The essential Corporate Law in Brazil (i) Limited Companies

These are the highlights if you want to know the essential of foreign direct investments in Brazil.  This entry was drafted by L.O. BAPTISTA ADVOGADOS ASSOCIADOS  for “E-IURE COMPENDIUM” 2018. Link to e-IURE Network.

This collaboration is a brief step-by-step guidance. In no case it can be considered as legal advice. If you want -or need – legal advice, ask for a lawyer or a law firm. In that case “L.O. BAPTISTA ADVOGADOS ASSOCIADOS” is an excellent option if you are looking for legal advice in Brazil.

Brazilian law provides for different forms of association for the conduct of economic activities geared to the production or circulation of goods and services. Among the most usual are the corporation (“Sociedade Anônima S/A”) and the limited business company (LTDA), which are both subject to registration at the Commercial Board (“Junta Comercial”).

Limited Companies (LTDAS)

Limited Business Companies are created under articles of association which must provide for, among other things, the company’s objectives and capital stock and the ownership interest of each partner. Generally, a Limited Business Company can perfectly operate a subsidiary whose capital is controlled or fully owned by foreign entities and/or individuals. They are particularly fit for smaller businesses. In forming the business relationship within a Limited Business Company, partners are given more freedom, including with respect to the distribution of profits. They are governed by their articles of association and by Law 10406/02 (Brazilian Civil Code). The registry is fullfilled when registered at the Civil Registry of Legal Entities (Registro Civil das Pessoas Jurídicas).

PARTNERS: minimum of 2.

Share (Quota) Capital

The capital can be paid with currency or assets. An initial payment of a minimum amount of capital subscribed in currency is not required. The capital is divided into ideal parts (“quotas”) with a par value. The owner of a “quota” cannot be deprived of voting rights. Capital increase: only permitted after all the shares have been paid up. The pre‑emptive rights of the partners to participate in the increase must be observed, in proportion to their holdings. Capital reduction: The capital may be reduced by a corresponding change in the articles of association: (i) following payment, if there are irreparable losses; (ii) if excessive in relation to the company purpose. Transfer and assignment of shares: the transfer to third parties of shares or of the pre‑emptive right to participate in capital increases requires the approval of partners representing at least 1/4 of the share capital (except if the articles of association determine otherwise). There is the need to change the articles of association.

Liability Of The Partners

Limited to the amount of the partner’s ownership interest; however, all partners are jointly liable for the payment of the capital. The same provisions contained in the item “Liability of Shareholders”, chapter SHARE CAPITAL in S/As, above, apply to LTDAs, in so far as the liability of partners is concerned. Moreover, the partners are jointly and severally liable for debts with the social security authorities, as well as for labor credits, as a result of the application, in these specific cases, of the ‘disregarding the corporate entity’ theory.

Administration

One or more individuals who may be a partner of the company or not, provided that they are resident in Brazil. Appointment can be made either in the Articles of Association or in a separate document. The management structure (the existence of both the Board of Directors and the Board of Officers, or only the Board of Officers) must be defined in the Articles of Association. The designation thereof requires the unanimous approval of the partners (when the capital is not totally paid up) or of partners representing 2/3 of the share capital (when the capital has been paid up). Removal of a partner administrator: requires approval by partners representing at least 2/3 of the share capital. Remuneration: there is no minimum amount or maximum limit. The participation of partners in the company profits, in a different proportion to the partners’ interest in the share capital is an option, provided that the Articles of Association or the partners’ agreement so allows Transformation of the company type, merger, merger by incorporation of companies and spin-off are allowed. Generally, no publication is required. Publication is required in the following cases: (a) call of a Meeting of Partners (for companies with more than ten partners); (b) minutes of the meeting of partners approving a capital reduction; and (c) balance sheet, economic results statement and management resolutions of any foreign company. The responsibility of the administrator of a LTDA before third parties, in principle follows the previously made comments applicable to the administrator of a S/A. However, in practice the administrators of LTDAs are being held to answer in the labor and social security field, jointly with the company, regardless of the cause of the event.

Resolutions

The law requires (i) 100% of the capital for appointment  of  an   administrator who is not a partner of the company, whenever the capital stock is not fully paid; (ii) 75% of the capital: (a) amendment to the articles of association; and (b) mergers, mergers by incorporation of companies, dissolutions and end of liquidations; (iii) 2/3 of the capital: appointment of an administrator who is not a partner of the company, whenever the capital stock is fully paid; (iv) More than half the capital: appointment of an administrator (in a separate document), his removal and remuneration, as well as any request for court-supervised reorganization; and (v) Simple majority for other matters provided for in the law or the articles of association. The Articles of Association may require higher quorums for specific matters. The decisions of the partners shall be taken in a partners meeting (for LTDAs with up to 10 partners) or in a general partners’ meeting (for LTDAs with more than 10 partners). If omitted from the articles of association, the legal rules that discipline the general shareholders meetings of S/As will apply to the meetings. Securities cannot be traded on the stock market as a means to raise funds. This could only happen if the Company is transformed into a publicly held Corporation.

Exclusión Of Partners

The law provides for the possibility of the non‑judicial exclusion of a partner who jeopardizes the continuity of the company, by virtue of acts of undeniable gravity, as resolved by the partners representing more than half of the share capital, as long as the articles of association provide for exclusion for good cause and the legal procedures are observed.

Financial Statemente

Generally, no publication is required. Publication is required in the following cases: (a) call of a Meeting of Partners (for companies with more than ten partners); (b) minutes of the meeting of  partners  approving a capital reduction; and (c) balance sheet, economic results statement and management resolutions of any foreign company. Nevertheless, large-sized limited business companies are required to have their financial statements published. Large-sized companies mean a large- sized company or group of companies under common control whose assets exceeded BRL 240 million or whose gross revenue exceeded BRL 300 million in the preceding fiscal year.

Choice

With the provisions brought by the new Civil Code, many of the advantages that previously existed for LTDAs have disappeared, notably their structuring flexibility. This should lead to greater reflection in regards to the choice of company type: LTDA or S/A. The choice will depend on each specific case, but by and large, one may say that LTDAs work very well for the operation of subsidiaries whose total quota capital is held by foreign companies, whereas possible joint ventures in Brazil should elect for the adoption of a S/A, owing, among other things, to the legal security conferred by the already officially accepted interpretation of the rules that govern this type of company.