Equity Finance 2024 Comparisons

In early-stage and venture capital financing, the typical arrangements differ based on the company's stage and needs, as follows.

Early-Stage Financing

Angel and seed funding

This initial round is often provided by angel investors, seed funds or early-stage venture capital firms. The prevalent financial instrument in this phase is the convertible note, known as mútuo conversível in Brazil. Convertible notes are debt securities that are designed to convert into equity during a future financing round. Their popularity in early-stage financing stems from their ability to postpone valuation negotiations, thereby simplifying the transition to equity ownership for early-stage investors.

Growth-Stage Financing – Series A, B, C and Beyond

These stages of investment are performed through investment rounds usually led by venture capital firms, and involve a combination of debt investments and equity investments. As the company demonstrates some traction and growth, particularly by the time it reaches Series C and beyond, the investment structure shifts from debt instruments to equity. This transition is marked by larger sums of capital being injected into the target company, which are crucial for accelerating further development and scaling its operations.

Preferred stock

During venture capital rounds, investors are commonly allocated preferred stock, which provides superior rights compared to common stock. This includes protective provisions like liquidation preference, ensuring investors recoup their initial investment in case of the company's dissolution or sale, and anti-dilution provisions to maintain their equity ownership percentage across funding rounds.

Late-Stage Financing

Although not usual in venture capital investments in Brazil, mezzanine financing is a sophisticated form of financing typically employed in later-stage financings. It is often used as a bridge before an IPO or a major acquisition, as it requires additional capital to bridge to an exit event. It combines aspects of debt and equity, and is subordinated to senior debt but senior to equity. Mezzanine financing can be instrumental in supporting a company's growth and expansion as it approaches a liquidity event.

Overall, hybrids like convertible notes offer flexibility in early-stage investments, while mezzanine financing supports growth and expansion closer to liquidity events.

Brazilian Legal Framework

The convertible note (mútuo conversível) is the main legal instrument for start-up fundraising in Brazil. The Brazilian Senate has recently endorsed a new legal instrument, the CICC (Contrato de Investimento Conversível em Capital Social), inspired by the Simple Agreement for Future Equity (SAFE) used in the international market for financing start-ups. The CICC addresses a gap in Brazilian legislation, allowing investors to convert resources into start-up corporate capital. The next steps involve forwarding the bill to the Chamber of Deputies for consideration. If amended, it must return to the Senate for analysis before being sent for presidential approval or veto.

In growth or private equity financing, the arrangements differ significantly from early-stage or venture capital financing, due to the maturity level of the company and the nature of the investment.

Growth Financing/Private Equity Financing

Types of investment

• Equity financing: investors provide capital in exchange for ownership stakes. This is common in growth equity rounds, where the focus is on scaling up the company rather than starting it.
• Debt financing: senior debt or mezzanine debt may be used, often in conjunction with equity. This debt is secured by the company’s assets or cash flow, and has a fixed repayment schedule.
• Hybrid instruments: private equity deals may involve hybrid structures that combine debt and equity features, such as convertible debt or preferred equity.

Typical investors

• Private equity firms invest in more mature companies, often taking significant equity stakes, focused on growth capital.
• Institutional investors such as pension funds, endowments or family offices may invest in private equity funds or directly into companies.

Financial structure

• Leverage: private equity deals often involve a substantial amount of debt, which is used to finance acquisitions or expansion, increasing the overall leverage of the company.
• Preferred returns: investors might receive preferred returns or dividend payments before common shareholders.

Differences from Early-Stage/Venture Financing

Stage of company

• Early-stage/venture financing focuses on start-ups and early-stage companies with high growth potential but limited revenue and established operations.
• Growth/private equity financing targets more mature companies with proven business models, steady revenue and established market positions.

Risk profile

• Early-stage/venture financing has a higher risk due to the uncertainty of business models and the potential for failure. Investment returns are typically higher to compensate for this risk.
• Growth/private equity financing has a lower risk compared to early-stage investments due to the company’s track record and existing cash flow.

Indemnification

• Early-stage/venture financing: early-stage and venture capital deals typically feature fewer operational representations and warranties, with indemnification often focused on past liabilities.
• Growth/private equity financing: private equity deals have a broader emphasis on comprehensive operational representations and warranties, reflecting the mature nature of the companies involved. As companies progress through intermediate funding rounds, there is a gradual transition in the indemnification structure, incorporating more elements seen in private equity deals to address the evolving risks and complexities of the business.

Investment size and terms

• Early-stage/venture financing: investments are smaller, with more flexible terms and conditions to accommodate the high-risk nature.
• Growth/private equity financing: investments are larger and involve more detailed due diligence. Terms often include extensive governance provisions and debt covenants.

Control and influence

• Early-stage/venture financing: investors may take smaller stakes and have less direct control over day-to-day operations, including a seat on the board and/or a position as an observer, which may attend board meetings and provide input but do not have voting rights.
• Growth/private equity financing: investors often seek significant control, including seats on the board of directors and the appointment of officers (CFO, COO, etc) with influence over strategic decisions of the company’s business.

Overall, growth and private equity financing deal with companies that are more established compared to early-stage ventures, leading to different risk profiles, financial structures and investor expectations.

Brazil currently has only one stock exchange where it is possible to have an equity listing: Bolsa, Brasil, Balcão S.A. (B3) offers the trading of stocks, futures, forward and futures contracts, index swaps, interest rates and exchange rates, and agricultural and energy commodities, as well as spot market operations such as gold, dollar and federal public securities.

Most of the companies listed on B3 are domestic issuers. However, B3 admits the listing of Brazilian Depositary Receipts (BDR), certificates of deposit issued and traded in Brazil, representing securities issued by foreign companies. More than 400 companies are currently listed with B3, and are divided into 11 industry classifications:

• basic materials;
• capital goods and services, and communications;
• construction and transportation;
• consumer cyclical;
• consumer non-cyclical;
• financial;
• health;
• information technology;
• oil, gas and biofuels;
• utilities; and
• others.

Some large blue-chip Brazilian companies have sought dual listings in the past. Most of these companies have listed American Depositary Receipts (ADRs) on the New York Stock Exchange.

The Brazilian public equity markets have been increasingly important over the past few years for companies and investors, even without any IPOs since 2021. For instance, B3 registered 5.3 million natural persons investing in equity securities in May 2024, compared to 700,000 in December 2018.

In an equity listing, a company needs to:

• register as a publicly traded company with the Brazilian Securities Commission (CVM);
• register as an issuer with B3; and
• obtain the listing of its shares from B3.

These procedures are normally conducted simultaneously, together with a public offering of shares, although in some cases there is no requirement to have a free float right after the listing, and, therefore, no public offering is needed.

In this regard, it is important to point out that B3 has five special listing segments, known as:

• Bovespa Mais;
• Bovespa Mais Nível 2;
• Nível 1 e 2 de Práticas Diferenciadas de Governança Corporativa (Bovespa Mais, Bovespa Mais Level 2, Levels 1 and 2 of Differentiated Corporate Governance Practices); and
• the Novo Mercado (New Market).

These special listing segments were designed for the trading of shares issued by companies voluntarily undertaking to abide by corporate governance practices and disclosure requirements more stringent than those mandated by Law No 6,404/76 (“Brazilian Corporate Law”) and by regulation.

The Novo Mercado segment is the most rigorous and the most common, and it provides that:

• the share capital of the company must be composed of only common shares, each one representing one vote in the corporate decisions (so, no super-voting structure is admitted);
• the company must keep a minimum of 20% of outstanding shares;
• at least two or 20% of the members of the board of directors of the company must be independent members; and
• the company shall have mandatory corporate governance documents, such as internal regulations for the board of directors and a code of conduct.

It is worth noting that B3 has initiated a public hearing to amend and update the Novo Mercado rules. One of the proposed amendments is to change the 20% minimum for independent members to 30%.

The main driver of a company's decision on whether or not to list is the balance between the costs and the benefits of being a public company. Such benefits include:

• the expansion of the financial resource base – an alternative to bank or debt financing;
• the professionalisation of the company’s management;
• greater asset liquidity (outstanding shares);
• having a margin for managing the capital structure (balance between equity and third-party capital);
• improvement of the company’s institutional image due to the higher level of transparency and compliance rules required for public companies; and
• greater exposure and visibility of the company in the local and international markets, as well as to investors and analysts.

There are several ways for a company’s management team and/or its shareholders to change the company’s capital structure in Brazil, to strengthen the capital structure to enable the continuation of business plans, and to improve the cash position and reduce financial leverage. Although amendments to the terms and conditions of existing debt transactions are still a prevailing form of restructuring for Brazilian companies, equity restructurings through capital increases and debt-to-equity swaps are becoming increasingly frequent.

Capital increases with the dilution of existing shareholders can occur through public offerings or through private transactions aimed at existing shareholders or third parties that acquire subscription rights from existing shareholders. Given the range of public offerings, these are usually preferred over private transactions. However, when market windows are unavailable or when a company’s equity story or financial circumstances do not attract the required level of attention during pre-marketing meetings with potential investors, private capital increases can be a viable alternative for companies to raise capital.

Debt-to-equity swaps are typically used in cases in which a significant part of the debt arises from international notes and bonds (for example, the OGX and Oi judicial restructurings). Such technique was adopted even before it was expressively provided for in the Brazilian Bankruptcy Law. In the Americanas and Light judicial restructurings, which are recent material restructuring cases in Brazil, existing shareholders agreed to a capitalisation of new money together with the debt-for-equity swaps.

Besides these structured and rather complex transactions, in the regular course of business, companies can launch share buyback programmes and approve the payment of dividends and interest on equity (juros sobre o capital próprio – JCP) to adjust their capital structure, as necessary.

Challenges

Companies can launch a public or private capital increase and rely exclusively on new potential investors or their existing shareholders to join and subscribe for newly issued shares. However, for companies in distress or those whose shareholders may have reservations or limitations about additional investments, a common technique has been to obtain full or partial backing from their controlling shareholders or third-party investors, or a combination of both.

By acting as anchor investors, controlling shareholders and strategic third-party investors can provide greater legitimacy to the transaction and, therefore, encourage other shareholders to join the capital increase by subscribing to more shares of the company to maintain or increase their equity interest. Moreover, in many cases, a capital increase may be called by controlling shareholders primarily to allow for the capitalisation of a direct investment made by such shareholders in the company.

The main challenge for the debt-for-equity swap is to convince Brazilian banks, which are significant creditors, to become shareholders of the debtor and be exposed to liabilities to which equity holders are generally exposed. Additional challenges arise from the fact that the implementation of a debt-for-equity swap may require shareholder approval and there are ongoing important regulatory and court discussions about shareholders' rights in restructurings and the extent to which they are bound by provisions of a judicial restructuring plan. The tax impacts of a debt-to-equity swap are also an important challenge.

In respect to share buyback programmes, among other regulatory requirements and limitations (such as restrictions on repurchases during blackout periods), companies need to hold specific resources to back the buyback transactions. Dividends and interest on equity payments are required to be backed by sufficient profit reserves and/or retained earnings, depending on the type of payment intended.

Finally, a challenge that is common to all equity restructuring mechanisms is the definition of the price per new share in a distress scenario, when the company has minority shareholders that can be diluted. Although there are legal standards to guide the definition of the price per share in the context of capital increases, the legitimacy of the price per share definition rests on the rationale that led to the price approval. The share issuance price must be set considering the following, alternatively or jointly:

• the company’s profitability perspective;
• the net worth of the shares; and/or
• the price of the shares on the stock exchange.

When a premium or a discount is considered, the reason for such a decision must also be detailed in the corporate decision and in the company’s disclosures.

The CVM's view on the matter can be summarised by the need for a reasoned decision on the price of the new shares. Therefore, companies’ directors and shareholders can be held liable when they are not able to reasonably demonstrate how the decision was reached in line with applicable regulations.

The Brazilian Corporate Law states that the general shareholders' meeting has the exclusive power to elect the members of the board of directors, amend the company’s by-laws, approve the company’s financial statements, and decide on corporate reorganisations, among others.

The quorum for the shareholders’ meeting is met in the first call if 25% of the share capital is present at the forum; in the second call, the quorum is met regardless of the number of shares present. In general, the agenda is approved by the majority of shares present at the meeting.

According to the law, the board of directors is responsible for setting the general direction of the company’s business, appointing the company’s officers and selecting the company’s auditors. The general rule is to have most members of the board of directors approving these themes, but the by-laws or the internal rules might determine a higher quorum for specific matters.

When control of a company is shared among two or more shareholders, it is common to have them execute a shareholders' agreement. This agreement typically covers previous meetings between the signatories, provides general guidance on voting in shareholders' meetings and/or board of directors' meetings, and includes basic rules regarding the appointment of the company's directors and officers by those controlling shareholders.

Shareholders’ agreements usually also provide tag-along (the right to sell their shares, along with the shares of the other signatory) and drag-along rights (the right to make the other signatories sell their shares along with a certain shareholder’s shares), right of first refusal, rules on permitted transfers, and the procedures to release the shares, allowing eventual sales on public offerings. They can also provide for a lock-up period, in which the signatories cannot sell or otherwise negotiate their shares. The terms and conditions of each right are negotiated on a case-by-case basis.

Concerning information rights, the general rule is that the shareholders might receive all the information needed to vote in general shareholders’ meetings, in advance. The following also applies.

• Holders of 5% or more of the share capital can request to see the company’s share register, including shareholder names and share transfer information. They can also inspect the corporation's books if there are suspected irregularities or violations of the law or by-laws.
• Any person may obtain certified copies of the entries made in the books about the shares of a company if it is necessary for the defence of their rights or the elucidation of their interest or the interest of any shareholder or the capital market.

If the company is public, it also must periodically disclose the following documents.

• The Enrolment Form (Formulário Cadastral) shall contain information about the identification of the issuer, its securities and auditors.
• The Reference Form (Formulário de Referência) is the most relevant document for a company that intends to list its shares and launch a public offering. The Reference Form contains the relevant information on the company, such as the description of its businesses, the associated risk factors, management’s analysis and discussion of its financial conditions and the result of operations, pending litigation and relevant contingencies, among other relevant information.
• The Financial Statements must be submitted on the same date as their publication, which is expected to occur within three months after the closing of the fiscal year or within one month before the Annual Shareholders’ Meeting, and shall be submitted together with several documents, as established by the applicable regulation.
• The Quarterly Financial Reports shall be submitted by the company within 45 days after the end of each quarter of the fiscal year, except for the last quarter.

Shareholders’ agreements can also provide that the signatories shall receive:

• audited annual financial statements of the company;
• unaudited quarterly financial statements;
• information sent to the board of directors; and
• the monthly financial report of the company.

Finally, concerning exit rights, under the Brazilian Corporate Law the direct or indirect sale of control of a publicly held company is subject to the launch by the relevant acquirer of a mandatory tender offer to all holders of voting shares of such company, paying at least 80% of the price paid for the controlling shares. If a company is listed in Bovespa Mais, Bovespa Mais Nível 2, Novo Mercado and Nível 2, the tender offer must be made on the same terms and conditions as those offered to the controlling shareholder, including the price.

Although there are investors that specialise in either equity or debt investments, major financial institutions in Brazil offer both types of investments to companies, through separate entities within the financial institution’s corporate group. These investment products are usually subject to distinct risk assessment proceedings, as well as distinct negotiation and monitoring teams, as equity investments entail greater risk and involvement for investors.

In insolvency scenarios, especially in judicial and extrajudicial reorganisations, equity and debt investors are paid under the conditions set forth in the restructuring plan. However, in such restructuring plans it is market practice to subordinate shareholders in respect to the company’s other creditors because of negotiations with lenders.

As for liquidation proceedings (ie, bankruptcy liquidation), shareholders are no longer subordinated to the payment of all other creditors (as they were until 2020), except for claims that were not constituted on an arms’ length basis. Therefore, they are paid in accordance with the nature of their claims (labour claim, secured claim, unsecured claim, etc).

Equity financing in Brazil, through which investors provide capital in exchange for equity interest or securities convertible into equity, can take place through the following techniques.

Public Offerings

These include IPOs (initial public offering of securities, when the company first goes public), follow-ons (subsequent public offerings of securities), tender offers (to begin investing in a company, to increase shareholding or to acquire a controlling interest).

Another common equity finance method through public offerings is tender offers, in which the company or a third party (which can be a shareholder or not) launches an offer to acquire a certain number of shares issued by the company (up to 100%).

Financing through public offerings can be sought through the offering’s marketing efforts and/or through private negotiations with strategic investors that may be willing to allocate their investment in the offering’s financial settlement (ie, anchor investments).

Private Transactions

These include standalone private investments or private investments in connection with a public offering (ie, anchor investments).

The public equity market in Brazil has experienced booms, such as in 2008 and 2009, as well as through 2020 and 2021, in which the number and volume of securities public offerings reached record high levels. However, even though there have not been any IPOs since 2021, companies, investments funds and investors have been gradually more involved in equity investments over the years.

Although the public equity market’s performance is subject to shifts arising from public policies, fiscal circumstances, the political landscape, risk perception among investors and impacts from other global markets, the Brazilian public equity market is well developed from a legal and regulatory perspective. For investors seeking higher levels of corporate governance, companies listed in the Novo Mercado segment at B3 may offer unique investment opportunities in relation to other emerging markets. B3’s Novo Mercado stands out for its high standards of corporate governance, ensuring a fair, transparent and democratic governance structure.

For further information about venture capital structures, please see 1.1 Early-Stage and Venture Capital Financing and 1.2 Growth and Private Equity Financing.

Investment funds and foreign investors typically provide equity financing to companies; such entities were the major stakeholders in all Brazilian offerings that happened during 2024. Under Brazilian laws, there are no restrictions on who can provide equity financing and/or become a shareholder in a company.

Those seeking Brazilian equity financing in public markets can be broadly categorised into profiles that vary following the macroeconomic landscapes and market windows.

During booming IPO seasons, both large and medium to small companies from a great variety of sectors – including health, finance, education, energy, retail, real estate, tech, oil and gas, and agribusiness – have successfully made their debut on Brazil’s stock exchange. For reference, between 2018 and 2021, 81 companies conducted IPOs at the B3 (most of them in 2020 and 2021), 74 of which are still listed as of 31 July 2024. Among those, over half are in the tech, retail or real estate sectors. Furthermore, during such IPO-abundant periods, offerings from various sizes have been successful. For reference, between 2018 and 2021 IPO volumes ranged from approximately BRL180 million to BRL11 billion.

During IPO dry seasons, successful debuts at the stock exchange are more likely for large, stable companies in traditional sectors, for cash-generating companies, and for those with private equity funds as controlling shareholders. Companies in the tech, construction, finance and health sectors, as well as capital-intensive businesses and those that have reached their break-even points, are also prominent IPO candidates. Higher offering volumes can contribute to IPO success by providing greater liquidity for investors.

Follow-ons can be subject to similar mechanics as described for IPOs. However, in drier periods, the follow-on market is often more resilient than the IPO market.

For IPOs and follow-ons, in both booming and drier seasons, a trend in the past few years has been for most successful offerings to be launched with anchor investors’ commitment to subscribe for and/or purchase shares at a set amount or range, or at a fixed price or range.

In terms of private capital increases, there has been less volatility linked to market conditions and companies’ sizes, sectors and shareholder composition compared to IPOs and follow-ons. Nonetheless, successful private capital increases have often been partially or fully backed by anchor investors which, in many cases, are controlling shareholders.

When market windows are not open for IPOs and/or follow-ons and conditions are not ideal for private capital increases, companies look for other financing options, such as private equity deals and debt issuances. Debentures have been a strong choice for investment funds, especially infrastructure debentures, which offer tax benefits. In the first semester of 2024, the Brazilian capital market recorded BRL338 billion in public offerings, with 69.6% debentures, 8.2% commercial notes and 7.5% certificates of real estate receivables. Total infrastructure debentures issued in the first semester of 2024 amounted to BRL64.5 billion.

The Brazilian equity finance market is well established, with almost 500 equity offerings since 2000. It experienced a significant boom during the COVID-19 pandemic (2020–2021) due to fiscal discipline, streamlined taxes, reformed social security and reduced business costs. During this time, there were more than 70 IPOs, totalling over BRL140 billion in equity financing.

In 2022, the CVM issued a new rule on public offerings to simplify and unify the applicable procedures and documentation. However, this new rule has not yet been fully assessed, since it has never been applied to an IPO.

The IPO market became dormant in August 2021 due to flawed macro and microeconomic policies. Nevertheless, there were 29 follow-on offerings in the Brazilian market between 2023 and 2024, amounting to BRL55 billion. As of 15 October 2024, there were nine equity follow-on offerings in 2024 alone, totalling over BRL26 billion.

A resurgence in the Brazilian equity market is expected in 2025, due to the improved US economy and the new government in power after the elections, along with reduced interest rates in Brazil. The initial equity offerings are likely to be from major players in traditional sectors such as utilities, energy, and oil and gas. The success of these offerings will pave the way for smaller players or those from different economic sectors to launch their own deals in the subsequent months. Brazil possesses a sophisticated securities market and is home to one of the largest stock exchange markets in the world.

Two trends have emerged in privately allocated equity transactions:

• companies are offering a subscription bonus along with newly issued shares to encourage shareholders to participate in the private capital increase; and
• due to market volatility, new stakeholders are investing in companies because of current shareholders assigning their pre-emptive rights.

In publicly raised equity transactions, again also due to market conditions, there is a trend to have an anchor investor before the launch of the transaction, even in secondary offerings. This anchor investor will commit to acquiring a specific number of shares at a predetermined price per share.

Both segments are important in the Brazilian jurisdiction and their recurrence depends on the fact that, when there is no market window for public offerings or transactions conducted in the stock exchange environment, it is more common to recur to privately allocated equity transactions. Nonetheless, publicly raised equity transactions are usually more significant in terms of the amount of money involved.

Investment opportunities arising from equity financing deals are usually sourced by investment banking departments of financial institutions, financial advising firms, private equity firms or venture capitalists. After conducting comprehensive research and evaluating the prospects, these professionals reach out to companies that they see as potential candidates for equity deals, to discuss opportunities and windows.

Given that most companies already have long-standing relationships with certain financial institutions, many equity financing opportunities arise from such connections. In many cases, investment bankers are the ones who make the equity pitch, but the ideal structure of an equity transaction can sometimes have the company itself as a starting point. For instance, it is common to have non-deal roadshow meetings, in which the bankers introduce the company and have it explain its business to potential investors, without being in the context of a public offering.

Depending on the complexity of the deal or of the corporate group of the company, additional financial and strategy advisers may be engaged once discussions begin.

Legal counsel to the players involved in structuring and implementing the deal are usually engaged early on to provide advice on viable configurations from a legal and regulatory standpoint, and to guide the company on the necessary preparations for the deal, which can range from minor tweaks to overall profound changes to its governance and accounting practices. In certain cases, when the proposed structure has not yet been tested in the market, it may be necessary to consult the CVM and/or B3 to discuss implementation details in advance.

Moreover, for companies planning to go public, independent auditors need to be engaged as early as possible, to give the company time to understand whether any adaptations are required for the admissibility of its financial statements for the purposes of the IPO.

In Brazil, an investor can realise the value that it might have created with its equity investments by selling its stake in the public company, either through a private transaction or a public one, on the stock exchange. The choice between the typical mechanisms will depend on the costs involved, the number of shares held by the seller, the availability of the buyer and the trading price of the shares. The private transaction is usually an M&A transaction with one or more specific buyers. The public transaction can be conducted through a secondary follow-on offering, a block trade (usually when the seller wants to sell a relevant stake on the same day) or a public sale during the trading session of the stock exchange.

As described in 2.3 Equity Finance Seekers, the decision to obtain financing via equity or debt deals often depends on market conditions, and is frequently reassessed by companies for each deal or period.

For companies that have made their decision concerning going public, the IPO and subsequent stock offerings are usually deemed a priority, and significant efforts are focused on that end. However, whenever market windows and/or the desired valuation are unavailable, such companies are pushed to the debt and private equity markets.

Given the strategic nature of the decision to go public, certain companies may decide it is not the ideal path or moment for them, given their development stage and business priorities. For these companies, the debt and private equity markets remain the preferred ways to obtain financing.

Recent changes to securities offerings regulations have encouraged companies to seek a middle ground between remaining privately held and becoming listed on the stock exchange. Companies that obtain registration before the CVM, in either category “A” (the category that allows trading shares and securities convertible into shares) or “B” (in which trading shares and securities convertible into shares is not allowed), can have easier access to financing through debt securities issuances and access a broader target audience of potential investors, even if they are not listed at B3. By registering as an issuer before the CVM, such companies increase transparency concerning their results, activities and corporate governance to an extent that increases investor confidence in their securities. Therefore, an expected result is a boost to the number of companies registered at the CVM but not listed. In addition to opening better debt financing opportunities, such registration with the CVM may also be a stepping stone for companies that wish to go public in the future.

The average time to raise equity finance varies between one and three months, depending on the structure chosen by the company.

Private Capital Increase

When a publicly held company approves a capital increase, it can approve either a “bullet” amount or a range that has bottom and top amounts. In the first case, all shares must be subscribed and paid in, otherwise the capital increase will be cancelled. In the second case, if the minimum amount is subscribed and paid in (usually, this amount corresponds to the prior commitment of the controlling shareholders), the capital increase may be homologated by the board of directors. The second case is known as “partial homologation”.

After the approval, all shareholders of the company will have the pre-emptive right to subscribe the newly issued shares in the proportion of their stake in the company. This right might be exercised within 30 days, unless the by-laws or shareholders’ meeting rules differently. During the period to exercise their pre-emptive rights, all shareholders shall indicate whether or not they would like to subscribe to and shares left over after this first period. Only after the leftover period, the board of directors can verify if the amount or, if a partial homologation is possible, any amount between the range was subscribed and, therefore, cancel or homologate the capital increase, as applicable.

In this scenario, the main timing challenge is to ensure that all stakeholders, including the stock exchange and the bookkeeping agent, can process the deal and provide the required information about the subscribers and the number of shares subscribed promptly. This is necessary for the company to homologate the capital increase. In addition, the company may want to offer more than one subscription period for the leftovers, which could affect the time taken from approval to capital increase.

Public Offering

The registration of a company and the IPO registration are usually conducted simultaneously. Upon the first filing of the required documents, the CVM has 20 business days to review and suggest improvements and adjustments to such documents. The issuer has up to 40 business days to address such requirements; however, in practice this step takes five business days.

After the second filing of the set of documents, the CVM has ten business days to review the documents and certify that the suggestions were implemented. The day of the second filing is also the day the launching announcement is published. If the CVM is still not satisfied of the compliance with the requirements, the issuer has another three business days to adjust the documents. The registration is then granted to both the company and the IPO. As stated before, the review of the documents by B3 is done simultaneously and should be finished at the same time as the CVM’s review.

In an IPO, timing is a crucial factor in addressing all additional CVM requests within the period set by the offering underwriters, to ensure the offer is concluded within a specific market window. Since there is no flexibility in the CVM analysis period, issuers typically aim to respond to the regulator's requests with new filings as quickly as possible. The pricing of all offerings typically occurs up to 15 days before the release of financial information, which determines the market windows.

A follow-on offering is significantly quicker if its target audience is professional or qualified investors, as defined by the applicable regulations. In those cases, the only period provided by the rules is five business days for exercising the pre-emptive rights by existing shareholders in case of a primary offering.

In a follow-on offering, the challenge with timing is to complete the documentation by the transaction launch and wrap up roadshow presentations and other investors’ meetings within a brief period.

Local rules do not impose restrictions on cross-border capital inflow and outflow. Foreign investors have a high degree of freedom for international remittances related to their equity investments in local companies. However, specific constraints may apply to certain sectors and businesses, such as ownership of rural lands and investments in the media, telecommunication, air transportation, health and energy sectors. In addition, all cross-border remittances to or from Brazil must be intermediated by an institution licensed by the Brazilian Central Bank (BCB).

Foreign equity investments are subject to different regulatory regimes, which are typically classified into the following.

• Direct foreign investment: foreign investment in local companies must be registered with the BCB’s electronic systems. It is necessary for cross-border remittances related to local equity investments.
• Investment in the capital markets: foreign investments in Brazilian capital markets are subject to specific regulations, including the need to open a brokerage account and designate a custodian.

Assuming that the payment of dividends and the capital repatriation are lawful, there are no foreign exchange limitations that must be considered. As mentioned in 3.1 Investment Restrictions, any cross-border remittances related to the payment of dividends and the capital repatriation will be subject to the following requirements:

• the invested company (or another local party) must engage an FX Intermediary to remit the funds abroad; and
• the investments held by foreign investors must comply with the applicable regulatory regime.

Specific constraints or requirements may apply to specific sectors and businesses.

Despite not covering equity financings specifically, Brazilian Anti-Money Laundering Law No 9,613/98 provides for the unlawfulness of concealing or dissimulating the nature, origin, location, disposition, placement or ownership of goods or assets deriving from criminal violations. However, only individuals are subject to criminal liability for the conduct in question, not companies.

Legal entities in certain sectors in Brazil must comply with “know your client” provisions under the Anti-Money Laundering Law. This applies to financial institutions and companies in areas such as insurance, leasing, foreign currency exchange, real estate, fund management and luxury goods sales. These entities must also report any suspicious transactions to the Brazilian Council for Financial Activities Control (COAF), especially regarding equity investments.

Regulatory bodies often require businesses to implement comprehensive anti-money laundering programmes, including risk-based know-your-customer and employee procedures. Obligated persons must carefully assess money laundering risks before acquiring assets or hiring new personnel.

Choice of Jurisdiction

Under Article 25 of the Brazilian Code of Civil Procedure, Brazilian courts are precluded from adjudicating disputes that arise from international agreements in which the parties have stipulated an exclusive foreign jurisdiction. This is contingent upon the respondent invoking the defence of lack of jurisdiction and the absence of any determination by the courts that such a choice of jurisdiction is abusive.

Furthermore, the recent amendment to Article 63 of the Brazilian Code of Civil Procedure, effective as of 5 June 2024, narrows the permissible choices of jurisdiction to those connected to the domicile or residence of one of the parties, or to the location where the contractual obligation is to be performed. It is important to note that this amendment has not yet been subjected to judicial scrutiny, particularly in the context of equity financing transactions. In addition, these procedural provisions are not applicable to arbitration proceedings.

The Brazilian Arbitration Act, which governs arbitration, does not impose restrictions on the parties’ autonomy in selecting the arbitration seat.

Choice of Law

In instances where a Brazilian court assumes jurisdiction over an international agreement, it will apply the conflict of laws rules as outlined in Decree-Law 4,657/42, as amended – also known as the Introductory Statute to the Norms of Brazilian Law (LINDB). According to the LINDB, contractual agreements are to be governed by the law of the country where they were executed. This principle does not apply to arbitration, and the Brazilian Arbitration Act acknowledges and upholds the principle of party autonomy in the context of choice of law, which is respected by Brazilian courts and arbitral tribunals, provided that such choice of law does not contravene public policy.

Even in a dormant IPO market, with no IPOs since December 2021, the Brazilian equity capital markets have been consistently changing, dealing with more complicated and sophisticated issues. For a growing number of companies, the primary focus is no longer on potential abuse of power by controlling shareholders or the effects of acquisitions made by controlling shareholders on share liquidity and free float requirements, but on the absence of a defined controlling shareholder and the issues related to this.

This development resulted in the growing relevance of the “reference investor” figure, who can materially influence the corporation’s business without controlling it. Such figures are viewed as a positive influence, able to oversee management without the inherent conflict of interests of the controlling shareholder, preventing financial fraud, manipulation of the company’s results, information asymmetry, excessive compensation and prejudicial related party transactions, among other issues. In the SABESP global offering concluded in July 2024, the State of São Paulo selected a reference investor to purchase a certain number of its shares, contingent on the satisfaction of a minimum price condition. The media and the market praised this investor figure, resulting in a highly oversubscribed offer.

Another result of “true corporations” is the concern about preventing overboarding, to ensure that the directors have enough time to participate in meetings and review relevant documentation. B3 is proposing an amendment to the Novo Mercado Rules, which would limit a board member in a listed company to sitting on up to five boards of directors from different companies. If they are a chairperson, it would count as two positions. If they are a CEO, they can only be part of one board of directors. The proposal is pending, and details can still be amended in its definitive version.

Finally, true corporations give rise to the challenge of delisting/deregistering public companies. Under the Brazilian Corporate Law, only the company and/or its controlling shareholder can launch a delisting tender offer. However, the company can only proceed with such an offer if it has the necessary legal reserves to repurchase its shares. These legal reserves often do not exist when the company is contemplating delisting due to financial difficulties or excessive regulatory burden. In this scenario, if the company does not have a controlling shareholder, it cannot be delisted and must bear the costs of staying listed as a public company. To address that, the CVM is currently amending its tender offer regulation to provide that, in a single offer, the offeror might be able to become the controlling shareholder and delist the company simultaneously.

Equity investments in Brazilian companies may generate three main types of return:

• dividends;
• interest on net equity; and
• capital gains upon the disposal of the investment.

Dividends arising from Brazilian companies are currently not subject to taxation in Brazil. Nonetheless, there are currently ongoing discussions in the Brazilian congress that may result in dividends becoming taxable in the future.

Alternatively, Brazilian companies can compensate their shareholders by paying interest on net equity, which is subject to withholding income tax at the standard rate of 15%. A 25% margin will apply to shareholders residing in countries deemed as “Low or Nil Tax Jurisdictions” under Brazilian law.

Finally, the capital gains arising from the sale of Brazilian located assets, such as shares of a Brazilian company, will be subject to taxation. The tax rate will vary depending on the type of investment and on the shareholder’s domicile. The main types of investment for tax purposes are:

• the investment in Brazilian capital markets under Resolution No 4,373 of the Brazilian Monetary Council (“Capital Markets Investment”); and
• direct investment in Brazilian private companies (“Direct Investment”).

Capital gains arising from the sale of a Capital Markets Investment on the Brazilian stock exchange or over-the-counter market are:

• exempt from income tax when realised by a shareholder that is not resident or domiciled in a Low or Nil Tax Jurisdiction; and
• subject to income tax currently at a rate of 15% in case of gains realised by a shareholder that is resident or domiciled in a Low or Nil Tax Jurisdiction.

Capital gains assessed on a sale or disposition of a Capital Markets Investment outside of the Brazilian stock exchange or over-the-counter market are subject to:

• income tax at the rate of 15% when realised by a shareholder that is not resident or domiciled in a Low or Nil Tax Jurisdiction, although different interpretations may be raised to sustain the application of the progressive rates from 15% to 22.5%; and
• income tax at progressive rates ranging from 15% to 22.5% in case of gains realised by a shareholder that is resident or domiciled in a Low or Nil Tax Jurisdiction.

Capital gains arising from the sale of a Direct Investment are subject to:

• income tax at progressive rates from 15% to 22.5% when realised by a shareholder that is not resident or domiciled in a Low or Nil Tax Jurisdiction; and
• income tax at a 25% rate in case of gains realised by a shareholder that is resident or domiciled in a Low or Nil Tax Jurisdiction.

In addition to the withholding tax, investors that invest in Brazilian companies will often need to execute foreign exchange transactions to remit investments in and out of Brazil, which are subject to the Tax on Financial Operations levied on Foreign Exchange Transactions (IOF/FX).

The IOF/FX rate varies depending on the nature of the foreign exchange transaction. Most transactions are subject to IOF/FX at a 0.38% rate. However, certain transactions may benefit from a zero rate, such as those related to the remittance of dividends and interest and interest on net equity paid by a Brazilian company, and inbound and outbound transactions related to investments in the Brazilian capital markets.

The Brazilian government is authorised to increase the IOF/FX rate to 25% at any time, although Brazil has never adopted rates over 6.38%.

Since the 1960s, Brazil has been establishing double taxation agreements (DTAs) with several nations. Although the Brazilian DTA network is not very extensive, Brazil has recently been endeavouring to expand this practice.

Brazil currently has DTAs in force with:

• South Africa;
• Germany;
• Argentina;
• Austria;
• Belgium;
• Canada;
• Chile;
• South Korea;
• Denmark;
• the United Arab Emirates;
• Ecuador;
• Slovakia;
• Spain;
• the Philippines;
• Finland;
• France;
• Hungary;
• India;
• Israel;
• Italy;
• Japan;
• Luxembourg;
• Mexico;
• Norway;
• the Netherlands;
• Peru;
• Portugal;
• the Czech Republic;
• Russia;
• Singapore;
• Sweden;
• Switzerland;
• Trinidad and Tobago;
• Turkey;
• Uruguay;
• Ukraine; and
• Venezuela.

All DTAs signed by Brazil were structured following the OECD’s standards and guidelines.

In theory, shareholders in Brazil are only required to approve the filing of a company for an insolvency proceeding. However, shareholders can have a highly active role in practice, including negotiating the restructuring plan and financing the company under reorganisation through a debtor-in-possession (DIP) (for example, the Americanas case). Brazilian companies tend to have a defined controlling shareholder, who normally appoints most board members and executive officers and is therefore very present in the company's day-to-day issues.

The commencement of a judicial reorganisation or an extrajudicial reorganisation should not have any material adverse impact on shareholders’ rights.

In a judicial reorganisation or extrajudicial reorganisation, the debtor’s shareholders with an interest of more than 10% of the debtor’s capital stock do not have voting rights in the approval of the reorganisation plan, and they shall not be considered for purposes of verifying the quorum for convening the creditors' meeting and taking a resolution.

A recent amendment to the Brazilian Bankruptcy Law introduced the possibility of creditors filing an alternative plan because of the rejection of the restructuring plan filed by the debtor in the context of a judicial reorganisation. In that hypothesis, the law protects shareholders’ rights to the extent that the new plan must not impose new obligations upon the debtor’s shareholders under existing contracts or that do not arise from law.

Concerning claims held against the debtor, in a judicial or extrajudicial reorganisation, shareholders will be paid under the conditions outlined in the restructuring plan. The Brazilian Bankruptcy Law does not provide for express subordination by shareholders in these scenarios, so, in principle, they will be paid under the same conditions as the other creditors of the same class (secured, unsecured, etc). Typically, shareholders are subordinated to all other creditors, but this is the general result of the negotiation of the reorganisation plan between the debtor and its creditors.

In a liquidation proceeding, shareholders do not have preference in the payment of a claim held against the bankrupt estate, but they are no longer subordinated to the payment of all other creditors (as they were until 2020), except for claims that were not constituted on an arms’ length basis. Therefore, shareholders will be paid in accordance with the nature of their claims (labour claim, secured claim, unsecured claim, etc).

The typical insolvency processes in Brazil follow these timelines.

• Judicial reorganisation: approximately one year to 18 months to approve the reorganisation plan, and approximately two to six years to close the proceeding after the approval of the reorganisation plan.
• Extrajudicial reorganisation: approximately six months to confirm the extrajudicial plan and two months to close the proceeding after the confirmation of the extrajudicial plan.
• Liquidation: approximately ten to 20 years to close the proceeding, considering the sale of assets.

Recovery levels are generally low in Brazil, including for creditors. In this context, recoveries for shareholders tend to be even lower. Interestingly, in a debt-for-equity swap, shareholders in Brazil tend to keep a stake, as opposed to being whipped out, as is common in other jurisdictions. In this perspective, shareholders do have greater recovery than in other jurisdictions.

The Brazilian Bankruptcy Law (Law No 11,101/2005) provides for three mechanisms:

• judicial reorganisation;
• extrajudicial reorganisation; and
• liquidation proceeding or bankruptcy liquidation.

Companies usually adopt the judicial reorganisation, for the following reasons:

• it allows for a 180-day stay period that protects the debtor from enforcement proceedings and constriction of assets, which can be renewed for an additional 180 days;
• a judicial reorganisation may be a better environment to raise third-party money through a DIP financing or sale of assets (priority in payment to DIP lenders in the event of liquidation and disposal of assets are free of a succession of the debtor’s obligation); and
• Brazil is a debtor-friendly jurisdiction.

In the judicial reorganisation, although there are no direct benefits for equity holders, they may benefit indirectly from the company’s recovery.

Shareholders are only required to approve the filing by the company for judicial reorganisation, but, in practice, shareholders can be highly active in a judicial reorganisation, including by negotiating the restructuring plan and sometimes even financing the company under reorganisation by providing DIP finance. Usually, negotiations with creditors are led by the debtor (but the debtor is usually influenced or instructed by the controlling shareholder).

According to Brazilian law, shareholders are only liable for the payment of the shares subscribed by them or for the abusive exercise of their voting rights, especially regarding their controlling power. They are generally not liable for the company's obligations, and their assets may only be sought in specific cases through piercing the corporate veil. In insolvency scenarios, creditors have requested veil piercing to reach shareholders' and officers' assets, but this is still a controversial matter with no settled interpretation of its requirements and consequences.

In the case of bankruptcy liquidations, if the court finds that the requirements of veil piercing were met (and such requirements are the same as described above), the assets of the stakeholders involved (the applicable shareholders, other companies or officers) will be pooled and applied to pay creditors to the extent necessary.

The Brazilian Bankruptcy Law also provides that a bankrupt estate can sue managers, who can be held personally liable as established in the respective laws. There are a few precedents in which administrators have been held liable for a company bankruptcy and, in those cases, the administrators have committed fraud that has been proven in other lawsuits or before the relevant jurisdiction (such as Banco Santos and Banco Schahin).