Structure and process, legal regulation and consentsStructure
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.Legal regulation
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.Legal title
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 and the corporation. 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.Multiple sellers
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.Consents
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, etc), 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 reais. 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.Regulatory filings
Must regulatory filings be made or registration (or other official) fees paid to acquire shares in a company, a business or assets in your jurisdiction?
See questions 5, 6 and 7.