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Brazil, 2016: What changes will Lava Jato bring to M&A deals?


Bruno Balduccini; Tiago Severo Pereira Gomes

Works originally published in the course handbook of Practising Law Institute’s Doing Business in and with Emerging Markets 2016

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In Brazil, M&A deals follow Anglo-Saxon principles, but are mainly governed by the Brazilian Civil Code of 2002, by the Corporate Law, by the New Competition Law, by the Capital Markets Law and by the Anticorruption Law. Depending on the nature of the transaction and on whether the target company operates on a regulated market, the regulations applicable to that market segment must also be complied.

In general, lawyers and their clients must identify the main issues that may affect the ideal structure, cost, timing and the feasibility of the transaction.

Operação Lava Jato (Operation Car Wash) brings an additional concern already existing in foreign markets, such as adoption of more transparent negotiation procedures, as emphasized at the Administrative Council for Economic Defense (CADE) public guide and commitment towards best governance practices and compliance procedures. 

Law and Economics and Corruption in Brazil: the judiciary efficacy and enforcement of the law

In 1960 and 61, Ronald Coase and Guido Calabresi, based on their works The Problem of Social Cost and Some Thoughts on Risk Distribution and the Law of Torts, began a movement known in the United States as Law & Economics, or Economic Analysis of Law, that is an empirical observation tool that mainly employs microeconomic analysis to identify impacts of a law on the real economy.

In 1968, Gary S. Becker, in Crime and Punishment: An Economic Approach, reaches the conclusion that the rationale behind the crime consists of an analysis of both elements: the probability that an offense is discovered and the size of the punishment.

In 2010, Ivo Gico Jr. and Carlos Higino Ribeiro de Alencar, in When Crime Pays: Measuring Judicial Efficacy Against Corruption in Brazil, stated that (i) only 34% of corruption cases in Brazil are actually investigated and (ii) only 3% of that percentage leads to conviction. This results from the inefficiency of the Brazilian judicial system.

This scenario may change after Lava Jato, as addressed below.

The book The Law-Growth Nexus: the rule of law and economic development reviews the legal system of several countries, mentioning that the fact that a country traditionally adopts a civil law or common law system – i.e. with a higher or lower level of formalism – is not a determining factor to assess the efficiency of its judicial system. According to the publication, higher economic development is the factor more intrinsically related to lower duration of legal proceedings.

Kenneth W. Dam says it is undeniable that the lack of resources and grants in emerging markets impairs the efficiency of their judiciary. The study shows, however, that these are not the major causes of poor performance of judges in such countries, outlining as the most important factors the unequal division of the tasks carried out by the judges, their resistance to reforms and, above all, misallocation of resources (channeling of public funds).

​Operação Lava Jato is at the hard core of this context: the efficiency of the judiciary in probing into acts of corruption and convicting the accused. 

Operação Lava Jato: background, stages, recoveries, international cooperation to obtain evidence and status

On March 17, 2016, Operação Lava Jato completed two years and has already recovered R$ 2.9 billion[1], a great part of it as illegal money deposited in offshore accounts. 

Money laundering through a chain of petrol stations was the starting point for uncovering corruption involving politicians, executives and large companies that siphoned off money from the country's major oil company Petrobras. Bribes alone accounted for R$ 6.2 billion. The Brazilian Federal Budget Oversight Board (TCU) estimates losses to the state-owned oil company at R$ 29 billion, while the federal police's figures are estimated at R$ 42 billion. 

In its first stage, Operação Lava Jato probed into financial crimes committed by four criminal organizations led by black market dollar dealers. Then in the second stage, it leaded to accusations of corruption and money laundering at Petrobras involving billions of reais. In the third and current stage, Lava Jato has unveiled corruption in other federal public bodies, such as the Ministry of Planning, Eletronuclear and Caixa Econômica Federal. The next stages are expected to focus on money illegally sent abroad, reported the local media. 

In 24 out of the 28 phases of Lava Jato, the Federal Prosecutor Office's task force has already recovered R$ 2.9 billion for the public entities, and a further sum of R$ 2.4 billion in defendants' assets has been frozen. The refund claimed by the task force currently amounts to R$ 21.8 billion. In addition, the Prosecutor Office filed 37 criminal charges against 179 persons and 6 malfeasance in office suits against 49 persons (33 individuals and 16 legal entities). There were 93 convictions, and in certain cases the defendants were convicted more than once. If added the sentences can already reach a total number of 990 years and 7 months in prison. Such results were achieved due to intense exchange of information among the Prosecutor Office, the Federal Police and the Federal Revenue Office. 

In this context, 1,177 proceedings were initiated and there were 574 search and seizure warrants, 117 coercive questioning warrants and 134 arrest warrants (64 warrants for preventive detention and 70 for temporary detention). Out of the 179 persons charged with corruption, money laundering and criminal conspiracy, only 8% of them are under preventive detention, while 3% are in prison without judgment. 

In addition to plea bargaining and leniency agreements, international cooperation has been an effective tool in Lava Jato to gather evidence, freeze and repatriate misappropriated funds. In two years, 97 requests for international cooperation were made, 85 of which were sent by the Brazilian authorities to 28 countries and 12 of which were received from 11 different countries. Investigation fronts in other countries have shown that corruption is a cross-border crime. Certain money laundering schemes are devised through banks in foreign countries. 

Lava Jato is currently in the 28th phase named Pyrrhic Victory ("Vitória de Pirro"), making reference to a victory achieved at the expense of great losses or costs. The Federal Police stated that the persons investigated in the current phase are involved in payment of kickbacks to prevent contractors from being called to testify in Petrobras Investigative Committee (CPI), at the Senate, and in Petrobras Joint CPI (lower and upper houses), at the Congress, initiated in 2014. 

Judge Sérgio Moro, in charge of Lava Jato investigations at first instance, has indicated his intention to complete the work within this year. Then, the focus will shift to defendants with privileged legal standing to be judged by a special court, i.e. STF.

Within the context of Lava Jato, we provide below some guidelines to buyers while outlining concerns with respect to the business environment in Brazil, especially involving M&A transactions. Therefore, it is important to understand the main points of the anticorruption law enacted for the first time in Brazil. 

Anticorruption Law in Brazil: a new guideline for the company-government relationship 

The Brazilian anticorruption law had its root in Law No. 12,846 of August 1, 2013, which provides for civil and administrative liability of legal entities for acts against the Brazilian or foreign public administration. 

The anticorruption law establishes strict liability of legal entities in the civil and administrative areas for wrongful acts, whether or not committed in their own interest or for their own benefit. In other words, pursuing such interest or benefit implies in liability on the legal entity under the anticorruption law. 

Almost two years after the anticorruption law had come into effect, the Brazilian government enacted the Decree No. 8,420 of March 18, 2015 to regulate that law. 

The decree establishes, among other provisions, guidelines for calculation of fines in corruption cases. 

The fine will be calculated based on the company's revenue, and will range from a minimum of 0.1% and a maximum of 20% of the total revenue. 

Articles 17, 18, 19 and 20 of the decree provide for a "middle ground" in the calculation of the fine, considering "mitigating" and "aggravating" circumstances. 

Mitigating circumstances refer to non-consummation of the violation, payment of damages, cooperation level, voluntary disclosure, development of an integrity program and an internal compliance structure. Aggravating circumstances refer to continuance of the conduct, forbearance by management, and interruption of public works or services. 

Where it is not possible to calculate the fine based on the company's revenue, the fine may be stipulated at a minimum of R$ 6 thousand and a maximum of R$ 60 million. Recurrence within a period of five years after confirmation of the "corrupt" conduct will result in an increase of 5% in the fine. 

On December 18, 2015, The President Dilma Rousseff enacted the Provisional Measure No. 703, which is currently under consideration at the Congress. The Provisional Measure No.703 authorizes cancellation of the fine and allows companies punished at the administrative level to participate in other public bidding procedures. This provisional measure must be approved by both the lower and upper houses on or before May 29, 2016, otherwise it will become ineffective. However, due to current political environment the chances of this Provisional Measure be considered timely by Congress and Senate is very low. 

New M&A transactions in Brazil: where to focus the attention?

Buyers must take into consideration the following questions before closing an M&A deal: Does the target company have any reputation, compliance or anticorruption issues? What are the possible consequences because of that? 

If a company engages in corrupt practices to restrict competition[2] in a public service sector through cartel, for instance, an administrative proceeding may be initiated against the company at CADE with the following consequences: the company and its senior managers may be fined; the judgment against the company must be published in a newspapers; the company may be prohibited from participating in biddings procedures; the company's name may be included in the National Consumer Protection Roster; the competent bodies may grant a compulsory license authorizing the use of the offender´s intellectual property rights; spin-off or transfer of control may be imposed on the company; the company may be prohibited from engaging in business activities on its own account for up to five years; and the company will be subject to any other measures required to eliminate practices in restraint of trade. It is important to mention that cartel formation constitutes a crime under Brazilian law. 

In public bidding, for instance, contracts may be questioned by authorities due to irregularities or illegalities during bidding procedures, and even rendered null and void. 

In the civil sphere, a company that obtains assets illegally or performs a wrongful act causing damage to third parties may be sentenced to indemnify them (lawsuit for damages) in a public civil action. There is also the possibility of piercing the corporate veil of the company upon evidence of deviation of purpose or intermingling of assets in illegal transactions, without prejudice to the measures already contemplated in the anticorruption law. 

If the company commits a wrongful act, minority shareholders may file lawsuits for damages questioning the company management. Furthermore, the Brazilian Securities Commission (CVM), which is the competent body to regulate and monitor securities distribution and trading in Brazil, may impose penalties on the wrongdoers, ranging from a warning to cancel the authorization or registration of activities in the capital market. 

As a general rule, suspected money laundering transactions must be notified to the Financial Activities Control Council (COAF). If this not occur, penalties might be imposed. And finally the Anticorruption law also establishes substantial fines and other punishments which may include joint liability of other companies of the same group even is such other companies have never involved in corruption practices. 

Conclusions: a leap forward is necessary 

So far, Operação Lava Jato has indicated a gradual consolidation of a new scenario in Brazil: a more independent and prepared, well-organized and efficient judiciary able to fight corruption. 

This means, in other words, that buyers should take all requisite pre-acquisition steps with due care and diligence to avoid unexpected issues resulting from the target company's management practices. 

However, where the buyer is unable to identify certain practices before the acquisition takes place, either because of a sophisticated corruption scheme or due to a lack of red flags of irregularities, lawyers must be prepared to face complex situations involving corruption evidences and potential liabilities because of that. Therefore, attorneys must have an outstanding negotiation ability to protect the buyer and mitigate risks concerned with reputation and liability inherited from the seller.


[1] The Federal Prosecutor Office estimates that this amount represents almost half of total kickbacks paid.

[2] Regarding the Lava Jato, two administrative proceedings on this matter are currently ongoing at CADE: one relating to the Petrobras affected contracts and the other relating to the consortium responsible for the assembly of Angra 3 nuclear power plant.​

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