Corporate Reorganisations

In Brazil, the main types of transactions considered to be forms of corporate reorganisation are detailed below.

Merger

A merger is a transaction whereby one existing entity is completely merged into another existing entity. In a merger, the merged entity no longer exists, resulting in one sole remaining entity, which becomes the merged entity’s legal successor in all its rights and obligations.

Spin-off

Through a spin-off transaction, an entity transfers the totality or part of its assets to one or more entities. When just part of the assets are transferred, the spun-off entity continues to exist, and this transaction is defined as a partial spin-off. Each entity that absorbs a portion of equity of the spun-off company becomes its legal successor in its rights and obligations related only to the assets received or listed in the relevant protocol. When, however, the totality of an entity’s assets is transferred to another entity or multiple entities, there is a full ‘spin-off’ and the spun-off entity is dissolved. In this case, the entities that absorb portions of equity of the spun-off entity will succeed to it in all its rights and obligations, even if these are not related to the assets received or listed in the relevant protocol, in the proportion of the net equity transferred to them.

Amalgamation

An amalgamation involves two or more entities merging together to form a new entity, which succeeds the merged and previously existing entities in all their rights and obligations. The merging entities are dissolved in the process.

Transformation

A transformation is a transaction through which an existing entity changes its corporate type into another (eg, from a limited liability company into a corporation).

There is another transaction that could be considered a fifth type of corporate reorganisation: the drop-down of assets, which consists of a company transferring either the totality or part of its assets to a subsidiary, which will have its capital stock increased and paid in by its controlling entity with the referred assets.

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Conditions such as the increasingly competitive corporate environment and constant need to maximise results, coupled with the global economic scenario, have converged into a worldwide trend involving the concentration of productive activities into small economic groups in order to optimise productive processes and reduce costs.

Corporate reorganisations are pursued for several purposes such as reducing the tax burden of the companies involved and increasing their competitiveness, profitability and presence in the global market. Accordingly, considering the current delicate political and economic scenario in Brazil, corporate reorganisations are occurring more frequently.

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Brazil’s high tax burden is one of the factors that lead business entities to consider undergoing corporate reorganisations to optimise their results and to restructure their organisations in a more synergetic and efficient format, when possible under a legal perspective.

Further, the delicate political and economic situation in Brazil in recent years has led to certain measures being adopted in the corporate scenario, such as the improvement of corporate governance and internal control practices, as well as the adoption of anti-bribery and corruption-prevention measures.

In view of the foregoing, it may be said that the economy in general and the adoption of best practices are the main drivers for corporate reorganisations in Brazil.

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The corporate reorganisation must be structured taking into consideration the intended goals and needs of the companies. Depending on the form of the corporate reorganisation, it is common to perform a due diligence process to reflect the real conditions, legal matters and financial health of the companies involved in the transaction.

The identification of such factors is usually attributed to the management of the entities involved, who are familiar with and participate in daily operations. Accordingly, in order to proceed with a corporate reorganisation, it is required that the managers present the suggestion for such to its equity holders, which must contain, essentially, the reasons why it is in the best interest of the company, and the intended changes in its capital stock and shares or quotas.

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The key laws in Brazil to be considered when undertaking a corporate reorganisation are the Brazilian Civil Code (Law No. 10,406/2002) and the Brazilian Corporations Law (Law No. 6,404/76). Both regulate the requirements to be observed when carrying out a corporate reorganisation and may apply depending on the corporate type of the business entities involved and form of the corporate reorganisation chosen.

Further, depending on the market under which the entities involved in the relevant transaction do business, other laws and regulations may apply. For instance, if one of the companies is a publicly held entity, it must observe the procedures and rules established by the Brazilian Securities and Exchange Commission (CVM). The CVM is a federal authority that regulates the companies’ duty to disclose relevant facts and notices to the market that mitigate the practice of insider trading, using transparency as the main tool for regulating its operations.

Other examples are the financial institutions and banks regulated by the Brazilian Central Bank, as well as the insurance-related entities, regulated by the Brazilian Private Insurance Supervisory Agency (SUSEP), to which specific laws and regulations apply.

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The undertaking of a corporate reorganisation in Brazil requires the parties involved to be conscious of several authorities from different jurisdictions.

Purely internal reorganisations (ie, those that take place intra-group, do not involve third parties and consist neither of an acquisition of control nor of an increase of shareholding in any company) do not require antitrust approval in Brazil.

Brazilian publicly listed companies are subject to specific rules set forth in the Brazilian Corporations Law and by the CVM, among them the duty to inform and disclose to shareholders and to the stock exchange the occurrence of any material fact within the company’s business. However, the CVM does not have the power to authorise or forbid the execution of the transaction; it only has normative and punitive powers to define some rules and requirements to be observed in the reorganisation process.

Further, depending on the corporate purposes of the company, the reorganisation may be required to be filed before other public authorities (Brazilian Central Bank, SUSEP, etc) for approval.

In Brazil, the restructuring of companies is operated through corporate documents, which, after specific previous measures (ie, those referred to above) are observed, must be filed with the board of commerce of the State in which the involved entities are based and, if applicable, where these entities have branches. Such filing is required to cause the corporate acts to produce effects before third parties.

Depending on the corporate type (eg, civil organisations and co­operatives), instead of the filing referred to above being made with the board of commerce, the corporate documents must be registered with the civil registry of legal entities.

Further to filing the corporate documents with either the board of commerce or the civil registry, the entities involved must update, change or cancel, as the case may be, their registries (the Federal Taxpayer’s Registry (CNPJ)) with the Brazilian Federal Revenue. Depending on the activities of the entities involved, their state registry must also be adjusted; this coincides with the CNPJ registration.

Any corporate reorganisations shall also be communicated to the municipality of the jurisdictions involved in the transaction, as well as to any class councils to which the entities are subject, or other authorities in which the companies are registered.

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In order to prepare for a corporate reorganisation, one of the most important steps is to conduct a thorough due diligence, especially from a tax, accounting, financial and legal perspective, in order to investigate and report the status of the entities involved. Legal due diligence is conducted according to the areas in which the relevant entities conduct their business and, therefore, may vary, but usually comprises investigation relating to: corporate, regulatory, environmental, real estate, intellectual property, social security, tax, civil and labour litigation, social security and labour routine, criminal and insurance areas.

The due diligence may even identify rights of creditors or equity holders who are not willing to participate in the relevant transaction, which, if their legal assurances are not observed, could render the relevant transaction null.

Such due diligence is usually assisted by legal and financial advisers who, once supplied with the due diligence information, are able to provide guidance on the most adequate structure to be adopted as well as through all the steps involved.

Based on the information verified in the due diligence, it is possible to adopt other measures that may be relevant in order to prepare for the corporate reorganisation, such as making pending payments, obtaining release from obligations and obtaining any prior approval or authorisation that may be required to proceed, among others.

Other significant aspects that must be taken into consideration when planning a corporate restructuring are operational and organisational logistics, financial aspects and, most importantly, applicable legislation and rules.

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One of the most important premises from a labour perspective in Brazil is that no change in the legal structure of the company for which an employee works should affect the rights acquired by such employee. Further, a change of ownership does not necessarily presuppose the termination of the employment agreements, as the employment agreement held by the acquired company remains binding on such company (unless the relevant employee does not continue to provide services, either by his or her own will or by that of the companies). In all events, the succeeding company will be responsible for all labour and social security rights and obligations arising from the employment agreements of the acquired company, except if there is any fraud in the business succession, in which case the seller is jointly liable for labour obligations.

Another relevant aspect that must be considered when undertaking a corporate reorganisation in Brazil is the employee’s salary. This can be a significant issue, as employees’ salaries cannot be reduced, and pay-parity cases may arise when comparing the transferred employees with those of the new employer, based on specific requirements established in the Brazilian Labour Code and the Consolidation of Labour Laws (CLT). The employees’ acquired labour rights concerning vacations, 13th salary (annual bonus), bonus accrual periods in course, etc, must also be respected.

When companies involved in a corporate reorganisation do not consider the employees’ salaries and benefits to provide a proper equalisation, they may be exposed to the risk of violating the principle of isonomy (ie, equality before the law), as well as other significant labour law principles and objective rules.

Further, corporate reorganisations must ensure the continuous observance and compliance by the entities involved of any special collective agreements or collective bargaining agreements (which are imposed on the companies and employees as a result of a negotiation between workers’ unions and employers’ associations) to which the original entity or the employees are subject to. Some of these collective agreements may even provide for specific rules for corporate reorganisation scenarios.

In order to ensure compliance with all adequate measures, it is always advisable to analyse the existing employment agreements, and their terms and conditions, and to track all benefits granted to employees and any agreements (as referred to above) to which employees are subject, a considerable amount of time before the corporate reorganisation takes place.

Notwithstanding the above, other specific labour aspects must be considered in a corporate reorganisation case by case.

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Pursuant to Brazilian labour law, the pensions and benefits offered to employees can be amended to receive improvements or to reflect a change of the company to whom they are providing services. In this regard, it is important to consider the premise that any benefits previously offered to an employee cannot be excluded or amended in order to reduce or worsen the conditions. For instance, if an employee was entitled to the benefit of a healthcare plan with full coverage of treatment, in view of a corporate restructuring, the surviving entity to which that employee will continue to render their services may change the health plan offered; however, the full treatment coverage must at least remain under the same conditions as the previously existing and offered one.

In order to ensure the adequate compliance with pension and benefits aspects, the entities involved must gather all existing documents and take into consideration all of their terms, either for the purposes of their assignment or so they can be duplicated or implemented under the same terms and conditions when the surviving entity receives the employees, as the case may be.

Especially in what concerns private pension plans, a previous case-by-case analysis is essential as, depending on the structure of the reorganisation or the intention of the new employer towards such benefit, the change or even maintenance of the plan can require specific regulatory procedures, which can impact the deadline and costs of the operation.

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Financial assistance is not only allowed in Brazil by private or public companies, but it is a common and increasingly adopted practice. Such practice is intended to optimise the deal and to maximise the outcome of the members involved, especially the surviving entity (either when acquiring its own equity or when selling or acquiring that of another entity).

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Some of the most commonly overlooked issues in a corporate reorganisation are:

• not giving due importance to the process of prior and detailed tax planning;
• overlooking the tax and financial consequences for the companies and their equity holders;
• not undertaking a due diligence process;
• not considering the corporate, social and synergetic purposes of the corporate reorganisation, or the ultimate intended outcome for the transaction;
• not obtaining any required prior approvals or otherwise overlooking specific procedures that the corporate governance of the involved entities establish;
• not analysing the availability of distributable reserves or, if analysing them, not aiming for the maximisation of their results;
• not establishing a plan and estimated timeline for the transaction, with the identification of all measures involved and responsible parties; and
• not hiring expert advisors to assist in specific aspects of the transaction (eg, legal, financial or accounting).

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From an accounting perspective, corporate reorganisations are usually implemented considering the book value of the assets and quotas or shares, when possible, to avoid significant tax impacts.

If the assets and businesses are valued at fair market value, the revaluation may trigger taxes on the related capital gain.

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If made at book value, corporate reorganisations do not normally trigger immediate taxation. However, depending on the case, a deferred gain must be recognised.

On the other hand, tax losses of the merged or spun-off company are lost (totally in the case of a merger, or partly in the case of a partial spin-off) upon a corporate reorganisation.

Another aspect to be considered is that the entity receiving the transferred assets becomes a successor of the merged or spun-off entity regarding past tax liabilities.

If the entities involved in the reorganisation enjoy any special tax regimes, the applicable legislation should be reviewed.

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The Brazilian Civil Code and the Corporation Law ensure that the rights of creditors cannot be prejudiced in view of a corporate reorganisation, which is why there is no specific requirement for the creditors to express their consent to carry out any such transactions. Also, the applicable law provides that the companies involved are jointly and severally liable for the obligations existing before the transaction took place.

In order to ensure that such rights of third parties will not be prejudiced, Brazilian law sets forth that some measures must be taken, such as the obligation of the companies involved in a corporate restructuring to publish the referred relevant corporate documents at least 90 days before the accomplishment of the transaction.

In addition, the partial spin-off may stipulate that companies that absorb portions of the equity of the spun-off company will only be liable for the obligations transferred to them, without solidarity with each other or with the spun-off company. In this case, any previous creditor may object to stipulations related to its credit, provided that it notifies the company within 90 days from the date of publication of the acts of the spin-off.

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In Brazil, essentially any type of corporate reorganisation requires prior consent and approval to be given by the equity holders or the management bodies of the entities involved.

Depending on the corporate type and the rules provided by the companies’ charter, such consent and approval must be given in a specific format (eg, by the managers, by the equity holders or by both the equity holders and managers).

All types of corporate reorganisation will ultimately result in changes or adaptations to the charters (either articles of association or by-laws) of the companies involved. Accordingly, the equity holders or managers, as the case may be, must approve the relevant corporate reorganisation as well as all the consequences arising thereof (eg, a merger could result in the enlargement of the surviving entity’s corporate purposes to comprise the activities of the merged entity and the increase of the surviving entity’s capital stock in view of the incorporation of the merged entity’s net equity). Also, usually, the equity holders must approve the appointment of experts and authorise the managers to practise all the relevant acts necessary for the accomplishment of the transaction.

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According to articles 247 and 248 of the Brazilian Corporations Law, in the company’s balance sheet, the investments in related companies or subsidiaries and in other companies that are part of the same group or are under common control will be evaluated by the equity method.

Such investments should be accurately stated with explanatory notes in the financial statements of the companies, in case of both assets and shared services.

Also, the shared expenses must be summed up and assessed pro rata between the parties, proportionate to their use and benefits arising thereof.

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Transactions between related companies are allowed, provided that they comply with certain specific rules provided by law.

In a merger, the equity capital of a company that will be merged into another can be either extinguished or absorbed by the surviving entity (in what can result in a capital increase of the surviving’s capital stock), in accordance with the steps and conditions described in the protocol and justification of the transaction.

The principle mentioned above will also apply in cases of amalgamation and spin-off followed by a merger.

Moreover, reciprocal equity interest between a company and its affiliates or subsidiaries is not allowed; if this should occur in violation of Brazilian law, the managers can be held jointly and severally liable for any civil and criminal effects that may arise thereof.

Accordingly, if a reciprocal participation arises out of a merger, amalgamation, spin-off or acquisition of the control of a company, the relevant reports and financial statements of the entities involved shall refer to it, and steps must be taken so this situation is resolved within one year as of the transaction that gave cause to such.

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According to Brazilian Law Nos. 6,404/76, 9,249/95 and 11,638/07, within a corporate reorganisation, the assets to be transferred must be transferred by either their market or book value, which must be observed equally by all entities involved in the transaction.

The legal entity that has part or all of its assets absorbed must draw up a specific balance sheet for the purposes of the transaction. It is common practice to draw up the balance sheet no more than 30 days before the transaction, so that the information stated therein is accurate as close to the effective date of transaction as possible.

In the case of transactions carried out between independent parties and with transfer of control, the assets and liabilities of the company to be merged into the other or those arising from a merger or spin-off must be considered by their market value.

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It is not possible for a corporate reorganisation to be backdated or deemed to have already taken place. The corporate reorganisations are performed based on an appraisal report prepared by three technical experts or a specialised firm, and such report must be as up to date as possible in order to reflect the conditions under which the transaction will be carried out.

The company that has part or all of its assets absorbed by another as a result of a corporate reorganisation must draw up a special balance sheet for the purposes of the transaction, ideally within 30 days of the date of the event.

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It depends of the type of corporate reorganisation and the company’s­ corporate type. The most common documents required in connection with mergers, amalgamations and spin-offs are:

• the protocol of the transaction and justification, which must detail and specify the terms, conditions, premises, reasoning and rules that are the basis of the corporate reorganisation, including the appointment of experts to prepare the appraisal report of the assets and the indication of which assets will be transferred and the equity contribution;
• the appraisal report, which must be drawn up and signed by either three experts or a specialised firm, and describe the totality of the assets to be transferred with the identification of the respective net equity value and the indication of the consequences thereof. The appraisal report is prepared to evaluate either:
• the net equity of the merged entity (in a merger);
• the net equity of the portion of an entity that will be spun-off (in a spin-off); or
• the net equity of the entities involved (in an amalgamation), based on balance sheets drawn up for this specific purpose;
• the minutes of the relevant shareholders’ or partners’ meetings to approve the protocol and justification, appraisal report, the transaction itself, its consequences to the relevant companies’ structure, as well as the practice of any acts and the signature of any documents that are deemed necessary to complete such transaction; and
• amendments to the articles of association or to the by-laws to reflect the changes in the companies’ structure in view of the transaction. For instance, such corporate act can approve the increase or decrease of the surviving entity’s capital stock, the enlargement of its corporate purposes or changes in the management structure, as the case may be, as a result of a merger or an amalgamation. Also, in the event of a spin-off, both entities (the spun-off entity and the one that will receive all or part of the assets) shall have their articles of association or by-laws amended in connection with the changes caused by the transaction.

In the case of a transformation of corporate type, after the approval of the transaction, the relevant equity holders must execute and file the corporate documents to implement the new structure of the company - either a partners’ meeting to approve the adoption of by-laws (in the event of a transformation from a limited liability company into a corporation) or a shareholders’ general meeting to approve the adoption of the articles of association (in the case of a transformation of a corporation into a limited liability company).

Other documents and requirements may be applicable, depending on the transaction and companies involved.

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The Brazilian law does not provide for a compulsory requirement for the entities involved to provide representations, warranties or indemnities in corporate reorganisations.

Nonetheless, considering that in corporate reorganisations the surviving entity succeeds the previously existing one in all rights and obligations, it is advisable to have a comprehensive understanding of what the transaction will include (for instance, civil, labour, tax contingencies, lawsuits or debts). This can be accomplished through due diligence or accurate contractual provisions.

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Yes, there are some differences where assets or a business as a going concern are transferred. The transfer of an asset is accomplished through a private instrument, while the latter is transferred by an instrument providing for the succession of an establishment, requiring prior authorisation by the Brazilian Federal Revenue.

The transferor and, mainly, the transferee of an asset transfer, must be aware that all the required licences for the activities to be developed in connection with such asset must be obtained from the competent authorities to enable the adequate operations. In the case of a succession of establishments (ie, business as a going concern), the relevant licences may accompany either the business or the establishment where the activities are developed.

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Before considering the corporate reorganisation aspects themselves, it is helpful to clarify some differences between non-profit and profitable entities in Brazil.

In accordance with the applicable law, a non-profit entity shall be formed mandatorily under the corporate form of an association and must remain so, not being allowed to be converted into a company per se. The corporate documents related to the formation, the structure and any corporate reorganisation with regard to the associations shall be filed before the civil registry of legal entities.

On the other hand, companies shall have their documents filed before the relevant board of commerce.

Regarding business companies, the most common corporate types in Brazil are corporations and limited liability companies, which have some considerable differences.

To exemplify these differences, while limited liability companies are mainly regulated by the Brazilian Civil Code and have more flexible management and cost-efficient structures, corporations are mainly ruled by the Corporations Law, have a more complex management structure and have stricter and more costly corporate governance rules (eg, the relevant corporate acts intended to produce effects on third parties must be published in widely circulated newspapers).

Also, in Brazil, corporations may be closed or publicly held. Regarding the latter, the rules of the CVM apply and any process of transfer of control of a publicly held entity must be previously approved by the CVM.

One important difference between such types of corporations are the restrictions and required documents for their effectiveness. The Corporations Law and, mainly, CVM Instruction No. 565/2015, determine that publicly held corporations must observe measures as to the disclosure of certain information, measures that closely held corporations are not required to observe.

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After the signing of the relevant corporate documents, they must be filed before the relevant board of commerce or registry of titles and documents, as the case may be, of the company’s relevant jurisdiction. Depending on the state of Brazil involved in the transaction, the updating of the companies’ registry before the Brazilian Federal Revenue (CNPJ/MF) may be jointly accomplished.

Afterwards, the managers of the surviving entity must proceed with the other relevant registries’ updates before the applicable federal, state or municipal authorities in which the companies are registered (eg, state revenue, municipalities, the Brazilian Central Bank, treasury departments, environmental and sanitary agencies, CVM, SUSEP, ANAC), and notify the tax authorities accordingly through the filing of the respective taxes or tax statements.

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