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 transactions (“Mergers and Acquisitions”) cover the purchase and sale of shares and/or capital quotaparts of existing companies, direct investment represented by the subscription of new shares and/or capital quotaparts, as well as the conversion, merger, amalgamation and spin-off transactions.
Corporate transactions are mechanisms that enable entrepreneurs to optimize the management of their companies’ businesses, whether by way of tax planning, corporate restructuring and other procedures.
According to the Mergers and Acquisitions Bulletin of March 2019¹, disclosed by the Brazilian Association of the Financial and Capital Market Entities (ANBIMA), the volume of notices of mergers and acquisitions transactions in 2018, comprising control acquisitions, mergers and divestments of equity interest in Brazil reached the sum of R$177,2 billion, resulting in an increase of 28.0% compared to the year of 2017. In this period the mergers and acquisitions transactions were concentrated mainly in three market segments that represented 49.5% of the total amounts: Paper and Cellulose (26.9%), Energy (11.6%) and Technology and Telecommunications (11.0%).
Among the corporate transactions that were concluded, a prevalence of transactions involving the acquisition of Brazilian companies by foreign companies occurred.
In 2018, the acquisition of Brazilian companies by foreign companies transactions represented 53% of the corporate transactions, compared to 46,0% in 2017. Whereas the transactions between Brazilian companies came in second place, accounting for 43.2% of the total, the acquisitions between foreign companies targeting Brazilian companies and transactions of foreign companies selling to Brazilian companies corresponded to merely 0.10% and 3.8% of the total, respectively.
Accordingly, the participation of foreign companies and foreign capital in a large part of the corporate transactions that occurred in Brazil is clearly important.
It is important to mention that the corporate transactions involving foreign investment in Brazil are subject to electronic registration in the Central Bank Information System (“SISBACEN”), which is done through an electronic declaration registration (a.k.a. RDE-IED – “Electronic Declaration Registration – Direct Foreign Investment”), according to Brazilian law and detailed in a specific Chapter.
8.4.1. Types of corporate transactions – Lautenschlager, Romeiro e Iwamizu Advogados
Brazilian corporate law provides four (4) types of corporate transactions, namely: conversion, merger, amalgamation and spin-off.
The types of transactions are provided in Book II, Title II, Chapter X of the Civil Code and in Chapter XVIII of Law no. 6.404/1976.
Te merger, amalgamation and spin-off transactions of publicly listed or affiliated companies, according to Law no. 6.404/1976 are considered, as a rule, a relevant event that must be disclosed to the Brazilian Securities and Exchange Commission (CVM) and to the market.
In the merger, amalgamation or spin-off transactions carried out by limited liability companies, the creditors harmed thereby may claim in court the cancelation of the transaction in up to 90 days following the publication of the corresponding corporate acts (Civil Code, Article 1.122).
In the mergers and amalgamation transactions carried out by corporations, the term to claim the cancelation of the transactions is 60 days (Law no. 6.404/1976, Article 232). In the spin-off transactions carried out by corporations the term to claim the cancelation of the corporation’s spin-off is 60 days (Law no. 6.404/1976, Article 233, sole paragraph).
220.127.116.11. Conversion – Lautenschlager, Romeiro e Iwamizu Advogados
The conversion consists in the transaction through which a company is converted into another type of company, without change of its corporate structure and without its dissolution or liquidation.
This type of corporate transaction is not intended to change the corporate purpose or the business in which the company is engaged, but to meet interests of the company’s shareholders, who are fully free to pick the type of corporate structure that most fits the business that it carries out.
The conversion also does not imply in change of the legal entity, structure of shareholders or assets of the company.
Consequently, no succession of rights and obligations occurs insofar as the converted company continues to hold the same rights and obligations.
Furthermore, no change or harm occurs in relation to the creditors’ rights, who shall continue, until their credit is paid, to vest the same guarantees that the former corporate structure afforded to them.
However, the existing type of corporate structure is changed and the extent of the shareholders’ liability may change as well, depending on the original and the final type of corporate structure.
Therefore, in view of the possibility of change in the extent of the shareholders’ liability, coupled with the fact that the selection of the type of corporate structure lays in the free will and convenience of the shareholders, the conversion decision lays exclusively on the shareholders, except if the company’s articles of organization or by-laws establishes otherwise, observing that such a decision may not be challenged by any court of law or administrative authority. The shareholders that disagree with the conversion decision may withdraw from the company, according to the law.
Any type of corporate structure provided in the law may be converted, whether the company is a limited or unlimited liability company.
The conversion shall observe the rules that regulate the organization and registration of the new type of company: the Brazilian Corporation’s Law applies to corporations and partnership by shares companies and the Civil Code applies to the other types of companies.
18.104.22.168. Merger – Lautenschlager, Romeiro e Iwamizu Advogados
The merger consists in the corporate transaction through which one or more companies are absorbed by another company, which succeeds it in all rights and obligations. The company or companies that were absorbed become extinct and disappear, with its/(their) assets and liabilities passed on to the absorbing company. Accordingly, a universal succession of all rights and liabilities of the company(ies) that was(were) absorbed by the absorbing company occurs.
A merger may only occur between two or more companies, which may or may not have the same type of corporate structure.
The incorporation is a corporate transaction that is widely adopted in Brazil, having in view the high rate and increasing process of corporate concentration, that occurs via acquisitions or mergers of companies. Another reason for why the merger is widely adopted is strategic motivation, whether for synergy reasons, with cost savings, or to increase bargaining power or occupy new market segments, or, still, for tax reasons, in order to obtain tax benefits and advantages at the corporate income tax level, particularly in regard to the offsetting of tax losses of the merging company with the profits of the merged company.
The merger must be discussed and approved by both the shareholders of the absorbing company and the shareholders of the company(ies) absorbed, in a quotaholders’ meeting, shareholders’ meeting or by amending the articles of organization or by-laws, according to the regulations that apply to the type of company involved.
The shareholders must also approve the protocol of merger and justification of the merger and the appraisal of the equity capital of the company(ies) absorbed. The protocol of merger and justification of the merger must state the reasons or purposes of the merger and the company’s interest in the transaction, as well as the merger conditions. The main purpose of such document is informative, aimed at showing to the shareholders that the transaction should be carried out to meet the company’s interests. The appraisal report must state the method adopted to appraise the equity capital of the company(ies) absorbed, which may be accounting or economic methods, as well as the value that will be absorbed by the absorbing company.
If the merger involves a publicly listed corporation, according to the Brazilian Corporation’s Law the absorbing company must also be a publicly listed company, obtaining the respective registration and, if the case may be, promote the admission of the negotiation of new shares in the secondary market, according to Paragraph 3 of Article 223 of such law. The purpose of such rule is to prevent that a shareholder of a publicly listed company, pursuant to the transaction becomes a shareholder of a non-listed corporation, subjected to harm because of the decrease in the liquidity of its shareholding.
22.214.171.124. Amalgamation – Lautenschlager, Romeiro e Iwamizu Advogados
An amalgamation consists in a corporate transaction in which two or more companies unite to form a new company, which succeeds them in all of their rights and liabilities. Accordingly, the companies that previously existed become extinct and disappear, with the birth of a new company.
The amalgamation is a transaction that is not adopted much, once the creation of a new company would result in the obtention of new licenses and authorizations for the newly incorporated company, what depending on the type of activity and number of offices may be extremely bureaucratic. Thus, the merger transaction by way of the unification of two or more companies has been recognized as more beneficial (in detriment to the amalgamation) as it permits the fruition of tax benefits and advantages, without the need of opening a new company, being a procedure that is more practical and simpler than the amalgamation.
Similarly to the merger, the amalgamation must also be discussed and approved by the shareholders in a quotaholders’ or shareholders’ meeting, or by amending the articles of organization or by-laws, depending on the type of company.
Furthermore, the protocol and justification of the amalgamation transaction must also be approved by the shareholders of the companies involved, as well as the respective appraisals.
In addition, similarly to the merger, the protocol and justification of the amalgamation must state the reasons or purposes of the transaction and the company’s interest therein, as well as the amalgamation conditions. The appraisals must mention the appraisal method of the equity capital of the companies that are being amalgamated, which may refer to accounting or economic methods.
126.96.36.199. Spin-off – Lautenschlager, Romeiro e Iwamizu Advogados
The spin-off consists in the corporate transaction where a company transfers a part of its assets to one or more companies that already exist or that are organized for such a purpose.
Because it is broadly and flexibly regulated by the current legislation, the spin-off is very practical as it allows the structural change of the company so that its structure may be adapted to the company’s business development requirements. Accordingly, the spin-off may be adopted as a mechanism to dilute the original company, splitting its assets to other companies, enabling, inter alia, diversification of investment.
The spin-off may be complete, in which the transfer and absorption of all of the assets of the company spun-off to other companies occurs. In this case the company spun-off becomes extinct and disappears, with the succession of the rights and liabilities of the company spun-off by the companies that absorb the assets of the spun-off company, proportionally to the value absorbed. On the other hand, the spin-off is partial when only a part of the spun-off company’s assets are transferred to other(s). In this case the company spun-off continues to exist, with only a decrease of its corporate capital occurring, proportionally to the assets that were transferred to the other company(ies). The liabilities and rights not covered by the assets that were transferred and absorbed by the other company(ies) shall remain with the company that originally existed, that is being spun-off.
Article 233 of Law no. 6.404/1976 establishes that in the spin-off with the extinction of the company that was spun-off, the companies that absorb its assets shall be jointly and severally liable for the liabilities of the company extinguished. Moreover, the company spun-off that survives and those that absorb its assets shall be jointly and severally liable for the former’s liabilities that existed prior to the spin-off.
The partial spin-off corporate document can establish that the companies that are absorbing assets of the company spun-off are liable only for the liabilities that were transferred to them, with no joint and several liability between them or with the company spun-off, in which case any former creditor may object such a stipulation, in regard to its credit, provided that the company is notified thereon in up to ninety (90) days as of the publication of the spin-off corporate documents.
Similar to the merger and amalgamation transactions, the spin-off must also be discussed and approved by the shareholders, in a quotaholders’ or shareholders’ meeting or amendment of the articles of organization or by-laws, depending on the type of company.
The protocol and justification of the spin-off must also be approved by the shareholders of the companies involved, as well as the respective appraisals.
Likewise, the protocol and justification of the spin-off must state the reasons or purposes of the spin-off and the company’s interest therein, as well as the spin-off conditions. On the other hand, the appraisal must mention the appraisal method of the spun-off company’s equity capital, which may refer to accounting or economic methods, as well as the value that will be absorbed and transferred to the other company(ies).
2 Annex II. Item 1.4.
Lautenschlager, Romeiro e Iwamizu Advogados
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