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Funding | 4 Points About ‘International Sanctions’ that Foreign Lenders and Investors Must Observe When Financing Brazilian Companies

Foreign lenders and investors who finance Brazilian companies via export prepayment, direct loan, equity, among others, must observe, provide in contracts and comply with regulations on 'international sanctions' to avoid relevant legal and financial charges, both in Brazil, the United States, and other countries.

See below 4 key aspects about ‘International sanctions’ in foreign credit transactions with Brazilian companies:

1. What are International Sanctions? International sanctions are comprehensive or selective measures aimed at the unavailability, blocking and restrictions on assets or transactions involving certain countries, companies or persons.

2. Who Applies International Sanctions? International sanctions can be imposed by the United Nations Security Council, and also by specific countries, notably the United States, through OFAC (Office of Foreign Assets Control).

Brazilian Federal Law 13.810/2019 provides that sanctions imposed by resolutions of the United Nations Security Council and also by a foreign central authority must be complied with in Brazil, which includes international transactions involving Brazilian parties.

3. Lenders and Investors Must Due Diligence and Surveil Compliance With International Sanctions:?Foreign lenders and investors must carry out due diligence on the Brazilian companies they finance to confirm that such companies do not carry out commercial, financial and other transactions with countries, organizations and persons subject to international sanctions.

After the funding transaction has been signed, foreign financiers must obtain periodic certification from financed Brazilian companies to reassure that they continue to comply with international sanctions provisions.

4. Contracts Must Provide for Representation and Obligations Regarding Compliance With International Sanctions: The main contracts for international credit and investment transactions, including export prepayments, direct loans, bonds, and others, must contain (i) in the Representations and Warrants section, a declaration by the borrower that it complies with the rules involving international sanctions and that it does not carry out commercial, financial and other transactions with countries, organizations and people subject to international sanctions and (ii) in the Negative Covenants section, an obligation that, until the outstanding balance is fully paid, it will not carry out commercial, financial or other transactions with countries, organizations and people subject to international sanctions.

Compliance with international sanctions is essential for both the foreign lenders and investors, and Brazilian borrrowersas non-compliance may result in penalties, including financial ones, with a material negative impact.

Mergers & Acquisitions | 4 Points of Attention in Contingency and Indemnity Clauses in Brazilian M&A Contracts

In a M&A transactions, it is essential to map all contingencies of the target company, through complete due diligence.

However, there are situations in which some contingencies are not possible to be identified until the closing of the Share Purchase Agreement (SPA), or even if they are, it is not possible to quantify them precisely.

This is why a special care must be taken with the contingency and indemnity clause, thus preventing the buyer from ending up assuming an unknown liability, or on other occasions turning their investment into a loss.?

We highlight 4 key points of attention and alternatives to mitigate the risks of these clauses:

1. Identification of Liabilities: Once due diligence has been completed, the buyer must objectively list the liabilities identified in the SPA, and whenever possible limit the related values. In these cases, there must already be an express clause on the seller's responsibility, including the possibility of discounting and/or offsetting future installment payments.?

2. Delimitation of Responsibilities: It is important to delimit the responsibility of each party for the company's identified liabilities, which can be fully assumed by the buyer or distributed between the buyer and seller, based on a time frame or the nature of the liability. Furthermore, liability for unidentified liabilities, but which may materialize after the closing of the transaction, also needs to be foreseen, according to the nature of the business. It is common, in these cases, for losses whose triggering event occurred prior to the signing of the SPA to be entirely the responsibility of the seller.?

3. Limitation of Indemnities: Criteria for limiting indemnity amounts can be established in the SPA, and the following concepts can be used: (i) De minimis: restricts the duty to indemnify irrelevant liabilities; (ii) Basket: duty to compensate occurs when a certain value is reached; (iii) Cap: maximum limitation of the compensation to be paid; and (iv) Temporal Scale: duty to be compensated is limited to a certain period after the closing of the transaction.?

4. Creation of Escrow Account: In cases where the identified liability is representative, it is possible to establish the obligation to create an Escrow account, in which certain price payment amounts will be blocked, being released to the buyer as the period of payment has elapsed. De constitution of the identified liability or reaching any other trigger established by the parties. In these cases, it is essential that the values are indicated in advance and objectively.?

To operationalize these points, it is essential to determine in the SPA the procedures for notifying and conducting contingency processes, such as who will conduct it, who will bear the expenses, and how guarantees will be provided, bringing greater security to the parties.

The preparation of the SPA is an extremely complex process, which requires mutual effort from the parties involved to align each of the provisions. The highlighted points must be structured according to the particularities of each operation, eliminating possible doubts and future discussions between the parties involved.

Tax | The Impact of Tax Reform in Brazil on Fintechs

One of the novelties brought about by the ongoing Brazilian tax reform is the proposal for a differentiated tax regime for players in the financial market, including fintechs and other players in the segment.

Although the bill relieves taxpayers of tax bureaucracy, the simplification of taxation through a single tax raises concerns about a considerable increase in the tax burden.

The tax reform introduced the creation of an exclusive regime for financial services, covering various activities such as credit operations, foreign exchange, securities and insurance, among others. Currently, the taxation on consumption of these services includes PIS, COFINS and ISS. With the change, the sector will now be subject to the VAT-DUAL Value Added Tax, levied on services through the Goods and Services Tax - IBS and the Goods and Services Contribution - CBS.

A specific point of concern for the financial sector is taxation at destination. As planned, the IBS will be levied where the service is consumed, which could lead to differences in tax rates between municipalities.

In addition, there is the possibility of double taxation of Financial transaction tax - IOF and IBS on some services. This is because the IOF rules remain the same, which can result in IBS being levied concurrently in certain cases.

Recently, Supplementary Bill No. 52/2024 was presented, which establishes and regulates the specific IBS and CBS tax regimes applicable to financial services and may mitigate some of the risks raised above. However, the bill has not yet been approved and there are no definitions, which requires the market's attention.

Technology & Cybersecurity | 4 Points of Attention For Companies Doing Business in Brazil With Respect to Internet Civil Act

The Brazilian Internet Civil Act (Federal Law 12.965/14) regulates the use of the Internet and applications in Brazil.?

See below 4 points of attention for Brazilian and foreign companies doing business in Brazil with respect to such regulation:?

1. Liability of companies for user-generated content. According to the Brazilian Internet Civil Act, companies can only be held liable for user content (such as posts, comments, reviews) if they fail to comply with a court order ordering the removal (judicial notice and take down).

Currently, this is the majority position in Brazilian case law, but such limitation of liability will be discussed before the Brazilian Supreme Court (STF) and there may be a change of understanding. According to the reporting minister, the case should go to trial in the coming months.?

2. Supervision of personal data protection. Since the creation of the Brazilian Data Protection Authority (ANPD), only one (1) fine has been imposed on a private company for non-compliance with the Brazilian General Data Protection Law (LGPD), due to improper processing of personal data. ANPD's position to impose such a sanction was a warning sign that the authority understands that companies already had time to adjust to LGPD and the tendency is for supervision to intensify, giving rise to new fines applied to private entities.

3. Legal Framework for Artificial Intelligence (Bill). In a legislative process similar to which resulted in the Brazilian Internet Civil Act and the LGPD, a bill to regulate artificial intelligence in Brazil is being discussed in the Brazilian Senate, which aims to increase the level of reliability and legal security, as well as allow the attraction of investments. The bill is expected to be presented in the Senate in the coming months and later sent to the Brazilian Chamber of Deputies.

The text under discussion is similar to the regulatory proposal under discussion in the European Union. For companies, the law must establish standards for data collection, liability for automated decision-making, implementation of measures to correct discriminatory trends, commitment to security, among others.?

4. Fake News Bill. The central point of the bill is the moderation of content published on the Internet, so that user-generated content considered offensive can be identified, deleted or flagged. A new version of the text should be presented in the coming months, aiming to reach greater agreement for voting in the Brazilian Congress.

If approved, the law would affect companies that manage social media, search engines and instant messaging services. The law should not affect e-commerce companies, video or voice closed meeting platforms, or online gaming and betting companies.?

It is important that companies and financial institutions to be aware of new laws that emerge to regulate activities in the digital environment in Brazil and the interpretations that are given by the Brazilian Judiciary to existing laws, to guide their conduct in order to avoid liability.

Labor | Labor Aspects in M&A Transactions Involving Brazilian Target Companies

Mergers and acquisitions (M&A) involve significant internal changes in the companies involved, so it is necessary to look at labor issues at all stages of the process.

For a long time, approaches to labor issues in M&A transactions were limited to quantifying liabilities by analyzing employment contracts, benefit plans and internal policies.

However, changes in legislation and the expansion of inspections by the Labor Prosecutor's Office point to the need for issues related to moral damage, both individual and collective, to be thoroughly examined and evaluated during due diligence and negotiations.

The occurrence of a Conduct Adjustment Agreement or the correction of certain practices can have a major impact on operating costs and business profitability. Therefore, an analysis of internal policies, the structure of whistleblowing channels and the procedures for investigating complaints became essential during the due diligence process.

For the contingency of amounts, which may be deducted from the price, the expenses necessary to adopt procedures to correct the irregularities and the amount of the fines should be used as a basis, taking into account the number of employees involved. Specifically in relation to collective moral damage, given the possibility of arbitrating amounts without any parameter or relation to objective or easily quantifiable criteria, the amount should be set by estimate.

The due diligence process must provide the parties involved with adequate information about the risks involved, and issues involving means to curb the practice of moral damages are fundamental to analyzing the viability of maintaining the business model adopted and the company's operational profitability, directly impacting the M&A operation.