M&P Legal Note 2014 No.2-1

This brief article has the scope of providing its readers

Brazil is now recognized as a mature country with

with information regarding recent Brazilian social,solid macroeconomic indicators. Its fast expanding

political and economic highlights, all with theinternal consumer market makes the country one of theobjective of outlining the basic Mergers &most promising emerging economies in the world. InAcquisitions procedures currently observed in Brazil.

addition to this, in 2014 there is a presidential race toThus, the text was divided into two sections. The firstwhich there is no predictable result, despite theaims at providing an insight into the current Brazilian

indication contained in some polls demonstrating thatMarket. The second describes the main proceduresMrs. Dilma will remain acting as president until 2018.

regarding our M&A market.
In addition to this, there is an increase of awarenessI. Current Brazilian Market

demonstrated by the population, as perceived by theIn the last 5 years, Brazil's economy has improved its

public demonstrations occurred during July 2013.

GDP (Gross Domestic Product) and overall

Mainly, the protests were against public expenditure,

employment. Additionally, its middle class population

the lack of investments in infrastructure and education,

hit record highs. Brazil has also past the phase of being

as well as contrary to huge international eventsthe "must go" destination for investments, especiallyscheduled for Brazil (e.g., 2014 FIFA World Cup andamong the BRICS (i.e., Brazil, Russia, India, China

the 2016 Summer Olympics Game). These eventsand South Africa) and has become a more complex,

provide an insight into the opportunities and next

yet full of opportunity, market.

challenges for the local population and foreigners, who
intend to expand and do business in Brazil.

M&P Legal Note 2014 No.2-1

In this complex scenario, Brazil shall remain

involved in the transaction, in the sum of US$ 88 bn.

undoubtedly an attractive place for investments,

Of the total amount of transactions, 40% involved

especially when compared with the Eurozone, USA

foreign investors, making Brazil the second hottest

and other South American countries. Part of theinvestment destination globally.

continued appeal is that Brazil's economy is its
corporate fragmentation. In other words, there aremany mid-sized family businesses. This state of affairs

II. M&A Procedures in Brazil

makes room for corporate consolidation andOne of the challenges entrepreneurs face, especiallyrestructuring, with possible efficiency gains for a

foreign investors, is to understand the rules andpotential investor, interested in entering into theregulations regarding Mergers & Acquisitions

Brazilian Market by means of equity acquisition.

procedures in Brazil. For this reason, it isrecommended, while still in the initial phase, that theFor foreign investors, buying this type of company isparties draw up the basic premises of the intended deal,

particularly interesting, as their pre-existing licenses

signing documents that ensure transparency andand sometimes surprisingly strong brands can give you

convergence of interests. This is usually done by a

immediate access to markets that would otherwise

Letter of Intent ("LOI"), which usually is associatedrequire significant expenditures in regulatory

with a Non-disclosure Agreement ("NDA").

approvals, as well as expensive marketing campaigns.
An LOI will indicate which kind of transaction is
It is important to mention that Brazil adopts the freeintended between the parties.

flow policy in regard to its currency. This might givean edge for foreign investor since recently theA. M&A Transaction Structures in Brazil.

American dollar has increased its relative value in

Basically, there are four main transaction structures forcomparison to the Brazilian national currency (i.e., theM&A operations in Brazil. The more common of'Real' or simply R$). This may cause the Brazilian

which is the acquisition of a target company's equity

assets to seem depreciated and to appear moreby an investor (Diagram 1). Mergers are also common

attractive to foreign investments.

place (Diagram 2). In this type of transaction, a
corporate vehicle incorporated in Brazil by an investoracquires a target company, integrating the latter´s

Recently released indicators endorse this opinion.

assets into its own structure. Additionally, it is not

According to a report by a large accounting firm inuncommon to arrange an operation based on anBrazil, there was a 5.2% year-on-year increase on theexchange of shares among investors and investees

number of transactions during 2013 compared with(Diagram 3). Finally, some transactions are "asset

2012. Of the total of 811 transactions announced indeals" that are structured around the acquisition of a2013, 291 (only 36% of the total) disclosed the amount

M&P Legal Note 2014 No.2-1

single asset or group of assets, such as a trademark orindustrial plant.

Due to the Brazilian corporate fragmentation described

operations described in the above paragraph, as well as

earlier, restructurings and turn-around operations areless popular types of operations such as a split off,commonly implemented. This procedures aim at

wind down and drop down.

providing a company with a more efficient legalstructure. In this sense, it may involve all types ofM&P Legal Note 2014 No.2-1

In accordance with the Brazilian Corporate Law (Lawaddition, the internationally adopted usages andNo. 6.404/76), a "split-off" is an operation whereby apractices have been incorporated into Brazilian

company transfers a portion of its assets to one or moretransactions, allowing different formats andcorporations already in existence or formed for thismethodologies.

purpose; the company splitting off shall become
extinct if all its assets are transferred, or if the transfer

Usually, when the initial phase of defining the basis of

is only partial, its corporate capital shall be split-off

negotiation has been concluded, including thebut the company itself will remain in existence.

execution of LOI, the process moves into the stage forsubmission of documents and information to lawyers,

On the other hand, a "wind down" is similar to aauditors and specialized consultants, known as due

dissolution where some of the company's assets will bediligence, to verify the situation of the target company.

divided for distribution among its shareholders. AOnce the Due Diligence report has been completed and"drop-down" is a more complex structure, which

the issues that came to the fore have been discussed,involves the incorporation of a new entity by thethe parties are ready to proceed to the final stages ofCompany, with the contribution of some of assets inthe negotiations. This is when the parties start toorder to segregate a specific line of business. Despite

negotiate the definitive agreements, such as the Sharethe fact the final result be similar from the partial

Purchase Agreement (SPA), which is the document

split-off, due to regulatory reason, drop down may be

aimed at regulating the liabilities and duties of eachmore convenient.

partner.

Lastly, please note that in Brazil, a simple transferenceof business (in Portuguese called "trespasse") is notcommonly used. Basically the "establishment" (andnot the company) is sold in this operation. An"Establishment" is a legal concept which describes theplace of business and business operations conducted insuch place.

This operation, if performed without due

attention to the law, has the potential to generate up
debts and insolvency.

B. General Steps of M&A in Brazil and CADE
Examination.
It is important to notice Brazilian law does not containspecific laws that outline M&A procedures, although

It is important to note that there are certain foreign

there are general rules in corporate and contract law. In

investment restrictions in Brazil which could affect theM&P Legal Note 2014 No.2-1

general M&A procedure described above.

Since thisdeclared in its last balance sheet annual gross revenue

topic is complex and requires close attention, it will beor the total sales volume in Brazil equal to or greater

addressed in another opportunity.

than R$ 75,000,000.00, in the year preceding thetransaction.

We would like, however, to point to another matter
which will affect the general timeline of M&A.

That

The initial decision regarding an approval of the dealis, depending on the context of the initial documents

structure takes an average of two to three months,

for an M&A operation, the intended transaction might

depending on the complexity and the circumstances ofhave to be submitted to the Brazilian System for thethe transaction envisaged. Should the deal be rejected,

Defense of Competition (also named CADE). From aa period of six months to a year may be expected for avery high level point of view, the Antitrust Law (Law

final administrative decision.

12.529/2011) defines in its Section 90 the following
transactions as acts of concentration: (i) the merger ofIn the end, it is important to mention that closing deals

two companies that were previously independent fromin Brazil is not for the beginners and for theeach other; (ii) the acquisition of total or partial control

inexperienced. It requires resilience, deep dueof one or more companies, by one or more companies,

diligence, as well as a profound understanding of thedirectly or indirectly, by means of purchase or

Brazilian Law and its complex regulatory landscape.

exchange of shares, partnership rights, legal titles orWhile there is no doubt that Brazil has reached a highother securities convertible into shares, or tangible orlevel of political stability in the last generation, itsintangible assets, contractually or by other means; (iii)

government is still unfortunately subject to a fasta merger of one or more companies into a thirdchanging legislation (especially in regard to tax law),company; and (iv) the execution of an associative

protectionist measures that seek to do anything fromagreement, consortium or joint venture, by two orcooling the flow of hot money into the country, tomore companies.

shielding local companies from internationalcompetition.

Further, the Antitrust Law specified in its Section 88
that the acts of economic concentration (as defined in

It is important to mention that this brief article is notSection 90) which cumulatively fulfill the following

intended to deplete this complex subject, quite therequirements shall be submitted to CADE'scontrary. It intends to start a dialogue by giving a

examination : (i) at least one of the groups involved inglance of this complexity and trying to explain in a

the transaction has declared in its last balance sheet

very summarized form how the M&A transactions areannual gross revenue or the total sales volume

conducted in Brazil.

inBrazil equal to or greater than R$ 750,000,000.00, inthe year preceding the transaction ; and (ii) at least oneof the other groups involved in the transaction has

M&P Legal Note 2014 No.2-1

<Author biography>
Fernando Zanotti Schneider

For further query or information regarding thisarticle, please contact below:

Attorney at Law (Brazil)

Fernando Zanotti Schneider

Abe, Guimarães e Rocha Neto Advogados

Attorney at Law (Brazil)
Abe, Guimarães e Rocha Neto Advogados

Mr. Fernando Zanotti Schneider works in the area

Rua Bela Cintra, 904 - 6o. andar, São Paulo, SP -of business law, notably in the corporate area

01415-000 - Brasil

involving foreign investment, structuring of

Email: fzanotti@abe.adv.br
Tel: +55 11 3512 1312 /+55 11 3512 1300

business, mergers & acquisitions and capital
markets. He is the leader of the Corporate area of
Abe Advogados and has acquired a vast

Yoshinobu Mizutani

experience in assisting international clients in

Attorney at Law (Japan, NY)

green fields operations, joint ventures and sell

Matsuda & Partners

side and buy sides deals in Brazil. Specialist inAsahi Seimei Bldg. 7F

Corporate Agreements Law at Fundação Getúlio

2-6-1, Otemachi, Chiyoda-ku, Tokyo 100-0004,Vargas and graduated at the Pontifícia

JapanUniversidade Católica de São Paulo (PontificalCatholic University of São Paulo - PUC/SP), since

Email: mizutani@jmatsuda-law.com
Tel: (General)+81-3-3272-0101;(English)+81-3-3272-0105

2006. Fluent in Portuguese, English and Spanish.

The information provided herein is prepared for the general information of our clients and interested
persons and for educational and informational purposes only. In no event such information be relied
upon or construed as legal advice, and should not be acted upon without specific legal advice basedon particular situations.

M&P Legal Note 2014 No.2-1