Doing business in brazil // Coimbra & Chaves // 2014 DOING BUSINESS IN BRAZIL

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1 DOING BUSINESS IN BRAZIL

2 Aspects of Brazilian Corporate Law

3 The Brazilian Civil Law Code (Law /02) lists as corporate entities: (i) Associations, (ii) Foundations, (iii) Religious Organizations, (iv) political parties, (v) Corporations ( S.A. ) and (vi) Limited Liability Companies ( Ltda ). This presentation deals with corporate entities that can receive direct or indirect foreign investment whether forprofit or not. Associations and Foundations are constituted by a group of people sharing certain assets with the purpose of exercising non-profit activities and in the case of foundations such activities must be of a religious, moral, cultural or support nature. Brazilian Law does not recognize trusts. On the other hand, Corporations and Companies are constituted by one or more individuals or corporate entities, domestic or foreign, resident or non-resident in Brazil with the purpose of exercising forprofit activities. Companies without a legal personality of their own are: (i) Unregistered Joint Ventures and (ii) Unincorporated Joint Ventures. Companies with a separate legal personality are (i) General Partnerships, (ii) Ordinary Partnerships, (iii) Limited Partnerships (iv) Limited Liability Companies ( Ltda ), (v) Corporations ( S.A. ) (vi) Limited Partnerships per Shares, and (vii) Co-ops. Individual Limited Liability Companies ( EIRELI ) are a novelty in Brazilian corporate law resulting from the unification of the concept of an autonomous entrepreneur and the limited liability company (where the liability of each partner is limited to his or her investment) allowing one individual (or corporation) to exercise a business activity autonomously, but with limited liability.

4 In order for a foreign individual or corporation to make an investment in Brazil, the related investment must be declared and registered with the Brazilian Central Bank ( BACEN ) through its on-line system ( SISBACEN ) as either a direct corporate investment ( RDE-IED ) or other financial transaction ( RDE-ROF ) such as loans, services, franchise, lease, guaranties etc. The choice of corporate investment vehicle in Brazil depends on many factors such as the nature of the intended business activity and type of investment. I. Sociedade Limitada (LTDA) The Ltda is by far the most commonly used company form in Brazil. Approximately 98% of all companies in Brazil are incorporated as a Ltda. This is mainly due to its (i) simplified and flexible structure; (ii) limited liability for quotaholders; (iii) no minimum capital requirement and (iv) low maintenance cost. It is optional for a Ltda to adopt certain corporate governance rules normally only applicable to corporations (S.A.). Law /07 requires companies and groups of companies, which in the prior fiscal year had assets exceeding 240 million Reais or gross annual income exceeding 300 million Reais to publish their financial statements.

5 a. Incorporation The Ltda can be incorporated by individuals or companies, nationals or foreigners, resident or not in Brazil. The Articles of Incorporation must state the expression Limitada or Ltda in the company name, address, whether incorporated for a limited or unlimited period of time, business purpose, capital, management etc. The Articles must be filed with the local Board of Commerce in the home state of the company. Non-resident partners must appoint a proxy in Brazil with powers to receive notifications on their behalf. The power of attorney must be issued in accordance with the laws of the country of residence of the quotaholder, legalized with the Brazilian consulate in that country and translated into Portuguese by a sworn translator. b. Limited Liability The liability of each quotaholder is limited to any capital not paid-in. This means that in case the capital of the company has been fully paid-in, the quotaholders have no further liability except in case of fraud, in which case the corporate veil can be pierced and the individual quotaholders made responsible joint and severally. c. Capital The capital of the company is divided into a number of quotas. Payment for quotas can be made in local currency, assets or other rights. There is no minimum capital requirement.

6 d. Administration The Ltda is managed by one or more individuals, partners or not, appointed in the Articles of Incorporation. A non-resident alien cannot be the manager of a Ltda. In order to be appointed manager of a Ltda the foreigner must obtain a permanent visa. A special permanent visa is available for foreigners, who will act as managers or executives of companies (Resolution 62/04 from the National Immigration Council). Citizens of the Mercosur member states and associated member states (Argentina, Paraguay, Uruguay, Bolivia, Chile, Colombia, Venezuela and Peru) may obtain temporary visas convertible into permanent visas according Decree 6.975/09 and may act as administrators according to Normative Instruction 111/10 from the National Immigration Council. The powers of the administrators can be limited through provisions in the Articles of Incorporation requiring for instance two signatures on all corporate documents. e. Quotaholders Meetings The quotaholders must meet in an ordinary meeting at least once a year no later than four months after the end of the company s fiscal year in order to approve accounts and financial statements from the prior year, decide on distribution of profits and disposal or election of administrators, if required. The quotaholders can meet in extraordinary meetings whenever the interest of the company so requires. Specific quorum requirements can also be determined.

7 II. Corporation The Corporation ( S.A. ) is regulated by the Brazilian Corporations Code (Law 6.404/76) and is generally used by companies that intend to obtain capital in the market. This corporate entity is similar to the Ltda in that it limits the liability of its shareholders. The capital of the company is divided into shares and the liability of the individual shareholder is limited to the unpaid part of the nominal value of the shares, i.e. once these shares have been fully paid up the individual shareholder has no further liability. Apart from its shares the corporation can issue other types of securities such as debentures and subscription bonus. Corporations are divided into closely held corporations and public companies with shares listed on an exchange. Corporations that wish to have their stock listed on local exchanges must register with the Brazilian Exchange Commission CVM, which is an administrative branch of the federal government supervising the domestic stock exchanges. a. Incorporation The corporation can be incorporated by individuals or companies, domestic or foreign, resident or non-resident, through a private or public offering.

8 A public offering requires prior registration with the CVM and the intermediation of a financial institution. A private offering can be made through a shareholders meeting or public deed. The Articles of Incorporation must state the name of the corporation followed by the expression Companhia or Sociedade Anônima or abbreviated as well as address, if incorporated for a limited or unlimited period, business purpose, share capital, management and must together with the subscription bulletin be filed with the local State Board of Commerce. The same rules apply to foreign shareholders as mentioned above for limited liability companies. b. Business Purpose By nature the corporation is a commercial company and the purpose of the company must include its area of business. The purpose of a corporation can be the investment in other companies (holding company). c. Capital The capital of the corporation is divided into shares, which can be not to bearer, ordinary or preferred with one or more classes with or without a nominal value, with each shareholder having at least one share.

9 The common stock gives its holders general shareholder rights including the right to vote. Preferred stock gives its holders certain preferred rights to dividends but may be limited in other ways from ordinary shares. The number of preferred shares with a right to vote or limited right to vote cannot exceed 50% of the total shares issued. Share holdings and the transfer hereof is registered in share registers, which are subject to registration at the local state Boards of Commerce and must be kept at the headquarters of the corporation. There is no minimum capital requirement and shares can be underwritten in exchange for assets, rights or local currency. A minimum of 10% of the shares issued must be underwritten in local currency at inception. The underwriting of shares in exchange for assets and other rights must be approved by the shareholders meeting and subject to an appraisal report prepared either by three appraisers or a specialized company appointed by the shareholders meeting. The capital of the corporation can be increased by decision of the shareholders when at least ¾ of the capital has been underwritten. A reduction of the share capital is allowed up to the amount of accumulated losses or in case the capital is deemed excessive to achieve the business purpose. The Articles of Incorporation can contain a standing authorization to the Board of Directors to increase the share capital through issuance of new shares up to a specific limit without the approval of a shareholders meeting. The shareholders have a right of preference to underwrite new shares or the buy-back of shares from other shareholders on equal

10 terms. The shareholders can limit preferential share rights as well as impose conditions on the transfer of shares such as, but not limited to, Tag Along, Drag Along or voting agreements through signing of shareholders agreements, which must be kept at the corporation headquarters. d. Management The management of the corporation can be composed of the following administrative organs: (i) Executive Board, (ii) Board of Directors and (iii) Audit Committee. The Executive Board is required for all corporations whereas the Board of Directors is not required in closely held corporations (as opposed to public companies and those with authorized capital). The Audit Committee can be permanent or limited to certain situations as defined by the shareholders. The Executive Board consists of a minimum of 2 members, individuals, citizens or foreigners, resident in Brazil and is elected for a maximum term of 3 years. The Board of Directors must have a minimum of 3 members, individuals, citizens or foreigners, resident or not in Brazil and elected for a maximum term of 3 years. The Executive Board has the exclusive right to represent the corporation for legal and commercial purposes all in accordance with the Articles of Incorporation and the decisions of the shareholders meeting and the Board of Directors.

11 e. Corporate Decision Making The shareholders meet in a General Assembly, which must be called at least once a year during the four months following the end of the fiscal year of the corporation with the purpose of approving the financial statements and decide on distribution of dividends and election of directors if required. The shareholders can meet in extraordinary meetings when the interest of the corporation so requires. The Articles of Incorporation can establish minimum quorum requirements for decision making in certain matters. The corporation must keep the updated share registers, minutes of Shareholders Meetings, Executive Board Meetings and Board Meetings at the corporation headquarters.

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