Legal Insights From Brazil to Start Your Week

What you will be reading in this issue:

1. Corporate Governance?| 5 Governance Insights That CEOs and Controlling Shareholders in Brazil Need to Implement to Attract Investors and Lenders

2. Mergers & Acquisitions?| 5 Key Points to Watch Out in M&A and Venture Capital Deals in Brazil With Earn-Out Clause

3. Tax?| Fixed-Odd Betting Business Taxation in Brazil: Challenges and New Rules

4. Dispute Resolution?| Mere Configuration of Economic Group Does Not Authorize Disregard of Legal Entity and Extension of Bankruptcy, Says Brazilian Superior Court of Justice

5. Labor?| Attention to Brazilian Companies: The 'Saga' of Monetary Adjustment of Labor Credits

Corporate Governance | 5 Governance Insights That CEOs and Controlling Shareholders in Brazil Need to Implement to Attract Investors and Lenders

As condition for accessing credit and equity in BRL, US$ and Euro, Brazilian companies should implement solid corporate governance.

Governance is the set of management controls that aims to give confidence and transparency in corporate information, regardless of size.

In fundraising, governance provides lenders/investors with conditions to price the risk of disclosure, accountability and compliance of the borrower/issuer.

Below are 5 essential corporate governance items that should be required from Brazilian companies in fundraising process:

1. Audit of Financial Statements: Companies interested in raising funds from foreign banks, funds and investors must have their financial statements audited by an independent audit firm. This is the starting point;

2. Management Structure: The company's management structure needs to be well defined, with clear competences and powers. The idea of the “owner”, with unlimited powers, who can change the direction of the business at will, will certainly limit lender/investors interested in taking this risk. Governance structure, with powers for the Executive Team, Board of Directors (if any) and Shareholders 'Meeting/Partners' Meeting, is essential;

3. Professionalization of the Team: Lenders/investors pay much attention to the capacity/sophistication of the company's management, from the financial, commercial, operational, compliance points of view. There are countless cases of fundraising where managers misappropriated funds. Therefore, giving attention to the professionalization of the executive and managers’ team is an important aspect;

4. Corporate Documents: Investors are more and more observing whether companies in the process of raising funds have clear codes and policies for “good practices”, including (i) Code of Ethics and Compliance, (ii) Risk Management Policy, (iii) Remuneration Policy, (iv) Policy on Transactions with Related Parties, (v) Internal Regulations of the Board of Directors, Fiscal Council and Executive Team, (vi) Sustainability Policy, among others;

5. Succession and Relationship Between Shareholders: A point that is generally neglected, especially by family businesses, is the part of succession and relationship between partners. Having a structured succession process and a well-defined relationship between business controllers, through Shareholders Agreements, provides greater medium/long-term stability and results in a reduction in risk perception for lenders/investors.

With the increase in liquidity in the financial and capital markets in the post-pandemic, the corporate governance items listed above will be fundamental for companies that wish to be successful in raising funds.

Mergers & Acquisitions | 5 Key Points to Watch Out in M&A and Venture Capital Deals in Brazil With Earn-Out Clause

When we are negotiating a shareholding sale transaction the price is, obviously, the main topic. On the seller's side, the expectation of receiving the best valuation for the business developed is always high, and is often not aligned with the buyer, resulting in complex negotiations.

As a way to overcome this issue and equalize these expectations, it is possible to include a remuneration mechanism through an earn-out clause, in which the parties establish certain goals that, if achieved after closing the deal, will result in the sellers receiving a portion extra price.

As an example, we highlight 5 key points to watch out:

1. Objectively establish the relevant event: at this point, buyer and seller must make it clear what the trigger will be that will justify payment. Will it be achieving a certain growth target? Capturing a specific customer? Keeping salespeople in the business for a certain period of time after closing? There are many issues, and they need to be addressed from the beginning of the clause negotiation.

2. Company Management: this is perhaps one of the most relevant points to be observed. The management of the company, the way in which business will be conducted and, mainly, who will carry out this management is usually one of the points of greatest future dispute when sellers remain in the operation, and therefore deserves special attention in negotiation.

3. Clear metrics for determining the achievement of goals: In cases where the event is related to subjective data, the next step is to reflect in the clause how the evaluation or calculation of achievement will be carried out, including through the creation of formulas, avoiding any room for an interpretation that takes away the buyer's right to receive the extra installment.

4. Form of remuneration: many earn-out clauses include other forms of remuneration for sellers, and the price portion may be represented, for example, by receiving equity participation in another business from the buyer.

5. How will the participation in another company be constituted: in cases where remuneration does not occur through monetary payment, it is important to establish what the terms and conditions will be for receiving the installment. In the example given in item 3, in which participation in another business is granted, issues such as partners' agreements, non compete and non solicitation will also need to be negotiated in the earn-out clause, thus preventing the seller from ending up exposed in other businesses. or, even more serious, there is some impediment to receiving this portion of the shareholding.

Given the relevance of the topic for the closing of an M&A, it is essential that some care is taken when constructing this clause, which must be structured in a personalized way for each sales process, thus avoiding future discussions that could have a direct impact on the price of the deal.

Tax | Fixed-Odd Betting Business Taxation in Brazil: Challenges and New Rules

The sports betting market in Brazil has grown significantly in recent years, driven by technological advances and the popularization of online platforms. However, with this growth came an urgent need for effective regulation and taxation.

Law No. 14,790/2023 introduced several changes aimed at regulating the fixed-odds sports betting market in Brazil. In addition to allowing these companies to operate legally in the country, the new legislation imposes a series of requirements for betting platforms to establish themselves as Brazilian tax residents.

Here are the key taxes applicable to betting operations in Brazil:

1. Gross Gaming Revenue (GGR): A 12% tax on the gross revenue from bets, which is the total amount collected by betting companies after deducting prizes paid and income tax on winnings.

2. Corporate Income Tax (IRPJ) and Social Contribution on Net Profit (CSLL): Betting companies that are tax residents in Brazil are subject to a combined rate of 34% on profits (25% for IRPJ and 9% for CSLL).

3. PIS and COFINS: Betting companies are also required to pay PIS and COFINS, with a combined rate of 9.25% on gross revenue. The calculation basis for these taxes could be a subject of debate, particularly concerning what should be considered taxable.

4. Service Tax (ISS): Some cities have indicated they intend to apply ISS to betting activities.

The future of the betting market in Brazil is still developing but holds great potential for companies in the sector. Although there are regulatory and tax challenges to overcome, such as aligning with international practices and establishing clearer rules, the market also presents significant opportunities for growth.

Dispute Resolution | Mere Configuration of Economic Group Does Not Authorize Disregard of Legal Entity and Extension of Bankruptcy, Says Brazilian Superior Court

The Brazilian Superior Court of Justice (STJ) has recently established new parameters for the disregard of legal entity, a institute that allows creditors of a company to seek accountability for the assets of its partners or other companies in the group under certain circumstances.

The STJ's decision introduces a significant change for creditors: the mere existence of an economic group or the conduct of commercial transactions between companies is no longer sufficient to justify the disregard of legal personality.

To apply this measure, it is necessary to clearly and objectively demonstrate the existence of asset confusion or diversion of purpose. Asset confusion occurs when the assets of the company and its partners become so intertwined that it is impossible to identify ownership of each asset. Diversion of purpose is characterized by the use of the legal entity for purposes unrelated to its social objectives, to the detriment of creditors.

With this new guidance, creditors must be prepared to present robust evidence demonstrating the occurrence of these requirements. Simply alleging that there has been harm to the bankrupt estate will no longer suffice. It is necessary to clearly and objectively show how the legal entity was used to defraud creditors or divert assets.

This STJ decision provides greater legal certainty for business relations by defining the boundaries of disregarding legal personality. However, it is important to emphasize that the disregard of legal entity remains a crucial tool for protecting creditors, especially in cases of fraud and abuse.

Labor |?Attention to Brazilian Companies: The 'Saga' of Monetary Adjustment of Labor Credits

In recent years, the Labor Court has been the stage for intense debates about the criteria for correcting labor credits.

Historically, the Referential Rate (TR) has always been the official index, but this reality began to change with the proposal to adopt a more representative index, particularly the Broad National Consumer Price Index (IPCA).

The discussion gained new dimensions when the Supreme Federal Court (STF), in its ruling on the Declaratory Action of Constitutionality (ADC) 58, surprised everyone by deciding to adopt the IPCA in the pre-judicial phase and, from the filing of the action, the Selic rate. This decision paved the way for a new approach to the monetary correction of labor debts, as well as providing an opportunity to review labor liabilities.

Recently, the Specialized Section in Individual Disputes (SDI-1) of the Superior Labor Court (TST), under the report of Minister Alexandre Agra Belmonte, issued a new pronouncement in line with the changes introduced in the Civil Code by Law 14.905/2024. Let’s understand the main points:

1. Pre-Judicial Phase: Application of the IPCA-E, plus default interest (Article 39, caput, of Law 8.177/1991).

2. Judicial Phase (until 08/29/2024): From the filing of the action, the Selic rate will be applied, respecting any amounts that may have already been paid, according to the modulation established by the STF, prohibiting the deduction or compensation of differences arising from the previous calculation criteria.

3. After 08/30/2024: For calculating monetary updating, the IPCA will be used (Article 389, sole paragraph, of the Civil Code). Default interest will correspond to the difference between the Selic and the IPCA (Article 406, sole paragraph, of the Civil Code), with the possibility of non-application (zero rate), as stated in § 3 of Article 406.

It is important to highlight that the SDI of the TST aims to standardize theses in situations where there is still no consensus among the court's panels. Therefore, this decision represents an important milestone.

While this change seeks to standardize the monetary correction of labor debts, ensuring a uniform and transparent correction, companies will need to revisit their provisions related to these debts.