The M&A market in Brazil, like in many other parts of the world, was significantly affected by the COVID-19 pandemic, causing a slowdown as uncertainties surrounding the economic ramifications emerged. Many companies opted to defer or cancel their M&A plans to prioritise stabilising their operations and addressing pandemic-related challenges. As time progressed and the situation began to stabilise, the Brazilian M&A market gradually recovered.

In 2021, Brazil witnessed a significant increase in the number and value of M&A. It was a record year for the country in this regard, with a substantial volume of transactions occurring across various sectors of the economy.

However, the volume of transactions in 2022 and 2023 was negatively impacted by the local economic situation and political uncertainties.

Economic and financial projections anticipate a significant increase in deals for 2024, linked to the expectation of falling interest rates and Gross Domestic Product growth. Notable sectors include renewable energy, pharmaceutical industries, healthcare and infrastructure.

Brazil is the main agribusiness player in the world, with many M&A and corporate transactions taking place in this sector. Other stable business sectors that have attracted investment focus over the past 12 months include health, technology and food.

According to market reports, a significant number of Brazilian transactions closed in 2023 were related to the information technology, services, financial and real estate sectors. However, the most substantial deals were closed in the agrobusiness, mining, healthcare, food and beverage, chemical and pharmaceutical sectors, among others.

One of the main sectors adversely affected by the COVID-19 pandemic in Brazil was the consumer sector. Despite signs of recovery in 2021 and 2022, the high interest rates impacted the sector in 2023.

The first step is a preliminary analysis of the target numbers, business and general concerns.

Upon the purchaser declaring interest in the acquisition and the parties executing preliminary instruments, it is recommended to conduct due diligence on the target in order to assess potential liabilities and confirm transaction bases, including the target numbers.

The transaction structuring is based on many relevant factors and plays a very important role at this point, guiding the parties in the negotiation and execution of the definitive agreements.

When involving publicly held companies, tender offer and disclosure procedures based on the Brazilian Corporations Law and the regulation of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) shall be complied with by the parties involved. Approval from government authorities shall also be obtained when applicable, including from regulatory agencies and the Brazilian Administrative Council for Economic Defense (CADE).

From an antitrust perspective, CADE is the government authority responsible for analysing market concentrations that affect competition in Brazil, depending on whether certain thresholds set forth by law are met. Depending on the business sector involved, the transaction may also need to be approved by other government authorities, such as regulatory agencies.

Although the Brazilian regulatory framework is generally friendly to foreign investments, Brazilian laws do impose certain restrictions and limitations on foreigners, including the following.

• Land ownership: the Constitution establishes limits on land acquisition by foreigners, especially in rural areas, border areas, national security zones and environmental preservation areas.
• Media companies: there are restrictions on foreign participation in media companies, such as radio, television and newspapers. Brazilian law sets limits on the foreign capital control of media companies, aiming to protect diversity of opinion and the country's cultural identity.
• Airlines: the Constitution stipulates that airlines operating domestic routes in Brazil must have the majority of voting capital and effective control in Brazilian hands.
• Nuclear and natural resources: in some sectors deemed strategic for national security, such as nuclear, oil and some other natural resources, there are restrictions on foreign capital participation in companies and projects.
• Financial sector: although Brazilian legislation allows foreign investments in the financial sector, there are certain restrictions and specific regulations regarding the control of banks and other financial institutions.

Foreigners should also consider restrictions and differences involving tax treatment, bureaucracy and other matters relevant to the structuring of foreign investments.

CADE must pre-approve the implementation of certain transactions (such as the sale and purchase of relevant equity stakes and assets, joint ventures, associate agreements and certain types of consortia) that are likely to have an impact on the Brazilian market. This is provided that the economic groups involved meet the minimum revenue criteria, which are that at least one of the groups reported, in the last financial statement, annual gross revenue or total turnover in Brazil, in the year prior to the transaction, equivalent to or greater than BRL750 million, and the other group BRL75 million.

For the purpose of defining an economic group, CADE considers companies that are under common control, whether internal or external, and companies where any of such companies hold, directly or indirectly, at least 20% of the equity ownership or voting rights.

Investment funds are considered part of the same economic group for the purpose of calculating the revenue referred to above, as follows:

• the economic group of each investor who holds, directly or indirectly, a participation equal to or greater than 50% of the quotas of the fund involved in the transaction through individual ownership or through any type of quotaholder agreement; and
• the companies controlled by the fund involved in the transaction and the companies in which the mentioned fund holds, directly or indirectly, a participation equal to or greater than 20% of the share capital or voting rights.

Regardless of the criteria mentioned above, CADE may require the submission of concentration acts for its analysis within one year following the closing of any transaction.

For those involved in M&A deals and foreign investments in Brazil, a key area of concern should be labour law regulations covering employment agreements, employee benefits, termination protocols and the risks associated with labour liabilities. Ensuring compliance with Brazilian labour laws is vital to minimise potential risks and liabilities arising from the integration and restructuring of the workforce following an acquisition. Furthermore, having a clear understanding of collective bargaining agreements, labour union dynamics and industry-specific regulations is essential for the smooth execution of M&A transactions in Brazil.

Although Brazil lacks a formalised national security review process like some other jurisdictions, certain transactions may receive closer scrutiny from regulatory and/or governmental authorities, especially those involving sectors that are deemed critical to national security. Depending on the investment sector involved in an M&A transaction, regulatory agencies and other public bodies, as applicable, are responsible for the analysis of the national public interest involved.

While not directly related to the context of M&A deals, Law No 14,195/2021 (also known as the Business Environment Improvement Law) was important in improving the business environment in Brazil by simplifying processes, reducing corporate bureaucracy and creating a liberal environment favouring private investments, thus bringing real changes to the entire Brazilian business sector and consequently boosting the M&A market.

Law No 14,801/2024 also represents a significant advancement in the Brazilian capital market and an improvement in access to financial resources, whether through reduced interest rates or infrastructure debentures announced by the Brazilian government, which will also contribute to attracting investments to the country. In this context, new opportunities will arise for companies to raise funds and drive their M&A transactions.

Furthermore, the tax reform approved by the Brazilian government in 2023 favours economic and legal stability in the country, thus enhancing the level of predictability and market security, making it more attractive for foreign investments, which may also lead to an increase in M&A transactions in the coming years.

In December 2023, the CVM put forward a proposal for new rules regarding tender offers for public consultation. The aim is to review and update the regulation, addressing sensitive points for improvement compared to the current model and incorporating understandings that have been built by the CVM and the market over the last 20 years. The public consultation ended in March 2024, and the CVM is expected to adopt new procedures on the subject soon.

It is relatively common to build a stake in the target prior to launching an offer in Brazil, either by means of acquiring shares held by the current shareholders or by purchasing a certain volume of shares of a publicly held company on the stock exchange. However, investors should be aware of disclosure provisions related to minority shareholdings involving publicly held companies, as defined in the Brazilian Corporations Law and the CVM regulation. Also, local regulation involving publicly held companies imposes restrictions on stakebuilding prior to launching an offer if the ultimate intention is to acquire a majority shareholding (two-step transaction), depending on how the stakebuilding and the majority acquisition are structured.

The CVM sets forth that shareholders holding 5% or more of a class or type of shares issued by a publicly held company are required to disclose their equity ownership. Any change in controlling shareholders or variation in their equity ownership causing it to exceed or fall below the thresholds of 5%, 10%, 15% and so forth of the same class or type of shares shall also be disclosed.

Companies have flexibility to introduce different rules regarding stakebuilding and corporate governance, but these rules must comply with the applicable corporate laws and regulation.

Brazil has a well-established derivatives market overseen by the CVM, and transactions involving derivatives are permitted.

In Brazil, the filing and reporting rules that are generally applicable to securities (see 4.2 Material Shareholding Disclosure Threshold) also apply to derivatives.

Derivatives backed by shares and other securities involving relevant shareholding or corporate external control with potential antitrust impacts shall also be subject to the generally applicable antitrust rules and to the oversight of CADE.

In the acquisition of control over a publicly held company’, the investor’s intentions and purposes shall be disclosed, in accordance with corporate and regulatory laws. Such legal and regulatory provisions aim to promote transparency, integrity and protection of the local market, and shall be analysed on a case-by-case basis.

The requirement to disclose a deal varies, depending on factors such as whether the company is publicly or privately held, as well as the regulations applicable to the activities of the target company and its corporate documents.

M&A transactions and the main terms and conditions involving publicly held companies are typically a material fact to be disclosed to the market, as they may impact the stock price, the investor’s decision to buy, sell or hold such stocks, or the investor’s decision to exercise any rights inherent to being the owner of securities issued by the company or referenced to them. In this sense, when negotiations are deemed material and potentially impact the stock price or investors’ decision-making power, the deal shall be disclosed, generally at the moment when any document is signed.

Transactions involving publicly held companies shall also comply with the tender offer rules and the rules related to disclosure and transparency.

Companies typically adhere to the deadlines established in legislation and/or internal regulations for disclosing information. However, due to the strict oversight by the CVM, publicly held companies tend to be quite cautious and conservative, disclosing information as soon as formal documents are signed.

The scope of due diligence in Brazil typically includes a comprehensive review of several aspects of the target's business, legal affairs, operations, finances and other relevant areas in order to identify potential and actual liabilities, risks and opportunities to inform the decision-making process of the purchaser.

The scope of due diligence in Brazil has been affected by the COVID-19 pandemic, which brought attention to particular risks and considerations, such as maintaining business operations, managing disruptions in the supply chain, adapting to remote work setups, and responding to shifts in consumer behaviour. As a result, purchasers may now place greater importance on evaluating the target company's resilience to challenges posed by the pandemic and its capacity to adjust to evolving market conditions.

In Brazil, standstills and exclusivity clauses are very typical in various business transactions, including M&A deals, as they grant the purchaser more certainty over the competitive investment process, as well as the possibility of maintaining a certain level of the company’s business.

M&A transactions that require the implementation of a tender offer are documented in definitive agreements, the content of which shall be reflected in the offer instrument and the terms and conditions of which shall comply with the applicable laws and regulation from the CVM.

In Brazil, the process for acquiring or selling a business can vary widely depending on the complexity of the deal and the regulatory approvals required. On average, the process can take several months to a year to finalise. Brazilian governmental measures enacted in response to the pandemic, such as mandates for remote work and restricted access to government facilities, have notably introduced practical delays and hurdles to the deal-closure process. However, the digitalisation process implemented by the government and the courts during the pandemic has had a positive impact on M&A transaction processes.

Brazil's mandatory offer thresholds vary depending on the type of transaction and the securities involved. These thresholds are closely overseen and regulated by the CVM, which is the country's primary regulatory authority concerning securities transactions. The thresholds themselves can vary based on factors such as the type of transaction, the nature of the securities involved (eg, common stock, preferred stock) and the ownership percentage being sought by the acquiring party. As such, compliance with these thresholds is imperative for parties engaged in acquisitions or sales within Brazil, ensuring adherence to regulatory requirements and transparency in the transaction process.

Cash is more commonly used as consideration in Brazil, although shares are also largely used in M&A transactions. Common tools to bridge value gaps include earn-outs, two-step sale structures and adjustment mechanisms based on post-closing performance.

In Brazil, common conditions for a takeover offer typically encompass a range of factors aimed at ensuring regulatory compliance and shareholder consent. These conditions often include obtaining the requisite regulatory authorisations or approvals from entities such as the CVM, CADE and regulatory agencies, when applicable. Shareholder approval is also frequently sought, aligning with corporate governance standards and promoting transparency in the decision-making process.

Material adverse change clauses are commonly incorporated to address unforeseen events or developments that could significantly impact the target company's value or operations. These clauses serve to protect the interests of both the acquiring and target entities by allowing for adjustments to the terms of the offer in response to material adverse changes in the target company's condition.

It is worth noting that, while certain conditions are common in takeover offers, regulators in Brazil impose restrictions on the use of offer conditions to prevent undue impediments to shareholder choice and ensure fairness in the transaction process. In sectors that are regulated by regulatory agencies, different public interests may also impose additional restrictions on takeover offer conditions.

In Brazil, the minimum acceptance condition for tender offers is a crucial aspect of M&A transactions, often governed by both legal regulations and specific provisions outlined in the by-laws of the target company. As a general rule, this condition requires the acquirer to secure a majority of the outstanding shares or a higher percentage as stipulated by the company's by-laws or relevant regulations, although the target company’s by-laws may impose different thresholds forcing the bidder to deliver a tender offer.

The CVM plays a central role in regulating tender offers and setting guidelines for their conduct. For example, CVM Resolution No 85/2022/2002 outlines the detailed rules and procedures governing tender offers in Brazil, according to which the minimum acceptance condition must be clearly specified in the tender offer documents submitted to the CVM and made available to shareholders.

The rationale behind setting a minimum acceptance condition at a majority or higher percentage of outstanding shares is multifaceted. Firstly, it ensures that the acquirer attains a controlling interest in the target company, thereby consolidating decision-making power and influencing corporate governance matters. This control is essential for implementing strategic initiatives, driving operational changes and potentially realising synergies post-acquisition.

Moreover, setting a minimum acceptance condition aligns with the principles of shareholder protection and corporate governance. By requiring a substantial level of shareholder support, the condition helps to safeguard the interests of minority shareholders and prevents coercive or opportunistic takeovers that may undervalue the company or disadvantage minority shareholders.

In addition, the establishment of a minimum acceptance condition serves to promote transparency and fairness in the tender offer process. It provides clarity to shareholders regarding the threshold for acceptance and allows them to make informed decisions about whether to tender their shares.

A business combination in Brazil may be conditional on the bidder obtaining financing. However, it is essential to ensure compliance with regulatory requirements and disclosure obligations regarding financing arrangements.

Deal security measures that a bidder can seek in Brazil include not only break-up fees, match rights, force-the-vote provisions and non-solicitation provisions, but also specific contractual and legal performance rights assuring the transaction success. Contractual considerations to manage pandemic risk may include well-negotiated material adverse clauses and specific representations and warranties related to the impacts of COVID-19. Changes in the regulatory environment impacted the length of interim periods, particularly regarding regulatory approvals.

A bidder who does not seek 100% ownership of a target in Brazil can seek additional governance rights through board representation, the appointment of executive officers, veto rights, special voting rights attached to specific matters, transparency rights and appointing the fiscal council board, amongst other possibilities.

Shareholders in Brazil are permitted to vote by proxy. Such right is granted under Brazilian corporate law and is subject to specific formalities and procedures outlined in both the company's by-laws and relevant regulations, including those established by the CVM.

In Brazil, squeeze-out mechanisms, short-form mergers and other similar mechanisms serve as crucial tools for majority shareholders to achieve full ownership of a company following a successful tender offer. These mechanisms are governed by specific legal provisions and regulatory frameworks aimed at protecting the rights of minority shareholders while facilitating the consolidation of ownership interests.

Squeeze-out mechanisms are generally governed by provisions related to corporate reorganisations, mergers and acquisitions outlined in the Brazilian Corporation Law. These provisions establish the legal framework for executing squeeze-out transactions, ensuring compliance with regulatory requirements and the protection of minority shareholder rights.

In addition to squeeze-out mechanisms and short-form mergers, other mechanisms may also be utilised to acquire the shares of minority shareholders who have not tendered following a successful tender offer. These include statutory share buyback programmes, compulsory redemption provisions and other arrangements designed to facilitate the acquisition of minority shares at a certain value.

It is important to note that, while these mechanisms allow majority shareholders to achieve full ownership and control of a company, they are subject to regulatory oversight and legal scrutiny to ensure compliance with the applicable laws and the protection of minority shareholder interests. As such, any squeeze-out or merger transactions must be conducted in accordance with established legal procedures and with due consideration for the rights and interests of all shareholders involved.

It is common to obtain irrevocable commitments to tender or vote from the principal shareholders of the target company in Brazil. Negotiations for these commitments typically occur during the due diligence or pre-offer stages. The nature of these undertakings may vary, but they rarely contain provisions allowing the principal shareholder to accept a better offer if made.

In Brazil, the process of making a bid public is governed by strict disclosure requirements established by the Brazilian Securities and Exchange Commission (CVM) for the case of publicly held companies. When a bid is initiated, the offering party is obligated to comply with these regulations, ensuring transparency and fair treatment for all stakeholders involved.

The bid becomes public through a series of formal steps overseen by the CVM. Initially, the offering party must submit comprehensive documentation and relevant information regarding the proposed bid to the CVM for review and approval. This documentation typically includes details about the transaction structure, the offer price, the terms and conditions of the bid, financing arrangements, and any other material information pertinent to the transaction.

Once the CVM has reviewed and approved the bid documentation, the offering party is then required to publicly disseminate this information to shareholders and the broader market. This dissemination is typically achieved through regulatory filings with the CVM and public announcements in accordance with established disclosure protocols.

In Brazil, the type of disclosure required for the issuance of shares in a business combination varies depending on whether the transaction involves privately held entities or publicly held companies.

For privately held entities, M&A transactions and business combinations often offer a degree of flexibility in terms of information disclosure, as the parties involved typically have more control over the information shared. This flexibility allows the parties to negotiate and tailor the disclosure requirements based on their specific needs and preferences.

However, when the business combination involves publicly held companies, the regulatory landscape becomes more stringent. Both the Brazilian Corporations Law and regulations set forth by the CVM impose various types of disclosure requirements to ensure transparency and compliance with regulatory standards. These disclosure requirements may include the disclosure of material information related to the transaction, such as details about the parties involved, the terms of the transaction and any potential risks or implications for shareholders.

When the transaction is required by law to be implemented by means of tender offers, parties are often required to disclose detailed information such as:

• the number of shares involves;
• price and payment conditions;
• subordination of the offer to the minimum number of acceptors;
• the procedure that must be adopted by accepting shareholders to demonstrate their accessibility and carry out the transfer of shares;
• the validity period of the offer;
• the valuation methodology based on financial statements and other relevant documents; and
• information to ensure shareholders and regulatory authorities have a comprehensive understanding of the transaction's impact on the company's financial position and performance.

As a general rule, in the context of a tender offer bid, bidders are not required to disclose or prepare financial statements.

Nonetheless, when M&A transactions and business combinations involve publicly held companies, the Brazilian Corporations Law and regulations set forth by the CVM mandate the implementation of different kinds of tender offers. In this context, bidders are required to deliver a tender offer that includes, amongst other matters, valuation information based on the target company’s financial statements and in accordance with the IRS rules applicable in Brazil.

Publicly held companies involved in business combinations or M&A transactions are typically required to disclose material information that may impact the company's shareholders or the market. This includes details about the terms of the transaction, any significant agreements or contracts involved and potential risks or implications for shareholders.

The requirement to disclose transaction documents in full may depend on the nature and significance of the documents, as well as any confidentiality or competitive concerns that may arise. In some cases, parties may seek to redact certain sensitive or proprietary information from transaction documents before disclosure, particularly if the documents contain commercially sensitive information or trade secrets.

The CVM may provide guidance or specific requirements regarding the disclosure of transaction documents, particularly if the transaction involves complex or high-profile transactions. The CVM aims to ensure that disclosure practices adhere to the principles of transparency, fairness and investor protection, while also balancing the need to protect sensitive information and maintain market integrity.

Overall, publicly held companies engaged in business combinations or M&A transactions in Brazil are subject to stringent disclosure requirements established by the Brazilian Corporation Law and regulated by the CVM. Compliance with these requirements is essential to ensure transparency, investor confidence and regulatory compliance throughout the transaction process.

In Brazil, directors and officers engaged in a business combination are subject to a robust framework of legal obligations and regulatory oversight aimed at ensuring transparency, fairness and accountability in corporate governance practices. These duties are enshrined in the Brazilian Corporation Law and are further reinforced by regulations established by the CVM.

Directors and officers in a business combination have a range of duties and responsibilities designed to protect the interests of the company and its stakeholders. They are required to exercise care, diligence, loyalty and transparency in the performance of their duties, which entails making informed decisions based on thorough analysis and consideration of relevant factors, while also avoiding conflicts of interest that could compromise their impartiality or judgement.

The duties of directors and officers are primarily owed to the company, but, to the extent they conflict with the company’s interest, there is growing recognition of the importance of considering the interests of stakeholders, including shareholders, creditors, employees and business counterparts.

It is relatively common to establish special or ad hoc committees in business combinations, particularly when conflicts of interest arise among directors and when the transaction involves antitrust concerns, which many impose the necessity of forming clean teams. These committees are tasked with ensuring fairness and proper governance throughout the transaction process.

In Brazil, the business judgement rule is not expressly set out in the legislation, although it is interpreted by the courts and doctrine as being implicit from the rationale of the fiduciary duties applicable to board members.

Directors and officers in Brazil commonly rely on independent legal, financial and other advisory services to assist them in evaluating and negotiating business combinations. This advice helps directors and officers to deliver the transaction, fulfil their fiduciary duties and make informed decisions.

Conflicts of interest involving directors, officers and shareholders are strictly regulated by the Brazilian legislation and also overseen and regulated by the CVM when publicly held companies are involved, in order to ensure that conflicts are adequately disclosed, managed or mitigated and to ensure fairness and protect the interests of the company and its stakeholders.

In Brazil, hostile tender offers are permitted under the Brazilian legal framework. The Brazilian Corporation Law sets forth rules and regulations governing the conduct of tender offers, including requirements related to disclosure, fairness and shareholder protection. These regulations aim to ensure transparency and fairness in the market, and to protect the interests of minority shareholders.

Furthermore, the CVM plays a crucial role in regulating securities transactions and overseeing the conduct of market participants. It establishes regulations governing tender offers, monitors market activities and enforces compliance with securities laws to safeguard investor interests.

In addition to legal and regulatory constraints, the culture of corporate governance and shareholder activism in Brazil also influences the prevalence of hostile tender offers. Companies often prioritise maintaining positive relationships with shareholders and stakeholders, which may lead them to pursue negotiated or friendly transactions rather than hostile takeovers.

Overall, while hostile tender offers are permitted in Brazil, their occurrence is relatively less common compared to friendly transactions due to the regulatory and legal framework, as well as cultural and market dynamics that favour negotiated deals.

Directors and officers, as well as shareholders, have the authority to use defensive measures to protect the interests of the company and its shareholders, subject to shareholders’ liability, the fiduciary duties of the directors and officers involved, and regulatory oversight.

Common defensive measures in Brazil include poison pills, golden parachutes, the enforcement of shareholder rights, forcing corporate governance based on best practices arising from self-regulatory guidelines and calling for regulatory oversight. The prevalence of these measures did not change substantially due to the pandemic.

When enacting defensive measures in Brazil, directors and officers owe duties of loyalty, care, good faith and transparency to the company. These duties require directors and officers to act reasonably and in the best interests of the company, considering the potential impact on its business, shareholders and other stakeholders.

Directors and officers in Brazil have the discretion to reject a business combination or take action to prevent it subject to personal liability if the business combination does not meet the company’s best interest or if it breaches provisions contained in the company’s corporate documents and the law.

Litigation in connection with M&A deals in Brazil is relatively common, particularly in cases involving disputes over deal terms, purchase price adjustment, valuation and indemnification.

Litigation may arise at various stages of the deal process in Brazil, including during negotiations, corporate approvals and post-closing.

Since most M&A deals are ruled by arbitration and Brazilian arbitration law dates back to 1996, many lessons have been learned from disputes between parties with pending transactions in early 2020. Since then, parties and advisers have placed increased attention on contractual provisions and law interpretation, the enforcement of break-up fees and other important matters.

Shareholder activism is an important force in Brazil, particularly in publicly held companies, where activists seek to influence corporate governance, strategic decisions and financial performance. However, Brazilian laws and the regulatory framework lack important class action mechanisms, which restricts shareholder activism in corporate matters.

Activists in Brazil may seek to encourage companies to enter into M&A transactions, spin-offs or major divestitures to enhance shareholder value. In some cases, the pandemic impacted corporate activism strategies due to the increasing necessity of maintaining companies' resilience, risk management and long-term sustainability.

Activists typically seek to influence the outcome of announced transactions in Brazil, although their capacity to disrupt completion hinges on several determinants. These include the level of shareholder backing, the attainment of regulatory approvals and the legality of their interventions.