The rules for the extrajudicial (or administrative) exclusion of
partners from Brazilian limited liability companies are established
in the Civil Code (Law 10,406/2002).
Although the former Civil Code - as well as certain articles of the Commercial Code and Brazilian doctrine and case law - already provided for the exclusion of partners for cause, Article 1,085 of the existing Civil Code stipulates expressly that, through an amendment to the company's articles of association, partners representing more than half of the company's capital may exclude any partners that place the company's continuity at risk or perform acts of undeniable severity, provided that exclusion for cause is expressly contemplated in the articles of association.
The Civil Code also states that the extrajudicial exclusion procedure must be deliberated and voted on at a general partners' meeting called especially for that purpose, and that the accused partner has the right to receive reasonable advance notice of the meeting in order to prepare a defence and attend the meeting.
The main parameters for the introduction of this express provision in the Civil Code were:
- the need to protect and preserve companies, regardless of any disputes among their partners;
- the requirement of affectio societatis (ie, a spirit of cooperation) among the partners on incorporation of the company and during its existence; and
- the observance of the majority principle for company resolutions, including the exclusion of partners, with the aim of protecting the company's interests.
A number of legal requirements must be met for an extrajudicial exclusion to be carried out, including:
- a quorum of partners representing more than half of the company's capital;
- the performance of an undeniably grave act by the accused partner; and
- express provision for extrajudicial exclusion in the articles of association.
Therefore, a minority partner that jeopardises a company's
interests and creates obstacles to the way in which business
activities are conducted may be excluded by partners representing
more than half of the company's capital at a general
partners' meeting called especially for such purpose, provided
that the articles of association expressly provide for the
extrajudicial exclusion of partners.
As the exclusion of a partner must be linked to the performance of an act of undeniable severity that jeopardises the company's ability to conduct normal business activities, which is an inherently subjective concept, the articles of association should expressly define the hypothetical scenarios that the partners consider to be acts of undeniable severity that would lead to the extrajudicial exclusion of a partner for cause.
For illustrative purposes, the following acts might be deemed undeniably grave:
- unlawful conduct, such as engaging in acts of unfair competition or instigating disputes between partners;
- unauthorised use of the company's corporate name;
- abuse of voting rights; or
- acting in conflict with the company's interests.
The accused partner is entitled to present his or her defence in
the extrajudicial exclusion procedure. If the decision of the
majority partners remains unchanged, the accused partner may seek
the applicable judicial measures.
In light of the above, although Article 1,085 expressly provides for the extrajudicial exclusion of a limited liability partner, before this can take place, companies must insert such a provision into their articles of association. Ultimately, the decision will depend on the other partners' subjective determination of what is deemed an act of undeniable severity that would jeopardise the continuity of the 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.