8.1. Limited Liability Company – Pacheco Neto, Sanden, Teisseire Advogados
One of the most popular types of business entity in Brazil, currently representing 21.57% of the companies registered1 before the country’s commercial registries, the limited-liability companies (sociedade limitada, in Portuguese), regulated by article 1.052 et seq. of the Brazilian Civil Code, are largely consolidated by their use by Brazilian and international entrepreneurs. This type has several attractive advantages, to wit, limited liability of the partners, reduced setup and maintenance costs, no obligation of publication of organizational documents; and a possibility to use specific Joint-Stock Company rules, which may permit a more sophisticated management structure if partners or investors so desire.
Its capital is divided into quotas, between at least 2 members – although organization by a sole shareholder is currently under discussion, as explained below along with the one-member company types – and its operating rules are established in articles of organization (contrato social in Portuguese), a document that will identify who are the partners, the amount of capital, the address of the main place of business and branches, who are the directors and what are the management rules of the company, among other information. The articles of organization are freely amended upon consent of the members, with new amendments superseding prior decisions, and taking effect as soon as they are registered before the commercial register (Junta Comercial in Portuguese) of the State of the Federation where the company is established. There is a minimum obligatory annual resolution in limited-liability companies dealing with the annual approval of accounts and appointment of directors where applicable. Such approval of accounts is mandatory and must take place, pursuant to article 1.078 of the Civil Code, within four months counted from the end of the fiscal year, the numbers of which are the object of the resolution.
The management of the limited-liability company is carried out by at least one Brazilian individual or a foreign citizen resident in Brazil with a permanent visa. The appointment is made directly in the articles of organization or in a separate document. The directors may or may not be partners of the company. In the latter case, they may be removed from office at any time, in the event of an indefinite term tenure. Directors who are partners may only be removed by the majority of the capital, unless otherwise provided in the articles of organization.
A limited-liability company is a simple business entity type. As a general rule, it does not offer a sophisticated corporate governance structure, except for an Audit Committee (Conselho Fiscal), provided for in articles 1.066 et seq. of the Civil Code. This means that a limited-liability company is an associative type not intended for extensive capital-raising, neither to compose the interests of a large number of partners.
Despite the inherent simplicity and inappropriateness to raise funds as they do not have access to the capital market, the possibility of issuing bonds (Debêntures) by limited-liability companies is under discussion, notably after the publication of Normative Instruction 38 of DREI (Departamento do Registro de Empresa e Integração – Manual of Acts for Limited-Liability Companies2), pursuant to which a Limited-Limited-Liability Company may be governed secondarily by the Brazilian Joint-Stock Company Law (“Lei das Sociedades por Ações”), either by express provision or by the use of specific Joint-Stock Company mechanisms, provided that they are not incompatible with limited-liability companies. In an exemplary list, the following are defined as non-incompatible specific rules (i) treasury stocks, (ii) preferred stocks, (iii) board of directors, and (iv) audit committee. These provisions seem to leave partners free to decide what level of sophistication and governance they wish to implement.
8.2. Joint-Stock Companies (or corporations) – Pacheco Neto, Sanden, Teisseire Advogados
There are two subtypes of corporations (sociedade anônima, in Portuguese), also called joint-stock companies (sociedade por ações, in Portuguese): publicly-held corporations, companies whose securities are publicly traded on securities markets, or closely-held corporations, whose papers are not publicly traded, thereby operating similarly as limited-liability companies. A corporation’s capital is divided into shares, not quotas. It is governed by articles of incorporation (estatuto social in Portuguese), which may be freely amended by the controlling shareholders as often as necessary to accommodate the growth of the company.
Joint-stock companies also confer liability limited to the contributions of partners, as do limited-liability company. However, corporations are less used than limited-liability companies as it they tend to present higher management costs, chiefly due to the obligation to publish certain organizational documents – although a new regulation for the Brazilian Joint-Stock Company Law (by Law 13.818/19) is currently in force, waiving the requirement to publish a call notice and balance sheets for the closely-held corporations with less than 20 shareholders and with equity of up to R$ 10,000,000.00 (ten million Reais).
Despite its rarified use, a Corporation is a business entity type more suited to the development of businesses requiring a larger sum of capital, given its wide list of mechanisms for the raising of funds, and in addition, the possibility of using various types and classes of shares, which will be extremely useful when converting investments into equity, a typical situation when converting different rounds of funding in a startup, for instance. The corporation is a preferred mean for fundraising by investment funds, which have in their regulations the obligation to invest only in corporations, in light of their more sophisticated governance system.
As for money-raising instruments, in addition to the aforementioned bonds, the corporations may use Beneficiary Parties (Partes Baneficiárias), provided for in articles 46 et seq. of Law 6.404/76, which are investment instruments issued by the company and which guarantee their holder the distribution of profits. Subscription Warrants (Bônus de Subscrição), on the other hand, are provided for in article 75 et seq. of the Brazilian Joint-Stock Company Law, and consist of a right to acquire equity interest at a later time, pursuant to the term and price clauses and other provisions, according to the issuance certificate, of article 79 of said Law.
8.3. Other Types of Companies – Pacheco Neto, Sanden, Teisseire Advogados
Apart from the Sociedade Limitada and the Sociedade por Ações, single-shareholder partnerships are extremely popular in Brazil. Be it an Individual Micro Entrepreneur (MEI – Microempresário Individual, Law No. 123/2006, articles, 18-A et seq.), Individual Businessperson, Limited-Liability Proprietorship (EIRELI – Empresa Individual de Responsabilidade Limitada, article 980-A of the Civil Code), a One-Member Limited-Liability Company (Sociedade Limitada Unipessoal, in Portuguese) (Art. 1.052, §1º), single-partner types are practical and easy to organize. EIRELI complies with Limited-Liability Company rules, with the distinguishing factor of an obligation to have a minimum paid-in capital of 100 minimum wages. EIRELI may have only one member, including a legal entity, which may be foreign. However, an individual cannot hold title for more than one EIRELI. As for the one-member limited-liability company, it will comply with the rules of the limited-liability companies, and there are no restrictions on the participation of a legal entity or foreign member.
Unincorporated Joint Venture (SCP – sociedade em conta de participação, in Portuguese), a type provided for in articles 991 et seq. of the Brazilian Civil Code, is a widely used depersonalized type, being effective only among the partners, the registration of its documents before any registry does not confer legal personality, pursuant to article 993 of the Civil Code. It is a de facto corporation, spearheaded by a general partner (sócio ostensivo), who deals with and is fully obligated before third parties, and where the limited partners (sócio oculto) participate by investing and receiving the profits. However, such protection may be jeopardized in the event the silent partner engages in management practices (art. 993, sole paragraph).
Less widely used is the General Partnership (sociedade em comum, in Portuguese), or de facto corporation (sociedade de fato, in Portuguese), which is a depersonalized type, where the liability of the members is joint and several (article 990 of the Civil Code), and the company is evidenced by any means by third parties, but exclusively in writing by the members (art. 987). It is quite true that there is a great risk of the members’ personal property being involved in the event of company debts, which makes the type rarely used; on the other hand, it is a good temporary solution to start carrying out activities, since it does not engender organization and maintenance costs with bookkeeping or bureaucracy. The taxation of the partners will be pass-through.
In addition to the above, there are also minor corporate types such as limited partnership (comandita simples, in Portuguese) and limited partnership per shares (comandita por ações, in Portuguese), which are currently in disuse, ordinary partnership (sociedade em nome coletivo, in Portuguese), which resembles a de facto corporation, and the cooperative corporation (cooperativa, in Portuguese), which is always a partnership with specific form, of a civil nature, not subject to bankruptcy, and which are not intended for profit.
8.4. Corporate Transactions – M&A (“Mergers and Acquisitions”) – Lautenschlager, Romeiro e Iwamizu Advogados
M&A operations (“Mergers and Acquisitions”) include the purchase and sale of shares and/or quotas of existing companies, direct investment represented by the subscription of new shares and/or quotas, as well as corporate transformation, incorporation, merger and spin-off operations.
Corporate transactions are mechanisms that enable entrepreneurs to optimize the conduct of business business, either through the implementation of tax planning, or through business restructuring, among others.
Since the pandemic, the mergers and acquisitions (M&A) market in Brazil has gone through different phases. As in other countries, in 2020, there was a drop in the number of operations due to economic uncertainty. As of 2021, the sector showed a recovery driven by the reheating of the economy, reaching a record of values traded with 1,963 operations, and in Brazil the sectors that led the operations were the Internet, with about 34% of transactions and Information Technology (IT), with 18% of the business, with 65% of the volume traded in the Country.
For the year 2022, despite the recovery observed in 2021, the sector had a slight drop of 12% in operations, registering 1,728 transactions, which can be attributed to challenges such as the war in Ukraine, high inflation, and presidential elections, which followed in 2023, a year in which there was a drop of 13% to 17%, with a number of operations between 1,505 and 1,287, according to data released by KPMG and PWC.
Referring to the 1st half of 2024, according to the Mergers and Acquisitions Survey released by KPMG, Brazil registered 426 operations, which points to an increase of 17% compared to the same period of the previous year. The monthly report on the Brazilian transactional market published in July 2024 by the TTR Data blog tells us that Brazil moved around R$122 billion and that the largest number of transactions occurred on the Internet, Software & IT Services Sector, with 188 transactions. The United States continues to be the country that invests the most in Brazil, representing 40.6% of cross-border operations in the country until July 2024 and the Internet sector, which represents the largest number of transactions.
It is important to mention that corporate transactions involving foreign investments in Brazil are subject to electronic registration through the Central Bank Information System (“SISBACEN”), through an electronic declaratory record (called SCE-IED – “Foreign Capital Information Provision System for Foreign Direct Investment”), in accordance with Brazilian law and as detailed in a specific Chapter.
8.4.1. Types of corporate transactions – Lautenschlager, Romeiro e Iwamizu Advogados
Brazilian corporate law provides for 4 (four) types of corporate transactions, namely: transformation, incorporation, merger and spin-off.
The types of transactions are provided for in the Civil Code, Book II, Title II, Chapter X, as well as in Law No. 6,404/1976 – Brazilian Corporation Law, in its Chapter XVIII.
The merger, merger and spin-off operations of publicly-held companies or affiliated companies, pursuant to Law No. 6,404/1976, constitute, as a rule, a material fact that must be disclosed to the Brazilian Securities and Exchange Commission and to the market.
In merger, merger or spin-off operations carried out by limited liability companies, the injured creditors may plead in court for the annulment of said operation, within 90 days after the publication of the respective acts (Civil Code, article 1,122).
In merger and merger operations carried out by corporations, the deadline for requesting the annulment of the transaction will be 60 days (Law No. 6,404/1976, article 232). In the case of spin-off operations carried out by corporations, the deadline will be 90 days for annulment of the spin-off of a corporation. (Law No. 6,404/1976, article 233, sole paragraph).
8.4.1.1. Transformation – Lautenschlager, Romeiro e Iwamizu Advogados
Transformation is the operation through which a company moves from one type of company to another type, without changing its business structure and without that company being dissolved or liquidated.
This corporate transaction is not intended to change the business activity or the business developed, but to meet reasons of interest of the company’s partners, who have full freedom to choose the most appropriate corporate type for the development of their business.
The transformation also does not result in a change in the company’s legal personality, corporate structure or the company’s assets.
Consequently, there is no succession of rights and obligations, since the transformed company itself will remain as the holder of the same rights and obligations.
Furthermore, there will be no modification or prejudice, in any case, to the rights of creditors, who will continue, until the payment of their credit, with the same guarantees that the previous type of company offered them.
There will, however, be a change in the existing corporate type, and there may also be a change in the degree of liability of the partners, depending on the initial and final corporate type.
In this sense, in view of the possibility of modifying the degree of liability of the partners, combined with the fact that the choice of the corporate type is at the discretion and convenience of the partners, the decision on the transformation is exclusively up to the partners, unless the articles of association or bylaws of the company provide otherwise, and it is not possible for any judicial or administrative authority to question this resolution. Shareholders who oppose the resolution of transformation shall have the right to withdraw or withdraw, under the terms of the applicable legislation.
The transformation of the company can occur to any other type of company provided for by law, whether limited or unlimited liability.
In the transformation, the rules regulating the constitution and registration of the new corporate form to be adopted must be obeyed: the Brazilian Corporation Law for companies and limited partnerships, and the Civil Code for other corporate types.
8.4.1.2. Merger – Lautenschlager, Romeiro e Iwamizu Advogados
Incorporation consists of the corporate transaction through which one or more companies are absorbed by another, which will succeed them in all rights and obligations. The merged company or companies will be extinguished and disappear, and its assets and liabilities will be transferred to the acquiring company, which will succeed it in rights and obligations. Thus, there will be universal succession of the company(ies) acquired by the acquiring company, of all the rights and obligations of the former.
The merger will always occur between two or more companies, which may or may not adopt the same corporate types.
Incorporation is a corporate operation widely used in business practice in Brazil. Among others, this operation is widely used in practice for strategic reasons, whether for synergy reasons, through cost reduction, or to increase negotiating power or occupy new markets, or even, for tax reasons, for the purpose of obtaining tax benefits and advantages in the sphere of corporate income tax, especially with regard to the offsetting of tax losses of the developer with profits of the merged company.
The merger must be resolved and approved by both the partners of the acquiring company and the partners of the merged company(ies), by minutes of the meeting or shareholders’ meeting or by amendment of the articles of association, as provided for in the applicable legislation for the corporate type in question.
The partners must also approve the protocol and justification of the merger and the appraisal report of the net equity of the merged company(ies). The protocol and justification of the merger must contain substantially the reasons or purposes of the merger operation to be carried out and the company’s interest in carrying it out, as well as the conditions of the operation. The main objective of this document is informational, with the purpose of demonstrating to the partners that the operation must be carried out to meet the interests of the company. The appraisal report must mention the criteria for evaluating the net worth of the acquired company(ies), which may refer to book or economic values, as well as the amount that will be absorbed by the acquiring company.
It should be noted that if the merger transaction involves a publicly-held company, under the terms of the Brazilian Corporation Law, the acquiring company must also be a publicly-held company, obtaining the respective registration and, if applicable, promoting the admission of the trading of new shares in the secondary market, as provided for in paragraph 3 of article 223 of said law. The purpose of this rule is to prevent a shareholder of a publicly-held company, by virtue of the transaction carried out, from becoming a shareholder of a closely-held company, and may suffer damages as a result of the reduction in the liquidity of their shareholding.
8.4.1.3. Merger – Lautenschlager, Romeiro e Iwamizu Advogados
The merger consists of the corporate operation through which two or more companies unite to form a new company, which will succeed them in all their rights and obligations. Thus, previously existing societies are extinguished and disappear, with the emergence of a new society.
In practice, the merger operation is little used, since the creation of a new company would imply obtaining new licenses and authorizations in the name of the new incorporated company, which depending on the type of activity and the number of establishments can be extremely bureaucratic. Thus, the merger operation through the unification of two or more companies has been recognized as more beneficial (to the detriment of the merger), as it allows the use of tax benefits and advantages, without the need to create a new company, being a more practical and simple procedure than the merger.
The merger operation, as in the merger operation, must also be resolved and approved by the partners, in minutes of the meeting or assembly of partners or amendment of the articles of association, according to the corporate type. In addition, the protocol and justification of the merger must also be approved by the partners of the companies involved, as well as the respective appraisal reports.
Furthermore, as in the case of the merger, the protocol and justification of the merger must describe the reasons or purposes of the merger operation to be carried out and the company’s interest in carrying it out, as well as the conditions of the operation. The appraisal reports must mention the criteria for evaluating the net worth of the merged companies, which may refer to book or economic values.
8.4.1.4. Spin-off – Lautenschlager, Romeiro e Iwamizu Advogados
The spin-off consists of the corporate operation through which a company transfers a portion of its assets to one or more companies, already existing or constituted for this purpose.
Because it has been regulated by the legislation in force in a broad and flexible manner, the spin-off operation has a lot of practical use, as it allows the structural modification of the company in order to enable the adaptation of its structure to the requirements of the development of the company’s business. Thus, the spin-off can be used as a mechanism for decentralizing the original company, dividing its assets to other companies, enabling the diversification of investments, among others.
The spin-off may be total, when the entire assets of the spun-off company are transferred and absorbed to other companies. In this case, the spun-off company will be extinguished and disappear, and there will be a succession of its rights and duties to the companies that will absorb the net assets of the spun-off company, in proportion to the amount absorbed. On the other hand, the spin-off will be partial, when only the version to other company(ies) of part of the assets of the spun-off company occurs. In this case, the spun-off company will continue to exist, with only a reduction in its capital stock, to the extent of the net equity transferred to the other company(ies). The obligations and rights not related to the shareholders’ equity transferred and absorbed by the other company(ies) will remain with the initially existing company, now spun off.
Law No. 6,404/1976 stipulates in its article 233 that, in the spin-off with extinction of the spun-off company, the companies that absorb portions of its equity will be jointly and severally liable for the obligations of the extinct company. In addition, the spun-off company that survives and those that absorb portions of its equity will be jointly and severally liable for the obligations of the former, prior to the spin-off.
The act of partial spin-off may stipulate that the companies that absorb portions of the equity of the spun-off company will be liable only for the obligations that are transferred to them, without joint and several liability among themselves or with the spun-off company, and, in this case, any previous creditor may oppose the stipulation, in relation to their credit, provided that they notify the company within ninety (90) days from the date of publication of the spin-off acts.
As in merger and merger operations, the spin-off operation must also be deliberated and approved by the partners, in minutes of the shareholders’ meeting or assembly or amendment of the articles of association, according to the corporate type.
The protocol and justification of the spin-off must also be approved by the partners of the companies involved, as well as the respective appraisal reports.
Likewise, the protocol and justification of the spin-off must describe the reasons or purposes of the spin-off operation to be carried out and the company’s interest in carrying it out, as well as the conditions of the operation. On the other hand, the appraisal report must mention the criteria for evaluating the shareholders’ equity of the spun-off company, which may refer to accounting or economic values, as well as the amount that will be absorbed and transferred to another company(ies).
1 https://kpmg.com/br/pt/home/insights/2022/03/volume-fusoes-aquisicoes-alcancou-recorde-2021.html
3 https://fusoesaquisicoes.com/hr/fusoes-e-aquisicoes-caem-13-em-2023-diz-kpmg/
6 https://blog.ttrdata.com/relatorio-mensal-sobre-o-mercado-transacional-brasileiro-julho-2024/
Author: Nathalie Leite
Lautenschlager, Romeiro e Iwamizu Advogados
Av. Paulista, 1842, Torre Norte, 22º andar
01310-200 – São Paulo-SP
Tel.: (11) 2126 4600
Fax: (11) 2126 4601
E-mail: [email protected]
Internet: www.lrilaw.com.br
Fields of practice: contracts, mergers/acquisitions and auditing, corporate restructuring and reorganization, corporate Law, civil and commercial litigation, consumer protection law, labor law, social security law, tax law, among others.
Pacheco Neto, Sanden, Teisseire Advogados
Al Franca, 1050, 10th and 11th floors.
01422-001 – São Paulo-SP
Tel.: (11) 3897 4400
E-mail: administraçã[email protected]
Website: www.pnst.com.br