Brazil maintains a civil law system derived from Roman law, whose essential corporate issues and proceedings must not differ significantly from those of other jurisdictions with systems similarly derived. The most relevant laws in Brazil are codified. To some extent there can be no significant legal differences either from countries whose corporate laws derive from the Anglo Saxon law, as many legal solutions given to corporate matters in these jurisdictions have also been introduced in Brazilian law; however, to another extent there may be major differences vis-à-vis other jurisdictions, regardless of their original legal systems, with respect to the legal treatment of some specific corporate issues.
Under the corporate point of view, private businesses in Brazil can only be developed by Brazilian companies or by branches of foreign companies authorised to operate in the country. However, this latter option is seldom used as the process for a foreign company to establish in Brazil a branch or a representative office (as an extension of the parent legal entity abroad) is burdensome, time consuming and the authorisation will ultimately depend on the approval of the Minister of Industry and Commerce.
Therefore, foreign investors intending to do business in Brazil usually incorporate “wholly owned” Brazilian subsidiaries or form companies in association with Brazilian nationals. In these cases, even a small representative office will have the legal nature of a company with its own legal entity status different from that of the parent company.
Foreign investors wishing to set up a presence in Brazil are not required to have Brazilian partners, unless the intended business falls within the few segments of economic activities which still require that the control be in the hands of Brazilian nationals (press and transport companies).
Thus, in the majority of the cases, the consideration as to whether to form a joint-venture with Brazilian partners is a matter to be taken solely from the business perspective. In other words, whether having local partners could somehow be good for the proposed business. However, as in any other jurisdiction, forming bi-national joint venture companies require the focus on more corporate aspects than in the incorporation of a wholly owned company. In case of a joint venture company, a poorly negotiated or badly drafted Shareholders Agreement will likely lead to the failure of the corporate relationship or even end up in a corporate litigation.
A foreign investor may also purchase shares or quotas in an existing company. In this latter alternative, in order to avoid the succession on the seller´s contingencies and liabilities, it is advisable that the prospective investor conducts a due diligence exercise examining the legal, environmental, tax and accounting status of the company which has issued the shares/quotas it intends to purchase, as well as the legal status of the seller itself.
Moreover, a foreign investor may also consider the acquisition of assets which form an operating commercial or industrial establishment. Likewise, it is important that, before the acquisition, a due diligence exercise be conducted to avoid the succession of the seller´s or the establishment´s contingencies and liabilities.
In case of acquisitions of shares, quotas or establishments, the foreign investor should also consider the incorporation of a wholly owned holding company in Brazil which, in its turn, would be the acquirer in the proposed transaction, even though there is not any legal disposition that would prevent a direct acquisition by the foreign investor. Under certain circumstances, a local holding company may be useful for the foreign investor vis-à-vis a better control of the funds invested in the country, as well as to reduce the risks of a direct exposure to the liabilities of the acquired business.
Brazilian law requires that the acts reflecting the incorporation of a company be reviewed and signed by a local lawyer. Not only because it is the Law but to retain the services of a reputable law firm is advisable at all times before incorporating a company in Brazil.
2. Types of Companies
Brazilian Commercial Law provides for several types of companies. The most frequently used company structures are the Limited Liability Company (“Sociedade Limitada”) and the Corporation (“Sociedade Anônima”). This is due to the fact that in both cases the participants have their liability limited to the issue price of the shares representing the corporate capital. The law grants legal entity status to these companies separate from their participants.
However, the shareholders´ limited liability is not an absolute concept as, under certain circumstances, labour and tax laws may attribute joint liability of the company and its shareholders towards employees or the tax authorities, as the case may be.
Brazilian Law also provides for other forms of association in the form of joint ventures and consortia which do not have a legal status separate from their participants; in these cases the parties contract rights and obligations individually for the common benefit of the group. These other contractual structures are usually adopted to fulfil specific purposes or for non commercial business.
2.1 The Sociedade Anônima: “S.A.”
By legal definition, the S.A. is always a commercial entity and its capital is represented by shares. Foreign investors usually consider the adoption of this corporate type in case a joint venture should be negotiated or there is an intention to cause the company to be listed and receive financing from the local capital markets.
The S.A.´s name must be either preceded or followed by the Portuguese expression “Sociedade Anônima” (or the abbreviation “S.A.”), or preceded by Portuguese word “Companhia” (or the abbreviation “Cia”).
There are two kinds of S.A.: (i) the Listed S.A., whose shares and securities are publicly traded on the stock market, and (ii) the Closed Capital S.A., which obtains its capital through private offerings of its shares.
Notwithstanding the type chosen, there are five basic requirements to incorporate an S.A.
(a) subscription by at least 2 persons of the entire allotted share capital;
(b) payment in cash of at least 10% of the portion of the subscribed capital to be paid in cash (this requirement is not applicable if the full capital will be paid in credits or goods);
(c) deposit in cash with the Banco do Brasil S.A., or any other financial institution authorised by the Brazilian Securities and Exchange Commission (Comissão de Valores Imobiliários- CVM), of 10% of the amount of the subscribed shares;
(d) registration of the minutes of the Incorporation Meeting and the company´s By-laws with the Articles of Incorporation with the Commercial Registry (Junta Comercial).
(e) publication of the minutes of the Incorporation Meeting and the company´s By-laws in the Official Gazette of the Federal or State Government in a widely circulated newspaper, within thirty days after the registration referred to in item (d) above.
Listed S.A.´s are subject to additional regulations set forth by the CVM.
The capital of an S.A. is divided into shares representing parts or fractions of the capital. Shares can either have par value or no par value. The capital of the S/A may be increased or decreased upon decision of the Shareholders Meeting, or in certain cases, by the Board of Directors.
Brazilian law does not permit bearer shares. The ownership of all shares must be registered in the Nominative Shares Registry book. The transfer of shares is registered in this corporate book in accordance with the corresponding legal evidence of such transfer (agreements, succession, etc.).
Generally, shares are fully transferable to third parties without any requirement that preference be given to the other shareholders. In a Closed Capital S.A., however, the by-laws can impose some restrictions on the transfer of shares, provided that any restrictions do not prohibit transfers or require prior approval of any such transfer by a majority of shareholders or by the Board of Directors
The shares may be ordinary or preferred. Shares of the same class confer the same rights on their owners. Ordinary shares entitle the holder to common or essential shareholder´s rights, including the right to vote in the Shareholders Meetings. Preferred shares have special rights of a financial or political nature. Usually, the preferred shares confer its holder financial advantages vis-à-vis the ordinary share as a compensation for the lack of the right to vote. Preferred shares cannot account for more than 50% (fifty percent) of an S.A.´s outstanding shares. The capital structure divided into ordinary and preferred shares can be helpful in joint venture companies it may be useful to accommodate different interests of the investors.
The law expressly permits shareholders to enter into shareholders´ agreements concerning the transfer of shares, pre-emptive rights to purchase shares, and the exercise of voting rights or controlling powers. To become enforceable before third parties and the company, a shareholders´ agreement must be registered in the proper S.A´s corporate books. Any shares subject to a shareholders´ agreement cannot be negotiated on the stock market. Shareholders Agreements are valuable tool in a joint venture company.
There are two kinds of General Shareholders´ Meetings: (i) the Annual, which shall be held at least once a year in order to discuss the company´s management and financial statements and to elect members of the Board of Directors and Audit Committees; and (ii) the Extraordinary, which can be held at any time to deliberate any issues which do not fall within the competence of the annual Shareholders´ Meeting; thus, capital increases or decreases and changes in the By-laws are frequent matters to be decided by the Extraordinary Meetings.
With few exceptions, decisions voted on at Shareholders´ Meetings must be approved by an absolute majority (fifty percent plus one) of all votes cast. Minutes of all meetings must be drawn up, registered in the appropriate books and filed with the Commercial Registry in order for ensure enforceability against third parties of the decisions taken.
The administration of an S.A. is conducted by one or two corporate bodies, each with specific authority and responsibilities: the Board of Directors (Conselho de Administração) and the Executive Board (Diretoria).
Every S.A. is required to have an Executive Board. In its turn the existence of the Board of Directors is mandatory in Listed S.A.´s and authorised capital S.A.´s, but optional in the closely held S.A.
The Board of Directors is non executive body. It must be composed of at least three members. The members must also be shareholders but do not have to be resident in Brazil. The members are elected, and can be removed at any time, by the Shareholders´ Meeting. Their term of office may not exceed three years, but re-election is permitted.
The Board of Directors is responsible for (i) establishing the general business, administrative and financial policies of the company in accordance with guidelines established by the Shareholders´ Meeting, (ii) electing and dismissing the members of the Executive Board, (iii) supervising conduct of the business by the members of the Executive Board, (iv) examining the company books and papers, (v) monitoring the company´s contractual relations and negotiations, (vi) and any other acts related to the company´s business.
The Executive Board is the executive body responsible for the routine operations of the company and for representing the company before third parties in the ordinary course of business.
The Executive Board is composed of at least two officers who must be resident in Brazil. In other words, a foreigner may be an officer of an S.A. if he has obtained a Brazilian permanent visa, in which case he/she be considered to be resident for all legal purposes. Officers are appointed, and may be removed at any time, by the Board of Directors or by the Shareholders´ Meeting if the company has no Board. The maximum tenure for officers is 3 years, but re-election is permitted.
The financial reporting period of an S.A. is one year, the ending date being established in the By-laws. The auditing of the financial statements is not mandatory, except in the case of the listed S.A.´s. Publication of the S.A.´s year-end financial statements in the Official Gazette and in another widely circulated newspaper is mandatory.
The dissolution of an S.A. may take place: (i) at the end of its term specified in the By-laws; (ii) by resolution of the Shareholders´ Meeting; (iii) by the existence of only one shareholder in an Annual Shareholders´ Meeting, if the minimum of two is not re-established prior to the subsequent Annual Shareholders´ Meeting; or (iv) by court decision or the administrative decision of a competent public authority.
The liquidation of the company´s assets in order to pay off outstanding debts precedes dissolution. Any assets remaining are distributed to shareholders in proportion to their investment (subject to any priority rights granted to preferred shareholders). The liquidation may be voluntary or imposed by judicial decision.
2.2 The “Sociedade Limitada”: “LTDA”
The LTDA is established by the partners´ signatures in the respective Articles of Association (“Contrato Social”) and has only a single class of partners, the limited liability quotaholders.
The company name of an LTDA must always be followed by the expression “Limitada” (or the abbreviation “LTDA.”).
The capital of an LTDA is divided into quotas. The quota represents the amount (in cash or other assets) that a quotaholder contributed to the formation of the company. The quotaholders are jointly liable for the payment of the entire amount of the company´s capital. After the payment of the capital the quotaholders do not have further responsibilities towards third parties who contract with the company. Notwithstanding, likewise the S.A. labour and tax laws may attribute joint liability of the company and its quotaholders towards employees or the tax authorities, as the case may be.
The capital of a LTDA may only be increased after being fully paid up. The capital may also be decreased if it has been eroded by losses or if it exceeds the amount necessary to achieve the company´s objectives, or when a quotaholder fails to pay-up his subscribed quotas. The decision to increase or decrease the company´s capital requires the approval of quotaholders representing at least ¾ of the company´s capital.
The LTDA can be managed by one or more individuals who must necessarily be resident in Brazil. The manager can be one of the quotaholders or not. However, before the company´s capital is fully paid up, appointing a manager who is not a quotaholder requires the approval of all quotaholders. After the full payment of the capital the decision to appoint a manager who is not a quotaholder can be taken by quotaholders representing 2/3 (two thirds) of the company´s capital..
The manager is not personally responsible for the company´s liabilities. A manager will however, be personally liable to the company or third parties for any acts which exceed the limits of his or her authority or which violate the Law or the company´s Articles of Association.
The Articles of Association may be amended by resolution of the quotaholders to, inter alia:
(a) increase or decrease the company capital;
(b) extend the term of the company duration;
(c) change the company name;
(d) change the company´s registered office;
(e) reflect the transfer of quotas;
(e) admit new quotaholders;
(f) recognise the withdrawal of a quotaholder; or
(g) exclude a shareholder
Quotaholders who disagree with an amendment to the Articles of Association have the right to withdraw from the company.
Quotas are not represented by securities or certificates but instead its ownership is registered in the Articles of Association. Consequently, any transfer of title over the quotas requires an amendment to the Articles of Association. The Law requires the approval of quotaholders representing at least ¾ (three quarters) of the total company capital to amend the Articles of Association.
Decisions requiring the approval of quotaholders must be taken in a formal meeting, convened under the terms of the Articles of Association. In addition, at least once a year quotaholders must hold a Quotaholders Meeting to discuss the management report and financial statements.
Meetings are called and conducted in the manner prescribed by the Articles of Association (or, if the Articles are silent, in the manner specified in the relevant law). The manager usually has the authority to call meetings, but the law also provides that in some cases quotaholders representing at least ¼ (one quarter) of the company´s total capital can summons the meetings.
Summons of the Quotaholders Meetings must be provided as set forth in the relevant law, unless the Articles of Association provide otherwise. However, prior summoning will be deemed unnecessary if all quotaholders declare in writing that they knew that a meeting would be held, actually attended such meeting or unanimously decided in writing any matters in the agenda.
The total dissolution of a LTDA may take place in the following cases: (i) due to the end of its term as set forth in the Articles of Association; (ii) by the unanimous resolution of all quotaholders; (iii) by the resolution of quotaholders representing an absolute majority, in companies with an undetermined term of duration; (iv) by the existence of only one quotaholder, if the minimum of two is not restablished within 180 (one hundred and eighty) days; (v) if applicable, due to the expiration of its license to operate; and (vi) by bankruptcy.
The death of a quotaholder does not bring about dissolution of an LTDA if the succession by the quotaholder´s heir(s) is provided for in the Articles of Association or if otherwise the Articles establish that the company shall continue with the remaining quotaholders.
The Brazilian Civil Code has regulated the corporate relationships in general and established specific legal framework for each corporate type. In the case of the LTDA, the legal dispositions governing corporate relationships in general will be applied in principle to any corporate issues not covered by either the company´s Articles of Association or the specific legal regime of the LTDA. However, the quotaholders may choose to alternatively establish in the Articles of Association that Law 6.406/76, which governs the S.A., will be applicable for the issues not covered by the LTDA specific legal framework or the Articles of Association.
2.3. Rules Common to the S.A. and the LTDA
All companies permitted under Brazilian law may spin-off a portion of their assets, transform to another type of entity, merge into or consolidate with another legal entity.
The transformation alters a company´s legal type to another without dissolving it. A merger is an operation by which one or more companies are absorbed by another. Consolidation unites two or more companies to form a new company which will succeed the consolidated entities in all rights and obligations. A spin-off is an operation whereby a company transfers all or part of its assets and liabilities to another company, already in existence or to be incorporated. If a company spins-off all of its assets and liabilities, it will be dissolved.
Foreign entities or individuals holding shares or quotas in Brazilian companies must maintain an attorney resident in Brazil with powers to receive services of process in legal actions involving its quotaholding, as well as register with the Registration Department of the Brazilian Internal Revenue Service (Cadastro Nacional de Pessoas Jurídicas ? CNPJ, if the foreigner is a legal entity or Cadastro de Pessoas Físicas ? CPF, if the foreigner is an individual). The registration must be effected at the CNPJ or CPF office with jurisdiction over the tax domicile of the foreign investor´s attorney in Brazil.
To apply for registration before the CNPJ, a foreign entity must present a copy of its incorporation documents, a copy of the corporate resolution approving the issue of the power-of-attorney to an attorney resident in Brazil, a copy of the power-of-attorney issued to the attorney resident in Brazil, and a declaration as to whom are its own controlling shareholders.
Foreign individuals must be registered in the Individual Taxpayers´ Registry of the Brazilian Internal Revenue Service (Cadastro de Pessoas Físicas – CPF). A foreign individual must present a copy of the power-of-attorney to an attorney resident in Brazil and a copy of a document indicating his or her mother´s name.
Corporate names are protected in Brazil under Law n. 8.934 of November 18, 1994 (regulated by Normative Instruction n. 53 of the National Department of Commercial Registry). This protection is granted automatically in the State where the company´s head-offices will be located upon registration of the Articles of Association or By-laws with the competent Commercial Registry. However, as Brazil is composed of 27 States, to extend the protection to each additional State, after the incorporation specific applications must be made before the Commercial Registry of each State where protection is intended.
Prior to registering the Articles of Association, a trade name search must be performed to determine the availability of the proposed trade name. Priority is given to the company that first registers a trade name, without consideration of any existing trademark registration(s) or application(s). Reservation of a trade name is not possible in Brazil.
Regardless of the legal type adopted by the company, it is necessary to indicate the company´s objectives to some extent in the company name.
3. Incorporation Procedures
Incorporation of a company in Brazil requires registration with several governmental authorities. Full operational status of the new company will be gradually achieved upon each registration and/or license it is supposed to have under the Law. For any and all companies the mandatory registrations are the following:
3.1 Commercial Registry
As a first step, the Articles of Association or By-laws must be filed with the Commercial Registry, in the state where the company is headquartered. Companies become corporate entities, with a legal status separate from their owners, only after the Articles of Association or By-laws are registered. However, at this stage, the company cannot operate yet.
Generally, the request for filing the Articles of Association or By-laws must be accompanied by the following documents:
(i) three original counterparts of the Articles or By-laws, signed by the partners and reviewed by an attorney;
(ii) a power-of-attorney, granted by foreign shareholders or quotaholders to an attorney resident in Brazil;
(iii) a document proving the existence of a foreign entity holding shares or quotas;
(iv) certified copies of the identity (foreigner´s passport and/or certificate of birth) and taxpayer cards of all shareholders, quotaholders, directors, partners, and managers.
(v) completed forms containing data on the company and its shareholders, quotaholders, directors, partners, and managers,
(vi) receipt of payment of the application fees.
In order to be enforceable before third parties in Brazil, all foreign documents must first be signed before a notary public in their country of origin and legalised before the Brazilian Consulate with jurisdiction. In Brazil, the foreign documents must be translated into Portuguese by a public sworn translator and registered at a Deeds and Documents Registry Office.
3.2. CNPJ (The Federal Taxpayers Registry)
After registration of the Articles of Association, the company must also be registered with the CNPJ. The application must be filed at the CNPJ office with jurisdiction over the tax domicile of the company in Brazil.
Once the Brazilian company is registered with the CNPJ, it is possible to open bank accounts and make purchases, but the company still cannot make sales or issue its invoices.
3.3. State and Municipal Taxpayers´ Registries
To become fully operational, companies involved in commercial activities must also register with State and Municipal taxpayers´ registries before invoicing. Companies that only render services do not need to be registered with the State Taxpayers´ Registry.
Filing with the State Taxpayers´ Registry is done before agency of the State tax authority with jurisdiction over the tax domicile where the company´s headquarters is located. Among the documents required are a copy of the registration with the CNPJ and a copy of the last land tax bill over the property where the company´s headquarters is located.
Filing with the Municipal Taxpayers´ Registry is done before the agency of the Municipal tax authority of the city where the company is located. The Municipality is the authority in charge of granting business licenses (Alvará de Funcionamento) and ensuring that the company complies with applicable municipal laws.
3.4 Other Registrations
Brazilian Companies which engage in foreign trade activities must also be registered with the data system of the Inland Revenue Service, the so-called SISCOMEX.
Companies engaging in the rendering of services may depend upon the registration of any agency which regulates the related professional activity (for example, Regional Council of Engineering and Architecture ? CREA; Regional Council of Commercial Representatives; Regional Council of Administration Technicians; Regional Council of Economists, etc.)
Sócio-fundador de Noronha Advogados, admitido na Ordem dos Advogados de São Paulo em 1978.