In Brazil, the acquisition process of a company is complex, involving a lot of documentation. In this article you will find out what the necessary documents are for the process.
Due to the opening and expansion of international markets, businesses are becoming more global. Many companies perceive the need for constant expansion. A variety of transactions can conduct this expansion and acquisition of another company is one of them.
Transactions of this type involve a certain complexity, since this process is very bureaucratic in Brazil. To start the process of acquisition first, it is necessary to put on paper the basic conditions to structure the transaction.
Before preparing a contract it is common to create preliminary documents that summarize the transactions that will occur. These draft documents are very important to develop with clarity, speed and objectivity in the negotiation process. In Brazil, the most frequent preliminary documents are:
- letter of intent (carta de intenção ou LOI)
- memorandum of understanding (o memorando de entendimentos ou MOU)
- term sheet (acordo de investimento)
The preliminary documents can be produced by the company interested in the acquisition – the buyer – through its shareholders or managers. The documents are usually addressed to the shareholders and managers of the company to be acquired.
Importance of the Preliminary Documents
The preliminary documents may be non-binding or binding. The non-binding represent the preliminary terms of trading and do not create obligations for those involved. The binding creates obligations for the parties and is the primary structure of a future agreement. Its terms must be reflected in the definitive documentation that will formalize the acquisition.
The production of preliminary documents is a very important step in the process of acquisitions, considering that according to the current civil code such documents assume legal nature of preliminary agreement. That could bind the parties and, as a consequence, lead to the final contract .
The preliminary contract is so important that it'sregistration with a competent authority allows a judge give to it a definitive character. That's why it is essential that the preliminary documentation be as similar as possible to the final contract to be entered into at the closing of the acquisition.
Foreign or Brazilian Law?
Another important issue related to the preliminary documents is the adaptation of its terms. This is because each jurisdiction has its peculiarities requiring the harmonization of documents considering the jurisdiction of the countries of the companies involved.
It should be mentioned, finally, that the parties opt for the use of arbitration to solve any disputes and – even in cases of transactions in Brazil – parties usually apply the rules of common law over the application of the civil code. The preference is justified by the greater familiarity that foreign investorshave with this system, allowing greater flexibility in closing the acquisition.
Letter of Intent/Memorandum of Understanding
The letter of intent is typically used when there is a transaction in sight, but still there is no knowledge of the interested party about the conditions of the company that might be acquired. Therefore, usually the conclusion of the letter of intent follows the completion of due diligence.
The memorandum of understanding is similar to the letter of intent in the sense that clearly establishes the conditions for two companies reach an agreement. However, the memorandum of understanding is usually used when you want to create a new business or enter into joint ventures, so this document isn't necessary in acquisition transactions.
The LOI and MOU shall present essentially the following topics:
|Parties|| The parties that shall be duly qualified are the buyer company, the company being acquired, and all their partners or shareholders. If there is any investor involved in the operation it is also important to be properly qualified. |
|Object of the Transaction|| What is being acquired must be specified (quotes, shares, stocks, etc). |
|Value of the Company|| The value of the company being acquired must be estimated if the financial expectations presented in the audit were confirmed. |
|Investment|| Must be specified: the value of the amount, the conditions of the investment disbursement, the equity interest that the buyer company is acquiring and, if it were the case, the use of financial resources invested. |
|Guarantees|| The buyer company should require some corporate and financial guarantees for the company to be acquired, in order to avoid that during the evaluation process and negotiations no kind of financial impact on the partnership that could compromise the transaction. |
|Management|| The buyer company may nominate an observer to monitor the management of the company to be acquired, while the process of evaluation and negotiation does not end. |
|Minimum Rights of Partners/ Shareholders|| Once performed the evaluation and formalized the option for acquisition, it is necessary to foresee the LOI or MOU. It is important to establish in advance how the management of the company will be held as the company management, the adoption of strategies, annual action plans, including business plans, operating and partnership investments budgets, besides the possibility of setting up councils of shareholders. |
|Due Diligence|| Which auditor will provide the service and who will afford the cost. |
|Confidentiality|| The terms established in the confidentiality agreement must be ratified. |
|Exclusivity|| During the evaluation and negotiation, is natural and consistent that the buyer company has exclusivity rights over the company to be acquired. |
|Non-Commitment|| In case one of the parties gives up of the acquisition, the party should be exempt of any penalty. If that wasn't established in the clauses of the LOI or MOU this preliminary documents would be should be irrevocable. |
|Period|| The LOI or MOU should not prevail for an indefinite period. The parties shall determine the deadline for a goal, which means that the process of evaluation and negotiation should respect a schedule. |
Generally, after the conclusion of the LOI or MOU an audit is realized to evaluate the legal, accounting and operational structure of the acquisition operations. As the document in question has the clause “non-commitment” if there is no longer interest between the negotiating parties, it is possible to cancel the transaction without the application of any reciprocal penalty.
The term sheet details the legal and financial terms of the acquisition and quantifies, in numbers and other indicators, the value of the transaction. This document – when accept by a consensus between the parties – serves as the basis for the production of all documents that give legal backing to an acquisition. The structure of a term sheet tends to be more complex and is only concluded after conducting the due diligence.
The negotiation of an acquisition, generally, is a long and complicated task. The term sheet is a formal and legal version of the sum of all the discussions that business people, investors, partners and shareholders had about the negotiation. The term sheet consolidates the LOI or MOU and the due diligence. Essentially, the term sheet must contain the following information:
|Parties|| The shareholders of the buyer company and of the company to be acquired must be fully specified. |
| Investment, Capital Increase, Issue of Shares and Subscription Shares ||Will specify how many shares will be issued or subscribed and the amount to be paid by them, determining definitively the participation of each parties in the partnership.|
|Compensation|| The buyer company can require legal protection against potential losses that the company may suffer due to contingencies arising from the past, not recorded, or merely impossible to be estimated. The compensation clauses are fully viable in order to prevent the buyer company from suffering any damages . |
| Shareholders Agreement for Limited Liability Companies or the Shareholders Agreement in Corporations || In parallel to the term sheet, another document must be signed to establish the management relationship, management procedures and the decision making among the new parties, which transcends the Articles of Association of the Company. |
|Precedent Conditions|| For the faithful execution of the term sheet, is required to be fulfilled by the parties certain requirements that establish the absence of legal impediments to the regular functioning of the company, as well as representations and guarantees of the partners or shareholders. Such as: legal situation, non-existence of conflict, social capital, accounting books, agreements, worker legislation, taxes, litigation, intellectual property, licenses and approvals, etc. |
| Administration - Deliberations in Society - Decision Making - Veto Rights ||The partners shall provide in the term sheet, the final and definitive form of administration and management of the company.|
| Administrative Council for Economic Defense (CADE) ||It is mandatory to submit to CADE any type of acquisition in order to be or not approved. If CADE does not concede an approval for the transaction, the acquisition cannot occur. CADE is responsible for guaranteeing that the transaction won't create any kind of concentration that may harm the companies competition in the country.|
|Commitment Effect|| Differing from the LOI or MOU, the term sheet is a commitment made between the buyer company and the company to be acquired. |
|Confidentiality||It is strongly recommended that the parties keep all information confidential related to the term sheet, in order to preserve the integrity of the trading partners and customers.|