Portuguese
Mergers and Acquisitions: adaptation to Brazilian regulations
Companies have always been bought and sold since they had their own existence, distinct from the person of their members. This practice has become extremely used in other places given the volume of transactions and expansion of the economy of developed countries. This practice was called M&A – Mergers and Acquisitions.
Abroad, the practice and the large number of transactions of this type led to a sophisticated degree of specificity and a regulation of this sector. As the evolution and improvement of this market was happening, the negotiating companies felt the need to include in their contractual arrangements, in the so-called contract design, clauses such as sandbagiging, anti-sandbaging, Mac/Mae, specific clauses of limitation and forfeiture, among others.
Precisely because of this enormous international expertise, when the M&A segment began to flourish in Brazil, the natural tendency on the part of legal operators was to import the experiences already lived and minutes of foreign contracts, without a greater concern of comparing foreign institutes in light of our legislation. From feeling that in the United States, such clauses are well accepted in light of the Common Law system that has greater elasticity in the application of legal institutes as well as the principles inherent to that country – especially with regard to the constant search for the greatest possible economic freedom, full freedom to contract and marked respect for contracts. The same cannot be said with regard to our civil system, as codified legislation tends to have a much greater degree of intervention in contractual relations. Not that this is a defect, but a peculiar characteristic of our system.
Let's, therefore, explain in very brief lines, what each of these institutes exposed above would be and the reasons for difficulty in adapting its application before Brazilian legislation, not without first making an introduction to what is one of the biggest problems of M&A, which is the fixing of the price of the business.
On pricing in M&A transactions
One of the major issues pertaining to M&A, if not the biggest, is the pricing of a company. To explain: the controller or seller of a company prices it with all the data from their accounting and by knowing their line of business in detail, they know: the latest revenues, their main competitors, and have the latest market projections. In short, they dominate their business. On the other hand, the acquirer does not know the ins and outs of the company and sometimes does not even operate in the same line of business.
On the other hand, the parties may have a great interest in the deal, and setting an exact price at the time of sale is very difficult, precisely because of the information asymmetry between the parties at the time of sale. Therefore, the acumen of the negotiators leads the parties to close the deal, under certain price conditions, but defer part of the payment or the setting of the final price to a later time, when the acquirer, already in possession of the company, can fully assess the business and can agree on a price with the seller.
On the other hand, the seller always fears that once the baton is passed to the buyer, the latter may, due to inexperience or other reasons, not know their business, not know how to run it, and in a short time lead the company to a considerable decrease in its assets or an increase in liabilities, and consequently to a decline in the final sale price that was left to be adjusted at a future time.
In this scenario, as mentioned, the negotiators' acumen establishes a series of clauses as a way to try to alleviate these pains of the contracting parties and be able to reach a good agreement. Let's go to the first clause:
MAC/MAE Clause
1
Definition
One of these clauses is called MAC/MAE (material adverse change or material adverse effect) which consists of stipulating that between the closing of the deal and the final payment of the price, certain relevant factors or changes may occur that significantly decrease the company's price.
2
Application
These factors may be changes in the company, business risk, changes that are not under its control or not foreseen by the parties. The buyer may, then, if the conditions are met, make use of the referred clause and not conclude the transaction or renegotiate its terms.
3
Carve-out
The parties may also discriminate certain situations that would not fit the MAC/MAE concept and, therefore, the contract would remain valid and enforceable, this is the so-called carve-out.
At the current moment, the COVID-19 pandemic may be a factor to shake this market and provoke numerous MAC/MAE allegations, because if the pandemic occurs between the signing and the closing, it is unlikely that the parties would not use this clause to be able to review the price adjustment of the company given the world recession that we will possibly go through.

Finally, comparing it to our legal system, we have here the formulation of the theory of unforeseeability adopted in art. 421 of the Civil Code that establishes that in private contractual relations, the principle of minimum intervention and the exceptionality of contractual revision shall prevail. Therefore, even if exceptionally, judicial review of the contract is possible. Thus, probably the MAC/MAE clauses may be adopted as a form of impediment or not (carve-out) to the contractual revision as long as the hypotheses are expressly provided by the parties.
Sandbagging or anti-sandbagging
Another of these clauses pertaining to the M&A segment is the imposition of sandbagging. Through this clause, the parties stipulate in the contract that any deficiencies or inconsistencies in information may generate compensation for the buyer, even if the buyer has prior knowledge of the inaccuracy of the declarations. On the other hand, anti-sandbagging has the opposite effect of not allowing compensation, even with knowledge of inconsistencies. In the American system, the parties present lengthy declarations called "reps and warranties" during the negotiation, that is, information and documentation that allow an honest assessment of the current state of the company to be sold.
In our legal system, such clauses may present complications, especially regarding good faith, because if the party was aware of the inaccuracy of the information, why did they enter into the contract and then seek compensation based on those same inaccuracies?
Another aspect is bilateral fraud in light of Article 150 of the Civil Code, because if both parties proceed with fraud, neither can invoke it to annul the transaction or claim compensation – since one party makes an inaccurate declaration and the other agrees to enter into the transaction even knowing about the inaccuracy of the declaration thanks to the sandbagging clause, which would allow for later discussion.
Survival Clause
Finally, this type of clause, common in American contracts, establishes that certain matters remain valid even after the termination of the contract. Examples include so-called non-compete and confidentiality clauses that would continue to have effect even after the conclusion of the contract. However, such clauses can be seen, under our law, as accessory agreements to the main contract. In other countries, parties sometimes use these survival clauses to extend the term of certain contractual obligations, which may conflict with our legal system, which has inflexible rules of public order regarding limitation periods. Therefore, depending on the matter, eventual clauses may be invalidated in court.
Conclusion
Clause Import
In principle, we consider the attempt to import clauses or legal concepts from common law into our system in the context of M&A to be valid, due to the greater negotiating intensity and autonomy of the parties existing in some of these countries.
Necessary Adaptation
Due to the large number of deals and consequent problems arising therefrom, there has been a natural evolution of that system compared to ours when in the context of M&A. However, while such legal solutions are good for those countries, on the other hand, we have the challenge of acclimatizing these concepts to our legal system.
Risks of Non-Adaptation
And this almost always does not happen without problems. Thus, the mere translation of contracts without acclimatizing these concepts to our legal system can end up bringing more harm than benefits. Extensive contracts, with frequent regulation and with terms not adaptable to our system, can generate more conflicts than short contracts more common to Latins, accustomed to greater state intervention.
Relevant Jurisprudence
It is interesting to note the case brought up at the FGV M&A event (Oxbow Carbon Minerals Holding v. Crestview) in which the Delaware Court stated that the interpretive power of a court cannot use, for example, the principle of good faith to rewrite a contract and give greater contractual protection to one of the parties when the contract has an express solution for this. According to Prof. Levi-Minzi, interpretation cannot occur when there is no gap.
Final Thoughts
In fact, when we hear such a statement, we think we are facing a great novelty in which a Court did not interfere in a contract. We only forget that this has already been embedded as a legal brocard for centuries in our civil law system, which is: "in claris non fit interpretatio". The problem is that over the years and with the transformations of our society, we have forgotten the rigid principles that brought us here. Over time, legislation has become increasingly interventionist to meet the complexity and increase of social relations. The challenge is to seek Aristotelian balance, because the justice of the specific case is always good, but we must also not forget that the form guarantees against arbitrariness.