Impact of proposed new Commercial Code on joint ventures
Article written by Paulo Rocha, senior partner in charge of M&A at Demarest Advogados
When the new Civil Code was enacted in 2002, the Commercial Code lost much of its relevance and content — the rules that regulated business activity were largely incorporated into the new Civil Code, but in a manner that brought uncertainty and changes to the known concepts and rules that had traditionally been applied to joint ventures in Brazil.
As a result of the controversy surrounding the new Civil Code, since 2011 Congress has been discussing a new Commercial Code. To expedite the discussion, projects proceed in parallel in the House and the Senate, and the latest version of the latter’s discussion has recently been published for public consultation.(1)
The new Commercial Code proposed by the Senate would revoke the corporate rules introduced by the 2002 Civil Code, restoring certain traditional concepts while modernising others, and is likely to change the approach to joint ventures and acquisitions in Brazil.
From the perspective of foreign investors interested in joint ventures in Brazil, no other rule was more disruptive than the introduction of unreasonable supermajority quorums for decisions in limited liability companies. Under the rules introduced by the 2002 Civil Code, any amendment to a limited liability company’s articles of association required more than 75% of the votes. This also applied to mergers and spin-offs involving the company. This super-majority quorum made a minority quotaholder that held more than 25% part of the company’s controlling group and prevented majority quotaholders from pursuing mergers or spin-offs without the approval of such minority quotaholders. While this undesired outcome could, to a certain extent, be overcome with a quotaholders’ agreement, it was often a source of attrition in negotiations in relation to joint ventures. The proposed new Commercial Code would reinstate traditional simple majority quorums for ordinary corporate decisions, revoking the 75% super-majority quorum that was introduced by the Civil Code.
Investors that wish to acquire minority stakes of 5% or more in limited liability joint ventures will also appreciate the judicial intervention mechanism proposed in the new Commercial Code. Under this procedure, minority investors that hold 5% or more of the company are entitled to request that a judge declare an intervention on the company if suspicions of mismanagement or fraud arise. The judge will then appoint an inspector to manage the company (either individually or together with a manager appointed by the party requesting the intervention) for up to 180 days, at which time he or she must present a report to the judge. Depending on the findings and the judge’s decision, the innocent party may be entitled to indemnification, or even to buy out the other party.
Also noteworthy is a new buy-out methodology for overcoming impasses: if a deadlock among quotaholders could endanger the continuity of the company, a ‘shotgun’ mechanism will be adopted in court, with each member presenting an irrevocable pricing proposal for the company’s quotas. The quotaholder that makes the highest proposal will then have the right to buy the quotas of the other quotaholders. This fair mechanism will provide an incentive for quotaholders to price the value of the company correctly and is commonly used in shareholders’ agreements.
Joint venture quotaholders that acquire 100% of a Brazilian limited liability company will also welcome the possibility of being a single quotaholder for an indeterminate period of time (at present, the time limit before another quotaholder must join the company is 180 days). This will remove the existing practice of attributing one quota to a third party just to meet the current legal requirement of a plurality of quotaholders.
Compared to the situation in force under the Civil Code, the proposed new Commercial Code would restore certain traditional corporate law concepts, as well as offering innovation in several others with the aim of simplification and modernisation. The manner by which the project has been publicly discussed with the legal community and publicised online is also of note. Anyone interested in joint ventures or other acquisitions of equity in Brazil should follow the project closely, as it is expected to bring new views and mechanisms to corporate life.
For further information please contact Paulo Rocha at Demarest Advogados: procha@demarest.com.br
Endnotes
(1) http://buff.ly/1dqbXFa (in Portuguese).
Published on October 30 2013 at ILO — International Law Office: http://buff.ly/1dqbW4f
