Contracts for the purchase or sale of companies, whether drawn up by sellers or buyers, usually follow a market pattern. The difference relates only to certain requirements or to the intensity or manner of determining certain conditions, depending on which side drafts the first draft.
In general, the industry also sets certain conditions, because some issues usually affect all companies in the same operating segment to a greater or lesser extent. A frequent example is activities that have rules and legislation specific to the activity and are supervised by regulatory agencies, as is the case of concessionaires or permitholders of energy and telecommunications public services. In these cases, there are not only typical industry issues from the commercial point of view of customer and supplier relations, but also requirements of specific legislation.
Throughout the negotiation and, mainly, after the investigation of the situation of the company that is the target of the acquisition, other specific situations usually arise that must be addressed in the acquisition agreements and that, in fact, are situations of that particular company.
Although all these common conditions exist and various contractual clauses are considered "standard", in all acquisitions the contracts are obviously different, due to issues specific to the industry or to the legal, financial, and commercial situation of the company being acquired, as to the person of the sellers (whether a family that directly holds an interest in the company, a large conglomerate, or even the market, when it is a publicly traded company, with or without defined control). The topics addressed are the following:
- price and adjustment;
- conditions precedent or closing conditions;
- indemnity (what is indemnifiable by each party, what the limits are, if any, to the indemnity obligation, whether in time or in amount);
- closing acts; and
- general provisions and form of dispute settlement between the parties (arbitral or judicial proceeding, mediation, etc.).
In acquisition transactions in general, therefore, there is an entire legal framework to seek protection, on the buyer's side, in relation to possible contingencies, materialized or not, in relation to the company that are of concern because they may fall upon the buyer. After all, obtaining compensation for losses arising from acts or facts that occurred before the purchase was made can be complex. This is the biggest concern of those who acquire a business in Brazil. So much so that in many acquisitions, collateral is also provided or requested for the seller's obligation to indemnify the buyer after completion of the transaction.
The conditions precedent are certainly of concern, in addition to other possible situations or conditions of the deal, but it is undeniable that the indemnification clause is almost always the clause that usually causes the biggest discussions between the parties. It is usually the most stressful point for the buyer in acquisition transactions. These are consequences subsequent to the closing, to the actual acquisition, which in fact require a lot of dedication during the negotiation. The time between signing and closing is as short as possible, except in transactions that require prior authorization from the antitrust authority, regulatory agency, or shareholders in order to be concluded.
In judicial reorganizations, the concern changes
In one type of acquisition, especially, the focus of concern changes a lot: these are acquisitions of companies (or assets of companies) under judicial reorganization. In such cases, companies in financial difficulties can be more effective in paying their creditors and restoring their activities. It is a strict and supervised procedure whereby the indebted company is granted a term to continue operating while negotiating with its creditors, in compliance with the Reorganization and Bankruptcy Law (LRF or Law No. 11,101/05), as amended.
The process allows companies to renegotiate accumulated debts, with the objective of effectively enabling recovery of activities and avoiding closure, layoffs, and lack of payments. To this end, the company must present its reorganization plan showing that, even in the face of difficulties, it can get back on its feet, if it can renegotiate its debts to continue to be active with production.
By requesting judicial reorganization, the company obtains a moratorium, that is, payment to creditors is postponed or suspended, for it to be able to focus on paying employees, raw materials, and products essential to the operation of the business.
Article 60 of the LRF deals specifically with the sale of branches or Isolated Production Units (UPIs) of the company under reorganization. The sole paragraph of this provision assures the acquirer of the absence of succession:
Article 60. If the judicial reorganization plan approved involves the judicial sale of branches or isolated production units of the debtor, the judge shall order that it be carried out, with due regard for the provisions of article 142 of this Law.
Sole paragraph. The object of the sale must be free of any encumbrance and there shall be no succession in the debtor's obligations, including tax obligations, subject to the provisions of paragraph 1 of article 141 of this Law.
The UPI is not defined in the LRF, but it is understood as something close to the establishment, an organized set of assets through which a business activity is carried out (whether the UPI is a company and all its assets or only part of the corporate assets).
Although there is no legal definition, a UPI is formed when the judicial reorganization plan is approved by the judge and the creditors. It can be sold during the reorganization period. This possibility allows, in addition to renegotiation with creditors, the entry of financial or strategic investors and reestablishment of the business. For the world of mergers and acquisitions, it is therefore an excellent opportunity, although the operation here has its complexities.
And, amazingly, the complexity in these acquisitions does not lie in the risk of the buyer succeeding the seller with respect to the contingencies and liabilities of the company (or set of assets) that is the subject of the transaction. This is because the LRF provided that there is no succession in the debtor's obligations in sales made under reorganization and bankruptcy proceedings. The purpose was to allow the sale to generate funds that enable satisfaction of the creditors' interests, either by direct and immediate payment of their claims, or by using the proceeds of the transaction to boost the company's activities, in compliance with the judicial reorganization plan.
In other words, in contracts for the acquisition of UPIs, the potential problems and complex clause are not usually indemnification or guarantee of liability for existing liabilities or those that may arise later, but which arise from issues prior to the completion of the transaction, because in these cases there is no question of succession of the purchaser in relation to the liabilities of the debtor in possession. In these UPI acquisition situations, the major concern is in the acquisition procedure: formation of the UPI and its scope (validity and legitimacy of the formation of the UPIs); the formal process and compliance with the requirements of Law No. 11,101/05 and the respective judicial reorganization plan for consummation of the transaction; maintenance of the condition of the business and activities; and the least possible deterioration in the UPI's economic and financial situation.
In other words, in UPI acquisition processes, the concern is not with the phase after the closing and execution of the acquisition, but with the period before. Not only because the economic and financial situation of the businesses developed by a UPI is more delicate, or its deterioration more likely, but for all the other issues, which are detailed below.
To minimize the risks of the acquisition, even after the ratification of the judicial reorganization plan that contemplates the transaction and its main terms and conditions, it is important that the legal term for the filing of any appeal have elapsed. In the event an appeal is filed, no court decision shall be in force granting a stay of such appeal against the decision that authorized the sale of a UPI (in addition, of course, to the decision by CADE and regulatory agencies, as applicable).
The risk of occurrence of what in the jargon of acquisitions is called "material (or relevant) adverse effect" in relation to the business and the economic and financial situation of a UPI is greater due to the delicate situation of a UPI even before the acquisition, inasmuch as time is a determining factor for the success or failure of the operations. With this, the very conduct of the activities in their normal course and the necessary maintenance of the company's investments in its activities and in the preservation and updating of assets and client portfolio, as well as all the concerns of not deteriorating the activities, are much greater than in a company in a "normal" situation or one that is not under judicial reorganization.
It is also important to negotiate reasonable monitoring of financial information, to the extent permitted by law, so that the buyer can know and monitor the situation of the UPI up to the effective date of acquisition.
Another feature that gains importance when it comes to a transaction involving a UPI, although it is not very common in sale and purchase transactions of companies, is the so-called breakup fee or fine for termination of the purchase and sale agreement before the closing. In the case of a UPI, this is almost a mandatory rule to minimize the loss of investment opportunity, which, in cases of judicial reorganization, may be decisive for non-recovery of the UPI or the seller, as the case may be. A fine to be paid in favor of the seller becomes of utmost importance in this case.
Often, in UPI sale and purchase agreements, there is not even an obligation to indemnify sellers, or, even if there is, it cannot be relied upon. The risk in this case is only in relation to the costs of any legal defense, as the law itself protects the buyer from liability for prior liabilities of the UPI.
It is concluded that the absence of the greatest fear (mainly of foreign acquirers/investors, who sometimes have greater difficulty in understanding the risks of Brazilian businesses) in relation to the succession of known and/or hidden liabilities of the business after its effectiveness may not exist in the acquisition of a UPI. In this type of acquisition, the concern comes in the run-up to the actual acquisition.
So whether it is an acquisition of a company in a normal situation or a business in judicial reorganization, the legal, financial, and business challenge should never be overlooked. The question is only the "moment" at which there is the greatest risk: after or before the acquisition is done.
