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Time to be Bullish to Buy Brazilian Businesses?

Foreigners looking to invest in Brazil need to take into account a number of economic and other factors, including the peculiarities of Brazilian law, custom and culture.

On April 12, 2017, the Brazilian Central Bank cut the SELIC benchmark interest rate by 1% as inflation for the twelve months ended March 2017 slowed to 4.57% from a high of 10.71% for the twelve month period ended January 2016. Although GDP declined by almost 3.5% in 2016 over the prior year, foreign direct investment into Brazil increased by 6 per cent over the same period to 78.9 billion dollars. Anectodal evidence suggests that M&A activity has increased in Brazil as Brazil`s third largest airline Azul successfully sold 645 million dollars of shares in an initial public offering listing its shares on the New York Stock Exchange and the Sao Paulo BM&F Bovespa.

Brazil`s ability to attract foreign investment is still dogged by Brazil’s “ease of doing business” ranking of 123 out of 190 countries by the World Bank and the International Finance Corporation—a ranking that can make the M&A process particularly challenging. Getting rid of the added cost of doing business in Brazil, or the “Custo Brasil,” will require more than economic recovery. Foreigners looking to invest in Brazil need to take into account a number of economic and other factors, including the peculiarities of Brazilian law, custom, and culture.


Corruption is an important element of the Custo Brasil that can make the M&A process formidable. The due diligence process, especially involving privately held companies, may uncover inappropriate payments made by the target to governmental authorities, frequently in connection with tax, labor, governmental permitting, or customs matters. In light of the mandates of the U.S. Foreign Corrupt Practices Act and other similar relevant laws, before entering into any transaction, an investor needs to identify such practices and implement the necessary controls and training systems to ensure that these practices do not continue post-acquisition. In addition to hiring an auditing firm to examine accounting records, retaining a private investigator to do background checks on the target company and its executives and shareholders is common.

The Brazilian Clean Companies Act, which went into force in January 2014, imposes requirements comparable to those of the U.S. Foreign Corrupt Practices Act and the UK Bribery Act. In the case of an entity acquired through merger, the law makes the successor entity liable for restitution and fines of up to the value of the assets transferred in the transaction. In addition to the decrease in illicit practices as a result of the new law, investors can take some comfort that Brazilian executives, unlike many of their counterparts in other parts of the world (and unlike some Brazilian politicians!), when queried often will come clean and admit to their past questionable practices.

The lack of transparency also affects trust in judicial authorities. Because of concerns about transparency (whether perceived or actual) and inordinate delays in Brazilian courts, arbitration is the preferred dispute resolution mechanism in M&A agreements. If arbitration decisions will have to be enforced in Brazil (because a party’s principal assets are in Brazil), the arbitration should be conducted on Brazilian soil; those rendered outside of Brazil must be “homologated” before Brazilian courts will enforce them. Arbitration in Brazil can be in the English language using international rules.

Labor Laws

Another key part of the Custo Brasil is Brazil’s complicated labor laws. They dictate the provision of various fringe benefits and terms of employment, including severance obligations upon termination. At-will employment is a concept that does not exist in Brazil.

Most employees in Brazilian companies are automatically members of the union that represents their industry or profession; the employer must comply with the requirements of the relevant collective bargaining agreements. Most companies have a large number of pending labor lawsuits (for example, a well-known international company with 18,000 employees in Brazil has 2,000 pending labor litigation matters).

Salaries for qualified executives can often be higher in Brazil than those for comparably situated executives in the United States, given the high cost of living and relative scarcity of educated professionals. If key executives are to be retained in management roles (particularly in the administrator role of a limitada, or limited liability company), some Brazilian lawyers suggest that “pro-labore agreements” might provide more flexibility than what would otherwise be required by employment agreements under Brazilian labor laws. Post-employment noncompetition obligations, however, are difficult to enforce and require payment of compensation during the noncompete period (noncompetition obligations imposed upon sellers of a business, in contrast, do not require payment of separate consideration).

Many companies seek to avoid labor law mandates by using independent contractors and sales representatives, who may later challenge their status in employee-friendly labor courts. Moreover, the Brazilian sales agency law requires payments upon termination equal to one-twelfth of all consideration paid to the sales representative during the lifetime of the relationship.


A third contributor to the Custo Brasil is the convoluted tax regime, with myriad taxes imposed at the national, state, and local levels. The difficulty in complying with the complicated tax system is compounded by aggressive tax planning. Many of these tax positions may be challenged years later, and they can be subject to high interest and penalty charges. Even if the likelihood of discovery and challenge of the tax position is remote, FIN 48 of the U.S. GAAP accounting standards requires U.S. companies to prepare financial statements where tax contingencies are accrued based on the assumption that all tax positions will in fact be examined by the appropriate taxing authority.

Tax planning is an important part of the Brazilian M&A process. To obtain partnership (“check the box”) tax treatment for U.S. income tax purposes, the Brazilian entity acquired should be a limitada and not a sociedade anônima (corporation). Brazilian tax lawyers often recommend that acquisitions be structured by creating a Brazilian entity that acquires the shares of a target company, which merges into the target company at some point after the acquisition to secure certain tax advantages as part of the transaction.

Civil Law Mandates

The civil law tradition of Brazil may also limit flexibility in structuring transactions. Buying the assets of a business as opposed to the equity interest of the company does not avoid successor liability for labor, tax, and other contingent liabilities. In fact, the acquiring company can be ensnared with group-wide liability for tax, labor, and environmental matters. As such, there is a heightened focus on applicable statutes of limitations. For tax contingencies, there is generally a statute of limitations that covers tax liabilities for five full tax years, and for labor contingencies, the statute of limitations is generally five years for a current employee and two years from the date of termination for a former employee.

To guarantee repatriation of the original investment and dividends, an investment should be made with funds that are brought into Brazil and duly registered with the Brazilian Central Bank. Licensing transactions that result in payment of royalties on trademarks, patents, and know-how outside of Brazil must be registered with the INPI, the Brazilian patent and trademark office. Royalties between related parties on trademarks and other rights are often limited by the INPI. Under Brazilian law, know-how is not licensed, but rather deemed to be transferred by the party possessing the know-how.

Antitrust Considerations

Brazil now requires prior approval by CADE, the Brazilian antitrust authority, of acquisitions surpassing certain statutory thresholds. Transactions in which the combined operations will result in a market share of more than 20 percent in the rel- evant market require the filing of a laborious “long form statement” that allows the authority more time to review the filing. From an operational and due diligence perspective, buyers need to take into account that there is greater scrutiny of anticompetitive behavior, including price fixing.

Public Company Issues

Investment in publicly traded companies is affected by the rules of the CVM, the Brazilian securities and exchange commission, and the listing rules of the BM&F Bovespa. Acquisition of a controlling interest can trigger a mandatory tender offer for the free float of the publicly traded company. The bylaws of publicly traded companies can contain what is termed by Brazilian lawyers as “poison pill” provisions that extend such tender offer requirements to where only a 10 or 20 percent interest is acquired. In acquisitions where the target will remain publicly traded, the transfer agent of a publicly traded company may require certain information or other actions in order to register the shares in the name of the purchasing entity. Transfer agents sometimes also impose limitations and restrictions upon future transfers of shares.

M&A Customs and Practices

The customs and practices surrounding Brazilian M&A agreements can be helpful to buyers. For example, asset or stock purchase agreements, unlike in the United States, often contain pro-buyer provisions indemnifying for all preclosing liabilities, with no cap or one equal to the purchase price, with baskets of less than one percent of the purchase price, and with indemnification time periods that typically range from three to five years. Escrows of between 15 and 30 percent of the purchase price for the indemnification term are not uncommon. The limited caps and time periods for indemnification and baskets that one sees in U.S. acquisition agreements, however, are gaining favor in Brazil. In addition, in cross-border M&A transactions where the target is Brazilian, New York, Delaware, or other U.S. state law may be used as the governing law of the transaction documents (as is often the case in other Latin American countries).

Brazilian law generally requires that contracts governed by Brazilian law specify payments in Brazilian Reais. In cross-border transactions governed by laws other than those of Brazil, to avoid some of the complications that might result from fluctuating exchange rates, it may still be advisable to fix the purchase price in Brazilian currency. Fixing the price in local currency is consistent with a valuation that is based on revenues and costs in local currency and simplifies the process of introducing the correct amount of funds for Central Bank registration purposes.

A final important matter that cannot be ignored is that negotiating transactions in Brazil often becomes a process where the counterparties get to know each other. As such, the process generally is longer than one would see in the United States or Europe. Getting down to business immediately or aggressive negotiating tactics with “take it or leave it” stances are usually counterproductive and do not facilitate getting the deal done.

This article is adapted from an article that appeared in the May 2016 issue of the Cleveland Metropolitan Bar Association’s Bar Journal, which was adapted from an article the author published in Bloomberg BNA’s Mergers & Acquisitions Law Report, Vol. 19, No. 13, pp. 490-491 (March 28, 2016). The views expressed herein are those of the author and do not necessarily reflect the views of Jones Day in which he is a partner.

About the author

Sanjiv K. Kapur

Partner São Paulo / Cleveland

+55.11.3018.3911 / +1.216.586.7114

Sanjiv Kapur practices U.S. and international corporate and commercial law and has extensive experience in mergers and acquisitions and joint ventures in the United States, Latin America, Europe, and Asia. He regularly conducts compliance investigations and training in Portuguese and Spanish.

Selected representations include:

  • Enjoy S.A.’s acquisition of a 45 percent interest in the Conrad Punta del Este Resort and Casino in Uruguay;
  • Harris Corporation’s sale of its worldwide Broadcast Communications Group to the Gores Group;
  • Monier Group’s sale of a 51 percent interest in the Brazilian solar thermal systems manufacturer Heliotek to Bosch Thermotechnology;
  • Bayer CropScience’s acquisition of the biological pest management company AgraQuest, Inc. and its Mexican subsidiary;
  • RPM International’s acquisition of Viapol Limitada, a Brazilian manufacturer of building materials;
  • Bunge’s joint venture with Solazyme, Inc. to build renewable oils production facility in Brazil; Cliffs Natural Resources’ acquisition of Minera Cerro Juncal S.A., a company with concessions in Argentina; Cliffs Natural Resources’ acquisition of a 51 percent interest in a joint venture for the exploration of iron-oxide/copper/gold deposits in Chile;
  • Harris Corporation’s purchase of Tyco Electronics’ worldwide private mobile radio business; and
  • Bayer Pharmaceuticals’ strategic alliance in the primary care pharmaceutical business (Cipro, Avelox, and Levitra) with Schering Corporation.

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