Due diligence

Key areas

What are the most critical areas of due diligence in a distressed M&A transaction?

The Brazilian Bankruptcy Law provides that in isolated productive unit (UPI) sales or sales pursuant to a public auction or other organised competitive process, the purchaser does not take on the obligations of the debtor (seller), so that the scope of the due diligence in these cases tends to be narrowed to identify liabilities that are inherent to the assets under negotiation themselves (eg, liens and ownership of the assets, propter rem obligations and, in the case of an equity deal, the liabilities of the entity being acquired itself). The due diligence should also cover contracts that are key to the business, such as financial and commercial agreements in general (clients and suppliers, including governmental authorities), as purchasers should be aware of any change of control or other provisions to be addressed as condition precedent to the closing of the relevant transaction or other aspects that could impact the acquired business.

In the case of distressed transactions carried out outside a formal insolvency proceeding, the UPI sale protections provided by the Brazilian Bankruptcy Law do not apply, so besides the full investigation with respect to the target, the due diligence should also cover sellers’ and their group’s liabilities to adequately assess clawback risks and succession risks.

Searches

What searches of public records should be conducted as part of a due diligence exercise in distressed M&A transactions in your jurisdiction?

The same searches are required that a purchaser would perform in standard M&A transactions, mainly focused on court certificates on existing lawsuits, tax clearance certificates and other customary certificates (labour debts, protest offices, etc.). There are other documents and information that, as a rule, may be obtained independently, such as corporate documents filed with the Board of Trades, court records, real estate enrolment certificates issued by the Real Estate Registry Offices and collateral instruments filed with the applicable Registry of Deeds and Documents, among others. Depending on the corporate type of the involved entities, such entities may also be required to publish their financial statements in the newspapers, thus allowing the relevant accounting and financial information to be easily accessed.

Contractual protections and risk mitigation

What contractual protections and other strategies are commonly used to mitigate diligence gaps in a distressed M&A transaction?

The same contractual protections and other strategies typically used to mitigate diligence gaps in non-distressed M&A transactions, such as representations and warranties and indemnification provisions in general, are used. However, in view of the insolvency of sellers in distressed M&As, purchasers must seek further protections to ensure that they will be indemnified for losses arising from past liabilities. Such additional protections are generally structured as escrow accounts, purchase price holdback, collaterals over sellers’ remaining assets and third parties’ collateral.