Felipe Barreto Veiga
BVA – Barreto Veiga Advogados, São Paulo
felipe@bvalaw.com.br

Henrique Falleiros Mareze
BVA – Barreto Veiga Advogados, São Paulo
henrique@bvalaw.com.br

Introduction

Latin America has played an important role in the global M&A market in recent years. As a consequence of some international events, such as the war in Ukraine, which has already passed its first anniversary, the increase in Covid-19 cases and its variants, and the political discussions between the United States and China, Latin America is once again attracting the attention of large investment funds and multinational conglomerates looking for new business opportunities.

In this context, and from the Brazilian perspective, we have identified that Brazil has witnessed an economic leap in the last decade through investments made by international investors, many of them landing in the country for the first time. The published figures on M&A transactions in Brazil have grown in recent years, reaching a historic mark of 1,963 deals in 2021. In the following year, the number of transactions declined slightly, closing 2022 with 1,728 announced transactions. The most active sectors of the Brazilian economy regarding M&A transactions are technology, services, finance, telecoms and energy.

Great complexity and innovation

Alongside growth in the number of transactions is the greater complexity and innovation apparent in the terms and conditions in the documents between buyers and sellers in M&A transactions. One of the most complex discussions those parties normally face relates to the guarantees offered by sellers in order to protect buyers from liabilities and losses as a result of facts or omissions that originated or occurred on or before the closing date of the M&A transaction.

Among the different kinds of guarantees normally suggested by buyers’ legal advisers, the retention of the purchase price has become one of the most popular options. In transactions with a retention provision, normally buyers also set forth that the purchase price shall be made in different instalments.

The retention provisions allow the buyer to retain, in whole or in part, any amount of the purchase price, especially those deriving from falling due instalments, as a form of compensation for losses incurred by the buyer that are indemnifiable by the seller.

On the other hand, it is important to highlight that sellers may also rely on guarantees to be offered by the buyers, especially when the parties set forth that the purchase price will be paid through instalments after closing. In these scenarios, sellers can set forth guarantees in order to ensure that buyers will be able to afford the whole purchase price of the respective transaction.

Such a provision is even more important when sellers identify the risk of the buyer entering into a judicial reorganisation procedure, or even where a company has its bankruptcy decreed by the courts.^[1]

Although it is more common to see risks in the opposite direction (when companies that are targets of acquisitions are subject to reorganisation), it is worth noting that in recent years we have seen huge Brazilian companies filing for judicial reorganisation.^[2]

In order to prevent sellers from losing the whole or part of the purchase price in situations, such as the one stated in the aforementioned paragraph, they must take some precautions when negotiating the terms and conditions of the transaction with their legal advisers.

Please find below some forms of protections afforded to sellers in a Brazilian M&A transaction:

The escrow account

In an M&A transaction, buyers may establish that part of the purchase price will be deposited in an ‘escrow account’ to guarantee future losses are indemnifiable by the sellers. On the other hand, escrow accounts may also be used to protect sellers against the risk of insolvency of the buyers.

Therefore, even though sellers cannot, at the time of the transaction, identify that buyers are at risk of going through a judicial reorganisation procedure, sellers can recommend the opening and maintenance of an escrow account, through which all falling due installments of the purchase price must be deposited and released to: the buyers in order to guarantee any losses incurred by their indemnified parties and that are indemnifiable by the sellers under the sale and purchase agreement (SPA); or the sellers, if buyers and/or the targets have filed for judicial reorganisation or bankruptcy.

Once the escrow account is opened, the amount deposited must be included in a pledge on the credit rights (penhor sobre os direitos creditórios). The reason for establishing this procedure is that the pledge will be classified as a ‘secured credit’ (crédito gravado com direito real de garantia) and will have preference in the receipt of credits in case of the bankruptcy of the buyer.^[3]

Otherwise, the sellers will be the holder of ‘unsecured rights’ (direitos quirografários), without special qualification.

Guarantor and credit insurance

Sellers can also use guarantors (fiadores) and/or credit insurance, which are types of guarantees provided by third parties in order to guarantee the obligations of the buyers. For the sellers’ benefit, the guarantor (fiador) must be a third party (eg, an affiliate of the buyer or a company in the buyer’s economic group) or a financial institution.

In addition to the guarantor, there exists in the Brazilian legal system ‘credit insurance’ (seguro de crédito), which is considered to be more favourable to the secured party. Credit insurance is a type of guarantee that operates as insurance contracted within an M&A transaction, in which the buyer is the contracting party and the seller is the insured party. In this case, the insurer assumes its own liability to pay the seller in the event of default, as occurs with other types of insurance.

Fiduciary guarantees

A fiduciary guarantee is a kind of guarantee through which there is a transfer of ownership of an asset from the debtor to the creditor, called ‘fiduciary ownership’. In these cases, the possession of the asset remains with the debtor, but the ownership is transferred to the creditor. The ‘fiduciary ownership’ is extinguished when the obligation is settled, that is, when the debtor pays what is owed to the creditor.

Acceleration

To increase the sellers’ security due to the risk of default concerning the buyer’s obligation to pay the purchase price, the parties may establish an acceleration provision in the SPA. According to such a provision, if the buyer does not fulfil certain obligations, the seller will be entitled to accelerate the payment of the falling due instalments of the purchase price.^[4]

Covenants

Sellers can also require the buyer to comply (together with the target company) with certain obligations until the falling due instalments of the purchase price have been fully paid. If the buyer does not comply with such covenants, the buyer will be subject to a default penalty. For example, the covenant forbids buyers from selling shares in the target company before the complete payment of the purchase price unless previously authorised by the sellers.

Notwithstanding the above, the parties may also establish other additional provisions that ensure sellers the necessary security to fully receive the purchase price, considering the provisions in the relevant Brazilian legislation.

Thus, for all those who intend to invest in companies or businesses in Brazil, we highly recommend prior consultation with a local attorney in order to be aware of the risks and opportunities involved.

Sources:

BOTREL, Sergio. Fusões e aquisições. 5 ed – São Paulo: Saraiva, 2017.

www.planalto.gov.br/ccivil_03/leis/2002/l10406compilada.htm.

www.planalto.gov.br/ccivil_03/_ato2004-2006/2005/lei/l11101.htm.

https://valor.globo.com/financas/noticia/2022/12/28/fusoes-e-aquisicoes-devem-se-recuperar-em-2023-na-al.ghtml.

https://valor.globo.com/empresas/noticia/2023/01/05/fusoes-e-aquisicoes-caem-12percent-no-brasil-com-menor-apetite-por-tecnologia-em-2022-diz-kpmg.ghtml.

https://investnews.com.br/negocios/fusoes-e-aquisicoes-caem-em-2022/.