Mergers and Acquisitions

Last verified on Monday 4th October 2021

Mergers and Acquisitions: Brazil

Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

Siqueira Castro Advogados

All questions

1. How strong were M&A trends in the first couple of months of 2020, before the pandemic? How has the covid pandemic affected M&A activity since March 2020? Have you seen an increase in recent months? What are the prospects for 2021?

Brazil

There were great expectations for the year 2020 concerning M&A transactions in Brazil. Continuous GDP growth and the approval of the pension reform and other structural changes were projecting an accelerated growth of M&A deals for that year. However, the covid-19 pandemic, a factor that no market expert considered, severely affected deals as social isolation directly impacted many important steps in M&A deals, especially in the middle market. Eye-to-eye meetings for negotiations, visits to facilities of potential targets are only a few to mention. As Brazil’s economy recovers from the severe impacts of the pandemic, GDP growth of 5 per cent is expected for 2021, and the volume of M&A deals grew eightfold in the first semester of 2021 compared to the same period last year. The M&A market is likely to remain buoyant during the second semester of the year, as now we have a more optimistic economic outlook.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

2. How has working remotely affected the ability to do the intensive work needed to complete a deal? Have you been successful in completing all the different aspects of a deal on a remote basis – company owners getting to know each other, diligence, negotiations?

Brazil

Building synergies and aligning around a common goal in an M&A deal can be complex without human interaction. Especially in a culture such as the Brazilian. Many times, visiting the target company or the potential buyer can be essential. Especially during the due diligence. Nonetheless, the market progressively seeks new ways to overcome these difficulties. The challenges are being surpassed by implementing technology, like electronic signatures in the numerous documents that involve a deal, for example, and prior understandings and measures with notary offices and board of trades for closing a transaction.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

3. Did many buyers try to terminate or renegotiate pending deals because of the adverse effects of the pandemic by, for example, claiming that the seller had suffered a material adverse effect, had breached its covenant to conduct business in the ordinary course or otherwise failed to comply with the purchase agreement?

Brazil

For those in the early stages of an M&A deal, constant dialogues were needed to analyse new conditions that should be taken in the future, so that the parties involved would not be too adversely affected by covid-19, given the forecast that the economic situation would take significant time to be fully re-established. Therefore, considering the need for constant review of such recovery forecasts, the parties are currently using Material Adverse Effect (MAE) and Material Adverse Change (MAC) clauses in compliance with the principle of good faith.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

4. Did buyers have difficulty obtaining acquisition financing during the pandemic?

Brazil

Despite many unfavorable conditions due to the covid pandemic, market players counted with a favorable exchange rate, given the rise of the dollar against the real, and a greater market liquidity due to the strong reduction of the basic interest rate (SELIC – Brazilian treasury bonds yields) that favoured obtaining acquisition financing during the pandemic.   

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

5. Besides the pandemic, what are the factors influencing the level of M&A activity – Economic? Political? Commodity prices? Weakness in currency? Stock market performance? Liquidity? Rule of law? Other?

Brazil

The volume of M&A deals grew eightfold in the first half of 2021 compared to the same period in 2020. Investors’ optimism for new deals is due to a positive expectation of the Brazilian GDP expansion as the Brazilian economy gradually recovers from a severe crisis. In this sense, a more favourable business environment should positively affect the number of M&A deals in 2021. Another factor that should increase M&A activity is the low basic interest rate (SELIC), around 5 per cent, creating a pressure that will end up on the diversification of many portfolios into private investments. In addition, the depreciation of the Brazilian real (BRL) against foreign currencies is also an excellent incentive for foreign players to invest in Brazilian targets. Finally, the intended government privatisation agenda may also represent a significant source of M&A deals in the short and medium term.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

6. Which industries do you expect will see the most M&A activity in 2021?

Brazil

The technology industry had led the number of M&A transactions in Brazil and is likely to continue playing a leading role in 2021. This dominance may be explained by the companies’ need for innovation and optimisation in all areas by applying new technologies. This lack fosters the emergence of robust businesses (fintech, proptech, sportstech), which are very attractive to investors. Within this industry, as an example of relevant transactions, we may mention Stone that presented an undisclosed value contribution at Vhsys, a software developer for micro and small entrepreneurs, Locaweb, which acquired Dooca, an e-commerce platform in Novo Hamburgo (RS), for 26.5 million reais, and Astella Investimentos, a Brazilian fund manager that invested 7 million reais in Sled, a platform that simplifies financial transactions in retail. As already explained, deals of this sort are likely to be expected in 2021. Other industries that played a significant role in 2020 and are likely to rise are the oil and gas industry and the electrical energy sector. 

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

7. What types of deals do you expect to see?

Brazil

The number of mergers has increased 333 per cent from 2020 to 2021. The number of joint ventures was not much significant (approximately three), and spin-offs are not likely to play an essential role in M&A deals in 2021, following the trend of last year.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

8. Discuss the level of M&A activity you have seen over 2020 and expect to see in 2021 of: (i) pure domestic deals; (ii) deals in your jurisdiction involving a domestic target and foreign acquirer from Latin America, or a foreign acquirer from outside Latin America; and (iii) deals involving a domestic acquirer and foreign target in Latin America or a foreign target outside Latin America.

Brazil

In 2020, there was an increase of 31 per cent in the interest of domestic investors (with 772 transactions), in comparison to 2019. In this context, transactions involving national investors represent 78 per cent of the total announced acquisitions. With 221 transactions carried in 2020, foreign investors dropped 19 per cent compared to 2019, when they carried out 273 transactions. United States, France and Canada accounted for 46 per cent of total transactions involving foreign capital. Although the depreciation of the Brazilian real (BRL) against foreign currencies is attractive to foreign investors, they are still cautious with the government's structural reforms. 

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

9. What is the level of private equity activity? Are domestic or international funds involved? What kinds of deals are they doing?

Brazil

In 2020, the number of M&A transactions involving private equity funds had shown an increase of approximately 26 per cent compared to 2019. The majority were domestic investors (about 73 per cent). International funds account for the rest. The market for private funds is currently upbeat, and they have been involved in all sorts of M&A deals. The top industries invested by private equity funds are information technology, the financial sector and the retail sector.   

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

10. Is acquisition financing available for deals? Where is financing coming from? How much concern do you have that an increase in interest rates or risk of a recession will limit the availability of financing?

Brazil

It is well known that the cost of credit in Brazil is prohibitive when compared with other jurisdictions. Securities offerings or leveraged funds typically fund acquisitions. For particular cases, private equity investment funds are also used as financing mechanisms. In addition, not all sectors have access to local funding. Inbound cross-border projects are usually financed outside Brazil. Leveraged buyouts are not so uncommon. In some cases, pre-acquisition debt may be pushed down to the target after closing, subject to certain conditions where the target is a listed company. 

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

11. How open is your country to investments and acquisitions by foreign buyers? Is there a level playing field when foreign and domestic bidders compete to buy the same domestic target company?

Brazil

In general, foreign-controlled buyers are not limited to investing in most sectors, subject to a few exceptions (particularly nuclear power, postal and telegraph services, and satellite launch and orbital positioning, and related activities). Furthermore, Brazil does not have a foreign investment committee such as CFIUS in the United States. However, to acquire frontier land or equity in a company that holds frontier lands, prior consent of the General Office of the National Security Council is required. In addition, foreign shareholders may be subject to additional obligations that do not apply to nationals, such as registering their investments with the Brazilian Central Bank and appointing a legal representative domiciled in Brazil with powers to receive the summons. Considering that most of the game is played under these rules for near two decades and that the level of high standard services from the Brazilian professional services firms, especially law firms and CPAs, the level of familiarity with the game provide information and ability, bringing a spirit of fair play where foreign buyers will be at the same level of competition while bidding with a domestic buyer.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

12. Are corruption and compliance concerns affecting M&A activity? Are there industries where this is a particular issue?

Brazil

The Car Wash Probe, the Weak Flesh Probe, and the sanction of Brazil’s Clean Company Act (Law No. 21,846) have all significantly affected business in the country and how M&A deals are conducted. However, the year 2020, just like in 2019, was much less turbulent, as we have not seen many companies involved in corruption scandals. One relevant measure that sellers and buyers have been adopting to mitigate this issue is to conduct compliance due diligence in target companies, which is a practice that was not so common years ago.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

13. How big a part of M&A activity is the restructuring of financially troubled companies? Have you seen more of this in 2020 as compared with 2019, due to the pandemic or otherwise? What are the prospects for 2021?

Brazil

The Brazilian economy has been through some years of intense crisis. In times of hope for growth, the outlook was once again affected by the global economic slowdown resulting from the covid-19 pandemic. In this context, transactions aimed at acquiring companies or assets of companies in financial difficulties are an investment opportunity, since selling assets through M&A deals is an easy way to generate cash.  

In addition to that scenario, the Insolvency Law in Brazil (Law 11.101/05) was amended by Congress and established significant improvement by inserting a new framework for multinational and multi-jurisdiction insolvency, bringing international creditors, debtors, and investors in a level of equality. Some relevant amendments worth mentioning were recognising the international insolvency case and granting more straightforward access to foreigners to participate in an insolvency case in the Brazilian courts.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

14. Does your country’s bankruptcy law permit the reorganisation of the debtor as a going concern, and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?

Brazil

Yes, Brazilian legislation affords numerous benefits from reorganisation to avoid bankruptcy. Among these benefits, the Bankruptcy Law grants a 180-day stay period during which all claims against the debtor are suspended, and such period may be extended. In 2019, the filing for court-supervised reorganisation decreased, but in 2020 the numbers increased due to the severe impact of the covid pandemic on many businesses. Now, as the Brazilian economy gradually recovers, the numbers of filing for court-supervised reorganisation are decreasing again.

In addition, a recent amendment on the Brazilian Insolvency Law considers the application in Brazil of similar protection of assets to the US Chapter 15. As a result, assets in Brazil are now subject to cross-border protection from international court reorganisation and insolvencies. This is likely to increase M&A activity in Brazil with distressed assets from ongoing liquidation or reorganisations conducted abroad.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

15. Has there been any increase in public company M&A?

Brazil

In comparison to 2019, there was an increase in the amounts involved in M&A deals of public companies. One high-profile transaction worth mentioning was JBS, a Brazilian meat processor, which has acquired the American company Empire Packing for US$238 million. Another relevant transaction was América Móvil, controller of Telecom Claro, which has acquired Nextel's operation in Brazil for US$905 million.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

16. How well protected are minority shareholders in public companies? What recent developments have there been as relates to independent directors, special committees, independent advisers, fairness opinions?

Brazil

The Brazilian corporate legislation provides several rights to minority shareholders, including participation in the board. In addition, it creates special listing segments of Brazil’s Stock Exchange to foster high standards of corporate governance that, among other things, benefit minority shareholders. For instance, in the sale of corporate control, companies listed in the highest segment (Novo Mercado) shall grant tag-along rights where the acquirer pays minority shareholders 100 per cent of the premium price paid for the controlling block.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

17. Has there been any increase in shareholder activism and hostile takeovers? Are international hedge funds active in your market? What defences are target companies permitted to adopt?

Brazil

Due to certain features of Brazilian corporate law, shareholder activism is still under development in Brazil. Shareholders usually rely on representations before the Brazilian Securities and Exchange Commission (CVM) as a first step before filing a civil lawsuit for damages. Thus, the environment for activists’ campaigns is not very favourable. Still, there has been pressure for change because foreign investors holding deposit receipts have been obtaining indemnification awards in other jurisdictions. In contrast, investors in Brazil have not been successful, although lawsuits have been filed based substantially on the same facts. In addition, most public companies in Brazil have a high concentration of ownership, and, as a result, there are minimal threats to management through takeovers. In Brazil, shareholder activists are usually pension funds, investment fund managers, state-owned companies, and other institutional investors as minority shareholders. Finally, although hostile takeovers are not common, listed companies usually adopt poison pill clauses in their by-laws.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

18. Have directors, management and controlling shareholders changed how they conduct themselves in M&A deals? What kind of fiduciary duties do directors, management and controlling shareholders have under the laws of your jurisdiction? From your experience, are directors, management and controlling shareholders more diligent today in their review of M&A transactions and other matters?

Brazil

It is common knowledge that the Car Wash Probe and the Weak Flesh Probe have shaken the Brazilian financial market and how M&A deals are conducted in the country. Following the events involving Petrobras, JBS, Odebrecht, and CCR, good corporate governance practices and high compliance standards are increasingly demanded by investors, the market, and the Brazilian Securities and Exchange Commission (CVM). Thus, due diligence in target companies has been more rigorous to mitigate risks, especially those related to corruption. Under Brazilian corporate law, the chief fiduciary duties of executives are diligence and loyalty. Although the law is still somewhat abstract concerning these duties, they have been progressively becoming more transparent by regulators of the market and by jurisprudence. Given all of this, directors, managers, and controlling shareholders are becoming more aware of good corporate governance practices and high compliance standards in M&A deals.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

19. Should directors, management and controlling shareholders be more concerned today about negative publicity, shareholder criticism, regulatory pressure, shareholder lawsuits and liability from potential litigation?

Brazil

Considering that most listed companies have defined control, shareholder activism is still not as common in Brazil as it is in other countries. However, directors and controlling shareholders have recently become more aware of negative publicity and shareholder criticism as minority shareholders (mainly asset managers and pension funds) have become progressively more active. In addition, considering the developments of the Car Wash Probe and other corruption scandals, institutional investors have been demanding stricter corporate governance practices, internal controls, and compliance policies by listed companies.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

20. Are there major differences in how domestic and cross-border deals are being conducted? For instance, does the type of purchase agreement used in your jurisdiction differ significantly from the international style of agreement? If so, which type is being used more often?

Brazil

The New York style of purchase agreement used in cross-border deals is becoming progressively common in pure domestic deals. However, one significant difference from the international standard agreement when dealing with Brazilian targets is that the indemnity provisions in M&A deals are usually not limited to breaches to representations and warranties but also cover some (if not all) liabilities derived from facts before the transaction. In addition, since the current Brazilian market is attractive for buyers, most purchase agreements are buyer-friendly, which explains a broader indemnification provision in favor of buyers.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

21. Have there been changes in the process for how M&A transactions are conducted in your jurisdiction?

Brazil

Over the past few years, the Brazilian market has seen profound changes in the structuring and legal framework of M&A transactions. On relevant change is that, for the first time, the Brazilian Securities and Exchange Commission (CVM) expressly authorised a cash and stock merger on the Brazilian securities market. In addition, M&A practitioners must now be more accountable for the higher active role of the Brazilian antitrust authority (CADE). For example, discussions in Brazil on break-up payments and rules on "Hell-or-High-Water" were almost non-existent a few years ago. However, after CADE started to follow a more stringent antitrust enforcement strategy (resulting in the dismissal of several high-profile deals), antitrust clearance, buyer's divestment requirements, and significant break-up payments have become the most discussed issues in deals involving players in the same sector.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

22. How level is the playing field for domestic and international bidders?

Brazil

Given the familiarity of the complexity of the Brazilian legislation (especially tax and labor), domestic buyers are usually more acquainted with the legal risks surrounding an M&A deal. On the other hand, most multinational buyers hire a local team in the country that can better assess all potential liabilities of a particular transaction and advise foreign buyers concerning the risks implied. Moreover, local counsel can negotiate solid indemnity provisions in the purchase agreement covering all past liabilities of the target company. This is especially true considering the current market, which is hot for buyers.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

23. For international buyers and investors looking at deals in your jurisdiction, what are the three most important pieces of advice you have and what are the three most important pitfalls that should be avoided?

Brazil

International buyers and investors looking into Brazil should be fully aware that, despite the country has consolidated democracy and solid legal and governing institutions, the Brazilian legislation is highly complex and often of difficult understanding. Therefore, studying the Brazilian tax system is essential, which is challenging to keep up to date due to constant changes. In addition, foreign investors must have a comprehensive understanding of their legal obligations regarding the Labour Law. Regardless of the current government efforts to facilitate business, Brazil is still a highly bureaucratic country. It is of the utmost importance to bear this in mind and work with experienced local professionals to mitigate it. Conducting compliance due diligence on potential targets is also strongly advised to avoid unpredictable liability. Finally, it is also relevant to understand how businesses are made, especially considering that Brazil has continental proportions and different cultures.

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

24. Have there been any significant regulatory developments affecting M&A – your country's securities exchange commission, antitrust regulators, tax authorities, Central Bank, other regulators that review deals etc?

Brazil

The more active and strict role of the Brazilian antitrust authority (CADE) has been forcing M&A practitioners to negotiate provisions not much discussed years ago, such as break-up payments and rules on "Hell-or-High-Water".

Answer contributed by Guilherme Dantas, Rodrigo Macedo, Sérgio Ricardo Fogolin and Helena Coelho Romero

Get unlimited access to all Latin Lawyer content