Acquisitions through share deals versus asset deals in Brazil: general considerations
August 2017 | EXPERT BRIEFING | MERGERS & ACQUISITIONS
In Brazil or elsewhere, investors may opt for an array of corporate structures in planning an acquisition, including capital contributions, assets contributions, mergers, reverse mergers and spin-offs, among others. Most of these corporate structures, if not all of them, invariably fall into the universal categories of either a share acquisition or asset acquisition.
When structuring acquisitions through share or asset deals, a common driver often taken into consideration by investors across jurisdictions relates to the tax impacts of the transaction. In Brazil, a few additional factors should be considered by investors in defining the ideal corporate structure, including: (i) the risk that the purchaser may become a successor of the seller with respect to debts and liabilities attaching to the relevant shares or assets prior to the transaction; (ii) the fact that the investor owns or not an existing vehicle in Brazil; and (iii) the need or not to retain or obtain certain licences and authorisations in Brazil that are fundamental for the business going forward.
Acquisitions through share deals are predominant in Brazil because their implementation is typically easier; they embed the transfer of the bulk of rights and liabilities related to the target and its underlying assets (including contracts, rights, licences and authorisations) and may be preferable in terms of tax planning.
Nevertheless, acquisitions through asset deals may also attract investors under certain circumstances. For instance, while in both share and asset deals purchasers have no statutory protections for liabilities attached to the underlying shares or assets prior to the acquisition, Federal Law No. 11,101/2005 (the Brazilian Bankruptcy Act) provides for a specific safe harbour for the transfer of assets owned by entities subject to bankruptcy or judicial recovery, and which have been consolidated as a so-called isolated productive unit (UPI), which protection is extended for pre-existing labour, tax and social security debts and liabilities.
Share deals in Brazil commonly relate to the transfer of shares or other security interests of corporations or quotas of limited liabilities companies. The transfer of shares or quotas results in a transfer of the target’s business to the purchaser, including assets, liabilities, rights, contracts and employees. The target’s corporate status and existence are preserved, but with a different controlling shareholder or quotaholder. Share deals may also involve the segregation or spin-off of specific assets and liabilities of a pre-existing entity into a separate vehicle, followed by the transfer of the ownership of such vehicle to the purchaser.
From a tax perspective, share deals present certain advantages as compared to asset deals, particularly whenever the target has accrued tax losses which may occasionally be offset against future taxable income under certain circumstances. In addition, the price paid by the investor in consideration for the equity interests includes a premium or goodwill, which may potentially be subject to amortisation and generate tax deductible expenses in the target’s business going forward, provided that certain legal requirements are met.
Share deals present no material advantages or disadvantages compared to asset deals when it comes to investors’ protection for debts and liabilities existing prior to the completion of the transaction. Ultimately, in either case, the investor may be directly or indirectly exposed to pre-existing liabilities attached to the shares or assets.
In essence, a share deal does not result in a direct or automatic succession of debts and liabilities of the target from the seller to the purchaser, since the target was directly liable for its own debts and obligations prior to the transaction and will remain so following it. Eventually, there is an indirect succession of the target’s existing and future debts and liabilities from the seller to the purchaser, since the latter’s equity will ultimately be affected by future losses of the target. Also, the investor may be held directly liable for the target’s obligations if it pierces the corporate veil, which is a resort commonly adopted by courts of law in Brazil for tax, social security, labour and environmental claims.
Nevertheless, the risk that the purchaser may be held liable for the debts and liabilities of the target existing prior to the completion of the transaction – through its interest in the target or due to piercing the corporate veil – is typically addressed and allocated in the relevant share purchase agreement through representations, warranties and indemnities in favour of the purchaser. Generally, third parties would still seek payments or indemnifications from the target, but the purchaser may resort to remedies and indemnities against the seller under the relevant share purchase agreement.
Finally, a share deal may be particularly attractive to investors with no presence in Brazil, since the transaction would involve the acquisition of an active and operating entity, presumably with all relevant licences and authorisations in place. Particularly in regulated markets, such as in the telecom, power and ports sectors (that would be the case of a target holding a public concession or authorisation, for instance), the issuance of these licences may be subject to lengthy and bureaucratic filings and proceedings. As such, the acquisition of an entity that is operational certainly presents upsides to investors.
Asset deals usually involve the transfer of title and interest over tangible or intangible assets. The sale of assets is something that is inherent to the company’s purpose and business and should have no noteworthy implications for the purposes of this paper. However, sales that comprise groups of assets that are vital to a business may be subject to special treatment under Brazilian law and attract effects that are comparable to those of a share sale – particularly with respect to a lack of protection to the purchaser for existing debts and liabilities that attach to the transferred assets.
Article 1,142 of Law No. 10,406/2002 (the Brazilian Civil Code) defines a business unit as a group of assets organised for the performance of a business activity. The statutory concept of a business unit not only encompasses assets that are vital to a company (i.e., the entirety or substantially all of the assets of a company), but also those which alone may be essential to a given plant, facility or production unit of a company.
From a tax perspective, the upside of an asset sale to a purchaser is a step-up in asset basis and depreciation of deductibility. From the perspective of purchaser’ protection, an asset transfer does not insulate the purchaser from existing debts or liabilities attached to the assets. Article 1,143 of Brazilian Civil Code sets forth that existing liabilities attached to a business unit shall be conveyed to the purchaser, if such liabilities have been booked. Notwithstanding that, the seller will be jointly liable with the purchaser for overdue credits attached to the assets, for a period of one year following the transaction; and for credits attached to the assets not yet due and payable, until the respective maturity dates. In some cases, courts of law may also hold the purchaser liable for obligations of the seller that are unrelated to the transferred assets or business unit, and particularly with respect to labour, social security and tax claims.
Nevertheless, and similarly to a share sale, the seller and purchaser may allocate their liabilities for pre-existing debts and liabilities related to the underlying assets (or business unit, for that matter) under the relevant asset purchase agreement, which may also provide for indemnities in favour of the purchaser.
There is a statutory exception for the succession of existing debts or liabilities in asset transfers if such assets belong to companies in bankruptcy or judicial recovery and have been consolidated into the so-called isolated productive units. According to articles 60, 141 and 142 of the Brazilian Bankruptcy Act, purchasers will have a safe harbour for existing liabilities attached to such assets (including tax and labour), provided that certain requirements are observed. There are number of court precedents in Brazil (including from the Supreme Court of Brazil) that have upheld such protection. Finally, if a sale of assets results that the seller will remain with insufficient assets to meet its obligations with third parties, then the transaction will be conditioned to the payment of all creditors or the consent of all creditors.
Share and asset deals offer similar risks and exposure with respect to investors’ protection for existing liabilities of the target and assets. Except in specific circumstances, Brazilian law provides no specific protection to investors in either case, while the allocation of liabilities between purchaser and seller is usually agreed upon in the relevant purchase and sale agreement.
Share deals are predominant in Brazil as they are easily implemented and embed a transfer of the bulk rights and liabilities related to the target and its underlying assets (including contracts, licences, authorisations and the like). However, the choice for a share or asset deal will ultimately depend on a number of factors, including operational, regulatory and tax aspects, while tax aspects are more than often a guiding factor.
Guilherme Ohanian Monteiro is a senior associate at Veirano Advogados. He can be contacted on +55 (21) 3824 1348 or by email: email@example.com.
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Guilherme Ohanian Monteiro