The essential
1. A good consultant (in other words: taxation, taxation, taxation)
Nothing replaces a consultation with a good lawyer. The Brazilian corporate and tax laws are rather extensive and no one is better than a professional to assess whether the joint venture can actually be developed in Brazil and whether it is a feasible venture.
Above all, always check the total taxation in Brazil and in the capital’s country of origin. Take advantage of tax incentives and international agreements to avoid double taxation.
2. A due diligence
Never sign a definitive partnership agreement or a future partnership agreement without performing a due diligence to investigate the legal status of your future business partners.
If this is at all impossible, then make clear that the effectiveness of the partnership is subject to the legal regularity of all parties involved.
This due diligence should include an investigation of tax, social security, labor and civil debts as well as a research of lawsuits in which your future partners are involved. Many partnerships end up in trouble because the Brazilian party has too many unpaid debts.
3. Check the documents (don’t trust anyone)
Despite the mutual trust you and your partner might have developed, do always obtain official certificates which attest the information your Brazilian partner gives you. Such certificates should be requested in a manner that does not depend on your partner.
In case the joint venture depends on contributions in the form of real state, shares or quotas from other companies, you should obtain certificates which attest to said ownership.
Also, if you are joining a company which pre-dates your joint-venture, it is advisable to request and analyze the corporate documents filed at the Registry of Commerce (Junta Commercial) to assess the regularity of the venture.
Be a good boy scout and be prepared!
4. Intellectual Property and Confidentiality (really, trust NO ONE)
If your joint venture involves the development or transfer of technology, you should pay attention to the drafting of intellectual property and confidentiality agreements.
In special, if the technology is developed in cooperation, the partnership agreement should contain express provisions on who will hold the intellectual property of the product/process developed.
Note that Brazilian courts are usually unwilling to grant punitive damages. Because of that, whenever there is a breach in intellectual property and confidentiality agreements, the aggrieved party can often only recover the actual losses it is able to prove. Unfortunately, said proof is rather difficult to attain in cases which involve new technology.
A partial solution is to draft a “liquidated damages” clause in this kind of agreement. This way, you will be certain to receive at least a pre determined amount.
5. Real state ownership in Brazil (don’t trust the government)
Though the problem is still being discussed in Brazil, there are currently several restrictions to rural real state ownership by foreigners and Brazilian companies controlled by foreign entities. Accordingly, should your joint venture require the acquisition of large portions of land, you should pay attention to such restrictions.
Furthermore, since March 2011, the government has been blocking merger and acquisitions of foreign entities with Brazilian firms which hold ownership of rural real state in Brazil, alleging that such transactions are performed to circumvent said restrictions. As such, your joint venture might be blocked if it involves an M&A of a Brazilian entity which is a large landowner.
As I have mentioned on several occasions in this blog, there are ways to overcome these difficulties, mainly using shareholder’s agreements. However, the subject deserves careful analysis by a lawyer.
6. Brazilians only
In Brazil, foreign capital has restrictions in some markets, including: formal media (newspapers, magazines, TV and radio stations, among others), service providers for the public administration and domestic aviation.
If your joint-ventures intend to act in those markets, it is necessary to conduct a thorough analysis of the legislation to ensure that the partnership is structured without violating the Law.
Furthermore, keep in mind that foreign capital cannot participate in any enterprises which purpose is: the development of activities involving nuclear energy, the provision of health services and official mail services, and the manufacture of aerospace technology.
7. Management by non residents (you must trust your lawyer)
Only people living in Brazil, whether Brazilians or foreigners (in which case they need a visa which allows the person to acquire residency status, like the permanent visa), may participate directly in the management of Brazilian corporations. Accordingly, a foreigner may not formally manage its enterprise unless he/she comes to live in Brazil.
The only exception for the non-resident rule is the participation in the Board of Directors of a corporation. In this case, however, the foreigner must appoint an attorney-in-fact with powers to receive judicial notice.
8. Business and politics: contractual relations with the government and corruption issues
Pay attention to whether your partner has ties with the local or federal government. Though this may seem as an advantage, if your joint-venture wishes to obtain government contracts this might become a disadvantage. In Brazil, corruption is a pervasive problem, so the media and competent authorities are bound to interpret any ties with the government as hint of irregularity in bidding processes, which can put the company and its image at risk.
9. Labor and Social Security Contributions: subcontractors and outsourced service providers
In case your joint-venture will subcontract or outsource service providers, you should draft your agreements in a way that guarantees your joint-venture will not be liable for the contracts executed between the contractor and its employees or for the labor and social security contributions owed by these third parties.
In Brazil, it is rather common that employees of outsourced or subcontracted third parties sue the larger company (in case, the joint-venture), alleging that their employment bond has been transferred to this larger entity. They win most of the time. Don’t take the risk.
10. Brokerage and agency agreements (don’t trust third parties)
If you’re negotiating a joint venture by means of a broker or alike, pay attention to the brokerage agreement.
In many cases, these agreements contain clauses which hold your company liable if the broker’s commission due by your Brazilian partner is not paid.
11. Time is of essence? You wish.
The complaint I hear most often is that things take way too long to happen in Brazil. Companies take 6 months to be set up. Visas take 24 months to be issued. Environmental licenses take 3 years. Lawsuits take forever.
Don’t lose hope. Things are getting better, but slowly. The hard truth is that making money in Brazil takes time.
I have seen companies being incorporated in 10 days, but I have also seen companies being incorporated in 5 months. It all depends on many factors, some of which can be controlled, others that cannot.
For example: sometimes the public translators that can work with Chinese are overcrowded with work. This, alone, might cost the investor 3 weeks.
