here. - Fischer Advocacia

JOSÉ MAURÍCIO MACHADO
ISABEL A. BERTOLETTI
LUÍS ROGÉRIO G. FARINELLI
MIGUEL A. VALDÉS
JÚLIO M. DE OLIVEIRA
ANA MARIA NAKAZA
ANTONIO CARLOS SALLA
SÓCIO RESIDENTE (CHICAGO)
CARLOS AUGUSTO DA CRUZ
EDIMILSO GOMES DA SILVA
CRISTIANE M. S. MAGALHÃES
ROSIENE SOARES NUNES
Mª CRISTINA BRAGA E SILVA
MAURI BÓRNIA
JOÃO CAIO GOULART PENTEADO
LISIANE B. H. MENOSSI PACE
RICARDO M. DEBATIN SILVEIRA
DANIEL LACASA MAYA
CONSULTOR
RENÉ GELMAN
MARTIM FRANCISCO M. MACHADO
ADRIANO R. A. P. CHAVES
RENATA ALMEIDA PISANESCHI
FABIO F. LANZANA PEREIRA
FABIO MEDEIROS
SORAIA MONTEIRO DA M ATTA
MARCIO ROBERTO ALABARCE
FABIA E. MOREIRA AZEVEDO
ANDRÉA DE OLIVEIRA RAMOS
CINTIA LADOANI BERTOLO
JULIANA MARI TANAKA
ERIKA YUMI TUKIAMA
PATRICIA REGINA MARTIN DE GODOY
CECÍLIA YOKOYAMA
IARA M. S. SOUSA DO AMARAL
FABÍOLA C. GIRÃO VAIDYANATHAN
CAROLINA ROMANINI MIGUEL
ROBERTO FLEURY A. CAMARGO
VICTORIA ROZSAVOLGYI
ROCHELLE RICCI
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MACHADO ASSOCIADOS NEWSLETTER
MERGERS AND ACQUISITIONS IN BRAZIL
Adriano Chaves, Maria Cristina Braga and Fabíola Girão
1.
Based on our firm’s experience, please find below an outline of the most important legal
aspects for structuring mergers and acquisitions in Brazil, focusing on transactions involving privately
held companies.
I. Deal Structuring
2.
The success of the transaction depends not only on a clear understanding of the parties’ goals,
but also on their decision for a practical and cost efficient legal structure.
3.
A company may wish to acquire equipment to start certain activities; however it may not be
able to operate immediately if it does not have the necessary licenses and permits.
4.
The conclusion of the transaction may be delayed by disputes between local authorities or lack
of mechanisms for its implementation. Sometimes, official electronic registrations are not prepared to
recognize the transaction (e.g. silent partnerships are not recognized by the Brazilian Central Bank’s
electronic systems).
5.
The parties shall also consider difficulties to register or approve the transaction with local
authorities. This can happen, for instance, in a sale of a business unit involving two different Brazilian
legal entities. Depending on where the business unit is located, the transaction may need to be
implemented in different ways: the buyer may be authorized to operate with the former State tax
enrolment, but must be obliged to obtain a new Municipal tax enrollment for the same purpose.
6.
Non-compliance with certain legal provisions may also invalidate the transaction. This can
happen with foreign investments in certain activities (e.g. newspapers and sound and image
broadcasting) or if the validity of the transaction depends on governmental authorities’ prior approval
(e.g. change of controlling shareholders of Brazilian financial institutions).
7.
Brazilian currency exchange control rules may also restrict the parties’ freedom to structure
the deal. If an acquisition shall be funded with equity and debt, the debt shall be consistent with
market practices to be registered with the Central Bank (such registration is essential for the
remittance of the relevant payments abroad). Limitations may also arise from the prohibition of
private offsetting of credits and debts between a Brazilian resident and a non-resident.
8.
Any transaction that results in a company or group of companies reaching a 20% share of a
relevant market or involving a group of companies which has recorded a gross turnover of BRL
400,000,000 or more, in the Brazilian territory, in the last financial year, must be approved by
Brazilian antitrust authorities. A transaction subject to the analysis of Brazilian antitrust authorities
must be filed within 15 business days as from the execution of the first binding document.
9.
Tax saving opportunities weight considerably in the decision for the best M&A structure.
Asset deals are not very popular in Brazil, mainly because of (i) business disruption risks; (ii) tax,
labor and social security succession risks; (iii) transaction costs with indirect taxes; and (iv) less
favorable rules to deduct the premium paid for the assets.
10.
Generally, the premium is part of the asset or investment acquisition cost and is tax deductible
upon sale or liquidation. However, specific rules allow the earlier tax deduction of the premium paid
by an investor for the acquisition of shares/quotas of Brazilian company, thereby favoring a share
deal.
11.
Accordingly, the premium paid in a share deal (equivalent to the difference between the
acquisition cost and the interest net worth value) can be deducted by the surviving company in case of
a downstream or upstream merger when calculating its Corporate Income Tax (15%), Corporate
Income Tax Surcharge (10% on taxable profits exceeding BRL 20,000 per month or BRL 240,000 per
year) and Social Contribution on Net Profits (9%), depending on the reasons for the payment of the
premium and provided that such reasons are duly confirmed (an appraisal report by a qualified and
independent professional/firm accredited by the Brazilian Securities and Exchange Commission is
advisable for such purpose).
12.
The premium based on assets market value shall be added to each relevant asset value, thus
becoming tax deductible jointly with depreciation/amortization expenses or as part of the relevant
asset acquisition cost in case of sale or liquidation thereof. The premium based on future profitability
of the target company shall be tax deductible at a rate not exceeding 1/60 per month, with due regard
to the minimum and maximum amortization terms of 5 and 10 years, respectively.
13.
Transactions involving companies within the same group must be carefully studied. Artificial
or purely tax driven structures must be avoided, specially in light of recent changes in Brazilian
accounting rules to favor substance over form and the trend followed by the Brazilian case law of
broadening the sham definition and accepting the abusive exercise of rights theory. The buyer should
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even be careful with tax planning implemented by the seller of the relevant assets/investment to avoid
future tax claims.
II. Memorandum of Understandings
14.
The main purpose of a Memorandum of Understandings is “freezing” the transaction
guidelines. Generally, this document establishes the estimated price or pricing criteria, the due
diligence process, payment terms, guarantees, confidentiality and exclusivity rights. Depending on its
content, the memorandum may be considered the first binding document between the parties,
triggering the obligation of reporting the transaction to Brazilian antitrust authorities.
III. Due Diligence
15.
Due diligences are aimed at revealing target’s liabilities, succession risks, contingencies and
rights of third parties which may be detrimental to the transaction closing. This is one of the most
important steps in the overregulated and complex Brazilian legal system, and it is often decisive to
confirm the feasibility of the transaction and its terms.
IV. Final Agreement
16.
After the steps described above, the parties will be able to review the transaction structure and
decide on the final acquisition agreement. Generally, the buyer will demand representations and
warranties regarding, among other issues, the accuracy of the documents made available for due
diligence and target’s past practices.
17.
Indemnification clauses for pre-closing contingencies are equally important. The parties shall
also agree on who will be responsible for defending any proceedings involving such contingencies.
18.
If expected liabilities are material, it is common to have guarantees and/or escrow
accounts. Alternatively, the buyer may withhold part of the purchase price for a term established in
light of the applicable statute of limitations.
19.
Non-compete covenants are also relevant. Unless otherwise agreed, Brazilian law establishes
that the seller of an establishment must not compete with buyer for 5 years. The situation of key
managers and employees must be examined carefully, since specific limitations apply in this case.
20.
Finally, the parties shall analyze the convenience of electing a foreign law to govern a
Brazilian acquisition and of submitting related disputes to foreign courts or arbitration chambers. The
parties must bear in mind the mandatory compliance with certain local legislation (e.g. conflict
between the foreign law and Brazilian rules of public interest and mandatory competence of Brazilian
Courts to decide on certain matters).
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V. Closing
21.
The closing may be simultaneous with signing or deferred until certain conditions precedent
are met.
22.
Before the execution of any document, the powers and authority of each signatory must be
checked, as well as the compliance with any requires prior approvals (e.g. shareholders’ or board of
directors’ approval).
VI. Post-closing
23.
Post-closing actions are as important as the steps described above and include: (i) filing
corporate documents with the Commercial Registry; (ii) registering certain documents with a Registry
of Deeds and Documents; (iii) registering/updating the registration of foreign investments with the
Central Bank; (iv) obtaining/updating registrations with the Brazilian Trademark and Patent
Office, if applicable; and (v) updating accounting/tax books of the relevant companies and the legal
entity’s Federal, State and Municipal tax enrolments.
VII. Corporate Governance
24.
Following the acquisition of a Brazilian company, the buyer may intend to review the
company’s corporate governance model to adequate it to its own group’s model.
25.
The high management model of sharing the management of the company between its officers
and a Board of Directors can be adopted in any Brazilian company (e.g. limited liability companies or
corporations).
26.
Certain limitations regarding this matter must be considered. For instance, officers of
Brazilian companies must be resident and domiciled in the country. The compliance with certain
transparency levels and corporate governance practices will be mandatory for corporations with
shares/securities traded in domestic or foreign capital markets (São Paulo Stock Exchange –
BOVESPA imposes the compliance with certain corporate governance rules to rate public held
corporations).
27.
Finally, it is important to remark that managers of Brazilian companies may be held personally
liable for illegalities or abusive exercise of their powers for civil, tax and even criminal purposes.
____________________________________________________________________________________________________________________T
his letter only contains summarized information and general comments on legal matters. It does not represent a legal opinion of our firm on the
subject herein. In specific cases, it is advisable to rely on proper legal assistance before adopting any concrete actions relating to the matters dealt
with herein.
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