International Deal Making – Assisting Acquirers
QUESTION ONE – In your experience, what are the key considerations that international clients should have the front of mind when assessing a target company for acquisition in your jurisdiction?
It is important to understand the local market practices and see if the planned business model will work in Brazil. It is usually necessary to adapt the business model, and the investor should check the feasibility of the changes and whether the target company is indeed a good fit for the strategic goals of the buyer.
In this assessment, the buyer should also consider the pros and cons of an ongoing concern, as compared with those of a greenfield project. Depending on the nature and size of the contingencies found in the due diligence, a greenfield approach may prove more sustainable.
Regulatory hurdles and the complex taxation in Brazil may require some structuring of the transaction. This should be studied and developed in advance, as it can be very expensive to fix mistakes in Brazil. For instance, Brazil has currency exchange controls which may limit the ability to structure certain deals.
It is important to check whether any prior approvals from the antitrust and other authorities (in the case of a regulated industry) are required. Generally speaking, the following thresholds trigger the need for merger clearance with antitrust authorities.
- Gross revenues in Brazil in excess of R$750 million (buyer or seller group)
- Gross revenues in Brazil in excess of R$75 million. (other parties)
Finally, in case of a partial acquisition or joint venture, at least three things are essential. These are a good understanding of the cultural differences to see if a joint venture is indeed possible, a well-balanced corporate governance structure, where the voting and veto rights reflect the contributions of each party, and good exit strategies, such as call and put options, drag along and tag along rights, etc.
QUESTION TWO – How would you, as a professional advisor, approach the due diligence process to ensure all bases are covered prior to a sale price being agreed?
Typically, indemnification provisions in Brazil are not limited to what is disclosed/represented by the seller but actually cover all liabilities and contingencies prior to closing.
In any event, enforcing an indemnification obligation can be time-consuming and expensive. Therefore, due diligence is an important exercise to understand what is being bought, and this should be reflected in the pricing.
Naturally, the due diligence should not be limited to legal matters, but should also cover operational, cybersecurity, real estate, technical environmental matters, etc.
The focus should be given to tax, employment, litigation, environmental and anticorruption matters. Data protection is a new focus, given the new legislation in Brazil.
In middle-market deals, the quality of information may be an issue. Many companies are not audited, and family businesses may have a level of informality that may not be acceptable for multinational companies. This scenario should be examined from the beginning to avoid unnecessary stress in the negotiations.
QUESTION THREE – Once an acquisition is agreed, what are the key clauses or warranties and indemnities you would recommend for inclusion in the sales contract?
Typically, share purchase agreements (SPAs) in cross-border deals in Brazil follow the same structure as the United States of America (US) and United Kingdom (UK). However, indemnification practices may differ.
In this context, it is common for SPAs in cross-border deals in Brazil to have extensive reps & warranties, even though the indemnification will cover all liabilities and contingencies arising from facts prior to closing (regardless of whether they were represented/disclosed or not).
We recommend the establishment of a holdback or escrow account to guarantee the payment of a portion of the indemnification by the seller. Normally, the release of the funds is spread across five years, but this term can vary depending on the profile of the liabilities found in the due diligence.
Such a profile will also affect the discussions about caps, baskets and ‘de minimis’ amounts applicable to the indemnification. The amounts can be quite different from those seen in the US.
Even though the indemnifying party usually maintains control of third-party claims affecting the target business, this may not occur when the seller is substantially smaller than the buyer.
We recommend establishing a price adjustment mechanism to address any variation in the working capital and indebtedness (and any other chosen variable) between the date of the last balance sheet and the closing date.
Simultaneous signing and closing are common when there is no need for prior approval by authorities. When they are not simultaneous, the parties need to agree on the limitations for the business of the target company between signing and closing.
Non-compete provisions are also very important. Differently from the US experience, it is common to see non-compete obligations that extend up to five years.
Finally, it is very important to have a good dispute resolution mechanism. Arbitration is becoming more and more the rule, given that it is faster, confidential and more technical than court proceedings. One cannot disregard, however, that arbitration is more expensive than a lawsuit and that the parties may not appeal against an arbitral award.
Tips for completing a successful cross-border acquisition
Learn about the local culture and business practices
The reality in Brazil can be quite different from the reality in other markets. Understanding the local business culture is key for a successful negotiation and operation. A common mistake is to look at Brazil with the eyes of a different culture. Another one is to simply apply in Brazil, without adaptation, a business model that is successful elsewhere.
Plan in advance
Brazil can be highly regulated. Investors should carefully plan their investments, considering local laws and taxation, before implementing them or even starting a negotiation. Planning in advance is of the essence in order to avoid pitfalls and the high cost of fixing mistakes.
Do not underestimate the importance of due diligence
Performing a thorough due diligence investigation of the target business is key, particularly given the complexity of regulations regarding tax, employment, environmental and anti-corruption matters. Data protection is a new focus of due diligence.
This excerpt was taken from the IR Global Guide: International Deal Making: Assisting Acquirers. To view the full publication, please click here.