The M&A Environment in Brazil – A Guide for Indian Acquirers

learned colleague Rodrigo and I have written an article on the M&A environment
in Brazil (from an Indian buyer’s perspective). It is available at
and I have also excerpted it below.


Brazil is the world’s
fifth largest country and with an estimated population of 200 million, it is
also the world’s fifth most populous country after China, India, USA and
Indonesia. Brazil is a member of BRICS[1],
an association of five major emerging national economies. Generally speaking,
Brazil was a relatively closed economy in the 1970s and 1980s. However, similar
to India, liberalization took place in the 1990s, resulting in the lifting of
trade barriers and protective practices and the local manufacturers are now
more competitive internationally.

Brazil has rich
biodiversity and abundant agricultural, mineral and energy potential as well as
broad industrial base and infrastructure and a diversified economy. The country
has showcased enormous internal growth potential in last few years and dynamic
business conditions. With abundance of semi-skilled and unskilled labor, Brazil
is a commodity powerhouse. Recent years have seen a devaluation in the local
currency i.e. Brazilian
Real[2] leading
to an attractive exchange rate for offshore acquirers. As a result, Brazil has
been able to attract significant foreign investments and has emerged as one of
the favourite destinations for global investors.

There has been a trend
recently of Indian entities aggressively acquiring foreign companies or
entering into mergers with them, so as to establish their presence in global
markets. The transactions have been entered into by Indian entities either to
expand their research and development, or to access intellectual property
relating to their business or gain entry into lucrative as well as
well-established markets around the globe. Indian investors have noticed the
economic growth and potential in Brazil, and have made significant investments
in Brazil. According to the Indian embassy in Brazil, Indian companies have
made investments of around $5 billion i.e INR 32,762 crore, in

Recent Indian
investments in the Brazilian pharmaceuticals market with Cipla acquiring Duomed
Produtos Farmaceuticos Ltd and Lupin Ltd acquiring Medquímica Indústria
Farmacêutica S.A, is indicative of the recognition by Indian investors of the
lucrative markets in Brazil.

Even IT companies like
TCS, Wipro, and Infosys, automobile companies like Mahindra & Mahindra and
infrastructure companies like L&T have followed the trend and invested in
Brazil. The oil and gas sector in the country has seen investments by Indian
companies, like Videocon Industries Ltd, which already owns stake in 10
exploration blocks in Brazil and proposes to further invest $2.5 billion over
three years.

Legal Environment

The basic laws which
govern any merger and acquisition transaction in Brazil are:
Corporations Law (Law 6,404/76);
Law (12,529/2011)

Regulatory bodies

The bodies regulating
the various aspects of the mergers and acquisition are as follows:
Banco Central do Brasil (“BCB”): BCB is the central
bank and regulates the monetary policy, exchange controls, registration and
control of foreign capital, profit remittances and banks and financial
Comissão de Valores Mobiliário (“CVM”): CVM is the securities
and exchange commission of Brazil and regulates the securities market and
listed companies.
Conselho Administrativo de Defesa Econômica (“CADE”): CADE is the
anti-trust commission regulating and monitoring any unfair business practices
and anti-competitive practices.
Instituto Nacional da Propriedade Industrial (“INPI”): INPI is Brazil’s
institute of industrial property regulating patent and trade mark registrations
and technological development.
Others: Depending on the business purpose of the company, other agencies
may be involved. Examples are the National Agency of Petroleum (“ANP”) for oil and gas
companies, Sanitary Authorities(“ANVISA”) for
pharmaceutical companies, among others.

Investment Vehicles

Popular forms of
vehicles which are involved in carrying out mergers and acquisitions in Brazil,
include the following:
Sociedades limitadas (e. Limited
liability companies): These entities are basically private limited companies
issuing quotas and comprise of quota holders. The advantage of this is having
flexibility especially in relation to formalities. They are regulated by the
Civil Code and articles of association.
Companhias fechadas (e. Closely-held
corporations): These entities are basically public limited companies and issue
shares and comprise of shareholders. They are required to have a developed
corporate governance structure in place. They are regulated by Federal Law
6.404/76 (Corporations Law) and their bye-laws (estatutos).
Fundo de Investimento em Participações: This is a
close-ended private investment fund consisting of certain qualified quota
holders, which is managed by an administrator. They are regulated by the CVM.

Methods of mergers and

A few notable ways of
entering into an acquisition transaction in Brazil are:
Private Negotiations: The acquiring party can enter into
negotiations with the controlling shareholders and execute a shareholders
agreement. This is the most efficient method in light of the fact that most of
the companies in Brazil have a concentrated ownership. It needs to be noted
that the minority shareholders have been provided a tag-along right as per law,
as the acquirer of the controlling voting rights is obliged to make an offer
for the non-controlling voting rights at a price of at least 80% of the price
paid for the controlling voting shares.
Acquisition through the stock market: This method is
effective in case the ownership of a company is dispersed. The same can be
combined with private negotiations involving owners of the dispersed shares.
Any such acquisition could trigger the requirement of an open offer as well.
Hostile acquisition: There is no distinction as per the laws of Brazil
between a voluntary acquisition and a hostile acquisition, and considering that
majority of the companies in Brazil have a concentrated ownership, the
probability of the occurrence of a hostile acquisitions is rare.
Mergers: Mergers in Brazil can
be classified into three types of transactions. First, is fusão, which is a merger of
two or more companies to form a new company. Second is cisão, which is a spin-off
of an existing company. Third is incorporação, which involves
one or more companies merging into another. The most common type of merger
transaction in Brazil are incorporação and cisão, while fusão is
used less in the context of Brazil as it is considered troublesome. Cisãois usually used for the
purpose of segregating the assets and liabilities of a company which are to be
sold from the rest.

Tax Perspectives

Even though the tax
regime in Brazil is complicated, there is flexibility provided which can be
utilized by foreign companies through efficient tax planning. Acquisition of a
company in Brazil does not entitle the company to utilize tax benefits such as
tax credits and net operating losses carry-forward, however the same can be
utilized through a merger with a company in Brazil.
From a tax perspective,
share purchase is more beneficial than an asset sale, as a share purchase
provides benefits like claim of amortization of goodwill generated on the share
acquisition of the Brazilian company as a deductible expense in respect of the
Brazilian corporate income taxes and social contribution on net profits.
Additionally, through a share purchase, the indirect taxes applicable on sale
of assets can also be avoided. Brazil also does not have a regime for indirect
transfer of ownership of a company, which can also be utilized by foreign
Brazil has also
executed double taxation avoidance agreements with various countries, including
India. The benefits under the double taxation avoidance agreement is therefore
available to Indian companies which seek to establish themselves and operate in


Foreign Investment: Under the foreign
investment regime in place in Brazil, foreign ownership or control in certain
sectors, e.g. media and broadcasting, mail and telegraph services, aviation
companies etc., is prohibited. Additionally, certain other sectors have
restrictions with regard to foreign investment, e.g. utility providers,
insurance, similar public transportation, railroad, securities companies, fund
managers and gambling.
Transfer of technology: The regulations
relating to transfer of technology require that the technology transfer
agreements, including transfers of patents and trademarks, must be approved and
registered with INPI. In addition to the approval by INPI, any remittances for
such transfers require BCB’s prior approval. Creation of such a multi-fold
approval system increases the complexity of any inbound merger and acquisition
Foreign Managing
 The management of both
Limitadas and Corporations, may be undertaken by a foreign individual as long
as he is resident in Brazil and has obtained a permanent visa and work permit.
According to Brazilian laws, in order to obtain a permanent visa for the
foreign managing director, the shareholders must prove to the Brazilian
authorities that either (a) an investment of at least 600,000 Brazilian Reals
was made per foreign managing director that will be assigned in Brazil; or (b)
an investment of at least 150,000 Brazilian Reals was being made per managing
director to be assigned in Brazil, together with the presentation of a business
plan and the undertaking of a commitment with the authorities of hiring at
least 10 local employees within 2 years following the arrival of the expatriate.
Foreign Employees: When hiring foreign
employees, the company must follow all the legal formalities to obtain proper
visa and also to obtain an authorization to hire foreign employees from the
Ministry of Labour, Ministry of Justice, Federal Police and the Federal
Revenue’s Office. Accordingly, foreign employees must obtain a temporary work
visa. The term of validity of this visa may vary according to the relationship
of the employee with the Brazilian company. Brazilian law states that at least
two thirds of the workforce of the companies registered in the country must be
composed of Brazilian citizens, and two thirds of the payroll must go to

Issues and Challenges

Complex laws and
 The multiple regulators
and the complex procedures prescribed under various regulations applicable to
merger and acquisition transactions, act as an impediment in both the entry of
new foreign investors wishing to acquire and the existing entities as well.
Environment: The environment
protection laws makes the owner of real estate property liable for any
contamination which occurs, even though the actual contamination may have been
done by some other party or the previous owner.
Anti-trust: The requirement of
approval of CADE in case of certain specified mergers and acquisition
transactions, creates yet another issue for such transactions as the same are
time consuming. The approval of the CADE required for proceeding with such
transactions can take up to 330 days and can cause a major hold up in deals.
New anti-corruption
 Brazil introduced a new
Anti-corruption Act (Law 12,846/13) on January 29 2014, which provides
stringent civil and administrative liability for corporate entities involved in
corruption or bribery. The new law also creates a liability for the directors,
managers, officers, administrators or employees of a company which have been
involved in such an act.
Tax related
The Imposto Sobre Operações Relativas à
Circulação de Mercadorias e Serviços de Transporte Interestadual de
Intermunicipal e de Comunicações
 (“ICMS”), which is
Brazilian value-added tax on sales and services and Imposto sobre Produtos Industrializados (“IPI”), which is the
Brazilan tax on Industrialized Products, are the most commonly applied taxes in
Brazil. Transactions in some sectors have significant ICMS and IPI, which can
be burdensome for foreign investors. Additionally, Brazil has a transfer
pricing policy in place, which applies to import and export of services and
goods in relation to related parties who are not residents of Brazil and keeps
a check on the transactions between such parties.
Language: The official
language of Brazil is Portuguese, which creates issues for a foreign company
planning to invest in the country. The legal documents and contracts are
required to be in Portuguese, in order to remain valid and in order to be
enforced in the court of law in Brazil. The law in Brazil mandates that certain
documents like charter documents, minutes of meetings and real estate related
agreements have to be only in Portuguese. In addition, although documents like
shareholders’ agreements, voting agreements and escrow agreements can be in
some other language, in case of a conflict in interpretation of the document in
the two languages, the Portuguese version of the document will prevail.
Judicial System: The Brazilian judicial
system is presently ill-equipped to deal with the issues relating to complex commercial
transactions such as mergers and acquisitions. Additionally, the same is both
time consuming and expensive, making it unviable to approach the courts for
resolutions of any issues.
Diligence Specific
 Other than the above,
certain diligence specific issues emerge in Brazilian acquisitions. Some of
these are briefly set out below:
quality of information
of internal controls
and employment issues
and related party transactions
of visibility and absence of written contracts
cost of capital (working capital finance, under-investment)
issues (for example, in relation to anti-bribery, anti-corruption regulations)
are often poorly advised

In Conclusion

Therefore, the key to
successful entry in Brazil through acquisition is careful target selection and
disciplined due diligence, amongst others. Specifically since many of the above
issues also arise in the Indian context, Indian acquirers are well placed to deal
with these issues constructively.

identification of networked lawyers/ advisors who can work together and advise
Indian and Brazilian entities in relation to potential cross-border deals is
critical. For example, the authors’ law firms have a close working relationship
and assist on India-Brazil corridor deals.

Disclaimer: The
contents of this article are for informational purposes only
and not for the purpose of providing legal advice. Views
expressed are personal.

About the authors
Satyajit Gupta is leading the Corporate/ M&A team
at Advaita Legal. Satyajit has completed his B.A., LL.B. from National Law
School of India University, Bangalore. He is dual-qualified to practice laws of
India and England. Satyajit is the Committee Liaison Officer of the
International Bar Association Asia Pacific Forum and a Vice-Chair of the Asia
Pacific Committee of the American Bar Association.  

Rodrigo Ferraz de
 is the partner
responsible for the corporate department at FCAM. Mr. Camargo has a B.A.
(L.L.B.) in Law from Pontifícia Universidade Católica PUC-SP, an L.L.M. in
Corporate Law from PUC-SP, and an L.L.M. in Bank Law from IBMEC – SP. He has
work experience in Mergers and Acquisitions (M&A), succession planning,
corporate law, bank law, capital market, civil law, and competition law.

[1]  The term “BRIC” was coined in 2001 by then-chairman of Goldman Sachs Asset
Management, Jim
, in his publication Building Better Global Economic BRICs.
The foreign
 of the initial four BRIC states (Brazil,
Russia, India, and China) met in New York City in
September 2006 at the margins of the General Debate of the UN General Assembly,
beginning a series of high-level meetings. The first full-scale diplomatic
meeting was held in Yekaterinburg,
Russia, on 16 June 2009.
[2]   1 Brazilian Real = INR 18.37

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