capital markets have expanded rapidly, both in terms of volume and number of companies with shares quoted in the stock exchange, there are more than 50 publicly-held corporations with dispersed shareholding3 and market takeovers begin to appear.

The first attempted hostile takeover in Brazil was made by Sadia, a food processor company, that in 2006 launched an ultimately unsuccessful bid for its rival Perdigão. The case that changed everything and was instrumental to induce CVM to revise and change the rules adopted in 2002 was the successful and controversial bid made in 2009 by Vivendi, the French telecom and media conglomerate, that acquired the GVT Holding, a Brazilian telecom operator. Vivendi was the winner of a dispute involving Telefonica, the Spanish carrier, which was also very interested in GVT. It all started when Vivendi made a tender offer for all the shares of GVT, Telefonica responded with a counter offer and the BM&FBovespa, the Brazilian stock exchange, set an auction. Before the auction took place, however, Vivendi negotiated with funds that held shares and options on shares in GVT. Using derivatives instruments, Vivendi obtained the right to acquire more than 50% of GVT's common shares through stock exchanges purchases and direct negotiations. Therefore, Vivendi achieved its objective of acquiring the control of GVT without having to make a tender offer.

The new rules approved by CVM aim to avoid "surprises" like the GVT episode and give more transparency to tender offers and also intend to protect the minority shareholders, that many times are forced to accept a tender offer with...