Brazil: How To Purchase A Business In Brazil?*


Brazil has been attracting increasing interest from multinational companies and venture capital looking for investment opportunities in the emerging markets. Among the reasons for such interest we may point out the following:

  • stabilization of the economy with a low inflation rate;
  • the opening of the Brazilian economy and flexibilization of importation rules;
  • the size of the domestic market and its potential for growth;
  • the diversity and specialization of the Brazilian economy;
  • the trade facilities offered by the Mercado Comum do Sul (Southern Cone Common Market - Mercosur);
  • the lack of natural disasters;
  • the overall political, religious and ethnic stability;
  • the strength and sophistication of the banking system and capital markets.
  • the privatization program and private concessions policy mainly in the areas of telecommunications, hydroelectric generation, gas distribution, petroleum, and others;
  • the opening of the insurance, reinsurance and financial markets to foreign investments.

The privatization program and the private concessions policy will generate a greater demand for companies which supply supporting equipment, machinery and services to the concessionaire. Such a demand will require a presence of the foreign concessionaire company in the country.

It should be stressed that foreign investments in certain fields are currently restricted in Brazil such as those ones related to the telecommunications and newspaper areas, as well as petroleum and gas areas, for example.


Prospective purchasers should be aware that the purchase of the assets of a Brazilian target company, instead of the purchase of the company's shares or quotas representing the target company's capital, is not a guarantee that the purchaser will not be held responsible for the target company's tax, labor and social security liabilities.

II.1 - Tax Considerations

The Brazilian Tax Code establishes that any individual or legal entity that acquires the goodwill or the commercial or industrial installations and/or under the assets of a company and continues the company's trade under the same or a different trade name is held responsible for any tax due in connection with said goodwill, commercial or industrial installations and/or assets, up to the date of the purchase. The purchaser will be held totally responsible for the tax due in case the target company interrupts its activities. The purchaser will be subsidiary responsible, in case the target company continue its activities within six (06) months after the purchase.

II.2 - Labor Considerations

The purchaser may also be affected by labor obligations of the target company since the Brazilian Consolidation of Labor Laws acknowledges that any purchaser that acquires the goodwill or the commercial or industrial installations and/or the assets of a company and continues its activities with the same employees is a successor and should be held liable for any credit of the employees.

II.3 - Other General Considerations

Furthermore, in order to hold any assets in Brazil and to do business it will be necessary to incorporate a company which will be eligible to apply for the proper authorizations and permits to operate in the country.

In view of the above, the best course of action in most cases is to acquire the shares or quotas of the target company, in case the purchaser wishes to acquire the whole business, or to proceed with a split-off of the target company in order to separate the business that will be acquired from the other businesses of the target company and than purchase the new company resulting from the split-off.

During the negotiations with the controlling shareholders/quotaholders of the target company, it is advisable to proceed with a legal due diligence in order to ascertain the extent of the purchaser's eventual tax, labor and legal liabilities.

With regard to the legal due diligence procedure, it is important to emphasize that even though the Brazilian tax, labor and social security authorities issue indebtedness certificates it is advisable to audit the tax, labor and social security payments effected by the target company. It is also advisable to verify the existence of any law suites against the target company and what will be the possible outcome.

II.4 - Environmental Considerations

In addition to the tax, labor and social security liabilities it is also important that prospective purchasers examine any existing environmental liabilities.

Brazil has several newly enacted environmental laws and regulations in the Federal, State and Municipal levels. Said laws and regulations contain the requirements for issuance of the necessary licenses and permits, the standards for pollution control and the requirements for disposal and stockpiling of certain substances. One of the reasons why purchasing the target company is the best course of action in most cases is that licenses and permits issued by the several regulatory and agencies (depending on the type of the activity developed) may not be assigned or transferred to other companies (except, some times, in case of a split-off, merger or amalgamation).

The environmental due diligence should comprise basically the following issues: (i) the existence of all necessary licenses and permits and whether there was any condition or obligation to be fulfilled by the target company, when such licenses and permits were issued; (ii) whether the pollution emitted by the target company is within the established governmental standards; (iii) whether the company may obtain the necessary authorizations and permits to increase its production; (iv) whether there is any waste stockpiled by the target company without the proper authorizations and permits; (iv) how much would cost to dispose of its waste products with an incinerator or a landfill area; and (v) whether the target company has been visited and/or fined by any environmental authority.

Depending on the activities developed by the target company, environmental liabilities is another area that requires a detailed due diligence by the purchaser in order to avoid future problems with the several environmental agencies and action groups.

II.5 - Anti-Trust Considerations

In addition to tax, labor, social security and environmental liabilities the prospective purchaser should also be aware of the Brazilian anti-trust legislation, which may be applicable to the acquisition of Brazilian enterprises depending on the effects of such purchase in the relevant market.

The Brazilian Federal Constitution of 1988, established the free competition as one of the basis of economic order and delegated to the Brazilian legislative branch the task of drafting anti-trust legislation.

Law No. 8,884, of June 11, 1994, ("Anti-Trust Law") constitutes the basic anti-trust legislation and may be considered the equivalent of the U.S. Sherman Act and Clayton Act.

The Anti-Trust Law transformed the Economic Protection Administrative Council ("CADE") created in 1962, into an independent agency under the Ministry of Justice. The Economic Law Office of the Ministry of Justice ("SDE") was maintained as an agency of the Ministry of Justice under CADE`s supervision.

The impact of anti-trust legislation in the acquisition of a Brazilian enterprise will vary according to the existing competitor and the market share of the target company. Therefore, it is necessary to review the effective applicability of the Anti-Trust Law on a case by case basis.


Since the due diligence issues have already been addressed, we will make certain remarks hereinbelow in connection with the letter of intent, memorandum of understanding, purchase and sale agreement and shareholders agreement.

The prospective purchaser should be aware that pursuant to the Brazilian Civil Code, the default of one party in complying with its obligations authorizes the non breaching party to sue the breaching party for losses and damages. Furthermore, Brazilian law makes no reference to punitive damages and the non breaching party will only be able to claim in court the damages effectively incurred plus the profits that could be reasonably expected.

Since damages and future profits are not always easy to ascertain, it is advisable to include in the letter of intent, Memorandum of Understanding or in the purchase and sale agreement a penalty clause, which amount may be freely established between the parties, provided it is characterized as an advanced settlement for damages and loss of future revenues. In practice, the penalty clause will work as punitive damages since its value has the purpose of preventing a possible breach of the contract.

The Letters of Intent and Memorandum of Understanding are considered under Brazilian law as a promise to contract. Therefore, if such documents are to be binding, they should be drafted in a way to clearly state of the parties specific obligations. Such specific obligations would be subject to execution in the case of a breach by one of the parties.

The Brazilian code of Civil Procedures allows for the specific performance of certain obligations. In general terms, specific performance may be obtained, whenever the obligation of one party may be fulfilled by a judicial decision (fungible obligation). For instance, breach of a Letter of Intent or a Memorandum of Understanding grants the right to the non-breaching party to seek a judicial decision which will bind the breaching party to the already agreed to clauses, provided the parties have not agreed otherwise, and that the Letter of Intent or Memorandum of Understanding contains all the requirements of the envisaged contract.

The non-Brazilian purchaser should decide which will be the best purchase/payment route, among several alternatives such as:

(i) through a direct sale of the relevant shares/quotas to the non-Brazilian purchaser;

(ii) through the sale of the relevant shares/quotas to an existing Brazilian subsidiary; or

(iii) through the sale of the relevant shares/quotas to a fully controlled special purpose company off-shore.

The payment of the purchase price may be effected in several different ways, for instance:

(i) through a direct payment to the seller;

(ii) through an investment or a loan to a subsidiary which will, in turn, pay the seller; or

(iii) through more sophisticated financial structures involving financial institutions which may finance the acquisition.

Regardless of the chosen alternative for payment, it is very likely that the amounts involved will have to be submitted to registration with the Central Bank of Brazil either as a foreign investment or as a loan. Such registration is necessary in order to allow the remittance of profits abroad, remittance of payments of principal and interest on the loan, as well as to allow the repatriation of the amounts invested in case of a capital reduction or a sale of the original investment.

The responsibility for undisclosed liabilities should be carefully addressed in order to prevent later conflicts with the seller and should be adapted to reflect the tax, labor, environmental and social security systems in Brazil. Non competition provisions should also be included, as the case may be, attached to a heavy penalty clause against the breaching party.

Whenever the prospective purchaser is acquiring less than one hundred percent interest in a local venture, the shareholder agreement may turn to be a vary important document among the parties, since it allows for specific performance. Pursuant to Law No. 6,404, of December 15, 1974, the ("Brazilian Corporation Law"), shareholders agreements may regulate the exercise of voting rights and the preemptive rights of the shareholders. However it is also possible to include provisions regarding put options, whereby one party has the right of selling its equity holding to the other party and call options, whereby one party has the right of purchasing the other party's equity holding. In case of put or call options, it is advisable to previously agree on the applicable formula to establish the sale/purchase price of the relevant shares, since a wording with general terms may generate a long litigation procedure in court.


Finally, please note that the above information was provided in order to give prospective purchasers a very broad and preliminary idea of the issues that should be addressed whenever there is an acquisition of a Brazilian enterprise. The applicable documents, the extension and depth of the legal due diligence, the payment terms of the transaction will vary greatly from case to case. That's the reason why it is very important to seek local legal advise even before a Memorandum of Understandings or a Letter of Intent is drafted.

* The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.

For more information please contact us.

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