Amendments to the Brazilian Corporate Act – new rules for Brazilian corporations

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

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

The rules for Brazilian corporations (sociedades anônimas) have been recently subjected to several changes, with impacts to shareholders and investors (including foreigners) as well as incentives for companies with aspirations to go public.

This article will briefly explain the definition of a Brazilian corporation, followed by an overview of the relevant topics included by recent legal provisions, such as the new rules for officers, paperwork reduction and plural voting in shareholders’ resolutions.

Brazilian corporations are often deemed as companies best suited for larger projects and business activities, due to the burdensome paperwork and governance obligations that come with much simpler procedures for negotiating shares (compared to other types of companies in Brazil), more transparent ways of arranging corporate control and the possibility of offering shares publicly (an alternative for raising funds that is, so far, restricted to corporations). However, they may also be used for businesses that do not require raising of funds or that are not structured for an IPO, such as setting up subsidiaries in Brazil.

This alternative approach to the Brazilian corporation has been strengthened by the recent changes in the Brazilian Corporation Act (Federal Law No 6,404/1976) in 2021, which are part of Brazil’s effort to comply with international guidelines. They are expected to make corporations a more attractive structure for business projects and investments in general.

The first of these changes are the new rules for officers. One of the main issues faced when setting up a Brazilian corporation was that officers were legally required to be permanently resident in Brazil, making foreign shareholders contract with local professionals to act as officers. Another relevant issue was the obligation to appoint at least two officers, which could be an additional expense for foreign companies looking to start a business in Brazil, due to the need to contract more than one local representative to act as officers.

Both these issues have been addressed in recent legal provisions, which implied that corporations may now be managed by a single officer (appointed for a term of up to three years, notwithstanding reappointments) and that an individual resident outside of Brazil may act as officer (a possibility that was previously restricted to members of the board of directors). However, the officer resident overseas shall grant a person resident in Brazil with powers to receive summons and notices on its behalf during the entire term of their office and for three years afterwards. It is important to clarify that this requirement differs from the previous requirement for officers to be resident in Brazil, since the officer resident in other countries may now perform management acts directly, without the need for third parties in Brazil to make their decisions effective.

Following the improvements in the rules for management, changes were also provided to reduce the amount of paperwork related to the accounting and corporate procedures required from corporations. For corporations that are not public, mandatory corporate records – such as books providing for the ownership and transfer of shares and participation certificates, minutes of shareholders’ resolutions and the respective shareholders’ attendance – may now be kept on digital records (opposed to hard copies stored in the company’s headquarters). Furthermore, when the corporation’s annual gross revenue is less than R$78m, books containing minutes of board or officers’ meetings may also be recorded digitally and announcements required by law (eg, summons for shareholder’s resolutions or financial statements prepared by the officer) may be published online.

In connection with the recent growth experienced by the Brazilian stock market, paperwork burdens were also reduced for corporations looking to carry out an IPO. For corporations whose annual gross revenue is less than R$500m, an IPO may be performed without the assistance of a financial institution and companies may go public without having a monitoring board (both of which are requirements for conventional public corporations). These special requirements, however, still depend on regulatory provisions by the Brazilian Securities Exchange Commission (CVM) to be effective.

Another measure intended to promote the Brazilian stock exchange market, making it more attractive to Brazilian investors in comparison with foreign markets, is the possibility of plural voting within shareholders’ resolutions. Inspired by similar rules provided in the United States and in the United Kingdom, plural voting in Brazil consists of granting a share with up to ten votes under resolutions undertaken by the corporation’s shareholders.

A few restrictions are imposed to the owners of these shares, such as a time limit of up to seven years, after which the extra voting power expires if not renewed by the shareholders, and limits to transferring these shares without them losing their plural voting quality. Usually, extra voting powers are preserved when the acquirer also holds the same kind of shares or when the seller maintains control over the voting power of the acquirer.

Restrictions are also placed on corporations that issue plural voting shares, including:

• they will not be able to acquire, be acquired or merge with public corporations that do not have any of its shares with plural voting powers;
• public corporations without plural voting shares may not promote a demerger operation resulting in a corporation with plural voting shares; and
• only a corporation that does not offer its shares publicly may issue plural voting shares, provided that, if turned into a public corporation, it will be able to maintain its existing plural voting shares.

Although it might serve the purpose of adding value to some of the company’s shares, the provision of plural voting in corporations has been criticised for going against the increasing corporate governance culture in Brazil, especially when it comes to public corporations, since it may harm the balance of the corporate control within a company. However, part of this governance issue has been addressed by the new rules themselves, which imply that the extra voting power granted by plural voting shares will not be considered in resolutions regarding relevant related-party transactions. When it comes to public companies in general, related-party transactions, and transactions involving at least 50 per cent of the corporation’s assets, may now only be performed with prior approval of the shareholders.

Notwithstanding the remaining issues surrounding the Brazilian corporation, these new rules may help it become a more popular alternative for Brazilian and foreign investors. Therefore, when looking to invest in projects and business in Brazil, it is advisable to consider the benefits that the changes to the Brazilian Corporation Act may bring – especially the ones regarding management, paperwork reduction and plural voting shares – to assess the best structure for setting up a company in Brazil.