September 1, 2012
Interviewed by: David Snow
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Brazilian M&A Law

Karyn Koiffman, a partner in the New York office of law firm Baker & McKenzie with an expertise in Brazilian M&A and private equity law, speaks with Privcap about doing deals in the country. Koiffman discusses labor laws, as well as what is unique about the Brazilian M&A market, how a lack of documentation can slow the due-diligence process, how Brazilian funds are regulated and how to navigate the restricted industries of Brazil.

Karyn Koiffman, a partner in the New York office of law firm Baker & McKenzie with an expertise in Brazilian M&A and private equity law, speaks with Privcap about doing deals in the country. Koiffman discusses labor laws, as well as what is unique about the Brazilian M&A market, how a lack of documentation can slow the due-diligence process, how Brazilian funds are regulated and how to navigate the restricted industries of Brazil.

Privcap: With Brazil as one of the most active deal scenes in the world, what has kept you busy as an M&A lawyer?

Karyn Koiffman, Baker & McKenzie: I’ve definitely being very busy. A lot of my clients are very interested in investing here, and I’m getting new clients as well.

Privcap: What are some unique features of the Brazilian M&A market that affect the private equity opportunity there?

Koiffman: I think, in terms of the expectation of timing on a deal is very different if you’re doing a cross-border transaction, especially with Brazil, than in the US. All phases of the transaction take a little longer.

In terms of due diligence, the companies generally don’t have a very structured management of the company, so they lack documents. You need to dig into the company, and it takes longer. Because Brazil is a codified country, you have to obtain certificates from governmental agencies to make sure the company’s clean. So the whole process takes longer.

A lot of companies are family owned, so you have to break the barrier of getting the owner or the seller comfortable with the due diligence process. Then you go to the purchase agreement. The purchase agreement is actually simpler.

But because it’s a codified country, a lot of the rules are in the law, and they’re not going to be in the agreement. So it takes us some time to educate the client in what the law is, and what is not in the agreement that they need to be aware of. If it’s a US-governed document, it’s easier. But if the parties end up– if the seller doesn’t agree to New York law and we end up negotiating a document governed by Brazilian law, then you have to be more careful.

And the same with the shareholders agreement, or other equity documents. They are governed by Brazilian law, so you have to educate the client on those. And the whole negotiation process generally takes longer.

Privcap: Does the lack of leverage in Brazil mean that deal negotiations are somewhat simpler?

Koiffman: Nowadays, private equity firms are investing 100% of equity, most of them. Because although there is that available, it’s very expensive. You pay at least like a base interest of over 10% plus a spread of 3% to 7%, so you end up paying 17% a year. And that’s really close to the carried interest in our private equity firm, so you’re not going to be very profitable if you do that, if you leverage your investment.

So what the private equity firms have been doing is to put up equity, and then they work more on the capital growth and improve the revenues of the company and corporate governance instead of getting the benefits of financial engineering.

Privcap: What do non-Brazilians need to know about laws that govern how they do deals in the country?

Koiffman: Brazilian funds are regulated by the Brazilian SEC, the CVM. So you set up a Brazilian fund, then you register the fund with the Brazilian SEC. If you are a foreigner, and you want to take advantage of some tax benefits, you’re going to have to comply with certain conditions. And one of them is to not invest more than 40%. So the structure that we are adopting abroad is to set up three feeder funds that to have up to 33% of the fund. And then they will invest it in foreign vehicle or directly in the FIP to get that benefit.

Privcap: Which industries are restricted with regard to foreign investment?

Koiffman: That’s a good question. There are some restriction in some industries, the agricultural business, for example. There is a restriction in rural land acquisitions. A foreigner cannot have control of the investment in the rural land. So what we’ve been doing is to work in partnership with Brazilian investors or Brazilian farms to develop the land. Or if you buy a land that is small enough to be below the threshold, then you don’t have that problem.

Other areas are the medical services, for example, hospitals, don’t allow any foreign investment. Although, if you are in the health care business, you could invest in diagnostic laboratories or other types of health care industries that are not specifically medical care and not restricted by the law.

There is some restriction in mining. There are mining concessions that are not given to foreign entities or foreign investors. In the aviation, there is a threshold, as well as media. And so these are the main areas that are restricted.

Privcap: Please discuss what investors should know about Brazilian labor laws.

Koiffman: Yes, absolutely. The labor laws are very protective in Brazil. There are two aspects of the labor laws. One is high taxes and high social contributions, so it’s very expensive to hire an employee in Brazil. And the second one is very regulated in terms of how we’ve hired employee, how we pay for overtime. It ends up being a burden for certain companies, so you have to be careful about how you structure your business.

In terms of tax law, you’re going to have to be looking very carefully at labor and tax contingencies. The companies normally– I haven’t seen any company in Brazil that I’ve done diligence that doesn’t have tax and labor contingencies. And a lot of times, environmental.

These are the three areas that are very important. And because in Brazil, even if you buy assets, you still have the succession liability. You have to be careful about all this contingencies, especially what is, like, the undisclosed contingencies that you’re not seeing on the agreement. If you don’t have assets of the seller to back up their representations and warranties, for example, it’s worthless just having a beautiful agreement and not being able to enforce it. So you need to make sure in the due diligence that you know what you know what you’re stepping into.

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