Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Rolf Watter
  • Bär & Karrer AG (Zürich)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

South America

PERUVIAN UPDATE – The Impact of “Lava Jato” on M&A in Peru

Editors’ Note:  This post was written by Jose Antonio Payet and Mario Lercari Bueno of Payet Rey Cauvi Pérez, one of Peru’s leading firms with significant experience in foreign investment in Peru.  Mr. Payet is a member of XBMA’s Legal Roundtable.

Background: Lava Jato reaches Peru

Corruption has always been a sensitive issue when doing business in Latin America. In recent years, the Brazilian “Lava Jato” investigation has been in the spotlight for its implications throughout the continent. Brazilian construction giants such as Odebrecht, OAS, Camargo Correa, Andrade Gutierrez and Quieroz Galvao, among others, were indicted in Brazil and other jurisdictions with criminal charges for corrupt practices. As the evidence for this corruption network became clearer, the main representatives of these companies started to participate in leniency programs to reveal information concerning the officials of the respective countries that were involved in the corrupt practices. Peru has been no exception to this reality.

The indictment issued by the U.S. Department of Justice in late 2016 states that Odebrecht representatives acknowledged the payment of US$ 29,000,000 to Peruvian officials from 2005 to 2014. For these payments, Odebrecht allegedly received illegal benefits such as the award of investment projects with favorable conditions, the disqualification of other consortia in the bidding processes, and the execution of addenda to increase projects costs, among others alleged benefits.

This revelation started a political crisis in Peru in which it became clear that major investment projects during 2005 to 2014 were tainted by corrupt practices affecting bidders and Peruvian officials. Criminal investigations have been started against the responsible public officers  – some officers are already imprisoned and an international warrant has been issued for the arrest of former President Alejandro Toledo for charges of receiving a USD 20 million dollar bribe from Odebrecht.  In this context, the Government of Peru (“GOP”) has issued additional measures directed mainly to provide additional safeguards against corruption in public bidding processes, to prevent the sale of assets by companies involved in cases which would jeopardize payment of penalties to the Government, and to increase sanctions for companies involved in corruption practices.

The Government takes action: Measures to counter corruption practices

On October 2016, the Peruvian Congress passed an authoritative law in which it delegated to the executive branch faculties to legislate in the prevention and fight against corrupt practices, among other matters. Under such circumstances, the executive branch issued Legislative Decrees N° 1341 and N° 1352 that introduced severe administrative sanctions to companies convicted for corrupt practices and money laundering. Furthermore, on February 2017, the executive branch issue an Urgency Decree to prevent the sale of assets of companies convicted for such crimes. Finally, new legislation establishing criminal liability of legal entities has been passed.

All these measures have an important impact in M&A processes, including due diligence, structure, drafting and execution.

  • Modification of the State Procurement Law (Ley de Contrataciones del Estado): Legislative Decree N° 1341 modifies the State Procurement Law to incorporate new grounds for permanently disqualifying entities to contract with the GOP. In this sense, a company whose representatives have been convicted in any jurisdiction for corruption related crimes and/or money laundering will not be able to contract with the Republic of Peru. The same sanction applies if such representatives acknowledge the commission of such crimes in a leniency program in any jurisdiction.
  • Criminal and administrative sanctions for companies: Legislative Decree N° 1352 establishes administrative sanctions for the companies whose representatives have been convicted for corruption related crimes and/or money laundering, among others. In this cases, the liability of the company is determined in the criminal process of the person(s) that allegedly committed such crimes. The administrative sanctions that the criminal judge may impose are:
    • Fines of more than the double of the illegal profits obtained but less than six times such profits;
    • Disqualification in any of the following forms: (a) suspension of the company’s activities, (b) temporal or definitive prohibition to carry out the same activities in which the criminal conduct was performed and (c) to contract with the GOP.
    • Cancelation of licenses, concessions or rights or any other authorization granted;
    • Temporal or definitive foreclosure of their offices and/or establishments; and
    • Dissolution of the company.

The implicated company may avoid these administrative sanctions if, prior to the commission of the crime, it adopts and implements in its organization a prevention model appropriate to its nature, risks, needs and characteristics, consisting of appropriate monitoring and control measures to prevent the aforementioned crimes or to significantly reduce risk of their commission.

Change of ownership in a company does not affect liability for past acts.

  • Restriction of the Transfer of Assets: Urgency Decree N° 003-2017 and its Guidelines establish certain restrictions for companies which are included within its scope of application. The most relevant provisions include: (i) restriction on the transfer of funds abroad, (ii) the need for prior authorization from the Ministry of Justice in case of a transfer of rights and/or assets; and, (iii) the withholding of payments that GOP entities must execute in favor of the included companies. The subjective scope of this regulation will be applicable to the following companies:
    • Companies which have been convicted or whose officials or representatives have been convicted in Perú or abroad by a final decision for crimes against public administration or money laundering or equivalent crimes (if they have been committed in other countries) against the GOP.
    • Companies which have recognized or whose officials or representatives have recognized the commission of crimes against public administration or money laundering or equivalent crimes (if they have been recognized in other countries) against the GOP.
    • Related parties to the companies set forth in the preceding items.

To this date only the economic group of Odebrecht S.A has been included under the scope of this decree.

The GOP has dictated other measures to prevent and fight corrupt practices. In this sense, it is worth noting that all the new PPP Agreements shall include an anti-corruption provision that will permit the GOP to terminate any PPP Agreement in which corrupt acts were performed during bidding or selection process to award the PPP.

Lava Jato’s hangover: A new way of dealing with M&As

The Lava Jato investigation is having a profound impact in the political landscape in Peru. Information received in leniency programs in Peru, Brazil and the United States, have allowed Peruvian prosecutors to indict corrupt officials, and further investigations are underway. Although these investigations will have a short term negative impact in infrastructure investment in Peru, the long term effects will probably be beneficial.

On the other hand, companies involved in the Lava Jato investigation will probably need to sell some or all their Peruvian assets. These include assets in toll roads, electricity generation, irrigation, oil and gas, among others. Many of these M&A transactions will have to comply with the provisions of Urgency Decree N° 003-2017.

In addition, as criminal and administrative sanctions to companies have grown harsher, Peruvian companies must implement compliance and prevention models according to its nature, risks, needs and characteristics. Accordingly, legal firms are upgrading their compliance and white collar criminal law practices as future M&A transactions will surely include an in-depth revision of compliance and prevention models of the target companies.

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Brazil’s New Antitrust Law To Require Pre-Merger Clearance

Editors’ Note:  This paper was authored by Tito Amaral de Andrade, partner, and Erica Sumie Yamashita, associate, at Machado, Meyer, Sendacz e Opice Advogados, one of Brazil’s most  respected corporate law firms with extensive experience in Brazilian M&A and antitrust matters.

Executive Summary/Highlights:

  • The Brazilian House of Representatives has approved a bill that substantially changes merger review procedures and antitrust investigations in Brazil.  The new law is subject to Presidential approval and will likely become effective in mid-2012.
  • The new law creates a pre-merger review system (clearance will be a condition precedent to closing) and changes the fines applicable to antitrust violations.
  • The old market share threshold is abolished by the new law in favor of a new revenue threshold which will require the mandatory filing of transactions in which one of the groups involved had Brazilian annual gross revenues of at least R$400 million in the past fiscal year  and the other group had Brazilian revenues of at least R$30 million in the past fiscal year.

Introduction

The current Brazilian antitrust law (Law 8,884/94) sets forth the institutional framework of what is known as the Brazilian Antitrust System (“SBDC”), which is composed by the following agencies: the Administrative Council for Economic Defense of the Ministry of Justice (“CADE”), the Secretariat of Economic Law of the Ministry of Justice (“SDE”) and the Secretariat of Economic Monitoring of the Ministry of Finance (“SEAE”).

CADE is composed of 6 Commissioners (lawyers and/or economists) and a Chairman, and is responsible for judging merger review cases and alleged antitrust violations. SEAE is responsible for issuing non-binding economic opinions in all merger cases, and SDE is mainly responsible for the prosecution of violation cases.

Main changes of the new law

The new law changes the institutional framework of SBDC. SDE is abolished and SEAE’s participation is reduced and limited to promoting competition advocacy and issuing non-binding opinions in merger cases when requested. CADE will be restructured and the activities currently carried out by SDE and SEAE will be developed by a new department at CADE – the Directorate General. CADE will also comprise a Department of Economic Studies and an Administrative Tribunal, which will be composed by six Commissioners and a Chairman.

The current term of CADE Commissioners is 2 years, renewable for another 2-year term, and this will be converted to a single mandate of 4 years without the possibility of being reappointed. In addition, the new law establishes a permanent staff by providing for the creation of 200 new positions at CADE.

In relation to merger review, deep changes will be made.

First of all, a pre-merger review will be introduced. Clearance by CADE will become a requirement for the closing of notifiable transactions, subject to a fine ranging from R$ 60 thousand to R$ 60 million. After the filing is made, the Director General has up to 60 business days to issue its decision to approve the transaction without restrictions, or up to 90 business days to issue a decision in a case that requires further investigation (complementary phase). The Administrative Tribunal must review the cases that were blocked by the Directorate General or that were approved with restrictions, and may review, if there is an interest, cases approved without restrictions. The new law establishes that the final decision must be reach within 240 days of the filing, a deadline that can be deferred for up to 60 days at the Applicants’ request, or for up to 90 days based on the Administrative Tribunal’s decision.

The thresholds for the mandatory merger filing have also changed. The market share threshold was abolished, and the new revenue threshold will only require the mandatory filing of transactions in which one of the groups involved had Brazilian annual gross revenues of at least R$400 million in the past fiscal year, and the other group had Brazilian revenues of at least R$30 million in the past fiscal year. Apparently the local revenue of the target is still irrelevant under the new law for the assessment of whether the transaction should be submitted to antitrust scrutiny.

It is important to note that, despite the introduction of a pre-merger review system, it is established that for a period of one year after the new law enters into force the parties to a transaction will be able to request the Administrative Tribunal the immediate closing of the transaction.

For those merger cases that are currently pending CADE’s decision, after its entry into force the new law will be applied only (i) in respect of procedural issues, (ii) if the practice is no longer considered an antitrust violation, or (iii) if the applicable penalty is less severe compared to the old legislation.

Finally, the bill is still subject to eventual amendments by the President Dilma but no major changes to the document approved by the House of Representatives are expected. After presidential approval, the bill will be published in the official gazette, and the new law will enter into force 180 days of its publication.

* Please note that this article reflects our preliminary opinion based on the follow up of the voting session of the Brazilian Congress that passed the new law. Since voting was quite confusing, and the final text of the new law has not yet been made available, adjustments this article may be required and will be made in due time.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

PERUVIAN UPDATE – New Rules for Investments in Natural Resources in Peru

Editors’ Note:  This paper was written by Jose Antonio Payet and Silvia Cachay, partners at Payet Rey Cauvi, one of Peru’s leading firms with significant experience in foreign investment in Peru.  Mr. Payet is a member of XBMA’s Legal Roundtable.

Executive Summary/Highlights:

  • New laws  provide indigenous people consultation right with respect to investment in Peruvian natural resources, but not the veto investors feared; however, they could delay projects while regulations are worked out,
  • New mining “windfall profit tax” expected by the Peruvian Government to raise the total tax and mandatory profit sharing costs in the mining industry to 46.5% of operating profit for companies with no pre-existing mining tax stability agreements and to 40.20% for companies with  tax stability agreements, which the Government believes remains competitive internationally. 

MAIN ARTICLE

In the past few weeks, the new Peruvian Government has passed two important pieces of legislation with respect to investments in natural resources in Peru: Law 29785, which regulates the right of indigenous and tribal peoples to prior consultation, and Laws 29788, 29789 and 29790, which create a “windfall profit” tax applicable to mining companies. These two matters were campaign promises of President Humala, who has been able to pass the legal reforms required to implement them with multi- partisan support and in an investor friendly manner.

Consultation to Indigenous and Tribal Populations

Law 29785, enacted on September 6, implements the right of indigenous and tribal peoples to prior consultation with respect to legislative or administrative measures which directly affect them set forth in the International Labor Organization 169 Convention (1989), which was ratified by Peru in 1993.

During the debate of the new law, the key issue was whether the approval of indigenous or tribal peoples would be necessary in order to implement government measures directly affecting those populations. This would in effect have granted the relevant populations a veto right over the development of many natural resource projects and infrastructure in Perú, including mining, oil and gas, roads, electricity generation and transport, etc.  In fact, a prior bill approved by Congress had been vetoed by the Executive in June 2011, before the change of Government, because it was not clear in stating that the Government had the final decision on whether a project should move forward.

With respect to the “veto right” issue, article 15 of the law states that “the final decision over the legislative or administrative measure corresponds to the relevant Government entity”. While this decision needs to be duly motivated and incorporate in its analysis the opinion of the relevant tribal and indigenous populations and evaluate the impact of the measure on their collective rights, the Government can still implement a measure notwithstanding opposition from the relevant tribal or aboriginal populations. Thus, article 15 also states that “The agreement between the Government and tribal or indigenous populations, as a result of the consultation process, is binding. In case no agreement is reached, Government entities shall adopt all measures which are required to guarantee the collective rights of tribal and aboriginal populations and the rights to life, integrity and full development”. This means that the Government may implement the measure, but needs to assure protection of relevant rights of the tribal or aboriginal communities.

There are several matters that still need to be defined and regulated before the law may be fully implemented. Key among them is the determination of which are the tribal or aboriginal populations that are required to be consulted and which their areas of influence. A delay in this process could directly affect many projects now in the pipeline.

Mining “Windfall Profit Tax”

On September 27, the President enacted laws 29788, 29789 and 29890, which establish a new “windfall tax” regime for the mining industry. Until the enactment of these laws, mining companies were subject to the general tax regime and in addition were subject to a special mining royalty established as a percentage of the value of sales of concentrate (1 to 3% depending of the value of annual sales). Companies with mining tax stability agreements (which are mainly multinationals with large operations) were exempt from the royalty, but many of them had entered into an agreement with the Government creating a voluntary contribution system.

The new regime is comprised of three similar taxes or contributions that are assessed over quarterly operating income (instead of annual sales as the prior royalty). Companies which are not party to mining tax stability agreements are subject to Law 28788 and to law 29789.  Law 29788 provides for a mandatory payment (called the “Mining Royalty”) which is applicable to mining companies extracting metallic or non metallic resources. The Mining Royalty base is quarterly operating profits and the rate slides from 1% for companies with operating margin of between 0% and 10% to 12% for companies with operating margin over 80%, with a minimum payment of 1% of sales.  Law 29789 establishes an additional tax (called a “Special Mining Tax”) applicable only to companies extracting metallic resources. Its base is the same as the Mining Royalty but the rate is different, sliding from 2% for an operating margin between 0 and 10% to 8.4% for an operating margin over 85%. Both the Mining Royalty and the Special Mining Tax are deductible as expenses for the purpose of calculating general income tax.

Companies with mining tax stability agreements are not subject to the Mining Royalty or to the Mining Special Tax.  Instead, law 29790 provides for a contribution (called “Gravamen”) which shall be applicable only to these companies, provided they voluntarily enter into an agreement with the Government. The Gravamen is not technically a tax, because companies need to accept the obligation to pay by entering into the agreement with the Government. However, its basis and form of calculation are similar to the Mining Royalty and to the Special Mining Tax.  In this case, the rate slides from 4% of quarterly operating profits for companies with operating margin between 0% and 10% to 13.12% of quarterly operating profits for companies with operating margin over 85%. The “Gravamen” is also a deductible expense for the purpose of determining income tax.

The new tax regime was proposed by the Executive to Congress after reaching an agreement with the mining industry. The Government expects to obtain revenues of approximately USD 1.1. billion per year with these new taxes.

According to the Government, with the new regime, the total tax and mandatory profit sharing costs in the mining industry are 46.5% of operating profit for companies with no mining tax stability agreements and to 40.20% for companies with such tax stability agreements, which remains competitive internationally. According to Reuters, the CEO of Barrick Gold, one of the main investors in Peru´s mining industry, recently said that the new tax was “something he could work with”.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

BRAZILIAN UPDATE – Recent Restrictions on Foreign Investment in Agribusiness in Brazil Could Have Broader Implications for Cross-Border Acquisitions of Brazilian Companies that own Land

Editors’ Note:  Antônio Corrêa Meyer is a founding partner of Machado Meyer and a member of XBMA’s Legal Roundtable.   Mr. Meyer is one of Brazil’s leading experts in the internationalization processes of Brazilian companies, mergers and acquisitions, and large infrastructure projects, all of which might be affected by the opinion discussed in this paper.

Executive Summary/Highlights:

  • An August 2010 legal opinion of the Federal Attorney-General of Brazil (Advocacia Geral da União) extended the Brazilian law that restricts the acquisition of rural land by foreigners to apply also to acquisitions of land by Brazilian companies controlled by foreigners.
  • As a result, cross-border change of control transactions involving Brazilian companies that own  land will likely require approval by the Brazilian Institute for Agrarian Reform (INCRA) or the Brazilian Congress.
  • Going forward, foreign acquirors must take into account the Attorney General’s opinion when considering an M&A transaction which involves companies owning land in Brazil.

Introduction

A legal opinion of the Federal Attorney-General of Brazil (Advocacia Geral da União) has been recently issued (August, 2010), imposing further restrictions on the acquisition of rural land by residents outside Brazil. A broader interpretation is given to the law that governs and imposes certain restrictions on the acquisition of rural land by foreigners who are permanent residents in Brazil and by foreign legal entities authorized to operate in Brazil. The legal opinion extended the limits to the acquisition of rural land by foreign individuals to Brazilian companies controlled by foreigners. Therefore, the legal opinion further restricts the ability for foreigners to acquire land in Brazil and may even be applicable in case of change of control of a Brazilian company holding rural land. The new interpretation of the law is an important factor that must be taken into account when considering a M&A deal involving a company holding land in Brazil.

Brazilian Foreign Ownership Land Control Law

The Brazilian Foreign Ownership Land Control Law establishes limitations on the areas that can be purchased by foreign residents or companies operating in the country. Foreign individuals without permanent residency in Brazil are not allowed to acquire rural land in Brazil (except by inheritance).  Acquisition of rural land by foreign legal entities and Brazilian entities controlled by foreigners, on the other hands, is only allowed if the land is used for agricultural, cattle-raising, industrial or development projects and to the extent that such activities are included in the articles of association of such entity.

In addition, the acquisition of rural land by foreigners or the acquisition of controlling interests of companies that owns properties over a certain size requires the approval from the Brazilian Institute for Agrarian Reform (Instituto Nacional de Colonização e Reforma Agrária or INCRA). Larger plots of land require the approval from the Brazilian Congress and foreigners cannot own more than one-quarter of the land within the territory of a municipality (and not more than 10% if they are of the same nationality). Acquisitions of land or the control of a company in violation of the restrictions contained in the law are null and void. In such case, both the notary public, who is responsible for the drafting and the execution of the public deed to transfer real estate properties, the real estate registry, which is responsible for the registration of the ownership transfer, and the individual in charge of the registration  of the articles of association by means of which the control of a limited liability company is transferred in Brazil may be held civil and criminally liable.

New legal opinion Attorney-General: extension of restrictions to companies controlled by foreigners

The new legal opinion of the Attorney-General intends to increase the control of the government over rural lands and extends the law to Brazilian companies controlled by foreigners, by means of a wider interpretation on the Law. Furthermore, according to such new legal opinion, the restriction for the acquisition of rural lands may apply to Brazilian companies in which foreigners: (i) directly or indirectly own shareholding interest; (ii) effectively control the Brazilian company; and (iii) are headquartered abroad.

According to the Brazilian Corporations Law, a Brazilian company is to be considered controlled by a foreigner if such foreigner owns shareholding interest which allows it to (i) have the majority of the votes in the shareholders meeting, (ii) appoint the majority of the managers of the company, and (iii) guide the activities of the company and conduct its business.

From the above definition of control, it can be understood that a controlling shareholder according to the Brazilian Corporations Law is not necessarily the shareholder with the majority of shares, but instead the shareholder, or group of (indirect) shareholders de facto controlling the company. A shareholder that does not have the majority of the shares may therefore still be a controlling shareholder and two shareholders together having the majority of the votes, because they have entered into a voting agreement, are also considered majority shareholders according to the Brazilian Corporations Law.

Transfer of control to foreigners in M&A transactions

Although the legal opinion of the Attorney-General does not specifically mention the transfer of control of Brazilian entities to foreigners or entities controlled by foreigners, it seems likely that transfers of Brazilian companies’ control which hold Brazilian rural lands are also regulated by the legal opinion. If so, any transaction which results in the transfer of control of a Brazilian company holding rural land to foreigners without residency in Brazil or Brazilian companies controlled by foreigners without residency in Brazil, should also be approved by INCRA or by the Brazilian Congress depending on the size of the land such company is holding, as mentioned above. This could complicate M&A transactions involving Brazilian entities holding rural land and is something foreign parties should at least be aware of when considering a transaction involving rural land in Brazil.

Therefore, it has to be prepared to apply for the prior approval of INCRA or the Brazilian Congress before the closing of the transaction in order to avoid such a transaction to be declared null and void. In this matter, it is important to point out that, since the applicable laws or the opinion do not state on which grounds the approval will be granted or refused, the prior approval of the proposed transaction may be subject to INCRA or the Brazilian Congress’ sole discretion, as the case may be.

Conclusion

Although Brazilian law and the new legal opinion of the Attorney-General do not prohibit foreigners to be owners of rural land in Brazil, the transfer of the ownership to foreigners must be previously approved by INCRA or the Brazilian Congress in order to be validly registered. If the approval is not provided, the transaction may be declared null and void. The extension of the approval requirement to Brazilian companies controlled by foreigners and the fact that the approval requirement will most likely also apply to a change of control, is an important factor parties must take into account when considering an M&A transaction which involves companies owning land in Brazil.

The views expressed herein are solely those of the author and have not been endorsed, confirmed or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

XBMA – Quarterly Review for Q1 2011

Editor’s Note: This is an example of the type of post and content the XBMA Forum seeks to showcase.

The attached slides summarize trends in cross-border M&A and strategic investment activity throughout the first quarter of 2011.

 

Highlights:

  • Global M&A volume for Q1 2011 was US$671.8 billion, up 29.5% as compared to Q1 2010.
  • Cross-border transactions have rebounded substantially from 2009: 38% of Q1 2011 global M&A was cross-border — up slightly from 37% in 2010 and up significantly from the low of 26.8% in 2009.
  • Canada and Australia’s shares of global M&A each more than double their respective shares of world GDP, perhaps reflecting the large number of deals involving natural resources.
  • Distressed deals have exceeded US$75 billion per annum since 2009.
  • Energy M&A remains the most active among cross-border transactions – reflecting the ongoing pressure to acquire natural resources to fuel emerging economies and the churn created by political instability in the Middle East and by the widespread adoption of technological improvements in the natural gas industry – with Materials and Financials cross-border M&A in the second tier.

XBMA Quarterly Review for Q1 2011

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