BRAZIL: An Introduction to Corporate/M&A
Current Brazilian M&A Market
Globally speaking, 2022 was a year of uncertainties. In Brazil, it was certainly no different – possibly, it was even more the case. Major geopolitical turnarounds (eg, the war between Russia and Ukraine) affected the economy worldwide and their effects are still ongoing.
Brazil experienced great political turmoil due to the presidential elections that took place in October 2022, in which a centre-left candidate emerged victorious against the right-wing incumbent. The actual implications that this power shift will have for the Brazilian economy are yet to be seen. However, they will ultimately depend on the approach taken by the new government in the first two quarters of 2023, which will send investors worldwide a message about what to expect from Brazil within the economical spectrum during the next four years.
Each of the above-mentioned events can be cited as a reason for investors, companies and capital markets all around the world to adopt a more cautious approach when considering accessing equity capital markets or entertaining M&A transactions. In Brazil, some of this uncertainty and caution had been anticipated in 2022 (owing to the elections). As a result, no IPOs took place in Brazil in 2022 – with 26 companies withdrawing their offerings. This is a historical low for Brazilian capital markets, which has not been witnessed in more than 20 years. As for follow-on offerings, Brazil had 27 successful transactions in 2022, raising approximately BRL76 billion.
The number of M&A transactions in Brazil has returned to pre-pandemic levels, however – despite having decreased by 12.27% in 2022 from the numbers that were achieved in 2021. According to the Transactional Track Record (TTR) annual report for 2022, there were 2,387 transactions in Brazil, involving an approximate total amount of BRL291 billion (which represents a 51.78% decrease in comparison to 2021). It is important to note that 2021 was an outstanding year for M&A worldwide that is unlikely to be repeated in the short term and that the decrease in M&A transactions is something that was seen globally in 2022.
That being said, the aforementioned results for 2022 prove that the Brazilian M&A market is solid and active, with an ability to thrive in times of uncertainty and political and economic turmoil. 2023 also looks set to be a year of many challenges in Brazil. The new political administration that won the 2022 elections has yet to present their agenda for the economy in the coming years and it remains unclear how foreign investors, capital markets and the M&A market in general will react to the Lula government’s approach.
Furthermore, interest rates are still more than double digits, which makes financial loans expensive and reduces investors’ willingness to take chances in the equity market – even though the overall outlook for offerings appears more promising than in 2022. IPOs are expected to recover, although the scale on which this recovery will operate is unclear and will depend on the new government.
Notwithstanding the obstacles and challenges that Brazil faces over the coming year, the robustness of the M&A market in Brazil should not be underestimated. Year after year, investors – both local and foreign – have showed interest in many segments. By way of example, there are two strategic industries that account for approximately 66% of the total amount involved in M&A deals in Brazil – namely, energy/natural resources (one of the most continuously active industries for M&A in Brazil) and manufacturing services. In addition, the start-up and technology industries – while not quite demonstrating the same drive of previous years – are still very significant and sponsor growing industries within the M&A spectrum.
Finally, it is worth noting that Brazil has a series of incentives for foreign investors that are still in place – for example, income tax exemption on dividend distributions and other tax incentives for foreign investors that trade in the local stock exchange. These make the Brazilian market unique for foreign investors and an interesting prospect – not only in the abovementioned industries, but also in many others.
M&A Regulation
In Brazil, private M&As are regulated mainly by the Brazilian Civil Code (Law 10.406 of 10 January 2002) and the Brazilian Corporations Law (Law 6.404 of 15 December 1976). In addition to these statutes, public M&A should observe the Brazilian Capital Markets Law (Law 6.385 of December 07, 1976) – as well as the rules and regulations issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários, or CVM).
The Brazilian Antitrust Authority (Conselho Administrativo de Defesa Econômica, or CADE) and the Brazilian Antitrust Law (Law 12.589 of 30 November 2011) are also of relevance to M&A activities in Brazil. Other governmental agencies may have jurisdiction over M&A transactions that take place in regulated industries. The antitrust authority in Brazil has proven to be very reliable, issuing quick decisions that are technically very accurate, without jeopardising the speed of deals in Brazil.
Trends and Opportunities
Bureaucracy reduction
The most important recent regulatory trend to affect the M&A market is certainly the reduction of the bureaucracy involved in common procedures such as incorporating a company in Brazil, filing corporate acts, publishing financial statements, and other day-to-day operations. This also comes in response to the significant growth of the country’s start-up industry, which required the simplification of such processes and reduction of the costs involved therewith.
One example of this tendency is the Economic Freedom Law (Law 13.874 of 20 September 2019), which introduced a multitude of changes in all areas. It simplified labour practices and introduced a brand-new type of company to Brazil – the Limited Liability Company, with a sole shareholder (local or foreign).
The Start-Up Act (Supplementary Law 182 of 1 June 2021) is another such example. This law instituted a series of new and simpler processes that are applicable to start-up companies and small businesses, thereby increasing legal certainty with respect to such matters.
Most recently, Federal Law 14.451 of 21 September 2022 aims to make the decision-making process for limited liability companies less bureaucratic and more friendly. This is especially necessary because the limited liability company tends to be the most widely used corporate form in Brazil for foreign investors – given that it is currently the only one that admits a foreign entity as a sole shareholder.
Opportunities
The infrastructure industry presented many opportunities for M&A deals in 2022, much as it has done for local and foreign investors alike throughout the past few years – especially when it comes to energy and natural resources. It is certainly expected to maintain this momentum in 2023. Technology and venture capital deals are also expected to remain very attractive transactions for investors in Brazil.
Another important industry to take into account is the telecommunications industry, which has continuously presented a great deal of opportunities for M&A transactions in recent years. This trend definitely looks set to keep moving in the same direction in 2023 – perhaps even more succesfully, considering the recent implementation of 5G technology in Brazil.
Common Hurdles in M&A Transactions
Regulatory approvals
Despite the recent trend explained earlier for reducing bureaucracy when it comes to the day-to-day operations and governance of companies, the Brazilian government itself is still significantly bureaucratic in many respects. This can clearly be seen in the case of M&A transactions that require approval from governmental authorities before they can be implemented.
M&A transactions involving regulated industries such as energy or telecommunications may require prior approval of certain governmental agencies. Obtaining such approvals may take a significant amount of time, as in most cases there is no regulation or statute that sets forth a clear timeline for these processes. Antitrust approvals in Brazil are the exception, as these follow a very clear and specific procedure that was set forth by the Brazilian Antitrust Law and that has already been put to the test several times in the past decade.
Lack of experience of the Brazilian judiciary system
M&A transactions in Brazil rarely rely on local courts for dispute resolution. It is very common to see dispute resolution clauses in Brazilian M&A that refer the dispute to arbitration, which may incur significant costs to the parties involved. This is due to Brazilian courts’ lack of familiarity with complex corporate law matters.
To add insult to injury, many provisions that are common in M&A transactions around the world – as well as in Brazil – have not been tested in Brazilian courts. Therefore, there is very little to no reliable jurisprudence concerning the specific performance in Brazilian courts of mechanisms such as tag-along, drag-along, put-and-call options, material adverse effects, earn-outs, and limitation to indemnity.
Notwithstanding the foregoing, Brazilian courts have recently been making more of an effort to specialise in the subject. Shareholders’ agreements or share purchase agreements are now more likely to feature dispute resolution clauses that refer disputes to Brazilian courts – albeit nowhere near as frequently as is the case in the United States, for instance.