BRAZIL Law and Practice Contributed by: Roberto Panucci, Tiago Severo, Diogo Nebias and Guilherme Teles, Panucci, Severo e Nebias Advogados
5.5 Other Restrictions Guarantees and security interests in Brazil are subject to certain consents and limitations, as follows. • Spousal consent – under Brazilian civil law, if an individual (or an entity controlled by a married individual in certain marital arrangement) grants a guarantee or security interest, the spouse may need to consent. • Corporate benefit and interest (see 5.3 Down- stream, Upstream and Cross-Stream Guarantees ) – even aside from acquisitions, any guarantee by a company for another party’s debt could be questioned if not in the guarantor’s interest/direct/ indirect benefit. • Regulatory consents – companies in regulated industries might need public authority consent to encumber assets or grant guarantees. • Insolvency claw-back period – if a company grants collateral for an existing debt before insolvency, Brazilian bankruptcy law may void it (as an act in debtor’s suspect period that gives preference to a creditor). The law states that granting security to an unsecured creditor within the 90 days (and up to two years in some cases) prior to a bankruptcy filing can be clawed back. • Rural land – restrictions also apply to foreign own- ership of rural land and can limit enforcement of security in favour of non-resident lenders, as fore- closure may require transfer to an eligible Brazilian acquirer. 5.6 Release of Typical Forms of Security Upon repayment of the secured obligations, creditors issue release instruments for cancellation at the rel- evant registries (the Real Estate Registry, the Registry of Deeds and Documents ( Registro de Títulos e Docu- mentos , or RTD), the Commercial Registry, the Nation- al Institute of Industrial Property ( Instituto Nacional da Propriedade Industrial , or INPI)), etc). For security over shares, releases are annotated in the company’s cor- porate books or with custodians. For security over quotas, releases are included in an amendment to the articles of association. Partial releases follow the same process for specific assets. If a creditor fails to co-operate, the debtor may seek judicial relief to compel cancellation.
responsibility principles. Corporate law requires that guarantees be consistent with the company’s purpose and interests; minority shareholders may challenge guarantees lacking clear benefit. Corporate approvals (board and shareholder resolutions) should document the rationale, particularly for upstream or cross-stream guarantees. In practice, guarantees to affiliates are accepted when justified as part of a group financing strategy that may indirectly benefit the company providing the guaran- tee even if it does not directly benefit from the loan. Regulated entities may face additional sector-specific restrictions. 5.4 Restrictions on the Target Unlike some jurisdictions, Brazil does not have an explicit, codified “financial assistance” prohibition. However, in practice, there are limitations on a target company providing financing, guarantees or security for the acquisition of its own shares. The concept is addressed under general corporate law principles and specific rules for publicly traded companies. For public companies, the CVM and securities law impose duties: using a public company’s assets to assist in buying control could be seen as a breach of duty by officers and controlling shareholders, poten- tially triggering actions by the CVM or lawsuits by minority shareholders. The CVM has rules on conflicts of interest in transactions with controlling sharehold- ers, and guarantees, security or financial assistance could be considered a related-party transaction requiring disclosure and fairness (if it is not obviously beneficial to the granting company). In any event, Brazil does not have a bright-line rule prohibiting the target company from providing financ- ing, guarantees or security for the acquisition of its own shares, so this becomes a matter of risk manage- ment and corporate governance. In straightforward LBOs where the target is wholly owned post-acqui- sition, and especially if it is not a regulated or public company, the risk of anyone challenging an upstream guarantee to support acquisition debt is lower (given that the only shareholders now are the acquirers, who obviously consent).
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