Potential opportunities for distressed transactions in Brazil in view of the Brazilian Judicial Recovery Act
- Brazil
- 01/08/2010
- Azevedo Sette Advogados
Originally published on Financier Worldwide
The Brazilian market has experienced an important increase in M&A; transactions, Joint-Ventures and Foreign Equity investment during recent years. A constant and solid development resulted in a dynamic scenario for investments, despite the negative effects of the world crisis. Brazil’s corporate market has developed strategic areas in which investors from all over the world are increasingly interested in business and cross-border transactions. This increase has been motivated by several reasons including the effectiveness of the Federal Law # 11.101/2005, the Brazilian Judicial Recovery Act, which has an important role in restructuring companies in critical economic situation. This Act has updated the laws regarding companies’ bankruptcy and financial recovery in Brazil. It regulates the suspension of existing lawsuits against company and also that the company provides a Judicial Recovery Plan with the purpose of recuperating from the financial loss. It intends to offer to the company in distress an opportunity to recover from the collapse situation, making possible the maintenance of the operations of the company, employees’ jobs and creditors’ interests, allowing, this way, the preservation of the company, its social function and the encouragement for the development of economic activities in Brazil.
Numerous Brazilian companies have also been severely affected by the world crisis, although the impact was not as substantial in all sectors as was in other countries. According to Brazilian Central Bank reports, the two sectors in Brazil most affected by the crisis were automotive and financial. The crisis was especially felt deeply by Brazilian companies which exported to the international market, rather than those that supplied their products to the internal market. In this scenario, several opportunities for deals have arisen. It is worth mentioning the incorporation of a new company named “Brasil Foods” resulting from the merger of Sadia and Perdigão, two largest companies in the food processing business in Brazil.
Judicial recovery process
Certain Brazilian companies that could not obtain credit or renegotiate debts to keep operating were forced to apply for a Judicial Recovery Process, a type of arrangement with creditors, regulated by Federal Law # 11.101/2005. The Brazilian Judicial Recovery Act has updated the laws regarding companies’ bankruptcy and financial recovery in Brazil.
Although Law # 11.101 dates from 2005, its application by Brazilian Courts increased after 2008 due to the impact of the world economic crisis. According to research conducted by Brazilian Company Serasa, between January and June 2009, a total of 391 Judicial Recovery requests were filed before Brazilian Courts based on the rules of Law # 11.101/2005. This represents an increase of 185 percent compared to the first semester of 2008, when 137 Judicial Recovery requests were filed before Brazilian Courts.
Serasa advisers believe that the increase in the number of requests is due to mainly to the effects of the world crisis, which include: (i) reduced availability of domestic and international credit; (ii) a decrease in business activity and; (iii) the recession of highly developed economies. Among the 391 Judicial Recovery requests filed, there were 256 requests accepted in the first semester of 2009, which happens when the company requests the suspension of the Collection Lawsuits in order to plan its recovery from crisis. Also, in the first semester of 2009 there were 43 Judicial Recoveries conceded, which happens when the plan developed by the company is approved by the creditors and duly ratified by the Justice. This is a significant increase considering that in the same period of 2008 only six Judicial Recoveries were conceded.
Furthermore, the following persons may apply for a Judicial Recovery Plan in Brazil: (i) an individual businessman; (ii) companies incorporated under the laws of Brazil; and (iii) foreign companies with proper authorisation to operate in Brazil.
The debtor may only apply for a Judicial Recovery Plan in the event it cumulatively fulfils the following requirements: (i) the company develops its business activity for more than two years; (ii) the company was not in the process of bankruptcy; (iii) the company was not part of a Judicial recovery in the past five years; (iv) the company was not part of a Judicial recovery in the past eight years (in the case of smaller companies); (v) none of the officers or shareholders of the company were considered guilty on bankruptcy crime suits. In addition, article 50, II, of the Judicial Recovery Law sets forth mergers and acquisitions of companies and the assignment of the shares held by the debtor as possible methods of recovery, among others.
In addition, prerequisites for a company to apply for a Judicial Recovery are set forth on article 282 of Brazilian Civil Process Code and Article # 51 of Act # 11.101/2005, which are: the explanation of real causes of the current financial situation of the debtor and the reasons of the critical economic and financial situation; Presentation of the financial sheets regarding the 3 last financial years; presentation of the financial statements specially drafted for documenting the request of Judicial Recovery; List of the names of the creditors and details of each debt (value, origin, etc); list of employees and their respective enrollments; clearance certificate of the company issued by the registry of companies with the Articles of Incorporation and appointment of officers; list of particular assets of controlling shareholders and officers of the debtor (which is criticized by the doctrine ); bank extracts; clearance certificates issued by the notary; list of al judicial claims in which the company is a party along with an estimative of the amounts demanded.
Considering the changes in the Brazilian Judicial Recovery legislation and the main government initiatives for the development of business in Brazil, the current circumstances can present an advantageous platform to investment funds which may apply in direct acquisition of shares of Brazilian companies by means of private equity and venture capital, especially considering the post crisis phase. A recent study by Deloitte Touche Tohmatsu revealed that globalisation of the venture capital industry will intensify in the coming years, creating opportunities for emerging markets such as Brazil. Moreover, a PricewaterhouseCoopers report asserts that private equity is growing stronger in the current scenario and is a good alternative for resources achievement. So far in 2009, private equity investors participated in 24 percent of transactions in Brazil. They were particularly active the food and beverage, education, construction, logistics, entertainment, retail, electric energy, technology and finance sectors.
It is important to emphasize that Law # 11.101/2005 is considered flexible as it allows companies to use several structures to recover their business. For this reason, companies in the process of judicial recovery present an opportunity for M&A; transactions and foreign investments. According to the Judicial Recovery Act, a company in debt needs to present a detailed plan of recovery establishing the means it intends to follow for the purposes of recovering and paying its creditors. The plan of recovery may include, among other items, opportunities for M&A; operations or assignment of the company’s shares at a lower price. By means of a recovery plan, companies in the Judicial Recovery Process are able to decide on selling parts of their assets to investors excluding eventual debts, for example. A Recovery Plan also provides that the company’s current lawsuits are temporarily suspended for 180 days.
In summary, the world crisis has brought not only losses but also new opportunities for investments. Along with this scenario, the Brazilian Judicial Recovery Act has created grounds for investments – especially for small and medium sized companies – by private equity and venture capital funds, as well as strategic buyers.
Rachel Martins is an associate attorney at Azevedo Sette Advogados.
