What measures should be taken to best prepare for a corporate reorganisation?
In order to prepare for a corporate reorganisation, one of the most important steps is to conduct a thorough due diligence, especially from a tax, accounting, financial and legal perspective, in order to investigate and report the status of the entities involved. Legal due diligence is conducted according to the areas in which the relevant entities conduct their business and, therefore, may vary, but usually comprises investigation relating to: corporate, regulatory, environmental, real estate, intellectual property, social security, tax, civil and labour litigation, social security and labour routine, criminal and insurance areas.
The due diligence may even identify rights of creditors or equity holders who are not willing to participate in the relevant transaction, which, if their legal assurances are not observed, could render the relevant transaction null.
Such due diligence is usually assisted by legal and financial advisers who, once supplied with the due diligence information, are able to provide guidance on the most adequate structure to be adopted as well as through all the steps involved.
Based on the information verified in the due diligence, it is possible to adopt other measures that may be relevant in order to prepare for the corporate reorganisation, such as making pending payments, obtaining release from obligations and obtaining any prior approval or authorisation that may be required to proceed, among others.
Other significant aspects that must be taken into consideration when planning a corporate restructuring are operational and organisational logistics, financial aspects and, most importantly, applicable legislation and rules.Employment issues
What are the main issues relating to employees and employment contracts to consider in a corporate reorganisation?
One of the most important premises from a labour perspective in Brazil is that no change in the legal structure of the company for which an employee works should affect the rights acquired by such employee. Further, a change of ownership does not necessarily presuppose the termination of the employment agreements, as the employment agreement held by the acquired company remains binding on such company (unless the relevant employee does not continue to provide services, either by his or her own will or by that of the companies). In all events, the succeeding company will be responsible for all labour and social security rights and obligations arising from the employment agreements of the acquired company, except if there is any fraud in the business succession, in which case the seller is jointly liable for labour obligations.
Another relevant aspect that must be considered when undertaking a corporate reorganisation in Brazil is the employee’s salary. This can be a significant issue, as employees’ salaries cannot be reduced, and pay-parity cases may arise when comparing the transferred employees with those of the new employer, based on specific requirements established in the Brazilian Labour Code and the Consolidation of Labour Laws (CLT). The employees’ acquired labour rights concerning vacations, 13th salary (annual bonus), bonus accrual periods in course, etc, must also be respected.
When companies involved in a corporate reorganisation do not consider the employees’ salaries and benefits to provide a proper equalisation, they may be exposed to the risk of violating the principle of isonomy (ie, equality before the law), as well as other significant labour law principles and objective rules.
Further, corporate reorganisations must ensure the continuous observance and compliance by the entities involved of any special collective agreements or collective bargaining agreements (which are imposed on the companies and employees as a result of a negotiation between workers’ unions and employers’ associations) to which the original entity or the employees are subject to. Some of these collective agreements may even provide for specific rules for corporate reorganisation scenarios.
In order to ensure compliance with all adequate measures, it is always advisable to analyse the existing employment agreements, and their terms and conditions, and to track all benefits granted to employees and any agreements (as referred to above) to which employees are subject, a considerable amount of time before the corporate reorganisation takes place.
Notwithstanding the above, other specific labour aspects must be considered in a corporate reorganisation case by case.
What are the main issues relating to pensions and other benefits to consider in a corporate reorganisation?
Pursuant to Brazilian labour law, the pensions and benefits offered to employees can be amended to receive improvements or to reflect a change of the company to whom they are providing services. In this regard, it is important to consider the premise that any benefits previously offered to an employee cannot be excluded or amended in order to reduce or worsen the conditions. For instance, if an employee was entitled to the benefit of a healthcare plan with full coverage of treatment, in view of a corporate restructuring, the surviving entity to which that employee will continue to render their services may change the health plan offered; however, the full treatment coverage must at least remain under the same conditions as the previously existing and offered one.
In order to ensure the adequate compliance with pension and benefits aspects, the entities involved must gather all existing documents and take into consideration all of their terms, either for the purposes of their assignment or so they can be duplicated or implemented under the same terms and conditions when the surviving entity receives the employees, as the case may be.
Especially in what concerns private pension plans, a previous case-by-case analysis is essential as, depending on the structure of the reorganisation or the intention of the new employer towards such benefit, the change or even maintenance of the plan can require specific regulatory procedures, which can impact the deadline and costs of the operation.Financial assistance
Is financial assistance prohibited or restricted in your jurisdiction?
Financial assistance is not only allowed in Brazil by private or public companies, but it is a common and increasingly adopted practice. Such practice is intended to optimise the deal and to maximise the outcome of the members involved, especially the surviving entity (either when acquiring its own equity or when selling or acquiring that of another entity).Common problems
What are the most commonly overlooked issues or frequently asked questions in a corporate reorganisation?
Some of the most commonly overlooked issues in a corporate reorganisation are:
- not giving due importance to the process of prior and detailed tax planning;
- overlooking the tax and financial consequences for the companies and their equity holders;
- not undertaking a due diligence process;
- not considering the corporate, social and synergetic purposes of the corporate reorganisation, or the ultimate intended outcome for the transaction;
- not obtaining any required prior approvals or otherwise overlooking specific procedures that the corporate governance of the involved entities establish;
- not analysing the availability of distributable reserves or, if analysing them, not aiming for the maximisation of their results;
- not establishing a plan and estimated timeline for the transaction, with the identification of all measures involved and responsible parties; and
- not hiring expert advisors to assist in specific aspects of the transaction (eg, legal, financial or accounting).
Accounting and taxAccounting and valuation
How will the corporate reorganisation be treated from an accounting perspective? How are target assets and businesses valued?
From an accounting perspective, corporate reorganisations are usually implemented considering the book value of the assets and quotas or shares, when possible, to avoid significant tax impacts.
If the assets and businesses are valued at fair market value, the revaluation may trigger taxes on the related capital gain.Tax issues
What tax issues need to be considered? What are the tax implications of carrying out a corporate reorganisation?
If made at book value, corporate reorganisations do not normally trigger immediate taxation. However, depending on the case, a deferred gain must be recognised.
On the other hand, tax losses of the merged or spun-off company are lost (totally in the case of a merger, or partly in the case of a partial spin-off) upon a corporate reorganisation.
Another aspect to be considered is that the entity receiving the transferred assets becomes a successor of the merged or spun-off entity regarding past tax liabilities.
If the entities involved in the reorganisation enjoy any special tax regimes, the applicable legislation should be reviewed.