Editor’s note: Pinheiro Neto Advogados’ Alexandre Bertoldi has featured at the top of Chambers and Partners’ rankings for the last 20 years. He is among the very best of a generation of high achievers in the legal profession and has maintained an enviable 35-year career leading some of Brazil’s most prominent M&A transactions, including the landmark deals that resulted in the creation of airliner LATAM and retailer Via Varejo. Recently, he advised Brazilian paper company Santher on its sale to Marubeni and Daio. He is also highly respected for leading Pinheiro Neto over the last 15 years, helping the firm to establish and develop its quintessential culture. Managing partner since 2009, Bertoldi also serves as chair of Pinheiro Neto’s executive committee. Fernando Meira co-manages the firm and is a top-class M&A lawyer. His career spans almost 30 years and he has featured in Band 1 since 2008. Meira’s portfolio is marked by landmark acquisitions. Boeing’s acquisition of Embraer and Raízen’s acquisition of Biosev are examples. He also assisted Odebrecht with the formation of Braskem. Pinheiro Neto is a leading firm topping key rankings in Chambers Brazil in contentious and transactional areas as well as in important and innovative sectors and industries. Bertoldi and Meira have co-authored the following overview to share their insights on Brazil’s business landscape.
Just as Brazil started to gather pace following years of slump and slow growth, the Covid pandemic brought unprecedented challenges to the country and its economy. Can 2021 generate the highly expected rebound moment? Bertoldi and Meira dwell upon this critical question, going through the many opportunities and pitfalls lying on the road of investors and key players in this dynamic market as they advise: “If pro-market measures are implemented, the situation may improve quite fast.”
BRAZIL: Country Overview
Can we expect a recovery in 2021 after a stormy year? This is a question that has no answer yet, but the prospects of a robust recovery certainly generates huge expectations for companies and law firms operating in Brazil.
Although optimism is moderate and the scenario is full of uncertainties, this year is expected to be better than 2020. The pandemic is not such a novelty as it was back then, and economic actors across all sectors of the economy are now better prepared to deal with the situation. But the degree and speed of a possible recovery will mostly depend on the actions of the executive branch of government, especially in relation to the speed and reach of the vaccination programme.
Financial emergency aid and other extraordinary measures taken by the government certainly helped to minimize the negative impacts of the pandemic. Furthermore, in early 2021, the end of a deadlock over the elections of Congress leaders sparked optimism in the market. On the other hand, any actions by the government considered as interventions or simply politically motivated may dull expectations and promote a sense of uncertainty in the country.
The impact of the pandemic on business was uneven across different sectors. While industries such as tourism, aviation and education have been deeply affected, the technology, health and pharmaceutical sectors have been boosted. Consumption has also increased after the injection of money from emergency aid and stimulus provided by the government.
One area that may be most impacted by this scenario of uncertainty is capital markets, considering that a significant proportion of Brazilian stock market indexes relates to government-controlled companies. However, if the Economy Minister fulfils his promises to take pro-market measures in the coming months, the situation may improve quite fast, as already experienced under similar circumstances.
Doing business in Brazil
The Brazilian domestic market has great potential and is sparking interest from global companies targeting large markets as well as smaller companies seeking expansion, which always target Brazil. Last year, we noticed that domestic consumption increased after the injection of money from the Brazilian government – which confirms the growing pent-up demand in the country.
With favourable exchange rates for foreign investment and the high dollar value, Brazilian assets have become cheap. The high exchange rate margin brings more comfort for foreigners wishing to invest in Brazil, although less volatility in the foreign exchange market is certainly desired. The country has many family businesses and businesses undergoing generational change. At a time like the one we are experiencing, these businesses may be more open to seeking investors or purchasers interested in buying their operations. In addition, merger and acquisition opportunities may arise due to companies finding it difficult to obtain financing or being unable to access the capital markets.
A shortage of credit may be one of the obstacles if economic uncertainty remains, resulting in fewer financing opportunities from the National Bank for Economic and Social Development (BNDES), state-owned banks and private banks. At the same time, economic uncertainties may hinder access to the capital markets and shut the doors for companies in need of credit.
But with record low interest rates, controlled inflation and a credit crunch, the hope is that the capital markets will continue to provide an option for credit and move forward in 2021. The overall number of IPOs and follow-ons already announced in 2021 is grounds for a very positive expectation for the year. A concern is that today we are seeing a change in the market sentiment and many players are betting that interest rates will increase gradually, reducing the current appeal for securities. Only future developments and government decisions may provide answers to these uncertainties and dangers.
Legal topics on the agenda
The great expectation for 2021 is the overhauling of the tax regime. While the chances of an administrative overhaul occurring this year have been reduced by the pandemic’s impact, a solution to the tax system – complex and often unclear to foreigners – is still expected. Streamlining the tax rules and system will make the life of companies easier, reduce costs and facilitate investments.
We also expect growth in the highly competitive agribusiness sector in Brazil, in spite of the current regulatory restrictions placed in particular on foreign ownership of lands. A bill is currently under consideration; more relaxed rules may strongly boost the sector's growth in Brazil, attracting a massive flow of foreign investments.
For its part, the infrastructure sector, which is where Brazil faces its largest bottleneck, depends on the government’s initiatives. The New Legal Framework for Sanitation, sanctioned by the President of the Republic in July 2020, is likely to unlock this area for investments. With the goal of providing 99% of the population with drinking water and 90% with sewage collection and treatment services by 2033, this framework is aimed at providing universal access to and improving the quality of sanitation services. However, this move involves long-term works that do not yield fast political and electoral benefits. We will have to see the path the government will tread along the year.
Another theme that has gained even more traction in the business and investment environment is ESG (Environmental, Social and Governance). As several markets and economic sectors have moved to adhere to ESG principles, the relevant discussions must be consistent with each particular situation. In this context, lawyers have played a key role in resolving the questions concerned and defining what would be conduct aligned with ESG principles. In 2020, the ESG issue gained more strength, such that we saw the first issuances of green bonds in the infrastructure area, and it has still a huge growth potential in Brazil.
The implementation of an open banking system beginning in February 2021 is poised to move the financial sector forward, with a more competitive landscape and an environment more favourable to innovation and creation of new products. The new system will allow financial institutions to share data – so long as this is authorized by the respective data subject – through integration of systems. This is likely to create a greater balance among players in the Brazilian financial system such as banks, fintechs and payment institutions. As a consequence, charges will drop on account of increased competition between market players. The open banking system is scheduled to be implemented in four stages, to be completed in December 2021.
Finally, we cannot overlook the theme of data protection in the current context. With the inception of the activities of the National Data Protection Authority (ANPD) and full effectiveness of the General Data Protection Act (LGPD), we can say that 2021 will be the kickoff year for data protection in Brazil. In 2021, the ANPD is expected to focus on the regulation of controversial issues and the dissemination of a data protection culture in Brazil, playing more of an awareness-raising than a sanction-imposing role.
After so many changes over recent months, the pandemic has shown that flexibility and adaptability are essential at all levels of the legal profession, from law firms to legal departments. More inflexible and unyielding professionals have suffered enormously over the last year. This has deepened a movement that was already irreversible: proactive and responsive lawyers who understand their industries and needs have gained even more ground. That is why flexibility and adaptability are so important.