Perspectives on the reform proposed to the Brazilian Civil Code for corporate law

Gustavo Flausino Coelho
Bastilho Coelho Advogados, Rio de Janeiro
gustavo@bastilhocoelho.com.br

Thales Castanheira Ribeiro
Bastilho Coelho Advogados, Rio de Janeiro
thales@bastilhocoelho.com.br

The most common option for foreign investors seeking to incorporate a subsidiary in Brazil is the local version of the limited liability company (sociedade limitada). It is a straightforward path and entails less paperwork than its alternative, the corporation (sociedade anônima), which is required to disclose financial statements annually. Moreover, since 2019, limited liability companies (LLCs) – may be incorporated by a single shareholder (a benefit generally granted only to this type of entity), thereby simplifying the corporate framework for foreign investors, who are no longer required to involve an additional entity as a minority shareholder solely to meet the shareholders’ plurality requirement.

If the 2019 change made LLCs significantly more attractive by allowing the possibility of a sole shareholder, a proposed reform to the Brazilian Civil Code may render LLCs even more appealing to foreign investors, this time as vehicles for joint ventures and acquisitions of minority interests. The proposal is currently under debate in the Brazilian Senate and will subsequently be submitted to the Chamber of Deputies. If enacted, the amendments would introduce several changes that might turn LLCs with multiple shareholders into a more strategic business option.

One of the most eye-catching changes is the possibility for LLCs to issue preference shares, limiting a shareholder’s voting rights in exchange for economic advantages or voting privileges in corporate resolutions. Preference shares – or preferred stock – are not exactly a novelty, constituting a well-established tool for structuring investments and corporate governance in several jurisdictions. The flexibility afforded by preference shares makes such arrangements more robust, as the privileges granted to minority shareholders become more reliable (in case of litigation, a legal statute backing such privileges certainly strengthens a claim), while the controlling shareholder may conduct the business without interference and may capitalise the company without fear of share dilution. In Brazil, despite extensive and often controversial debate regarding the legal possibility of LLCs issuing preference shares, this option is currently only explicitly permitted for corporations (sociedades anônimas), which, as mentioned, are not the preferred vehicle for foreign investors at first. Therefore, formally allowing LLCs to issue preference shares would make the acquisition of minority interest and the structuring of joint ventures more friendly and interesting to foreign investors.

Another relevant change refers to the managerial positions of LLCs. Currently, the appointed officers are required to be individuals. Moreover, if these individuals are not resident in Brazil, an attorney-in-fact must be appointed for the purposes of receiving summons and notices. In this context, the reform proposes that not only individuals, but also legal entities (such as companies) may be appointed as officers, entailing a set of options for the management framework. The proposed wording restricts this alternative to LLCs with more than one shareholder, thus making it especially useful in joint ventures.

The requirements for calling shareholders’ meetings would also be significantly simplified. Shareholders would no longer need to be notified of meeting calls through announcements published in newspapers. The companies would be able to announce meeting through their websites and notify their shareholders by email. Moreover, the majority shareholders would be able to simply approve resolutions without the need to call a meeting, which currently is only possible when all shareholders agree on the resolution. Similarly to the preference shares, this change would expedite decision-making and prove especially valuable in conducting the business of joint ventures.

A final topic worth mentioning concerns the LLC's corporate name. The proposed changes would allow company names to be written in a foreign language and would eliminate the requirement to include a description of the company’s scope. This may be a detail but might also help corporate groups to better organise their multiple subsidiaries through the standardisation of their names, aligning them with the subsidiaries incorporated in other countries.

As mentioned above, these changes are not final and remain subject to debate and potential amendment during the legislative process. Nonetheless, it is important to monitor these developments closely to anticipate potential new business strategies – particularly regarding joint ventures and acquisition of minority interest – and to access the regulatory risks and compliance costs associated with investments in Brazil in the near future.