Focus on: The Post Pandemic M&A Market in Brazil

Finocchio & Ustra Sociedade de Advogados

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The pandemic caused by the coronavirus has brought several impacts to the national and global market. Some reports were recently published pointing out the number of mergers and acquisitions (M&A) transaction in Brazil between the beginning of the pandemic and the months that followed. According to such studies, if we compare the number of M&A transactions performed at the beginning of the pandemic and the number of transactions today, we see that there has been a significant increase.

The August 2021 report published by the Transactional Track Record (TTR)[1], indicates a 52% increase in the number of concluded transactions if compared to the same period in 2020, with US companies increasing their acquisitions in the Brazilian market by 91%. According to this report, in August 2021, 232 mergers and acquisitions were registered, for a total value of BRL 32.3 billion, being the most active month of the year in relation to the number of transactions. The technology sector is the most active of the year, with a total of 547 transactions, representing a 78% increase over the same period in 2020. In second place is the finance and insurance sector, with 265 transactions.

Such increase in the M&A sector can be explained by the fact that many transactions that were in progress in the period prior to the pandemic were paused and were only resumed once the economic scenario and the pandemic were stabilized, allowing the parties involved in the transaction to negotiate and close their respective deals. Additionally, the Real depreciation after the COVID pandemic made Brazilian companies more attractive to foreign investment made by international companies who look for acquisitions to grow their participation in the Brazilian market or to enter into such market, using the advantage of a strong currency against Real, such as Euro or United States Dollars.

Moreover, with the pandemic and all the respective economic difficulties, many companies had to (i) seek resources in the market in order to survive; and (ii) file for bankruptcy or receivership; while others were sold because their partners could no longer support their costs. On the other hand, some sectors of the economy were benefited by the pandemic and are on the rise, being noticed by investors and even began to seek opportunities in the market.


On August 26, 2021, Law 14.195/2021 was sanctioned in Brazil, also known as the Business Environment Law, which aims to promote the reopening of the economic activity in Brazil after the pandemic and attract foreign capital. Among its provisions, such law purports to facilitate entrepreneurship in the country by promoting debureaucratization, simplification, and legal security.


In this sense, it is highly recommended that companies seeking to enter into M&A transactions make the proper preparation, assisted by financial and legal advisors through all the phases of the transaction in order to make the best deal possible.

For a company to prepare itself for a M&A transaction, the main point is to identify what would be the company’s major concerns and goals and to establish which actions would have to be performed so that all matters are addressed and covered during the M&A phases (that is, the due diligence, negotiation of the main documents, signing and closing procedures). That way, the company will be able to verify (i) if the governance of the company was set in accordance with applicable law; (ii) if the company has any issues whatsoever regarding tax, labor, environmental and/or civil matters; and (iii) how to outline mitigation plans for the main findings regarding the target company and/or target assets.


The best way to identify the major issues involving the target company or its assets is to perform a previous due diligence, where the legal and financial advisors review all the legal and financial aspects of the target company (in the same way as it would be performed by a prospective buyer) to identify the liabilities already materialized and possible future liabilities. Once the problems are identified, the company may draw up an agenda with its legal and financial advisors to resolve as many contingencies as possible and adjust its controls procedures until the consummation of a possible sale.

The due diligence phase is crucial to define if the transaction will be implemented or not. Depending on the red flags and issues identified by the relevant advisors, the potential buyer may choose to present a binding offer for the acquisition of the target company/assets with a potential adjustment of the purchase price as a result of the due diligence procedure. The potential buyer may even choose not to present a binding offer at all in case a major issue is found in the target company/assets.

Other possible scenario is to establish, in the definitive contracts, clauses that guarantee that any losses arising out of any matter of the due diligence would have to be indemnified by the sellers. The potential buyer can even hold a portion of the purchase price in a restricted account (usually an escrow account) or earn-out and/or require representations and warranties from the sellers in which they assume responsibility for possible risks identified or, even more importantly, for risks not identified due to the issues found, in which case the required representations and warranties will be even more significant.

Based on the above, it is clear to assume that if the company is in good standing, the purchase price will be better evaluated by the potential buyers. One point that should be highlighted is that the buyer is not in the day to day of the business, thus not knowing the history or having access to the same information as the sellers. With a proper due diligence, the company (potential buyer) will have all the information required to make a better assessment of the target company/assets.

By following the steps indicated above, the company willing to buy a target company and/or assets will have detailed information to better evaluate the financial matters, establishing a more accurate purchase price, besides the fact that it will have a more solid structure to go through a healthier M&A transaction and to achieve the goals established prior to implementing the transaction.


Clearly taxes play an important role in M&A transactions anywhere in the world, but in Brazil this is especially true. The complexity of our tax system gives rise both to the necessity of thorough due diligence and tax planning opportunities.

Share deals, where the buyer acquires shares in the target company in opposition to having asset deals, are the most common approach in Brazil, mainly because the taxation on sales of assets (fixed assets, inventory, etc) is higher than the sale of shares, but also due to the fact that buying shares can allow the acquirer to amortize goodwill (i.e. as long as proper structing is done), to step-up the cost basis of assets according to Purchase Price Allocation study (which needs to be done and registered before a Notary Public or the Tax Authorities) and since this is usually more straightforward than changing ownership/legal title of individual each asset/liability.

In most cases, foreign entities set-up and inject cash in a local holding company to make the acquisition, which has advantages both from legal/regulatory perspective as well as tax advantages such as pushing down intercompany debt (subject to special transfer pricing and thin capitalization rules) utilized to finance the transaction and allowing the buyer (i.e. the holding company) to be merged into the target (hence, allowing tax amortization of goodwill).

When modeling and analyzing financials of target companies in Brazil a detailed tax analysis is recommended, since there are many different taxation regimes, tax benefits and specific rules that can be impacted by a transaction and as a consequence modify financial flows of the valuation.

As final remarks, Brazil does not have a wide treaty network (e.g. there is no Double Tax Treaty between Brazil and the USA) and in spite of dividends currently not being subject to tax in Brazil, potential tax reform are under discussions in the Congress.

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