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Universit à di Roma – La Sapienza Master in Diritto Privato Europeo e della Cooperazione. Company Law - Brazil. Prof. Francisco Satiro email.: [email protected] [email protected]. Agenda. Models of entities in Brazil Managers’ duties and liabilities Shareholders’ liabilities - PowerPoint PPT Presentation
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Company Law - Brazil
Prof. Francisco Satiroemail.: [email protected] [email protected]
Università di Roma – La Sapienza
Master in Diritto Privato Europeo e della Cooperazione
Agenda
1. Models of entities in Brazil
2. Managers’ duties and liabilities
3. Shareholders’ liabilities
4. Capital Markets – Evolution
5. Capital Markets – Structure
6. Capital Markets – Data
7. Acquisition of rural property in Brazil
8. Foreigners coming for business
Company Law in Brazil: Models of Entities
• Most commonly used:
(i) Brazilian limited liability company (sociedade limitada, Ltda.)
(ii) Brazilian corporation (sociedade anônima, S.A.)
PS: individual enterpreneur
Company Law in Brazil: Incorporations (1985-2005)
BLUE – individual enterpreneurs RED – Limited Liability Companies GREEN – S/A (top)
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
Company Law in Brazil: Limited Liability Company (Ltda)
Rio de Janeiro - 1919
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
Company Law in Brazil: Limited Liability Company (Ltda)
Rio de Janeiro - 1919
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
Company Law in Brazil: Limited Liability Company (Ltda)
Brasilia (DF) 2002• 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)
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)
Company Law in Brazil: Limited Liability Company (Ltda)
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 or unanimous consent to convert into a corporation
• no mandatory publication
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
Company Law in Brazil: Limited Liability Company (Ltda)
Brasilia (DF) 2002
- Burocratic incorporation- Restrictions for husband x wife partnership- Unprecise rules on exclusion- OBS: not tax pass-through!
Sociedade Limitada
PROPOSALS:
• Proposal 1 – New Commercial Code
Company Law in Brazil: Limited Liability Company (Ltda)
Brasilia (DF) 2002
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
Company Law in Brazil: Limited Liability Company (Ltda)
Brasilia (DF) 2002
- Non proportional dividends allowed
- appraisal rights
- shareholders exclusion rules
Sociedade Limitada
PROPOSALS:
• Proposal 3 – Old Ltda Projected Law revival • Proposal 4 – Adoption of UNCITRAL Model Law on
SAS
Company Law in Brazil: Limited Liability Company (Ltda)
Brasilia (DF) 2002
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)
Company Law in Brazil: Corporation (S/A)
• 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
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)
Company Law in Brazil: Corporation (S/A)
• Preferred shares (non-voting) or shares with limited voting rights are allowed - limited to 50% of the total issued shares
Recife, 1976
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
Company Law in Brazil: Corporation (S/A)
Recife, 1976
• 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
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
Company Law in Brazil: Limited Liability sole Proprietorship (EIRELI)
Recife, 1976
• 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
Empresa Individual de Responsabilidade Limitada Law 12.441/2011
• Company or segregated enterpreneur estate? • Can a legal entity hold an EIRELI? • Can legal entities hold more than 1 EIRELI
Company Law in Brazil: Limited Liability sole Proprietorship (EIRELI)
Recife, 1976
• Can foreign investors use EIRELI?• Can EIRELIs explore non
commercial activities?
Salvador, 2011
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 limited liability company
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)
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)
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)
Capital Markets in Brazil: Historical Perspective
1964 1976 2001first wave second wave third wave fourth wave
• 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
• 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
• 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 – Bovespa Mais, Novo Mercado, Level 1 and Level 2
• Instruction CVM 475/07: mandatory adoption of IFRS standard as of 2010
Capital Markets in Brazil: Structure
CMN National Monetary Council
BACENBrazilian Central
Bank
CVMBrazilian Securities
Commission
Stock Exchange
OTC Markets
Investors
Securities
Financial Institutions Publicly held
companies
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
Capital Markets in Brazil: StructureCVM (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
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
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
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.
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
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
*Right to vote in certain circumstances (e.g. transformation, consolidation, spin-off, merger)
Capital Markets in Brazil: Structure
BOVESPA Mais Novo Mercado Level 2 Level 1 Regular
Market
Characteristics of the issued
shares
Only ON (common) shares may be traded and issued, but the existence of PN (preferred)
shares is permitted
Only ON shares are allowed
ON and PN* shares are allowed
ON and PN shares are allowed
Minimum percentage of Shares Traded on the Market
(free float)
25% free float by the 7th year listed or minimum liquidity
conditions
At least 25% free float
N/A
Public share Offerings N/A Shall adopt mechanism to favor capital
dispersion and broader retail access N/A
Comparing the requirements of the Listings Segments:
Capital Markets in Brazil: Structure
BOVESPA
Mais Novo Mercado Level 2 Level 1 Regular Market
Board of Directors
Minimum 3 members
(as prescribed
by law)
2-year unified mandate, minimum 5 members, of which at least 20% shall be
Independent; President cannot be CEO as of May, 2011; Obligate to give an opinion on tender offers launched to acquire the company’s shares
Minimum 3 members (as
prescribed by law)
Granting of Tag Along Right
100% for ON shares
100% for ON and PN Shares
----100% for ON shares and 80% for PN shares until
May, 2011
80% for ON shares (as prescribed by
law)
By-laws sections
prohibited as of May, 2011
N/A
Sections that set forth the (i) reduction of the shareholders’ number of votes lower than
5% of the stock capital, (ii) qualified quorum and (iii) fundamental clauses (cláusulas
pétreas)
N/A
Comparing the requirements of the Listings Segments:
Capital Markets in Brazil: Structure
BOVESPA
MaisNovo
Mercado Level 2 Level 1 Regular Market
Annual Balance Sheet As
provided by law
According to standards of US GAAP or IAS/IFRS
Shall be translated in EnglishAs provided by law
Adherence to the Market Arbitration Pane as the vehicle to solve corporate disputes
Mandatory Optional
Disclosure of Annual Calendar of Corporate Events
Optional Mandatory Optional
Obligation to hold a tender offer by the economic value criteria, in case of delisting or deregistration process
N/A Mandatory N/A
Comparing the requirements of the Listings Segments:
Capital Markets in Brazil: Data
1. Registered Securities Offerings
2. Registered Stock Offerings
3. Securities Offering Registered
4. Stock Trading (billions of shares)
5. Stock Trading (BRL billion)
6. Registered Debt Securities
7. Debt Securities Trading (SND)
8. Debt Securities Trading (Bovespa Fix and Soma Fix)
9. Securitization
10. Securities registered in 2011
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 20110
20,000,000,000
40,000,000,000
60,000,000,000
80,000,000,000
100,000,000,000
120,000,000,000
140,000,000,000
160,000,000,000
180,000,000,000
200,000,000,000
2793530569726482348396
12926222742
29303242471
71526070188
124961643152
166977532752
130661114415
87607056336
193670211134
161000000000
Registered Securities Offerings
Source: CVM
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (set)
0
20000000000
40000000000
60000000000
80000000000
100000000000
120000000000
140000000000
160000000000
566202410861472403152086342830
920520294211141255040
26983911220
67322943532
3400399587632280348057
152007567043
16561864281
Registered Stock Offerings
Source: CVM
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (jan-jul)
0
1000000000000
2000000000000
3000000000000
4000000000000
5000000000000
6000000000000
7000000000000
8000000000000
9000000000000
10000000000000
7015401999605
7532475571211
9221707901929
8167382003143
43759530233264621016212330
5182213726499
3960983898709
3152478906539
8347391606388
524376089629
Source: BM&FBovespa
1 – Stock Exchange and Over the Counter Markets2 – Spot Market (standard lot)3 – Stocks +CDAs (Stocks Certificate), including BDRs
Stock Trading
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (April 18)
0
20000000000
40000000000
60000000000
80000000000
100000000000
120000000000
140000000000
160000000000
566202410861472403152086342830
920520294211141255040
26983911220
67322943532
3400399587632280348057
152007567043
18982000000
143000000001298000000
Stock Trading
Source: CVM / Anbima
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (April 18)
0
10000000000
20000000000
30000000000
40000000000
50000000000
60000000000
70000000000
80000000000
90000000000
52824040009614451500
41538852294
69464083040
46533786497
37458538000
1108034810515634956000
48500000000
86615000000
5070000000
Registered Debt Securities
Source: CVM / Anbima
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (jan-jul)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
17383.0
21454.223816.0
14096.0
19162.914703.8
27305.3
64641.9
86646.182407.6
38684.4
Source: SND
1- Debt Securities traded on Secondary market2- SND: The National Debt Securities System
Debt Securities Trading(SND)
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (jan-jul)0.0
200.0
400.0
600.0
800.0
1,000.0
1,200.0
1,400.0
1,600.0
41.79
338.82405.20
1,412.81
324.44
100.26 132.44 147.75182.87 150.85
67.25
Source: BM&FBovespa
Debt Securities Trading(Bovespa Fix/Soma Fix)
1 – Debt Securities traded on secondary market
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 (jan-jul)0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
99.76 98.45 98.33
90.89
98.34 99.32 99.52 99.77 99.79 99.82 99.83
0.241.55 1.67
9.11
1.660.68 0.48 0.23 0.21 0.18 0.17
SND Bovespa Fix and Soma Fix
FSources: SND and BM&FBovespa
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 (April 18)
0
2000000000
4000000000
6000000000
8000000000
10000000000
12000000000
14000000000
16000000000
200000000.0
1540000000.0
5134650000.0
8579125001.5
12777399200.0
9961555677.810020850000.0
8212657727.1
10233600000.0
14734000000.0
5593000000.0
108000000.0142,176,578.4287,598,926.1403,079,740.4
2,102,321,704.7
1,071,436,800.9868,298,374.2830,736,816.31,223,975,134.3
2,138,652,571.9
12,427,000,000.0
9,947,000,000.0
173,000,000.0
FIDC CRI
Securitization
FIDC: Receivables Investment FundsCRI: Real Estate Certificate Receivables Source: CVM / Anbima
Stocks Debt Securities Securitization FIP Real Estate Investment Fund
Others0
2,000,000,000
4,000,000,000
6,000,000,000
8,000,000,000
10,000,000,000
12,000,000,000
14,000,000,000
16,000,000,000
18,000,000,000
17413612171.3
2460000000.0
6363863170.2
2445100000.0
4956335656.8
3855958063.0
Securities registered in 2011
1 – Stocks: Stocks+Stocks Certificate2 – Securitization: FIDC: Receivables Investment Funds + CRI: Real Estate Certificate Receivables
Source: CVM
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 BrazilPermanent 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
Law in Brazil: Acquisition of rural property
By foreign person or foreign legal entity:
• Governed by Federal Law N. 5,709 of October 7, 1971 • Restrictions related to: (i) size of the property, which cannot
exceed 50 units called “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
Law in Brazil: Acquisition of 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
Law in Brazil: Acquisition of rural property
By foreign legal 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