Brazil: Business Establishment

Any entrepreneur needs to organize the elements of the production by applying a minimum set of assets (tangible and intangible) for the operation of an economic activity. The Brazilian law has given the name of "establishment" ("estabelecimento") for this group of assets to support an economic activity. The Brazilian Civil Code in section 1,142 defines "establishment" as a group of assets organized for the activity of a company by an entrepreneur (individual) or by a business company.

Establishment can be defined as a conglomerate of assets used for the company to operate a business. The establishment comprises both tangible goods (such as buildings, facilities, inventories), and intangible goods (such as trademarks and patents).

Law no. 9,279/96 ("Intellectual Property Law") sets forth the rules applicable to intellectual property, providing that they are assets that could comprise the invention, utility model, industrial design and brand. The business name is not regulated by the Intellectual Property Law, but rather by the Civil Code.

A company may have more than one establishment (one is operated by the headquarters and others that can be operated by the branches of the company).

The places where the company will have its establishments may be owned by the company or leased by third parties. If the company executes a lease agreement with a third party to rent a space for the operation of its activities, this non-residential lease will be ruled by Law no. 8,245/91. Such law provides for the mandatory renewal of the lease, provided that certain conditions are met, specifically: (i) the contract must have been made in writing and for a defined term; (ii) the minimum term of the contract or the sum of the periods of uninterrupted written contracts must be at least five years; and (iii) the lessee must be exploring the same business for a minimum uninterrupted period of three years.

The contract for the sale, usufruct or lease of an establishment will only produce effects before third after if it is registered with the Board of Commerce or in the Public Registry of Companies, as the case may be, and then published in the official press.

Important to note that if the seller does not remain with sufficient assets to solve its liabilities, the effectiveness of the transfer of the establishment will depend on the payment of all creditors or the consent of the creditors. Therefore, it is advisable that the buyer, before buying an establishment, carries out, at least, the following: (i) audit the financial statements of the company to check the assets and liabilities; (ii) check if there is any encumbrance that falls on the assets or real estates; and (iii) obtain the approval of the creditors for the sale of the establishment (at lease of the most important creditors).

According to the tax law, the buyer will be jointly liable for the taxes payable if the seller terminates the operation of the business. If the seller, after the transfer, continues to carry out the activity or start performing, within six months, a new activity in the same or another company, the responsibility of the purchaser shall be subsidiary.

In the labor area, the responsibility of the purchaser will be in the case of succession of companies or employers. Brazilian Labor Laws establishes that any change in the legal structure of the company will not affect the rights acquired by the employees and the change in the ownership or legal structure of the company will not affect the employment contracts of the employees. A legal succession occurs through a merger, amalgamation, spin-off or transformation. The succession of employers occurs through the mere exchange of ownership of the establishment.

The buyer of the establishment will be liable for the payment of the debts prior to the transfer, provided that such debts are regularly accounted for in the books. The seller will be jointly and severally liable with the buyer for a period of one (1) year counted as of the publication for the matured credits or counted as of the maturity date for the others.

If there is no express authorization in the Agreement for the Sale of an Establishment (in case the agreement is silent), the seller cannot compete with the purchaser for a period of five (5) years counted as of the date of the transfer of the establishment. The seller will be allowed to compete only in case there is an express authorization in the agreement. In case of lease or usufruct, this prohibition remains during the term of the agreement.

Unless otherwise agreed by the parties in the agreement, the transfer of the establishment will result in the automatic subrogation of the buyer in the relevant contracts for the operation of the business, provided the contract does not have a personal nature. However, the third parties will be allowed to terminate any agreement within 90 days counted as of the publication of the transfer, in case of a justified cause, excepted the seller's liability.

The assignment of credits in connection with the establishment transferred shall produce effects in relation to the debtors from the moment of publication of the transfer.

However, the debtor will be discharged from his obligation, if, he pays in good faith the assignor (seller). In this case, the buyer will allowed to charge from the seller the amount inappropriately received by him.

These rules are applicable only in case of sale, usufruct or lease of an "establishment", and not in case of a sale of shares/quotas of a company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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