M&A operations are an important strategy for companies looking to expand their operations into new markets. To this end, it is essential to carry out quality legal due diligence, which provides accurate information on which to base the decision to buy a shareholding.

In this case, we’ll tell you how Chenut advised a large European multinational that wanted to expand its presence in Brazil by acquiring a stake in a Brazilian company operating in a sector linked to sustainable energy generation.

CHALLENGES:

Important obstacles had to be overcome, in particular the need to conduct the due diligence in an agile manner so as not to impact the flow of negotiations. We fulfilled this requirement in two weeks, meeting the urgency requested by the client, thanks to the dedication of our team.

The complexity of the situation was amplified by the fact that the target company was also large, which meant that it had a vast amount of documentation to be thoroughly analyzed. Its presence in multiple states required the examination of liabilities in various locations, in addition to its considerable client portfolio and its large workforce.

In addition to the above challenges, the considerable documentation presented in the data room was incomplete. Several agency certificates were not provided and our questions about the inconsistencies identified in the documentation presented were unfortunately not properly clarified, which required additional research work on an emergency basis.

Given this scenario, it was also necessary to quantify the risks associated with not presenting certain documents, identifying those whose absence would represent an excessively high risk for our client, considering the nature of the target company’s business.

Finally, understanding the operational aspects of the business, the core business of the target company, was imperative for a complete and efficient analysis.

WHAT WE DID:

Our work consisted of understanding the target company’s business not only from a legal point of view, but also from an operational point of view, carrying out legal due diligence and preparing a report that covered all the areas relevant to the client based on extremely incomplete information that was made available in a data room, in a record time of two weeks. To do this, our teams worked in tandem and in an integrated manner, taking into account possible intersections between the various areas of law.

As an example, we can mention the existence of clauses in contracts signed with clients that required the presentation of regulatory licenses: although certain licenses were not required by law for the target company’s business, the lack of them could lead to the early termination of contracts, which was a point of attention to be reported.

Before starting the due diligence, we met with the client to understand what the main assets were that they were looking to buy. We were informed that the main interest was in the contracts the target company had with its clients, which were very profitable and long-lasting, and would guarantee significant revenues for years to come.

As these contracts were the target company’s biggest asset and the primary reason for the acquisition, it was important to access the possibility of their early termination by the clients in a demotivated manner, to map out which contractual breaches could give rise to early termination and other legal aspects that could impact our client’s decision to acquire the company, such as whether or not the clients would pay anything to the target company at the end of the contractual term, as a result of the high investments made in the construction of the steam plants.

In addition to analyzing the contracts with clients, we carefully evaluated the contracts with biomass suppliers, considering the scarcity of these suppliers in Brazil. It was essential to guarantee continuity of supply to ensure the viability of the business post-acquisition.

In addition, we carried out a comprehensive analysis of the target company, addressing labor, corporate, regulatory, environmental issues and potential tax liabilities or pending litigation, as usual.

RESULTS:

The results of the due diligence report were decisive for our client. Faced with the high legal risks identified – such as the possibility of valuable contracts being terminated by clients without receiving any compensation, as well as the existence of significant regulatory and environmental problems – the European multinational decided not to proceed with the acquisition.

The target company’s lack of cooperation in submitting the documentation was also seen as a warning sign, reinforcing the client’s decision not to do business with the target company, since the risks outweighed the intended advantages of the operation.