Brazil´s New Civil Code eliminates, almost completely, the flexibility of limited liability companies. Existing companies will have one year to adapt their Articles of Association and new investors may need to consider other vehicles for Joint Ventures.

 

The new civil code, which came into effect on 11 January 2003, regulates in book II, chapter IV, the limited liability companies, thus revoking decree law 3.708 of 1919.

The new regulation restricts, almost completely, the flexibility of this kind of company by imposing excessive formalities, in particular concerning those companies with more than 10 partners, which will have to carry out General Meetings in order to approve any corporate decision of the partners. Regarding companies with less than 10 partners, the law states that decisions may be made in a formal meeting previously summoned in the terms of the Articles of Association or observing the same formalities as those of the General Meetings. In either situation, they will be exempt from these formalities when the quota-holders unanimously decide, in writing, about the matter under deliberation.

The transfer of quotas, as well as the exclusion of a quota-holder, were also affected by the new civil law. The transfer of quotas is now freely permitted when made from one quotaholder to another, and, is permitted to third parties, when the quota-holders, who represent at least one-quarter of the social capital, do not oppose. Concerning this particular aspect, the law creates a conflict between the legal rules, since the transfer of quotas, in respect to this kind of company, may be carried out by means of amendments made to the articles of association, for which, according to the new civil code, the approval of three-quarters of the corporate capital is needed.

The exclusion of a quota-holder may be achieved through judicial means, or furthermore, by deliberation between those quota-holders who represent more than half of the corporate capital, in consideration of acts of undeniable severity and if such possibility is foreseen, within the articles of association. If a quota-holder must be excluded, this quota-holder has the right to defence within the meeting or in the general meeting, and will be summoned only for this purpose.

The rules regarding the corporate name will also be affected, as the company is required to make reference to the company´s objectives within the company´s name and the powers of administration maybe be granted to individuals, even if they are not partners of the company, provided that they have the unanimous approval of the partners when the social capital has not been fully paid and at least two-thirds of the quota-holders approval once the payment has been made in full.

There are many modifications and the new rules are more rigorous, therefore the companies that have already been established, must review their articles of association in order to adapt them to the new legal system, observing that the law entitles them to one year in order to proceed within these adaptation. New investors may need to consider other vehicles which are more flexible for Joint Ventures.