Brick by brick: Brazil

Debevoise duo Maurizio Levi-Minzi (pic) and Paul Rodel outline a financial and legal due diligence primer for Brazil-bound fund managers.

With its political stability, vibrant and entrepreneurial culture and impending status as the center of the universe for the World Cup in 2014 and the Olympics in 2016, Brazil appears positioned to continue to grow, albeit likely at a slower pace than in recent years, due largely to the economic conditions prevailing elsewhere.

Paul Rodel

Against that backdrop, Debevoise New York-based partners Maurizio Levi-Minzi and Paul Rodel provide a due diligence primer specifically around financial and legal due diligence best practices for private equity firms investing in Brazil.


Familiarity with due diligence process and requirements: Unlike China, most companies in Brazil are familiar with the due diligence process and are aware of its commercial importance. Still, management can be reluctant to share information with outsiders out of a cultural sense of invasiveness and likely some concern for its impact on its own future. In-house counsel, for example, may regard even ordinary requests and questions in connection with due diligence as personal attacks against their work and may respond negatively. As in all of the BRICs (and elsewhere), building trust with management is critically important to the success of the process.

Internal organization: The strength of the internal organization of Brazilian companies varies greatly. While many companies in Brazil, including all public companies, are subject to mandatory audits, many others are not; companies subject to independent audits of their financial statements are generally better organized than those that are not subject to audits. Most companies have legal departments and in-house counsel; however, decentralization of information and knowledge is a common issue. There is a lack of standardized documentation practices generally in the country and corporate records, such as minutes of the meetings of shareholders or the board and the registry of share ownership and transfers, may not have been properly documented or registered with the competent authorities.

Availability of public search resources: The Brazilian government has made substantial investments in public search resources, and a wide range of matters such as federal court litigation, trademarks, patents and domain, as well as certain tax debts can be searched through the internet. In some states, it is also possible to carry out public internet searches for labor and state court litigation and corporate records. As a general rule, if a public search cannot be made through the internet, it can be made at the public authority charged with keeping records of the particular information being sought.


Regulatory environment: Brazil’s legal system is based on written statutes. Compared to common law jurisdictions, prior court decisions have limited precedential authority in Brazil. Many laws and regulations are relatively new and contain broad and sometimes ambiguous provisions. As a result, as with all the BRICs, there is significant uncertainty as to one’s legal rights and obligations and government authorities and courts have wide discretion in interpreting and enforcing Brazilian laws and regulations.

Foreign exchange control: Foreign investments in Brazil must be registered with the Central Bank. Non-compliance with Brazilian registration requirements may jeopardize a foreign investor’s ability to remit dividends or other distributions payable to its investors outside of Brazil and may require the repatriation of the investment. Registrations are made electronically by the company receiving the investment through the electronic declaration registry of the Central Bank information system, but they are not subject to prior examination or verification by the Central Bank.

Regulated industries: Some industries are regulated by the government, and the granting of concessions or permissions to operate, the transfer of such concessions or permissions and the acquisition of any participations in the regulated companies are subject to the approval of the federal, state or municipal authority, as the case may be. While, subject to the foreign investment restrictions described above, there are no legal restrictions on the participation by foreign investors in most regulated industries, foreign investors must comply with the same requirements imposed on Brazilian investors.


Tax: The Brazilian tax compliance system is considered one of the most complex in the world. As a result, business entities in Brazil are frequently involved in many lawsuits and administrative proceedings that challenge the interpretation and application of the tax framework. Frequently, entities within the same industrial sector are involved in lawsuits and administrative proceedings challenging the same taxes and on the same grounds.

Labor litigation: Brazilian laws grant employees extensive social security and labor rights and benefits, the costs of which are mostly borne by the employer. Additional rights and benefits may also be established by collective bargaining agreements between labor unions and employers. Employees in Brazil frequently file suits against their former employers claiming unpaid rights and benefits, as well as damages; however, upon settlement of the disputes, the amounts actually due by employers tend to be considerably lower than the amounts claimed by the employees. Calculations of a company’s exposure to labor liabilities often include considerations of the average amount claimed in lawsuits of the same nature and the company’s historical rates of loss.


Accounting records: Brazil is currently implementing a public digital bookkeeping system, which will also include a digital accounting bookkeeping system and electronic invoices, all subject to digital certification. The integrated public digital bookkeeping system aims to improve the level of monitoring by Brazilian tax authorities and the transparency of accounting records. A significant example of this trend is the SPED Project currently being implemented by the Brazilian Federal Tax Authorities.

Financial Audit: Independent audits of financial statements are mandatory only for public companies, financial institutions, investment and private equity funds, and insurance companies; however, creditors commonly require independent audits of other companies as well. Most large Brazilian companies, whether public or private, are audited by the “big four” auditing firms or a reliable Brazilian accounting firm. Some local accounting firms in Brazil may be less credible and impartial in performing audits, as they may feel pressured to win engagements or maintain relationships with the companies for whom they are providing the audits.

Accounting standards: Brazilian companies are required by law to prepare audited financial statements under Brazilian GAAP; however, financial institutions, insurance companies and listed companies are required to prepare their financial statements in compliance with the IFRS. Following multiple rounds of revisions, the current version of the Brazilian GAAP is substantially in line with the IFRS, although differences still exist between the two standards.

Related party transactions: Private companies in Brazil tend to have extensive, and sometimes messy, related-party transactions or arrangements. These transactions generally result in tax and labor liabilities to the companies involved.

While the investment opportunities in Brazil are, in many cases, extraordinary, it is important to keep in mind that the vagaries associated with making investments and operating businesses in the rapidly developing economic and legal systems of Brazil can make it, like each of its fellow BRICs, fertile ground for corruption issues. This, of course, increases the importance of due diligence for foreign investors. Still, the role played by private equity in Brazil is growing rapidly as new funds have made successful investments in the country in the last few years. Given all of its unique strengths, it seems likely that well-advised investors will increasingly find prudent ways to navigate the Amazon.

This condensed article originally appeared in fuller format (including by addressing business diligence issues) as the third installment from a four-part series in the Debevoise & Plimpton Private Equity Report. Private Equity Manager published the first and second part titled, “Brick by Brick”, covering China and India, which can be found HERE and HERE