Brazil: Amendments To The Brazilian Corporation Law

BRAZILIAN CORPORATION

The Brazilian Corporate Law (Law No. 6.404, of December 15, 1976 as amended by Law No. 9.457, of May 5, 1997) establishes in its article 146 that only individuals resident in the country may be elected to manage bodies of corporations (the Administrative Council and the Board of Directors). In order to be elected to the Administrative Council of a corporation, the individual shall also be one of the shareholders of the corporation.

The former law (Decree-Law No. 2.627, of 1940) expressly required residence in the country only to the members of the Board of Directors. Therefore, since there was no express provision in relation to the members of the Administrative Council, it became common practice in companies with foreign capital, to appoint individuals resident abroad to hold positions in the Administrative Council.

The original wording of the Bill reforming the 1940 corporate law, discussed in the Brazilian Congress during 1976, expressly authorized individuals resident abroad to hold positions in the Administrative Council limited to one-third of its members.

During the discussion of the Bill, there was an argument that such provision would violate article 153 of the 1969 Brazilian Federal Constitution, also contained in the current 1988 Constitution, which required residence in the country for the exercise of any activity in Brazil. Based on nationalistic interests rather then legal reasoning, the unconstitutionality theory succeeded and the Bill was amended in order to limit the access to the Administrative Council to those individuals resident in the country.

Many companies with foreign shareholders opted to obtain residence Visas for those officers that would participate in the Administrative Council, even if they would not live in the country.

Provisional Measure No 1754-16 of April 8, 1999 (reenacted by Provisional Measure No 1754-17 of May 6, 1999) changed the wording of article 146 of the Brazilian Corporate Law, as follows:

 

"Art. 146. Individuals may be elected to the management bodies of the corporations provided that the members of Administrative Council are shareholders and the members of the Board of Directors are resident in the country, shareholders or not.

First Paragraph - The minutes of the General Shareholders’ Meeting in which is appointed new members to the Administrative Council, shall contain the full identification of each member, their term in office, and shall be filed with the commercial registry and published.

Second Paragraph - Administrative Council members shall only be vested in office after the appointment of an attorney resident in the country, with powers to receive service of process in lawsuits filed against them, based on the corporate law and for a term no shorter then their term in office". (free translation)

Based on the above Provisional Measure, it is currently possible to appoint individuals resident abroad as members of the Administrative Council of a Brazilian corporation provided they are shareholders.

The possibility of appointing individuals not resident in the country to hold positions in the Administrative Council of Brazilian companies, does not affect the management of the companies, since the Administrative Council has a supervisory capacity and is not required to be involved in the daily business of the companies, which is incumbent upon the Board of Directors.

Even though the new wording of article 146 mentioned above, represents a very important step forward to bring the Brazilian corporate structures in line with other jurisdictions, it is necessary to stress that the improved version of article 146 is based on a Provisional Measure. Provisional Measures are constitutional legal instruments which allow the President to legislate, subject to the later confirmation of the Brazilian Congress.

In case the terms of the Provisional Measure are not approved by the Brazilian Congress within thirty days from its enactment, it will be considered null and void from the date it was enacted. The Brazilian Congress shall regulate the legal acts carried out during the validity of the Provisional Measure. Since the legislative procedure is not an expeditious one, it has become common practice for the President to re-enact Provisional Measures on a monthly basis, in order to guarantee its legal effects, well beyond the original thirty day period.

Considering that the members of the Administrative Council may be elected for a term of up to three years (article 140 of the Brazilian Corporate Law), and in view of the fact that Provisional Measure No. 1754-17, may not be approved by the Brazilian Congress, what would legally happen to the election of individuals not resident in the country to the Administrative Council, carried out while Provisional Measure No. 1754-17 (or its successors) was in force?

Unfortunately, since Provisional Measures not confirmed by the Brazilian Congress within the specified period of time shall be considered null and void from the date of its enactment, the election of individuals not resident in the country to the Administrative Council, carried out while the Provisional Measure was in force shall be revoked and the member replaced, except if otherwise established by the Brazilian Congress when it decides not to approve the Provisional Measure.

Provisional Measure No. 1754-17 brings up additional issues that must be pointed out, as follows:

The first issue is the location where the Administrative Council meeting can take place. The Brazilian Corporate Law only regulates the meetings of the shareholders, which, except in case of an act of God, shall be held at the company’s head-office. Based on the limitation imposed by the original wording of article 146, it was logical to presume that the meetings of the Administrative Council should be held at the company’s head-office or in other place, but within the Brazilian territory. Since the new wording of article 146 allows the Administrative Council to be formed by individuals resident abroad, there should be no restriction to the place where the meetings of the Administrative Council are held (in the country or abroad), provided the minutes are drawn up in Portuguese and duly registered in the company’s books.

The second issue refers to the fact that it is still forbidden to have companies as managers of Brazilian corporations. The new wording of article 146 makes reference to individuals and does not mention legal entities. Such restriction is not justifiable if we consider that Decree No. 3.708, of 1919 (that regulates the limited liability companies in Brazil) already allows the management of the company by another company which delegates its management functions to an individual. Even in case a legal entity is appointed as member of the Administrative Council it will have to be represented by an individual, who will be liable not only individually for the acts practiced but will also be liable as representative of the legal entity, increasing third parties’ guarantees.

São Paulo, May 20, 1999.

The content of this article is intended to provide a general guide to the subject matter. A specialist's advice should be sought in order to provide professional advice on a case to case basis which will meet specific circumstances.

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