Avoiding Surprises in Brazilian M&A

November 2022

In recent years, most acquisitions and exits by international sponsors involving Brazilian targets have been routinely governed by Brazilian law. Recently, however, we are noticing New York and Delaware laws making a bit of a comeback in the Brazilian market. What is behind this trend? The comfort that foreign investors developed with transaction agreements governed by Brazilian law has a lot to do with the fact that these agreements are largely modeled on New York or Delaware forms. Indeed, agreements used by international sponsors for Brazilian deals typically contain provisions that are substantially identical to what would be used in a transaction involving a U.S.-based asset. But, do these provisions have the same legal effect when transplanted to a different legal system?

Unfortunately, it is difficult to provide a clear and definitive answer as to whether these provisions work in Brazilian context as they do in the United States. There are two reasons for this. First, most high-profile corporate disputes that arise under Brazilian law agreements are resolved in confidential arbitrations, making it difficult for market participants to access legal precedents and determine how provisions were interpreted. Second, because Brazilian securities laws do not require public companies’ disclosure of the most material agreements in their totality, data regarding market practice is not available, and each Brazilian firm develops its own view of what is market.

Brazilian legal practitioners and researchers have attempted to shed some light on two provisions commonly transplanted from U.S. to Brazilian M&A practice by analyzing a score of recent confidential arbitrations. The findings were presented and discussed at the 2022 M&A Conference of the Americas (MACA) held this summer in São Paulo. The conference was co-organized by New York University School of Law, the Law School of the University of São Paulo and Fundação Getulio Vargas (São Paulo) and was sponsored by Debevoise, PG Law and BTG. The two provisions examined—both central to U.S. deal making—were:

  • The provision stipulating that the contractual indemnity is the parties’ sole and exclusive remedy for claims relating to or arising in connection with the agreement; and
  • The “entire agreement” provision, which provides that the contract contains the entirety of the deal between the parties and limits their ability to bring evidence outside of its “four corners” to interpret it.

Below, we summarize the questions raised with respect to these two provisions.

Sole and Exclusive RemedyThe purpose of this provision is to assure the parties that the agreed-upon contractual indemnity will not be circumvented by recourse to other legal remedies that may be available at law. While it typically preserves the right of a party to pursue fraud claims, it otherwise ring-fences the parties’ tail risk, notably affecting the scope of its potential liabilities and related caps and deductibles. This provision is particularly critical in Brazilian M&A because representations and warranties insurance is rarely, if ever, available. Unfortunately, as noted by legal scholars and arbitrators at MACA, a sole and exclusive remedy provision governed by Brazilian law is vulnerable to being challenged in a dispute. Challenges have included “public order” considerations, such as good faith, and the contract’s “social function,” both contemplated in Brazilian statutory laws. Some challenges invoking the public order doctrine have argued that the sole and exclusive remedy provision could constitute an unenforceable advance waiver of a statutory right. In sum, these precedents suggest that a party relying on a sole and exclusive remedy provision in an agreement governed by Brazilian law may be exposed to risks that would not exist in a New York or Delaware-governed agreement. These considerations are particularly relevant to international investors preparing to exit their Brazilian investments.

Integration Provision. Equally central to the risk allocation embedded in acquisition agreements is the notion that, after signing, the parties are only bound by the “four corners” of the agreement if they have adequately negotiated an entire agreement provision. The goal of this provision in the U.S. is to avoid the admission into evidence of prior or contemporaneous communications between the parties outside of the contract, such disclosed materials, projections, term sheets, emails and so on. This provision ensures the application of the U.S. common law Parol Evidence rule, which bars such extrinsic evidence from being admitted if an agreement has been fully “integrated.” By including this provision in the contract, the parties “merge” their discussions into a single document, binding those discussions to its “four corners.”

Once again, the words on the page of a Brazilian law-governed agreement appear just as reassuring as those in an agreement governed by New York or Delaware law. However, the reality is more complicated. While it seems established that a party cannot use extrinsic evidence to challenge the agreement’s express terms, under Brazilian statutory rules, one could argue that such evidence should be used to construe the parties’ intent. Moreover, mandatory statutory provisions may not be subject to integration, and a party may deploy the same “public order” considerations noted above to challenge an integration clause and potentially other bespoke and financially significant provisions.

The cases discussed at MACA do not necessarily imply that United States and other foreign investors should always forgo having agreements governed by Brazilian law. However, it may be worth considering New York or Delaware law for more complex and challenging transactions where the nature of the assets being sold or the context of the negotiation may warrant additional caution and perhaps in exits where sellers are keen to limit tail risk and surprises. If, notwithstanding these cautionary tales, a foreign investor decides to accept the uncertainty of Brazilian law, there are still steps that can be taken, with the assistance of international counsel, to try to limit the potential additional exposure. The inclusion of targeted language in such provisions and strategic changes to the arbitration clause may provide a higher degree of confidence that they would ultimately be enforced.