Legal due diligence is the organized investigation of a company, an asset or a partner before closing a deal, to uncover what may prove costly later: undisclosed debts, contracts that fall away on a change of control, labor and tax liabilities, regulatory issues and problems with real estate, personal data and intellectual property. The step that tends to be underestimated is the next one: what the diligence finds must become price, a condition or a clause. Diligence that ends in a filed report protects very little.
This is an insight piece: it combines the legal basis that guides the review, with statutes cited by number, and the way the firm conducts this work.
Why diligence is not a formality
In several situations, Brazilian law transfers to the buyer liabilities that arose before it came in.
- Article 1,146 of the Civil Code (Law No. 10,406/2002) makes the acquirer of a business establishment liable for debts prior to the transfer, provided they were properly recorded in the books, while the original debtor remains jointly liable for one year.
- Article 133 of the National Tax Code (Law No. 5,172/1966) makes whoever acquires a going concern or establishment and continues operating it liable for taxes owed up to the date of the transaction: in full, if the seller ceases the activity, or secondarily, if the seller continues or starts a new activity within six months.
- Article 448-A of the Consolidated Labor Laws (CLT), added by Law No. 13,467/2017, assigns labor obligations to the successor, including those incurred when employees worked for the predecessor, which is jointly liable only if fraud in the transfer is proven.
- Law No. 12,846/2013, the Anti-Corruption Law, preserves the legal entity's liability in mergers and incorporations and limits the successor's liability to the fine and full compensation for damage, up to the value of the assets transferred, except in proven cases of simulation or fraud.
In a purchase of shares or quotas, the logic is even more direct: the liabilities stay inside the acquired company, which now belongs to the buyer.
What to check, area by area
Corporate
Articles of association and amendments, chain of title to shares or quotas, shareholders' agreements, officers' powers, liens on equity interests and the group's control structure. The central question is whether the seller can sell what it claims to be selling.
Material contracts
Contracts with key customers and suppliers, financing, guarantees given, exclusivity, non-compete and, above all, change of control clauses, which allow the counterparty to terminate or renegotiate when control changes.
Labor and tax contingencies
Pending lawsuits, hiring models, payroll contributions, collective agreements and the risk of employment being recognized in contractor arrangements. On the tax side, clearance certificates, installment plans, assessments, credits taken and aggressive tax planning, reviewed together with the accountants.
Regulatory
Licenses, authorizations, permits and administrative sanctioning proceedings. In regulated sectors, the authorization may be the main asset, and it is not always transferable without the regulator's consent.
Real estate
Up-to-date property registry records, encumbrances, construction and zoning compliance, leases and property tax and condominium debts on the properties that matter to the operation.
LGPD and data protection
Legal bases for processing, contracts with processors, security incidents and governance. Law No. 13,709/2018, Brazil's General Data Protection Law, provides, among other sanctions, for a simple fine of up to 2% of revenue in Brazil in the last fiscal year, capped at R$ 50 million per violation.
Intellectual property
Trademarks registered or filed with INPI, the Brazilian patent and trademark office, software and source code, domain names and licenses. It is not unusual to find that the brand or the core system is held by a partner personally, not by the company.
Red flags
- Repeated refusal or delay in opening basic documents.
- Accounts that do not match the actual operation.
- Essential assets held by a partner or a third party.
- A key contract with a change of control clause and no consent obtained.
- Heavy use of contractor companies in typical employee roles.
- A license that has expired, been suspended or is subject to a sanctioning proceeding.
- A personal data incident with no record or documented response.
How diligence becomes a clause
The report only protects when it is translated into the contract. The most common tools are:
- Representations and warranties. The seller states facts about the company, and what the diligence found goes into the exception lists known as disclosure schedules. A breach of a representation allows indemnity to be calculated objectively.
- Indemnification. Defines who pays, for which losses, with a cap, a basket and a survival period for the representations, which for tax and labor matters usually tracks the statute of limitations.
- Holdback or escrow. Part of the price is held in a third-party account as security for future indemnities and released in stages.
- Price adjustment and conditions precedent. Quantified liabilities reduce the price; curable issues become conditions to closing, such as obtaining consents or regularizing a license.
In the firm's view, the right question at the end of the diligence is not what was found, but what each finding changes in price, timeline and warranties. Article 421-A of the Civil Code, added by Law No. 13,874/2019, presumes civil and business contracts to be on equal and symmetrical footing, which makes it all the more important to negotiate and draft the allocation of risk carefully.
When to do it and how deep to go
The right time is after the initial letter of intent and the signing of a confidentiality agreement, and before the final draft. Depth follows the deal: a purchase of control calls for a broad review; a minority investment or partnership can focus on the risks that actually affect the investor or partner.
How the firm can help
Oliveira & Jacobovitz conducts legal due diligence on acquisitions of companies and equity interests, investments and partnerships, bringing together corporate, contractual, labor, tax, regulatory, real estate and data protection work. We define the scope with the client, organize the document review, deliver a report with a risk rating and translate the findings into representations and warranties, indemnification, holdback and conditions precedent, following the negotiation through to closing. Each case is assessed individually, with no promise of outcome.
