Legal due diligence is an essential step in lending and M&A transactions in Brazil, aiming at the protection of lenders and investors.
In addition to the aspects regularly assessed, the assessment of reputational and credit risks has been gaining ground in due diligence in Brazilian deals.
See below brief points of attention to each of these risks:
1. Reputational Risk in Legal Due Diligence of Credit and M&A Transactions: One of the main aspects assessed in legal due diligence in Brazil is the reputational risk that lenders and investors may face after the transaction is closed.
Transactions whose borrowers/target companies, controlling shareholders, and guarantors are involved in potential investigations and proceedings for anti-competitive and corruption practices, environmental issues, child labor or slavery-like practices, have signed leniency agreements, are part of relevant litigation, among others, can negatively impact the image of financiers and investors.
Due diligence helps identify these points of attention prior to the signing and closing of the transaction, allowing lenders and investors to adopt preventive or mitigating legal strategies, or even to give up on moving forward with the transaction as a whole.
2. Credit Risk in Legal Due Diligence of Credit and M&A Transactions: Another point of legal due diligence that has gained the spotlight in credit and M&A transactions in Brazil is the assessment of legal risk combined with the credit of the target companies.
Following recent billion-dollar cases involving the accounting of receivables assignment transactions, lenders and investors are paying extra attention to the regularity of commercial and financial contracts, collateral offered that impact the balance sheet, receivables assigned and their accounting, and possible hidden liabilities that may compromise the company’s ability to pay.
The combination of these two risks – reputational and credit – reinforces the importance of legal due diligence in credit and M&A transactions.
