1/5/2022
On November 23, 2021, another edition of the Finance & Law Summit Awards (“FILASA”) was held in São Paulo. The event, which brings together leaders of the legal and financial markets, aims to discuss relevant topics to these two worlds that are so closely connected.
The partners from L.O. Baptista Advogados’ Dispute Resolution area, Dr. Tonico Monteiro da Silva and Dr. Silvia Rodrigues Pachikoski, took participation in the conference, in a panel focused on the discussion over the prevention of adverse effects in mergers and acquisitions, as well as its repercussions in arbitration proceedings. The debate also had the participation of Dr. Marcia Sato[1] and Mr. Paulo José de Carvalho[2], who brought to the agenda the enlightening vision of the company and the auditor/expert.
The discussion addressed several issues of utmost relevance to the business practice, which deserve great attention from all players in the market: companies and their representatives, arbitrators, and judges who are involved in disputes related to corporate transactions.
The first highlighted point was the importance of having a consistent contract, not only for the operation itself, but especially to protect rights between the signing phase, when the operation becomes binding, and the closing phase, that is, when the transaction is carried out, because it is in this meantime that many of the identified problems occur.
In fact, the pre-closing[3] phase also reveals great tension between the parties, due to the need to comply with the agreed precedent conditions, in such a way that contracts negotiated in an imprecise manner often give rise to disputes, which is why the dedication to the negotiation phase and to the drafting of the contractual instrument becomes indispensable.
In this scenario, possible paths were discussed both for the success of mergers and acquisitions, as well as for the maintenance of the companies’ activities until they become effective.
Initially, the relevance of identifying and listing the business’s game-changers was mentioned, aiming to map and thus prevent adverse situations from occurring between the commitment of the purchase and the effective sale, as well as to ensure that the seller has the conditions to manage the company properly, without its plastering making the business unfeasible.
It was also mentioned that when the time lapse between the signing and the closing is too long, the buyer generally cannot have any influence over the business. However, regarding certain day-to-day situations, what is understood as the “ordinary management” of the companies, the importance of the parties agreeing legally on the matter was addressed, in order to avoid that, at closing, the situation between both parties is worn out to the point of preventing the transaction.
Furthermore, the creation of a transition committee was listed as a good possibility, to ensure compliance with the conditions precedent to the closing of the operation, which would be subject to rules pertaining to the interests of the company, in order to avoid that, on the closing day, the transition takes place abruptly or causes a disruption in the acquired company’s operations.
It was also mentioned the possibility, still experimental, of assembling a dispute board, which is a committee for the resolution of discussions and/or disputes, with a recommendation function, neither binding nor definitive, as an alternative to ensure that the passage between the companies occurs in a harmonious manner. However, even if this hypothesis brings alternatives to the judiciary/arbitration, it was mentioned the possibility of the issue’s re-discussion, including in arbitration, which can be a problem.
Regarding the post-closing period, when it involves payments in installments, for example, or when the purchase occurs only from the control of the company (and the seller remains in the operation) or the payment is linked to cash generation, auditors may be hired for this management and control. However, it was also highlighted that bringing this possibility to the period between pre-signing and closing could prevent adverse effects that are usually taken to arbitration.
The possibility of creating a transition management office was also discussed, with designated participants from both parties, destined to hold periodic meetings to ensure the success of operations that involve taking many steps.
Having dealt with the pre-litigation issues, the next step is to address the relevance of the arbitration clause’s draft. On this occasion, one should consider the choice of the arbitration institution, having in mind the contractual position of each party, the body of arbitrators, as well as the costs involved in the procedure, since, when poorly drafted, the instrument can generate adverse effects for the procedure itself, especially when dealing with a dispute involving different jurisdictions.
Finally, the profile sought by companies when choosing lawyers to assist them in M&A transactions was discussed. In this opportunity, the relevance of the professional’s expertise and ability to know the subject and the business was mentioned, due to the complexity that embodies this type of transactions; and also, the willingness to accompany the operation from the beginning to the end, that is to say, from the pre-contractual phase to the resolution of any dispute.
From the above, one can see the relevance of FILASA in shedding light on points of attention in M&A contracts.
[1] Lawyer with more than 20 years of experience in corporative law. EMBRAER’s Legal Executive Director.
2 Bachelor’s in Accounting, FGV’s specialist in controllership, with more than 30 years of experience in internal audit. Partner in PP&C Auditors.
[3] Pre-closing or post-signing, moment in which the Contract is already signed and fit for compliance to certain obligations.
