Merger operations involving the incorporation of shares have generated considerable controversy. The merger of shares, in its various forms, has been instrumental in the transfer of control of companies instead of selling outright. In addition to tax reasons, these operations are intended to prevent the outbreak of the tag along, or the right of the minority shareholder to receive the equivalent of at least 80% of the price paid to the controlling shareholder for the sale of its shares – this value may be integral in the case of companies listed on the Novo Mercado. The legislation requires that the transactions are settled financially to generate such rights.

These cases have been so frequent that the traditional sales of control have almost left the scene. Many of these operations are on top of the tag-along rights that minority shareholders would have in case of a normal sale. The form (merger of shares) prevails on the essence (the effective transfer of control), at the cost of subtracting legitimate expectations of legal rights. Needless to say, this instability creates an unsafe environment for investment.

Even when operations are commutative and there are safeguards to tag-along rights of minority shareholders, there is the discomfort of compulsoriness. The merger of shares leaves no option to minority shareholders: they have no alternative but to accept the exchange ratio of shares offered by the controller, or sell their shares at the price that the market offers at the moment.

These operations should instead be carried out through public offers to acquire shares of minority shareholders, giving them the opportunity to accept or reject the exchange ratio offered, forcing controllers to offer more equitable conditions for minority shareholders.

The urgency of such mergers to be preceded by public offers of shares or by other inducers of commutativity becomes clearer when examining transactions involving preferred (non-voting) shares without the right to tag along.

The exchange ratios in these cases have shown striking asymmetries in favor of drivers, in some cases even flirting with the expropriation of assets. The most recent operations, constructed in the wake of the financial crisis, bring an aggravating factor: the support of BNDES – the Brazilian state run national bank for development – to these structures.

The Legal Opinion 35 of CVM – the Brazilian Securities Exchange Commission – ,provides that, in the context of a merger, takeover between companies and merger of their shares, managers must negotiate an exchange ratio of shares fair to the shareholders of both companies, reflecting the value of each of them and dividing between them the potential gains from the operation.

The orientation of the CVM is that although the exchange ratio can be freely negotiated by managers, their decisions should aim to benefit all shareholders and not just the controllers. Directors can reject the transaction if the terms and conditions proposed are unsatisfactory.

Among other suggestions about the fiduciary duties of directors, in Legal Opinion 35, CVM recommends the following procedures in cases of merger, takeover and merger of shares:

1. the establishment of a special independent committee to negotiate the transaction and submit its recommendations to the board, or ii. the operation is subject to the approval of the majority of non-controlling shareholders, including holders of shares without voting rights or with restricted voting rights.

For reasons easy to understand, the companies have not used the latter way. Also predictably, even in the face of asymmetries that leap to the eye, the so-called independent special committees have done to corroborate the conditions and terms of trade set ex ante by the controllers.

Through which an ox goes by pass a herd can pass. If regulators do not act promptly and energetically, it will only be a matter of time before other operations negatively affect the market through the door of the merger of shares.