In January 2019, Jair Bolsonaro took office as the new president of Brazil. The Bolsonaro administration has indicated that changes to the Brazilian legal framework will be a strategic priority in rebuilding the Brazilian economy following system-wide corruption investigations that have led to the bankruptcy or near-insolvency of many. key Brazilian companies, particularly in the construction and oil and gas services sectors. To achieve the desired objectives, the Brazilian federal government is implementing a legislative program aimed at improving the business environment, fostering competitiveness and enhancing the interest of foreign investors.
As the largest economy in Latin America, Brazil has always been on the radar of international investors, especially over the past decade. Despite a recent history of economic recession and corruption scandals, the country is implementing a number of changes to improve legal certainty and attract or retain investment. In this regard, on September 20, 2019, Brazilian Provisional Measure No. 881, also known as the Brazilian Law on Economic Freedom (the Act), became law n ° 13.874 / 2019. The law aims to improve the business environment and reduce bureaucracy, and is part of a broader legislative framework aimed at reorganizing the economy. The summary below outlines the main changes in the law that we believe are relevant to our international clients and foreign investors.
The law provides for a number of regulatory changes to bring the structure of local investment funds closer to international standards. One of the most notable changes is the ability to limit the liability of a quota holder to the value of their stake in the fund (similar to the liability of quota holders in Brazilian limited liability companies). Before the Law, the liability of quota holders was generally uncapped, limited only by the proportion of their holdings in relation to the other quota holders of the fund in question, with a few exceptions such as with regard to real estate funds (where the liability was limited to a participation of the quota holder in the fund). After the law is enacted, a fund’s organizational documents may provide for limited liability for investors so that they do not have to shell out additional money if the fund underperforms or requires additional capital. . These regulatory changes are expected to improve the legal environment for Brazilian and international investors, stimulating the use of local investment vehicles and thus increasing investment in Brazil.
Equality between the contracting parties
The law included new provisions in the Brazilian Civil Code strengthening the concept of pacta sunt servanda (i.e. the agreement between the parties is binding) in private agreements and stipulating that the parties to civil and commercial contracts will henceforth be considered equal in most circumstances (for example, that both parties know the terms and understand the agreements they enter into), except as expressly provided by applicable law, such as consumer laws under which consumers will continue to be considered the weaker party for the purposes of contractual agreements. Indeed, Brazilian courts are now required to respect the actual contractual conditions when deciding disputes, even if this results in an apparent disadvantage for the party in a seemingly weaker position. This should increase legal certainty in commercial relations, as the parties can have more assurance that their contractual agreements will not be ignored by Brazilian courts.
Single-member limited liability companies
Brazilian limited liability companies (or sociedades limitadas) previously required at least two quota holders to be formed and maintained, and in the case of single member LLCs (or Empresas Individuais de Responsabilidade Limitada, EIRELI), a minimum share capital equivalent to 100 times the federal minimum wage (approximately USD 25,000 at the current exchange rate) is required. Under the law, Brazilian sociedades limitadas can now be formed and maintained with a single quota holder (which can be a natural or legal person), without the need to comply with the minimum capital requirements of an EIRELI.
Corporate veil piercing
In order for the courts to pierce the corporate veil, the Brazilian Civil Code requires the existence of an abuse of legal form, which is characterized by “patrimonial confusion” (patrimonial confusion) or “misappropriation of the corporate purpose” (desvio de finalidade). Prior to the Act, these concepts were not defined by law and, therefore, could be interpreted by the courts. The “abuse of the corporate purpose” is now limited to the use of the legal person for purposes of prejudice to creditors or for the commission of unlawful acts of any kind. “Asset confusion” is now defined as the lack of effective separation between the assets of the company and the assets of the shareholders. This occurs when the assets of the company are regularly used to meet the obligations of shareholders or managers and vice versa, there is a transfer of assets and liabilities without adequate consideration (except for proportionately insignificant amounts) and in any other circumstances which demonstrate a lack of autonomy of the ownership of the company.
Additional statutory revisions are expected to be approved in the coming months, in line with this new, more business-friendly legislative program pushed by the current government. A major overhaul of the Brazilian tax code is also underway, and additional legislative initiatives are proposed to further reduce the costs of doing business in Brazil. Recent changes have also been made to the provisions of Brazilian labor and social security legislation. The impact generated by these changes has been significant, with a substantial increase in the number of capital markets and M&A transactions in recent months and increased interest from international investors in Brazilian assets. We anticipate that future pro-business legislative initiatives will continue to provide an economic environment conducive to increasing levels of investment in foreign capital markets in transactions originating from Brazil.