8.1. Limited Liability Company
8.3. Other Types of Companies
8.4. Corporate Transactions – M&A (“Mergers and Acquisitions”)
The M&A (“Mergers and Acquisitions”) transactions cover the purchase and sale of shares and/or capital quotas of existing companies, direct investment represented by the subscription of new shares and/or capital quotas, as well as the conversion, merger, amalgamation and spin-off transactions.
Corporate transactions are mechanisms that enable entrepreneurs to optimize the management of their company’s businesses, whether by way of tax planning, corporate restructuring and other procedures.
According to the Mergers and Acquisitions Report – November 20161 , disclosed by the Brazilian Association of the Financial and Capital Market Entities (ANBIMA), the volume of notices of mergers and acquisitions transactions, public offer of shares (OPAs) and corporate restructurings in Brazil reached the sum of R$ 732.9 billion between 2011 and 2015. In this period the mergers and acquisitions transactions were concentrated mainly in five major market segments: Information Technology and Telecommunications, Financial, Energy, Oil and Gas and Transportation and Logistics.
Among the corporate transactions that were accomplished, a concentration of acquisition of Brazilian companies by foreign companies transactions occurred.
In 2017 alone, as reported in the Mergers and Acquisitions Bulletin of December 20172, the acquisition of Brazilian companies by foreign companies transactions represented 46% of the corporate transactions, with European companies accounting for 51.5% of the acquisitions. The transactions between Brazilian companies came in second place, accounting for 37.5% of the total, while the acquisitions between foreign companies targeting Brazilian companies and transactions of foreign companies selling to Brazilian companies corresponded to merely 8.9% and 7.7% of the total, respectively.
Accordingly, the participation of foreign companies and foreign capital in a large part of the corporate transactions that occurred in Brazil is clearly important.
It is important to mention that the corporate transactions involving foreign investment in Brazil are subject to electronic registration in the Central Bank Information System (“SISBACEN”), which is done through an electronic declaration registration (a.k.a. RDE-IED – “Electronic Declaration Registration – Direct Foreign Investment”), according to Brazilian law and detailed in a specific Chapter.
8.4.1. Types of corporate transactions
Brazilian corporate law foresees four (4) types of corporate transactions, namely: conversion, merger, amalgamation and spin-off.
The types of transactions are foreseen in Chapter X of the Civil Code and in Chapter XVIII of Law no. 6.404/1976 (the “Brazilian Corporation’s Law).
The merger, amalgamation and spin-off transactions of publicly listed or sister companies, according to Law 6.404/1976 are considered, by rule, a relevant event that must be disclosed to the Brazilian Securities and Exchange Commission (CVM) and to the market.
In the merger, amalgamation or spin-off transactions carried out by limited liability companies, the creditors harmed thereby may claim in court the cancelation of the transaction in up to 90 days following the publication of the corresponding corporate acts (Civil Code, Article 1.122).
In the mergers and amalgamation transactions carried out by corporations, the term to claim the cancelation of the transactions is 60 days (Law 6.404/1976, Article 232). In the spin-off transaction carried out by corporations the term to claim the cancelation of the corporation’s spin-off is 60 days (Law 6.404/1976, Article 233).
The conversion consists in the transaction through which a company is converted into another type of company, without change to its corporate structure and without its dissolution or liquidation.
This type of corporate transaction is not intended to change the line of business or in which the company is engaged, but to meet interests of the company’s partners, who are fully free to pick the type of corporate structure that is most fit for the business that it carries out.
The conversion also does not imply in change of the legal entity, structure of partners or assets of the company.
Consequently, no succession of rights and obligations occurs insofar as the converted company continues to hold the same rights and obligations.
Furthermore, no change or harm occurs in relation to the creditors’ rights, who shall continue, until their credit is paid, to vest the same guarantees that the former corporate structure afforded to them.
However, the existing type of corporate structure is changed and the extent of the partners’ liability may change as well, depending on the original and the final type of corporate structure.
Therefore, in view of the possibility of change in the extent of the partners’ liability, coupled with the fact that the selection of the type of corporate structure lays in the free will and convenience of the partners, the conversion decision lays exclusively on the partners, except if the company’s articles or by-laws establishes otherwise, observing that such a decision may not be challenged by any court of law or administrative authority. The partners that disagree with the conversion decision may withdraw from the company, according to the law.
Any type of corporate structure foreseen in the law may be converted, whether the company is a limited or unlimited liability company.
The conversion shall observe the rules that regulate the organization and registration of the new type of company: the Brazilian Corporation’s Law applies to corporations and partnership by shares companies and the Civil Code applies to the other types of companies.
The merger consists in the corporate transaction through which one or more companies are absorbed by another company, which succeeds it in all rights and obligations.
The company or companies that were absorbed become extinct and disappear, with its/(their) assets and liabilities passed on to the absorbing company. Accordingly, a universal succession of all rights and liabilities of the company(ies) that was(were) absorbed by the absorbing company occurs.
A merger may only occur between two or more companies, which may or may not have the same type of corporate structure.
The incorporation is a corporate transaction that is widely adopted in Brazil, having in view that modern capitalism is characterized by a high rate and ever increasing corporate concentration, that occurs via acquisitions or mergers of companies. Another reason for why the merger is widely adopted is strategic motivation, whether for synergy reasons, with cost savings, or to increase bargaining power or occupy new market segments, or, still, for tax reasons, in order to obtain tax benefits and advantages at the corporate income tax level, particularly in regard to the offsetting of tax losses.
The merger must be discussed and approved by both the partners of the absorbing company and the partners of the company(ies) absorbed, in a partners’ meeting, shareholders’ meeting or by amending the articles or by-laws, according to the regulations that apply to the type of company involved.
The partners must also approve the protocol of merger and justification of the merger and the appraisal of the equity capital of the company(ies) absorbed. The protocol of merger and justification of the merger must state the reasons or purposes of the merger and the company’s interest in the transaction, as well as the merger conditions. The main purpose of such document is informative, aimed at showing to the partners that the transaction should be carried out to meet the company’s interests. The appraisal report must state the method adopted to appraise the equity capital of the company(ies) absorbed, which may be accounting or economic methods, as well as the value that will be absorbed by the absorbing company.
If the merger involves a publicly listed corporation, according to the Brazilian Corporation’s Law the absorbing company must also be a publicly listed company, obtaining the respective registration and, if the case may be, promote the admission of the negotiation of new shares in the secondary market, according to Paragraph 3 of Article 223 of such law. The purpose of such rule is to prevent that a shareholder of a publicly listed company, pursuant to the transaction becomes a shareholder of a non-listed corporation, subjected to harm because of the decrease in the liquidity of its shareholding.
An amalgamation consists in a corporate transaction in which two or more companies unite to form a new company, which succeeds them in all of their rights and liabilities.
Accordingly, the companies that previously existed become extinct and disappear, with the birth of a new company.
The amalgamation is an transaction that is not adopted much, insofar as the merger by way of the unification of two or more companies is fit for the fruition of tax benefits and advantages, without need of opening a new company, being a procedure that is more practical and simpler than the amalgamation.
Similarly to the merger, the amalgamation must also be discussed and approved by the partners in a partners’ or shareholders’ meeting, or by amending the articles or by-laws, depending on the type of company.
Furthermore, the protocol and justification of the amalgamation transaction must also be approved by the partners of the companies involved, as well as the respective appraisals.
In addition, similarly to the merger, the protocol and justification of the amalgamation must state the reasons or purposes of the transaction and the company’s interest therein, as well as the amalgamation conditions. The appraisals must mention the appraisal method of the equity capital of the companies that are being amalgamated, which may refer to accounting or economic methods.
The spin-off consists in the corporate transaction where a company transfers a part of its assets to one or more companies that already exist or that are organized for such a purpose.
Because it is broadly and flexibly regulated by the current legislation, the spin-off is very practical as it allows the structural change of the company so that its structure may be adapted to the company’s business development requirements. Accordingly, the spin-off may be adopted as a mechanism to dilute the original company, splitting its assets to other companies, enabling, inter alia, diversification of investment.
The spin-off may be complete, in which the transfer and absorption of all of the assets of the company spun-off to other companies occurs. In this case the company spun-off becomes extinct and disappears, with the succession of the rights and liabilities of the company spun-off by the companies that absorb the assets of the spun-off company, proportionally to the value absorbed. On the other hand, the spin-off is partial when only a part of the spun-off company’s assets are transferred. In this case the company spun-off continues to exist, with only a decrease of its corporate capital occurring, proportionally to the assets that were transferred to the other company(ies). The liabilities and rights not covered by the assets that were transferred and absorbed by the other company(ies) shall remain with the company that originally existed, that is being spun-off.
Article 233 of Law 6.404/1976 establishes that in the spin-off with the extinction of the company that was spun-off, the companies that absorb its assets shall be jointly and severally liable for the liabilities of the company extinguished. Moreover, the company spun-off that survives and those that absorb its assets shall be jointly and severally liable for the former’s liabilities that existed prior to the spin-off.
The partial spin-off corporate document can establish that the companies that are absorbing assets of the company spun-off are liable only for the liabilities that were transferred to them, with no joint and several liability between them or with the company spun-off, in which case any former creditor may object such a stipulation, in regard to its credit, provided that the company is notified thereon in up to ninety (90) days as of the publication of the spin-off corporate documents.
Similar to the merger and amalgamation transactions, the spin-off must also be discussed and approved by the partners, in a partners’ or shareholders’ meeting or amendment of the articles or by-laws, depending on the type of company.
Likewise, the protocol and justification of the spin-off must also be approved by the partners of the companies involved, as well as the respective appraisals.
And, likewise, the protocol and justification of the spin-off must state the reasons or purposes of the spin-off and the company’s interest therein, as well as the spin-off conditions. On the other hand, the appraisal must mention the appraisal method of the spun-off company’s equity capital, which may refer to accounting or economic methods, as well as the value that will be absorbed and transferred to the other company(ies).
8.5. Liabilities of Partners and Managers
1 http://www.anbima.com.br/data/files/38/33/B4/70/2C7DA510D976ECA569A80AC2/Relatorio-Fusoes-Aquisicoes.pdf. Accessed April 16, 2018.
Lautenschlager, Romeiro e Iwamizu Advogados
Languages: English, German, Japanese, Italian, French and Spanish
Fields of practice: contracts, mergers/acquisitions and auditing, corporate restructuring and reorganization, corporate Law, civil and commercial litigation, consumer protection law, labor law, social security law, tax law, among others.