Brazil has escrow accounts!

I apologise for the excitement of the title. It is not often that I use an exclamation mark when I write about legal changes.

Let me explain the reasons for my enthusiasm.

As you may be aware, Brazil is not a common law jurisdiction, so equity and trusts do not exist as legal concepts – not in their original form, anyway. They have been imported into Brazil in piecemeal fashion: for instance, fiduciary duties that apply to directors of Brazilian corporations and security interests (liens) that apply over certain personal and real property.

Yet, Brazil’s Congress never imported the concept of escrow accounts – until now.

What are escrow accounts?

(If you are a common lawyer, you can skip this part.)

Escrow accounts are accounts where money or other assets are held by a neutral person (the escrow agent) who will only release them upon some event occurring or not occurring.

Escrow accounts are commonly used in financial transactions around the world, mainly in mergers and acquisitions (especially those involving earnouts), project finance and real estate purchases. Assets held in escrow are treated as segregated from the parties and from the escrow agent – the assets are tied to the terms of the escrow agreement, which sets out the conditions that need to be met for the funds to be released.

The escrow agent acts as a trustee, thus owing fiduciary duties to the parties, and has the job of determining if the conditions set out in the escrow agreement have been met or otherwise.

Until now, how did parties set aside funds in transactions subject to conditions?

Different strategies were used for different types of transactions, but they often involved either an obligation on a party to take certain steps or having an account held by both parties at a bank. Unfortunately, many demanded court proceedings, especially where a party refused to take the steps set out in the agreements (say, signing documents for the transfer of shares or informing the bank that the conditions were met).

Importantly, these funds were not considered segregated from the parties and were often the target of creditors (including tax authorities and former employees, these being the largest source of contingent liabilities of Brazilian companies), leading to time-consuming and expensive court disputes.

Escrow accounts now exist in Brazil. How will they work?

On 31 October 2023, article 7-A was added to the Notary Offices’ Law. Paragraph 1^st of the article provides that:

• the notary public can hold funds relating to the transaction;
• the funds must be deposited in a separate account in an accredited financial institution approved by a national notaries public representative body;
• the funds held in the account will be considered segregated (not being subject to seizure by courts or tax authorities due to the depositor’s, the parties’ or the notary public’s obligations other than as provided in the escrow agreement); and
• the funds will be transferred to the party owed upon the occurrence or non-occurrence of the applicable negotiated conditions.

Additionally, the article provides that notaries public may “certify the occurrence or non-occurrence of conditions and other negotiation elements”. This power is granted to notaries public on a non-exclusive basis, which means that these powers may be assigned to others.

Hence, the article 7-A makes it clear that notaries public can be escrow agents (trustees) and may also act as adjudicators, but the parties can choose others to make those decisions.

Finally, at the request of the parties, notaries public can provide written statements about the occurrence or non-occurrence of a condition. A statement written by a notary public carries substantial weight before Brazilian courts and arbitrators.

Practical issues about Brazilian escrow accounts

Brazilian notaries public are highly qualified and must pass an extremely competitive entrance examination (they are very different to their American counterparts). They are generally well-remunerated and conservative in their interpretation of the law. Hence, the escrow agreement needs to be very well-drafted and minimise the chances of dubious interpretations.

Due to key-person risk, the parties should consider having alternate notaries appointed in the escrow agreement in case the notary appointed dies or becomes incapacitated. This is important because notaries public are often of advanced age, as they do not have a mandatory age of retirement.

It may be possible for experts to be appointed to advise the notaries public on specific conditions (for instance, the completion of a certain milestone). This may even include clauses to have expert boards or arbitrators to decide specific issues.

Finally, a notice procedure with specific times, content and mode of delivery should be included in the escrow agreement to ensure that all parties are aware that a condition has been met. This will prevent delays caused by an overzealous notary public.

Questions?

Contact me if you would like further information. My firm is ready to assist you.

Brazil Brazilian trusts Corporate law Escrow Escrow account Escrow agent Mergers & Aquisitions Trust

Last modified: 11 November 2024