Brazil: Limited Liability Companies And The New Brazilian Civil Code

By Walter Douglas Stuber, Manoel Ignácio Torres Monteiro and Vera Lúcia Pereira Neto

The New Civil Code (Law Nº 10406, of January 10, 2002 – "NCC"), effective in Brazil as of January 11, 2003, brings several important changes to the rules applicable to the Brazilian Limited Liability Company ("LLC"), which was previously governed by Decree Nº 3708, of January 10, 1919 ("Decree Nº 3.708/19").

The changes of the NCC affect not only the LLC whose quotas are held by one single conglomerate but also those whose capital is distributed among several members who may have distinct interests in relation to how the corporate business is conducted.

Included in the several changes brought by the NCC, some of them are deserving of special attention, specially those to LLC whose corporate capital is distributed among several members that are not members of the same controlling group.

The first issue to discuss is the management of a LLC, which pursuant to Decree Nº 3708/19 would be performed by all members, notwithstanding any statutory provision to the contrary. A member had automatically management powers.

The NCC expressly determines that provisions applicable to the management should be regulated statutorily. Thus, the articles of association must clearly indicate whether the LLC can or will be managed by a non-member, whose appointment will be conditioned upon (i) unanimous decision (if the capital is not paid up) or (ii) approval of two thirds of the capital in the case of paid up capital. Besides the appointment of non-members to manage the LLC, the NCC does not allow that the position as managing member be automatically extended to those that subsequently take the position, to the extent that all members are in charge of the LLC management.

An officer appointed in a separate document (Management Appointment Instrument or Minutes of the Members Meeting for Appointment of Manager) will take office by means of the signature of the respective office taking record on the Book of Management Meetings Minutes, within ten days of taking office. Therefore, a Book of Management Meeting Minutes is set where, in addition to the office taking records, the minutes of the meetings or resolutions of the offices are recorded.

Removal of a member that has been statutorily appointed officer will be conditioned upon approval of members representing no less than two thirds of the corporate capital, except in the case of statutory requirement of a higher or lower quorum.

It is important to stress out that most articles of association today establish that the decisions will be taken by majority of the corporate capital, which may be unacceptable under the NCC because of their generality.

An innovation brought by the NCC is the express regulation of the resignation, which become effective to the LLC after written communication thereto and in relation to third parties after recording and publication on the relevant official gazette and major newspaper.

Article 1071 of the NCC establishes that the following matters will be decided by the members: (i) approval of management accounts; (ii) designation of office, if in a separate act; (iii) removal of officers; (iv) compensation, if not statutorily established; (v) change in the articles of association; (vi) merger, amalgamation and dissolution of the LLC, or suspension of the winding-up status; (vii) appointment and removal of liquidators and ascertainment of accounts; and (viii) file for protection under concordata (which is similar to Chapter 11 in the USA).

Approval of matters indicated in items (v) and (vi) above requires approval of members representing ¾ (three fourths) of corporate capital.

As to the approval of accounts, we should not forget that officers that are also members are not allowed to approve their own accounts. Therefore, such an important matter may be approved by the minority members. Bar to vote by officers is expressly provided in Article 134, (1) of the Corporation Law and applies subsidiarily to LLC.

As to amendments to articles of association several decisions that were previously made by the majority (over 50%), under the NCC, an agreement of 75% of the corporate capital is necessary to implement them.

A major advantage of being a LLC is that very few legal formalities apply, as compared to corporations. Not seldom we find LLC that last filed a current corporate document with the Commercial Registry long ago. The informality of procedures in a LLC may be appealing to members but for professional administrators, non-members, they are disadvantageous. According to those professional administrators, regular meetings of the management, board or even shareholders is an opportunity to discuss and record relevant events in the corporate life.

Particularly in that aspect, the NCC innovates greatly, specially as regards members’ meetings and annual meetings. In this sense, all the matters listed in article 1071 and mentioned above will be discussed and/or approved in a meeting or member’s meeting. Additionally, a meeting or members’ meeting must be convened within the first four months of each year, to: (i) examine the management account and make decisions as to the balance sheet and financial statements; (ii) designate officers, if applicable; (iii) to transact any other business in the agenda.

Like with the corporations, meetings and member’s meetings (LLC with over ten members have member’s meeting) will be convened by publication, for three days at least, on the (state or federal) official gazette and major newspaper, no later than eight days of the first call and five days of the subsequent calls. Call may be waived if all members attend the meeting or provide written statement that they are aware of the place, date, time and agenda. The procedure must be followed for both kinds of meetings.

Decisions about matters at meetings or members’ meetings have a practical impact since LLC is required to keep a members attendance book and a management meetings and member’s meeting minutes book. There is also a political implication, to the extent that all members may express their opinions regarding the several matters to be discussed at such meetings or, yet, question any member of the LLC’s management. In addition, business to be transacted at meetings must be communicated in advance through the agenda, which must address the main business to transact.

Removal of a member is now regulated, expressly, by the NCC. A member, except as otherwise provided in the articles of association, representing the majority of the corporate capital, could, under the Decree Nº 3.708/19, amend the articles of association whereby the minority member was removed as a result of breach of the so-called "affectio societates". The "affectio societates" may be understood as a special relationship existing among several people willing to organize a LLC. Most of the time, the minority member will only be aware of the removal after the removal document is filed with the Commercial Registry.

Under the NCC, it is still possible to remove a minority member but such removal is now conditioned on the following: (i) majority of the corporate capital in favor of the removal; (ii) possibility of removal being expressly provided in the articles of association; (iii) reason that could jeopardize the continuation of the business; and (iv) meeting or members’ meeting specially convened to discuss the removal whereat an opportunity for the aggrieved member to defend himself/herself. Therefore, the possibility of removing a member has been dramatically reduced.

The NCC reflects expressly rules already existing today in the sense that heir of a member can only be admitted to the LLC to the extent that the articles of association makes express provision to that effect or there is an agreement among the other members. Considering that the deceased member’s share is not always paid as fast and that said deceased member could be a majority member, special attention should be given to the succession planning.

Finally, the NCC establishes the creation of an Audit Committee to LLC which is very similar to that found in corporations, except that in the latter said body is permanent and established by a simple request of a shareholder representing 10% of the voting capital or 5% of the total capital. Under the NCC, the Audit Committee, if any, must be statutorily provided, being that a member holding 20% of the capital may elect a member of the committee. It is reasonable to assume that even if not statutorily provided, and being the LLC capable of bearing the costs of an Audit Committee operation, the member representing at least 20% of the corporate capital may request the establishment and operation of an audit committee since the right to inspect is a right of the members themselves to which the controlling member may not oppose.

In conclusion, many changes were brought by the NCC to the LLC regulations and members should give special attention to the articles of association, particularly those LLC having more than one member and where there is always a risk of conflict.

However, it should also be mentioned that some proposed amendments to the LLC were presented to the Brazilian National Congress, even before the NCC had come into force, and still will be examined. Therefore, it is very likely that this matter will be subject to changes in the new future.