Acquiring a company in Brazil São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | João Paulo F. A. Fagundes Luiz Gustavo de Oliveira Ramos

General Information  Foreign and domestic investments in Brazil receive the same treatment, except for some specific statutory restrictions  Minimum amount is not required for foreign investments and investments may be paid in cash or goods  Brazilian Central Bank – Brazilian authority in charge of controlling the entrance, remittances and exits of capital in and out of Brazil São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

General Information  Foreign investments should be registered with the Brazilian Central Bank  The registration with the Central Bank entitles the investor to remit profits abroad and repatriate the invested capital  Legal representative residing in Brazil must be appointed in order to represent the foreign investor before Brazilian authorities São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

General Information Registration at Brazilian Central Bank: (i)has been performed electronically, through an online program, available at the Brazilian Central Bank’s website (ii)Invested company and non-resident investor, by its legal representative, are responsible for the registration of the investment São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Statutory Restrictions for Foreign Investments  Few restrictions to foreign investments  Restrictions are basically imposed on certain activities considered to be somehow of “public interest” São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Statutory Restrictions for Foreign Investments  Nuclear Energy Activities  Postal and Telegraph Services  Public Aviation Services  Assistance to health  Real state property in the Brazilian country side  Property and management of newspaper, magazine, radio and TV  Activities in the border zone, specially broadcasting services, mining activities, and real state properties São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Alternatives of Investments – Structures São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues Foreign Company invests directly in the target company Foreign company invests in the target company through a Brazilian subsidiary Most usual situation: investments through a Brazilian subsidiary

Usual Acquisition Structures São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues  Cash-for-stock acquisition – Brazilian subsidiary buys target company stock directly from its shareholders  Cash-for-Assets acquisition – Brazilian subsidiary buys all or part of target company’s assets

Structures – Cash for stock acquisition São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues  Company may succeed to labor liabilities of the target company in some circumstances

Structures – Cash for Assets acquisition São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues  Usual path to avoid all liabilities, including labor  For avoiding liabilities, only part of the assets constitute the object of the acquisition – Avoiding the transfer of goodwill

Consolidation São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues Subsequent to the stock acquisition, there can be some type of consolidation:  “Fusão” - two companies combine in order to form a larger and new company, which succeeds to the assets and liabilities of the merged companies  Upstream Merger – target company mergers into the Brazilian subsidiary  Downstream Merger – Subsidiary mergers into the target company

Alternatives of Investments – Downstream merger São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues Brazilian Law authorizes companies to carry fiscal losses indefinitely and to offset them against taxes up to 30 % of the profits in each year As a condition, the company with accumuled losses should survive – downstream Merger Because of a tax issue – downstream merger is the most usual type of consolidation

Types of Legal Entities Sociedade Limitada (“Ltda”)  Each partner's liability is limited to the value of his shares, but all of them are jointly liable for the payment of the capital stock  Very simple corporate structure, reduced costs, less formalities. Adequate for companies with few partners  Shares of a Limitada are not securities and any transfer of title over the shares will require an amendment to the Articles of Association São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Types of Legal Entities Sociedade por Ações (“S.A”.)  Each partner's liability is restricted to the value of his shares – there is no provision of jointly liability  Shares of a “Sociedade Anônima” are securities  Transfer of shares do not require an amendment to the Articles of Association São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Private Equity Investment Funds (FIPs) in Brazil  Incorporated and organized as a condominium, a form of joint ownership  Must be registered with the CVM (The Brazilian Securities Exchange Commission) and managed by entities authorized by CVM to manage securities portfolios  Minimum Investment required: 100,000 Reais (about US$ 53,000) São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Private Equity Investment Funds (FIPs) in Brazil  FIPs must invest only in the acquisition of securities  FIPs must participate in the decision process of the invested company and its management, by indicating members to the Board of Directors São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Private Equity Investment Funds (FIPs) in Brazil Advantages: FIPs allow certain tax benefits. Net earnings, including profits and capital gains, received by FIPs are tax exempted  Taxes are imposed only on the investors  Additionally, gains earned by foreign investors upon the redemption or sale of FIP’s quotas may be granted a zero % withholding income tax rate benefit if certain conditions are met São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Private Equity Investment Funds (FIPs) in Brazil Conditions to be met: (i) The foreign investor can not, individually or together with related parties, hold 40% or more of the quotas issued by the FIP (ii) The foreign investor can not, individually or together with related parties, hold the right to receive 40% or more of the total income generated by the FIP São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues Private Equity Investment Funds (FIPs) in Brazil (iii) FIPs’ net worth can not, at any time, consist of more than 5% of bonds, except for bonds convertible into government bonds or shares (iv) The foreign investors owning the quotas can not be resident in a country that does not impose income tax or impose it at a rate lower than 20% - tax heaven

Before acquiring a company – due diligence Due diligence: identifying, evaluating and mitigating possible risks involved in the acquisition It is essential to understand the legal environment in Brazil, especially regarding to the liabilities that may arise for the Buyer São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Succession Assignment of quotas/shares The target company maintains all its obligations, no liabilities being transferred to the buyer Merger The new company shall be successor of the pre-existing companies in their rights and obligations São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Incorporation The company which has incorporated the other one shall be its successor in all rights and obligations Spin out Obligations listed in the date of acquisition: the new or pre-existing company which acquires the spun out company is its successor Unknown obligations: the new or pre-existing company succeeds the spun out Company proportionally to the spun out Company’s net worth acquired São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Partner Liability In general terms, Shareholders are not directly responsible for the obligations of the companies they invest in, exception made to some situations set forth in Brazilian law However, the Shareholders as well as any related company may be found liable (i) if the Company has no assets to respond for all its obligations, and (ii) if there are indications of abuse of the legal entity (disregard of legal entity doctrine or “piercing the corporate veil”) São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Labor Liabilities The general understanding of the Labor Courts in Brazil is that the partners have subsidiary liability All companies of the same economic group are jointly liable for complying with labor obligations (Brazilian Consolidation of Labor Laws, art. 2º, § 2º) Additionally, it is important to note that labor courts understand that the companies are subsidiary liable for any labor debts of their service providers São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Labor One of the most concerning issue in a due diligence Brazilian labor law is complex and protective, and it provides many benefits for employees that are considered not negotiable A thorough analysis of the routines and procedures adopted by the Company is required for indentifying contingencies, especially unknown contingencies São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Labor Any agreement that implies services rendered on a personal, subordinated and steady basis may be deemed as a labor relationship Outsourcing requires special attention: If disregarded by the Labor Court, the contracting party must pay for all the benefits and contributions owed to employees, such as overtime, 13th salary, vacation, severance fund deposits, among others, as well as taxes São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Tax Brazilian tax legislation is complex and there are a large number of pulverized rules currently in force. We have 9 federal taxes, 3 state taxes and other 3 municipal taxes A comprehensive due diligence in a Brazilian company is essential to identify contingencies and credits of the Company, specially the hidden contingencies resulting from the routines adopted by the company and which do not represent a debt yet São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Tax Basically, the due diligence will require: (i)Analysis of the tax and social security’s routines adopted by the company (ii)Analysis of the company’s compliance with the different taxation regimes that exist in the country and with the different accessory tax obligations for each type of activity (iii)Evaluation of the debts resulting from tax assessments and lawsuits filed against the company for the payment of its taxes obligations São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Contractual and Commercial In some types of contracts, Brazilian law provides for outstanding fines and damages to be paid in case of breach or termination of contracts Brazilian law admits contractual provisions establishing the termination of the contract in case of acquisition of the company or modification of its corporate structure Nonnegotiable terms and conditions São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Contractual and Commercial Determination of the obligations that may be undertaken by the company and evaluation of the impact of the acquisition usually require special attention to contracts such as: Financing and loan agreements Distribution and sales representative agreements (the distributor and Sales representatives are overprotected by Brazilian Law) Agreements with Customers and Suppliers São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Litigation Due to the characteristics of the Brazilian Judicial System, obtaining all the relevant pleadings may be highly difficult Evaluation of the litigation materiality and its actual financial exposure is complex, especially in labor, contractual, customers and environmental issues São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Focal Points Litigation Even without relevant materiality, a lawsuit may jeopardize the deal if:  Poses an obstacle for the transfer of shares/quotas (ex., in case of attachment or seizure)  Indicates the contamination of the company by third parties’ obligations and duties São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Due Diligence Basic Check-list (i) Corporate documents, including Articles of Association and its Amendments, Minutes of Meetings of Shareholders Meetings, all registers made in the regional Trade Boards and any Shareholders’ Agreements (ii) Financial statements, list of all companies owned in whole or in part by the Target and corporate documents in connection with shares, quotas or interests held by the Target in any legal entity or venture, in Brazil or abroad (iii) Power-of-attorneys São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Due Diligence Basic Check-list (iv) Information about the investments and other data registered before Brazilian Central Bank (v) Claims - Issuance of certificates by several judicial and administrative authorities in cities where the Company has offices, such as Federal and State Courts with respect to judicial claims, registry offices for unpaid commercial papers, Social Security Agency in connection with social security taxes, Federal Revenue Service (“Secretaria da Receita Federal”) regarding federal tax and contributions, Labor Courts, among others (vi) List of all assets owned, leased or used by the Company and all correspondent documents São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Due Diligence Basic Check-list (vii) Any relevant contracts and documents involving debts owed by the Company, including loans, agreements with banks, commercial papers, mortgages, guarantees, collaterals (viii) List of clients and copies of all commercial contracts entered into with clients (ix) Outsourcing contracts, including agency, distribution, supply and service agreements São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Due Diligence Basic Check-list (x)All documents referring to the Company’s employees such as list of employees, employment contracts, trainee contracts, copies of the registers of the employees, collective bargaining agreements, certified copies of documents that prove the compliance with the labor law requirements and payment of any labor charges arising from the remuneration paid to the employees (xi)Insurance policies (xii)Documents related to intellectual property rights or duties, such as trademarks, patents, software São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

Due Diligence Basic Check-list (xiii) All tax and financial documents related to the last 5 (five) years of every tax and contribution imposed on the Company (ICMS, ISS, PIS, COFINS, IPTU, IR, INSS, among others) (xiv) Enrollment and registrations, as well as licenses and permits of each Company’s office and facilities São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues

RFOR - Rayes, Fagundes & Oliveira Ramos is a full service law firm recognized for its expertise and experience in representing and advising foreign companies and individuals in Brazil Counting on solid professional relationships and providing complete and customized solutions, with sophistication and profitability for its clients, RFOR performance is divided into three great spheres, Corporate, Litigation and Tax For further information, please contact: RAYES, FAGUNDES & OLIVEIRA RAMOS ADVOGADOS Rua Líbero Badaró, 425, 11th. floor – São Paulo – SP – Brazil - CEP Telephone: (55 11) / Fac-Simile (55 11) / Website: São Paulo - Rio de Janeiro - Belo Horizonte - Campinas | Acquiring a Company in Brazil Legal Issues