Recent amalgamations/mergers have brought the question of the tag along right to the fore once again, given its relevance for the protection of the minority shareholders. The CVM (the Brazilian Securities Commission) recently published an analysis concluding that Article 254-A of the basic corporate law (Law 6404/76) does not apply to these transactions, citing the cases of Totvs-Datasul, Gafisa-Tenda and Brascan-Company.

The shareholders of the acquired companies, whose shares were absorbed, became minority owners of the acquiring companies, without any distinction between controlling and minority shareholders. Evidently, the former controlling group received larger stakes, since they had more shares to be exchanged. The tag along right would consist of extending the deal to the minority shareholders, through a public tender offer to acquire their shares, as a result of the change in the control composition. However, it would not be appropriate to speak of extending the conditions given to the former controlling shareholders if the exchange of the minority shareholders’ shares were carried out simultaneously and equally with the exchange of the controllers’ shares. If that were the case, all the shares issued by the acquired company would be exchanged for the acquiring company’s shares.

However, tender offers to the minority shareholders may be necessary in the future. Supposing that Company A, controlled by the Shareholder X and with minority shareholders X, acquires and merges with Company B, controlled by Shareholder Y and with minority shareholders Y. If Shareholder Y’s shares are acquired by Shareholder X, and the transaction is characterized as a later phase of the change of control deal, carried out successively, the same treatment must be afforded to the old minority shareholders of Company B. Y’s shares could be sold in the market. But for reasons of price, lack of liquidity or previous arrangement, the shares are sold directly to X in a private deal. The transaction will no longer be equitable, because Y receives an additional advantage that the others do not: liquidity, through the sale of the shares received from Company A, with the purchaser being the controlling shareholder of the acquiring company, a related party or a company under common control. 

In this way, the same advantage should be extended to the minority shareholders, to satisfy the requirements of Article 254-A, since the deal involves the transfer of shareholding control through a merger, and with subsequent payment to the former controlling shareholders. In the event that Y does not sell all its position in Company A, the tender offer to the minority shareholders will be carried out in a manner that is proportional to the interest that has been sold. If later on Y sells the balance of the remaining shares, a new tender offer will have to be formulated.

An argument to the contrary is that due to the sale, Shareholder Y was no longer the controlling shareholder. In this case, it is necessary to question why only its shares were purchased, if they did not alter the majority position of X in the Company. In a classic case that was widely covered in the press at the time, the CVM established an interpretation of this matter, publishing Deliberation no. 56 of 11/23/1987. In September 1985, Madeireira Nacional S.A. (Manasa) decided on a capital increase with funds provided by four new shareholders. The controlling shareholders yielded subscription rights with no compensation, becoming minority shareholders, and the new group took control of the company. Immediately after this, it purchased the remaining common shares that were still in the hands of the old controlling shareholders. While the transfer of control may have been configured at the time of subscription, the offer to the minority shareholders could not be determined, since the rights were yielded at no cost. Since there was no cost element in the transaction, there was no way to make a public tender offer with no price to be offered.

However, in the following step, when the remaining block of common shares was sold by the ex-controlling shareholders, now minority shareholders, the disposal of control became perfected with the introduction of the differentiated treatment element, which until that point had not existed. The CVM denied the appeal presented by the purchasers at a meeting on 9/8/1987, and determined there be a public tender offer to the initial minority shareholders, which was done on 5/17/1988. The Commission held that the payment for the controlling stake occurred a posteriori.

In a more recent decision, in the opposite sense, but in analogous fashion, the CVM ordered a public tender offer to the minority shareholders of Companhia Brasileira de Distribuicao (CBD), part of the Pão de Açucar supermarket group, by deciding that the payment was carried out a priori, before the transfer of control of CBD to the French group Casino. That is, even though the transfer of control had not been materialized, the CVM ordered that equal treatment be extended to the minority shareholders, using reasoning opposite (though equally legitimate) to that in the earlier decision described.

Up to this point, I am only referring, in theory, to pure and simple merger transactions, which consist of appraising and exchanging shares and increasing capital of the company. In the operations mentioned by the CVM, however, there were additional ingredients that go beyond common amalgamations/mergers: payment of dividends; redemption of shares of private companies; reverse merger and capital increase, besides what results from the absorption of equity.

When combined with a sequence of transactions, mergers acquire broader outlines and require greater scrutiny

What is involved in these deals, then, is mergers with an uncommon design. There was cash payment to the shareholders through the distribution of dividends and the redemption of shares issued by intermediary companies that figured in the transactions, not the simple exchange of assets as set forth in law, as in cases of the merger of companies or shares. This aspect brings up a question related to the valuation of the companies, to determine the proportion of shares to be exchanged, specifically in the sense of considering in the appraisal reports the payments already made, since they were planned from the beginning.

Hence, I do not believe they can be construed as pure mergers, by the terms of Article 254-A. Indeed, this is precisely the matter in question. The transfer of control was consummated, without a doubt. The power of control in Datasul, Tenda and Company shifted to other parties, as the original controlling shareholders were replaced as a result of various corporate acts with similar designs.

The individual and collective examination of each act or phase, especially the different valuations, is necessary to verify the fairness of the benefits generated. In a merger per se, there is equality. However, to repeat, when combined with a sequence of other transactions, the deal acquires broader outlines and requires greater scrutiny.

The doctrine supports this position: “Article 254 of Law 6404/76 contains a precept that aims to regulate the onerous and voluntary transfer of control of public companies, regardless of the legal form by which the transaction is carried out, to ensure minority shareholders the same price and the same conditions contracted between the purchaser and the controlling shareholder. The penalty is disallowance of the transaction if the requirements it establishes (previous authorization from the CVM and public tender offer) are not satisfied. It is a rule of public policy, by which the use of indirect transactions to circumvent the law’s application and reach the same results as a sale must be considered as defrauding the law and punished by invalidity.” The rule that requires a public tender offer to the minority shareholders covers the transfer of shareholding control, irrespective of the form in which it operates.