M&A in Brazil
Editor's note: Despite the unprecedented challenges brought by the pandemic, M&A in Brazil skyrocketed in 2021 due to a combination of factors. In the article below Demarest Advogados' Paulo Coelho da Rocha explains the reasons why, which includes several pivotal changes in legislation. A much-admired partner with key international experience, Rocha has been featuring highly in Chambers rankings for more than ten years. He co-authors this overview with equally prominent partner José Diaz, who is a top figure for International Trade work and is also ranked highly in the M&A table.
M&A in Brazil
The COVID-19 pandemic left its mark on the macroeconomy in Brazil in 2020, but 2021 has shown signs of good recovery, thanks in good measure to government-backed incentive programs. After suffering a reduction of 4.1% in 2020, the GDP is expected to finish 2021 with a growth of 5%.
The official base annual interest rate (SELIC) is up to 7.75%, compared to a historic low of 1.9% in December 2020, making Brazil more attractive to foreign investors again. The return of inflation to annual double digits, on the other hand, is currently a major cause of concern for the Brazilian government, along with a still high (albeit slowly decreasing) unemployment rate of around 14%.
M&A Level: Level of Activity and Trends
As in most parts of the world, certain industries in Brazil continued to suffer from the economic effects of the pandemic in the first semester of 2021. With people still working from home and refraining from travelling, airlines, hotels and the entertainment industry in general remained in waiting mode and did their best to stay afloat. Activities in other sectors, including technology and delivery services, skyrocketed. As a result of the increase of vaccination levels throughout the country, the second semester brought the lifting of restrictions and a sense of normality in the economy started to return.
As a reflection, M&A transactions in Brazil came back with a vengeance in 2021. The first three quarters of 2021 saw a staggering 1,716 transactions worth BRL 376.2 billion. These numbers represent an increase of 54% in the volume relative to the corresponding three quarters in 2020, and the third quarter alone registered 699 M&A transactions – the most active quarter among the last 8 quarters. Technology remains the sector with the most transactions, followed by the financial industry and insurance deals.
It is interesting to note that in spite of its traditional formality-based culture (requirement of witnesses to agreements, original signatures, etc.), dealmaking in Brazil was quick to adapt to digital signatures and waiver of other minor formalities, a welcome legacy of the pandemic to the way of doing business in Brazil.
Changes in Legislation
Aiming at the simplification of the business environment in Brazil, a number of laws that have a direct effect on Brazilian companies were introduced.
Law 14,195/2021 and Complementary Law 182/2021 implemented changes to the Brazilian Corporations Law, including two important changes to the management of Corporations. As a result of one of these changes, Board members and Officers no longer have to reside in Brazil (provided that such individuals keep an attorney in fact in Brazil for at least three years after their term of office is over, with powers to receive service of process in lawsuits related to the Brazilian Corporations Law). Another change no longer requires that Corporations have at least two Officers – now only one Officer is required, as in the case of limited liability companies. Other improvements introduced by Law 14,195/2021 include (i) the creation of a single database (Redesim) that will concentrate all the information of the partners of companies, allowing them to incorporate companies much faster, (ii) the unification of the Municipal, State and Federal tax registrations into one single registration (CNPJ), and (iii) the automatic granting of operating licences for companies of medium risk (low risk companies already enjoyed such benefit since 2019).
Fintechs have also benefited from the regulatory sandbox introduced by the Brazilian Central Bank (BACEN), the National Monetary Council (CMN) and the Brazilian Securities Exchange Commission (CVM). The sandbox, designed in a fashion similar to the United Kingdom’s Financial Conduct Authority established in 2013, aims at fostering new business models by waiving or lowering regulatory requirements generally applicable to similar, already established businesses. With the initiative, it is expected that fintechs will be able to test innovative projects through experimental services or products with real clients, subject to lower, specific regulatory requirements, and close monitoring by the financial authorities. In the event that a problem is identified, the innovation can be adjusted, limited or even prohibited. If it is successful, a definitive authorization can be granted for large-scale use.
An important change in tax law is also under discussion in Brazil’s Congress, and could pass in 2022. According to the latest version of the Bill under discussion, the 0% tax rate on dividends (in force since 1996) would be increased to 15%, in exchange for a reduction in the Corporate Income Tax rate (from 15% to an expected 8%). A wider, more comprehensive tax reform aimed at reducing the overall taxation and simplifying the complex Brazilian tax system by combining Federal, State and Municipal taxes is also on the horizon, but the conclusions of discussions in Congress remain uncertain.
Challenges and Opportunities
The Bolsonaro administration will soon enter its final year, and as elections approach at the end of 2022, we are likely to see the Federal Government try to revert the opinion of detractors (domestic and foreign) that accuse his administration of failure to introduce an efficient national COVID-19 vaccine program during the pandemic, as well as issues with his environmental policies. Economists also expect 2022 to be a year of modest GDP growth for the country (close to 1%). The recent decision by the Federal Government to disregard public spending limits in order to extend the COVID-19 emergency welfare could induce further devaluation of the Brazilian Real, resulting in higher inflation and interest rates.
Despite the proximity of the curtain call for the Bolsonaro administration, true to its liberal agenda the Federal Government wants to push some important privatization and infrastructure projects down the pipeline, including the privatization of the national postal service and major airports, as well as the construction of important highways and ports. Although more difficult, the Federal Government has also hinted at the possibility of selling shares of Petrobrás to give up its control – a very controversial move to many.
As we distance ourselves from the harshest period of the pandemic, distressed M&A may give way to more strategic opportunities, as well as continued private equity and venture capital fund investments in innovative startup companies. Investors also continue to show appetite for companies with clear ESG objectives, and the financial markets are likely to continue to develop novel financial products focused on such companies. The lack of an existing sustainability regulatory framework leaves room for both opportunity and questions about the direction of the market.