By: Antonio Mazzucco and Luiz Gustavo Doles

At the time of any type of acquisition, it is necessary for the acquirer to protect himself to avoid a future discussion about the validity of the transaction.  

In this sense, it is necessary to carry out a procedure to analyze the documentation relating to the object being purchased and the seller, with the aim of mitigating the risks of the operation for the purchaser in good faith, which is why any capital market operation must be preceded by adue diligence. 

This survey is extremely important in “closed door” transactions, in which the company is sold as is, with all its assets and debts. In this case, a DD demonstrates in detail all the risk to which the buyer is exposed. 

This is a process that aims to protect the interests of both parties as the debts of the company to be acquired are transferred to its new owner.¹ and the debts of the transferor may contaminate the M&A transaction (the transfer or encumbrance may be considered fraud of execution in the event that proceedings are being carried out against the debtor, at the time of the transfer or encumbrance of the asset, an action capable of reducing it to insolvency²). 

It is very common for the “problems” associated with poorly performed or flawed due diligence to only appear long after the sale has been made, making it advisable to keep the process documentation for a period of at least 10 (ten) years.  

Due diligence is carried out based on the principles of good faith and transparency, i.e., it is assumed that the company being analyzed provides all the necessary documentation so that its status can be verified before the sale. In addition, objective good faith must be considered, which teaches us that society expects a certain standard of behavior from both parties. 

Is this information easily verifiable by anyone? Is it information that could hardly be identified even by specialized professionals? Such aspects may influence the decision of the judiciary or the arbitrator, since the seller cannot be blamed for not providing information available to the general public that is part of any M&A transaction and should therefore be verified by the seller, such as the company's registration with the CNPJ or the ownership of the company's website domain. 

However, it should also be noted that each party is responsible for its due diligence, including the type of information that is requested and how it is interpreted. Therefore, there is no way to avail of any legal measure related to DD for data that was not requested or that was misinterpreted.  

It is possible for companies to hide information or provide incorrect data with the aim of defrauding due diligence and selling the company for a price higher than its market value. 

Due to the sensitive nature of the information discussed in the DD and the impacts that its disclosure may have on the market, such discussion is often carried out via arbitration; however, this type of issue has already been presented to the judiciary. 

In this case, fraud in the DD may generate the right to compensation for material and moral damages, however, it depends on a series of assumptions. 

It is necessary to prove the bad faith of the company that offered the information and analyze the contract for the sale of equity interest, especially the clause representations and warranties, and possible fine clause, with the possibility of making several requests, including: 

1. Cancellation of the operation as a whole 

2. Price reduction 

3. Compensation for moral damages 

4. Compensation for material damage 

This occurred, for example, in appeal number 1002714-02.2016.8.26.0180 that was processed before the TJSP, which discussed whether or not there is a defect in the sale of a shareholding in the event of omission regarding tax debts. 

The appellants claim that the sale of the company was carried out fraudulently, as the sellers failed to disclose tax liabilities of more than R$1,000,000.00 (one million reais) generated by the adoption of “slush funds” that were only subject to tax enforcement after the sale of the company. 

There was a discussion regarding objective good faith, but the liability, in this case, was not recorded in the company's accounting books and the nature of the tax debts made it impossible to collect them at the time of purchase of the company. Therefore, there is nothing to discuss regarding objective good faith because it would be extremely difficult for the average person to be able to deduce the existence of the tax debt. 

Furthermore, M&A contracts usually have a clause indicating what is being purchased, including any liabilities. The absence of this clause or the finding that the statement does not correspond to reality may give rise to legal or arbitration disputes. 

Because of this, it is extremely important to do the due diligence, since it is through it that the purchaser in good faith will be able to gather all the information about the object of the purchase and the seller, thus mitigating the risks of the legal transaction, in addition to hiring a qualified lawyer for guidance and survey of possible risks involved so that the buyer can make an informed decision, aware of the real condition with which he is dealing, with complete and in-depth research and consultation to verify and elucidate the risks involved. The more precise and complete the examination is in the due diligence, greater legal certainty will be linked to the completion of the business.