Introduction
Brazil remains one of the leading destinations for foreign direct investment in Latin America, and European investors, French investors in particular, have expanded their presence in the country through subsidiaries, acquisitions and joint ventures. The material risk in these transactions lies not only in the analysis of the business itself, but in the way the transaction is structured from day one. Decisions made at the structuring stage determine the level of exposure of the foreign parent company and of the Brazilian operation throughout the entire life cycle of the investment. This article outlines the main points requiring attention, from a legal standpoint, for foreign investors that are assessing or already conducting operations in Brazil.
Entry structures: subsidiary, acquisition and joint venture
Each way of entering the Brazilian market carries its own risk profile.
In the incorporation of a subsidiary (greenfield), as in the formation of a joint venture with a local partner, the predominant risk is a governance risk: in the joint venture, disagreement among the partners over strategic direction, future funding and the exit of one of them; in the incorporation of a subsidiary, the hiring of local officers and the definition of powers of representation and management authority. These risks are mitigated by a well-drafted quotaholders’ or shareholders’ agreement, which must set out clear decision-making rules, qualified quorums for sensitive matters, and exit and deadlock-resolution mechanisms among the partners (for joint ventures), and by the establishment and ongoing monitoring of governance policies (for subsidiaries).
In the acquisition of a Brazilian company (M&A transactions), the central risk is a different one: undisclosed or understated liabilities, which may pass to the buyer by succession. Prior due diligence, particularly on labor and tax matters, is the instrument that informs price, guarantees and the contractual structure of the transaction, and should not be treated as a generic checklist. The equity purchase agreement must accurately reflect its findings: attention should focus on the precision of the representations and warranties, the proportionality of the indemnification caps and claim periods to the risks identified, the drafting of the conditions precedent to closing and, where applicable, a holdback of part of the price or deferred payment tied to performance.
Choice of corporate vehicle
Once the entry structure has been defined, the next structural decision is the corporate form of the Brazilian vehicle. The two options most used by foreign investors are the limited liability company (sociedade limitada, or LTDA) and the corporation (sociedade anônima, or S.A.).
The LTDA is usually preferred in transactions of lower corporate complexity, given its simpler governance structure and lower maintenance cost. The S.A., in turn, is advisable where multiple investors are expected, where different classes of shares need to be issued, where a stock option plan for local executives is to be structured, or where an IPO or additional investment rounds are envisaged[1].
Beyond the choice between an LTDA and an S.A., a point frequently underestimated by foreign groups is the interposition of a Brazilian holding company between the parent and the operating business, instead of a direct investment by the parent in the operating company. This structure offers two practical advantages. First, it centralizes governance: if the group has, or comes to have, more than one operation in Brazil, the holding company works as a single point of control and decision-making, rather than the parent holding scattered interests in each company. Second, it facilitates partial divestment: the sale of quotas or shares of the holding company to a new partner does not trigger change-of-control clauses in the commercial agreements, licenses or financings of the operating company, which remains untouched[2].
Additional risks: compliance, data protection, regulatory and environmental
This article does not seek to exhaust the risk map of a foreign operation in Brazil, but rather to flag points of attention to the investor in order to facilitate the structuring of its business; the points below are therefore also addressed.
- On compliance, the central risk lies in the Brazilian operation’s dealings with public officials under Law No. 12,846/2013 (the Anticorruption Law), which provides for strict liability of the legal entity in the administrative and civil spheres. This risk is mitigated by integrity due diligence prior to closing, complemented, after closing, by an active compliance program within the Brazilian operation, with a whistleblowing channel, a code of conduct adapted to local circumstances, and periodic training. The existence of an effective integrity program is a factor expressly taken into account in the assessment of administrative penalties under the Anticorruption Law.
- On data protection, the central risk lies in the international transfer of personal data between the Brazilian operation and the foreign parent, governed by Law No. 13,709/2018 (the LGPD) and by ANPD Board Resolution No. 19/2024, which requires one of four mechanisms: an adequacy decision on the destination country, standard contractual clauses, specific clauses for exceptional situations, or binding corporate rules among group companies.
- On regulatory matters, regardless of the sector, the risk lies in treating licensing as retrospective due diligence on licenses already issued to the seller or to the existing operation, instead of building it prospectively into the initial structuring itself. Early identification of the sector authorizations and licenses applicable to the activity should be part of the pre-investment timeline, and not be treated as a post-closing formality.
- On environmental matters, the central risk is strict liability: pre-existing environmental liabilities may be enforced against the Brazilian operation regardless of fault, which warrants heightened attention in the due diligence of industrial, rural or agribusiness operations.
Management perspective
From a business standpoint, structuring the operation does not end at legal closing. Day-to-day governance of the Brazilian subsidiary requires a clear definition of powers of representation (who signs on behalf of the company, and up to what monetary limit), of the approval policy for expenses and investments, and of periodic reporting to the parent.
In this context, remote management of the Brazilian operation is, in practice, one of the greatest challenges faced by the foreign parent, especially in the first years of operation. Time-zone differences, language and negotiating style make day-to-day oversight from a distance harder, and widen the gap between the occurrence of a problem and its identification by the parent. This risk is mitigated by combining three elements: a trusted local manager, with autonomy and clearly defined decision-making limits; a structured reporting routine to the parent that goes beyond monthly financial reporting, including operational and compliance indicators; and periodic on-site visits, which complement remote oversight and allow the parent to form a direct view of the operation, and not only of the reported figures.
It is also advisable that the foreign investor assess, from the initial structuring stage, the internal controls applicable to third-party payments, supplier engagement and dealings with public officials, so that the Brazilian operation is born aligned with the parent’s internal control standards, and not merely compliant with the Brazilian legal minimum.
Practical recommendations at the pre-investment stage
Beyond legal structuring, the experience of foreign investors already established in Brazil points to certain practical precautions that precede the decision to invest and reduce execution risk.
The first precaution is to size up realistically the operational complexity, the entry costs and any infrastructure or market shortcomings in the relevant segment.
The second precaution is the investor’s physical presence in Brazil, even if only through occasional visits during the assessment phase: direct contact with the local market complements, and at times corrects, the reading obtained from a distance through reports and projections.
The third precaution is to surround oneself with the right people. This includes having one or more trusted local partners and seeking support from specialized legal, accounting and tax professionals before entering into binding commitments.
Conclusion
Reducing risk in foreign operations in Brazil does not depend on a single instrument, but on consistency among the choice of entry structure and corporate vehicle, the depth of the prior due diligence, the precision of the contractual drafting, the adequacy of the guarantees and of the financing structure, the applicable regulatory licensing, and the existence of compliance and governance controls consistent with the parent’s standards. Investors that treat the initial structuring as a strategic stage, and not as a formality, tend to navigate calmer waters in Brazil, with fewer liabilities and less friction, whatever their nature.
[1] For further information, see the article previously published by GT Lawyers at https://www.gtlawyers.com.br/artigos/limitada-ou-sociedade-anonima-como-escolher-o-tipo-societario-no-brasil/.
[2] The choice between investing directly from abroad or through a Brazilian holding company should be preceded by an analysis of tax efficiency.
