Distressed M&A – Brazil
Bruno Werneck 8 April 2011
São Paulo: +55 11 2504 4245
Tauil & Chequer Advogados is associated with Mayer Brown LLP, a limited liability partnership established in the United States.
Market’s Influence on Transactions
• Healthy markets and healthy business tend to favor sellers.
• Healthy conditions can drive demand from large pool of strategic and financial buyers with
ready access to capital.
• In a healthy situation sellers can accelerate or extend timing to meet its transaction objectives
(for instance, the seller may speed the process to limit the amount of time potential buyers can
take to consider due diligence findings).
• An economy in recession, on the other hand, tends to give the buyer the upper hand.
• The scarcity of credit contributes to a decrease in the purchase price.
• Bankruptcies and distressed M&As are driven by: (i) over-leveraged capital structures; (ii)
enormous amount of debt maturing; (iii) scarcity of credit and inability of companies to de-
• As a consequence, distressed targets will (i) seek alternatives to a distressed sale or bankruptcy
(refinancing and recapitalization); (ii) be forced into non-bankruptcy rescue sale (non-core
assets, spin-offs, split-offs or entire business); or (iii) bankruptcy.
• Ultimately, this scenario will lead to valuation decline and unique opportunities.
Basic General Points
• The worst the company’s financial situation is, the stricter the and more formal the
procedure rules get for a M&A transaction.
• These transactions can occur in normal distressed situations, such as an out of court
friendly rescue financing or in a more restrictive scenario, in which judicial
intervention is mandatory.
• Out of Court “friendly” rescue financing has the following advantages: (i) potential
cost saving by avoiding judicial intervention; (ii) the transaction’s approval does not
depend on creditors’ consent nor court approval; and (iii) may mitigate adverse
publicity (which negatively impacts costumers, suppliers, employees and others).
Downside is higher legal uncertainty.
• Despite the recent crisis, the economy has shown in the past years a healthy scenario and
indicates a prosperous future
• GDP growth:
– 2010 – 7 to 7.5%:
– 2011 – 4 to 5%
• Unemployment rate: 6.1% (IBGE)
• Foreign Direct Investment only in Jan/2011: US$ 2,956 millions (BCB)
• Growth Medium Rates 2001-2010: (FGV and IBGE)
– GDP: 3.98%
– Pop.: 1.35%
– GDP per capita: 2.6%
• 787 M&A transactions in 2010 New record! (PwC Dec/2010)
– 89 only in December
– +9% before 2007 pre-crisis
– IT, food, oil & gas, chemical, mining, real state, health care and banking
• Capital Market:
– 375 listed companies, reaching US$1.536 trillion in market value (BM&FBovespa Mar/2011)
– 59 issuances (US$ 8.7 billion) in 2011: increase 98% over the same period of 2010 (Anbima
– IPO’s (11) and Follow Ons (13) in 2010: US$90.54 billion (2011: US$2.724 billion) (Anbima
Basic Points on the Brazilian Legislation
• Judicial Recovery
- Objective: Its purpose is to make it possible for the distressed debtor to overcome its financial crisis
and continue to fulfill its social function and economic activity.
- Companies: Only businessmen and business companies can file for an application for judicial
recovery. State-owned and mixed economy companies, public and private financial institutions,
credit co-operatives, consortiums, private pension entities, health plan operators, insurance
companies and capitalization entities are excluded from judicial recovery.
- During proceedings for judicial recovery, the debtor continues to conduct its business, under the
supervision of a judicial administrator responsible for monitoring compliance with the recovery plan.
- Objective: It is based on the premise that the debtor’s business is no longer economically viable. Is
the ultimate mechanism to preserve and optimize the productive use of property, assets and
resources. All the debtor’s assets are placed under the control of an administrator.
- Companies: Bankruptcy applies to the same persons and entities as judicial recovery.
Basic Points on the Brazilian Legislation
• Extrajudicial Recovery
- Objective: Its purpose is to allow private agreements between a debtor and its creditors
that create favorable conditions for the restructuring of a company in financial distress.
- Companies: Extrajudicial recovery applies to the same persons and entities as judicial
- Judicial affirmation of an extrajudicial recovery is optional. The recovery plan cannot
provide for advanced payment of debts, nor for unfavorable treatment of creditors that
are not a party to the agreement.
- The debtor can also file for judicial affirmation of an out-of-court reorganization plan that
binds all included creditors, provided it is signed by creditors representing over 60% of all
claims of each included class.
- In order to obtain judicial affirmation of an extrajudicial recovery plan, the debtor
submits an application setting out the reasons for the request, together with the
recovery plan instrument signed by the participating creditors.
Shareholders’ and Officers’ Liabilities
• Corporate Veil: In principle, a company’s bankruptcy does not extend to its shareholders. The
exception is cases of abuse of legal personality, characterized by the misuse of the legal entity’s
distinct personality or a confusion of assets between the legal entity and another person (whether
natural or legal), where the court finds that certain obligations extend to the personal property of
the legal entity’s director, officers, shareholders or partners. That is, the courts can disregard the
legal personality of an entity when it is used for fraudulent purposes or to conceal property to the
detriment of creditors. However, lifting the corporate veil is an exceptional measure and depends on
proof of fraud or abuses of rights to the detriment of creditors.
• Shareholders, directors and officers of a bankrupt limited liability company can have both civil and
penal liability. This liability is not for the corporations obligations and is limited to the losses the
individual caused to the debtor by their fault, wrongful conduct or violation of the law or the
corporation’s by-laws. Other parties can be held liable if they have in any way contributed to such
• In normal conditions (without the disregard of the legal entity) shareholders are only liable for the
payment of their share on the corporate capital. In case of a bankruptcy procedure, the amounts
resulting from a partner’s right to receive his portion of the capital stock upon liquidation of the
company cannot be enforced against the estate, being the corporate capital a guarantee of the
• The following acts may be declared ineffective, regardless of whether the contracting party
was aware of the debtor’s financial distress and whether or not the debtor intended to
- Payment by the debtor of debts not yet due within the legal term of its bankruptcy;
- Creation of real security to guarantee a pre-existing debt within the legal term of the
bankruptcy. If new hypotects are created against hypotecated property;
- Gratuitous transactions carried out in the two years before the decree of bankruptcy; and
- Sale or transfer of the debtor’s establishment without the consent of all creditors and without
retaining sufficient assets to meet its liabilities, unless there is no opposition by the creditors.
Acquisitions of Companies and Credits in
Judicial or Extrajudicial Recovery
• Distressed financial scenarios are to be dealt with an extra attention, specially when involving the interest
of different groups of creditors as it may occur in the acquisition of companies, assets or credits involving
judicial recovery or extrajudicial recovery.
• The sale of a company in judicial or extrajudicial recovery is a possible alternative to company’s financial
situation and may be a part of the recovery plan. As a consequence of necessarily having its terms and
conditions detailed in the plan, it must undergo the recovery plan’s approval procedure.
• In an extrajudicial recovery, the recovery plan must be approved by creditors representing 60% of the
credits of each included class. If such plan is signed by 60% of the creditors of each class and then ratified
by the competent court it drags the other 40% of each class as it extends a binding effect on them.
• In a judicial recovery, the recovery plan must be approved by a general meeting of the creditors. At
meeting, the deliberation quorum (majority present at the meeting) is set by the affirmative vote of
creditors representing the majority of its class respective credits (except for labor creditors whose approval
consists on the affirmative vote of the majority per capita).
• The acquisition of credits is also a possibility in distressed situations (judicial and extrajudicial recovery and
bankruptcy). The buyer subrogates itself in the creditor’s position. The exception to that rule is the
acquisition of labor credits. Despite being allowed by the Brazilian Bankruptcy Law, the assignment of a
labor related claim to a third party automatically makes such credit an unsecured one, ceasing to have all
the benefits inherent to a labor credit. Aside from this exception, the assignment operates as a regular
assignment in which the buyer acquires all the rights pertaining to the former owner, such as voting rights.
Specific Acquisitions without Succession
• Acquisitions without succession: as per the wording of article 60 of the Brazilian Bankruptcy Law, if the
approval of the reorganization plan involves judicial disposal of branches or separate production units of
the debtor, the judge shall order that this be performed. As states the sole paragraph of such article “the
object of the disposal shall be free of any encumbrance and the winning bidder shall not succeed to the
debtor’s obligation, including tax related obligations, with due regard for the provisions of article 141
hereof (which provides for the sales of assets in bankruptcy)”.
• Despite being controversial, a common interpretation (by courts and jurists) is that the acquisitions of
those “separate production units” are free from any encumbrances, including tax and labor related
• Therefore, the acquisition of “separate production units” of companies in judicial recovery and the
acquisition of assets of a bankrupt estate are free from succession.
• Despite not having a legal definition, “separate production unit” can be interpreted as a set of rights and
goods organized in order to develop the company’s activities that is capable of being having specific and
identifiable rights and liabilities. It is conceptually very similar to an establishment.
São Paulo: +55 11 2504 4245