Corporate M&A 2023

Last Updated April 20, 2023

Brazil

Law and Practice

Authors



Trench Rossi Watanabe advises on all aspects of corporate M&A, with particular expertise in handling highly complex inbound and outbound transactions. The firm’s corporate and finance team co-ordinates high-end, sophisticated and multi-jurisdictional deals involving publicly listed and private Brazilian companies and is renowned for having a strong international trade practice, assisting Fortune 500 international companies from several countries. Trench Rossi Watanabe professionals are constantly updated on the legal regulation changes in Brazil and abroad, being better qualified to advise companies in establishing their business in Brazil. In addition, the firm has a practice devoted to providing sound and commercial advice for domestic reorganisations involving private or listed companies, and to co-ordinate planning and execution in other jurisdictions as well.

When the current M&A market and its operations is analysed and compared to the peak of the COVID-19 pandemic, a reduction in both number of transactions and total aggregate value of these operations is noted. Based on available public data and the authors’ knowledge of their own practice, these reductions appear to be due to a slow down on both domestic and cross-border transactions and, therefore, less direct investment in the region. This scenario applies to the whole Latin America region; however, Brazil is still the biggest player in M&A transactions in the region and the impact is thus more pronounced here.

This slowdown in M&A transactions in Brazil in 2022 compared to 2021 can be observed in both numbers of transactions involving private equity and venture capital industries. This underscores how the global turmoil has affected the market. Moreover, there has been an increase of interest by large, multi-jurisdictional companies in business, focused on innovative solutions and/or start-up companies. It has been noted that these large, multi-jurisdictional companies are using their corporate venture capital investments arm in such transactions, which have become more common. Several deals were analysed during the period.

During the pandemic there was a huge volume of transactions in the healthcare industry, but this has slowed considerably in the past year. Most of those transactions involved acquisitions of health institutions, supply chains related to health and hospital management, as well as distributors, education and support services.

While the Brazilian M&A market during the last 12 months continued to suffer from the ongoing impacts of the COVID-19 pandemic, political instability has had a much larger and more direct effect on investment.

During 2022, there was an increase in venture capital operations and, especially at year end, an increase in transactions in the private equity industry, mainly focused on technology and financial sectors.

An upward trend in restructurings and distressed M&A transactions, especially turnaround processes, divestments and spin-offs, was also seen, and seems likely to continue in 2023. Companies struggling to recover and reassessing their strategies must reshape their businesses. Many should continue promoting divestments in non-core assets, either to reinvest in strategic capabilities or to strengthen their balance sheets.

Despite the decrease in the number of transactions in the health industry, there are still a stable number of projects in the energy industry (mainly focused on energy transition) and technology (fintechs and other “techs” focussed on several sectors) driven by new demands in the productive and service sectors.

In the current scenario, financial capacity of contracting parties and likelihood of defaults in dealing with materialised and potential contingencies is of paramount importance. This means the firm’s work is increasingly focused on due diligence and requesting collateral to secure against risks.

It is also essential to highlight a growing awareness of ESG and sustainability amongst clients in all industries, and this is having an impact on the types of projects coming to market.

There has been a significant upturn in (i) the technology sector (eg, start-up fintechs, including the software industry, internet, e-commerce, digital media, process optimisation, digital innovation solutions and digital transformation, among others); (ii) energy, with emphasis on renewable energies and transmission assets, as well as energy transition; (iii) ESG and sustainability projects; and (iv) banking and finance, as well as financial services and investments – mainly to encourage competition in the lending and payments sector, as well as the development of intermediation companies and fintechs, and the offering of new financial products and services.

In Brazil, the pandemic directly affected sectors such as tourism and hospitality, services, leisure and entertainment, transportation, retail and exports. The complexities generated by the lockdown and the supply chain crisis, with significant shortages of products and changes in living and consumption standards, put these sectors into a slowdown, and 2022 showed that this recovery is yet to come.

Brazilian companies are most commonly acquired by means of private share purchase transactions negotiated directly with the owners of the shares, whether through a one-to-one negotiation or a private bid process.

Hostile takeovers of listed companies are not very common. This is because Brazilian companies usually have a controlling shareholder and free-float shares are, in many instances, not sufficient to give control.

As a rule of thumb, a public tender is required for the privatisation of government-owned companies.

Asset deals involve certain complexities, as the buyer may need to apply for new licences from scratch to operate the acquired business, transfer taxes will apply and the transfer of agreements is usually subject to the counterparties’ consent. In addition, unlike some other jurisdictions, Brazilian laws provide for successor liability in case of business transfers.

The primary regulator for M&A activity is the Administrative Council for Economic Defence Conselho Administrativo de Defesa Econômica or CADE). When the target is a public/listed company, the Brazilian SEC (Comissão de Valores Mobiliários or CVM) will have oversight powers, to make sure disclosure requirements and the rules governing tender offers for the acquisition of shares (when applicable) are observed. The CVM will also review the tender offer materials and approve the registration of the tender offer in the cases where a tender offer for the acquisition of shares is mandated by law. The local stock exchange (B3 S.A. – Brasil Bolsa Balcão or B3) will also review whether the rules of special trading segments, in particular the Novo Mercado, Nível 2, Bovespa Mais and Bovespa Mais Nível 2, applicable to certain tender offers for the acquisition of shares, are being observed.

If the target company operates in a regulated industry, specific agencies such as the Central Bank of Brazil (for financial institutions), the Brazilian Telecommunication Agency (Agência Nacional de Telecomunicações or ANATEL), the Brazilian Electric Power Agency (Agência Nacional de Energia Elétrica or ANEEL), the Superintendence of Private Insurance (Superintendência de Seguros Privados or SUSEP), among others, may have to approve the transaction.

Brazilian law sets forth restrictions on foreign investments in Brazilian companies in a few specific economic sectors, in addition to activities that are determined by the Brazilian constitution as a state-controlled company monopoly (eg, nuclear power, mail, telegraph and certain aerospace activities), for which foreign investments are forbidden. Foreign capital is also restricted – to a certain extent – in activities related to: (i) mineral resource prospecting and mining in border areas; (ii) media (eg, news companies, radio and free-to-air television); (iii) healthcare (in specific situations); (iv) acquisition of rural and border lands; and (v) insurance and reinsurance.

In the specific cases of media and healthcare, the legislation also expressly extends the restrictions to indirect investments.

Apart from the above, Brazilian exchange control rules require the registration of foreign investment in Brazilian companies with the electronic system of the Central Bank of Brazil. The lack of proper registration may affect the ability to repatriate the investment and to remit dividend payments abroad, and may subject the Brazilian company to fines. Exchange control rules also impose the periodic reporting of limited financial information relating to the Brazilian company, subject to fine. The registration system is declaratory and quite straightforward.

The Brazilian Competition Law (BCL) sets forth an objective list of transactions subject to mandatory pre-merger notification to the Administrative Council for Economic Defence (CADE, the antitrust authority), which requires the parties involved to wait for CADE’s approval to proceed with the closing of notifiable transactions. These transactions are: typical M&A transactions (acquisition of control or significant minority shareholdings, as well as relevant productive assets); certain associative agreements; joint ventures; and consortia, except those formed solely for the purposes of participating in public bids.

In addition to falling within the list of transactions above, the thresholds for mandatory filing are: (i) the transaction must generate at least potential effects in Brazil; and (ii) the parties’ economic group must meet the revenue criteria.

The effects requirement is often met when the target has a direct presence in Brazil through a subsidiary, distributor, commercial representative, etc, or an indirect presence through exports. The revenue thresholds are as follows: (i) the economic group of one of the parties involved in the transaction must have had revenues in Brazil, in the year prior to the transaction, equal to or higher than BRL750 million; and (ii) the economic group of at least one other party to the transaction must have had revenues in Brazil equal to or higher than BRL75 million.

For the purposes of defining “economic group”, Brazilian regulations state that one has to consider: (i) all companies that are controlled directly or indirectly by the same parent company or individual; and (ii) all companies in which any of the companies identified in item (i) holds an equity interest of at least 20%, directly or indirectly, in the total capital or voting capital. CADE’s Tribunal has stated that the concept of an economic group is even broader, also encompassing the economic group of shareholders holding, directly or indirectly, an equity interest of 20% or more in the party to the transaction, even if the shareholder in question does not exert control over the party.

In the case of investment funds, for revenue calculation purposes, the economic group should comprise the following: (i) the investment fund itself; (ii) the economic group of each investor that holds, directly or indirectly, equity interest equal to or greater than 50% of the fund involved in the transaction (whether thorough individual participation or shareholders agreement); (iii) companies controlled by the fund involved in the transaction; and (iv) companies in which such fund holds, directly or indirectly, interest equal to or greater than 20% of the total capital or voting shares.

Notwithstanding the above, CADE can request the notification of any transaction that does not meet these thresholds for up to one year after closing, with powers to order divestitures.

Although Brazil has a rather strong litigation culture when it comes to labour claims, the transfer of the share control or of employees between companies (whether via offer and acceptance or employer substitution) in the context of acquisitions normally does not trigger information and consultation processes, whether with employees, unions or work councils.

Acquirers should consider that the transfer of a company’s ownership as a whole is not needed to trigger liability succession. In case of asset deals, the buyer will inherit liabilities and obligations to employees that the seller had, even if the transfer involved just one establishment or one line of business of the seller. For this reason, it is paramount to properly address such liabilities in the transaction agreement through proper indemnification rights of buyer against seller, which will be effective as between them.

There is no general procedure set forth in the Brazilian law for national security screening of acquisitions. Certain restrictions set forth by the legislation on foreign investments in Brazil are related to the protection of national security and economic welfare (eg, nuclear activities and acquisition of rural lands). Specifically, in relation to foreign investments, prior examination or verification is necessary by regulatory entities in certain situations that are indirectly related to national security, in particular the exploitation of frontier zones and the acquisition or rental of rural properties.

The parties to an M&A transaction in Brazil usually elect, in the share purchase agreement, arbitration for the resolution of disputes. Court decisions are often issued in the context of small transactions where arbitration was not elected. The downside of arbitration in terms of legal development and the formation of precedents is that the arbitration procedure is confidential. This makes it difficult to obtain details on the facts involved and on the arbitration decision.

Nevertheless, a very controversial arbitration decision was issued in relation to the acquisition by Paper Excellence of Eldorado Celulose, a cellulose company owned by J&F (JBF group). The parties entered into a share purchase agreement and closing was subject to certain conditions precedent, as usual in M&A deals. Some of those conditions precedent were not met, so the deal did not close. Paper Excellent filed an arbitration accusing J&F of bad faith, blaming it for the failure to accomplish the conditions precedent and asking to take control of Eldorado Celulose. The arbitral tribunal granted the relief in view of the evidence produced in the proceedings. J&F is now trying to challenge the arbitral award, so far without success. This is an important precedent regarding the consequences of not accomplishing the conditions precedent, depending on the conduct of the parties.

Another important case, which is still ongoing, is the arbitration filed by Telefonica, TIM (Telecom Italia Mobile) and Claro against the Brazilian mobile operator Oi for the sale of mobile telecom licences. The claimants seek almost USD1 billion for supposed breach of representations and warranties. The case shows the importance of proper due diligence and detailed wording in the share purchase agreement representations and warranties clause.

There have been no significant changes to the takeover legal framework in 2022, and no major change is expected in 2023. However, in 2022 the Brazilian government continued employing efforts to simplify licensing and other requirements for doing business in Brazil. A tax reform is expected to be approved in 2023, but the extent of the reform will depend on the political leverage of Brazil’s newly elected government. 

Stakebuilding prior to the launch of an offer for the acquisition of a listed company is a common practice up to 4.99%, considering the 5% threshold for material shareholding disclosure further detailed below. Whenever the material shareholding disclosure threshold is achieved, the acquirer has to report the transaction with shares or share-referenced derivatives and disclose to the market if it intends to change the management or the share control of the target company.

In addition, often the by-laws of Brazilian-listed companies set forth an obligation for the acquirer of a certain threshold (usually between 10% and 35%) of the voting shares to launch a tender offer for the acquisition of the remaining shares for a price determined based on a specific metric, with a premium. This obligation can nevertheless be waived by the shareholders’ meeting.

The Brazilian SEC regulation defines certain material shareholding disclosure thresholds. In a nutshell (and without prejudice to specific disclosure requirements applicable to the members of statutory boards), the direct or indirect controlling shareholders, the shareholders who elect members to the board of directors or audit board, and any individual or legal entity, or group of individuals or legal entities acting in concert or representing the same interest, which carry out significant trades with securities, are required to inform the Brazilian-listed company (through communication addressed to its investor relations officer, who will then inform the market) and, in specific cases, disclose a material fact notice with the details of the transaction.

Significant trades are defined as the transaction or series of transactions whereby any of those mentioned above change their direct or indirect holdings by 5%, 10%, 15% and so forth of any class or type of shares of the capital stock of the Brazilian-listed company. This also includes other types of securities, financial instruments referenced to shares and rights over any of the above. When referring to “changes” in holdings, the local rules mean both the increase and the decrease in holdings reaching the thresholds.

Trading with certain specific securities, such as securities index investment funds and other derivative instruments in which the shares of the listed company represent less than 20%, do not fall under the above-mentioned disclosure rules.

A listed company cannot hinder or lower reporting thresholds imposed by the Brazilian Corporation Law and the Brazilian SEC regulation, but it can impose additional requirements and provide for certain hurdles to stakebuilding. A relatively common hurdle is to impose on the acquirer of a certain threshold (that usually varies between 10% and 35%) of the voting shares the obligation to launch a tender offer for the acquisition of the remaining shares for a price determined based on a specific metric, with a premium. The shareholders’ meeting can waive this obligation.

Dealings with derivatives are allowed and, as a general rule, also fall under the Brazilian SEC disclosure requirements. The exception refers to certain specific securities, such as securities index investment funds and other derivative instruments in which the shares of the listed company represent less than 20%.

Even though the reporting obligations imposed by the securities rules also apply to derivatives (whether cash-settled or settled by physical delivery of the underlying asset), the form of calculation of the 5% threshold differs in each instance, as follows:

  • shares directly held and those referenced in derivatives with physical delivery of the underlying asset (eg, the shares of the Brazilian issuers) should be bundled together for the purposes of determining the disclosure threshold;
  • derivatives referenced to shares which are exclusively cash-settled should be computed separately from the shares mentioned in the preceding item in order to calculate the disclosure threshold; and
  • the number of shares referenced in derivative instruments that have economic exposure to the shares cannot be offset with the number of shares referenced in derivative instruments with opposite economic exposure.

Transactions with derivatives whose referenced securities grant powers in relation to the corporate control and management of the target company are, in principle, subject to the Brazilian Competition Law and to merger control approval if the other thresholds for mandatory filing are met.

Whenever the material securities holding disclosure thresholds are met, the investor needs to disclose certain information, not only in relation to its own identity and the conditions of the transaction with securities that it carried out, but also in relation to the purpose of the acquisition.

In particular, the investor needs to disclose the number of shares (and derivatives referenced to shares) it intends to acquire, with a statement as to whether it intends to change the share control or the management of the Brazilian-listed company. The investor also needs to disclose the number of shares and other securities and derivative financial instruments referred in such shares it holds and whether the investor or any related party is a party to any agreement governing the right to vote and/or the purchase or sale of securities issued by the Brazilian-listed company.

The execution of an agreement for the transfer of the share control of a Brazilian-listed company through a private transaction is one of the examples of events that require the issue of a material fact notice. The completion of the transfer also needs to be disclosed, and the acquirer will be required to notify the market if it intends to take the company private within one year following completion, and other important information related to the business and any corporate reorganisation.

If the transaction is expected to be conducted through a (voluntary) public takeover bid, no prior announcement is required, and the bidder may announce the offer directly upon the disclosure of the tender offer notice.

The Brazilian SEC may force the announcement if there are leaks or rumours that a potential acquirer intends to acquire the share control of a Brazilian-listed company either through a private transaction or by way of a takeover bid.

The market practice on timing of disclosure does not differ from the legal requirements.

The due diligence in a negotiated business combination involves all aspects: legal, tax, accounting, financial, environmental, anti-corruption, operational, IT security, data protection, etc. Non-materialised liabilities are often assessed by auditors (such as one of the Big Four) who review tax filings and payroll. Since the government granted some tax and employment incentives during the pandemic, these were included in the scope of the due diligence as well.

Brazilian-listed companies usually have a controlling shareholder and the free-float shares are not sufficient to give control, so standstill agreements are not common. On the other hand, before employing resources on due diligence and substantive negotiation, the potential acquirer will demand exclusivity. The seller will refuse to commit to exclusivity in private bid processes, depending on the level of competition.

Brazilian-listed companies are usually acquired upon negotiated private transactions, rather than upon tender offers.

As a general rule, the direct or indirect transfer of the share control of a Brazilian-listed company through private transactions is conditional upon the acquirer launching a tender offer for the acquisition of the remaining voting shares of the free float, for a price equal to at least 80% of the price paid for the shares of the share control. Depending on the segment of B3 on which the company is listed, the acquirer may have to extend the offer to the non-voting shares and the price to be offered to the free float may reach 100% of the price paid for each voting share that is part of the share control. Because of this, it is common for share purchase agreements to provide for the obligation of the buyer to make the tender offer, subject to specific indemnification rights of the seller.

Generally, the process for acquiring/selling a business in Brazil takes about four to six months, if there are no complex closing conditions, including complex merger control filing. Even though the outbreak of the pandemic resulted in closing uncertainty in some cases (especially due to discussions on material adverse effect clauses), deals signed after the outbreak were generally not delayed or prevented from closing because of the pandemic.

The Brazilian Corporation Law and the Brazilian SEC regulations set forth the following mandatory tender offers for the acquisition of shares of a Brazilian-listed company.

  • Tag along tender offer – the direct or indirect transfer of the share control of a listed company through private transactions is subject to the acquirer launching a tender offer for the acquisition of the remaining free-float voting shares, for a price equal to at least 80% of the price paid for the shares of the share control. Depending on the trading segment of B3 on which the company is listed, the acquirer may have to extend the offer to the non-voting shares and the price to be offered to the free-float shares may reach 100% of the price paid for each voting share of the share control.
  • Tender offer due to increase in shareholding – the controlling shareholder of a listed company shall launch a takeover offer whenever it, a person related to it, or other persons acting jointly with the controlling shareholder wish to acquire more than one-third of the free float of a given type or class of shares.
  • Taking-private tender offer – in order to take a company private, the controlling shareholder or the company itself shall launch a tender offer for the acquisition of all shares of the company. The Brazilian SEC will only approve the cancellation of the registration as a public company if holders of at least two-thirds of the free-float shares registered to participate in the bid accept the offer or expressly agree with the company going private.

In the case of the tender offer due to increase in shareholding and of the taking-private tender offer, the offer price must be fair and duly supported by an appraisal report prepared in accordance with the Brazilian SEC regulation. In addition, holders of at least 10% of the free-float shares can request the calling of a special meeting of holders of free-float shares to decide on the performance of a second valuation.

Except in the case of Nível 1, B3 regulations applicable to the special trading segments impose the launch of a tender offer in order for companies to delist from such segments.

Cash is more common than shares as consideration for M&A transactions in Brazil because shareholders are generally entitled to pre-emptive rights in the issuance of new shares. Due to such statutory pre-emptive rights, companies are somewhat restricted from issuing shares as consideration in an acquisition. In order to use shares, the transaction must be structured as a merger or a merger of shares, in which case pre-emptive rights would not apply, as opposed to a buy-out acquisition. However, a business combination transaction is more regulated than an acquisition, increasing execution costs, time and risks. For instance, in a merger, there is the need to produce certain financial statements and appraisal reports, shareholders usually have withdrawal rights, and the transaction must be approved by the shareholders of both entities. On the other hand, acquisitions do not have these constraints and would only trigger withdrawal rights and be subject to shareholders’ approval in limited circumstances.

The most common tool to bridge valuation gaps is through earn-outs, which often are based on future performance (EBITDA, net profits or revenues) of the target companies, typically between one and three years after closing. Another tool becoming more commonly used is a staggered acquisition, through which the buyer starts with a lower percentage of the equity and has a call option to purchase control, usually priced based on a pre-determined metric and premiums depending on the target’s future performance. In such instances, it is also common for sellers to have a call option contingent on the buyer not exercising its call option.

A takeover offer can be subject to voluntary conditions provided that the satisfaction of such conditions is not dependent on the bidder. As such, regulation does not allow for discretionary conditions, such as conclusion of diligence at the satisfaction of the bidder.

The most common voluntary conditions (ie, in addition to regulatory conditions) of a takeover offer in Brazil are the obtainment of material waivers from debtors and key customers and suppliers, waivers from poison pill clauses, absence of force majeure events and/or material adverse effects and, depending on the origin of funding, and absence of material foreign exchange currency fluctuations.

Minimum acceptance conditions differ according to the type of tender offer. In case of a takeover tender offer, the minimum acceptance is the number of shares sufficient for the bidder to reach more than 50% of the outstanding shares of the target, but the bidder can increase that threshold as a voluntary condition (although it is not common because it increases the risk of failure), as 50% +1 is the shareholding legally defined as control in right.

In taking-private tender offers, the minimum acceptance is two-thirds of the outstanding shares. In addition, in tender offers launched by the controlling shareholders and the company itself, purchases are limited to one-third of the outstanding shares, unless the two-thirds acceptance threshold is achieved. These rules are designed to protect liquidity.

Business combination transactions were not previously subject to financing conditions, as such transactions under Brazilian law were traditionally stock-for-stock. Recent market trends have developed for business combination transactions carrying redeemable preferred shares that are designed to deliver a pay-out to shareholders. In such cases, financing conditions can be contemplated and would be legally possible.

It is important to note that in Brazil, tender offers cannot contain financing conditions, because all tender offers are required to be carried out with a financial settlement guarantee from a duly registered financial institution or broker/dealer.

In Brazil, business combination transactions are not designed for hostile bidders. As such, in business combination transactions, the parties’ management boards are mutually interested in the transaction and co-operating in the negotiation of the deal agreements. Such agreements will always provide for the calling of a shareholders’ meeting to vote on the transaction and may (and usually do) provide for break-up fees. Non-solicitation provisions are less common in Brazil in light of the Brazilian Civil Code, which imposes a duty of objective good faith. For that reason, Brazilian market practice does not often see provisions such as non-solicits or no-shop provisions in agreements.

In terms of managing interim period risks, the most common tool is through a material adverse effect condition clause. Parties have been carefully negotiating the terms, exclusions and carve-outs in order to allocate such risks between the parties in a clear way. Other situations that are becoming more important are: (i) the escalation of the war in Ukraine; (ii) escalation of US-China tensions; and (iii) Brazilian political instability (ie, election challenges).

There have not been recent regulatory developments affecting the length of interim periods.

In Brazil, companies cannot provide additional governance rights to individual shareholders through shareholder rights agreements. Governance rights can only be included in by-laws and would benefit all shareholders. Nevertheless, under Brazilian Corporate Law, shareholders have certain statutory governance rights after reaching a certain level of shareholding, such as: (i) holders of 10% of the non-voting shares or 15% of voting shares (if the company is trading under Novo Mercado, this threshold is reduced to 10%) right to demand a separate vote for one board member, in which controlling shareholders cannot vote; holders of a certain ownership threshold ranging from 2% to 8% of voting shares or 1% to 4% of non-voting shares can request the installation of a Fiscal Council with broad supervision powers, in which minority shareholders would likely be able to appoint a representative member; among others. In addition, a holder of more than 50% of the capital will have a statutory right to appoint the majority of the board and enough votes to approve any matter, including business combination transactions and amendments to the by-laws. It is noted that controlling shareholders have a statutory fiduciary duty towards the company and are also subject to certain conflicts of interest provisions and rules against abuse of power.

Shareholders of listed companies in Brazil can exercise their voting rights in the following manner:

  • in person, noting that many companies have adopted virtual or hybrid shareholders’ meetings in which the shareholder can be present remotely;
  • represented by an attorney-in-fact who is present at the meeting in person (see the bullet point above);
  • by submitting a remote voting form, duly executed, in meetings where the companies provide such a remote voting form (companies are obligated to provide the form in the annual meeting and in meetings called to vote on board election – in all others the provision of a remote voting form is at the company’s discretion); and
  • providing a proxy to management.

Given the virtual or hybrid meeting option and the remote voting form, voting by proxy to management has become a rare strategy in the Brazilian market.

A statutory squeeze-out mechanism is only available in the context of taking-private tender offers in which less than 5% of the total shares remain after the tender offer. In this case, the bidder can redeem the outstanding shares by paying the price of the tender offer.

In the context of other tender offers, such as takeover tender offers, no squeeze-out mechanism is available. In those cases, the strategy usually adopted by bidders is either: (i) launch a taking-private tender offer after the takeover tender offer; or (ii) engage in a business combination transaction by which the remaining shareholders are forced up into the bidder’s capital and out of the target’s capital.

In the context of takeover tender offers, there have been some instances in which the bidder obtained a commitment from relevant shareholders to tender their shares.

In other types of tender offers, such as taking-private tender offers, it is also common to obtain commitments from relevant shareholders either to tender shares or to approve the taking-private bid.

In tender offer cases, the commitments are usually negotiated before the bid is made public, as the bidder seeks some sort of deal certainty before deciding to move on with the offer. Still, bidders should be careful because the failure to obtain such commitment may expose the bidder’s strategy, cause a leak or instigate a competitive tender offer from a third party.

In business combination transactions, it is also possible to secure voting support agreements, which are usually negotiated along with the transaction agreements.

In either case, such commitments usually do not provide an out in case of better offers.

A bid must be kept secret until the moment it is published to the market. In Brazil, there are certain types of tender offers that are subject to prior registration with the Brazilian SEC (eg, going-private tender offers, exchange tender offers, tag-along tender offers) and voluntary tender offers that are not subject to registration, such as takeover tender offers. In tender offers subject to registration, the intention is made public by notice to the target company on the date the tender offer is filed for registration with the Brazilian SEC. In the context of a takeover bid, the bid is disclosed when the bidder publishes the Tender Offer Notice in the newspaper, sends a notice to the target company and files it with the SEC. The bidder has discretion as to when to make the bid public in such cases.

However, if information about the bid leaks to the market, the bidder must promptly either publish the Tender Offer Notice or inform the market of its interest in launching a takeover tender offer. If the bidder opts to merely inform the market of its intention, the Brazilian SEC may impose a deadline for the publication of the Tender Offer Notice.

In Brazil, a business combination transaction (eg, merger, spin-off, share merger) is subject to the approval of the shareholders’ meeting. Listed companies are required to submit a minimum disclosure package in preparation for the shareholders’ meeting, which generally includes appraisal reports, details on the involved companies and their shareholders, the main terms and conditions of the deal, information on how the shares of both companies have been evaluated, pro forma financial statements of the listed companies, information on dilution and rights of dissenting shareholders.

Bidders are not required to disclose or produce financial statements in the context of a tender offer bid because, under Brazilian rules, the tender offer bid must be guaranteed by a financial institution duly registered with the SEC.

However, in the context of a business combination, both parties are required to produce financial statements in IFRS. In cases where the business combination is likely to result in a dilution of more than 5% of a listed company in Brazil, pro forma financial statements are also required.

Full disclosure of transaction documents is not required in Brazil, even though some companies may choose to do so as a good governance practice. Notwithstanding, the main terms and conditions of the agreements must be disclosed to shareholders in anticipation of the meeting.

Under Brazilian Corporate Law, directors and officers owe certain fiduciary duties to the shareholders in the context of business combinations: (i) duty of care when negotiating the terms of the transaction; (ii) full and fair disclosure so that shareholders can make an informed decision; (iii) duty of loyalty to the company protecting shareholders from conflicts; and (iv) duty to treat shareholders equally, without unlawful discrimination.

The Brazilian Corporation Law also provides that controlling shareholders, directors and officers have a fiduciary duty to direct the company to satisfy its social function. Social function has been construed as encompassing all of the company’s stakeholders.

Brazilian SEC rules require companies to establish a special committee to negotiate the terms of a business combination when the merger is between a controlling shareholder and the controlled company, and the controlling shareholder intends to vote to approve the transaction as a shareholder of the controlled company. However, there have been circumstances in which the company opts to establish a special committee, even though one is not required under the rules, as a governance practice in situations where there may be a potential conflict of interest as the Brazilian SEC has recognised this practice as relevant evidence that the approval process has not been tainted by conflict of interest.

Both Brazilian courts and the Brazilian SEC recognise the business judgement rule (BJR) as estoppel for directors’ civil and administrative liability. In order for the BJR to apply, the directors’ decision must have been carried out through a good faith, diligent, informed and disinterested process. In the context of hostile takeovers, it is unlikely that the BJR will apply due to the inherent personal interest directors will have in the outcome of the transaction. As such, directors should be careful during takeovers and respectful of the shareholders’ rights.

Business combination transactions such as mergers, in Brazil, are usually friendly transactions and, as such, directors do not usually engage counsel or advisers different from the company’s counsel and advisers. Such advisers are usually legal and financial. In some instances, there is also a fairness adviser.

On the other hand, in case of takeover transactions, it is very common that the board of directors engage independent legal counsel and a fairness opinion.

Conflicts of interest of directors, officers and shareholders have been actively subject to judicial and Brazilian SEC scrutiny in Brazil. There is a longstanding debate over the application of the Brazilian statutory conflict of interest rule for shareholders and the Brazilian SEC has issued conflicting opinions over time. The issue is whether the conflict of interest should prevent the shareholder from voting (also referred to as formal conflict) or should be assessed after the vote in light of the actual terms and conditions of the transaction and potential consequences (also referred to as material conflict). Most recently, the Brazilian SEC has settled for the material conflict application. However, it is still unclear whether such understanding will keep prevailing after changes in the SEC board’s composition.

Hostile tender offers are permitted in Brazil; however they are not very common as the country has a great number of companies with controlling shareholders holding more than 50% of the shares, making those impossible targets. Even so, there have been a few successful and unsuccessful hostile tender offers in the past decade, which provide for reasonable precedents.

The use of traditional defensive measures has been very limited and the lack of a great number of hostile takeovers in Brazil reduces the number of opportunities. The Brazilian law is also very restrictive to certain traditional measures. For instance, it is not possible to discriminate among shareholders issuing shares and diluting the bidder. In addition, the time between the launch of the offer and the auction is relatively short (30–45 days) making procuring and negotiating alternative deals very challenging. In addition, directors do have a fiduciary duty to allow the shareholders to decide on the tender offer and are required to issue a diligent opinion on the merits of the offer.

The most successful defensive measures used in the past have been: (i) challenges to the compliance of the offer with the Brazilian SEC’s rules and procedures, causing delays and other hurdles; (ii) procurement of a competitive tender offer; (iii) issuing a compelling and substantiated negative opinion about the offer and work with relevant shareholder base politically; and (iv) potentially challenging the transaction from an antitrust perspective if the bidder is a strategic player. The pandemic has not had any effects on such measures.

It is common practice in Brazil for companies to include clauses in their by-laws requiring shareholders who achieve a certain ownership level to launch a tender offer for all shareholders at a premium over market price, also known as the Brazilian poison pill. However, shareholders are able to waive such requirement in a shareholders’ meeting. In practice, bidders have included such waiver as a condition to their offer and the management is required to put the matter to a vote before the auction date.

Directors must always act diligently, with loyalty to the company and its shareholders. The ability of the directors to avoid the offer is very limited.

In the context of a hostile takeover, directors do not have an ability to “just say no”. They can issue a negative opinion about the offer, but the shareholders are the ones who will ultimately decide whether or not to tender.

On the other hand, in the context of a business combination transaction, such as a merger, directors end up, in practice, having the ability to prevent the transaction as the merger terms must be negotiated and approved by the board before being submitted to the shareholders. The shareholders’ remedies in such case would be limited to seeking civil and administrative liability from directors who allegedly breach their duty of care or acted with conflict of interest. However, the business judgement rule could apply and stop such liability.

Litigation is relatively common in Brazilian M&A deals and is often subject to arbitration.

M&A litigation usually relates to post-closing indemnities and earn-out calculations. At the second level, litigation has been seen in connection with the enforceability of call/put options, closing enforcement and governance rights under shareholders’ agreements.

During the COVID-19 pandemic, there were many deals that were in the phase between signing and closing. In most of the transactions, the parties managed to negotiate new terms and conditions. However, this was a lesson learned on the importance of clearly defining in the share purchase agreement “material adverse effect”. Otherwise, if the agreement is subject to Brazilian Law, the provisions of the Civil Code will apply, under which a party may claim hardship and terminate or review the price of an agreement, whenever extraordinary and unforeseeable facts impact the economic balance of the transaction, highly benefiting one party and highly damaging the other party. In many instances such provision was claimed in an attempt to renegotiate the terms of share purchase agreements or reviewing the purchase price.

Historically, shareholder activism has not been an important force in Brazil. However, in the last five years, many shareholders have been taking advantage of the mandatory arbitral clause applicable to corporations listed on Novo Mercado of B3 to bring arbitrations claiming damages in case of alleged misconduct. For instance, there were arbitrations against Petrobras for supposed misconduct in the “Car-Wash” operation, against Vale for the environmental accident in the city of Brumadinho, against JBF for supposed management misconduct and more recently against Lojas Americanas for supposed accounting fraud.

Activists are mostly focused on fixing supposed wrongdoing and, to the extent possible, interfering in the appointment of management.

So far, activists have not sought to interfere with the completion of announced transactions. However, in the cases where a tender offer for the acquisition of free-float shares is mandatory and the law requires the offer to be made at the so-called “fair price”, there can be a lot of pressure to review or challenge the appraisal report or to otherwise increase the price (for instance, in case of delisting tender offers).

Trench Rossi Watanabe

Arq. Olavo Redig de Campos Street, 105
31º, Ed. EZ Towers, Torre A
04711-904
São Paulo, SP
Brazil

+55 11 3048 6800/+55 11 5506 3455

www.trenchrossi.com
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Trends and Developments


Authors



Machado, Meyer, Sendacz e Opice Advogados has been in operation for 50 years and is noted for its sound ethical principles, the technical skills of its professionals, and its close relationships with clients. The team provides innovative legal solutions that anticipate scenarios and make business possible, contributing to clients’ business growth and transforming realities. Practice areas include aviation and shipping; banking, insurance and finance; capital markets; competition and antitrust; contracts and complex negotiations; financing and infrastructure projects; labour and employment; litigation, arbitration and dispute resolution; M&A and private equity; public and regulatory law; restructuring and insolvency; and tax.

M&A Outlook 2023

Three years ago we were facing the beginning of the COVID-19 pandemic, which resulted in uncertainty towards M&A activity and a momentary reduction of new transactions in Brazil. The scenario was reverted still during 2020, with more than 1,000 reported transactions representing an increase of around 10% in relation to 2019. That trend was repeated in the following years with a high level of M&A activity in 2021 and 2022. The most active sectors were technology (in general), energy, hospitals and healthcare, and financial services, among others.

During 2021, even though the pandemic scenario was still critical in the country due to the high number of COVID-19 cases and lack of vaccines, the number of M&A transactions increased by more than 60% in relation to 2020 and turned out to be a record-setting year, with the total amount of M&A transactions reaching over USD66 billion. Some of the most relevant transactions included the merger of Hapvida and Notredame Intermédica, in the health insurance sector, the acquisition of Big by Carrefour, and the merger of Unidas and Localiza, creating a giant of the car rental business. It was also a significant year for capital markets, with a record 45 initial public offerings – the highest number since 2007. This positive scenario was a result of many factors, including the need to explore strategic transactions, low interest rates and a favourable exchange rate of the Real to the US dollar.

Based on this positive scenario, there were good expectations and optimism for 2022 as the pandemic had entered a more stable and controlled stage, irrespective of the uncertainty of the presidential elections, with the high political polarisation in the country, and outside factors such as the war in Europe. The market in 2022 was still very active, with transactions in areas such as energy, natural resources, and services. Private equity funds and investments also played an important role in the year’s M&A results, which were remarkable considering the challenges.

The expectations for 2023 are still unclear. Many believe that the first half of the year is likely to be slow, with activity picking up towards the end of the year. But that is difficult to predict. The uncertainties that still exist concerning the economic agenda of the new government and the mechanisms for controlling inflation, expectations regarding interest rates and the remaining effects of the pandemic are some of the factors that may contribute to a challenging year.

M&A Practical Trends

Share purchase agreements

During the COVID-19 pandemic, M&A transactions were forced to adapt to a new reality: people working from home, fully remote due diligence with the lack of site visits and less interaction of multidisciplinary teams. From a negotiation perspective, virtual meetings replaced face-to-face interaction. The use of technology made M&A transactions possible during the pandemic and helped transactions to become more efficient, with reduced costs. With the return of activities to the “new normal”, a hybrid system is the reality, where face-to-face meetings, drafting sessions and signing/closing ceremonies will coexist with remote work and virtual interaction.

As a result of the uncertain scenario and as a consequence of the unforeseen events of the past years, certain clauses and voting arrangements, in special those related to future events, gained more attention from the parties during negotiations. For example, buyers and sellers have come to dedicate a more significant amount of time in tailoring precisely “standard” material adverse effect provisions that would allow termination of a binding agreement prior to closing based on future and unforeseen events. Practice demonstrates that such clauses, although always inserted in M&A agreements, were rarely invoked by the parties in Brazil prior to the pandemic.

Likewise, earn-out provisions, where parties agree on conditional payments related to the target’s future performance, also gained more attention from the parties, as unforeseen systemic events could temporarily affect the target’s results and not necessarily represent the actual financial results in the long run. In this sense, clauses with the most accurate definition of criteria to be considered when assessing earn-out future payments became of more concern to the parties.

Similarly, parties paid more attention and negotiated in more detail other contractual provisions that depended on future events and valuation such as put/call options prices, criteria for the exercise of drag-along rights or conditions to the exercise of tag-along clauses.

Shareholders’ agreements

With companies facing unforeseen difficulties and challenges, discussions about shareholders or similar voting agreements, including the duties of managers and shareholders arising therefrom, are also becoming more frequent. It is common practice in Brazil to bind directors to voting instructions issued by a shareholder or group of shareholders that are parties to a shareholders’ agreement.

The Brazilian Corporate Law

Article 118 of Law 6.404/76 (as amended, the “Brazilian Corporate Law”) provides that shareholders’ agreements should govern matters such as the purchase and sale of shares, pre-emptive rights, voting rights and control power. These agreements shall be observed and complied with by the company if filed within the company’s headquarters.

In Brazil, board members elected pursuant to shareholders’ agreements are normally bound to the voting provisions of such agreement and to the voting instructions of the shareholders or group of shareholders that nominated such directors. Pursuant to Brazilian Corporate Law, however, board members shall always act in the best interests of the company itself and not in the interests of a certain shareholder or group of shareholders.

To enforce and secure compliance with the shareholders’ agreement, Brazilian Corporate Law establishes that (i) the chair of the applicable meeting (shareholders or board) should disregard and not count any vote issued contrary to an existing shareholders’ agreement, and (ii) a shareholder/board member can vote on behalf of the others that are absent from the meeting and bound to the provisions of such agreement. This treatment clearly indicated the legislative option to reinforce the shareholders’ agreement provisions by providing the possibility of specific performance of the voting obligations during the meeting and without the need to file any type of judicial measure. This provision also indicates that a vote in accordance with the shareholders’ agreement is presumed legal.

Fiduciary duties

Board members and executive officers are, by law, bound to fiduciary duties to the company, including the duty of care, loyalty, absence of conflicts and disclosure of information. They shall always act in the best interests of the company itself and not in the interest of the shareholder or group of shareholders that appointed such member. Similarly, the controlling shareholder is defined by Brazilian Law and is also subject to several obligations including fiduciary duties and the need to act in the best interests of the company. Both the management and the controlling shareholders are liable for actions taken in violation of the law, those fiduciary duties or the company’s by-laws, or in cases of wilful misconduct or fault (dolo ou culpa) and may be required to indemnify the company for the losses incurred as a result thereof. An important remark is that, from a litigation perspective, the filing of derivative lawsuits (ie, those initiated by shareholders on behalf of the company against those subject to fiduciary duties) or shareholder court activism in Brazil have historically been deterred by the financial risks arising from court fees and litigation expenses and the lack of consolidated precedents that substantiated relevant indemnification claims. The fact that any financial indemnification would likely benefit the company and not the shareholders directly also discourages this type of litigation.

Additionally, except if otherwise prescribed by specific agreements executed between the company and its board members, directors can be replaced, at any time, by the shareholders irrespective of cause. Therefore, from the board member’s perspective, on the one hand, they are bound by the voting instructions of the shareholders and, on the other hand, when they understand that the voting instruction is not in the best interests of the company and decide to vote contrarily to such instruction, such member runs the risk of being immediately replaced. In addition, the chairperson of the applicable meeting is likely not to count a vote contrary to a shareholders’ agreement.

Obviously, the board member shall not be obliged to comply with voting instructions determining the adoption of illegal acts – in such cases, both the shareholder and the board member may be held personally liable. The controversy is more complex when there is a legitimate divergence towards the definition of the company’s best interests in cases of agreements regulating the control group.

Best interests of the company

Irrespective of being common practice in M&A and being based on specific legal provision, scholarly discussion has aroused controversy with respect to whether board members should be completely independent to vote – and therefore able to refuse to comply with the shareholders’ agreement based on the argument that a certain voting instruction is not in the company’s best interests – or whether the member should always follow the voting instructions. In the end, the discussion comes down to the definition of the responsible party in determining the interests of the company: the controlling shareholder or the management of the company.

Many of the shareholders’ agreements drafted (in our practical experience) indicate that the board members shall also follow voting instructions of the shareholders responsible for their respective appointment. Contrarily, there are agreements in which the matters in relation to which board members should follow voting instructions are determined. In this case, the clauses tend to be exhaustive and specific, listing in detail the matters and circumstances that would entail a certain group of shareholders to vote as a group and to instruct their respective appointed management member to vote accordingly. Normally, in any case, the definition of the vote is established by the shareholders in meetings that occur prior to the shareholders’ or board meeting, with the purpose of defining the group vote in relation to the applicable matters in discussion.

In this regard, scholars have been divided into three different lines of opinion:

  • those who believe that the board members should be required to follow voting instructions in full, without any reservation;
  • those who believe that board members should not be required to follow any voting instruction, and always vote with freedom if they understand that such orientation is contrary to the company’s interests; and
  • those who defend an intermediary position, according to which board members and executive officers should be required to follow voting instructions except with respect to supervising matters and to matters that are not directly inherent to the controlling power. This includes, for example, supervising officers, examining company’s information such as financial statements and agreements, convening shareholders’ meetings, expressing a position towards the officers’ management report and choosing independent auditors.

Although there are arguments in favour of each of the positions above, from a litigation perspective, the intermediary position tends to be the prevailing one in courts due to the managers’ obligation to pursue and to act on behalf of the company’s best interests. Based on this scenario, if the board member understands that a certain instruction is not in the company’s best interests, they should be allowed to vote contrarily, including for purposes of preserving their position and not being held liable for a certain decision that allegedly is not in the company’s best interests.

It should be noted that the board may be replaced at any time and a vote contrary to the shareholders’ instruction could result in the removal of such member. Also, in practice, the definition of the company’s best interests can be complex and not obvious or straightforward. Thus, in practice, the controlling shareholders’ orientation tends to prevail without question in most cases, especially limited liability companies and closely held corporations. In publicly held companies, on the contrary, in addition to the existing civil liabilities, board members and executive officers can be investigated and punished by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) for breaching their fiduciary duties, which is an additional control mechanism. In contrast to what occurs in other jurisdictions, CVM is empowered to monitor and punish capital markets infractions pursuant to Law 6385/76 but also corporate infractions, including with respect to the Brazilian Corporate Law, in relation to controlling shareholders, officers, board members and other players. Therefore, in this scenario, the likelihood of a board member questioning a voting instruction and refusing to vote accordingly if they consider such instruction to be prejudicial to the company tends to be higher, given that they may also be investigated and punished in the administrative sphere.

As discussions about voting agreements become more frequent, it is understood that it is of the utmost importance that shareholders’ agreements governed by Brazilian law are drafted in consideration of board members’ and executive officers’ fiduciary duties, specifically addressing matters and circumstances that would entail shareholders deciding to vote as a group and instructing their respective appointed management member to vote accordingly, to ensure enforceability and avoid questioning.

Machado, Meyer, Sendacz e Opice Advogados

Ed. Seculum II
Av. Brigadeiro Faria Lima, 3200, 5th floor
Itaim Bibi
São Paulo, SP
01453-050
Brazil

+55 11 3150 7000

+55 11 3150 7071

machadomeyer@machadomeyer.com www.machadomeyer.com
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Law and Practice

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Trench Rossi Watanabe advises on all aspects of corporate M&A, with particular expertise in handling highly complex inbound and outbound transactions. The firm’s corporate and finance team co-ordinates high-end, sophisticated and multi-jurisdictional deals involving publicly listed and private Brazilian companies and is renowned for having a strong international trade practice, assisting Fortune 500 international companies from several countries. Trench Rossi Watanabe professionals are constantly updated on the legal regulation changes in Brazil and abroad, being better qualified to advise companies in establishing their business in Brazil. In addition, the firm has a practice devoted to providing sound and commercial advice for domestic reorganisations involving private or listed companies, and to co-ordinate planning and execution in other jurisdictions as well.

Trends and Developments

Authors



Machado, Meyer, Sendacz e Opice Advogados has been in operation for 50 years and is noted for its sound ethical principles, the technical skills of its professionals, and its close relationships with clients. The team provides innovative legal solutions that anticipate scenarios and make business possible, contributing to clients’ business growth and transforming realities. Practice areas include aviation and shipping; banking, insurance and finance; capital markets; competition and antitrust; contracts and complex negotiations; financing and infrastructure projects; labour and employment; litigation, arbitration and dispute resolution; M&A and private equity; public and regulatory law; restructuring and insolvency; and tax.

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