Acquisitions, Investments and Joint Ventures

In previous columns we have focused on establishing and registering a new company in Brazil, as well as some of the challenges related to doing business there. These prior columns have mainly focused on the concerns of the individual investor or business person planning to invest or do business in Brazil. In this column we are going to shift gears somewhat and focus on the concerns of the foreign company that plans to acquire, invest in, or enter into a joint-venture with a Brazilian company.

For simplicity’s sake, let’s assume that you represent an American company that wants to buy or enter into a joint venture with a Brazilian company. There are several areas on which you will need to focus. The first and most important area is due diligence. You will want to conduct a thorough financial and legal due diligence investigation of the Brazilian company. For this discussion we will focus only on legal due diligence.

When conducting legal due diligence in Brazil, in addition to being concerned about such matters as whether the Brazilian company is in good standing, its contacts are valid and enforceable and its accounts receivable are collectable, you will want to give special attention to two areas: potential tax liabilities and potential labor law liabilities. These areas in particular can be traps for those with limited experience doing business in Brazil, where the sheer number taxes can be mind boggling and the labor laws can seem, at least to someone more accustomed to the “at will” employment regime in the U.S., onerous and counterproductive.

When I was working on my first Brazil-based transaction representing a U.S.-based multinational company that was purchasing a Brazilian business, the potential tax liabilities of the Brazilian company became an area of concern. Interestingly, the company’s owners told us that like every other business in Brazil, this company had paid all the taxes it had to pay, but not necessarily all the taxes it was required to pay. When our client expressed concern about the possibility of being held liable for unpaid taxes, the owner told us that if the Brazilian government went after this company for unpaid taxes, it would have to go after every other company in Brazil, since no Brazilian company pays all the taxes that it is supposed to pay. While I am in no better position now than I was then to evaluate the validity of this statement, I can report that as legal counsel to the U.S. purchaser, we insisted that the seller indemnify our client for any future tax liabilities that might arise after the purchase was completed.

The other area to which you will need to pay careful attention as part of your legal due diligence is possible labor law violations and related contingent liabilities. At this point, we do not need to survey all the potential labor law violations that could result in contingent liabilities. It is suffice to say that the labor laws in Brazil, which most everyone agrees need to be reformed, are a trap for the unwary and ill-advised. The variety of ways in which a Brazilian company can attempt to circumvent the convoluted and often draconian labor laws can result in contingent liabilities for which a subsequent purchaser would be held liable. So, you will want to make sure that the Brazilian company has been complying with Brazilian labor laws and that the seller indemnifies you for any past violations thereof that might be discovered only after the closing of the transaction.

As a U.S. company buying or entering into a joint venture with a Brazilian company, in addition to your U.S. legal counsel, you will want to engage Brazilian legal counsel. How should you go about engaging a Brazilian lawyer or law firm? Well, you could do what I did when faced with this question for the first time, grab a copy of the Martindale-Hubbell Legal Directory or a similar resource and look for a big, well established and prestigious law firm in Brazil. At the time, I figured that since I was working at a big law firm in New York City, we should look for the same sort of firm in São Paulo, Brazil, the financial capital of Latin America to assist us and our client. However, I have since learned that this in not necessarily the best way to go about hiring legal counsel in Brazil. That is of course unless your primary concern is with covering your “back-end.” In which case, going with a brand name may indeed be your best bet, even though it may not be your best choice.

In Brazil bigger is not necessarily better when it comes to law firms. First, most of the larger law firms in Brazil have only become big firms in the last decade or so, and thus cannot be easily compared with the large law firms in the U.S. Second, while it would seem that most of the smaller boutique law firms in the U.S. are being gobbled up by larger, global firms, Brazil seems to be heading in the opposite direction with highly skilled junior partners and senior associates leaving their big law firms to create smaller boutique firms.

Generally speaking, unless you’re talking about a billion dollar transaction, most foreign companies purchasing or entering into a joint venture with a Brazilian company, will be better served by engaging a small to midsized Brazilian law firm to work along side their regular, non-Brazilian outside legal counsel rather than hiring one of the big Brazilian law firms. The primary role of your Brazilian legal counsel will be conducting legal due diligence, advising with respect to Brazilian legal matters, “localizing” transaction agreements to comply with Brazilian law, coordinating Brazilian Central Bank operations, and arranging for the translation and registration of various documents in connection with your acquisition or joint venture.

There’s another reason to engage a small to midsize Brazilian law firm: the Brazilian company that you are buying or with whom you are entering into a joint-venture, despite its size or the size of the transaction, will more than likely be represented by a small to midsized Brazilian law firm, rather than one of the big law firms. You may also be surprised to discover that the Brazilian company will probably not engage U.S. legal counsel to work along side its Brazilian legal counsel, despite the fact that it is involved in a transaction with an U.S. company. While this is generally a mistake on the part of the Brazilian company and its Brazilian lawyers, it is the topic for another column.

One problem you may encounter when trying to hire a small to midsized Brazilian law firm is that these small to midsized firms are not always listed in such sources as Martindale-Hubbell. And even if they were, you may have a hard time distinguishing between them. The best place to start your search is by consulting someone who has experience working on Brazil-based transactions, someone who is capable of evaluating your particular needs and who can indicate one or more firms which would be well suited for your particular transaction.

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