By Robert Eugene DiPaolo
Up to this point in our discussion about doing business in Brazil, we have focused on organizing a new company through which you can operate a business, buy an existing business or invest in Brazil, and some of the obstacles related thereto. In this discussion we are going to shift gears a bit, and approach our discussion from the perspective of a person, generally a foreign corporation, that wants to acquire, invest in or enter into a joint venture with an existing Brazilian company.
There are several areas in which you need to focus when considering the acquisition of, an investment in, or joint venture with an existing Brazilian business. The first area of focus should be due diligence. You will want to conduct, or have conducted on your behalf, both financial and legal due diligence. For our current discussion we will focus on legal due diligence.
When conducting legal due diligence in Brazil, in addition to being concerned about such matters as the legal status of the company to be acquired, the enforceability of its contracts, the validity of its accounts receivable and the level of its debt obligations, to name a just few, you will want to give particular attention to potential tax and labor law liabilities. These areas in particular can be traps for those with little 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 USA, convoluted and even counterproductive
When I worked on my first Brazilian-based transaction in 1997, representing a US client that was purchasing a Brazilian company, the potential tax liabilities of the company being acquired became an area of particular concern. The owner of the target company told us that like every other company in Brazil, the 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 liable for unpaid taxes, the owner told us that if the Brazilian government came after this company for any unpaid taxes, it would have to go after every other company in Brazil, since no company in Brazil pays all the taxes that it is supposed to pay. While I am in no position to evaluate the validity of this statement, I can tell you that we insisted that our client be indemnified for any future tax liabilities that might arise after the purchase was completed.
Another area to which you will want to pay careful attention during you due diligence is possible labor law violations and contingent liabilities related thereto. At this point in our discussion there is no need to survey all the contingent labor law liabilities for which you may end up being responsible. Suffice to say that the labor laws in Brazil, which are in serious need of reform, are a trap for the unwary and ill-advised. The variety of ways in which Brazilian companies attempt to circumvent the rather convoluted and often draconian labor laws can result in significant contingent liabilities for which a subsequent purchaser would ultimately be liable.
To conduct your legal due diligence, you will need to hire a Brazilian law firm capable of conducting such an investigation. While Jose C. Santiago in his three part series How to Hire a Lawyer in Brazil provides a very helpful guide to finding a Brazilian lawyer, his series is more geared to finding an individual Brazilian lawyer, rather than a Brazilian law firm to assist you with a larger transaction. So, if you are involved in leading your company, or advising a client, in the purchase of, an investment in or joint venture with a Brazilian company, you will want to work with an experienced law firm in Brazil. So, how should you go about engaging a Brazilian law firm? Well, you could do what I did when originally faced with this question back in 1997, grab a copy of the Martindale-Hubbell Legal Directory or a similar source and look for a big, well established and prestigious law firm in Brazil. I figured that since this was the sort of firm for which I was working in New York City at the time that I should look for the same sort of firm in Brazil. Since then however, I have learned that this in not necessarily the best way to find a law firm in Brazil. That is 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. First, most of the larger law firms in Brazil have only become larger firms in the last decade, and thus cannot be easily compared with the larger law firms in the US or UK. Second, while most of the smaller boutique law firms in the US and UK are being gobbled up by larger, more global firms, Brazil is heading in the opposite direction with highly skilled junior partners and senior associates leaving their large firms to create smaller boutique firms.
You will more than likely be better served by a smaller to mid-sized Brazilian law firms, most of which are staffed with former lawyer form large firms, who are more than capable of providing you with the same quality of work as the larger firms and generally in a more efficient and cost effective manner. In addition, there is a very good chance that the Brazilian company you are buying, investing in or entering into a joint venture with, despite its size or the size of the transaction, will be represented, not by one of the big Brazilian law firms, but by a smaller to mid-sized firm.
The problem is that these smaller to mid-sized 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 with a variety of law firms in Brazil, large, small an in-between, who is capable of evaluating your particular needs and can indicate one or more firms which would be well suited for your particular transaction. This could be a consultancy, such as The Fidelis Group do Brasil Consultoria, or a similar legal or business consultancy or advisory, which can be of invaluable assistance helping you engage a Brazilian law firm to assist you with your acquisition, investment or joint venture in Brazil.
Mr. DiPaolo is the co-founding managing director of The Fidelis Group do Brasil Consultoria, Ltda., a legal/business consultancy specializing in assisting non-Brazilians who want to do business or invest in Brazil. He can be reached at firstname.lastname@example.org.
Previous articles by Robert:
Doing Business In Brazil: Part 4 – The Despachante
Doing Business In Brazil: Part 3 – Starting Your Business
Doing Business In Brazil: Part 2 – The Variety of Brazilian Companies
Doing Business In Brazil: Part 1“