Brazil: Developments In M&A Transactions In Brazil In 2009

Before addressing any development occurred in Brazil in 2009 which may affect mergers and acquisitions in general – the so-called M&A transactions - it is important outline the legal framework and current scenario in which these negotiations are conducted.

M&A transactions in Brazil are governed by the following legislation and regulations: (i) Law No. 10.406, of January 10, 2002 (the Brazilian Civil Code)1; (ii) Law No. 6.404, of December 15, 1976, as amended (the Corporation Law)2; (iii) Law No. 6.385, of December 7, 1976, as amended (the Securities Law)3; (iv) rulings of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM)4; (v) self-regulatory rulings from the New Market (Novo Mercado), the special corporate governance listing segment from the São Paulo Stock Exchange (Bolsa de Valores de São Paulo – Bovespa, as well as from Levels 1 and 2, special listing segments at Bovespa; (vi) rulings enacted by other specific governmental agencies, depending on the target´s activities. Such governmental agencies, among others, comprise: the Telecommunications Agency (Agência Nacional de Telecomunicações – ANATEL), the Electrical Energy Agency (Agência Nacional de Energia Elétrica – ANEEL), the Oil and Gas Agency (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis – ANP) and the Civil Aviation Agency (Agência Nacional da Aviação Civil – ANAC); and (vii) rulings from the National Monetary Council (Conselho Monetário Nacional – CMN) and the Central Bank of Brazil (Banco Central do Brasil – Bacen)5.

Unlike other jurisdictions such as the United States in which the wider share dispersion is quite common and constitutes the general rule, in Brazil many publicly-held corporations have an owner (or a group of owners) holding the share control and share dispersion still remains an exception.

Under Brazilian law, a controlling shareholder6 is an individual or a legal entity, or a group of individuals or legal entities by a voting agreement or under common control, which: (a) possesses rights which permanently assure it a majority of votes in resolutions of general meetings and the power to elect a majority of the corporation officers; and (b) in practice uses its power to direct the corporate activities and to guide the operations of the departments of the corporation. A controlling shareholder shall use its controlling power in order to make the corporation accomplish its purpose and perform its social role, and shall have duties and responsibilities towards the other shareholders of the corporation, those who work for the corporation and the community in which it operates, the rights and interests of which the controlling shareholder must loyally respect and heed.

The most utilized means of acquisition in Brazil are: (a) the private negotiation between the controlling shareholder and potential purchaser; and (b) the acquisition through implementation of merger of entities or merger of shares, as approved in applicable general shareholders meetings.

Despite the financial crisis that the main economies in the world are facing, the private equity activity has been a particularly vital ingredient in the current M&A market in Brazil. Both domestic and international private equity firms have made relevant investments in several industry segments, in many cases envisaging an initial public offering for the following years. All private equity and venture capital managers use vehicles to take part in an invested target company which varies according to the type of intended equity investment.

In relation to venture capital, the mode largely used in promising undertakings, based on the annual revenue of the target company, is the Emerging Companies Investment Fund (Fundo Mútuo de Investimento em Empresas Emergentes – FMIEE)7. The FMIEE is a closed-end partnership, with a limited number of investors (35) and a defined period of duration (10-year term), which can be extended by means of approval of the general quotaholders´ meeting. This type of fund can be under the management of an individual or legal entity8 and is limited to investments in publicly or privately-held companies. The target company cannot have an annual net revenue above R$ 150 million on the date on which the first investment is made, nor be part of an economic group whose consolidated net worth exceeds R$ 300 million. The profile and targets of FMIEE investment portfolios are companies undergoing the seed capital, start-up or expansion investment stages.

The most attractive vehicle for the more advanced investment stages is the Private Equity Investment Fund (Fundo de Investimento em Participações –FIP)9. The FIP is a closed-end investment fund with accepted resources for qualified investors. The following are considered qualified investors10: (i) financial institutions; (ii) insurance companies and capitalization societies; (iii) private welfare opened or closed capital organizations; (iv) individuals or legal entities that hold financial investments in an amount superior to R$ 300 thousand and that additionally attest in writing their qualified investor condition; (v) investment funds directed exclusively to qualified investors; (vi) portfolio administrators and securities consultants authorized by CVM, in relation to their own monies; and (vii) own social security regimes instated by the Federal Government, by the States, by the Federal District or by Municipalities. Like the FMIEE, it is also restricted to investments in publicly or privately-held companies. However, there are no limits to the revenues of the invested companies and the FIP must participate in the decision-making process of the invested companies and only legal entities can manage this type of fund.

Another vehicles also used in Brazil are other investment funds11 and holding companies organized either as a corporation (sociedades anônima) or a limited liability company (sociedades empresária limitada). They are usually identified only in the form of institutional investors, which normally invest in companies undergoing the turnaround or PIPE investment stages or even in the free-float of companies listed on the Bovespa.

The most relevant development on M&A transactions to be analyzed herein is the change of the accounting standards used for the audited financial statements of the target company, which is evidenced by the transition of the Brazilian generally accepted accounting principles (GAAP) toward the international financial reporting standards (IFRS)12, specially with regard to goodwill amounts paid under acquisition structures. The application of these new accounting rules for M&A transactions involving the payment of goodwill amounts is regulated by CVM Deliberation No. 580, of July 31, 2009, which approved the Technical Pronouncement CPC 15 of the Accounting Pronouncements Committee (Comitê de Pronunciamentos Contábeis – CPC) that deals with business combinations (combinação de negócios).

According to this CVM Deliberation, the amount paid for the acquisition of Brazilian target companies should be allocated, at the level of the acquiring company, to the fair market value of the assets (tangible or intangible) or liabilities for which the purchase price was paid. The difference between such allocation and the total amount paid for the acquisition of an equity participation in the Brazilian target company should be classified, for accounting purposes, as goodwill. This accounting rule will only be mandatory for M&A transactions take in place as from December 2010.

The main change already in full force and effect is that the goodwill paid on the acquisition of Brazilian target companies is subject to annual impairment testing since January 2009. This means that the goodwill is no longer amortized at the level of the Brazilian acquiring company. The impairment, if it occurs, cannot be reversed in the future and it is not deductible for local tax purposes. Therefore, the impairment can affect the acquiring company´s net equity and, consequently, the outflow of dividends arising from the target company (the acquired operating company)13.

After the merger between the acquiring company and the target company and provided that some relevant conditions are met, the goodwill amount may continue to be deducted for local tax purposes. One of these conditions is to provide evidence that the acquisition structure has been established with consistent business purposes and not with the sole purpose of avoiding taxation in Brazil14. Acquisition structures where the merger has already been carried out would be more protected in the event of any future changes in the local tax rules, disallowing or reducing the ability to deduct the goodwill15.

Footnotes

1. The Brazilian Civil Code contains general rules for private transactions entered into under Brazilian law.

2. The Corporation Law is applicable in case of transactions involving corporations, including publicly-held companies (listed companies).

3. The Securities Law is applicable in case of transactions involving sales or offers of securities.

4. The CVM rulings are applicable in case of transactions involving publicly-held companies.

5. The CMN and Bacen rulings deal with registration of foreign investments in Brazil.

6. The definition of controlling shareholder is contained in article 116 of the Corporation Law.

7. The FMIEE is regulated by CVM Instruction No. 209, of March 25, 1994, as amended.

8. The individual or legal entity in charge of the management of a FMIEE must be duly authorized by CVM, pursuant to CVM Instruction No. 306, of May 5, 1999, as amended.

9. The FIP is regulated by CVM Instruction No. 391, of July 16, 2003, as amended. It is normally used in later stages, acquisition finance, management buyout or buy-in, bridge finance, turnaround, mezzanine and private investment in public equity (PIPE), especially because of the revenues of the companies to be invested in and of the necessary management level in these companies.

10. This definition is contained in article 109 of CVM Instruction No. 409, of August 18, 2004, as amended, which regulates the incorporation, administration, operation and disclosure of information on investment funds.

11. According to the Brazilian legislation, investment funds are not legal entities, but condominia with units (quotas) held by their investors (quotaholders).

12. This is the main goal of Law No. 11.638, of December 18, 2007, which amended the Corporation Law.

13. These implications are only valid for accounting purposes. For tax purposes, the current Brazilian legislation establishes that the new accounting rules shall not increase the company´s tax burden and responsibilities. The tax benefits derived from the payment of goodwill for the acquisition of Brazilian target companies are still in force. In most cases, the purchase premium (sales proceeds exceeding book value of the target company can be recovered (amortized) over a five-year term, i.e. 1/60 each month during the period.

14. The Brazilian tax authorities are already discussing potential changes in regard to the tax treatment related to tax deductions arising from goodwill paid in acquisition structures. In the near future the tax legislation may be changed and the tax benefits may be reduced, as a result of the adoption of the IFRS methodology, or even eliminated. It is unlikely, however, that any change will be valid for 2010.

15. In any case, in principle, the potential reduction in the tax benefits arising from goodwill deductions would correspond to lower purchase prices to be paid for Brazilian assets. Consequently, this will represent less capital gain to be earned by the seller and taxed upfront in Brazil. Other than income tax rate differences and timing issues, any tax impact of the goodwill legislation, in general, would not affect future tax revenues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Walter Stuber
Adriana Maria Gödel Stuber
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions