Publications

Category: Tax

Leonardo Martins and Matheus Caldas Cruz

By means of State Law No. 9,041/20, published on October 5, the State of Rio de Janeiro authorized reduction of the ICMS tax basis on domestic operations with marine diesel fuel, to be consumed, moreover, by vessels intended for oil and natural gas exploration, extraction, or production activities. With the change, which internalizes ICMS Agreement No. 51/20, entered into by the National Finance Policy Board (Confaz), the tax collected will be equivalent to 4.5% of the value of the transaction.

The state law also provides for a reduction of up to 90% in interest and fines on overdue tax debts arising from levies or disallowances of tax credits for taxpayers performing the economic activities of oil and natural gas extraction and natural gas processing (CNAE codes 0600-0/01 and 3520-4/01) and manufacture of oil refining products (code 1921-7/00), whether or not entered or enrolled as outstanding debt, including those filed with respect to triggering events occurring up to September 30, 2020.

In order to enjoy special payment conditions, a Tax Conduct Consent Order (TACT) must be entered into, which will suspend enforceability of the tax debts covered and must be submitted by taxpayers opting in by December 7, 2020, in addition to complying with the other conditions that may be established by decree.

The debt may be settled in cash, within 15 days from the date of execution of the TACT, or in installments, with the first installment corresponding to at least 50% of the total value of the debt and the last payment made by December 15, 2020.

For cases in which there is ongoing litigation in the administrative or judicial sphere, the taxpayer must, by the date of execution of the TACT, expressly, irrevocably, and irreversibly formalize the waiver of the right on which objections, actions, or appeals relating to the tax debts covered are based. It is forbidden to use the amount of the judicial deposit for payment of the debt, since the guarantees presented in court can only be withdrawn after effective liquidation of the debt.

In the event of non-payment of the initial tranche, all debts must be demanded immediately. In the event of default for more than 30 days for any of the installments after the initial one, the benefits provided for will be immediately cancelled and the remaining balance will be calculated with the application of a fine and other legal accruals, less the installments paid.

The payments made with the reduction benefits provided for in Law No. 9,041/20 do not allow taxpayers to take advantage of any ICMS credits and also do not entail any ancillary obligations other than those expressly provided for in the law or in the TACT.

The discounts on default surcharges granted by the government of Rio de Janeiro are in line with initiatives taken by public revenue agencies with the purpose of raising cash and reducing their stocks of outstanding debt. For taxpayers, this movement represents an opportunity to reduce their tax exposure, using a significant financial discount, in a prolonged period of economic downturn.

Category: Litigation

More than an article, this text is testimony to the success of a crisis management that has as one of its relevant pillars the appreciation of diversity. We, the authors, were fortunate to be involved from the very beginning in an important, challenging. and emblematic case of our firm, related to the crisis management of one of our clients. First of all, we are privileged to be part of a firm that brings diversity and inclusion into its culture. For this reason, we feel extremely comfortable and encouraged to include in the development of our work all the values, experiences, and perceptions arising from our diverse characteristics. In our case, in particular, these characteristics are related to race, sexual orientation, and gender.

In general terms, the project involved putting into operation, in record time, a program for extrajudicial compensation linked to an event that reached a large number of people.

Given the start of the project, the typical challenges of a crisis scenario came about, which are always great, urgent, and, even with much preparation and organization, bring about many uncertainties which the organization needs to handle. We already knew that it would be essential to have a qualified team to handle the claims that would come. And since the issues that would appear to be resolved in relation to the different stakeholders involved were diverse and complex, it was essential to have an equally diverse team to handle them.

We believe that embracing diversity is the premise of successful teamwork. After all, if team members need each other to develop their work and achieve better results, it is valuable that they bring to the group multicultural contexts and diverse skills and knowledge.

A diverse team, that is, one made up of groups traditionally seen in the corporate environment and other social minority groups such as women, blacks, LGBTQ+ and people with disabilities, allows for the potential of pluralities to break paradigms. It was therefore one of the most relevant factors for the success of our crisis management that we supported ourselves and, in doing so, fostered a stimulating and welcoming environment so that everyone felt more engaged and motivated to carry out their activities and tasks, and thus extract their full potential for high performance.

It was possible to incorporate all this richness and multiplicity of values, experiences, challenges, successes, and even failures, of each one to the team work, potentiating the set of skills and, above all, creative solutions of the team. Specifically in a crisis management, it is necessary to anticipate demands, to meet the expectations of different people, to interpret the diversity existing in society, all this in an agile and efficient manner. In this context, non-traditional problem-solving methods are great allies as they provide greater adaptability, flexibility, resilience, and antifragility.

Now, uniting diversity with non-traditional management we have developed tools to enable high critical thinking, complex problem solving, and optimization of results. Combining this with a management that sought to create and maintain an environment of psychological safety, so that all team members could stimulate their creativity, autonomy, intrinsic motivation, risk taking, innovation, critical thinking, connection, and collaboration, without using their mental efforts to protect themselves, the result was high efficiency of the team.

At the end of the first year of the program, still in progress, it was possible to achieve all the goals set by the client efficiently, generating the legal protection necessary and meeting all the project's governance issues, as well as its social, economic, and humanitarian aspects.

This kind of approach, in an environment that embraces diversity in an open way and encourages equality between people and freedom of thought, usually yields great discussions and brings about creative and well-targeted solutions. In a crisis, this is an important differential in achieving better results. Turning it into an opportunity by managing it effectively, especially from a legal point of view, means reviewing traditional views and practices and welcoming diversity.

The search for creative, agile, and collaborative solutions finds fertile ground in a diverse team. Therefore, companies based on a culture of trust, collaboration, and inclusion, in which everyone feels represented, are those that achieve the best ideas and solutions, even in the face of a crisis. And this is how it is in our firm. And so we perform crisis management in our project with a high level of performance.

Category: M&A and private equity

Near the end of the third quarter and after almost six months of social distancing, it is already possible to identify, at least on a preliminary basis, some of the impacts caused by the covid-19 pandemic in the practice of mergers and acquisitions.

Until the end of May, practically all transactions were suspended due to a lack of vision regarding the progression of the coronavirus and its social and economic impacts, but now the M&A market is following the capital market and is already beginning to show a strong movement towards recovery still amidst uncertainties regarding the pandemic.

Mergers and acquisitions in figures

April showed the largest decline in transactions announced, according to the latest data from the Transaction Impact Monitor, published by the Transactional Track Record. May and June followed with low numbers, and July registered the highest number of transactions in the year. In consolidated data for 2020, the approximately 750 M&A transactions announced in Brazil up to and including August represent a drop of 18% compared to the same period in 2019.

The industry with the highest number of transactions was technology, followed by finance and insurance. These data indicate that most of the transactions that had been suspended were resumed at an accelerated pace. This goes against initial expectations that M&E transactions during the pandemic would focus on distressed assets and indicates that market players are aware of assets that represent high potential for appreciation due to new trends in behavior and social organization during and after the pandemic.

New developments

While market players continue to seek business opportunities in the face of the new conditions imposed by the pandemic, a partial and preliminary assessment of new developments in the practice of mergers and acquisitions that occurred in the negotiations during the pandemic should be conducted.

• Due diligence: from the point of view of contingency mapping, the pandemic has affected economic players in different ways, making it difficult to analyze and draw conclusions that can be applied generally to all businesses.

In this context, attention has been redoubled. The buyers' advisors reviewed their standard due diligence request lists to include questions regarding the impacts of the pandemic on the activities, sales, expansion, contracts, and future prospects of the target companies in general. The weight given to the year 2020 in terms of growth and expansion of target companies has been relativized by potential buyers in their assessments and models.

• Earn-out: mechanisms in which part of the acquisition price depends on the performance of the business during a certain period after the closing have proven to be effective instruments for bridge building and risk allocation between buyers and sellers at a time when often the parties' expectations are not fully aligned with the pricing of the asset in the current uncertain situation.

Indeed, in a scenario of instability and increased exposure to various types of risk, such as the covid-19 pandemic, earn-out clauses have become powerful alternatives to reducing the value of assets at the moment, allowing businesses to capture the benefits of the economic recovery expected for the near future.

As usual, the parties must clearly and objectively define the metrics that will be taken into account to determine satisfactory performance by the business, and establish effective mechanisms for measuring it.

• Material adverse effect: the condition precedent of absence of material adverse effect was already important in the deal documents before the pandemic, but now has even more weight for market players and parties involved.

Without going into the merits of the effectiveness of the condition precedent of absence of material adverse effect, the structure of the definition and the respective condition precedent have not undergone substantial changes in the new scenario, but the possible cases of occurrence and exceptions have been more detailed and designed for the specific case.

The express mention of epidemics and pandemics as exceptions to a finding of material adverse effect was already present in some negotiations, but now the parties have made it clear in the purchase and sale contracts that the effects of the covid-19 pandemic, in a generic manner, cannot be used as a justification to avoid closing the transaction, even if its potential effects cannot be clearly predicted.

• Representations and warranties: the representations and warranties clause, coupled with the obligation to indemnify for the falsity or inaccuracy of such representations, continues to be a central element of the negotiations. The actual business impacts of the pandemic are addressed, as needed, in the exhibits listing exceptions to such representations and warranties (the so-called disclosure schedules).

Some sellers try to get a representation from buyers recognizing that the transaction is being negotiated and entered into in the context of the covid-19 pandemic, and that any breaks in representations between the signing and closing resulting from the effects of the pandemic may not give cause for the buyers to withdraw from the deal. Buyers, in turn, have refuted the representation. It cannot be said that this contractual provision has been widespread in the practice of mergers and acquisitions.

Private equity

The private equity sector has so far had a rather unique dynamic. In mid-March, at the beginning of the pandemic, attention turned to private equity managers active in Brazil in terms of both potential divestments via capital markets and new investments.

As for divestments, the reduction of the basic interest rate to levels unprecedented in the Brazil's recent history, combined with the liquidity generated by the government in the markets (among other factors), has boosted the raising of funds through initial and follow-on share offerings in the capital markets, which has allowed the exit of mature investments by private equity managers. With B3 breaking historical records at almost 120,000 points in early 2020, there was an expectation that local and foreign managers would indeed seek liquidity for their investments.

As for investments, the expectation of growth in the number of businesses was not lower given the announcement of record levels of dry powder (capital available for investments), which, associated with the devaluation of the Brazilian Real against the dollar and the euro, had the potential to increase the expectation of new deals.

With the pandemic, however, Brazilian and foreign managers initially took care to give the necessary support to their investees. This was done with few new investments being made until the middle of this year. With regard to divestments, of course, very few IPO processes and follow-on offers were completed by the middle of the year.

However, even somewhat surprisingly, as of mid-June managers began to pursue their plans for divestment via the capital markets, and many IPOs and follow-on offers were successfully launched. Many others are likely to be completed this year, judging from the queue of applications submitted to the Brazilian Securities and Exchange Commission (CVM).

Already at the cutting edge of investments, such managers began to study new private transactions, especially in the technology, health, and education sectors. For this second half of the year, expectations for new investments remain high despite the slow progress of tax and administrative reforms.

Conclusion

Although the pandemic is a reality that should remain for some time, the M&A transactions under analysis have the same fundamental characteristics as the transactions carried out at the beginning of the year, with certain exceptions mentioned above.

Even in a scenario of uncertainty, mergers and acquisitions continue to be a relevant instrument for the most varied of sectors of the economy, either to enable the combination of relevant players in a given industry or to enable the injection of liquidity in various businesses, providing important alternatives for expansion and/or financial optimization {improvement, sanitation}.

Category: Competition

The Administrative Council for Economic Defence (Cade), through its Department of Economic Studies (DEE), recently released a study entitled Competition in digital markets: a review of specialized reports, which benchmarks international reports on the subject and summarizes their main discussions and conclusions.

This study is part of Cade's efforts to promote proper review of mergers and conduct in digital markets, which challenge traditional conceptions of the relevant market and have peculiar characteristics, such as the presence of multilateral platforms, economies of scale, data essentiality, and network and learning effects, which impose challenges on the work of antitrust authorities.

Despite the undeniable economic and even political relevance of mergers and acquisitions in digital markets, many of these transactions, especially those involving startups or platforms operating in the so-called zero price markets, escape the scrutiny of antitrust authorities by virtue of the legal minimum billing criterion for mandatory reporting, adopted in Brazilian law and also in various other countries. In view of this, the need to rethink the reporting criteria is debated at the international level and it is argued that the bodies should have their powers extended to review mergers and acquisitions already carried out.

Brazilian law already gives Cade the power to do so: our Competition Law allows the body to, within one year of consummation of the transaction, request notice of mergers whose parties do not meet the billing criterion.

In this context, Cade has sent a series of letters to various digital platforms to perform a historical monitoring of transactions carried out by these companies and their economic groups over the past ten years. The objective is to evaluate the movements in the sector and, potentially, identify transactions for which reporting may still be required.

The sector is under the spotlight of antitrust authorities abroad and in Brazil, which is why companies must assess the competitive risks of their business practices and also of potential mergers and acquisitions.

Category: Real estate

Since 2015, with the publication of Law No. 13,240/15 and later, Law No. 13,465/17, the federal government has been indicating a clear interest in improving the process of "destabilization" of public real estate that, for some reason, is of no use or does not serve any public interest in the assets of the Federal Government. This is beneficial not only from the point of view of greater efficiency in the management of the other buildings that are actually relevant to the Federal Government, but also for the composition of the State’s revenue.

In general terms, this process was already better structured for properties that were leased to or occupied by private parties registered with the Bureau of Federal Assets (SPU). This was done by means of a simplified procedure for direct purchase, by public notice or by private initiative, with the possibility of waiving public bidding (topic already addressed by us in this article).

Recently, as a complement to existing legislation, the federal government published Law No. 14,011/20 with the purpose of specifically facilitating the process of selling the Federal Government’s real estate not directly linked to any private individual by means of a prior right and which, therefore, requires a competitive process for sale.

In this regard, we highlight the following main points of innovation in the legislation passed:

• Acquisition of non-reserved/occupied property at the initiative of the private party. Any interested party may submit an offer for the acquisition of Federal Government property that is not recorded in the system for leasing or occupation. Orders can be made on the federal government’s website, in which the interested party must record its data and that of the property. In the order, documents related to the property that facilitate the evaluation of the property, such as photos and reports, may be attached.

If the property does not have a valuation report prepared or valid, it is up to the interested party to do so and submit it for the Federal Government's validation. The reports may be prepared by a qualified valuation expert or private firm.

• Sale at the Federal Government's own initiative. The Federal Government itself may prepare proposals for the sale of its properties, contracting BNDES to carry out studies and execute a privatization plan. The privatization may be done, among other ways, through the issuance of a lease, sale, or exchange; or by the creation of real estate investment funds and the hiring of their managers and administrators.

If it is advisable, considering the valuation and liquidity of the properties, the law provides that the sale may be done in lots, encompassing more than one property. This possibility, however, is expressly suspended by the legislation while the state of public health emergency arising from covid-19 is in force.

• Specific rules for public auction. The sale of Federal Government property requires an auction, which can be done online. In the event that the first auction is deserted or unsuccessful, the Bureau for Coordination and Governance of the Federal Government's Assets may hold a second auction, applying a 25% discount to the sale. If the second auction is also deserted or unsuccessful, the properties will automatically be put up for direct sale, with the application of 25% discount over the amount of the valuation. The acquisition also subjects the bidder to the right of preference of the assignee of a real or personal right, the lessee, or the tenant who is up to date with its obligations with the SPU, as well as expropriated parties.

The interested party who has financed the valuation of the property may acquire it on equal terms with the winner of the successful auction (that is, the party incurring the initial costs is entitled to preference for acquisition, on equal terms with the best bidder). If not, the winner will have to reimburse it for the costs of appraising the property.

• Consideration for the assignment of public assets. In addition to the sale of property, the paid assignment of Federal Government assets remains a possibility, and there is also provision for payment of the price of the assignment as consideration, which may be done through the obligation to build, remodel, or provide engineering services on real or personal property in the Federal Government’s interest. This can be especially interesting for the installation of infrastructure projects in reputable locations such as marine land, which usually include port and multimodal logistics enterprises.

In this case, the assignment will be done under a condition subsequent, conditional on the completion of construction, remodeling, or provision of engineering services.

The expectation is that the sale of Federal Government real estate, mainly from areas that are no longer useful to the Public Administration or that are the product of criminal seizures (including productive farms and commercial real estate), will represent a reduction in maintenance costs and an important source of revenue for the public power, considering not only the price of sales, but also the collection of the territorial or urban property tax (ITR/IPTU) by the new purchaser and the Service Tax (ISS) due for constructions and remodeling that will be carried out on these properties.

Category: Infrastructure and energy

Thiago Spercel and Felipe Baracat

The covid-19 pandemic has accelerated the implementation of sustainability practices in companies. It is already possible to see greater internal cohesion in organizations around purpose, culture, and value and acting in compliance with social and environmental standards and good governance practices becoming an imperative for survival in the corporate world. Companies that have been applying these concepts will have an important competitive advantage.

In this publication, we analyze the concept and advantages of responsible investment and the impacts of covid-19 on ESG practices related to environmental, social, and corporate governance aspects.