By Vasco Marques Correia & Anabela Gonçalves Ferreira
I. Introduction – An Overview of the Current Economic Situation
By 1995, the M&A activity in Portugal had experienced significant growth along with the general trends of the markets, then also stimulated by the privatisation of companies in important sectors such as banking, telecommunications, electricity, transport, insurance, brewery, cement and manufacturing.
Following that intense period, the situation of the economy worldwide impacted in a significant adverse manner in the Portuguese economy.
This factor produced a very clear fall in the M&A market and whilst mergers continued, at a slow rate and in most cases in respect of medium size inter-group operations, acquisitions have been greatly affected.
The years 2000 and 2001 were marked by moderation in growth, inflation and unemployment rates.
The expected recovery of the economy of the US, usually followed by that of Europe, will certainly extend its positive effects to Portugal, where the new Government elected in mid March is already working on and implementing measures to reform the tax system, to modernize the industry and to increase the country's competitiveness in the integrated and globalised world markets.
The Government has already announced a programme for the productivity and growth in Portuguese economy in order to reinforce the competitiveness of companies and to dynamize the economy.
Such programme to be executed until the end of 2002 includes (i) tax relieves (possibility of the companies to create in 2003 tax reserves up to 20% of their tax assessment in Corporate Tax which must be used in new investments in the two subsequent years), (ii) launching of new privatisation processes of public companies such as Portucel, Galp, EDP, EPAL, ANA, TAP and (iii) removal of bureaucracy as to legal requirements and procedures applicable to investment in Portugal, to set up companies and branches, to obtain industrial licences, to merge and demerge and to acquire companies.
The performance of the Portuguese M&A market may now be positively perspectivated, in particular in the last quarter of the year 2002.
II. Legal Regime
2.1. Governmental Control of Foreign Investments
In general, foreign investments in Portugal are solely subject to an information requirement in a form of notice to ICEP (the Portuguese Investment, Trade and Tourism Board) within 30 days after acquisition, for registration and statistical purposes only.
The non-compliance with this notification obligation, however, subjects the defaulting entity to fines.
The acquisition of stakes in certain sectors such as defense industry, weapons and explosives depends on the prior approval of the regulatory authorities.
The acquisition of shareholdings in credit or financial institutions equal to or in excess of 10, 20, 33 or 50 per cent of the respective voting rights or share capital (the so-called "qualified participations") are also subject to the prior notification and subsequent notice of completion to the Central Bank of Portugal. A very similar regime applies to the acquisition of shareholdings in insurance companies, which must be subject to the appreciation of the regulatory entity Instituto de Seguros de Portugal, under Minister for Finance.
As part of its general powers of supervision over credit and financial institutions, the Central Bank of Portugal may also oppose to any acquisition in case it would consider that the purchaser of a qualified participation would not be able to guarantee a sound and prudent management of the institution concerned. Mergers between credit institutions are also subject to prior authorisation by the Central Bank of Portugal.
2.2. Merger Control - Competition Rules
In order to determine whether or not a particular transaction is subject to the scrutiny by the anti-trust authorities, two tiers of regulations apply; the EEC Merger Regulation and Portuguese Competition Law (Decree-Law 371/93) which sets out the rules governing concerted parties, abuse of dominant position and merger control.
Should a notification be made at Community level, no local notification to the Portuguese competition authority would be required, even if the requirements for local merger control are met.
The Portuguese legal concept applied in competition law to merger control is that of "concentration of enterprises", which includes not only mergers between two or more companies, but also acquisitions of control, including outright acquisitions of interests in a company by another entity, as well as transactions whereby the investing company obtains the power to influence the activity of the target company.
Concentrations of enterprises will have to obtain the prior approval of the Portuguese Antitrust Authority (Direcção Geral do Comércio e Concorrência), before completion of the transaction and/or before a takeover offer, whenever:
- .(i) As a result of the operation, a share of more than 30 per cent is created or strengthened in the national market for a particular good or service; or
- .(ii) The aggregate turnover of the undertaking concerned during the corporate year prior to the concentration exceeds € 149.639.369,12 (equivalent to PTE 30 billion) net of taxes directly related to the aggregate turnover.
This form of merger control does not, however, apply where the target companies are credit and financial institutions and insurance companies, inasmuch as such entities are governed by special requirements as briefly mentioned above.
III. Corporate Procedures
Mergers are mainly governed by the Portuguese Companies Code (PCC).
The central corporate document in a merger procedure is the merger project, which must be jointly prepared by the board of directors of the companies involved, addressing the matters and including the references required by law and outlining the objectives of the merger. Measures to ensure protection of shareholders’ and creditors’ interests and the economic and financial advantages arising out of the proposed merger should also be therein mentioned.
Further to the registration of the merger project with the competent Commercial Registries, the merger is subject to corporate approval, by the General Meeting of shareholders of the companies concerned, followed by execution of the respective deed before a notary public and registration thereof at the Commercial Registries. A 30-day period during which any creditor of the companies involved may oppose to the proposed merger must pass before registration can be completed.
Depending on the merger being considered likely to have a positive effect on the productive structure of the business concerned and provided further that it does not impair competition, companies involved in merger operations may benefit from certain tax relieves.
3.2.1. Private Acquisitions
For the purpose of this article, private acquisitions are those operations not completed by means of a public takeover offer.
While purchase and sale contracts for the transfer of shares in a SA (limited liability joint stock company) are not subject to any specific contractual form (although registration requirements may apply), the transfer of a participation in a Lda (limited liability "quota" company) must be executed by means of a notarial deed of assignment of "quotas" before a Notary Public, subsequently registered with the Commercial Registry.
The company’s By-Laws may impose restrictions on the transmission of nominative shares, by subjecting any transmission to the consent of the company, establish a pre-emptive right of the existing shareholders on the transmission of shares, or other restrictions on the grounds of the interest of the company.
The approval of the new Securities Code (hereinafter CVM) in late 1999, determined the introduction of several modifications to the PCC, thus also impacting on private acquisitions.
Public takeovers are governed by CVM, approved by Decree-Law nr. 486/99 of November 13th, and by the regulations issued by the Securities Commission.
The CVM includes a various number of matters paramount to M&A in Portugal, the main objective of the extensive revision carried out as regards the former Code being the accommodation, inter alia, of EU directives on insider trading and public offers, as well as the setting forth of new take-over provisions, which resulted in a complete change of the underlying views of take-overs and mergers in Portugal.
The CVM also takes into consideration the developments in both the concepts and mechanisms concerning placing and trading of securities such as the Internet, the use of mailings to potential investors and placement of foreign securities in Portugal.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.