Mergers & Acquisitions

Private transactions: Private M&A transactions are typically structured as a share deal through either:

• the acquisition of an equity interest in a Brazilian company from a seller through a share purchase agreement; or
• investment in a Brazilian company through an investment agreement.

Asset deals are less common and are mainly used in special situations, such as:

• in cases of distress; and
• where companies are undergoing reorganisation and/or bankruptcy proceedings.

In cross-border transactions, it is not uncommon to use offshore holding companies to hold the equity interest in the Brazilian company, with the aim of enhancing tax efficiency for the foreign investor.

Public transactions: Acquisitions of publicly traded corporations must follow the rules of the Securities Commission (CVM). They can also occur as part of the acquisition of a group, if an entity listed in Brazil is part of a global transaction.

The most common form of public transaction is a public tender offer, which may be voluntary or mandatory, as provided by CVM regulations.

The main factors that influence the transaction’s structure are:

• tax issues;
• succession of liabilities; and
• local legal requirements – for example:
• • the regulators in sectors such as petroleum, natural gas and biofuels and health set out specific rules on change of control transactions; and
  • the acquisition of rural land by foreign investors is also subject to specific rules.

Usually, the parties to an envisioned transaction enter into a non-disclosure agreement. Confidentiality clauses can also be part of a memorandum of understanding (MoU) or a letter of intent (LoI), with varying degrees of bindingness.

Break fees are permitted as part of the principle of party autonomy. The triggering conditions for such fees must be established in the MoU or LoI signed between the parties; however, the most common triggering events include:

• unilateral withdrawal from the transaction; and
• failure to comply with the MoU or LoI.

The fee amount is usually based on an estimate of the costs of the aborted transaction for the other party (eg, the costs of legal and financial advisers).

Equity financed transactions are more common.

Both legal and tax advisers should advise the in-house financial team of a client that wishes to buy a company in Brazil. Depending on the case, competition lawyers and regulatory counsel are also crucial.

The standard market practice is that the client acquiring a target in Brazil should bear the costs of its advisers directly. However, Brazil does not have an explicit legal prohibition in this regard; therefore, nothing prohibits the target from ultimately bearing such costs.

(a) Commercial/corporate

Although most essential issues can be found in the different versions of the articles of association, the data room should also contain all other documents, such as:

• shareholders’ agreements; and
• shareholders’ resolutions.

(b) Financial

All material agreements should be analysed, including intercompany loans. In some cases, restrictions on the transferability of bank loans apply, depending on the origin of the investors. Intercompany loans should be considered when determining the purchase price.

(c) Litigation

The volume of litigation in Brazilian targets is often astonishingly high from the perspective of foreign investors. The litigation analysis should cover all spheres:

• civil;
• commercial;
• tax; and
• labour.

One particular challenge in Brazil is that many high-value commercial disputes are resolved through arbitration, which is confidential and not publicly accessible. In such cases, the analysis mainly depends on the reports and memos prepared by the target’s lawyers who acted as party counsel in the arbitral proceedings.

(d) Tax

Tax due diligence is usually limited to the analysis of tax litigation. Larger targets will often be either claimants or defendants in tax litigation. It is also common when conducting tax due diligence to obtain diverse certificates from various public authorities which present a more detailed report.

(e) Employment

Labour due diligence is usually limited to the analysis of labour litigation. The volume of labour claims against targets is often considered high by foreign investors in comparison to their home jurisdictions. It is also common when conducting labour due diligence to obtain diverse certificates from various public authorities to present a more detailed report.

(f) Intellectual property and information technology

It is important to confirm that the target:

• owns all key intellectual property (trademarks, patents, software, copyrights); or
• has valid licensing agreements for such intellectual property.

(g) Data protection

Most larger entities in Brazil will have already conducted a gap analysis after the entry into force of the General Personal Data Protection Law and will have implemented measures to bridge any gaps. However, the due diligence must verify whether the target has:

• a data governance programme;
• privacy policies; and
• other data-related matters as determined by the law.

(h) Cybersecurity

Cyberattacks are increasingly an issue in Brazil. At minimum, valid and sufficient agreements with providers should be in place.

(i) Real estate

Real estate due diligence must verify the ownership and regularity of the target’s owned or leased properties. Additionally, certain particularities that restrict the acquisition of land in Brazil should be considered, including restrictions on foreigners acquiring:

• rural land; and
• areas formerly inhabited by:
• • indigenous people; or
  • former slaves (Quilombolas).

(j) Environmental

Environmental due diligence should verify the target’s compliance with Brazil’s environmental legislation – especially where, for example, the target’s production processes:

• involve potentially harmful substances; or
• release fumes, wastewater or similar.

(k) Compliance

Compliance due diligence will:

• analyse the target’s compliance management system (CMS) and anti-corruption policies, especially if the target has any agreements and/or commercial relationships with the public sector;
• verify the target’s compliance with Brazilian anti-corruption laws, as far as possible; and
• ideally, check whether there is an adequate tone from the top that goes beyond the paperwork of a CMS.

(l) Regulatory

If the target operates in a regulated industry, it should be determined whether:

• all necessary licences and permits are in place; and
• a change of control has any impact on them.

It is usual to conduct searches of public sources to collect information and obtain certificates that attest to the situation of the target and its shareholders in relation to labour, civil, criminal and tax-related litigation.

Pre-sale vendor due diligence is usually conducted in the case of larger targets for sale and in situations in which problems are likely to appear, to give the vendor a chance to resolve any material issues before they are detected by the buyer’s counsel. This is especially true if the vendors wish to organise a bidding process. Although formally no reliance is given to this due diligence in most cases, the underlying engagement letters will usually contain a liability cap that corresponds to, or is a fraction of, the insured amount.

Competition approval must be obtained and notifications must be given if certain annual turnover thresholds are exceeded.

In addition to the competition analysis, transactions in certain regulated sectors require prior approvals from the respective regulatory agencies for the transfer of control or assets to be valid – for example:

• electricity;
• telecommunications;
• financial institutions; and
• health plan operators.

The main body responsible for scrutinising M&A transactions is:

• the Administrative Council for Economic Defence; and
• in the case of deals involving publicly listed companies, the Securities Commission.

The applicable taxes vary from transaction to transaction. In share deals, the most common tax is income tax on capital gains, to be paid by the seller(s). In asset deals, taxes such as the tax on the transfer of real estate may apply.

Representations and warranties will very much depend on:

• the specific transaction; and
• the negotiating power of the parties.

Fundamental representations and warranties often relate to matters such as:

• the existence and capacity of each party;
• the ownership of the shares/assets that are the subject of the transaction;
• compliance with Brazilian anti-corruption laws; and
• litigation.

Limitations of liabilities are usually addressed in the transaction documents through:

• an indemnity cap, which in many cases is deposited in an escrow account for a few years upon signing;
• de minimis and basket provisions; and
• a limitation in time, which is a matter of negotiation between the parties but is usually limited to the legal statute of limitations.

Warranty and indemnity insurance is not common in Brazil, even though some providers are trying to break into the market.

The most common approach is the creation of an escrow account. However, other mechanisms such as the holdback of price instalments are relatively common.

Yes, it is common for the transaction documents to include non-compete and non-solicitation provisions. Although there are no specific provisions on this matter, most restrictive covenants provide for timeframes of up to five years. Besides the time limit, non-compete and non-solicitation provisions must be limited in geographical scope. Such provisions must be subject to specific analysis in order to prevent questions by the Administrative Council for Economic Defence.

Conditions precedent and bring-down of warranties through a closing certificate are considered market practice in Brazil.

Usually, the offer is made in an MoU or LoI and can be adjusted in accordance with the results of a due diligence process.

Yes; however, there are disclosure obligations under the Securities Commission’s (CVM) regulations. For example, upon reaching the threshold of 5%, 10%, 15% (and so on) of a class of shares, the company must disclose this information to the CVM and the market.

Yes, after a public tender offer for delisting, if less than 5% of the total shares issued by the target remain in circulation, the shareholders’ meeting may approve the compulsory redemption of these shares at the same price paid in the public tender offer.

Usually, minority shareholders have the following rights:

• an appraisal right;
• a tagalong right; and
• the right to challenge the public tender offer price.

According to CVM Resolution 215, with the exception of public tender offers for the acquisition of control, the collateral can be replaced by:

• contracting a surety bond; or
• making a deposit in an escrow account for the total value of the offer.

The cancellation of registration will depend on its acceptance by at least two-thirds of the voting stock in circulation.

Minority shareholders often challenge the price when delisting, using the legal mechanism of requesting a new valuation (available to holders of 10% of the free float) as a pressure tool to renegotiate the terms of the offer.

The CVM’s regulations provide for a minimum price for the public tender offer – for example, in the case of a change of control involving payment in cash, the public tender offer price must be at least equal to 80% of the price paid to the controlling shareholder, plus interest, from the date of payment to the controlling shareholder until the date of financial settlement of the tender offer.

In public takeovers, the invocation of MAC clauses is quite restricted, especially when compared to the private sector. It is possible in exceptional cases, but with limitations.

MAC clauses can be invoked only if these conditions:

• are objectively measurable; and
• have a major impact which directly affects the ability to conduct the contract or the subject matter of the tender.

Mechanisms with these effects can be structured through private contracts, such as shareholders’ agreements or voting agreements.

Hostile takeovers are treated like any other public tender offer. They must strictly follow all registration and publicity procedures established by the Securities Commission.

Yes.

Poison pill provisions are the most common method of defence.

Reports indicate that although the total number of transactions decreased in 2024 compared to peak years, the total value mobilised increased, reflecting a clear trend towards larger and more complex deals. Multiple significant deals took place in the last 12 months, especially in the oil and gas sector and the energy sector.

A new Securities Commission regulation will likely come into force within the next 12 months. New tax reforms should also become partially valid within the next 12 months.

The regulatory complexity, tax burden and high volume of contingent liabilities in Brazil make the due diligence and initial contractual structuring extremely important. Therefore, in order to ensure smooth closing, this work should be undertaken with special care. Additionally, care must be taken to manage the expectations of parties that are not from Brazil, as the reality will usually differ materially from what they are used to in their home jurisdictions.