Brazil: How to buy distressed assets

12 March 2024

  • Brazil
  • Insolvency

In Brazil, the acquisition of distressed assets does not have to be stressful.

Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

The assets subjected to the protection may be

  • a specific asset (machinery, production lines, trademarks, contracts);
  • establishments, branches, units; or even
  • the entire business activity as protected assets.

This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

There are several safe paths available to acquirers:

  1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
  2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
  3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
  4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
  5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

Summary

The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

The goal of this article is to list the top five most relevant novelties.

#5 – Reorganization plan presented by creditors

Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

#4 – Mediation focusing on the turnaround

Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

#3 – Distressed assets operations

The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

#2 – Debtor-in-Possession (DIP) Financing

The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

#1 – Cross-Border Insolvency

Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

  • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
  • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

Indemnification

Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

Termination by the agent

The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

  • reduction of the activities in disagreement with the contractual stipulation
  • breach of exclusivity (territory and/or products), if so stipulated in the agreement
  • determination of prices that makes the agency unfeasible and
  • default on payment of the commissions
  • force majeure

Termination without cause

Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

Can principal avoid the indemnification?

The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

  • acts by agent causing disrepute of the principal
  • breach of obligations related to the agency activities
  • criminal conviction related to honor, reputation

These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

Potential risk: configuring employment relationship

In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

Agent vs. employee

For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

The elements of an employment relationship are:

  • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
  • Non-eventuality – exclusivity: the services are rendered in a regular basis;
  • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
  • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

Needless to say, the result could turn into a considerable potential contingency.

The author of this article is Paulo Yamaguchi

The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

Country-by-Country Reporting Regulation

Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

  • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
  • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
  • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

Need to disclose beneficial ownership and how to do it

Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

The author of this article is Paulo Yamaguchi

When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

  1. Local legal advisors

The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

Slowing down a bit to the benefit of certainty is a sound advice.

Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

  1. Debt

Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

  1. Tax/labor contingencies

Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

  1. Material adverse change

Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

  1. Guarantees and Indemnification

For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

  1. Break-up Fees

A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

  1. Recommendations

In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

  • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
  • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
  • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
  • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
  • MAC Clauses shall be clear, precise and objective; and
  • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

The author of this article is Paulo Yamaguchi

In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

The usual forms are not much different from other countries. The most utilized are:

Incorporating a Brazilian subsidiary

A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

Entering a distribution agreement

Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

Entering a commercial representation agreement

A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

Entering an agency agreement

Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

Franchising

Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

Brazilian economic outlook

There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

The author of this article is Paulo Yamaguchi

The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

Partners, Quotas and Capital

A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

Company’s name, objectives and address

The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

The company objectives and address must be included in the Articles of Association.

Administration

The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

Partners Resolutions

Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

As the EIRELI has one single holder, all decisions are taken by the holder.

Liability of Partners and of Holder

The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

  • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
  • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
  • In case the foreign partners/shareholders/holder are/is a legal entity:

– Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

– Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

Geraldo Fonseca

Practice areas

  • Corporate
  • Credit collection
  • Insolvency
  • International trade
  • Litigation
Contact Geraldo

Contact Brazil: How to buy distressed assets





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    Brazil – Reforms in Insolvency and Turnaround

    4 December 2022

    • Brazil
    • Banking
    • Insolvency

    In Brazil, the acquisition of distressed assets does not have to be stressful.

    Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

    It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

    Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

    The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

    The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

    The assets subjected to the protection may be

    • a specific asset (machinery, production lines, trademarks, contracts);
    • establishments, branches, units; or even
    • the entire business activity as protected assets.

    This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

    There are several safe paths available to acquirers:

    1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
    2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
    3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
    4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
    5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

    There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

    There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

    Summary

    The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

    When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

    The goal of this article is to list the top five most relevant novelties.

    #5 – Reorganization plan presented by creditors

    Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

    Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

    #4 – Mediation focusing on the turnaround

    Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

    The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

    #3 – Distressed assets operations

    The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

    Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

    #2 – Debtor-in-Possession (DIP) Financing

    The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

    The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

    The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

    As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

    #1 – Cross-Border Insolvency

    Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

    We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

    There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

    These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

    A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

    One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

    • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
    • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

    This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

    No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

    On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

    Indemnification

    Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

    The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

    Termination by the agent

    The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

    • reduction of the activities in disagreement with the contractual stipulation
    • breach of exclusivity (territory and/or products), if so stipulated in the agreement
    • determination of prices that makes the agency unfeasible and
    • default on payment of the commissions
    • force majeure

    Termination without cause

    Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

    Can principal avoid the indemnification?

    The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

    • acts by agent causing disrepute of the principal
    • breach of obligations related to the agency activities
    • criminal conviction related to honor, reputation

    These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

    As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

    Potential risk: configuring employment relationship

    In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

    Agent vs. employee

    For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

    The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

    The elements of an employment relationship are:

    • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
    • Non-eventuality – exclusivity: the services are rendered in a regular basis;
    • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
    • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

    In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

    As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

    Needless to say, the result could turn into a considerable potential contingency.

    The author of this article is Paulo Yamaguchi

    The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

    Country-by-Country Reporting Regulation

    Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

    The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

    Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

    The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

    • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
    • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
    • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

    In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

    The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

    Need to disclose beneficial ownership and how to do it

    Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

    This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

    Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

    This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

    On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

    Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

    Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

    The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

    These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

    The author of this article is Paulo Yamaguchi

    When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

    The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

    1. Local legal advisors

    The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

    Slowing down a bit to the benefit of certainty is a sound advice.

    Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

    Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

    An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

    Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

    1. Debt

    Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

    As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

    1. Tax/labor contingencies

    Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

    Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

    1. Material adverse change

    Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

    Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

    In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

    1. Guarantees and Indemnification

    For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

    De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

    The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

    1. Break-up Fees

    A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

    Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

    In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

    1. Recommendations

    In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

    • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
    • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
    • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
    • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
    • MAC Clauses shall be clear, precise and objective; and
    • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

    The author of this article is Paulo Yamaguchi

    In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

    The usual forms are not much different from other countries. The most utilized are:

    Incorporating a Brazilian subsidiary

    A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

    The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

    Entering a distribution agreement

    Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

    The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

    Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

    Entering a commercial representation agreement

    A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

    Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

    Entering an agency agreement

    Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

    Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

    Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

    Franchising

    Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

    Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

    Brazilian economic outlook

    There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

    There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

    A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

    An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

    Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

    It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

    Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

    The author of this article is Paulo Yamaguchi

    The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

    As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

    Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

    In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

    Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

    A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

    This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

    Partners, Quotas and Capital

    A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

    Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

    There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

    The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

    The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

    The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

    Company’s name, objectives and address

    The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

    The company objectives and address must be included in the Articles of Association.

    Administration

    The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

    The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

    Partners Resolutions

    Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

    Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

    As the EIRELI has one single holder, all decisions are taken by the holder.

    Liability of Partners and of Holder

    The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

    Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

    Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

    Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

    By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

    Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

    The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

    In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

    • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
    • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
    • In case the foreign partners/shareholders/holder are/is a legal entity:

    – Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

    – Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

    Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

    We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

    At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

    Geraldo Fonseca

    Practice areas

    • Corporate
    • Credit collection
    • Insolvency
    • International trade
    • Litigation
    Contact Geraldo

    Contact Brazil: How to buy distressed assets





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      Brazil- M&A and Agency Agreements

      20 August 2019

      • Brazil
      • Agency
      • Corporate
      • M&A

      In Brazil, the acquisition of distressed assets does not have to be stressful.

      Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

      It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

      Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

      The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

      The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

      The assets subjected to the protection may be

      • a specific asset (machinery, production lines, trademarks, contracts);
      • establishments, branches, units; or even
      • the entire business activity as protected assets.

      This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

      There are several safe paths available to acquirers:

      1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
      2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
      3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
      4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
      5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

      There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

      There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

      Summary

      The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

      When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

      The goal of this article is to list the top five most relevant novelties.

      #5 – Reorganization plan presented by creditors

      Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

      Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

      #4 – Mediation focusing on the turnaround

      Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

      The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

      #3 – Distressed assets operations

      The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

      Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

      #2 – Debtor-in-Possession (DIP) Financing

      The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

      The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

      The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

      As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

      #1 – Cross-Border Insolvency

      Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

      We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

      There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

      These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

      A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

      One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

      • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
      • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

      This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

      No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

      On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

      Indemnification

      Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

      The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

      Termination by the agent

      The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

      • reduction of the activities in disagreement with the contractual stipulation
      • breach of exclusivity (territory and/or products), if so stipulated in the agreement
      • determination of prices that makes the agency unfeasible and
      • default on payment of the commissions
      • force majeure

      Termination without cause

      Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

      Can principal avoid the indemnification?

      The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

      • acts by agent causing disrepute of the principal
      • breach of obligations related to the agency activities
      • criminal conviction related to honor, reputation

      These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

      As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

      Potential risk: configuring employment relationship

      In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

      Agent vs. employee

      For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

      The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

      The elements of an employment relationship are:

      • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
      • Non-eventuality – exclusivity: the services are rendered in a regular basis;
      • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
      • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

      In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

      As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

      Needless to say, the result could turn into a considerable potential contingency.

      The author of this article is Paulo Yamaguchi

      The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

      Country-by-Country Reporting Regulation

      Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

      The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

      Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

      The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

      • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
      • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
      • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

      In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

      The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

      Need to disclose beneficial ownership and how to do it

      Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

      This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

      Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

      This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

      On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

      Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

      Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

      The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

      These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

      The author of this article is Paulo Yamaguchi

      When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

      The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

      1. Local legal advisors

      The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

      Slowing down a bit to the benefit of certainty is a sound advice.

      Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

      Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

      An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

      Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

      1. Debt

      Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

      As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

      1. Tax/labor contingencies

      Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

      Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

      1. Material adverse change

      Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

      Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

      In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

      1. Guarantees and Indemnification

      For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

      De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

      The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

      1. Break-up Fees

      A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

      Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

      In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

      1. Recommendations

      In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

      • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
      • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
      • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
      • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
      • MAC Clauses shall be clear, precise and objective; and
      • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

      The author of this article is Paulo Yamaguchi

      In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

      The usual forms are not much different from other countries. The most utilized are:

      Incorporating a Brazilian subsidiary

      A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

      The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

      Entering a distribution agreement

      Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

      The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

      Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

      Entering a commercial representation agreement

      A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

      Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

      Entering an agency agreement

      Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

      Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

      Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

      Franchising

      Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

      Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

      Brazilian economic outlook

      There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

      There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

      A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

      An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

      Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

      It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

      Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

      The author of this article is Paulo Yamaguchi

      The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

      As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

      Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

      In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

      Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

      A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

      This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

      Partners, Quotas and Capital

      A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

      Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

      There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

      The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

      The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

      The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

      Company’s name, objectives and address

      The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

      The company objectives and address must be included in the Articles of Association.

      Administration

      The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

      The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

      Partners Resolutions

      Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

      Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

      As the EIRELI has one single holder, all decisions are taken by the holder.

      Liability of Partners and of Holder

      The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

      Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

      Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

      Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

      By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

      Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

      The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

      In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

      • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
      • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
      • In case the foreign partners/shareholders/holder are/is a legal entity:

      – Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

      – Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

      Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

      We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

      At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

      Brazil – Reporting and Disclosure of  final beneficial owner

      9 October 2018

      • Brazil
      • Compliance
      • Corporate

      In Brazil, the acquisition of distressed assets does not have to be stressful.

      Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

      It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

      Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

      The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

      The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

      The assets subjected to the protection may be

      • a specific asset (machinery, production lines, trademarks, contracts);
      • establishments, branches, units; or even
      • the entire business activity as protected assets.

      This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

      There are several safe paths available to acquirers:

      1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
      2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
      3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
      4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
      5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

      There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

      There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

      Summary

      The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

      When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

      The goal of this article is to list the top five most relevant novelties.

      #5 – Reorganization plan presented by creditors

      Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

      Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

      #4 – Mediation focusing on the turnaround

      Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

      The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

      #3 – Distressed assets operations

      The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

      Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

      #2 – Debtor-in-Possession (DIP) Financing

      The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

      The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

      The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

      As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

      #1 – Cross-Border Insolvency

      Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

      We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

      There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

      These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

      A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

      One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

      • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
      • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

      This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

      No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

      On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

      Indemnification

      Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

      The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

      Termination by the agent

      The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

      • reduction of the activities in disagreement with the contractual stipulation
      • breach of exclusivity (territory and/or products), if so stipulated in the agreement
      • determination of prices that makes the agency unfeasible and
      • default on payment of the commissions
      • force majeure

      Termination without cause

      Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

      Can principal avoid the indemnification?

      The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

      • acts by agent causing disrepute of the principal
      • breach of obligations related to the agency activities
      • criminal conviction related to honor, reputation

      These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

      As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

      Potential risk: configuring employment relationship

      In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

      Agent vs. employee

      For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

      The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

      The elements of an employment relationship are:

      • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
      • Non-eventuality – exclusivity: the services are rendered in a regular basis;
      • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
      • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

      In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

      As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

      Needless to say, the result could turn into a considerable potential contingency.

      The author of this article is Paulo Yamaguchi

      The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

      Country-by-Country Reporting Regulation

      Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

      The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

      Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

      The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

      • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
      • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
      • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

      In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

      The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

      Need to disclose beneficial ownership and how to do it

      Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

      This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

      Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

      This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

      On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

      Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

      Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

      The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

      These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

      The author of this article is Paulo Yamaguchi

      When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

      The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

      1. Local legal advisors

      The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

      Slowing down a bit to the benefit of certainty is a sound advice.

      Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

      Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

      An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

      Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

      1. Debt

      Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

      As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

      1. Tax/labor contingencies

      Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

      Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

      1. Material adverse change

      Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

      Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

      In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

      1. Guarantees and Indemnification

      For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

      De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

      The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

      1. Break-up Fees

      A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

      Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

      In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

      1. Recommendations

      In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

      • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
      • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
      • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
      • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
      • MAC Clauses shall be clear, precise and objective; and
      • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

      The author of this article is Paulo Yamaguchi

      In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

      The usual forms are not much different from other countries. The most utilized are:

      Incorporating a Brazilian subsidiary

      A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

      The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

      Entering a distribution agreement

      Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

      The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

      Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

      Entering a commercial representation agreement

      A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

      Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

      Entering an agency agreement

      Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

      Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

      Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

      Franchising

      Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

      Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

      Brazilian economic outlook

      There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

      There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

      A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

      An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

      Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

      It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

      Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

      The author of this article is Paulo Yamaguchi

      The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

      As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

      Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

      In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

      Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

      A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

      This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

      Partners, Quotas and Capital

      A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

      Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

      There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

      The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

      The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

      The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

      Company’s name, objectives and address

      The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

      The company objectives and address must be included in the Articles of Association.

      Administration

      The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

      The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

      Partners Resolutions

      Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

      Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

      As the EIRELI has one single holder, all decisions are taken by the holder.

      Liability of Partners and of Holder

      The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

      Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

      Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

      Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

      By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

      Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

      The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

      In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

      • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
      • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
      • In case the foreign partners/shareholders/holder are/is a legal entity:

      – Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

      – Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

      Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

      We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

      At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

      Brazil – M&A checklist

      1 August 2018

      • Brazil
      • M&A

      In Brazil, the acquisition of distressed assets does not have to be stressful.

      Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

      It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

      Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

      The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

      The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

      The assets subjected to the protection may be

      • a specific asset (machinery, production lines, trademarks, contracts);
      • establishments, branches, units; or even
      • the entire business activity as protected assets.

      This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

      There are several safe paths available to acquirers:

      1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
      2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
      3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
      4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
      5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

      There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

      There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

      Summary

      The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

      When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

      The goal of this article is to list the top five most relevant novelties.

      #5 – Reorganization plan presented by creditors

      Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

      Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

      #4 – Mediation focusing on the turnaround

      Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

      The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

      #3 – Distressed assets operations

      The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

      Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

      #2 – Debtor-in-Possession (DIP) Financing

      The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

      The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

      The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

      As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

      #1 – Cross-Border Insolvency

      Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

      We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

      There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

      These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

      A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

      One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

      • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
      • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

      This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

      No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

      On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

      Indemnification

      Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

      The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

      Termination by the agent

      The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

      • reduction of the activities in disagreement with the contractual stipulation
      • breach of exclusivity (territory and/or products), if so stipulated in the agreement
      • determination of prices that makes the agency unfeasible and
      • default on payment of the commissions
      • force majeure

      Termination without cause

      Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

      Can principal avoid the indemnification?

      The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

      • acts by agent causing disrepute of the principal
      • breach of obligations related to the agency activities
      • criminal conviction related to honor, reputation

      These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

      As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

      Potential risk: configuring employment relationship

      In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

      Agent vs. employee

      For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

      The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

      The elements of an employment relationship are:

      • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
      • Non-eventuality – exclusivity: the services are rendered in a regular basis;
      • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
      • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

      In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

      As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

      Needless to say, the result could turn into a considerable potential contingency.

      The author of this article is Paulo Yamaguchi

      The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

      Country-by-Country Reporting Regulation

      Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

      The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

      Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

      The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

      • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
      • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
      • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

      In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

      The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

      Need to disclose beneficial ownership and how to do it

      Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

      This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

      Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

      This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

      On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

      Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

      Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

      The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

      These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

      The author of this article is Paulo Yamaguchi

      When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

      The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

      1. Local legal advisors

      The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

      Slowing down a bit to the benefit of certainty is a sound advice.

      Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

      Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

      An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

      Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

      1. Debt

      Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

      As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

      1. Tax/labor contingencies

      Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

      Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

      1. Material adverse change

      Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

      Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

      In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

      1. Guarantees and Indemnification

      For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

      De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

      The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

      1. Break-up Fees

      A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

      Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

      In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

      1. Recommendations

      In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

      • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
      • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
      • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
      • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
      • MAC Clauses shall be clear, precise and objective; and
      • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

      The author of this article is Paulo Yamaguchi

      In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

      The usual forms are not much different from other countries. The most utilized are:

      Incorporating a Brazilian subsidiary

      A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

      The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

      Entering a distribution agreement

      Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

      The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

      Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

      Entering a commercial representation agreement

      A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

      Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

      Entering an agency agreement

      Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

      Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

      Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

      Franchising

      Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

      Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

      Brazilian economic outlook

      There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

      There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

      A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

      An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

      Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

      It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

      Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

      The author of this article is Paulo Yamaguchi

      The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

      As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

      Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

      In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

      Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

      A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

      This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

      Partners, Quotas and Capital

      A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

      Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

      There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

      The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

      The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

      The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

      Company’s name, objectives and address

      The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

      The company objectives and address must be included in the Articles of Association.

      Administration

      The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

      The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

      Partners Resolutions

      Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

      Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

      As the EIRELI has one single holder, all decisions are taken by the holder.

      Liability of Partners and of Holder

      The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

      Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

      Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

      Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

      By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

      Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

      The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

      In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

      • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
      • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
      • In case the foreign partners/shareholders/holder are/is a legal entity:

      – Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

      – Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

      Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

      We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

      At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

      Brazil – How to start a business

      10 May 2018

      • Brazil
      • Corporate

      In Brazil, the acquisition of distressed assets does not have to be stressful.

      Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

      It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

      Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

      The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

      The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

      The assets subjected to the protection may be

      • a specific asset (machinery, production lines, trademarks, contracts);
      • establishments, branches, units; or even
      • the entire business activity as protected assets.

      This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

      There are several safe paths available to acquirers:

      1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
      2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
      3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
      4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
      5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

      There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

      There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

      Summary

      The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

      When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

      The goal of this article is to list the top five most relevant novelties.

      #5 – Reorganization plan presented by creditors

      Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

      Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

      #4 – Mediation focusing on the turnaround

      Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

      The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

      #3 – Distressed assets operations

      The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

      Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

      #2 – Debtor-in-Possession (DIP) Financing

      The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

      The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

      The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

      As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

      #1 – Cross-Border Insolvency

      Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

      We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

      There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

      These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

      A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

      One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

      • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
      • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

      This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

      No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

      On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

      Indemnification

      Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

      The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

      Termination by the agent

      The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

      • reduction of the activities in disagreement with the contractual stipulation
      • breach of exclusivity (territory and/or products), if so stipulated in the agreement
      • determination of prices that makes the agency unfeasible and
      • default on payment of the commissions
      • force majeure

      Termination without cause

      Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

      Can principal avoid the indemnification?

      The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

      • acts by agent causing disrepute of the principal
      • breach of obligations related to the agency activities
      • criminal conviction related to honor, reputation

      These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

      As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

      Potential risk: configuring employment relationship

      In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

      Agent vs. employee

      For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

      The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

      The elements of an employment relationship are:

      • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
      • Non-eventuality – exclusivity: the services are rendered in a regular basis;
      • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
      • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

      In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

      As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

      Needless to say, the result could turn into a considerable potential contingency.

      The author of this article is Paulo Yamaguchi

      The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

      Country-by-Country Reporting Regulation

      Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

      The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

      Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

      The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

      • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
      • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
      • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

      In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

      The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

      Need to disclose beneficial ownership and how to do it

      Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

      This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

      Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

      This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

      On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

      Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

      Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

      The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

      These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

      The author of this article is Paulo Yamaguchi

      When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

      The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

      1. Local legal advisors

      The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

      Slowing down a bit to the benefit of certainty is a sound advice.

      Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

      Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

      An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

      Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

      1. Debt

      Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

      As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

      1. Tax/labor contingencies

      Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

      Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

      1. Material adverse change

      Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

      Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

      In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

      1. Guarantees and Indemnification

      For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

      De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

      The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

      1. Break-up Fees

      A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

      Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

      In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

      1. Recommendations

      In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

      • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
      • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
      • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
      • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
      • MAC Clauses shall be clear, precise and objective; and
      • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

      The author of this article is Paulo Yamaguchi

      In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

      The usual forms are not much different from other countries. The most utilized are:

      Incorporating a Brazilian subsidiary

      A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

      The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

      Entering a distribution agreement

      Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

      The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

      Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

      Entering a commercial representation agreement

      A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

      Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

      Entering an agency agreement

      Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

      Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

      Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

      Franchising

      Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

      Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

      Brazilian economic outlook

      There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

      There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

      A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

      An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

      Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

      It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

      Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

      The author of this article is Paulo Yamaguchi

      The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

      As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

      Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

      In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

      Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

      A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

      This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

      Partners, Quotas and Capital

      A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

      Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

      There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

      The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

      The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

      The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

      Company’s name, objectives and address

      The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

      The company objectives and address must be included in the Articles of Association.

      Administration

      The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

      The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

      Partners Resolutions

      Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

      Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

      As the EIRELI has one single holder, all decisions are taken by the holder.

      Liability of Partners and of Holder

      The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

      Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

      Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

      Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

      By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

      Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

      The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

      In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

      • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
      • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
      • In case the foreign partners/shareholders/holder are/is a legal entity:

      – Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

      – Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

      Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

      We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

      At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

      Brazil – Corporate structures

      12 October 2017

      • Brazil
      • Corporate

      In Brazil, the acquisition of distressed assets does not have to be stressful.

      Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

      It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

      Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

      The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

      The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

      The assets subjected to the protection may be

      • a specific asset (machinery, production lines, trademarks, contracts);
      • establishments, branches, units; or even
      • the entire business activity as protected assets.

      This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

      There are several safe paths available to acquirers:

      1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
      2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
      3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
      4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
      5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

      There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

      There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

      Summary

      The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

      When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

      The goal of this article is to list the top five most relevant novelties.

      #5 – Reorganization plan presented by creditors

      Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

      Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

      #4 – Mediation focusing on the turnaround

      Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

      The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

      #3 – Distressed assets operations

      The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

      Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

      #2 – Debtor-in-Possession (DIP) Financing

      The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

      The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

      The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

      As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

      #1 – Cross-Border Insolvency

      Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

      We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

      There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

      These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

      A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

      One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

      • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
      • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

      This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

      No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

      On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

      Indemnification

      Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

      The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

      Termination by the agent

      The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

      • reduction of the activities in disagreement with the contractual stipulation
      • breach of exclusivity (territory and/or products), if so stipulated in the agreement
      • determination of prices that makes the agency unfeasible and
      • default on payment of the commissions
      • force majeure

      Termination without cause

      Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

      Can principal avoid the indemnification?

      The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

      • acts by agent causing disrepute of the principal
      • breach of obligations related to the agency activities
      • criminal conviction related to honor, reputation

      These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

      As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

      Potential risk: configuring employment relationship

      In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

      Agent vs. employee

      For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

      The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

      The elements of an employment relationship are:

      • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
      • Non-eventuality – exclusivity: the services are rendered in a regular basis;
      • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
      • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

      In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

      As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

      Needless to say, the result could turn into a considerable potential contingency.

      The author of this article is Paulo Yamaguchi

      The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

      Country-by-Country Reporting Regulation

      Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

      The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

      Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

      The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

      • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
      • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
      • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

      In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

      The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

      Need to disclose beneficial ownership and how to do it

      Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

      This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

      Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

      This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

      On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

      Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

      Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

      The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

      These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

      The author of this article is Paulo Yamaguchi

      When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

      The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

      1. Local legal advisors

      The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

      Slowing down a bit to the benefit of certainty is a sound advice.

      Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

      Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

      An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

      Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

      1. Debt

      Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

      As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

      1. Tax/labor contingencies

      Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

      Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

      1. Material adverse change

      Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

      Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

      In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

      1. Guarantees and Indemnification

      For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

      De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

      The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

      1. Break-up Fees

      A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

      Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

      In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

      1. Recommendations

      In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

      • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
      • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
      • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
      • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
      • MAC Clauses shall be clear, precise and objective; and
      • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

      The author of this article is Paulo Yamaguchi

      In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

      The usual forms are not much different from other countries. The most utilized are:

      Incorporating a Brazilian subsidiary

      A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

      The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

      Entering a distribution agreement

      Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

      The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

      Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

      Entering a commercial representation agreement

      A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

      Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

      Entering an agency agreement

      Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

      Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

      Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

      Franchising

      Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

      Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

      Brazilian economic outlook

      There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

      There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

      A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

      An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

      Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

      It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

      Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

      The author of this article is Paulo Yamaguchi

      The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

      As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

      Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

      In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

      Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

      A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

      This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

      Partners, Quotas and Capital

      A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

      Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

      There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

      The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

      The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

      The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

      Company’s name, objectives and address

      The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

      The company objectives and address must be included in the Articles of Association.

      Administration

      The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

      The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

      Partners Resolutions

      Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

      Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

      As the EIRELI has one single holder, all decisions are taken by the holder.

      Liability of Partners and of Holder

      The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

      Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

      Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

      Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

      By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

      Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

      The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

      In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

      • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
      • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
      • In case the foreign partners/shareholders/holder are/is a legal entity:

      – Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

      – Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

      Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

      We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

      At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

      Renata Antiquera

      Practice areas

      • Contracts
      • Corporate
      • Distribution
      • M&A
      Contact Renata

      Contact Brazil: How to buy distressed assets





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        Brazil – Legal requirements for incorporating a company

        28 September 2017

        • Brazil
        • Agency
        • Corporate

        In Brazil, the acquisition of distressed assets does not have to be stressful.

        Due to the debtor’s insolvency situation, the acquirer must exercise additional caution to understand the extent of liabilities and to avoid risks of assuming undisclosed liabilities, losing assets in claw-back actions, or being held liable for fraud. In this context, due diligence becomes more thorough and detailed (and therefore more costly).

        It is a common investment world jargon that the better the opportunities, the greater the risk; but also, the greater the risks, the better the opportunities.

        Considering that excessive risk in the acquisition of distressed assets could deter investors and considering that new investments may be indispensable to save a company in crisis or to obtain funds to pay creditors, Brazilian legislation has chosen to protect acquirers of distressed assets with robust safeguards against risks.

        The general rule stipulates that the acquirer will not pay anything beyond the defined price and will not assume any obligations of the debtor of any nature, remaining shielded from liabilities. In other words, creditors will have to compete to receive part of the price paid, but they cannot hold the acquirer responsible for the debt, even if the price is insufficient for settlement. Even if the seller fails to recover and is declared bankrupt, the acquisition remains irreversible.

        The non-succession rule ensures that the purchaser or acquirer can invest safely in the debtor’s assets under judicial recovery without the risk of being held responsible for pre-existing obligations and liabilities. The absence of succession, therefore, stimulates competition for the asset to be alienated and consequently maximizes the values to be obtained and reverted for the benefit of the entire community involved in a judicial recovery process.

        The assets subjected to the protection may be

        • a specific asset (machinery, production lines, trademarks, contracts);
        • establishments, branches, units; or even
        • the entire business activity as protected assets.

        This circumstance, by providing a secure path, mitigates the requirements of due diligence, as risks are now controlled.

        There are several safe paths available to acquirers:

        1. Asset acquisition as a means of reorganization: in the judicial reorganization proceedings (Chapter 11), the debtor may foresee in the plan the selling of assets and the conditions for acquisition, such as minimum price and auction rules. The highest bidder assumes the assets. The price paid is allocated as provided in the plan (usually, a portion is allocated to pay creditors, and another to invest in the debtor’s business activity).
        2. Direct sale: if selling assets is proven to be indispensable for maintaining the company, the judge may authorize a direct sale at a fair price. The judge may order valuation and auction, unless urgency or the absence of potential interested parties is proven. If an auction occurs, the first bidder may act as a stalking horse, with the right to match the best offer.
        3. Asset acquisition in liquidation: in case of declared bankruptcy, the acquirer may offer a price lower than the appraisal, without the requirement of being a fair price. In this case, it is unusual to dismiss an open auction proceeding.
        4. Debtor financing: the acquirer may offer to finance the business activity, providing money or supplies, aiming to acquire assets or as collateral for future payment of the financing.
        5. Credit acquisition for asset adjudication: the interested party can also take an indirect path, acquiring the credits involved in the procedure and assuming the position of the creditors. Credit acquisition is legitimate, and commonly the price paid is considerably lower than the value of the acquired credit. By becoming the holder of a reasonable percentage of the credits, the interested party may offer these credits as payment for the acquisition of the assets they are interested in.

        There are still creative alternatives, which to some extent increase the risk in the transaction but may imply agility and lower investments. There are some other hints in the Legalmondo practical guide for buying distressed assets you can find here

        There is only one indispensable requirement for controlling risks: the acquirer must be adequately advised by professionals experienced in distressed asset acquisition operations.

        Summary

        The reform of the Brazilian Bankruptcy Act brings forward important changes in both reorganization procedures and liquidation measures.

        When the Brazilian Bankruptcy Act was about to reach its 15th Anniversary, a major amendment was enacted. It was needed, in fact. Over the past 15 years, creations of the Bankruptcy Act have been tested, and practical experiences showed that some tools needed adjustments, and others demanded complete change.

        The goal of this article is to list the top five most relevant novelties.

        #5 – Reorganization plan presented by creditors

        Before: the amendment, the construction of the reorganization plan was exclusively the responsibility of the debtor. If the majority of the creditors’ meeting decided to reject the plan, the automatic consequence would be the conversion into bankruptcy (liquidation).

        Now: in cases like this, the creditors have the right to present an alternative judicial recovery plan. As a result, creditors assume a more relevant role in corporate restructuring.

        #4 – Mediation focusing on the turnaround

        Mediation is now encouraged in ongoing judicial reorganization processes so that creditors and debtors may find a way out to overcome the crisis.

        The most important novelty is the anticipated mediation, which goal is to avoid reorganization and liquidation. In this procedure, the debtor convenes creditors for a mediated negotiation, and they may seek the judge for an order to stay enforcement measures.

        #3 – Distressed assets operations

        The disposal of debtor’s assets is now simplified in both judicial reorganization and bankruptcy. Particularly in bankruptcy – in which case maximizing the use of assets is essential – the law authorizes the anticipated sale, adjudication by creditors, and even the donation of assets that creditors are not interested in acquiring.

        Besides that, the distressed assets acquisitions and M&A deals are now safer, with a clearer legal provision of a liability shield in favour of the purchaser.

        #2 – Debtor-in-Possession (DIP) Financing

        The lack of incentive to finance the debtor undergoing judicial reorganization has always been a reason for criticism by stakeholders. In the absence of legal provisions, potential financiers could be insecure about the risks of the operation and the lack of clear advantages to offset the risk.

        The complaints were addressed with the legal treatment of the debtor’s financing during judicial reorganization. This type of financing is known as Debtor-in-Possession (DIP) Financing.

        The debtor is allowed, through judicial authorization, to conclude financing contracts to pay for the maintenance of his activities and assets, as well as to be liable for restructuring expenses.

        As a guarantee for the financing, the debtor may offer his own assets and rights or those of third parties, even if they belong to non-current assets, that is, assets not originally intended for sale, but which serve the business structure (machinery, for example).

        #1 – Cross-Border Insolvency

        Brazilian law finally incorporated the Uncitral Model Law on Cross-Border Insolvency. An integrated world full of global companies imposes the need to provide for specific rules on cross-border insolvency, which were hitherto non-existent, in order to eliminate the insecurity about the reach of foreign procedures for Brazilian creditors and about the effect of Brazilian procedures for foreign creditors.

        We now have a new panorama, with the possibility of procedures abroad having effects in Brazil and also of Brazilian procedures reaching foreigners.

        There is a detailed treatment of the participation of foreigners in Brazil and the international cooperation between judges and other authorities to put the fundamental principles that govern the entire insolvency system in motion, namely, the improvement of legal certainty, efficient management of the processes, maximization of assets, preservation of the company, and optimization of asset liquidation.

        These are the five main new features, in a nutshell. If you are interested in learning more about any of these topics or if you want to stay updated on insolvency – turnaround in Brazil, please get in touch.

        A legal due diligence of a Brazilian target company should analyze the existence and the content of Agency Agreements, including values paid to the agent and the nature of such payments and the factual situation of the target’s agents, in order to evaluate potential contingencies.

        One usual suspect in legal due diligences of Brazilian target companies in M&A transactions that should not be overlooked is the existence of agency agreements, due to:

        • the obligation to indemnify the agent stipulated by law: at least 1/12th of all commissions paid throughout the entire term of the agency agreement; and
        • the risks for the agency being disregarded and considered as an employment relationship, subjecting the principal to compensate the agent as an employee with all rights, benefits, taxes and social contributions.

        This should be considered for evaluation of potential contingencies and the impacts on the valuation of the target.

        No doubt that agents can be an important component of the sales force of the business and can be strategic for the activity of the principal, in view of a certain independence and for not increasing the payroll of a company.

        On the other hand, under Brazilian laws, the protective nature of the agency demands the principal a considerable level of attention.

        Indemnification

        Brazilian Federal Law No. 4,886/65 as amended – the Brazilian Agency Law – determines that the agent is entitled to, at the termination of an agency agreement, receive an indemnification of 1/12th calculated over all the commissions paid throughout the duration of the entire period of the agency agreement.

        The Brazilian Agency Law stipulates that if the parties sign a new contract within 6 months after the expiration of the previous, the relation between agent and principal shall be deemed as the same relationship and thus, the duration to calculate the indemnification shall encompass the entire period (past and subsequent contract).

        Termination by the agent

        The Brazilian Agency Law also stipulates situations that agent could terminate the contract and still be entitled to receive the 1/12th indemnification:

        • reduction of the activities in disagreement with the contractual stipulation
        • breach of exclusivity (territory and/or products), if so stipulated in the agreement
        • determination of prices that makes the agency unfeasible and
        • default on payment of the commissions
        • force majeure

        Termination without cause

        Termination without cause can be done, upon payment to agent of the indemnification and with a previous notice of at least 30 days, in which situation the agent shall receive the payment of 1/3 of the remuneration received during the previous 90 days prior to the termination.

        Can principal avoid the indemnification?

        The only cases where the 1/12th indemnification would not be applicable are when the contract is terminated by principal with cause. The Brazilian Agency Law has limited situations for principal to terminate the contract with cause:

        • acts by agent causing disrepute of the principal
        • breach of obligations related to the agency activities
        • criminal conviction related to honor, reputation

        These situations shall be clearly demonstrated. Producing the sufficiently strong evidence of the facts to configure cause for termination may not be an easy task, considering some of the facts may be subject to construing and interpreting by the parties, witnesses and ultimately the judge.

        As a result, from past experiences, it is rare to see principals in conditions not to incur in the 1/12th indemnification.

        Potential risk: configuring employment relationship

        In addition to the indemnification, the activities developed by the agent could eventually be deemed as performed by a regular employee of the principal and, in this case, principal could be subject to compensate the agent as an employee.

        Agent vs. employee

        For the appreciation of the employment relationship, the individual acting as agent shall file a labor claim and demonstrate the existence of the employment relationship.

        The Labor Court judge will consider the factual situation, prevailing upon the written agreements or other formal documents. The judge may rely on e-mails, witnesses and other evidence.

        The elements of an employment relationship are:

        • Individual: in case the individual acts by himself to perform the services; Personal services: the services are in fact performed by the individual specifically to the Principal;;
        • Non-eventuality – exclusivity: the services are rendered in a regular basis;
        • Subordination: key factor – the individual has to follow strict instructions directed by principal, such as reporting to an employee of the principal, determined visits;
        • Rewarding – fixed remuneration: the individual is awarded regular amounts and expenses allowances

        In the event the individual can demonstrate the existence of the elements to configure an employment relationship, he/she could have an award to entitle him/her to have his remuneration considered as of a regular employee for the last 5 years.

        As a result, the individual would be awarded the payment of Christmas bonus (equivalent to 1 monthly remuneration per year), vacation allowance (1/3 of a monthly remuneration per year), unemployment guarantee fund (1 monthly remuneration per year) plus other benefits that he/she would be given as an employee of principal (based on the collective bargaining agreement between the employees’ and employers’ unions). The company would also be obliged to make the payment of the co-related social security contributions.

        Needless to say, the result could turn into a considerable potential contingency.

        The author of this article is Paulo Yamaguchi

        The purpose of this post is to provide information about (i) the need of Brazilian companies for providing the Country-by-Country Reporting pursuant to the OECD Rules, Action 13 of the Base Erosion and Profit Shifting Actions (“BEPS Actions”) and (ii) the need to disclose the name of the final beneficial owner of entities with equity participation in Brazilian companies, or owners of assets in Brazil.

        Country-by-Country Reporting Regulation

        Normative Instruction RFB No. 1681 (“IN 1681/2016”) established the rules for the Brazilian companies to be compliant with the Country-by-Country Reporting Regulation (“CbCR”). The CbCR shall be presented annually considering the financial results of the previous fiscal year, as part of the fiscal declaration (ECF, which includes the information related to the corporate tax income return). Such declaration should be filled in accordingly with the list of mandatory information determined by IN 1681/2016 and pursuant to RFB Normative Instruction No. 1,422, of December 19, 2013.

        The CbCR is the result of the BEPS Project (Base Erosion and Profit Shifting) of the OECD’s initiative, contained in Action 13 of the BEPS Actions, aiming the enhancement of transparency while taking into consideration compliance costs.

        Multinational groups are obliged to deliver the CbCR if consolidated revenues for the fiscal year preceding the tax year of the declaration are equal to or greater than BRL 2.26 billion (or 750 million Euros, or if the local currency of the final controller of the group is equivalent to the mentioned amounts, as of January 31, 2015).

        The Brazilian subsidiary is (or may be considered) a substitute of the final controller and, as such, bound to fulfill the CbCR in the following cases:

        • it is the final controller of the multinational group is not obliged to deliver the CbCR in its jurisdiction of residence;
        • the jurisdiction where the ultimate controller is located has signed an international agreement with Brazil, however, still not ratified by the competent authorities before the deadline for delivering the CbCR; or
        • there has been a systemic failure of the jurisdiction of residence of the final controller of the multinational group that has been notified by the Brazilian Federal Revenue Office to the resident entity for tax purposes in Brazil.

        In case the Brazilian subsidiary is exempt from submitting the CbCR, it will still need to provide the identification and the jurisdiction of residence for tax purposes of its parent company.

        The deadline for providing the information will be the date for completing the ECF, to expire on 30 July 2018 for the fiscal year 2017. Failure to comply will expose the Brazilian subsidiary to the payment of a penalty of BRL 1,500.00 (USD 410 or EUR 340) per month. Submission of an incomplete CbCR may subject the Brazilian subsidiary a fine of 3% over the value omitted, inaccurate or incomplete.

        Need to disclose beneficial ownership and how to do it

        Brazilian companies are obliged to provide information on the person authorized to represent them, on the respective chain of equity interest, until the individuals characterized as final beneficial owner.

        This information shall be provided when a Non-Brazilian entity present its application to obtain the Federal Corporate Taxpayers’ Registry (“CNPJ”). If the Non-Brazilian entity already has a CNPJ, it must update the CNPJ with the beneficial owner information by 31 December 2018.

        Obtaining a CNPJ is mandatory for Non-Brazilian entities that have equity participation in Brazilian companies or other assets – financial investments, real estate, airplanes, ships, among others in Brazil.

        This obligation is in force by means of the Brazilian Federal Revenue Office Normative Instruction No. 1634 (“IN 1634/2016“). IN 1634/2016 contains a list of information to be provided and documents to be delivered for that purpose.

        On October 25, 2017, the procedure became mandatory also for Brazilian entities after publication of the ADE COCAD (Executive Declaratory Act – Registration Management General Coordination) No. 9/2017.

        Fail to comply with the procedure can result in suspension of the CNPJ. This suspension could result in inability to execute bank transactions, financial investments and obtaining loans and, ultimately, prevent the remittance of dividends to other countries or even the receipt of funds by means of a loan or capital injection from the respective parent companies abroad.

        Such information is not protected under fiscal secrecy, but the public employees shall not disclose this information pursuant to functional obligation of not disclosing information unless if summoned by court order.

        The requirement for presenting the information on the beneficial owner is already familiar for investors in Brazil. The Brazilian financial institutions are responsible for obtaining information of their client up until the beneficial owner, pursuant to Circular Letter No. 3.461/2009 of the Brazilian Central Bank. The information provided to financial institutions are subject to bank secrecy.

        These Brazilian financial institutions are severe on the provision and updating on the foreign parent companies. It is usual for companies with foreign shareholders to receive notices and warnings of possible blocking or closing the accounts if the required documents are not presented in full.

        The author of this article is Paulo Yamaguchi

        When M&A transactions in Brazil are deemed not successful by the investor the main reason for underperformance is generally the existence of debts or fiscal/labor contingencies materialized higher than evaluated, or unexpected material adverse changes.

        The reasons for overlooking the debts and fiscal/labor contingencies is often the rush to close the investment. Either for avoiding a competitor to acquire the target, or to keep the leading position of the market share, for certain cases, the buyers may have not paid proper attention to what their advisors had to say before closing the deal.

        1. Local legal advisors

        The legal advisors may take, for the perception of the executives eager to complete an acquisition, a bit longer than expected to round up facts and properly report the risks found. The perception for this lower pace to reach out the conclusions may differ from the executives due to the delay of seller to provide documents or clarify questions raised.

        Slowing down a bit to the benefit of certainty is a sound advice.

        Experienced Brazilian advisors shall always be included among the teams. Their knowledge on facing subtle change of applicable laws, rules or predominant court decisions is certainly valuable for better understanding the status of the target and the ways to mitigate risks.

        Certain facts may not seem at first as significant risk for first timers dealing with Brazilian matters. However, the advisors do have a reason to raise the point and should be properly heard. Examples such as absence of one single clear certificate issued by a government department or a missing report on disposal of solid residues, that may not seem a big issue, could turn into a risk of suspension of activities of a plant.

        An audit company is usually hired to identify tax and labor contingencies, but the audit company does not evaluate nor assess the numbers, only the maximum exposure. The legal advisors are in charge of the risk assessment and determination of the estimate of the contingencies. It is up to the buyer to accept and negotiate the relevant coverage for such contingencies.

        Seller may not give full details of all issues of the target at first. It is the role of the advisors to investigate, request further documents and clarification to bring matters that affect the business to buyer’s attention. In a good faith scenario, seller would be willing to discuss the matters, to avoid future disputes or frustrations to buyer.

        1. Debt

        Charges, penalties, interests and other compensations in financial operations turns these contracts full of minor details and very complex in anywhere in the world. Brazilian contracts are not exception. That is the reason why a proper assessment of the financial operations and obtain the real picture of the debt and related costs.

        As usual, attention to change of control provisions are also relevant to mitigate risks – absence of consent or non-compliance of the required steps prior to closing the operation can cause acceleration of the financial operation and trigger cross-default provisions in other contracts that can also lead to acceleration of the financial operations.

        1. Tax/labor contingencies

        Calculation and estimate of tax contingencies are specific for each tax and requires knowledge and a sound judgment to estimate exposure and appoint measures to cover the risks. Same level of care applies to labor-related contingencies.

        Tax and labor matters are usually the most relevant risks to be observed in a Brazilian target. Complexity of regulation and the amount of obligations to fulfill makes these points significant.

        1. Material adverse change

        Material adverse change clauses – “MAC Clauses” – are contractual provisions to mitigate negative effects or a substantial change to the parties. These provisions are admitted in Brazilian law, in view the M&A transaction documents are executed in good faith and respecting the parties’ freedom to commit to certain obligations.

        Needless to say, the MAC Clauses should contain crystal clear language, with objective description of the facts, well defined applicable time period, cause and consequences duly described for proper and easy execution. If not, determination of MAC Clause event shall end on a dispute.

        In the absence of MAC Clauses, Brazilian Civil Code contemplates the ability to any party in a continuous contractual relation to seek for the termination of the contract, by virtue of extraordinary and unpredictable facts, in the event such party is affected with excessive onus and generates extreme advantage to another party. Determination whether the parties were subject to extraordinary and unpredictable facts would depend nevertheless on ruling by a judge or arbitrator, as provided in the acquisition documents.

        1. Guarantees and Indemnification

        For avoidance of future problems, the buyer should obtain strong and prompt executable guarantees. The (a) ability to withhold payments, (b) deposit of part of the purchase price in escrow account with clear rules for withdrawing the escrow amount are most likely measures to ensure a prompt indemnification. From previous experiences, other guarantees like pledge of shares, personal guarantee, lien or even chattel mortgage over real property are harder to execute and indemnify the prejudiced party.

        De minimis clauses (minimum amount for a party to be indemnified – if not reached, the prejudiced party is not going to receive any indemnification) or basket (limitation of indemnifiable amount) are additions to the provisions for guarantees also acceptable for Brazilian M&A transactions.

        The experienced advisors will make a difference to assist on the drafting of these provisions and to reflect what the parties discussed and agreed on the table.

        1. Break-up Fees

        A conscious buyer will certainly avoid the risk of incurring in heavy break-up fees, with proper assessment provided by competent advisors of what may happen until closing. Nevertheless, in certain cases, even after signing a binding document, it might make sense paying a break-up fee even if substantial rather than entering into a risky transaction.

        Recent Brazilian M&A transactions have included break-up fees, applicable in case of the regulatory restrictions are too high or in case the buyer gives up the acquisition. The highest break-up fee known was included in an offer made by Paper Excellence (member of Asia Pulp and Paper, based in Indonesia) was BRL 4 billion (over USD 1 billion or around EUR 900 million). The deal was not closed as another bidder had better credit check (even proposing lower break-up fees).

        In 2015, Ânima paid BRL 46 million (around USD 12.5 million or EUR 10.6 million) of break-up fees to Whitney do Brasil – education sector – for giving up the acquisition due to changes on students’ public financing rules. In 2018, Ultragaz paid BRL 280 million (around USD 75 million or EUR 64 million) in break-up fees to Liquigás, due to the veto by the Brazilian antitrust authority for the operation.

        1. Recommendations

        In this regard, the recommendations to avoid the referred reasons for a not satisfactory failure in M&A transactions in Brazil are:

        • Rely on local advisors: make sure that local Brazilian experts are included in the advisory team – the proper Brazilian legal, accountancy, tax and business experts can provide you with the necessary and valuable information for the proper decision-making process;
        • Listen to what the local advisors have to say: some matters raised may not seem to harm the deal, but it is important to let your advisor give you the full explanation and the reasons why the advisor is concerned about the topic. The advisor has a reason to bring the matters to discussion;
        • On the buy-side, ensure the existence of proper guarantees – feasible and enforceable – for prompt reimbursement of the losses, instead of discussions or long disputes;
        • Be very attentive in the preparation and discussion of the indemnification, procedure for indemnifying a prejudiced party, accommodating the business negotiation and the coverage to the risks explained by the advisors;
        • MAC Clauses shall be clear, precise and objective; and
        • However hard may be, it might make sense paying a break-up fee instead of completing a risky transaction.

        The author of this article is Paulo Yamaguchi

        In this brief post, a few highlights on the usual formats to start a business and enter into the Brazilian market and an overview of the current Brazilian economic outlook.

        The usual forms are not much different from other countries. The most utilized are:

        Incorporating a Brazilian subsidiary

        A sole individual or entity – Brazilian resident or not – can incorporate a company with limited liability up to paid-in capital stock. The most usual type – a limited liability company – needs two shareholders.

        The foreign shareholder shall nominate a Brazilian resident individual as legal representative by proxy. The Brazilian company needs a Brazilian resident individual as officer. Minimum capital requirement is only for the sole shareholder entity currently BRL 95,400 (with the current exchange rate, would be EUR 23,000 or USD 28,100). The company’s purposes should be specific for obtainment of the appropriate registries, to be verified during preparation of the incorporation of the Brazilian subsidiary.

        Entering a distribution agreement

        Brazilian Civil Code regulates this type of agreement. The parties are free to set forth the terms and conditions, as to exclusivity of product, territory, remuneration and termination conditions.

        The law establishes that, if a party made relevant investment for the execution of the distribution activities, the agreement can only be terminated after a term compatible with the nature and value of the investment.

        Special attention in case of health and medical products: the distributor will be the owner of the product registries and, as such, the person entitled to import, on a non-exclusive basis (unless otherwise agreed between principal and distributor). The distribution agreement shall include the specific provisions for the rights of the distributor after the termination of the distribution agreement, as obtaining registries for these products takes some time.

        Entering a commercial representation agreement

        A specific law regulates these activities. The commercial representative will be paid commissions over the products sold and effectively received by the principal.

        Major points of attention are: (i) the indemnification of 1/12 over all commissions paid for the entire duration of the commercial representation; (ii) the commercial representative is entitled to terminate the contract in case principal reduces the scope or territory without compensation and still be entitled to receive the 1/12 indemnification; and (iii) jurisdiction of Brazilian courts .

        Entering an agency agreement

        Agency agreements are also regulated under Brazilian Civil Code. Similar to the distribution, the agent and principal have freedom to set forth the terms and conditions for the agency.

        Similar to distribution, the termination term shall be compatible with nature and value of the investment, if a party made relevant investment to perform the agency.

        Principals must be attentive that they cannot nominate two agents for the same territory with same incumbencies. The agent may claim remuneration for businesses even if closed without his/her assistance.

        Franchising

        Brazilian franchising law leaves the content and discipline of the operation to the parties. The franchising law requires franchisor to provide the franchise offering letter with, among others, clear provisions as to the obligations and presentation of franchise operation, financial status, background of franchisor activities information.

        Brazilian people has seen many successful international operation stipulated in franchising systems. There are also good Brazilian franchising business as well. It is a more complex operation, from finding the right franchisee profile that is capable to meet specific franchisor standards – demands training for operation – and to replicate the model to all other franchisees.

        Brazilian economic outlook

        There are good news for investors: Brazil is coming back to action. A realistic prediction for GDP growth for 2018 is 2.8% and similar rate for the forthcoming years. Cause or consequence: traffic is getting worse than the last couple of years.

        There is a large market, for the population of 200 million people. Brazilians are not afraid to spend: rather spending than saving. There is easy credit and the ability to buy (a TV, cell phone, fridge) in installments (3, 6, 12, 18 monthly payments) with direct financing from the retail.

        A favorable exchange rate (currently €1 = BRL 4.10; US$1 = BRL 3.40) is also an additional attractive for investors in Brazil.

        An investor may expect good margins, despite the complex tax systems and several obligations. Experienced consultants assistance for piloting Brazilian obligations is key.

        Labor law reform passed last year and allows more flexibility to negotiate labor agreements terms. This is a topic to be further explored.

        It is true there is corruption around. This view shall change in a near future, as a result of a series of investigations of political scandals and more rigorous compliance rules for government contracts. It may not get over, but hopefully reduced.

        Promising sectors are consumer goods, food, agribusiness, clean power and IT. Infrastructure – ports, airports, roads, railroads, public transport developments are always on the spot and around for big players.

        The author of this article is Paulo Yamaguchi

        The limited liability company (“Limitada”) is the most common form of corporate organization in Brazil, being largely adopted in view of advantages. A Limitada must have at least two partners (quotaholders), natural persons or legal entities that do not need to be Brazilian or Brazilian residents.

        As a consequence of such requirement, many companies adopting the limited liability form would have a second partner holding as little as one quota simply to comply with the legal requirement. In many cases, the second partner would have no interference in the business but undertakes a liability that is not under his/her/its control.

        Also, the need of the second partner would imply in extra costs with documentation and bureaucratic measures, not to mention extra accounting requirements when such second partner is a legal entity.

        In 2011 a new legislation was passed modifying the Brazilian Civil Code and included a new corporate form, the Limited Liability Individual Company, known as EIRELI. However, the EIRELI could not be incorporated with a legal entity as its holder, but would only be applicable to natural persons, whether Brazilians or Brazilian residents.

        Finally, in May 2017, the Brazilian Civil Code was modified once again in order to allow legal entities, whether domiciled in Brazil or not, to be the sole holders of an EIRELI. However, a holder of an EIRELI can only hold a single company incorporated as an EIRELI.

        A Limitada or an EIRELI are advantageous as they (i) are subject to fewer disclosure requirements as opposed to a corporation; (ii) have a simpler and less expensive organization; and (iii) corporate decisions can be taken easier and quicker.

        This Article intends to present the basic organization of a Limitada and of an EIRELI, as follows:

        Partners, Quotas and Capital

        A Limitada must have at least two partners, natural persons or legal entities that do not need to be Brazilian or Brazilian residents. An EIRELI may have only one holder, natural person or legal entity that do not need to be Brazilian or Brazilian resident.

        Each of the foreign partners or the holder, in case of EIRELI, shall name a legal representative, who lives in Brazil, with minimum powers to accept service of process and for representation before the Federal Revenue for obtaining a taxpayer number (for controlling purposes only).

        There is no minimum quota capital requirement for most cases, unless a permanent visa is required or if an import license is needed (the amount of the company’s capital influences the authorized amounts for imports and exports). The Brazilian company may be financed either by the direct investment (capital) or by loans to be granted by the partners. In case of loans, thin-capitalization rules apply.

        The ownership of the Limitada quotas or of the EIRELI is reflected in the company’s Articles of Association, since no certificates to that effect are issued.

        The quotas of a Limitada can only be transferred by a specific amendment to the Articles of Association and must be subscribed at the time the company is established. The EIRELI’s capital may or may not be divided into quotas.

        The company’s capital does not have to be paid up upon incorporation; it may be paid up within a certain period of time (i.e., two years), in Brazilian currency or goods.

        Company’s name, objectives and address

        The Limitada’s name has to include some words that indicate what the company’s objectives are. The names should be followed by the objectives (if more than one just the main objective) and by the specific area of the market. The EIRELI does not have to follow those requirements.

        The company objectives and address must be included in the Articles of Association.

        Administration

        The administration structure of the Limitada and of the EIRELI must be determined in the Articles Association. In addition, in the Articles of Association, or in a separate document for the Limitada, at least one administrator (general manager) has to be nominated. The partners of the Limitada or the holder of the EIRELI are(is) free to appoint one or several of them to administer the company, as well as third parties.

        The administrator has to be a Brazilian resident, meaning either a Brazilian or an expatriate bearing a permanent visa.

        Partners Resolutions

        Most of the partners’ resolutions in a Limitada may be taken by majority of the capital or by any higher quorum agreed upon by the partners.

        Resolutions of the partners altering the Articles of Association or deciding on acquisition, merger, dissolution, and cessation of the liquidation status must be taken by three quarters of the company’s capital. A few other resolutions as the election of the administrators when the capital is not fully paid up must be taken by the totality of the company’s capital.

        As the EIRELI has one single holder, all decisions are taken by the holder.

        Liability of Partners and of Holder

        The liability of the partners of the Limitada and of the EIRELI’s holder is limited to their respective participations in the company’s capital, except when the company’s capital is not fully paid-up. In this case, the partners are liable, with their personal assets, for the total amount of the company’s capital. Please note that in certain cases of disregard of the corporate veil, activities against the law and acts performed without proper authority, the partners or the holder may be unlimitedly responsible, especially in tax, labor and environment areas. In case of non-payment of taxes the administrator may be held co-responsible.

        Brazilian legislation requires every nonresident that holds quotas, capital or shares of a Brazilian company appoints an attorney-in-fact that resides in the country, with powers to receive service of process.

        Besides granting the power required by law, foreign partners usually grant other powers to their attorneys-in-fact, in order to facilitate the procedures, since all documents executed abroad must be notarized and Apostilled, and once they arrive in Brazil they must be translated by a sworn translator and registered before the Public Registry of Titles and Documents, in order to be valid in Brazil, which is time and money consuming.

        Also, all foreign companies holding quotas, capital or shares of the Brazilian company, need a Taxpayer number, called CNPJ. The taxpayer number is not for tax payment purposes, but for controlling purposes only. The foreign partners / holder need to grant a power of attorney for their enrollment at CNPJ, and representation before the Federal Revenue in all matters.

        By the time the company is incorporated the Power of Attorney granting the above-mentioned mandatory powers must be presented before the Board of Trade.

        Moreover, all Foreign Direct Investment must be registered at the Central Bank of Brazil. This means that every time the foreign shareholder/partner transfers money to the Brazilian company as investment, the respective exchange agreement must be registered at the Central Bank. Such registration is done electronically.

        The main effects of such registration are the possibility of remitting dividends and of repatriating the capital invested.

        In view of the above, the documents to be presented at the incorporation of a company in Brazil are:

        • Power of Attorney granting to a Brazilian resident powers to accept service of process, for enrollment at CNPJ and representation before the Federal Revenue;
        • In case the foreign partners/shareholders/holder are/is a natural person, a copy of his/her passport;
        • In case the foreign partners/shareholders/holder are/is a legal entity:

        – Copy of the passport of the legal representative of the foreign partners/shareholders/holder; and

        – Updated Certificate issued by the Board of Trade of the foreign partners/shareholders/holder’s head offices attesting: (a) its existence and good standing, and (b) its legal representatives for the purposes of evidencing that the company was duly represented in the Power of Attorney granted. This document (or a separate one issued by a public authority) must also contain the head offices address, name of shareholders, capital and objectives.

        Note that all documents need to be duly notarized and apostilled. Once they arrive in Brazil, they will undergo sworn translation and will be registered at the Public Registry Office in order to be valid.

        We would like to point out that the Federal Revenue and commercial banks have increasingly been requesting a series of complementary documents for compliance reasons, so that the final beneficiaries (natural person) of each foreign company holding quotas, capital or shares of Brazilian entities may be identified.

        At the chosen bank’s own discretion, other documents may be necessary, as balance sheets, statements and corporate documentation until the end controller (natural person) is identified. These documents must be presented for the opening of a bank account, and banks have been taking quite some time to open the account.

        Renata Antiquera

        Practice areas

        • Contracts
        • Corporate
        • Distribution
        • M&A
        Contact Renata

        Contact Brazil: How to buy distressed assets





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