Published on Wednesday, 27 July 2016
What are the most common types of private equity transactions in your jurisdiction?
Historically, cash deals for minority investments through the acquisition of existing shares and/or subscription of new shares in family-owned businesses and exit through initial public offerings (IPOs) were the most traditional type of private equity transactions in Brazil.
As a result of, among other factors, the increase of international firms investing and establishing offices in Brazil, the development of Brazilian firms and diversification of exit routes, we can observe that, over the past few years, transactions involving acquisition of control and/or of the entire capital stock of companies by private equity firms are becoming more and more frequent in the Brazilian market. Accordingly, secondary buyouts by financial sponsors have also been increasing over the years.
The lack of a developed market for private debt combined with higher interest rates charged by domestic banks continue to be barriers for the development of leveraged buyouts in Brazil. Nonetheless, there have been certain transactions involving leveraged buyouts in Brazil over the past few years headed by international private equity firms.
In this context, cash deals remain the most common type of private equity transactions, usually carried out by means of the subscription of new shares (cash-in) and/or the acquisition of part or the totality of existing shares of closely held companies (cash-out) by private equity investors.
With regards to the venture capital industry, the most common type of transaction for seed investments in Brazil is the convertible debt, and for early stage and expansion stage companies, we frequently see subscriptions of new shares through investments rounds.
With regards to the venture capital industry, the most common type of transaction for seed investments in Brazil is the convertible debt, and for early stage and expansion stage companies, we frequently see subscriptions of new shares through investments rounds.
What types of investors are most active (and what jurisdictions are they most commonly from) in the private equity market of your jurisdiction?
The most active investors in the Brazilian private equity market are foreign private equity funds, institutional investors and pension funds. According to the Brazilian Association of Private Equity and Venture Capital, foreign investors represent 56 per cent of all committed capital in 2014 invested in the Brazilian private equity market. In this regard, US-based private equity and venture capital firms are the most active investors, followed by European and United Arab Emirates based private equity investors.
We expect to see, in 2016, a continuous growth and records in terms of deals and investments, particularly US-based and European private equity and venture capital firms, focused on the Brazilian technology and internet industry. We have seen a notorious growth of interest of the private equity sector in Brazilian tech companies, with the creation of several new accelerators, programes and co-working spaces dedicated to entrepreneurs.
What historically have been the main target industries and what trends were noticeable throughout 2015? What trends do you expect to see in the next 18 months?
There is a broad diversification in sectors of the Brazilian industry that attract local and international private equity investors. Historically, in general, the main target industries were infrastructure, oil and gas, logistic and transport, energy, distribution and retail, healthcare, education, financial, insurance and information technology. In 2015, the sectors that received more investments by the private equity industry in Brazil were the financial, insurance, healthcare, distribution, retail, transport, aviation and logistic industries.
The healthcare and aviation industries should continue attracting private equity investors due to recent legislative change that allows direct and indirect participation (including control) of foreign investors in the health care sector and the increase of participation by foreign investors, from 20 per cent to 49 per cent, in the aviation sector. In this regard, the Brazilian Chamber of Deputies already approved an amendment to the provisional measure of the aviation sector increasing the foreign participation to 100 per cent and, therefore, allowing Brazilian airlines to be entirely owned by foreigners, subject, still, to approval by the Brazilian Senate and sanctioning by the Brazilian President. The information technology, agribusiness and education industries should continue to draw private equity investors’ attention, as well as companies facing financial difficulties from to the Brazilian recession and corruption scandals involving Petrobras and listed Brazilian-based companies.
With regards to the venture capital industry, the predominant sector for investments in Brazil in 2015 was information technology, focused specially on e-commerce and transportation, followed by the financial services, healthcare and life sciences sectors. Internet and technology companies have been the most attractive to foreign investors by deal volume in 2015 and shall maintain as such in 2016, jointly with financial services.
In 2015, Brazil continued to be the largest market for the private equity and venture capital industries in Latin America, with a total investment of US$3.2 billion, representing almost 50 per cent of all investments in Latin America. The political crises, economic recession and depreciation of the Brazilian real against the US dollar and euro have created a great opportunity for international private equity investors to enter or expand their businesses in Brazil, specially private equity investors focused on long-term gains and less worried about the influences of the volatility of the Brazilian real.
Please describe the main features, size and activity levels of local private equity funds. Are there any regulatory or market restrictions or incentives to the development of any such local funds? Have any begun to participate significantly in transactions out of their local jurisdiction?
Private equity funds in Brazil are usually structured as Fund for Investment in Equity Participation (FIP) and as Fund for Investment in Emerging Companies (FMIEE). FIPs are commonly used to perform investments in expansion stage companies while FMIEEs are often used for early stage financing. This difference is mostly given to the fact that the regulation on FMIEEs establishes a limitation on the size of the target company, restricting the investment only to companies that fit the following criteria:
The private equity investment funds (FIPs) were created and are regulated by the Brazilian Securities and Exchange Commission (CVM) in accordance with CVM Instruction No. 391/03. Due to their flexibility and generally favoured tax regime (provided that requirements of the law are met), FIPs became a frequent organisational form to channel private equity investments in Brazil, jointly with the SA and Limitada.
The FIP is an investment fund incorporated as a closed-end condominium regulated by the CVM, which allows investments in both private and listed companies, as well as debentures, subscription warrants or other securities convertible into or exchangeable for shares. The main participants of the FIP are the administrator, portfolio manager, distributor, auditor and custodian. The administrators and FIP portfolio managers must be accredited with the CVM according to the requirements set forth in CVM Instruction No. 558/2015.
Please be advised that only qualified investors may invest in FIPs. According to CVM Instruction No. 554/2014, qualified investors are: (i) financial institutions; (ii) insurance companies; (iii) pension funds; (iv) investment funds; (v) individuals or legal entities that hold financial investments of at least $1 million reais; (vii) individuals approved in specific exams; (viii) portfolio managers accredited by CVM; (ix) foreign investors; and (x) investment clubs.
Also, under Brazilian law, FIPs must participate on the decision process of its invested companies, by means of: (i) the ownership of shares of the controlling block; or (ii) the execution of a shareholders’ agreement; or (iii) the execution of any agreement that guarantees to the FIP the participation on target’s strategic decisions. In general, target companies must adopt certain minimum corporate governance practices to be eligible to receive FIP investments, such as having its financial statements annually audited by an accounting firm accredited with the CVM.
Considering that the FIP is regulated by the CVM and a more complex, time consuming and costly vehicle for private equity investments in Brazil in comparison to the SA and Limitada, its feasibility and benefits must be tested on a case-by-case basis. FIPs are usually used for structured and/or larger deals involving foreign investors and/or co-investments and may, as the SA or Limitada, serve for investments in a broad range of sectors. However, different from the SA and Limitada, the FIP cannot invest overseas or directly in real estate (see question 30). Nonetheless, SA and Limitada, as entities allowed to invest abroad still have no significant participation in transactions outside of Brazil.
Are there any private equity funds listed in your jurisdiction? Are there any special regulations or requirements applicable to the listing and public offering of securities by such funds or any reform initiatives that are under discussion?
There are a few private equity funds listed on the Brazilian exchange (BM&FBOVESPA). The listing of FIPs allows the FIPs to issue securities (quotas) admitted to negotiation on organised markets managed by BM&FBOVESPA. The listing must observe the procedures set forth in the Issuer Listing and Securities Trading Admission Regulation of BM&FBOVESPA, effective as of 18 August 2014.
There are two ways to make a the public offering of FIP securities (quotas) to the market: publicly, in accordance with CVM Instruction No. 400/03; or with restricted placements of securities (similar to a placement under Rule 144-A in the United States), as per CVM Instruction No. 476/09.
In general, the public offering of FIPs’ securities regulated by CVM Instruction No. 400/03 does not differ from those applicable to typical corporates and requires registration with the CVM, the preparation of offering memorandums and selection of underwriters.
On the other hand, the distribution with restricted placements of securities regulated by CVM Instruction 476/09 is a less complex and fast-track process, which does not require registration with CVM or preparation of offering memorandums, but, differently from offers under CVM Instruction 400/03, is limited to 50 investors.
Note that only FIPs securities issued under CVM Instruction 400/03 may be listed with the BM&FBOVESPA.
What are the main issues in connection with the liability of fund managers?
According to Instruction No. 391/03 of the CVM, the fund manager is liable for the losses caused to investors in case of fault or misconduct or breach of law, the CVM’s regulations or the FIP’s by-laws. Brazilian courts have decided accordingly, denying damage requests by investors in the event of fund losses if its manager duly performed its duties.
What are the main remuneration schemes and related features for fund managers and have there been any recent shifts observable in the market? Are there any limitations or reforms under discussion regarding the same?
Fund managers of private equity funds in Brazil continue to be mainly remunerated through management and performance fees. Management fees usually work as the monthly operational revenue of fund managers and generally range from 1 per cent to 3 per cent of the funds’ net equity per year. Performance fees are usually a more volatile source of semi-annual, annual or biannual revenue for fund managers and are calculated according to the performance of the funds under its management. The performance fee is usually 20 per cent of the amount that exceeds the invested capital, adjusted by the Broader Consumer Price Index (IPCA (inflation index)), plus a fixed rate of approximately 8 per cent to 9 per cent (benchmark). For reference, in December 2015, the IPCA index rate accumulated for the past 12 months was 10.67 per cent.
Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.
As mentioned in question 1, the lack of a developed market for private debt combined with higher interest rates charged by domestic banks continue to be barriers for the development of leveraged buyouts in Brazil. Nonetheless, there have been certain transactions involving leveraged buyouts in Brazil over the past few years headed by international private equity firms. In general, the most common collateral structure used in transactions involving leveraged buyouts is the fiduciary sale or assignment of assets or rights. The fiduciary sale or assignment ensures to the lenders a fast access to the assets or credits granted as collateral once it is not subject to the effects of a judicial reorganisation and the lender consolidates the property and may dispose of such assets in amicable sales. Note, however, that we have seen collateral granted in favour of the lenders, in the event of insolvency of the acquired company, being challenged under the allegation of fraud against creditors and arguing that the company became insolvent as consequence of the leveraged buyout.
What are the main organisational forms used in your jurisdiction to channel private equity investments? Has there been any change over time in the types of organisational forms used? What are the main formation requirements?
As mentioned in question 4, the main organisational forms to channel private equity investments in Brazil are FIPs and pure holding companies, formed as SA or Limitadas. As a general rule, the process of formation and maintenance of a FIP is more complex, time-consuming and costly in comparison to the process of formation and maintenance of an SA or Limitada.
With regards to the formation of a FIP, in principle, the registration should be automatically granted, within five business days as of filing of the appropriate documentation with the CVM, such as the acts of incorporation, regulations, capital commitment instruments, disclosure materials (if applicable), among others.
In addition to the registration for operation of the FIP, the public placement of the quotas issued by a FIP is also subject to registration with CVM (see question 5). Such registration process can take up to 120 days. Note, however, that CVM Instruction No. 476/09 foresees a fast-track process, which applies to restricted placements of securities (similar to a placement under Rule 144-A in the United States) for up to 50 “professional investors” (ie, financial institutions, investments funds, individual or legal entities with financing investments over 10 million reais and non-resident investors). If this is the adopted approach, the distribution of the quotas of the FIP would not be subject to previous registration with the CVM and, therefore, only the period required for the registration of the FIP would apply.
The SA and Limitada must have at least two shareholders and there is no general requirement of minimum capital to their formation, although there may be specific capitalisation or liquidity tests applicable under certain circumstances, such as immigration rules. The process of formation of a SA or Limitada usually takes 30 days and is mainly composed by the submission of company’s bylaws for registration with the Commercial Registry and application for the necessary enrollments with public authorities.
Foreign-based entities that are shareholders of an SA or Limitada must be enrolled with the Federal Revenue Office (National Register of Legal Entities, CNPJ) and the Brazilian Central Bank, as well as have an attorney-in-fact resident in Brazil to receive service of process on their behalf in corporate related matters. Please be advised that, as of 1 January 2017, local and foreign investors will have to disclose their final beneficiaries in order to be able to enroll with CNPJ and the local and foreign investors already enrolled therewith have to inform their final beneficiaries to the Brazilian Federal Revenue up to 31 December 2018.
What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?
The administration and management of SAs is assured to the shareholder’s general meeting, board of directors, board of executive officers and audit committee. The shareholders’ general meeting has the authority to decide on all transactions involving the SA and an exclusive authority to resolve on amendments to the by-laws, election or dismissal of directors, approval of financial statements, corporate restructurings, dissolution and winding-up of the company. The board of directors is responsible for establishing the general business and policies of the company and is optional for private companies and mandatory for listed companies. The board of executive officers represents the company in dealings with third parties and is responsible for its management. The audit committee is an optional management body of the SA, created to supervise the acts of the other management bodies, such as the board of directors and board of executive officers.
All shareholders’ general meetings, board of directors’ or meetings of the board executive of officers that contain resolutions that are meant to be enforceable against third parties, must be duly filed with the Commercial Registry, as well as published in the Official Gazette and in a broadly distributed newspaper of the location where the SA is headquartered.
Please be advised that a local company must adopt certain minimum corporate governance practices to be eligible to receive investments from FIPs, such as having its financial statements annually audited by an accounting firm accredited with the CVM, disclosing shareholders’ agreement and other sensitive documents, adopting arbitration as the method of dispute resolution, etc. Also, under Brazilian law, FIPs must participate in the decision process of its invested companies, by means of: (i) the ownership of shares of the controlling block; or (ii) the execution of a shareholders’ agreement; or (iii) the execution of any agreement that guarantees to the FIP the participation on target’s strategic decisions.
Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?
Under Brazilian law, the liability of each shareholder is limited to the capital contributed to the formation of the company. In principle, therefore, personal assets of the shareholders of SAs or Limitadas should not be affected by the company’s debts, which confers the limitation of liability typical of joint-stock entities. Notwithstanding, there are exceptional circumstances in which the limitation of liability of the shareholders of SA or Limitada may be disregarded.
These exceptions refer mostly to the following circumstances: (i) in the labour area, the shareholders may be held liable for unpaid labour debts whenever it is evidenced that company has insufficient assets to honour them, including debts of companies belonging to the same economic group; (ii) in the tax and social security area, shareholders may be held liable for unpaid taxes in the event of winding-up or liquidation procedures carried out in a manner inconsistent with applicable law and in the event of fraud. For such liabilities to apply to the shareholders, it is necessary that non-payment of such tax be attributable to their conduct; and (iii) in the civil area, the judiciary may disregard the limitation of liability in the event of abuse of the corporate entity by deviation of purpose or asset confusion (the disregard doctrine).
What are the most common minority protection rights, whether granted by operation of law or contractual agreement? Are there any special issues to be considered under the laws of your jurisdiction?
In accordance with the Law No. 6,404/76 (Brazilian Corporation Law), the shareholder of SAs are entitled to certain rights that may not be excluded in the by-laws, by the shareholders’ meeting or the board of directors. These rights that apply regardless of the percentage of the shareholder’s interest in the company are the following: (i) right to participate in the profits; (ii) right to participate in the distribution of assets of the company in case of liquidation; (iii) right to monitor the management of the company pursuant to the exercise of certain rights; (iv) pre-emptive right in the subscription of new shares, debentures convertible into shares and or subscription bonuses; (v) right not to be unjustifiably diluted in issue of shares or of new shares, debentures convertible into shares and or subscription bonuses; and (v) right to withdraw from the company in case of certain fundamental changes in the company. As to the most common minority protections granted throught the execution of a shareholders’ agreement are the following: (i) veto rights to certain matters; (ii) appointment of officers and/or board members; (iii) information rights; (iv) put option right; (v) right of first offer; and (vi) tag-along right.
What are the main exit strategies used by private equity investors in your jurisdiction? Are there any limitations to the availability, effectiveness or enforceability of exit arrangements that are commonly used in other jurisdictions? Have you seen a shift away from or towards certain exit strategies over the past year?
Historically, the most common exit strategy for private equity investments in Brazil was the IPO. However, due to Brazilian economic recession, weak performance of its equity capital market in the past few years, as well as development of its private equity industry, the private equity investors had to diversify their exist routes. Currently, the most frequent exist strategy is the sale to a strategic investor or to another financial sponsor through the secondary market or both.
What are the key legal issues to be considered when appointing or replacing directors and officers?
Under Brazilian law, in order to be able to act as officer of a Brazilian legal entity, an individual must be a Brazilian citizen or hold a permanent visa to live and work in Brazil. The members of the board of directors of Brazilian legal entities do not need to be Brazilian residents. SAs must be managed by at least two or more individuals appointed by the shareholders in a shareholders’ meeting, who can either be shareholders of the company or not.
According to the Law No. 6,404/76 (Brazilian Corporation Law), directors and officers are prohibited from (i) using inside information of the company in order to benefit himself or third parties, even if the company is not directly affected; (ii) refraining from exercising or protecting company rights or, in seeking to obtain advantages for himself or for a third party, from taking advantage of a commercial opportunity of interest to the company; or (iii) acquiring for resale at a profit property or rights that he knows the company needs or intends to acquire.
Brazilian law sets forth that directors and officers may be held liable for damages caused to the company and/or to third parties due to (i) negligence, lack of skills, imprudence or malice in their conduct and (ii) when acting in violation of the law or the company’s by-laws. In this regard, Brazilian law provides certain rules that the officers may be held liable for civil, tax, social security, labour and environmental debts of the company. Please note that Brazilian labour and tax courts not always require the fulfillment of all legal requirements mentioned above to characterise the officer’s personal liability. In practice, whenever such courts are not able to collect debts from the company, they attempt to reach the company’s officers, regardless of whether all requirements for the characterisation of the personal liability are present.
With regard to non-compete of dismissed officers or directors, the non-compete obligation must have limited term (usually for two or three years) and the individual must be remunerated during or for non-compete period (ie, the non-compete indemnification is usually set closely to what the individual would have received as regular salary).
Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.
The most significant issues commonly considered in connection with the execution of shareholders’ agreements in Brazil are the following and may vary from deal to deal according to its features, size and type of investors: (i) rights to appoint directors and officers; (ii) veto rights in resolutions of the board of directors or of the shareholders meeting (amendments to the by-laws, approval of corporate restructuring, issuance of shares, change of rights of existing shares, assets disposition, approval of financial statements, budgets and business plans, related party transactions, appointment of independent auditors, remuneration of officers, investments, dividend policy); (iii) restrictions on transfer of shares (eg, right of first offer, right of first refusal, tag-along rights, drag-along rights); (iv) deadlock provisions; (v) withdrawal mechanisms (eg, put options, shotguns, liquidation preferences, going public, piggyback registration rights); and (v) non-compete.
With regards to the share purchase agreements, the most significant issues commonly considered are the following and may vary from deal to deal according to their features, size and type of investors: (i) components of the purchase price and post-closing adjustments (enterprise value, debt, cash, working capital, transaction expenses); (ii) escrow (purchase price escrow, indemnification escrow, collateral); (iii) conditions to closing (antitrust approvals, bringing down of representations and warranties MAC provisions and interim operating covenants); (iv) representation and warranties of the seller and target company; and (v) indemnification (limitation of the indemnification, mini-basket/de-minis claim, survival of the representations and warranties, period may vary from fundamental representations and tax, social security, labour and environmental matters).
Please describe the main issues related to dispute resolutions under purchase, shareholders’ and other principal private equity agreements. What are the most common dispute resolution mechanisms selected in these agreements?
In Brazil, there is no fixed term to complete a legal proceeding and the total time required to completion may vary from court to court. The average time to complete a legal proceeding related to civil matters, such as a shareholder dispute, in Brazil is approximately five years.
The recourse to arbitration has been growing steadily in the last decade, mostly because of enactment of Law No. 9,307, of 23 September 1996, which regulates the settlement of disputes by means of arbitration, as well as because its has been considered a safer and faster method for settling disputes in Brazil. Also, local companies to be eligible to receive investments from FIPs must adopt the arbitration as method of dispute resolution. In this context, the arbitration is currently the most common dispute resolution method used by the private equity industry in Brazil.
Domestic arbitral awards are not subject to ratification or revision by the judicial branch and can be directly enforced by the parties with no right to appeal. Also, arbitration clauses are binding and the shareholders do not need to sign another document (arbitration agreement) for the commencement of the arbitration proceedings. The parties may appoint an arbitration chamber to conduct the proceedings according to its respective institutional regulations and may also freely choose the (i) applicable law to the merits of the dispute; (ii) language that the proceedings shall be conducted; (iii) number of arbitrators; and (iv) procedures for appointment of arbitrators.
Any arbitral award rendered outside Brazil is considered a foreign arbitral award for recognition and enforcement purposes in Brazil and in order to be valid and enforceable in Brazil, needs to be first recognised by the Brazilian Superior Court of Justice, STJ, which may be a time consuming process (approximately 6 to 18 months). The procedure for recognition and enforcement of foreign awards in Brazil is governed by the New York Convention, to which Brazil has been a signatory since 2002.
What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?
As mentioned in questions 4 and 9, the most common funding structure implemented by private equity investors in Brazil involves the formation of FIPs, SAs and/or Limitadas.
Structuring of foreign private equity and venture capital investors usually also involves master or feeder funds based abroad, which ensure the inflow of funds into the Brazilian vehicles used to implement the private equity investments in Brazil (FIP, SA or Limitada). The transactions carried out through these private equity vehicles in Brazil are usually the subscription of new shares (cash-in transactions) and the acquisition of part or the totality of the capital stock of local companies (cash-out transactions).
In relation to the venture capital industry, the most common investment transactions in Brazil are still convertible debts and subscription of new shares through rounds of investments. Please be advised that, at seed investments level, the majority of venture capital targets are still organised as Limitadas, in view of the lower costs for formation and maintenance of such companies and leaner legal and disclosure structure. As a consequence thereof, venture capital investors commonly finance target entities for, after a definite period and/or a Series A round and consequently transformation of the company into an SA, convert its debt into investment (shares).
Is there a domestic financing market for private equity deals? Has there been a shift in the sources of funding over the past few years? Where do you expect to see financing come from in the next 18 months?
As a consequence of the higher interest rates charged by domestic banks, the Brazilian financing market for private equity deals is still under development. The Brazilian currency depreciation against the US dollar has created a favourable environment for foreign investments, which have been funding and supporting the most relevant deals for private equity over the past few years. Nevertheless, BNDESPar, the equity vehicle of the Brazilian Bank for Economic and Social Development (BNDES) announced this year that it intends to invest up to 600 million reais in the private equity and venture capital industries in Brazil until 2017.
For the next 18 months, as a result of expected economic recovery with the definition of the political scenario (President’s Dilma Rousseff impeachment) and ongoing anti-corruption operations carried out by the Federal Police of Brazil (Operação Lava Jato), the market expectation is that domestic and foreign investors will be more confident and active in private equity and venture capital investments in Brazil.
What are the principal accounting considerations that arise in private equity transactions? Are there any contemplated or ongoing shifts in regulatory accounting standards in your jurisdiction?
In Brazil, the IFRS Standard is mandatory for publicly held companies, financial institutions and insurance companies. Therefore, the IFRS Standard is applicable to a relevant range of targets of private equity investments. Although several companies invested by the private equity industry have already incorporated the IFRS Standard and principles, there are several family-owned companies invested by private equity firms that still have to adapt their accounting methods to the IFRS Standard, as well as to other mechanisms adopted and required internationally by private equity investors. Usually, the principal account considerations that arise in private equity deals are special tailored to calculate EBITDA, audited versus unaudited reports and post-closing adjustments (enterprise value, debt, cash, working capital).
Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?
Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.
Any investment made by non-residents in Brazil must be registered with the Brazilian Central Bank of Brazil at the Electronic Registry (RDE) of the On-line Registration System of the Central Bank (SISBACEN), whether as a result of equity or debt transactions. The registration of the foreign investor with the Brazilian Federal Revenue (National Register of Legal Entities, CNPJ) is also required. Please be advised that, as of 1 January 2017, local and foreign investors will have to disclose their final beneficiaries in order to be able to enrol with CNPJ and the local and foreign investors already enrolled therewith have to inform their final beneficiaries to the Brazilian Federal Revenue up to 31 December 2018.
Registration of foreign capital is required when bringing funds into Brazil, remitting profits abroad, repatriating capital, and registering reinvestments. Investments are usually registered in the foreign currency in which they are actually made. In general, no preliminary official authorisation is required for investments in cash or immediately available funds. There are usually no restrictions on the distribution and remittance of profits abroad, and foreign capital registered with the Brazilian Central Bank can be repatriated at any time without a preliminary authorisation.
Are there any government approvals required in connection with private equity investments in certain industries or any industry-specific regulatory schemes that can affect private equity investments? What are the main requirements to obtain such approvals? Have there been any observable trends recently in the posture of specific regulators or the regulatory environment generally in connection with the review or approval of such investments?
Please see below some activities in which the participation of foreign investors are not allowed or restricted:
(i) Media: Foreign investors cannot hold more than 30 per cent of total voting capital. However, foreign investments are allowed, provided that the following requirements are observed: (i) only Brazilian individuals or legal entities, incorporated under Brazilian law and with headquarters located in Brazil may hold equity in Brazilian media companies; (ii) Brazilian residents must hold at least 70 per cent of the total corporate capital (including voting shares) of any media company; and (iii) Brazilian individuals must have powers to define the content released by the media company;
(ii) Oil and gas: There are no restrictions on foreign investments in the oil sector, however, the foreign investor must incorporate a legal entity under Brazilian law, with headquarters and management in Brazil, as well as comply with all technical and financial requirements set forth in applicable law;
(iii) Mining: Foreign investor must incorporate a legal entity under Brazilian law, with headquarters and management in Brazil. Furthermore, in order to exploit mineral resources at the border strip of Brazil (a strip of 150km parallel to the country’s border), mining companies must comply with the following conditions: (i) at least 51 per cent of the company’s corporate capital must be held by Brazilian individuals; (ii) at least two-thirds of the mine workers must be Brazilian citizens; and (iii) the majority of board of directors members must be Brazilian individuals;
(iv) Financial Institutions: The acquisition of a financial institution by foreign investors is subject to the prior approval of the President of Brazil, the National Monetary Council (CMN) and Brazilian Central Bank;
(v) Health Care: Foreign participation was forbidden until the enactment of Federal Law No. 13.097/2015, which allows foreign investment, including the acquisition of control, of companies pertaining to the health assistance sector (investments in hospitals, clinics, among others);
(vi) Aviation: Provisional Measure No. 744, of 2 March 2016, increased the permitted foreign participation on the voting capital of Brazilian airline companies from 20 per cent to 49 per cent. Please note that the Chamber of Deputies already approved an amendment to this provisional measure increasing the foreign participation to 100 per cent and, therefore, allowing Brazilian airlines to be entirely owned by foreigners. This amendment still needs to be approved by the Brazilian Senate and sanctioned by the Brazilian President. The subscription of new shares or acquisition of existing shares of aviation companies require the prior approval of the National Agency of Civil Aviation (ANAC);
(vii) Rural Land: acquisition and lease of rural properties by foreign investors is also subject to the relevant legal requirements and limitations set forth in applicable law; and
(viii) Postal services/ telegraph services: as a rule, foreign participation is forbidden in such sectors.
Please describe any antitrust approvals or other competition law requirements that may apply connection with private equity investments into your jurisdiction?
In Brazil, competition and antitrust matters are currently regulated by Law No. 12,529/2011 (Brazilian Competition Law). The Administrative Council for Economic Defence (CADE) is the Brazilian antitrust authority responsible for enforcing the Brazilian Competition Law. Therefore, CADE may impose restrictions or even prohibit transactions that may affect the competition of a relevant sector/market, or that may result in the predomination of a specific good or product in the market. The Brazilian Competition Law sets forth a pre-merger review for transactions involving certain parties that trigger the revenue thresholds, as further detailed below (concentration). In this regard, any transaction that is subject to a pre-merger review cannot be completed without CADE’s prior approval.
As set forth in the Brazilian Competition Law, CADE’s approval became a condition precedent to the closing of transactions/parties when the antitrust thresholds are met. Therefore, transactions must be submitted to CADE when: (i) at least one of the economic groups involved has reached, in the previous fiscal year, a gross revenue or general volume of business in Brazil in excess of 750 million reais; and (ii) at least one other economic group involved in the transaction has reached, in the previous fiscal year, gross revenues or general volume of business in Brazil in excess of 75 million reais.
Furthermore, minority shareholding acquisitions will result into CADE’s filing if: (i) buyer becomes the largest individual shareholder of the target; (ii) result in the acquisition of 20 per cent or more of the total share or voting capital of the target when there are no intersections or vertical links among the parties involved in the transaction; and (iii) the acquisition of 5 per cent or more of the total shares or voting capital of the target when the parties are related.
Are there any anti-money laundering or other similar financial regulations that should be considered when structuring a private equity transaction or setting up a vehicle?
Under Law No. 9,613/1998, money laundering is a crime subject to penalties that may vary from fines to detention (Money Laundering Law). As amended by Law No. 12,863/2012, the Money Laundering Law sets forth that: (i) any individual or legal entity that receives or applies financial resources of third parties; and/or (ii) any legal entity that develop activities that depend on the prior authorisation of the CVM, shall adopt mechanisms to control and prevent money laundering. Thus, in order to comply with the Money Laundering Law, private equity funds shall maintain updated information regarding their quota holders, financial transactions and investments.
In addition to the Brazilian Money Laundering Law, Law No. 12,846/2013 (Brazilian Anti-Corruption Law) has dramatically changed the Brazilian market by imposing civil and administrative liability on private and listed companies for acts against the national or foreign public administration. Brazilian legal entities may be liable for fines of up to 20 per cent of a company’s revenues and reimbursement of damages. Therefore, Brazilian entities are now developing mechanisms to avoid the practice of illegal acts by their representatives and employees. The Brazilian Anti-Corruption Law also sets forth that companies are subject to, among other penalties, (i) confiscation of assets resulting from illegal activities; (ii) suspension or prohibition of its activities; and (iii) compulsory dissolution.
Are there any exchange controls that typically affect how foreign private equity investments are structured in your jurisdiction?
Foreign investments must be registered with the Brazilian Central Bank by means of the Electronic Statement Register – Foreign Direct Investment (RDE-IED), at the SISBACEN system, within 30 days counted as of the inflow of funds.
There are three modes of registration of foreign capital with the Central Bank: (i) Financial Transactions Mode (RDE under Law 4,131/62 – RDE-ROF), related to financial transactions including foreign loans to Brazilian entities, (ii) Portfolio Investment Mode (RDE – Portfolio under Brazilian Central Bank Resolution No. 2,689/00 – RDE-Portfolio), related to investments in securities traded in Brazilian regulated markets, and (iii) Direct Foreign Investment Mode (RDE also under Law 4,131/62 – RDE-IED), related to direct equity investments in Brazilian companies.
The registration of foreign capital is required when bringing funds into Brazil, remitting profits abroad, repatriating capital, and registering reinvestments. Investments are usually registered in the foreign currency in which they are actually made. There are usually no restrictions on the distribution and remittance of profits abroad, and foreign capital registered with the Brazilian Central Bank can be repatriated at any time without preliminary authorisation.
What are the basic tax issues affecting private equity investments in your jurisdiction?
In Brazil, the distribution of dividends is not subject to taxation. In general, the remittance of foreign funds to or from Brazil is subject to the tax on financial transactions (IOF) rate of 0.38 per cent. However, foreign exchange transactions (inflow of funds) in connection with FIP investments in Brazil are subject to IOF at a rate of 0 per cent. Regarding withholding taxes, FIPs shall withhold the income tax payable by their investors at a 15 per cent rate in the event of redemption or liquidation of the quotas of the fund, along with the distribution of resources to investors. However, the 15 per cent rate shall not be applicable if the fund does not fulfil the portfolio requirements set forth in the CVM regulations. In such cases, the income tax rate shall be higher, depending on the duration of the investment.
In addition, foreign investors are subject to the withholding income at a rate of 0 per cent on income resulting from FIP investments, provided that: (i) the investor or its related parties own less than 40 per cent of the FIP’s quotas or more of the FIP total earnings; (ii) the investor is not domiciled in a tax-haven jurisdiction; (iii) the fund does not have any debt securities in excess of 5 per cent of its net worth, unless in regard of convertible debentures or public debt securities; (iii) the FIP’s portfolio is composed of at least 67 per cent of shares of corporations or convertible debentures; and (iv) the fund complies with all requirements provided by the CVM regulations. If these conditions are not observed, earnings generated by the FIP are subject to a 15 per cent withholding income tax.
What impact are recent and projected changes in macroeconomic trends in your jurisdiction and abroad and your government’s reaction to these trends having on private equity activity in your jurisdiction? When did you start to see an impact?
Recent legal measures (including, but not limited to, new regulations for health and aviation sectors), are relevant demonstrations of Brazilian authorities’ efforts to attract foreign investments. Notwithstanding Brazil’s current economic recession, political crisis and corruption scandals, private equity investments have been very active in Brazil. Therefore, the depreciation of the Brazilian real in relation to the US dollar has been creating a unique opportunity for the acquisition of Brazilian assets and/or companies by foreign investors.
Please describe any other regulations applicable to private equity funds and private equity investments not discussed in your answers to the above questions.
Please be advised that, on 17 December 2015, the CVM started discussions through public hearing regarding a draft regulation created to replace CVM Instructions Nos. 209, 278, 391, 406 and 460 (Public Hearing SDM No. 05/2015). The purpose of this draft regulation is to modernise and consolidate the current regulations related to FIPs and FMIEE. In general, this draft would change the current rules regarding the FIPs’ portfolio, influence on the invested companies’ management, new subdivisions of FIPs, accountancy, administration and management of FIPs and disclosure rules.
The draft new regulation sets forth that the FMIEE would be extinct, and establishes the creation of several subdivisions of FIPs, as follows: (i) Standard FIP, which does not bear any of the traits of other subdivisions; (ii) FIP seed capital, focused in investments in SA and Brazilian limited liability companies with annual revenues of up to 10 million reais; (iii) FIP-emerging companies, focused in investments in corporations with annual revenues of up to 300 million reais; (iv) FIP-IE and FIP-PD&I, both already governed by Law No. 11,478/07, and which would be the only FIPs authorised to invest in non-convertible debentures; (v) FIP foreign investment, which would be able to invest 100 per cent of its net assets in foreign assets that bear the same economic nature as a FIP’s target assets. It is not possible to foresee what changes will be implemented in the current draft regulation, as well as if and when this regulation will be enacted by the CVM. However, the current draft sets forth a period of six months to test the suitability of the existing FIPs to the new rule, as of its enactment. Therefore, we may conclude that, until the end of this year, the rules applicable to existing FIPs shall not change.
Also, there is a bill of law (Bill No. 4059, from 2012) that has been currently under discussion and, if approved, will open the Brazilian market for the acquisition of rural land by foreign investors. Furthermore, the Brazilian authorities have been also discussing a new Brazilian Mining Code (Bill No. 5,807, of 2013), which may substantially change the current Mining Code and affect many companies and private equity funds investing in the mining sector.
Please describe any other recent trends observed in your jurisdiction affecting how private equity transactions are conducted or how these investments are structured.
Please describe any other relevant legal considerations or new developments related to private equity investments in your jurisdiction not discussed in your answers to the above questions.