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Structure and process, legal regulation and consents
How are acquisitions and disposals of privately owned companies, businesses or assets structured in your jurisdiction? What might a typical transaction process involve and how long does it usually take?
In Brazil, the acquisition or disposal of a privately owned company, business or asset usually includes the negotiation and execution of a stock or assets purchase and sale agreement between purchaser and the target company’s shareholders, business or asset owners. In terms of structure, direct acquisition of equity interests is usually adopted in Brazil, instead of acquisition of assets or business - because, as a rule, direct transfer of assets is tax-inefficient for buyers and sellers alike, besides being more bureaucratic. Moreover, unlike other jurisdictions, the acquisition of assets may not differ much from the acquisition of a company in terms of succession of liabilities.
A typical transaction starts with the execution of preliminary agreements such as memoranda of understandings, letters of intent, term sheets, and non-disclosure agreements (NDAs), providing the transaction’s fundamental terms such as price and payment conditions. Purchaser’s advisers then conduct an accounting, business and legal due diligence at the target company, business or asset to assess contingent and existing liabilities. The parties then negotiate and sign the relevant stock or assets purchase and sale agreement, which may provide for conditions precedent to closing. Although the typical timeframe varies from three to six months, transactions may last more than that depending on the size of the target company, the type of activity it engages in, and the complexity of the deal itself. Note that Brazilian antitrust authorities must approve the completion of transactions subject to their review, and the obtaining of this approval may take from 30 days (summary proceeding) to roughly one year (ordinary proceeding) to be completed.
Which laws regulate private acquisitions and disposals in your jurisdiction? Must the acquisition of shares in a company, a business or assets be governed by local law?
There is no specific regulatory framework for M&A transactions; several statutes and rules generally apply, such as the Civil Code, the Corporation Law, the Capital Market Law, the Competition Law, as well as specific regulations issued by market regulators, such as the National Monetary Council, the Central Bank of Brazil and, with respect to publicly-held companies, the Brazilian Securities Commission.
Although Brazilian law does not prohibit the choice of a foreign law to govern civil or corporate agreements, typically, investors choose Brazilian law for their acquisitions whenever the target company, business or assets they acquire are located in Brazil. This is because, in these situations, if the documents are subject to any laws other than Brazilian law, to enforce obligations in Brazil, the parties will need to obtain a court decision abroad, and then have it confirmed by Brazilian superior courts, which, unfortunately, is a bureaucratic and time-consuming procedure. It becomes an issue, for instance, if a party needs to obtain an injunction or similar relief in Brazil against the other party, yet is unable to do so efficiently because of the choice of the foreign law.
Moreover, as international investors are normally encouraged to use a local vehicle to invest in Brazilian companies or purchase Brazilian assets because of potential tax benefits, the parties tend to adopt Brazilian law in a scenario where two Brazilian entities execute the agreements.
What legal title to shares in a company, a business or assets does a buyer acquire? Is this legal title prescribed by law or can the level of assurance be negotiated by a buyer? Does legal title to shares in a company, a business or assets transfer automatically by operation of law? Is there a difference between legal and beneficial title?
Brazilian law affords two main types of business organisations: the limited liability company (sociedade limitada) and the corporation (sociedade por ações). Legal title of ownership in the former is represented by quotas indicated in the company’s articles of association, whereas in the latter by shares registered in the company’s corporate books (closely-held corporations) or kept in a trust account by a trustee (listed corporations). Thus, the transfer of the legal title to quotas or shares in a company will require an amendment to the company’s Articles of Association (limited liability companies), or the execution of transfer deeds in the company’s share registry book (closely-held corporations) or share accounts by the relevant trustee (listed and some closely-held corporations). These events will demand actions both from purchaser and seller (execution of corporate documents, of transfer forms or instructions), and will typically take place at closing (completion) following the fulfilment of closing conditions.
As for assets, under Brazilian law legal title to assets may be represented by their possession (movable assets) or the registration of ownership in the proper registry of real estate properties (real estate). Transfer of legal title, therefore, will require either the delivery of the assets or the updating of ownership records.
In Brazil, differences between legal and beneficial title are not relevant for the private acquisition or disposal of businesses and assets.
Specifically in relation to the acquisition or disposal of shares in a company, where there are multiple sellers, must everyone agree to sell for the buyer to acquire all shares? If not, how can minority sellers that refuse to sell be squeezed out or dragged along by a buyer?
Unless there is a contractual drag-along obligation agreed upon the shareholders of a company (typically, the minority shareholder’s commitment to sell its shares if requested to do so by the controlling shareholder), all shareholders must agree to sell their shares in order for a buyer to acquire the company’s entire share capital. In fact, in Brazil, the legal squeeze-out procedure typically found in other jurisdictions apply only to delisting tender offers.
Exclusion of assets or liabilities
Specifically in relation to the acquisition or disposal of a business, are there any assets or liabilities that cannot be excluded from the transaction by agreement between the parties? Are there any consents commonly required to be obtained or notifications to be made in order to effect the transfer of assets or liabilities in a business transfer?
In Brazil, M&A transactions are usually structured as a purchase and sale of assets or equity interests. In both cases, all assets and liabilities associated with the target company or business are transferred to the purchaser upon closing of the transaction. Purchaser and seller, however, may carve out from the target company particular assets in preparation for the transaction through corporate restructurings (spin-off transactions, or transfers of assets), as well as contractually agree upon indemnification obligations associated with specific liabilities - although the target company remains liable, the buyer may receive the right of recourse against the seller for specific liabilities, typically those originated prior to closing.
Typically, only consents and notifications related to contractual obligations of the target company (shareholders agreements, loan and credit facility agreements, and others) are required to effect a corporate restructuring in preparation for an acquisition or disposal transaction. Moreover, if the target company engages in a regulated activity (such as oil and gas, electric energy, telecommunication, air transportation, and others), additional consents from or notifications to regulators may be required.
Are there any legal, regulatory or governmental restrictions on the transfer of shares in a company, a business or assets in your jurisdiction? Do transactions in particular industries require consent from specific regulators or a governmental body? Are transactions commonly subject to any public or national interest considerations?
Under Brazilian law, foreign capital is ensured the same treatment as that afforded to domestic capital, and any discrimination not expressly prescribed by law is prohibited. Nevertheless, participation of foreign capital in the following activities is prohibited for the benefit of national interest:
- nuclear energy;
- health services;
- post office and telegraph services;
- domestic flight routes; and
- the aerospace industry.
Moreover, some restrictions apply to foreign investment in the ownership and management of rural land, businesses abutting on international borders, newspapers, magazines and other periodicals, as well as in radio and television networks.
If the target company engages in a regulated activity (such as oil and gas, electric energy, telecommunication, air transportation, and others), additional consents from or notifications to regulators may be required to effect the acquisition or disposal of the target company, business or assets.
Finally, some transactions are subject to the approval of Brazilian antitrust authorities. Currently, transactions must be previously submitted to Brazilian antitrust authorities for approval whenever: the economic group of at least one of the parties reported, in its previous balance sheet, annual gross revenues or a volume of business in Brazil higher than 750 million reais; and the economic group of at least another party involved in that transaction reported, in its previous balance sheet, annual gross revenues or a volume of business in Brazil higher than 75 million reias. The concept of economic group for the purposes of the Brazilian competition law is very broad and includes: all companies under ‘common control’; and all companies in which those under ‘common control’ hold a direct or indirect interest of at least 20 per cent.
Are any other third-party consents commonly required?
Typically, in additional to potential regulatory approvals, consents related only to contractual obligations of the target company are required to effect an acquisition or disposal of a company, business or assets in Brazil. These may include banks holding the right to accelerate facilities upon a change in the target company’s corporate control, shareholders holding the right of first refusal to acquire shares in a company, or franchisers limiting the usage of their corporate brand. The obtaining of all such consents usually consists of a condition precedent to effect the transaction.
Must regulatory filings be made or registration fees paid to acquire shares in a company, a business or assets in your jurisdiction?
Please refer to our answers to questions 5, 6 and 7 above.
Advisers, negotiation and documentation
In addition to external lawyers, which advisers might a buyer or a seller customarily appoint to assist with a transaction? Are there any typical terms of appointment of such advisers?
In a typical transaction, each buyer and seller will appoint its external lawyers and financial advisers (investment bankers), and the buyer may have an accounting firm as adviser. The remuneration of financial advisers usually includes a percentage of the value of the relevant transaction, whereas lawyers and accountants charge pre-agreed fees for specific tasks such as the conduct of accounting due diligence or the preparation of financial reports and statements.
Duty of good faith
Is there a duty to negotiate in good faith? Are the parties subject to any other duties when negotiating a transaction?
Brazilian law requires any two parties to negotiate in good faith whenever contracting to one another, including in a private acquisition or disposal of a company, business or asset. The parties usually reaffirm this duty contractually, and all individuals involved in the transaction must comply with it. In addition to good faith, they must comply with the principle of integrity, meaning all parties involved must carry out their tasks in an ethical, honest and transparent way.
What documentation do buyers and sellers customarily enter into when acquiring shares or a business or assets? Are there differences between the documents used for acquiring shares as opposed to a business or assets?
The typical documentation in the acquisition or disposal of a privately owned company, business or asset usually includes a stock or assets purchase and sale agreement. Still, they may also include ancillary documents such as non-disclosure agreements, memoranda of understandings, a shareholders’ agreement (if the purchaser does not acquire the totality of the target company’s share capital) or an escrow agreement (addressing the potential differed payment of purchase price or indemnification commitments). Moreover, in the acquisition of equity interests, the actual transfer of quotas or shares will require the execution of an amendment to the target company’s articles of association or the updating of its corporate books or shares accounts.
Are there formalities for executing documents? Are digital signatures enforceable?
There are no legal formalities, although the collection of two witnesses’ signatures on the documents is customary, as this is a requirement in Brazilian courts. It is also common practice in Brazil for the parties to initial all pages of the agreements of the transaction. Digital signatures are generally enforceable in Brazil, but still unusual in the M&A practice.
Due diligence and disclosure
Scope of due diligence
What is the typical scope of due diligence in your jurisdiction? Do sellers usually provide due diligence reports to prospective buyers? Can buyers usually rely on due diligence reports produced for the seller?
In Brazil, due diligence is a multidisciplinary investigative process, covering both accounting and legal matters of the target company or business. From the buyer perspective, due diligence helps in evaluating the target company, and allows the buyer to sort out or mitigate contingencies after closing of the deal and to define contractual protections and risk allocation criteria (for already existing or hidden risks). From the seller perspective, due diligence increases seller credibility and allows issues raised by prospective buyers to be identified and duly handled in advance. The better due diligence work is, the easier the transition tends to be. In terms of scope, legal due diligence may cover all areas of law, including corporate, contracts, intellectual property, litigation, tax and social security, labour, environmental, and compliance. The most significant contingencies usually lie in the tax, social security, labour and environmental areas, although compliance has recently gained momentum in Brazil in the context of anti-corruption investigations. Although buyers may rely on due diligence reports produced by or for the sellers, it is customary for the buyer to have its own advisers investigating and reviewing the target company’s documents.
Liability for statements
Can a seller be liable for pre-contractual or misleading statements? Can any such liability be excluded by agreement between the parties?
Sellers may be liable for pre-contractual or misleading statements, and the parties may exclude such liability contractually.
Publicly available information
What information is publicly available on private companies and their assets? What searches of such information might a buyer customarily carry out before entering into an agreement?
In Brazil, certificates issued by court distributors are the most commonly used public documents that the buyer and its advisers may rely upon to investigate existing liabilities of a company. In these documents, the buyer may identify existing lawsuits filed against the target company or even the seller in most civil, criminal, and tax courts in Brazil. In addition, corporate documents filed with the commercial registry may also serve as a useful source of information. The fact, however, is that much information on private companies may be obtained only with the cooperation of the seller and the target company. Virtually no buyer proceeds to an acquisition transaction based solely on independent investigation.
Impact of deemed or actual knowledge
What impact might a buyer’s actual or deemed knowledge have on claims it may seek to bring against a seller relating to a transaction?
The buyer’s actual knowledge on claims related to the company or business it acquires will hinder its ability to seek indemnification from the seller only if the parties agree in the stock or assets purchase and sale agreement that disclosed liabilities are not subject to indemnification. In Brazil, it is customary for the parties to exempt the seller from the obligation to indemnify the buyer for liabilities disclosed under the relevant purchase and sale agreement, assuming the buyer factors in such liabilities when calculating the purchase price.
Pricing, consideration and financing
How is pricing customarily determined? Is the use of closing accounts or a locked-box structure more common?
Typically, financial advisers will evaluate the private company or business through valuation methods such as discount cash flow of earnings before interest, taxes, depreciation and amortisation multiple. Although locked-box structures are becoming more common in Brazil, closing accounts mechanisms still prevail in private acquisition or disposal of equity interests and assets.
Form of consideration
What form does consideration normally take? Is there any overriding obligation to pay multiple sellers the same consideration?
Typically, consideration includes cash or a combination of cash and shares. Although not mandatory in a private acquisition or disposal of shares or assets, the payment of the same consideration (price per share) to multiple sellers in an M&A transaction is customary in Brazil.
Earn-outs, deposits and escrows
Are earn-outs, deposits and escrows used?
All largely used in Brazil.
How are acquisitions financed? How is assurance provided that financing will be available?
In Brazil, acquisitions are financed through equity or debt capital alike. Assurance may include letters of guarantee, personal statements or corporate resolutions, depending on the structure adopted.
Limitations on financing structure
Are there any limitations that impact the financing structure? Is a seller restricted from giving financial assistance to a buyer in connection with a transaction?
No such limitations apply.
Conditions, pre-closing covenants and termination rights
Are transactions normally subject to closing conditions? Describe those closing conditions that are customarily acceptable to a seller and any other conditions a buyer may seek to include in the agreement.
Transactions are normally subject to closing conditions.
Typically, sellers will accept conditions such as:
- the obtaining of third parties approvals for the transfer of corporate control (notably banks);
- the conclusion of preparatory corporate restructurings arranging the carve-out of excluded assets;
- the obtaining of the approval from antitrust and other regulatory authorities (if any);
- the completion of due diligence in a manner that is satisfactory to buyer;
- the confirmation that all representations and warranties given by seller at signing remain valid and in effect at closing; and
- the receipt of relevant corporate approvals from buyer’s shareholders.
The buyer may also seek as closing conditions:
- the achievement of performance goals by the target company or business;
- the creation of escrow accounts for deferred payments and indemnification obligations;
- the receipt of assurance that financing is available; or
- the absence of material changes in the target company or extraordinary events (force majeure or acts of God).
What typical obligations are placed on a buyer or a seller to satisfy closing conditions? Does the strength of these obligations customarily vary depending on the subject matter of the condition?
Typically, except for the buyer’s corporate approvals and the obtaining of financing (which the buyer must seek independently), and for the obtaining of antitrust and regulatory approvals (which the buyer and the seller must request together), the seller is the one responsible for the actions required to satisfy closing conditions. From a legal standpoint, the strength of these obligations does not vary depending on the subject matter of the condition (eg, all are mandatory for closing to occur), but the parties may waive the conditions that do not result from a legal obligation.
Are pre-closing covenants normally agreed by parties? If so, what is the usual scope of those covenants and the remedy for any breach?
Pre-closing covenants are customary. They usually include:
- the conclusion of preparatory corporate restructurings;
- the conduct of the target company’s activities in an ordinary course of business; and
- the performance of all actions required to fulfil closing conditions.
The inclusion of extraordinary covenants will depend on the size of the target company, the type of activity it engages in, and the complexity of the deal itself. Remedies for breach typically include fines, and the obligation to indemnify the damaged party.
Can the parties typically terminate the transaction after signing? If so, in what circumstances?
Typically, they can, assuming the relevant stock or assets purchase and sale agreement so allows. Causes that normally afford a termination before closing include the occurrence of material changes in the target company or extraordinary events (force majeure or acts of God), and the parties’ failure to obtain the consents or approvals required for closing in accordance with the agreement.
Are break-up fees and reverse break-up fees common in your jurisdiction? If so, what are the typical terms? Are there any applicable restrictions on paying break-up fees?
In Brazil, break-up fees are usually associated with the termination of the transaction without cause by any party, typically at its early stage. They are uncommon after a certain point during negotiations, in particular after the execution of definitive agreements between the parties. Brazilian law does not provide for any legal restrictions in that respect.
Representations, warranties, indemnities and post-closing covenants
Scope of representations, warranties and indemnities
Does a seller typically give representations, warranties and indemnities to a buyer? If so, what is the usual scope of those representations, warranties and indemnities? Are there legal distinctions between representations, warranties and indemnities?
In Brazil, it is customary for a seller to give representations, warranties and indemnities to a buyer. Typically, these will include representations related to seller’s ability and power to enter into the transaction and perform all obligations in the agreements, representations related to the situation of the target company or business (corporate good standing, financial capacity, existing liabilities, title to assets and real estate, compliance with regulatory and licensing requirements, tax and accounting practices, relationship with governmental authorities), usually waived in the case of listed corporations, and perhaps representations associated with the seller’s own business practice in case the buyer believes it may have an impact on the target company’s risk exposure. In this context, the seller undertakes to indemnify the buyer and the target company for all losses resulting from a false or misleading representation in the agreement, though there are not legal distinctions between the representations and warranties given under the transaction.
Limitations on liability
What are the customary limitations on a seller’s liability under a sale and purchase agreement?
Typically, the seller’s liability under a sale and purchase agreement is limited to the direct losses (including loss of profits) incurred by either the buyer or the target company as a result of events happening prior to closing (completion) of the transaction, and relating to actions of the seller or the operation of the company or business acquired. Moreover, it is also usual for the parties to exempt the seller from the obligation to indemnify the buyer or the target company for the losses associated with liabilities originated prior to closing but fully disclosed to the buyer under the transaction. On the other hand, cap amounts for the seller’s liability under a sale and purchase agreement are rare in Brazil.
Is transaction insurance in respect of representation, warranty and indemnity claims common in your jurisdiction? If so, does a buyer or a seller customarily put the insurance in place and what are the customary terms?
Although this type of insurance does exist in Brazil, its adoption remains uncommon, particularly in transactions of moderate complexity.
Do parties typically agree to post-closing covenants? If so, what is the usual scope of such covenants?
Typically, post-closing covenants will include registration and filling procedures required for the actions carried out at closing to become effective before third parties. These may include, for instance, the filling of corporate resolutions (such as amendments to articles of association or minutes of shareholders’ meetings) with the relevant commercial registry, or the updating of tax and regulatory enrolments. In addition to that, after closing, if applicable, the parties may adjust the purchase price, if necessary, based on variations on the target company’s working capital and net debt.
Are transfer taxes payable on the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
From a Brazilian tax perspective, no transfer tax would be levied on the sale of shares in a company, a business or an asset, except if the asset is real estate. In this case, the tax on the transfer of immovable assets would be levied at a rate that varies according to the municipality where the real estate is located (average rate would be 3 per cent). The buyer usually bears the cost related to the tax on the transfer of immovable assets.
Corporate and other taxes
Are corporate taxes or other taxes payable on transactions involving the transfers of shares in a company, a business or assets? If so, what is the rate of such transfer tax and which party customarily bears the cost?
As a general rule, the capital gain (positive value between purchase price and acquisition cost) recognised by the Brazilian seller (legal entity) of shares in a company, a business or assets would be subject to Brazilian corporate income tax and contribution on net profits at a general combined rate of 34 per cent. In the case of an individual, the individual income tax would be levied on the capital gain at a progressive rate, as follows: 15 per cent for capital gains lower than 5 million reais; 17.5 per cent for capital gain higher than 5 million reais and lower than 10 million reais; 20 per cent for capital gain higher than 10 million reais and lower than 30 million reais; and 22.5 per cent for capital gain higher than 30 million reais.
In the case of a capital gain recognised by a foreign legal entity or individual owing to the sale of shares in a Brazilian company, a Brazilian business or Brazilian assets, the capital gain recognised by the foreign seller would be subject to Brazilian withholding income tax at the same rates applicable to the Brazilian individuals. Please note that exemptions and rate reductions could apply on specific cases and a flat rate of 25 per cent would apply in the case of sellers located in a tax haven jurisdiction. Furthermore, the seller would be the party that customarily bears the cost related to the income tax.
The gross revenue earned by the seller would be subject to Contribution for Social Integration Programme (PIS) and Contribution for Financing Social Security (COFINS) at a combined rate of 9.25 per cent (non-cumulative regime) or 3.65 per cent (cumulative regime). The seller would be the party that customarily bears the cost. It should be stressed that the revenue earned owing to the sale of shares, business and assets registered as a non-current asset would not be subject to PIS and COFINS.
The sale of assets would be subject to:
- the tax on manufacturing products on the sale price at a rate that varies according to the asset (average rate of 14 per cent). The sale of assets registered as non-current assets for more than five years would not be subject to tax on manufacturing products; and
- the tax on sale of goods on the sale price at a rate that varies according to the Brazilian State (average rate of 18 per cent). It should be stressed that there is an ongoing judicial dispute regarding whether the tax on sale of goods would be levied on the sale of non-current assets. Please note that the buyer would be the party that customarily bears the cost of such taxes.
The inflow and outflow of funds to and from Brazil necessary for the acquisition of shares in a company, a business or an asset owned by a Brazilian legal entity or individual should be carried out through a currency exchange transaction, which would be subject to tax on financial transactions at a general rate of 0.38 per cent. Such rate could be reduced under certain conditions. The party that customarily bears the cost would vary on a case-by-case basis.
Employees, pensions and benefits
Transfer of employees
Are the employees of a target company automatically transferred when a buyer acquires the shares in the target company? Is the same true when a buyer acquires a business or assets from the target company?
According to Brazilian law, in any given transfer of shares, the target company’s employees remain with the target company, which means no actual transfer occurs. In terms of liability, the target company (and the buyer, indirectly) remains liable for all labour claims associated with its employees, including those that originated prior to closing. The parties, however, may hold seller responsible for pre-closing labour claims by means of indemnification obligations in the purchase and sale agreement.
In an assets or business sale, although a transfer of employees usually takes place, it does not happen automatically. Typically, the seller dismisses and the buyer rehires most employees related to the transferred assets at closing, which used to be costly because of the settlement severance payments. In terms of liability, as a rule, the buyer succeeds the seller in all labour liability related to the transferred employees, but the parties may hold the seller responsible for pre-closing labour claims contractually (again through indemnification obligations).
Notification and consultation of employees
Are there obligations to notify or consult with employees or employee representatives in connection with an acquisition of shares in a company, a business or assets?
There is no such obligation under Brazilian law.
Transfer of pensions and benefits
Do pensions and other benefits automatically transfer with the employees of a target company? Must filings be made or consent obtained relating to employee benefits where there is the acquisition of a company or business?
Under Brazilian labour law employees must not be jeopardised following an acquisition or disposal transaction; therefore, the buyer must keep all pensions and other benefits intact following the acquisition of a company or business.
Update and trends
What are the most significant legal, regulatory and market practice developments and trends in private M&A transactions during the past 12 months in your jurisdiction?
In the past years, Petrobras, the Brazilian state-owned oil and gas company, implemented a large divestment programme that had a goal, for the period 2017 to 2018, of receiving proceeds in the amount of US$21 million. Therefore, we have seen a lot of M&A transactions involving the disposal of Petrobras assets and such transactions had to observe some procedures agreed by Petrobras with the Brazilian Federal Auditor’s Office (Tribunal de Contas da União - TCU). In October 2018, there will be presidential elections in Brazil and depending on who is elected there may be more M&A transactions involving state-owned companies, or the shutdown of the federal divestments programmes for the following four years.