BRAZIL Law and Practice Contributed by: Rafael Lacerda, Eric Nahum, Rômulo Martins and Fernando Oliveira, Lacerda Diniz Advogados
Foreign Investment Restrictions The Federal Constitution sets important constraints on foreign investors in strategic sectors, directly affect - ing private equity structures. Mining and aviation, for example, have specific national control requirements. As a result, international funds frequently use sophis - ticated co-investment arrangements with Brazilian partners to enable acquisitions in these sectors. Treatment of Sovereign Investors Although Brazil has no formal national security screen - ing regime, investments by sovereign wealth funds in critical infrastructure or privatisations tend to attract greater political scrutiny. In practice, however, regu - lators apply the same technical criteria to sovereign investors as they do to private funds. FSR The EU’s Foreign Subsidies Regulation (FSR) does not apply directly to purely domestic Brazilian transac - tions, but funds with global portfolios should consider its potential impact on exit strategies. Global man - agers operating in Brazil have therefore implemented more comprehensive compliance procedures from the outset, properly documenting the source of funds and any subsidies received to facilitate future cross-border deals. The FSR is distinct from EU member states’ foreign investment screening. FSR notifications are required only for concentrations meeting EU thresholds (includ - ing EUR500 million or more of EU turnover for at least one party, and EUR50 million or more in foreign finan - cial contributions over the past three years) and are suspensory; the FSR does not apply to purely domes - tic Brazilian deals without an EU nexus. Recent Developments, Compliance, ESG and Sanctions While not recent, earlier reforms continue to shape private equity in Brazil: the 2020 Water and Sanita - tion Framework has kept opportunities open, with deals closing recently, and the 2021 Start-Ups Law continues to facilitate investments in high-growth companies through simplified instruments. Over the past 12 months, there have been no structural regu - latory changes in anti-corruption, sanctions or ESG, but existing practices have consolidated and deep -
ened. CVM Resolution No 59/2021 continues to have practical effects, driving the integration of ESG criteria into origination, due diligence and portfolio monitor - ing. Enforcement of Law No 12,846/2013 has become more rigorous, making more robust integrity due dili - gence standard market practice.
4. Due Diligence 4.1 General Information
The scope of legal due diligence in Brazil is generally comprehensive, reflecting the complexity and inherent risks of the country’s legal framework. The depth of review, however, will depend on the size and profile of the transaction, the timetable available, and the level of competitiveness of the process. Red flags are typi - cally identified across several categories, with those representing potential deal breakers receiving the greatest emphasis. In practice, due diligence involves a combination of documentary review of materials made available in a virtual data room, management Q&A sessions and interviews, and meetings with relevant executives of the target company. Independent verification is also a standard element of the process, particularly through the review of certificates and filings issued by public authorities such as the Federal Revenue Service, judi - cial courts and other regulatory bodies. Principal areas of focus include: • corporate – capital structure, shareholder agree - ments, transfer restrictions and governance frame - work; • contractual – material agreements, termination clauses and change-of-control provisions; • regulatory – licences, permits and sector-specific compliance; • labour and social security – liabilities, litigation and compliance with labour regulations; • tax – contingent liabilities, tax litigation and the availability of special regimes; • environmental – licensing and potential liabilities, where applicable; and • certificates and filings – contested records from civil, tax or labour authorities.
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