One of the main improvements made in the Brazilian legal environment in 2013 was the launch of Federal Law n. 12.846/13, the so-called Brazilian Anti-Corruption Act ("BACA"). Although such law will only become effective in February 2014, since its enactment it has become one of the most debated legal topics in Brazil.
Despite some criticisms, such Law has been long-waited from both the Brazilian legal and financial community. Such market anxiety derived from the need to show how Brazil would not only be concerned about an economic growth, but also interested in bringing the country to a higher level of reliability, getting the confidence of domestic and foreign investors.
In summary, the BACA, which was pretty much inspired in the Foreign Corrupt Practices Act and in the UK Anti-Bribery Act, is capable of penalizing companies involved in illegal behaviors, mostly related to corruption, bribery and any sort of undue influence. It sets forth not only criminal consequences, but also civil and administrative sanctions and duties to companies and individuals.
Under section 4 of the BACA, it is set forth that the company's liability shall subsist even if it is subject to a merger, incorporation by another company or spin off. Additionally, its paragraph 1 establishes that a company which has either merged with or incorporated the company holding the primary liability should also be held liable, narrowing such liability, however, to the fines contemplated by the BACA and to the damages caused by the illegal behavior (other sanctions would not be transferred).
The rationale underlying such a provision is quite obvious and important: a company holding a liability derived from the BACA could not set it aside by means of a corporate restructuring. Knowing how creative lawyers and companies could be, the idea was to cause a third party to succeed on the liability, so that it would be put in place an external control in addition to the monitoring and sanctions already contemplated by the BACA.
The question, however, is how such a provision should be interpreted in light of section 60, paragraph 1, of Federal Law n. 11.101/05, the Brazilian Bankruptcy Act ("BBA"). According to such provision, an investor acquiring a business unit from a company under liquidation or judicial recovery shall not inherit any liability from the seller - the company under the bankruptcy proceeding - provided that certain formal requirements are met. This is the so-called "section 60 sale".
Such provision is one of the most important features of the BBA, and has been widely used in Brazil as a means to help companies under bankruptcy proceedings to recover its business, preserve employment and company's social role. It has also been seen as an important marketing opportunity for investors. Brazilian case law, on its turn, has been upholding the insulation brought by such rule, which is probably the main reason why its use is disseminated throughout the country.
In fact, if an acquisition made in the context of a bankruptcy proceeding could cause the purchaser to inherit any liability from the seller, a full due diligence would have to be made. It is known, however, that a company under bankruptcy would likely not meet the minimum thresholds required in any due diligence because of its indebtedness and poor capacity to indemnify purchaser in case any hidden liability arises.
Nevertheless, such consolidated scenario of the section 60 sale has now one more obstacle to overcome. How section 60 sale should be seen in light of the recent BACA? Should a company acquiring a business unit in the context of a bankruptcy proceeding be concerned about sanctions derived from the BACA? Which legislation should prevail? Would there be any means to align both statutes?
Although the questions will only be answered by future case law, it is undisputed that the mere existence of section 4, paragraph 1, of the BACA, will bring reasonable concerns in any acquisition of business units from companies under bankruptcy proceedings after February 2014.
On the one hand, if the BACA sanctions are not set aside by section 60 of the BBA, it could be said that it will be its death sentence. The sanctions brought by the BACA are so harsh that possibly no investor will be willing to acquire a business unit from a bankrupt company, unless a due diligence is performed from a compliance's perspective. At very least, the use of section 60 - probably the masterpiece of the BBA - would be quite diminished.
On the other hand, if section 60 continues being a safe harbor, the effectiveness of the BACA over companies under bankruptcy would be blurred. By means of section 60 sales, the fines and damages set forth in the BACA would be narrowed to the bankrupt company, which is likely not to have assets to respond for it, particularly after certain assets have been sold in the context of the bankruptcy proceedings.
Weighing pros and cons, we are under the opinion that Section 60 should insulate purchaser from any liability, including new ones to be created by new statutes, such as those to be derived from the new BACA. The situation brought by the BACA is not much different than how section 60 sale affects the Government with regard to the collection of tax debts. Nowadays, if a section 60 sale takes place, the Government is already prevented from going after the purchaser and the assets sold, which lower its ability to get paid, since the debtor will remain with fewer assets. In other words, it is already known and accepted that the section 60 sale may harm certain creditors (such as the Government with tax debts), but it is allowed since it is intended to benefit the majority of the creditors and keep the business unit sold generating employment, taxes and business in general. Hence, the liabilities derived from the BACA should not receive a different treatment if a section 60 sale takes place under the BBA.
Despite our understanding about the topic, it clearly deserves the attention of investors as of February 2014, when the BACA is going to become effective. Until higher Courts in Brazil are faced with the issue, this should be one more concern and topic to be addressed whenever a business unit is sold under section 60 of the BBA.
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