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Published on Monday, 15 September 2014 and last verified on Friday, 27 February 2015
Brazil
Francisco Antunes Maciel Müssnich and Fábio Henrique Peres
Barbosa Müssnich & Aragão
1. Has the level of M&A activity slowed, increased, or remained flat in 2014 as compared to 2013, and
what are conditions like today? In general terms, what level of activity is foreseen for 2015? What
are the factors influencing the level of M&A activity?
In general, Brazilian M&A activity in 2014 has slightly increased in terms of M&A values in comparison to 2013,
even though Brazil has experienced a year of slow economic growth and uncertainties with respect to the
Brazilian presidential elections held in the second half of 2014. With 2014 ending with a slight degree of market
pessimism with respect to Brazil’s economy for 2015, and considering the recent alleged corruption scandal
involving Petrobras, the level of M&A activity in 2015 is expected to remain flat.
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2. Which industries do you expect will see the most M&A activity in 2015?
As in the past few years, the infrastructure sector – including oil and gas, logistics and transportation – will
continue to offer the most significant investment opportunities, especially considering the concession programme
that the federal government relaunched in 2013 after almost 10 years. Also, the agribusiness and education
industries are expected to remain with a flourishing M&A activity, as well as the energy and construction sectors.
An increase of M&A activity involving financially-troubled companies is expected due to the slow economic growth
of the past few years, as well as M&A deals related to corporate restructurings and spin-offs resulting from the
alleged corruption scandal involving Petrobras.
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3. What types of deals do you expect to see?
As in the past couple of years, incorporation of joint ventures – boosted by major players joining forces for the
purposes of participating in governmental concessions – and total acquisitions will remain the main type of deal
structures in Brazil, as well as minority investments establishing strong protection rights to the minority
shareholder. Consolidation efforts in certain industries may also intensify, due to the lack of strong players in
specific sectors.
Cash deals continue to represent the vast majority of M&A transactions in Brazil. Earn-out provisions and longterm retention plans have been constantly seen in recent M&A deals involving Brazilian target companies,
revealing a common trend of establishing alignment mechanisms with local management.
Finally, the Brazilian IPO market was substantially less active than in 2013, due to Brazil’s battle with slower
economic growth and the global economic uncertainty. Depending on the economic performance of the first half
of 2015, this scenario may change for the remainder of 2015, with concerns related to high inflation and increase
in interest rates. Also, 2014 confirmed that the issuance of corporate bonds (debêntures) is the current choice for
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many companies, with a number of high-volume funding rounds being successfully concluded, although the
aggregate funding volume was lower than in 2013.
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4. Discuss the level of M&A activity you have seen over 2014 and expect to see in 2015 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.
Pure domestic deals remain the usual practice, especially within the context of a consolidation trend in certain
industries. However, it is expected that the most significant deals in amounts involved will continue to be
represented by cross-border transactions.
As in previous years, Brazil will be the stage for a number of significant cross-border transactions, both inbound
and outbound, with M&A transactions involving Brazilian acquirers and foreign targets (particularly in Latin
America) rising as foreign economies struggle with the global economic crisis and also as Brazil maintains its role
as the main economy in the region, despite the rising importance of Mexico, Chile and Colombia.
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5. What is the level of private equity activity? Are domestic or international funds involved? What
kinds of deals are they doing?
Private equity activity represented a major component of the Brazilian M&A market in 2014. More specifically, the
participation of local private equity firms and investment banks in M&A deals has gained significant prominence
and this trend is expected to continue throughout 2015, including divestitures that are swept up by other private
equity funds.
The involvement of international private equity funds is expected to increase in 2015, especially considering the
slow economic growth of the past few years and the Brazilian currency’s devaluation, conditions which are aiding
the funds to spot interesting local M&A opportunities.
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6. Is acquisition financing available for deals? For strategic buyers? For private equity buyers? From
domestic or international sources? What amount of debt/ equity leverage are you seeing in private
equity transactions?
The financing market for M&A deals in Brazil has become relatively steady as the country was able to maintain a
period of economic stability, despite the slow growth rates noted in 2013 and 2014. Although cash is still the main
form of consideration in Brazilian M&A deals, a variety of sources played a significant role in 2014, such as highly
capitalised strategic buyers and stronger local private equity firms and investment banks. As noted above, it is
worth mentioning the sustained rise in issuance of corporate bonds (debêntures) both by publicly-traded and
closely-held companies. Long-term financing, however, continues to be an issue for M&A deals.
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7. 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?
Despite an extensively regulated exchange market, Brazil is generally open for investments and acquisitions by
foreign buyers and, except for a better familiarisation with the Brazilian legal system, foreign and domestic bidders
have a level playing field for domestic companies. It is worth mentioning, however, that in certain sectors (such as
banks, airlines and media companies), Brazilian law, as in other countries, provides for a limitation on the amount
of direct or indirect equity that may be held by foreign investors.
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8. How big a part of M&A activity is the restructuring of financially troubled companies? Have you
seen more of this in 2014 as compared to 2013? What are the prospects for 2015?
M&A activity involving financially troubled companies always represents a part of the local M&A deals, especially
in industries facing a consolidation trend. From a different perspective, a rise in outbound deals may be seen, with
Brazilian companies targeting financially troubled companies abroad.
2014 has once again showed that even large economic groups in Brazil may experience severe adverse financial
situations, with some companies filing judicial recovery requests. In particular, the financial impacts in the
economic groups involved in the Petrobras corruption scandal might cause an increase of M&A activity related to
corporate restructurings and spin-offs within those groups. These facts may reveal some level of increase in the
amount of M&A activity involving distressed assets or companies in financial difficulty in Brazil.
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9. Does your country’s bankruptcy law permit the reorganization of the debtor as a going concern,
and the acquisition of the entity out of bankruptcy? Are you seeing much activity in this area?
Yes. Since the enactment of Brazilian Federal Law no. 11,101, in 2005, the legal framework regarding bankruptcy
and creditor arrangements have had significant changes and impacts in this kind of situation. Under the strict
terms and conditions of such legislation, Brazilian companies in financial distress are permitted (and encouraged)
to enter into arrangements with its creditors to restructure its debts, therefore allowing the debtor to reach
conditions to reorganise itself as a going concern and to avoid bankruptcy. The new legal system also allows the
acquisition of the entity out of bankruptcy. It is worth mentioning, however, that tax issues are treated separately
from the bankruptcy law and therefore continue to be subject, on a case by case basis, to specific long-term
installment programmes.
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10. More generally has there been any increase in hostile takeovers and shareholder activism? Are
international hedge funds active in your market? What defenses are target companies permitted to
adopt?
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The great majority of Brazilian publicly traded companies have a defined controlling shareholder or group of
shareholders. For this reason, the practice of hostile takeovers is still in its early stages.
It is important to note that during the IPO boom before the 2008 economic crisis, a great number of publicly-traded
companies adopted shark-repellent provisions (“Brazilian Pill”) in their incorporation documents, the most
common of which would be a provision regarding the requirement for the implementation of a public tender offer
directed to all shareholders in the event that a shareholder (or third party acquirer) exceeds a certain amount of
equity interest in the company, for a pre-defined acquisition price in almost punitive mounts (for instance, a large
EBITDA multiple). Another common provision in the by-laws of publicly-traded companies with broad ownership is
the limitation of the votes that may be casted by any shareholder to a given maximum percentage of number of
shares, regardless of the equity interest effectively held by the shareholder.
Shareholder activism is not so commonly found in Brazil, also due to the fact that a large number of the publiclytraded companies have a well defined controlling shareholder. Minority shareholders are mainly passive and
rarely use its equity interest to favour shareholder activism as seen in the United States and Europe, although
some Brazilian companies faced aggressive activism from qualified investors in the past few years. In general, the
level of activism we see in Brazil is usually driven by local investors, with international hedge funds adopting a
more passive investment strategy. Nevertheless, there has been a continuing rise in the voluntary adoption of
stricter corporate governance practices by publicly-traded companies, which certainly helps and enhances the
development of the Brazilian capital markets.
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11. 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?
There seems to be a continuing rise in the level of professionalism in how directors, management and controlling
shareholders conduct themselves in M&A deals. With the increase in the bargaining power that Brazilian
companies hold in cross-border deals, these players feel more compelled to be more diligent in the conduct of the
negotiations, commonly relying on financial advisers. Under Brazilian laws, certain types of deals require even
higher degrees of diligence by directors, management and controlling shareholders, especially when involving
related party transactions with potential to raise issues regarding conflict of interests. In these cases, directors,
management and controlling shareholders have clearly been developing a greater level of precaution (including,
for instance, special committees).
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12. Should directors, management and controlling shareholders be more concerned today about
negative publicity, shareholder criticism, regulatory pressure and liability from potential litigation?
As mentioned in question 10, shareholder activism is not so commonly found in Brazil as in the United States and
Europe. However, as the Brazilian capital market continues to evolve, one can expect to see a gradual increase in
this kind of concern by directors, management and controlling shareholders.
In the past few years, certain industries have seen an increase in regulatory and political pressure, especially in
the financial, telecommunication and energy industries, as the government pushed companies to lower rates
charged to consumers as an attempt to stall inflation, putting potential foreign investments in these sectors on
hold.
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Further, the potential liability arising from the application of anti-corruption, anti-bribery and anti-money laundering
foreign legislation has raised concerns both in domestic players and in potential foreign investors. In light of the
history of the Brazilian business environment and its struggling effort to cope with public-sector corruption, the
applicability of such legislation should be carefully considered in any M&A deal, especially considering the
enactment and entering into force of the Brazilian anti-corruption law (see question 18).
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13. 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?
The differences between how domestic and cross-border deals are conducted have been increasingly reduced
throughout the years. Both the legal and business aspects of the negotiation of deals and its terms have
developed a more international pattern and such development can be perceived in the way Brazil is being seen
by foreign investors as a major player in the global economy. There is not much doubt that the majority of
significant M&A deals in Brazil are conducted as any international and cross-border deal.
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14. Do domestic buyers have a greater tolerance than multinational buyers for risk in transactions,
such as (i) assuming risk of tax, labour, environmental and other contingencies; (ii) assuming risk
of regulatory approvals; or (iii) bearing the risk of non-compliance/corruption issues at the target
company? If so, does this give domestic buyers a competitive advantage over international
buyers? Do the FCPA and other international anti-corruption statutes present a significant
challenge for international buyers in your market?
In general, since domestic buyers are relatively more acquainted with the Brazilian legal environment and the
country’s particularities, local buyers seem to have a greater risk tolerance in local M&A deals, as compared to
multinational or purely foreign buyers. In practical terms, domestic buyers are more prone to understanding and
accommodating particular issues that normally arise in Brazilian M&A deals. However, although this greater
tolerance could present a competitive advantage over international buyers, other factors seem to act in favour of
international buyers, such as their greater funding access in comparison to domestic buyers.
The enactment of the Brazilian anti-corruption law in 2013, and the application of the FCPA and other
international anti-corruption legislation, have posed a major challenge for international buyers considering
investments in Brazil in recent years, especially considering the Brazilian political landscape and the recent
alleged corruption cases involving Petrobras (see question 18). Considering that the new Brazilian legislation
imposes strict liability on legal entities for acts of corruption within a broader range of punishable acts, as
compared to its foreign counterparts, and that, due to its recentness, it is still difficult to predict how exactly this
new legislation will be applied by Brazilian courts, international potential buyers seeking to invest in Brazil should
be particularly careful with the legal risks involving corruption issues with respect to their targets.
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15. 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?
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At first, since Brazilian judicial courts are still not highly technically proficient in dealing with complex transactions
such as cross-border M&A deals and the process remains highly costly and time-consuming, the provision of an
alternative dispute resolution such as arbitration is mandatory for a better resolution of potential disputes. In
general, foreign buyers and investors prefer to agree on international arbitration chambers. However, in recent
years, as a greater number of cases are presented in Brazilian arbitration chambers, they have consistently
proven to be reliable and highly qualified for the resolution of disputes in the context of cross-border M&A deals.
Secondly, the hiring of full-service law firms with recognised experience in complex and multinational transactions
should not be overlooked. The Brazilian legal system is so complex and unique in a variety of matters that being
represented by the top firms can represent a huge impact on the outcome of negotiations.
Finally, the international buyer or investor should make a real effort to be acquainted with the particular
characteristics and regulations of the target’s activities in Brazil, since Brazilian laws are crucial and very
influential in the conduct of business.
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16. Have there been changes in the process for how M&A transactions are conducted in your
jurisdiction?
Due to the recent changes in the Brazilian antitrust legal environment, the dynamics of more significant M&A
transactions have to be addressed in a different approach, since the Brazilian antitrust system is now based on a
pre-merger review system with a suspensory regime, requiring the Brazilian antitrust agency’s prior approval for
transactions that meet certain thresholds.
Apart from this substantial change, M&A activity in Brazil is as sophisticated and complex as M&A deals
elsewhere, mainly due to the economic growth of recent years.
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17. Have there been any significant M&A developments in the regulatory area – your country’s
securities exchange commission, antitrust regulators, etc?
In May 2012, Brazilian Federal Law No. 12,529, was enacted on November 2011, came into force, setting a
completely new antitrust legal environment in Brazil. Among the several modifications introduced by the new
antitrust law, the Brazilian antitrust system is now based on a pre-merger review system with a suspensory
regime, requiring the Brazilian antitrust agency’s prior approval for transactions that meet certain thresholds.
Currently, the thresholds require that a transaction be filed when one of the economic groups involved in the
transaction presents a gross turnover in Brazil in the previous year of more than 750 million reais and the other
more than 75 million reais. In practice, with the new rule, the turnover of all parties to the transaction will be
considered and the previous market share criterion was excluded. Further, the Brazilian antitrust agency (CADE)
has 330 days to issue its decision regarding the transaction. So far, CADE has proven to be agile in most cases,
generally taking no longer than 60 days to grant the required approval for less complex transactions. However,
the outcome in the context of more complex deals is yet to be seen.
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18. Describe recent and forthcoming regulatorydevelopments that affect M&A, whether involving the
securities and markets regulator, competition agency or other regulatory agencies that review
deals?
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In June 2012, the Brazilian stock exchange (BM&FBovespa), together with independent associations, entered into
an agreement for the creation of the Mergers and Acquisitions Committee (CAF), a voluntary self-regulatory
organisation with the main objective of assuring that shareholders of publicly-traded companies receive fair
treatment in the context of corporate transactions such as public tender offers and corporate restructurings.
Similar to the Takeover Panel in the UK, the basic goal of the Committee is to issue independent opinions and
decisions in disputes within certain transactions involving publicly-traded companies. Since the Committee is
formed as a voluntary self-regulatory organisation, its participation will be at the discretion of the companies. The
Committee started its activities in August 2013, searching for the support the main players of the market, such as
the Brazilian Securities and Exchange Commission. Regardless of the voluntary aspect, its creation is expected to
further contribute to the development of Brazilian capital markets, while its importance will be tested in the years
ahead.
Also, as mentioned in question 17, changes to the Brazilian antitrust legal environment brought new colour to
Brazilian M&A activity.
Finally, Brazilian Federal Law 12.846/2013 (the Anti-Corruption Law) came into force in 2014, establishing
administrative and civil liability of legal entities for acts committed against the public administration of national and
foreign governments. As a Brazilian version of the Foreign Corrupt Practices Act (FCPA) of 1977 and the UK
Bribery Act (UKBA) of 2010, the new legislation seeks to fill a gap in Brazil’s legal system by imposing objective
liability on legal entities at the administrative and civil levels for acts of corruption, and in doing so provides a
broader range of punishable acts than its foreign counterparts. Indeed, besides imposing sanctions for acts of
corruption, the new Brazilian law also establishes liability for other acts that are harmful to the public
administration. In Brazil, punishable acts include corruption (defined as the promise, offer or delivery, either direct
or indirect, of an undue advantage to a national or foreign public servant) and various other offences committed in
the context of public bids, such as arrangements or combinations between bidders with a view to frustrating or
defrauding the competitive nature of the public bidding procedure, manipulation or fraud of government contracts,
and the fraudulent or irregular creation of legal entities in order to take part in public bids or enter into government
contracts. The Anti-Corruption Law also states that the liability of legal entities does not depend on any intention
to commit a punishable act or negligence in preventing its occurrence. The mere occurrence of a punishable act is
sufficient to justify the imposition of sanctions, such as suspension or embargo on the company’s activities,
compulsory winding-up, and impairment to receive government incentives, grants or subsidies. Thus, all the
penalties established under the Law can be applied on the basis of the offender’s objective liability. Companies
and other legal entities that are subject to Brazilian law or that wish to invest in Brazil should be particularly
attentive to the specific features of Brazilian law and the impacts it will have on their business. Companies that
already have already implemented compliance programs and codes of conduct that meet FCPA and UKBA
standards certainly have a head start, but even existing programs should be reviewed to adapt them to the
particular features of the Brazilian Anti-Corruption Law.
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