BRAZIL Law and Practice Contributed by: Rafael Lacerda, Eric Nahum, Rômulo Martins and Fernando Oliveira, Lacerda Diniz Advogados
typically set up through dedicated vehicles (SPVs) and governed by co-investment agreements that define governance rules, veto rights and exit mechanisms. Co-investors may be limited partners of the fund itself (making additional passive contributions) or external investors participating directly on a deal-by-deal basis. Consortia combining private equity funds and cor - porate investors are less frequent but do occur in strategic sectors such as infrastructure, energy and technology. In such cases, the corporate investor brings sector-specific expertise and operational syn - ergies, while the fund contributes capital and M&A expertise. The growing presence of corporate venture capital (CVC) funds has further encouraged this type of partnership in the Brazilian market. 6. Terms of Acquisition Documentation 6.1 Types of Consideration Mechanism In Brazil, regardless of the mechanism adopted, the allocation of liability for indemnification generally fol - lows the “my watch, your watch” logic, whereby the seller is liable for losses incurred prior to closing and the buyer is liable for events occurring thereafter. In the case of a locked box, special attention is given to the base date as a reference for indemnification, since the seller continues to manage the company until closing. Earn-outs are particularly common in contexts of eco - nomic uncertainty or when there is a significant differ - ence between the seller’s and buyer’s valuations. They function as a “pay to see” mechanism that mitigates the risks of overly optimistic projections and keeps the selling partners engaged in the performance of the business during a transition period. This alignment is especially useful in sectors such as technology and healthcare, where future growth is critical to justifying the valuation. Deferred consideration is a more direct solution for making payment more flexible, usually structured as fixed instalments paid after closing. In addition to facilitating the buyer’s cash flow, it is common for part
of these amounts to be retained in an escrow account to cover any tax, labour or regulatory liabilities not identified in the due diligence, which is particularly relevant given the complexity of Brazilian regulations. Rollover structures – in which sellers reinvest part of the amount received in the company itself under a new control structure – have become more common, especially in private equity transactions. This configu - ration preserves the alignment of long-term interests, keeps key executives motivated and, for the buyer, reduces the need for immediate cash outlay. Rollovers are especially popular when investors want to retain the seller’s knowledge and leadership to accelerate business growth. The presence of a private equity fund tends to influ - ence the choice of mechanism and the level of detail of the protections. Purchasing funds generally seek greater predictability and security, favouring locked boxes with leakage clauses and, when there are com - pletion accounts, clear adjustments and post-closing audits. As sellers, funds prefer more direct and faster payments, avoiding excessive withholdings or highly conditioned earn-outs, given their investment cycle and need for returns to shareholders. Other types of buyers or sellers may accept more flexibility, consider - ing long-term strategic objectives. 6.2 Locked-Box Consideration Structures In Brazil, in private equity transactions using locked box pricing structures, it is not common practice to charge interest on the share price after the base date, nor to apply interest on losses incurred between the base date and closing. The price is fixed considering the financial statements on the base date, and the seller remains responsible for managing the company until closing, avoiding unauthorised withdrawals (leak - age). Any losses or deviations in value are normally compensated by direct adjustments to the price or refund, rather than by applying interest. Although in international markets some transactions include a pro rata surcharge (ticking fee) to compen - sate for the opportunity cost between the base date and the closing, in Brazil this practice is an exception and depends on specific negotiation. The prevailing logic is that all results and risks after the base date
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