By: Antonio Mazzucco, Luiz Gustavo Doles and Fernanda Lazzarini

In a scenario of change of government, it is worth highlighting advances made in Brazilian commercial legislation with a view to strengthening private initiative in contrast to economic statism. These advances resulted from the so-called Economic Freedom Law, as Law 13,378, enacted on 10/03/2019 (“LLE”), became known. 

The LLE established the so-called Declaration of Economic Freedom Rights with the purpose of resolving potential regulatory limitations on entrepreneurship. The LLE brought significant changes to the rules regarding commercial companies that are worth remembering. This declaration establishes the following principles: (i) freedom in the exercise of economic activities, (ii) good faith of the individual before the Public Authorities, (iii) subsidiary and exceptional intervention of the State in economic activity; and (iv) vulnerability of the individual before the State. 

We also had, on August 26, 2021, the enactment of Law 14,195, the so-called Business Environment Improvement Law (“LAN”). This law deals with several subjects and brought numerous changes to commercial law, particularly to corporate law with changes to Law 6,404/76, the so-called Corporations Law (“LSA”). 

Both LLE and LAN represented a major advance in commercial matters, both for large companies and for small and medium-sized entrepreneurs who are the major generators of jobs and income in the country.  

Sole Proprietorship 

The LLE, in its Article 7, amended Article 1,052 of the Civil Code and resolved one of the obstacles that existed at the time of its enactment, which consisted of the requirement of a plurality of partners to form a limited liability company, except in the case of a minimum contribution of the minimum share capital in the so-called EIRELI (Individual Limited Liability Company). In other words, the exception to the requirement of a plurality of partners was the EIRELI, which, in turn, required a minimum capital contribution in a significant amount for the small entrepreneur (one hundred minimum wages).  

The amendment to Article 1,052 of the Civil Code allowed a limited liability company to be formed by one or more persons. In practice, this possibility extends to individuals or legal entities, whether national or foreign.  

The EIRELI type of company ceases to exist by force of the LAN (Article 41), which was regulated by Circular Letter SEI No. 3510/2021/ME, of the National Department of Business Registration and Integration (“DREI”). 

The amendment of Articles 49-A and 50 of the Civil Code by Article 7 of the LLE aimed to strengthen the principle of limitation of partner liability for company debts. Maintaining and strengthening this principle is essential to encourage economic activity as it protects the entrepreneur's assets from debts incurred by the company as a result of its regular operations.  

The new wording of Article 50 of the Civil Code further elaborates on the concepts of “misuse of purpose” and “conflation of assets”. Misuse of purpose consists of any act with the intent to harm creditors and the practice of unlawful acts of any nature. Confusion of assets, in turn, will occur through (i) payment of obligations of partners or administrators or vice versa, (ii) transfer of assets or liabilities without effective consideration, except for proportionally irrelevant amounts; and (iii) any act of non-compliance with the autonomy of assets. 

It is clear that there is still much room for interpretation by the judiciary when it seeks to apply the above precepts to practical cases. In any case, this is a step forward in that it will require greater discretion in the application of the disregard of legal personality and the extension of obligations to the partners' assets.  

Plural Vote 

The LAN created the plural vote mechanism (according to Article 5, which modified Article 16, item IV of the LSA) by allowing the creation of classes of common shares of a closed company based on the attribution of plural votes to one or more classes of shares (observing the limit and conditions set forth in art. 110-A of the LSA). In other words, more than one class of shares with plural votes may be created. However, in any class, the limit of a maximum of ten votes per share must be observed.  

This is an innovation in Brazilian law in contrast to the rule that each ordinary share corresponds to a single vote in the deliberations of the general meeting (Article 110 of the LSA). 

This mechanism is adopted in the US and the UK and tends to benefit the company's founders in IPO processes, as the original shareholders will be able to maintain control of the company even if they do not hold the majority of the share capital. As such, the need for a shareholder agreement is reduced, at least with regard to the exercise of voting rights. As each share may have up to ten votes, the shareholder's influence on the decisions of the general meeting will be greater than his or her stake in the share capital. 

Although this device has received numerous criticisms in the sense that it would represent a breach of a requirement of good governance, its application was conditioned on a series of safeguards in favor of minority shareholders, all of which are also provided for in the LAN.  

Shares with plural voting rights can be created in both publicly traded and privately held companies. However, in publicly traded companies, the creation of these shares is not permitted if there are already shares being traded on the market. The company may be registered as a publicly traded company, but it cannot have started trading its shares through a primary or secondary offering.  

LAN has stipulated the need for a qualified quorum to create a class of shares with plural voting rights. Therefore, for this purpose, an absolute majority is required, that is, the affirmative vote of shareholders holding half of the shares with voting rights and half of the preferred shares without voting rights or with restricted voting rights (with preferred shareholders meeting in a special meeting). It is clear that the companies' bylaws may stipulate a higher quorum for these deliberations.  

The creation of a class of shares with plural voting rights, as well as the extension of the original term of existence of these shares – limited to seven years – imply the right of withdrawal of the shareholders who dissent from this resolution, unless the possibility of creating these shares is provided for in the articles of association. In resolutions on the extension of the term of existence of these shares, their holders will not have the right to vote. In other words, the limitation of plural voting rights to seven years may be extended, but in this resolution the holders of shares with plural voting rights will not be able to vote and the dissenters will have the right of withdrawal.  

The possibility of converting shares with plural voting rights into shares without plural voting rights is also provided for in the following cases: (a) transfer of shares to third parties – unless (i) the transferor remains as the indirect holder of the shares and in control of their political rights; (ii) the transferee already holds shares of the same class of shares received in the transfer; or (ii) transfer in a fiduciary capacity; and (b) existence of a shareholders' agreement between those with plural voting rights and shareholders who do not hold plural voting rights, with the provision for joint exercise of voting rights. 

In order to prevent the rule that publicly-held companies cannot create shares with plural voting rights after the start of trading of their shares on the market from being circumvented, LAN – in its Article 5, amending Article 110-A, Paragraph 11, of the LSA – prohibited the following transactions: (a) incorporation, incorporation of shares and merger of a publicly-held company that has not adopted plural voting rights and whose shares or securities are traded on the market, into a company that adopts plural voting rights; and (b) transfer of a publicly-held company that has not adopted plural voting rights and whose shares or securities are traded on the market to form a new company that adopts plural voting rights or to incorporate the spun-off portion into a company that adopts plural voting rights.  

LAN, also by its Article 5, also amended Article 110-A, Paragraph 12, of the LSA and prohibited the use of plural voting in deliberations on directors' remuneration and approval of transactions with related parties, with the relevance criteria established by CVM Resolution No. 80, Annex F, of 03/29/2022, with the amendments introduced by CVM Resolution No. 168/22. 

Plural voting may not be adopted by mixed-capital companies or their subsidiaries, nor by companies directly or indirectly controlled by the public sector, nor by limited partnerships, in accordance with the amendment introduced by Article 5 of the LAN to Article 110-A, Paragraph 14, of the LSA.  

The LSA quorums that were changed as a result of the creation of the plural vote, that is, that will be determined considering the plurality of votes, when existing: (a) Article 125, which deals with the quorum for the installation of general meetings; (b) Article 135, which deals with the quorum for the installation of general meetings for the amendment of the bylaws; (c) Article 136, caput and Paragraph 2, which deals with matters requiring a qualified quorum for approval at general meetings; (d) Article 141, which deals with cumulative voting for the election of members to the Board of Directors; (e) Article 215, Paragraph 1, which deals with the sharing of assets in the liquidation of the company; (f) Article 243, which deals with the presumption of significant influence in the invested company; (g) Article 252, which deals with the incorporation of shares.  

As expected, in its Article 5, the LAN amended Article 110-A of the LSA to establish that, in those provisions where the LSA stipulates quorums based on a percentage of shares or share capital, but without mentioning the number of votes conferred by shares, the calculation of the quorum must be made disregarding the plurality of votes. In other words, the determination of the legal quorums provided for in the LSA in the form of a percentage (whether of capital or shares) will not take into account the plurality of votes of shares with plural votes, which must be considered individually.  

Since there was no change in the limit of preferred shares that can be issued (50% of the total shares), the plural vote will allow a minority of shareholders to control the company.  

Plural voting is an innovative institution and, although it is considered an evolution in the business environment, it may give rise to abuse by controllers. Any excesses, however, should be discussed before the CVM and the courts until a balanced use of this legislative innovation is achieved. 

Accumulation of positions in publicly traded companies 

Article 5 of the LAN amended Article 138, Paragraph 3, of the LSA, in order to prohibit, in publicly-held companies, the accumulation of the position of chairman of the board of directors and the position of chief executive officer or chief executive of the company.  

However, the Securities and Exchange Commission made an exception for smaller companies, according to the sole paragraph of Annex K of CVM Resolution 80 of March 29, 2022 (amended by Resolution 168 of 2022), which allowed the cumulation of positions in companies that have earned consolidated gross revenue of less than R$500,000,000.00 (five hundred million reais), verified based on the financial statements at the end of the last fiscal year.

Article 58, item II of the LAN determined that the prohibition on the accumulation of positions in publicly-held companies would come into effect 360 days after the publication of the LAN, which occurred on August 27, 2021. As a result, since August 21, 2022, companies have been required to adopt a structure in which there is no accumulation of the position of chairman of the board of directors and the position of CEO or chief executive of the company. 

LAN also began to require the election of independent members to the Board of Directors of publicly-held companies, a matter regulated by the CVM in article 5 of Annex K of Resolution 80 of 2022. 

This requirement, which was already mandatory for companies listed on level 2 and the Novo Mercado, now applies to all publicly-held companies that meet the following requirements: 

1. is registered with the CVM in category A, that is, authorized to trade securities representing participation in its share capital; or 
2. has securities admitted to trading on the stock market by an entity managing an organized market; or 
3. have shares or share deposit certificates in circulation 

Furthermore, the CVM indicated that the number of independent directors on the board of directors must correspond to at least 20% (twenty percent) of the total number of directors. 

Increase in the matters within the jurisdiction of the General Assembly 

LAN (Article 5) amended Article 122 of the LSA to place the following matters under the jurisdiction of the General Meeting: (a) transformation, merger, incorporation and spin-off of the company, its dissolution and liquidation, electing and dismissing liquidators and judging its accounts; (b) authorizing the directors to declare bankruptcy and file for judicial recovery, and, in the event of urgency, the declaration of bankruptcy or the request for judicial recovery may be formulated by the directors, with the agreement of the controlling shareholder, if any, in which case the general meeting shall be called immediately to deliberate on the matter; (c) deliberating, in the case of publicly-held companies, on the execution of transactions with related parties, the sale or contribution of assets to another company, if the value of the transaction corresponds to more than 50% (fifty percent) of the value of the total assets of the company as stated in the last approved balance sheet. 

Call for the General Assembly 

In the first call, in the publicly-held company, the deadline was extended to 21 days.  

Non-resident directors 

LAN amended Article 146 of the LSA to allow the appointment of an administrator resident or domiciled abroad, provided that he or she appoints a legal representative in Brazil with powers to receive summons in actions and in administrative proceedings of the CVM within three years after the end of the administrator's term of office (Article 5 of the LAN). It is worth remembering that the power of attorney may not provide for the delegation to the attorney of the administrator's duties, which are non-delegable.

Corporate Books

The LAN also allowed the corporate books of closed companies to be replaced by mechanized or electronic records, which were already provided for in Normative Instruction No. 82/2021 of the DREI. This resolution established the procedures for authentication of books by commercial boards, considering the need to simplify, standardize, modernize and automate the procedures related to the authentication of the opening and closing terms of accounting record-keeping instruments, corporate books and books of auxiliary commercial agents. 

In this sense, within the context of the priority given by the Federal Government to the debureaucratization and valorization of entrepreneurship, in the first half of 2019, other measures were enacted that aim to improve the business environment in Brazil, such as, for example, Law 13.818, of April 24, 2019, which provided for the mandatory publications of the Corporations Law, increasing to R$10,000,000.00 the maximum permitted value of net equity for a privately held corporation to be entitled to the simplified regime for the publicity of corporate acts.

Investment funds 

The Civil Code received an update in its chapter on investment funds, considering them as a pool of resources, constituted in the form of a special nature condominium and expressly excluding the application of rules related to condominiums in general (provided for in articles 1,314 to 1,358-A of the Civil Code) to investment funds.

Some new features stand out, including the possibility of the fund's regulations determining the limitation of each investor's liability to the value of their shares, protecting them from being held liable for fund obligations that exceed their share (it is not clear, however, whether this limitation will prevail in more specific situations, such as those involving tax or labor demands) and the creation of share classes with distinct rights and obligations, with the possibility of constituting segregated assets for each class.

The application of the general rules of condominiums allowed unitholders to be held liable in an unlimited manner for the obligations assumed by the investment fund (which does not have its own legal personality), as can be seen in article 15 of CVM Instruction No. 555/14, which provides that unitholders could be held liable for any negative net equity of the fund. This scenario was changed by the new rule.

Furthermore, the publicity and enforceability of acts before third parties is guaranteed by registering the regulation with the Securities and Exchange Commission (CVM), eliminating the need to resort to registry offices for titles and documents, as already regulated by ICVM 615.

The insolvency of investment funds has also undergone changes insofar as it can be requested in court by creditors, by decision of the investment fund's shareholders, in accordance with its regulations, or by the CVM itself.

The new Article 1,368-E of the Civil Code also provides that investment fund service providers are not liable for the fund's obligations (except for losses caused when they act with intent or bad faith).

Therefore, any liabilities of the fund could not directly affect the assets of the unitholders, nor of the fund's service providers, and it would be mandatory to follow the insolvency process if the fund does not have sufficient assets to settle its debts.

Final considerations.  

Regulation is a complex activity because it directly affects an entire sector of the economy and, indirectly, all citizens. Therefore, it requires a clear focus and broad planning. 

In this case, these objectives were achieved since a new paradigm was presented for the discipline of State intervention in the Brazilian economy, aiming to defend free enterprise by offering positive changes to Brazilian business law. 

The replacement of EIRELI by the sole proprietorship generated great dynamism in the market, having been the corporate type adopted by 56% of the Ltdas companies that were opened in Brazil in 2021.¹. In addition, other innovations such as plural voting and the limitation on the accumulation of positions in publicly-held companies increase the options for corporate structures available in Brazil. 

The regulation of investment funds provided answers to long-standing questions from the fund industry, generating greater stability and predictability in carrying out operations. 

It is, therefore, a rule that seeks to guarantee freedom for entrepreneurs and companies in the exercise of economic activity, necessary prerequisites for the growth and development of the country.