Legal Insights From Brazil to Start Your Week

What you will be reading in this issue:

1. Distressed Assets?| Investing in Distressed Assets in Brazil: 5 Legal Insights for Investors in the Acquisition and Collection of Distressed Assets and Special Sits

2. Corporate?| How to Structure a Stock Option Program in Brazil for Startups and Consolidated Companies?

3. Tax?| Brazilian Tax Reform: 3 Points of Attention on Succession and Estate Planning in 2025

4. Credit Recovery?| Fiduciary Lien as Collateral: 3 Key Benefits for Brazilian and Foreign Creditors

5. Labor?| Retail Commission Policy in Brazil: 5 Strategies To Reduce Labor Liabilities

Distressed Assets | Investing in Distressed Assets in Brazil: 5 Legal Insights for Investors in the Acquisition and Collection of Distressed Assets and Special Sits

The distressed assets and special sits market in Brazil is worth over US$100 billion, attracting the attention of Brazilian and foreign investors.

Distressed assets include non-performing loans (NPLs), credits from civil, tax and labor lawsuits, court orders, real estate and industrial units subject to litigation, and any other problematic assets that can be acquired at a discount by investors who invest money and time to obtain returns that compensate for the high risk.

Investors in such class of assets are likely to be, in Brazil, receivables investment funds (FIDCs), and, abroad, hedge funds and family offices.

See below 5 legal insights for Brazilian and foreign investors in distressed assets and special situations in Brazil:

1. Identify, Find Upsides and Correctly Price Distressed Assets in Brazil: Distressed assets can be non-performing loans (NPLs), credits from civil, tax and labor lawsuits, court orders, movable and immovable property subject to litigation, and any other problematic assets.

Because they have a non-performing component, the challenge of (i) identifying assets (such as credits) of any nature, which are often unnoticed by other investors, (ii) finding upsides not identified or underutilized by the current creditor, such as collateral, unlocated assets, legal strategies, among others, that may accelerate credit recovery; and (iii) pricing these assets correctly, to the point of applying the correct discount versus the potential financial return over time, are a differentiator in this increasingly competitive market, but still nascent and full of opportunities.

2. Perform Legal Due Diligence on Distressed Asset and the Seller: A critical point for investors, it is essential to perform legal due diligence on both distressed asset and the seller.

In the case of portfolios of non-performing loans (NPLs) subject to legal proceedings, it is important to (i) pre-evaluate each legal proceeding, the credit documentation and collateral of the NPLs, the stage of the process, whether the deadlines were met (risk of legal fees), whether there are judicial deposits, whether there are in rem and personal guarantees, among other elements that increase or decrease the probability of a return in the shortest time and (ii) analyze information about the seller to avoid, in addition to the standard risks of this type of business, other non-obvious risks, such as reputational risks.

3. Pay Attention to the Purchase and Sale Agreement for Distressed Asset: Because they are problematic and pose significant legal challenges, the acquisition of distressed assets must always be carried out through a purchase and sale agreement, with protective provisions for the investor involving the purchase, transfer of rights, protection against false statements (past, current and future), fraud, issues involving money laundering, corruption, among other direct and indirect legal aspects (including obligations to do and not to do) that may impact credit recovery and also the investor himself.

4. Collect the Debtor's Distressed Asset Extrajudicially and Judicially Using Technology Tools and an Acute Collection Strategy: After acquiring the distressed asset, success in planning, gathering information about the debtor, guarantors and assets, and effective collection and execution of the credit is what sets investors apart from each other.?In the case of non-performing loans (NPLs) whether judicial or not, the more proactive the collection and execution of the credit is, whether judicial or extrajudicial, the greater the chances of success.

Measures such as (i) tracking, via technology tools, information about the debtor, guarantors and assets, and (ii) executing strategic and legal measures, both judicial and extrajudicial, against the debtor, guarantors, related third parties and assets of various natures, may reduce the recovery time of the distressed asset acquired.

With a growing billion-dollar market, distressed assets in Brazil will generate countless opportunities for Brazilian and foreign investors in the coming years, and it is essential to pay attention to the points above to understand and implement measures to reduce risks inherent to the segment.

Corporate | How to Structure a Stock Option Program in Brazil for Startups and Consolidated Companies?

A Stock Option program is an excellent tool that companies, including Startups, can use to retain talent and stimulate employee performance. The program allows employees to acquire shares in the company for a pre-established value after certain goals are achieved.

To ensure that the program in Brazil does not become difficult to implement, and that the entry of new partners may end up harming the Brazilian company, it is essential that some precautions be taken:

1. Criteria for Executing the Option: It is essential that the Stock Option program establishes criteria to allow the employee to acquire the share. For example, a vesting period, the achievement of goals, and even the completion of a certain round of investor raising can be used.

2. Option Pool: Creating an Option Pool, a percentage of the share capital reserved to be used in the offering of Stock Option, already establishing in advance the origin of the quotas/shares that will be offered, avoids surprises, organizes the capital and helps in the fluidity of the exercise of the Stock Option right.

3. Cap Table: The Cap Table must clearly reflect the distribution of shares among founders, investors and employees who adhere to the Stock Option. A poorly planned Cap Table structure generates uncertainty about the control of the company and future profit distributions, even its sale, which can discourage investors. On the other hand, a well-structured Cap Table demonstrates that the company has control over its governance and is organized to receive new investments.

4. Business Management: It is important for the company to understand the influence that the employee will or will not have on the management of the company after joining the company. In the case of limited liability companies, the new partner will have the right to vote on company decisions. In the case of corporations, it is possible to offer preferred shares, which offer priority in receiving dividends and in the event of liquidation, but do not grant voting rights, or common shares, which do not have the priority of the other group, but grant the right to vote and share in profits.

5. Shareholders' Agreement: Providing in the Stock Option contract that, when exercising the right, the employee must join to the company's shareholders' agreement is another important protection to safeguard the company's governance when new partners came, who, even if they are voting partners, must respect the parameters established in the shareholders' agreement, considering that Brazilian Courts use to respect what is provided for in the shareholders' agreement.

The construction of the Stock Option program in Brazil must be done in a personalized manner and attentive to the interests of the company, especially in cases where there is an interest in investors also being part of the business. It is always important to consider the future impacts of the entry of these partners/collaborators, ensuring the company's governance, minimizing corporate risks and protecting the interests of the founders.

Tax |?Brazilian Tax Reform: 3 Points of Attention on Succession and Estate Planning in 2025

Succession and estate planning in Brazil will become even more relevant in 2025, with the changes brought about by the Tax Reform.

Possible changes to the Inheritance and Gift Tax (ITCMD) include the adoption of progressive rates and an increase in the maximum tax ceiling, which requires extra attention to ensure efficient asset transfers and the preservation of family assets.

In addition to facing new tax challenges, carefully structuring planning can prevent family conflicts, protect assets, and ensure the continuity of companies and legacy between generations. Below, we highlight the three main impacts of the tax reform on succession and estate planning:

1. Changes to the ITCMD Rates: The Tax Reform provides for the introduction of progressive rates in the ITCMD, which may double the tax burden in some situations. Currently, in states where the maximum tax rate is 4%, the ceiling is expected to be raised to 16%. This significant increase directly impacts the costs of asset transfer, requiring a strategic assessment by families.

2. Window of Opportunity for Early Donations: Before the implementation of the new state regulations, families can benefit from the lower tax rates currently in force. Early donations and strategically structuring estate planning are measures that can significantly reduce tax costs, ensuring greater efficiency in the succession.

3. Personalized Planning and Alignment of Interests: Successful planning goes beyond tax management. Identifying the interests and skills of heirs allows for personalized asset distribution that respects family values and ensures harmony in the succession process. This approach contributes to the perpetuation of family assets and legacy.

In a context of significant tax changes, succession and estate planning becomes essential. Anticipating strategic decisions, taking advantage of the window of opportunity offered by current tax rates and adopting good management practices are fundamental steps to protect assets, minimize tax impacts and promote a harmonious transition between generations. Well-prepared planning is not only a tool for financial protection, but also an instrument for consolidating family legacy and values over time.

Credit Recovery | Fiduciary Lien as Collateral: 3 Key Benefits for Brazilian and Foreign Creditors

Creditors have various alternatives to secure credit transactions in Brazil, and the choice of the appropriate instrument depends on the specifics of each business.

The efficiency and security of each guarantee depend on factors such as the transaction structure, the nature of the asset, the amounts involved, and the debtor's financial condition.

Among the main guarantee instruments for business operations, fiduciary lien in Brazil stands out for offering significant advantages to financiers, as highlighted below.

1. Protection of the Asset: Fiduciary lien provides maximum protection for the asset. In certain cases, third parties are prohibited from seizing assets subject to fiduciary lien. In others, even if seizure is allowed, the fiduciary creditor retains priority over any subsequent guarantees;

2. Agile and Cost-Effective Execution: In the event of default, the enforcement of the guarantee can be carried out extrajudicially through a notary public, making the process faster and less expensive. Unlike judicial enforcement proceedings, this method avoids the high costs associated with court actions

3. Protection Against Judicial Reorganization or Bankruptcy: Claims secured by fiduciary lien are not subject to judicial reorganization or bankruptcy proceedings. This means that the guarantee can still be enforced, even if the debtor files for judicial reorganization or bankruptcy. However, caution must be taken as, in cases of judicial reorganization, if the asset is deemed essential to the debtor's business activities, enforcement of the guarantee will not be feasible.

To ensure the effectiveness of the guarantee, it is essential to accurately assess the asset, consider transfer costs, and verify whether the asset is deemed essential. Additionally, the agreement should include a provision for a deficiency claim, allowing the creditor to pursue any remaining debt balance if the proceeds from the sale of the collateral are insufficient to cover the full amount owed.

Fiduciary lien is an effective tool for securing credit protection, offering advantages such as speed, potential cost-effectiveness, and a degree of priority. However, its application requires careful consideration of the specific legal and factual circumstances, including a thorough understanding of the applicable laws and regulations in the relevant jurisdiction.

Labor | Retail Commission Policy in Brazil: 5 Strategies To Reduce Labor Liabilities

Commissions are essential for encouraging sales, especially in the retail sector. However, its inadequate implementation in Brazil may generate conflicts and a high rate of labor litigation.

Therefore, it is crucial to adopt well-structured, clear, and transparent policies to strengthen trust between the company and its employees and minimize the risk of legal liabilities.

Check out the following five fundamental steps to developing an efficient and safe commission policy:

1. Define Company Goals: For the policy to be more effective, it is essential to define the sales objective to be achieved. If the goal is to acquire new customers, the plan may include bonuses for new contracts or acquisitions. If the focus is on retaining existing customers, reward recurring sales or contract renewals. The company can evaluate the definition of temporary campaigns, with a higher commission, for example, on certain products, based on stock volume or market strategy.

2. Define Objective Criteria in the Policy: Determine commission percentages applicable to each product or service, clearly detailing payment conditions and any exclusions, such as items on sale. Consider creating temporary commission campaigns based on market strategies or stock volume, always with transparent rules, especially regarding the duration of these campaigns. Also define whether the commission will be fixed, progressive, or calculated based on the profit margin, specifying whether payment will be made on the gross or net sales value.

3. Document and Communicate: Formalize the policy in a document that is accessible to everyone involved. Record awareness and acceptance of impacted employees. Train staff and inform them of any updates. Provide frequent feedback to the team on performance and results.

4. Comply with the Legislation: Include commissions into the calculation of vacations, 13th salary, FGTS (right provided for in Brazilian legislation), and advance notice, all duly reflected in pay slips. Based on Brazilian case law understandings, interest on sales financed in installments must be considered in calculating the commission, unless otherwise agreed between the parties. Additionally, commissions are due even in the event of default by the buyer or cancellation of the transaction, in compliance with legal rules.

5. Use Control Tools: Automate sales calculation and monitoring to avoid errors and discrepancies. Constantly review the policy to keep it attractive.

A transparent commission policy offers several benefits, such as reducing conflicts and labor risks, improving the work environment and employee confidence, increasing employee satisfaction and motivation, and increasing productivity. A clear and well-structured document also promotes alignment of interests, consequently helping in the development of the company's sales strategies.

Implementing and constantly reviewing the commission policy, based on the most recent court case law and legislative changes, reduces the risks of creating labor liabilities and helps identify growth opportunities in a constantly changing scenario.