BRAZIL: An Introduction to Corporate/M&A

BRAZIL – AN INTRODUCTION TO CORPORATE/M&A

Overview of the Current Brazilian M&A Market 

2021 proved to be an excellent year for the Brazilian M&A market. Despite all the challenges that the country has faced, especially due to COVID-19, the number of transactions and the amounts involved in those transactions increased significantly when compared to the results of 2020. Research shows that there were approximately 280 M&A transactions involving more than BRL50 million. A 50% increase in relation to the 186 transactions that took place in 2020, involving approximately BRL300 billion, a 38% increase with respect to the BRL218 billion in 2020. Regarding the number of IPOs, 2021 had 51 successful offerings, raising approximately BRL54.9 billion, which also surpassed the 45 IPOs happening in 2020 that raised approximately BRL44.5 billion.

These results were achieved mainly because of two reasons. Firstly, the COVID-19 urged businesses to transform their day-to-day processes into a digital workplace experience. Furthermore, interest rates in Brazil in 2021 were historically low, an incentive for companies and investors to engage in financial leverage and indebtedness, as the costs of loans were low, causing a significant increase in liquidity.

2022, in its turn, presents a different scenario. There are uncertainties with respect to the Brazilian economy, there was a significant increase in interest rates, which already reached double digits, increasing the costs of financial loans. Accessing the capital markets for financing also does not seem to be a promising option, as the windows for IPOs and follow-ons this year are expected to be very restricted. In addition to that, the upcoming presidential election may also have its effects in the economy, and it is still unclear how investors and the M&A markets will respond to all those components.

Notwithstanding the obstacles and challenges that Brazil will face in this coming year, it should be taken into consideration that the M&A market in Brazil has been repeatedly proving to be very solid. Even during COVID-19, the M&A market remained very much active and investors, both local and foreign, have shown interest in many segments, notably technology, infrastructure and health industries which were greatly responsible for a substantial part of the deals in 2021.

The industries currently face a unique moment in Brazil, where many investment opportunities present themselves to all players. In particular, the start-up industry has been and still is flourishing, which triggered a great number of venture capital transactions, especially over the last 3 years. Technology and infrastructure (especially energy and telecommunications) should remain very attractive for transactions. Also, even in face of all the uncertainties that 2022 may bring, Brazil has a series of incentives to foreign investors that are still in place, such as income tax exemption over dividend distributions, and tax incentives to foreign investors that trade in the local stock exchange, which makes the Brazilian market unique for foreign investors and interesting in not only the abovementioned industries but many others.

M&A Regulation 

In Brazil, private M&A is regulated, mainly, by the Brazilian Civil Code (Law 10.406/2002) and the Brazilian Corporations Law (Law 6.404/1976). Also, public M&A should observe the Brazilian Capital Markets Law (Law 6.385/1976), as well as rules and regulations issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM).

Also relevant for M&A in Brazil is the Brazilian Antitrust Authority (Conselho Administrativo de Defesa Econômica – CADE) and the Brazilian Antitrust Law (Law 12.589/2011). For M&A involving regulated industries, other governmental agencies may have jurisdiction over M&A transactions. CADE has proven to be reliable, issuing quick decisions that are technically accurate, without jeopardizing the speed of deals in Brazil.

Trends  

The most important recent trend is certainly the reduction of the bureaucracy involved in common procedures such as incorporating a company in Brazil, filing of corporate acts, publishing of financial statements and other day-to-day operations. This also comes as a response to the significant growth of the start-up industry in the country, which required the simplification of such processes and reduction of the costs involved therewith.

Examples of this tendency are the Economic Freedom Law (Lei da Liberdade Econômica– Law 13.874/2019), which introduced a multitude of changes in all areas (including the introduction of the Limited Liability Company with a sole shareholder, local or foreign – a brand new type of company in Brazil – as well as a simplification in labour practices) and the Start-up Act (Marco Legal das Start-Ups– Supplementary Law 182/2021), which brought a series of new and simpler processes which applied to start-up companies and small businesses, increasing legal certainty with respect to such matters.

COVID-19 has also catalysed updates in laws and regulations dealing with corporate governance. One of the most recent discussions in that respect is the adoption of super-voting shares (Voto Plural), introduced by Law 14.195/2021, and introduced a series of simplifications to the day-to-day governance of companies, aiming to make companies adopt efficient governance practices that can also be protective of minority shareholders. Moreover, given the edition of Resolution CVM 59, which brought as main changes the reduction in the cost of compliance by the issuers and the disclosure of ESG matters in their annual report (Formulário de Referência), changes are also expected in 2022 on corporate governance of Brazilian public-held companies (2022 information shall be disclosed in 2023).

Lastly, expected to be implemented in 2022 is the reform of the securities public offerings regulation which will modernize, harmonize, and consolidate the applicable regulatory framework. Further, it is also expected by the market that CVM will regulate Special Purpose Acquisition Companies (SPACs) to incentivize the development of a local SPACs market.

Common Hurdles in M&A Transactions 

Regulatory Approvals 

Despite the recent trend explained above of reducing bureaucracy with respect to the day-to-day operations and governance of companies, the Brazilian government itself is still significantly bureaucratic in many aspects. This can be clearly seen in M&A transactions that require governmental authority approvals to be implemented.

Apart from antitrust approvals in Brazil, which follow a clear and specific procedure set forth by the Brazilian Antitrust Law and that has already been put to the test several times over the last 10 years, M&A transactions that involve regulated industries may require prior approval of certain governmental agencies and may take significant time, as most times there is no regulation or statute that sets forth a clear timeline.

Lack of Experience of the Brazilian Judiciary System 

M&A transactions in Brazil hardly rely on local courts for dispute resolution. It is very common to see dispute resolution clauses that refer the resolution of disputes to arbitration, which may represent significant costs to the parties involved, due to the lack of familiarity of Brazilian courts with complex corporate law matters. Also, many provisions that are common in M&A transactions around the world (including Brazil) have not been tested in Brazilian courts and, therefore, there is very little to no reliable jurisprudence with respect to specific performance, in Brazilian courts, of commonly used M&A mechanisms.

However, Brazilian courts have been aiming at specializing on the subject in recent years. Recently, it is becoming less unlikely to see dispute resolution clauses in Shareholders’ Agreements or Share Purchase Agreements referring disputes to Brazilian courts.