Memorandums of Understanding (MOUs) are widely used in M&As, Joint Ventures and commercial partnerships in Brazil.
MOU is a preliminary legal instrument for Brazilian law perspective, which summarizes the basic terms and conditions of the underlying project which, if moved ahead, will be the basis of the definitive contracts.
We list below 5 essential aspects to be considered in MOUs in Brazil:
1. Assessment of the Project: The MOU must contain in the initial part (i) what each partner will bring to the “table” (be it know-how, sales channels, operations, etc.), (ii) whether a team will be formed with employees of each party to validate the project’s feasibility, and (iii) the deadline for the results of the assessment to be presented to senior management for a decision on whether to proceed with the business;
2. Lock-Up: In MOUs where companies from different economic groups are evaluating a possible partnership, it is important to define whether, once the project does not go ahead, if one can contract with a third party and try to develop the same idea with it. If not allowed, the restrictive period is considered a “Lock-Up” and must be stated;
3. Exclusivity: Another relevant aspect in MOUs is whether there will be an exclusivity period between the partners for discussion, assessment and implementation of an identical or similar project (e.g. 90/180/360 days). After the stipulated period, the parties would be free to contact third parties;
4. Implementation of the Project: If the implementation of the project is approved, the partners must (i) commit to a deadline to negotiate the final contracts and operationalize the business (e.g. 90/120 days), (ii) the percentage of capital that will be contributed by to each one and which will consolidate its results, (iii) how the new business will be managed, (iv) the territory in which it operates, (v) the line of products and services, among other relevant points;
5. Important Legal Aspects: MOUs must always contain clear provisions on termination, confidentiality, prohibition or not of hiring employees of the other party, applicable law and conflict resolution.
Memorandums of Understanding may vary in form and substance to suit the sector and type of project under negotiation. Widely used by large companies accustomed to business in Brazil and abroad, they are gaining popularity among small and medium-sized companies, and serve to provide greater legal certainty for medium and long-term joint corporate and commercial projects.