DOING BUSINESS
IN BRAZIL
Doing business in brazil // Coimbra & Chaves // 2014
MERGERS &
ACQUISITIONS IN BRAZIL
The recent strong expansion of the Brazilian economy in
concert with an ever more globalized world economy has made mergers
& acquisitions an important legal and business topic in Brazil. In this
context such corporate transactions are an effective tool for companies
to capture funds for investments in new technologies and structural
improvements in order to grow the potential to compete in the global
marketplace.
In Brazil the term mergers and acquisitions or M&A normally
includes not only transactions of stock, quotas or assets, but also
encompasses mergers, takeovers and spin-offs.
Mergers, spin-offs and takeovers are regulated by the laws
covering the two principal corporate forms used in Brazil - limited
liability companies (“Ltda”) and corporations (“S.A.”) – the Civil Code
(Law n.º 10.406/02), articles 1.052 to 1.087 (“Civil Code”) and Law n.º
6.404/76 (“Corporations Code”).
Art. 228 of the Corporations code and Art. 1.119 of the Civil Code
state that a merger is a transaction by which two or more companies are
joined to form a new corporate entity, which will succeed them in rights
and obligations. A takeover is defined in Art. 227 of the Corporations
Code and Art. 1.116 of the Civil Code as a transaction by which one or
more companies are absorbed by another, which will succeed them in
rights and obligations.
Both types of transactions result in a succession, i.e. either
the new company or the company that absorbs the assets succeeds the
other(s) in rights and obligations.
The law also contains rules that preserve rights of creditors in
case of a takeover or merger stating that any act relating to a takeover
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Mergers & Acquisitions In Brazil
or merger must be made public, requiring possible creditors to within
60 days in the case of a corporation and 90 days in the case of a
limited liability enter a plea with the courts for the annulment of the
transaction according to Art. 232 of the Corporations Code and Art. 1.122
of the Civil Code.
A spin-off as foreseen in Art. 229 of the Corporations Code is a
transaction by which a company transfers part of its assets to one or
more already incorporated companies, followed by a total extinction of
the spun-off company in case of a complete spin-off or a division of its
corporate capital in case the spin-off was partial.
In this connection Art. 233 states that in the case of a complete
spin-off (when the spun-off company is extinguished) the successor
companies are liable for any debt of the extinguished company. In the
case of a partial spin-off, in principle, the spun-off company and the
successor companies are joint and severably liable for the obligations of
the spun-off entity.
However, the sole paragraph of Art. 233 permits that the partial
spin-off agreement states that the companies that absorb a part of the
spun-off entity remain liable only for debt related to part they received
without any joint and several liability, as long as no creditor opposes
such stipulation within 90 days of the publication of the spin-off
transaction.
It is worthwhile noting that in case of a spin-off of a corporation
a creditor cannot enter a plea for the annulment of the transaction as
in the case with a takeover or merger. The creditor can only oppose
the limitation of any liability. Another difference is that a plea for
annulment does not need to be motivated as opposed to the case of a
takeover or merger where the creditor must provide proof of loss to
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Mergers & Acquisitions In Brazil
annul such transaction. Art. 1.122 of the Civil Code also permits a plea
for annulment of the spin-off transaction in the case of a limited
liability company.
Accordingly, a partial spin-off is often recommended when the
intention is to only acquire part of the assets of of a company or business,
thus allowing for a partial succession, hereby assuring all rights and
obligations both for the acquirer and for the seller. On the other hand
a merger or takeover is commonly used in the case of restructuring of
companies within the same group.
In concluding, there are no defined rules. The choice of an
adequate corporate transaction requires an analysis on a case-by-case
basis. It is fundamental to analyze the debt of each company and know
the intention of the parties.
CONTRACTUAL STRUCTURING OF THE
TRANSACTIONS
Mergers and acquisitions in Brazil generally follow the same
procedures known abroad. The transaction begins with the negotiation
of the preliminary documents among which you generally have
confidentiality agreements, memorandums of understanding (MOU’s)
and letters of intent (LOI’s). In most cases these documents, which
set forth the basic conditions for the negotiations, are signed before
initiating any due diligence.
Apart from the above mentioned documents and after
completing the due diligence, a term sheet is prepared (especially in private
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Mergers & Acquisitions In Brazil
equity deals), defining the financial basis of the transaction. Preliminary
documents can be binding or non-binding and it is therefore important
to draft a contract clause defining which documents or clauses are in
fact binding on the parties and therefore can be enforced.
Once the business and contractual terms have been agreed the
parties will sign a final agreement in the form of a contract for the
sale and acquisition of shares or quotas, a stock subscription agreement,
or a contract for the sale and acquisition of assets or the documents
legally required for a merger, takeover or spin-off, i.e. protocol and
justification.
Under Brazilian law the Corporations Code sets forth the
contractual and corporate documentation needed to formalize such
transactions.
DUE DILIGENCE
The legal audit, or as it is normally known, due diligence is a
must in any transaction for the sale and acquisition of companies in
Brazil in order to identify, quantify and calculate the real liabilities
and obligations of the target company, requiring in-depth knowledge
of local law and exercise of utmost caution by the lawyers involved.
Among the legal aspects that deserve great attention in any
corporate transaction are those related to labor issues, environmental
matters and taxation.
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Mergers & Acquisitions In Brazil
LABOR LAW ASPECTS
Total Succession
In any Brazilian due diligence, the audit of labor contingencies is
a task of utmost importance. One must pay special attention to whether
the target company has complied with its labor obligations, such as, but
certainly not limited to salary agreements and the legal prohibition of
reduction in salary, 13th salary, severance pay, proportional vacation
pay, maternity (and now also paternity and adoption) leave, working
hours etc.
Articles 10 and 448 of the Brazilian Consolidated Labor Laws
(CLT) deal with the so-called labor succession obligations and state that
acquired workers’ rights may not be affected by any change in the legal
structure of a company and that the change of ownership of a company
does not change the existing labor contracts.
These consolidated labor laws are in place to protect workers
in case of change in the legal structure of a company or change of
ownership. The legal mantra here is the principles of continuation of
the labor contracts and that the business risk belongs to the employer.
Under Brazilian labor law the mere change of the owner of
record of the employing company is sufficient for succession to have
occurred under the law regardless of whether there is a connection
between the successor and the seller. All that is needed to legally
characterize succession for labor law purposes is the maintenance of
the economic activity of the target company by its successor.
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Mergers & Acquisitions In Brazil
In being so, succession for labor law purposes is established in
cases of mergers, takeovers, transformation or total spin-off as well as
in the case where a branch of a company comes under the control of
another company no matter how the transaction was made.
No matter what form is used, if there is a succession of the employer,
labor rights remain unaltered with all acquired rights protected under the
law. Case law has established that the employer is responsible not only for
labor contracts in force at the time of the corporate transaction but also for
those terminated before such fact, if they have not been fully settled.
Accordingly, analyzing the Brazilian rules for labor succession
one can conclude:
(i) In case of transfer, the successor company will become responsible
for all contracts in force at least until the time the succession occurred,
however, with the transferor remaining joint and severally liable for
such contracts; (ii) The transferor remains responsible for contracts
terminated before the transfer occurred with the transferee joint and
severable liable; and (iii) even in the case the deal only covers a branch
of a business, the transferee remains joint and severable liable for labor
contingencies in the remaining business if a fraudulent transfer can be
established in labor law terms.
ENVIRONMENTAL ASPECTS
The Brazilian Constitution of 1988 (“CF/88”) came with a specific
chapter on environmental matters, defining the environment as a
common good, in legal terms defining the environment as a common
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right for all the people essential to the healthy quality of life, requiring
the government and the people to preserve it for future generations to
be able to enjoy a balanced environment. In this sense Art. 225 of the
Constitution is the legal basis for all Brazilian environmental legislation.
Law nº 9.9605/98 and Law nº 9.985/2000 establish, respectively,
the legal and administrative sanctions to be applied to illegal and
environmentally harmful conduct and activities, as well as establishing
the National System of Conservation Units.
Prior to the Constitution of 1988, Law nº 6.938/81 had already
established a national environmental policy and created the National
Environment System, incorporating and improving local state legislation,
hereby becoming one of the most important normative instruments for
environmental protection and this Law continues in force.
Art. 14, paragraph 1 of this law created the so-called objective
civil responsibility for environmental damage clarifying that only
nexus between an action and damage caused has to be established
whether or not that action was intentional.
Paragraph 3 of Art. 225 of the Brazilian Constitution foresees a
triple responsibility for the polluter, be it an individual or company, i.e.
(i) criminal sanction, (ii) sanction for the objective civil responsibility,
and (iii) and an administrative sanction.
It is worthwhile noting that the courts in Brazil have ruled
that the buyer of real estate is responsible for remedying any existing
damage, even if he did not cause it. A great number of court rulings
state that environmental damage is not subject to statute of limitations
and there are several cases in the courts against current land owners
for damage caused by former owners.
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Mergers & Acquisitions In Brazil
TAX ASPECTS
Aspects Common to all Transactions
Brazilian tax and corporate law applicable to mergers,
acquisitions, spin-offs and transfer of assets incentivize such
transactions to the extent that they tax exempt if completed as part of
a corporate restructuring. Accordingly, mergers and spin-offs that are
performed in order to achieve a corporate restructuring are tax free
as long as the assets involved are transacted at book value. The option
exists to have such assets reappraised by qualified appraisers in which
case potential tax liability can be deferred in certain cases.
In the same way, transactions to pay up quotas or underwriting
shares through transfer of assets are tax free. In case a later sale of such
assets incurs a capital gains tax liability because the sales price exceeds
the book value the tax may under certain circumstances be deferred.
Mergers, spin-offs and transfer of assets are also not in any case
subject to indirect taxes or value-added taxes and there is also no tax on
net worth of companies or individuals. Such transaction will, however,
be subject to certain fees payable to commercial registries, and notarial
offices (real estate and documents).
Aspects Specific to Takeovers
Specifically in the case of takeovers, pre-transaction tax losses
in the target company are not transferable to the acquirer. However,
the buyer can offset its own losses, pre or post transaction, against
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Mergers & Acquisitions In Brazil
profits of the acquired company as long as the business purpose of
the company is not changed and control is not transferred. Reserves
originating from deferred taxes in the target company can be used by
the buyer unless prohibited by law.
Further, to avoid tax evasion, Brazilian legislation has a
number of specific income tax rules for related parties applicable to
profits derived from subsidiaries or affiliates abroad as well as transferpricing rules.
Aspects Specific to Spin-offs
As far as spin-offs are concerned, like in the case of mergers,
deferred tax reserves of the spun-off company can be off-set by the
successor company except if otherwise stated in law. In case of a partial
spin-off the tax losses of the spun-off company remain available for offset in proportion to the equity that remains after the spin-off.
Aspects Specific to Transfer of Assets
In the case of a simple transfer of assets between companies,
except in the case of underwriting of capital of companies, the seller
is subject to capital gains tax. However, depending on the nature and
purpose of the transfer, the tax liability may be avoided.
On the other hand, the acquiring company is not subject
to taxation except in the case of transfer of real estate. In this case
the buyer will be subject to real estate transfer tax “inter vivos” upon
registration of the ownership change.
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Mergers & Acquisitions In Brazil
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