Relevant regulatory changes improve the Brazilian corporate environment

The Brazilian government is committed in transforming the business environment in Brazil, improving regulatory conditions for entrepreneurs and companies that drive our economy.

This article will cover about the important changes for the corporations brought both by the Legal Framework for Startups, and by Law 14.195/21.

One of the government’s main platforms is to reduce the so-called “Brazil Cost”, which includes mechanisms to accelerate the incorporation of companies in the country, reduce bureaucracy for entrepreneurs, as well as create a specific regulatory framework for technology companies, in an attempt to promote the creation and development of these companies.

And in the context of these regulations, a series of provisions were also introduced, modifying the operational rules of some corporate types, in particular for joint stock companies. 

These changes aim to reduce the maintenance cost of such companies and tend to lead to the adoption of this corporate type also by small and medium-sized companies.

Some significant changes have been implemented when it comes to the management of corporations.

Firstly, the joint stock companies are now allowed to appoint a single statutory officer.

In addition, officers residing and domiciled abroad may now be appointed, equaling the treatment already given to members of the board of directors.

It is noteworthy that the appointment of an executive residing and domiciled abroad is also subject to the appointment of an attorney in fact residing in Brazil, with powers to receive services of law for a period of, at least, 3 years after the end of his or her term of office.

It is important to highlight that limited liability companies will also benefit from such specific modification and will be able to appoint administrators residing abroad.

Although this change meets a recurring demand from foreign investors, some fiscal and practical aspects must still be addressed in Order to avoid any difficulties in the day-by-day administration of the company by officers residing abroad.

As regards publicly-traded companies, two relevant modifications have been implemented as a way to protect the minority shareholders of such companies:

– the election of independent directors is now mandatory; and

– the chairman of the board of directors and the company’s main executive cannot be the same person, something that is already mandatory for those companies traded under The listing segment of The Brazilian stock exchange called Novo Mercado. This specific rule shall come into force in 1 year.

Other aspects that were simplified and aims at reducing the bureaucracy for the companies relates to mandatory publications and the management of the company’s books and documents. 

Based on such regulation, privately-held companies with annual gross revenues of up to 78 million reais are authorized to make all publications required under the corporations law by electronic means. This will represent huge savings for the companies, especially for smaller ones.

In addition to that, closed corporations are now entitled to replace certain physical corporate books for electronic registers.

Perhaps the greatest change brought by these recent regulations was the adoption of the dual class stock structure by Brazilian corporations law. 

By means of Law 14.195/21, it became possible to issue one or more classes of common shares with weighted voting rights, granting the holders of these shares with more than one vote per share in the shareholder’s  meetings.

This mechanism is widely used in other jurisdictions and promotes an imbalance between the shareholder’s financial participation in the company and its political rights. 

To avoid abuses, the Brazilian legislator modulated the use of such mechanism and established a series of limitations to protect the shareholders:

  • the ordinary shares with multiple voting rights will grant a maximum of the votes per share;
  • the multiple voting rights will be valid for a maximum initial period of 7 years (sunset clause), but it may be extended by the company’s shareholders pursuant to and in line with the procedures established by Law 14.195/21;
  • both listed and non listed companies may issue multiple voting shares, but for listed companies the issuance of such class of shares must take place prior to the negotiation of its stocks in any organized securities market (such as the Stock Exchange B3). Listed companies with shares already traded in organized securities Market cannot adopt a dual class structure;
  • listed companies with shares traded under organized securities market and that does not have a dual class structure cannot (a) be incorporated into, have its shares incorporated by, or be merged with a company that adopts a dual class structure, nor (b) be demerged to form a new company with a dual class structure or to assign part of its assets/equity to an already existing company with a dual class structure;
  • the ordinary shares with multiple voting rights will be converted into regular ordinary shares (without multiple voting) in case (a) such shares are transferred to third parties (except to permitted transferences, in accordance with Law 14.195/21), and (b) shareholders that own shares with multiple voting right and shareholders who does not own such shares enter into a shareholders’ agreement that regulate the exercise of voting rights;
  • the multiple voting rights will not be valid for resolutions to be taken in the context of shareholders’ meetings regarding (a) officers/directors remuneration and (b) the approval of transactions with related parties that meets the criteria of relevance to be defined by the Stock Exchange Commission;
  • state owned enterprises (wholly or partially owned by the a governmental body), its subsidiaries and its directly or indirectly controlled companies cannot adopt a dual class structure.

The adoption of dual class structures can be considered an advance for the Brazilian stock market, providing companies with new tools and more variations to accommodate the interests of shareholders with different profiles, but it will also require greater caution and attention when it comes to analyzing the acts performed by the holders of such classes of shares. 

In this context, the Brazilian stock exchange commission will certainly have a prominent role, since the decisions and understandings of the agency will certainly be the grounds for future court decisions. 

The changes implemented by the Startups Legal Framework and by Law 14.195/21 significantly modify the Brazilian corporate environment. The new rules simplify the administration and routine of the joint stock company, as well as create new alternatives to accommodate the interests of the various shareholders. 

Our firm’s corporate team can provide you with more information and assist you with these new rules.