Introduction

The Labour Code provides that changes in a company's corporate structure or ownership do not affect employment contracts or employees' vested rights. Thus, the buyer of a business is deemed to be the successor of all employment obligations (including ongoing and future litigation) and the transaction cannot affect existing benefits or terms and conditions of employment.

In addition, for the purposes of employment law, all members of a corporate group are considered to be a sole employer. As a result, each member is jointly and severally liable for employment contingencies for all the companies in the corporate group.

In light of this, the Superior Labour Court established Precedent 411/2010. According to the precedent, the acquiring company (ie, the successor) is not liable for the labour debts of other companies within a corporate group that encompasses the acquired company, provided that the entities – at the time of the transaction – were creditworthy or economically viable, except in the case of bad faith or fraud.

However, a recent reform to the Labour Code (Law 13.467/2017) – known as the labour reform – will enter into force on November 11 2017 and may change the existing understanding in this regard.

Precedent 411

Precedent 411 establishes two different scenarios in which the debts of a company belonging to the same corporate group as the seller may affect the buyer:

  • if the employer is in an unhealthy financial situation; or
  • even if it is in a financially healthy situation, in the case of bad faith or fraud.

Financial situation

The first scenario requires that, at the time of the transaction, the non-acquired companies be insolvent or not economically viable. The controversy that revolves around this provision rests on the definition of 'solvency' or 'economic suitability'. What causes a company to be considered insolvent or economically unviable? Does the mere existence of persistently unpaid labour debts attract the buyer's responsibility?

Some regional labour court decisions establish that the existence of several unpaid lawsuits against the non-acquired company could show its insolvency and consequently attract the buyer's responsibility.

However, the majority of case law – including Superior Labour Court decisions – applies Precedent 411 only in the event of bad faith or fraud, refraining from closely examining the financial situation of the seller's corporate group and affiliated companies.

Bad faith or fraud

Bad faith or fraud are most commonly recognised by case law as triggering a buyer's liability for the debts of the corporate group. In addition, these cases are easier to demonstrate when compared to the first hypothesis, since it is hard to validate the financial health of a company within the scope of a labour lawsuit.

In any case, where both scenarios overlap the buyer may be found liable. For example, if Company A transfers all of its viable assets to another company from the same corporate group (Company B), and the buyer (Company C) purchases only Company B, leaving Company A in an unviable financial situation, Company C may be considered liable for both Company A's and Company B's labour debts.

Labour reform

The labour reform has introduced three important provisions in this regard:

  • The new law clarifies that the buyer will absorb all labour obligations, including those contracted at the time that the employees worked for the seller.
  • The seller and buyer are jointly liable in case of fraud in the transaction.
  • Precedents from the Superior Labour Court and regional labour courts may not restrict legal rights or create obligations that are not provided by law.

In the same example above, the new law provides that the buyer (Company C) would be responsible for all labour obligations, except in the case of fraud – in which case Company B and Company C would be jointly liable. However, the provisions do not include Company A's liabilities in its scope.

Thus, considering that the law imposes no obligation on the buyer to assume the non-acquired company's labour debts, does it mean that, as of November 11 2017, buyers can be liable only for the seller's obligations, with no regard to the other non-acquired companies in the corporate group?

Comment

The Superior Labour Court has historically recognised buyers' liability in the case of fraud, which is more often than not due to the employer's financial situation. The labour reform has moved in the same direction, although it included only the seller in the joint liability provision, not non-acquired companies in the corporate group.

As the labour reform has not yet entered into force, it is impossible to predict whether the Superior Labour Court will cancel Precedent 411 or how case law will interpret the responsibilities of the buyer regarding the non-acquired companies in a corporate group.

Consequently, it is advisable (whenever feasible) to conduct complete due diligence of the seller's corporate group in order to ensure that none of the non-acquired companies can be considered insolvent or economically unhealthy until this matter is clarified. Notwithstanding this, the need and convenience of performing due diligence on the seller's entire corporate group must be evaluated on a case-by-case basis.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information of this topic please contact Domingos Antonio Fortunato Netto, Marina Dutra Marques or Arthur Alves de Quadros at Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados by telephone (+55 11 3147 7600) or email (dfortunato@mattosfilho.com.br, marina.dutra@mattosfilho.com.br or arthur.quadros@mattosfilho.com.br). The Mattos Filho, Veiga Filho, Marrey Jr e Quiroga Advogados website can be accessed at www.mattosfilho.com.br.