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Company Law - Brazil

Universit à di Roma – La Sapienza Master in Diritto Privato Europeo e della Cooperazione. Company Law - Brazil. Prof. Francisco Satiro email.: f.satiro@usp.com f.satiro@uol.com.br. Agenda. Models of entities in Brazil Managers’ duties and liabilities Shareholders’ liabilities

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Company Law - Brazil

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  1. Universitàdi Roma – La Sapienza Master in DirittoPrivatoEuropeo e dellaCooperazione Company Law - Brazil Prof. Francisco Satiro email.: f.satiro@usp.comf.satiro@uol.com.br

  2. Agenda • Models of entities in Brazil • Managers’ duties and liabilities • Shareholders’ liabilities • Capital Markets – Evolution • Capital Markets – Structure • Capital Markets – Data • Acquisition of rural property in Brazil • Foreigners coming for business

  3. Company Law in Brazil: Models of Entities • Most commonly used: • (i) Brazilian limited liability company (sociedadelimitada, Ltda.) • (ii) Brazilian corporation (sociedadeanônima, S.A.) • PS: individual enterpreneur

  4. Company Law in Brazil: Models of Entities 1985 to 2005

  5. Company Law in Brazil: Incorporations (1985-2005) • BLUE – individual enterpreneurs • RED – Limited Liability Companies • GREEN – S/A (top)

  6. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade por Quotas de Responsabilidade Limitada 1919 - Decree 3.708 (revoked) – Based on German Model • Only 18 sections • Consideration for quotas in kind allowed (not services) • Partner's limited liability • No minimum capital requirements • No pay up requirements Rio de Janeiro - 1919

  7. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade por Quotas de Responsabilidade Limitada 1919 - Decree 3.708 (revoked) • Management - one designated officer or any partner • Complimentary rules – Corporations (SA) • Regular bureaucratic incorporation • Capital maintenance rule • No minimum capital requirement • Contractual freedom Rio de Janeiro - 1919

  8. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade Limitada • 2002 – New Civil Code (Law 10,406 of 2002) (inspiration: Italian Civil Code) • simpler governance structure • lower degree of transparency and disclosure obligations • minimum 2 partners (individuals or companies) resident in Brazil or abroad • nonresident partners shall appoint an attorney-in-fact in Brazil and enroll in federal taxpayer • partner’s liability is restricted to the actual disbursement of the amount of subscribed capital • no minimum paid-in capital (money or assets) Brasilia (DF) 2002

  9. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade Limitada • 2002 – New Civil Code (inspiration: Italian Civil Code) • managed by 1 or more officers (Brazilian or a resident alien) • audit committee is optional • allows partners to structure allocation of profits (default arrangement being based on their percentage interest in the capital) Brasilia (DF) 2002 • Civil Code establishes percentages of member consents for some acts such as:not less than ¾ of the capital to amend the articles of incorporation and approve mergers and dissolution orunanimous consent to convert into a corporation • no mandatory publication

  10. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade Limitada 2002 – New Civil Code (inspiration: Italian Civil Code) PROBLEMS: • Supermajority quorum for specific issues • Annual General Meeting required • Limitations on transferability of quotas • Publications – official gazette Brasilia (DF) 2002 • Burocratic incorporation • Restrictions for husband x wife partnership • Unprecise rules on exclusion • OBS: not tax pass-through!

  11. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade Limitada PROPOSALS: • Proposal 1 – New Commercial Code Brasilia (DF) 2002

  12. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade Limitada PROPOSALS: Proposal 1 – New Commercial Code Proposal 2 –S/A amendment (sec 194) – SA Simplificada - Capital cap: US$ 24.000.000 - Sole holder allowed - Internet notices and disclosure allowed - Remote voting Brasilia (DF) 2002 - Non proportional dividends allowed - appraisal rights - shareholders exclusion rules

  13. Company Law in Brazil: Limited Liability Company (Ltda) Sociedade Limitada PROPOSALS: • Proposal 3 – Old Ltda Projected Law revival • Proposal 4 – Adoption of UNCITRAL Model Law on SAS Brasilia (DF) 2002

  14. Company Law in Brazil: Corporation (S/A) Sociedade Anônima (S.A.) - Law 6.404/1976 • initial shareholders must subscribe all the issued shares and pay (minimum paid-in capital: 10% of their value) • no minimum stated capital requirements (money or assets) • no debt/equity restrictions • public issue of securities is subject to prior registration with Brazilian Securities and Exchange Commission (CVM) • mandatory publication (e.g., articles of incorporation, financial statement and the minutes of the board and shareholder meetings), except to corporations with less than 20 shareholders and a net asset value of less than R$1,000,000 (€$330.000,00) Recife, 1976

  15. Company Law in Brazil: Corporation (S/A) Sociedade Anônima (S.A.) - Law 6.404/1976 • shareholders’ essential rights: dividends from income, distribution of net assets upon liquidation, inspection rights, preemptive rights and right to dissent (appraisal remedy) • By-laws may divide shares into classes and preferences preferences may exist with respect to: dividends (e.g., a higher rate of dividend), liquidation or voting rights (e.g., separate voting for separate classes of directors) • Preferred shares (non-voting) or shares with limited voting rights are allowed - limited to 50% of the total issued shares Recife, 1976

  16. Company Law in Brazil: Corporation (S/A) Sociedade Anônima (S.A.) - Law 6.404/1976 Corporate management structure: • minimum 2 officers or officers + Board of Directors • Board of Directors is mandatory only for publicly held and authorized capital companies • Board of Directors’ powers:overall policy decisions, appointment and removal of officers, call shareholder meetings, etc. • audit committee is mandatory (temporary or permanent basis): 3 – 5 members Recife, 1976

  17. Company Law in Brazil: Limited Liability sole Proprietorship (EIRELI) Empresa Individual de Responsabilidade Limitada Law 12.441/2011 • Amendment to Civil Code (Section 980-A) • sole proprietorship • Member’s liability is limited to the paid-up capital • 3 mandatory requirements: • paid-in minimum capital = 100 x minimum wage in Brazil (R$67.800 or €$22.600,00) • Activity under expression. “EIRELI” • each individual shall own only one EIRELI Salvador, 2011 Recife, 1976

  18. Company Law in Brazil: Limited Liability sole Proprietorship (EIRELI) Empresa Individual de Responsabilidade Limitada Law 12.441/2011 • Company or segregated enterpreneur estate? • Can a legal entity hold an EIRELI? • Can legal entitieshold more than 1 EIRELI • Can foreign investors use EIRELI? • Can EIRELIs explore non commercial activities? Salvador, 2011 Recife, 1976

  19. Company Law in Brazil: Managers’ duties – Corporations Act • Duty of care (LSA 152, NCC 1011): use the necessary care and diligence that any average and honest person would use in the management of his own businesses • Duty of loyalty (LSA 153): not benefit or not cause third parties to benefit from his manager position and keep company's business information confidential (*) • Duty to avoid conflicts of interest (LSA 154) : not take part in any corporate transaction or resolution in which his personal interests conflict with those of the company (*) • Duty to disclosure (LSA 157): obey the information policies set out by the Corporation Law and CVM Regulation (only to publicly held companies’ managers) (*) Apply, mutatis mutandis, to managers of a limitedliabilitycompany

  20. Company Law in Brazil: Managers’ liabilities • Managers’ will be personally liable for damages and losses occurred due to either: • fault, negligence, imprudence or wilful misconduct on the managers' action • it is evidenced that they were aware of the crime and did not take the necessary steps to avoid it • any breach of company's bye-laws • non-compliance with the law provisions, including, Tax (Section 135, III of Tax Code), labor, consumer, etc. • Possibility to disregard the corporate entity in case of abuse – legal provisions: Section 50 of Civil Code, Section 4 of Environmental Law (Law N. 9,605/98), Section 2, §2 Consolidation of the Labor Law - CLT)

  21. Company Law in Brazil: Managers’ liabilities • Managers may be criminally liable for, among others: • fraud and/or provision of false information about the company • economic law crimes under Law N.7,492 of 1986 (Crimes Against the Financial System Law) and Law N.1,521 of 1951 (Crimes Against the public economy) • crimes in bankruptcy proceedings (law 11.101/05), for example, fraud against creditors • crimes set out in the Consumer Code (Law 8.078/90) • insider trading (applicable only to publicly held companies) (Law 6.385/76 – sect. 27-D)

  22. Company Law in Brazil: Shareholders’ liabilities • controlling shareholders will be liable for damages and losses caused by acts performed by abuse of their power (Corporation Action, Section 117) - e.g., approve irregular accounts/dissolution of efficient company • Shareholders’ liability: possibility to disregard the corporate entity in case of abuse (Section 50 of Civil Code) • However, Courts are understanding as strict liability of the shareholders and officers in Tax, Labor and Environmental cases (Section 4 of Environmental Law n. 9,605/98; Section 2, §2 Consolidation of the Labor Law – CLT; section 135 of Tax Code)

  23. Capital Markets in Brazil: Historical Perspective first wave 1964 fourth wave third wave second wave 1976 2001 • Dispersed legislation concentrated on broker-dealers and financial institutions • Corporations governed by Decree-law 2627 of 1940 • Organization of a national savings system • Law 4595/64: regulation of a national financial system • Revision and amendments in Law 6385/76 and Law 6404/76 by Law 9457/97 and Law 10303/2001 • Stock Exchange Regulation (2001):Corporate governance listing segments – BovespaMais, Novo Mercado, Level 1 and Level 2 • Instruction CVM 475/07: mandatory adoption of IFRS standard as of 2010 • Law 4728/65: the first relevant special legislation of the Brazilian capital markets • Prudential supervision and focus on systemic risk • Stock Exchanges Crisis (1971-1972) • Tax incentives to promote investments in stocks, investment funds and government bonds • Establishment of a new regulatory model and an independent federal agency (Brazilian Securities Commission - CVM) • CVM (The Brazilian regulatory authority) governed by Law 6385 of 1976 (Securities Law) • Law 6404 of 1976: New Corporation Law: enacted to restore investors’ confidence and improve the corporate provisions

  24. Capital Markets in Brazil: Structure CMN National Monetary Council BACEN Brazilian Central Bank CVM Brazilian Securities Commission Financial Institutions Stock Exchange OTC Markets Publicly held companies Securities Investors

  25. Capital Markets in Brazil: Structure • CMN (The National Monetary Council): • oversees the activities of the Brazilian Central Bank • is responsible for monetary, credit and financial policies • establishes the overall determination of the regulatory framework of the financial and capital markets

  26. Capital Markets in Brazil: Structure • CVM (The Brazilian Securities Exchange): • governmental agency subject to the directive rules of CMN • governed by Law 6,385 of 1976 that created the CVM and provided for the definition of securities (as amended by Law 10,303 of 2001) • independent administrative authority and financial autonomy to regulate the securities market and monitor the compliance with its rules and procedures

  27. Capital Markets in Brazil: Structure • CVM (The Brazilian Securities Exchange): • oversees the stock exchange and the OTC market (securities market entities) • assures the disclosure of any relevant information about securities and its issuers • protect securities holders against fraudulent, illegal or unfair trading practices • stimulate savings and investment in securities

  28. Capital Markets in Brazil: Structure • Main recent rules enacted by CVM: • CVM Instruction N. 481 of 17 December 2009: disclosure of information and regulation of proxies • CVM Instruction N. 480 of 7 December 2009: requirements and procedures for registration of the securities issuers • CVM Instructions N. 331/332 of 4 April 2000: issuance and trading Brazilian Depositary Receipts • CVM Instruction N. 358 of 3 January 2002: disclosure and use of the relevant information about material facts by publicly-held corporations • CVM Instruction N. 361 of 5 March 2002: tender offers

  29. Capital Markets in Brazil: Structure • Main rules enacted by CVM: • CVM Instruction N. 400 of 29 December 2003: primary and secondary public offerings of securities • CVM Instruction N. 409 of 18 August 2004: investment funds and the definition of qualified investors • CVM Instruction N. 461 of 23 October 2007: manager entities of organized securities markets (stock exchanges, mercantile and future exchange and organized over-the-counter markets) • CVM Instruction N. 476 of 16 January 2009: restrict efforts public offerings.

  30. Capital Markets in Brazil: Structure • BM&FBOVESPA: • central counterparty of its markets (stock exchange trading and OTC markets) – not for clearing issues • clearing and settlement services - CBLC • trading is carried out by electronic systems. • establishes requirements for listing publicly held corporations at BM&FBOVESPA in ordinary markets and in one of three special listing segments (Level 1, Level 2 and New Market [Novo Mercado]) related to the adhesion to certain practices of corporate governance

  31. Capital Markets in Brazil: Structure • Listings Segments: • purposes: (i) improve methods of disclosure to the market, including shareholder agreements and transactions involving assets issued by the company on the part of the controlling shareholders or company management and (ii) strengthen corporate governance mechanics • the basic difference among segments is the level of the applicable governance practices

  32. Comparing the requirements of the Listings Segments: Capital Markets in Brazil: Structure *Right to vote in certain circumstances (e.g. transformation, consolidation, spin-off, merger)

  33. Comparing the requirements of the Listings Segments: Capital Markets in Brazil: Structure

  34. Comparing the requirements of the Listings Segments: Capital Markets in Brazil: Structure

  35. Capital Markets in Brazil: Data • Registered Securities Offerings • Registered Stock Offerings • Securities Offering Registered • Stock Trading (billions of shares) • Stock Trading (BRL billion) • Registered Debt Securities • Debt Securities Trading (SND) • Debt Securities Trading (Bovespa Fix and Soma Fix) • Securitization • Securities registered in 2011

  36. Source: CVM

  37. Stock Trading Source: CVM / Anbima

  38. RegisteredDebtSecurities Source: CVM / Anbima

  39. DebtSecurities Trading (SND)

  40. Securitization FIDC: ReceivablesInvestmentFunds CRI: Real EstateCertificateReceivables Source: CVM / Anbima

  41. Source: CVM

  42. Law in Brazil: Foreigners coming for business • Governed by Law N. 6,815 of August 19, 1980 • Types of visas for work purposes: • short-term business travel: request to Brazilian Consulate in the jurisdiction where the applicant resides • cannot receive any type of remuneration by a Brazilian source • period up to 90 days, renewable for an additional 90 days • Temporary work visa:authorization granted by the Ministry of Labor • period up to 2 years and may be extended for an additional 2 years • requirement: the professional must have a knowledge (know-how) not available in Brazil • Permanent working visa: authorization granted by the Ministry of Labor • to work as a director or manager, for example • requirement: the company must have a foreign investment in Brazil (register in Central Bank) of, at least, R$600,000/manager or R$150,000 if the company provides at least 10 new job positions in 2 years from the appointment of the foreign manager

  43. Law in Brazil: Acquisitionof rural property • Byforeignpersonorforeign legal entity: • Governedby Federal Law N. 5,709 ofOctober 7, 1971 • Restrictions related to: (i) size of the property, which cannot exceed 50 unitscalled“módulos rurais”;(ii) rural subdivisions, whereby the percentage of plots belonging to foreigners cannot exceed 30%; (iii) properties in areas of national security, where the approval of the federal agency that has authority over national security is required;(iv) what fraction of the surface of a municipality foreigners are entitled to own - no more than ¼; and (v) any donations of Federal or State land

  44. Law in Brazil: Acquisitionof rural property • Restrictions apply to foreigners who are: • (i) private individuals, • (ii) legal entities incorporated in a foreign country • (iii) to Brazilian companies controlled by foreigners? • 1995 amendment to the Federal Constitution removed the distinction between Brazilian companies and Brazilian companies with foreign equity control • AGU Opinion LA-01 (approved by the President on 2010): Brazilian companies controlled by foreigners are subject to the restrictions imposed by Law 5,709 • Opinion of the Inspector General’s Office of the Courts of Justice of the State of São Paulo on December 2012: exempts real estate registrars and notary publics from applying the restrictions imposed by Law N. 5,709

  45. Law in Brazil: Acquisition of rural property • Byforeignlegal entity: • Only if the purpose is the implementation of agricultural, cattle-raising, industrialization or colonization projects which shall be linked to their respective statutes • such projects shall be approved by either Brazilian Agriculture Ministry or the Department of Trade and Industry • resident of Brazil may, upon specific decree, authorize the acquisition of rural property beyond the provisions of the current law, in cases where such property is the object of priority projects involving the country’s development plans

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