In an acquisition, the price is only truly settled once the contract clearly defines who bears the contingencies that emerge after signing.
Some contingencies only come to light after the share purchase agreement is signed. Others, even when identified, cannot be accurately quantified during negotiations. In Brazil, this risk deserves particular attention: a complex tax system and an active labor court environment mean that contingencies can surface years after closing. For the buyer, the contingencies and indemnification clause is what separates a well-priced investment from an inherited liability.
These are the key points to consider when negotiating an acquisition:
1.Allocation of Liabilities: The starting point is defining who is responsible for each liability. When shares are acquired, the target company carries its entire history with it, and Brazilian tax and labor authorities will pursue the company regardless of what the parties have agreed. The contract does not eliminate the exposure. It determines who ultimately pays for it. Liabilities already identified may be assumed by the buyer, usually with an adjustment to the price, or shared with the seller according to their nature or when they arose. For those still unknown, the rule that best protects the buyer assigns to the seller any losses arising from events that occurred before closing, not just before signing. This avoids an uncovered gap between the two dates, a period in which the business is still under the seller’s management.
2. Indemnification Limits: Sellers typically seek to limit their exposure through a few mechanisms. A de minimis threshold excludes individual losses of small value. A basket conditions indemnification on losses accumulating above a certain amount. A cap sets a ceiling. There is also a deadline for claims to be made. On the buyer’s side, the negotiation is in the details. It is advisable to favor a basket that, once reached, triggers indemnification from the first dollar. Claim periods should also match the limitation periods of the liabilities of greatest concern. In Brazil, tax authorities generally have five years to assess taxes, and former employees may file claims up to two years after termination, covering the preceding five years of employment. A survival period shorter than these windows leaves the buyer exposed.
3. Holding Back Part of the Price: An escrow account places part of the price with a third party, available to cover losses that materialize. It makes sense when an identified contingency is significant or when the seller will have limited ability to pay in the future, as when selling shareholders distribute the proceeds among themselves. Funds are released to the seller in stages, as risks expire or as previously agreed triggers are met. For the buyer, it is essential that the amount, timing and release criteria be objective, leaving no room for dispute when a claim is made.
4. Prior Knowledge: A frequently overlooked point is the effect of the due diligence itself on the right to indemnification. If the buyer had access to certain information during the review, the seller may argue that the risk was accepted and priced in. Brazilian law offers no settled answer here, and courts tend to weigh the parties’ conduct in light of the principle of good faith, which makes the outcome hard to predict. The contract should state clearly whether the buyer’s knowledge excludes indemnification and specify which documents actually form part of what was disclosed. Without that clarity, the diligence carried out to protect the buyer may end up being used against it.
To put these points into practice, the agreement must set out the procedures for notifying and handling contingency claims, including who will conduct them, who will bear the costs and how court guarantees will be provided. This brings greater certainty to the parties and speeds up the resolution of disputes, which is especially relevant in Brazil, where court and administrative proceedings can run for years. Drafting an SPA is a highly complex process that requires a joint effort by the parties to align each of its provisions.
