In this article, we will speak of the growing role of private equity funds in the current credit crunch situation, as well as their interaction with the barriers put up by poison pill clauses in the bylaws of Brazilian public companies.

The current crisis of confidence that is ravaging financial and capital markets worldwide hinders access to financing and, consequently, increases capital cost. In this scenario of lack of market liquidity, the search for feasibility in attracting new investments, such as those made by private equity funds, has become even more relevant.

As we already had the opportunity to explore in previous articles, private equity funds are usually established in the form of funds that invest in assets with low liquidity, but high expected returns.

Until a short time ago, due to the nature of their investments, these funds were obfuscated by the return rates achieved by other financial and capital markets instruments. With this new scenario of uncertainty, however, the correction of the return rates achieved by the markets enables the role of private equity funds as financers to become more evident.

The statistics seem to be going in that direction. Although the numbers refer to a moment before the height of the financial crisis, a study promoted by PricewaterhouseCoopers reveals that private equity funds accounted for 18% of the total volume of merger and acquisition operations in Brazil up to September 2008, versus 15% in the same period in 2007. Expectations now point to a new potential for growth.

In parallel, in the going-public operations carried out by Brazilian companies starting in 2004, the inclusion of poison pill clauses in bylaws was seen as a general rule.

Brazilian poison pill clauses aim to discourage share acquisitions that would threaten the comfortable position of controlling shareholders and maintain a certain liquidity of the shares in the market. Thus, the Brazilian market became familiar with poison pill clauses that obligate buyers of a given percentage of a company’s capital, usually 20%, to make a public stock offering targeted at all of the company’s shareholders, at a high premium.

The existence of this mechanism makes it prohibitive for shareholders to increase their stake beyond the level considered safe by controlling shareholders, inhibiting, in some cases, the activities of private equity funds.

With a view to the current liquidity crisis in financial and capital markets, the controlling shareholders of public companies that need cash and have no access to financing, and whose bylaws contain poison pill clauses, are reviewing their need to maintain control in order to assure the continuity of their businesses.

For this reason, some companies recently revised their bylaws to eliminate poison pill clauses. This tendency reflects a market reality in which private equity funds have become ever more desirable financers for companies.