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 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?

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.