Legal due diligence in Brazil

Legal due diligence in Brazil: a right of and a benefit to

 personal and corporate investors

Are you and your company intending to become a partner or shareholder in an existing company in Brazil? Are you considering to set up a joint venture with national or foreign investors? Are you planning to acquire a business entity, to merge your business with another or to enter into a split-up? Would you like to know whether your intended business is healthy, without hidden risks?

If you are interested in any of these alternatives as a partner or shareholder, as acquiring party or as investor, you shall certainly make use of the due precautions in order to protect your rights and your assets.

In any of these cases, having a business broker to assist you will not suffice, as his or her purpose is solely to earn the brokerage fee. Nothing wrong with that, however.

But the use of caution is the best recommendation.

Legal advisory services is less than what is required for your protection. 

It takes more than that. You will need the assistance of another kind of lawyer, a lawyer familiar with legal auditing, with legal due diligence, duly enrolled with the Brazilian Bar Association, who will issue a legal opinion attesting the good standing of the target company, and its business in guarantee of your rights and, above all, in reducing or eliminating risks involving such company acquisitions.

This distinction between legal advising services and legal auditing or legal due diligence is well known outside Brazil, as legal advising services do not mix up with legal due diligence. Rather, they complete themselves.

A legal advisor and a legal auditor may be – but not necessarily so – members of a same law firm.

It is consequently a fact that a law firm may render not only advisory services (not always related to mergers and acquisitions) but also legal auditing (legal due diligence)  on behalf of its clients in companies to be acquired or in which they may become partners or shareholders.  This may also contemplate the acquisition of other assets (real estate, moveable assets or intellectual rights) so as to avoid the risks of a bad deal.

All investors are entitled to a maximum disclosure envolving the object of their investments. 

The greater the level of information thereon regarding the background of any such companies, their business operations, their partners and shareholders, the greater the level of disclosure, the lesser will be the financial, economical or even judicial risks to the acquiring parties and to the company being acquired by them or in which they may become partners or shareholders.

Therefore, carrying out a legal due diligence shall require the services of a legal auditor, of a lawyer fully acquainted with and fully knowledgeable of the applicable laws and its various specialities.

Such legal auditing shall require a deep analysis of the documents pertaining to the company being acquired (or in which one will become a partner or a shareholder) and on the interaction among its partners and shareholders vis-à-vis the target company.

Regardless of the fact that a company may be a limited company or a corporation, their partners or shareholders and administrators may be personally liable under certain circumstances under Brazilian Law.    

Therefore, a legal auditing shall necessarily check for the compliance by the company of all of the pertinent legal requirements of the Brazilian legislation.

It will therefore encompass a complete analysis of the company’s documents, the possible existence of quotaholders or shareholders agreements, of option agreements, any restrictions upon the transfer of quotas or shares, appointment agreements, the distribution of profits policy, checking up the background of its partners or shareholders, which may in any way interfere with their quotas and shares in the company; any possible withdrawal, exclusion or death of any partners, the probate proceeding in case of death of a partner; pending payments to the heirs, or to the withdrawing or excluded partner; eventual capital increases or reductions in the company; possible investments or participation in other companies and company reorganization within the past five years of the Statute of Limitations; carrying out an analysis of the fiscal (federal, state and local) books, the labor books in order to verify any possible case of labor succession  under articles 10 and 448 of the Consolidated Labor Laws (CLT), which would impact upon the sucessors; check for the timely payments of employee’s salaries no later than the 5th working day of each month subsequent to the accrual month; the submission of CAGED, the payments of the social security (INSS) dues, the enrollment of the company with PIS/PASEP, the regular deposits of the workers’ time of service fund (FGTS); checking for any possible suits of any nature against the company, whether civil, criminal, tax, environmental, labor, social security, etc.; checking for any possible tax debts and protests involving the company, its partners, its shareholders and its administrators;  any existing branch or the closing thereof of the company; any possible commitments undertaken by the company with third parties still in effect, etc.

Not the least, a legal due diligence is highly recommendable also on behalf of the partners or shareholders of an existing company. It should not be limited to the cases involving the merger or the  acquisition of a new company.

Another advantage of the legal auditing (legal due diligence) is that it may find possible assets or credits of the company not yet perceived by its administration and partners.

Knowing whether your company is at a good standing under all points of view (juridical, legal, business, commercial et. al.) is more than a mere right of its partners or shareholders. The Brazilian Corporate Law imposes on them the duty of diligence, under the penalty of their individual liability.

Prado Garcia Advogados (www.pradogarcia.com.br)  is pleased to being of assistance to their Brazilian and foreign clients in this endeavor over the years.