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
- 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.
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.
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.