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.


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.

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Walter Stuber
Adriana Maria Gödel Stuber
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