Legal Aspects of Privatizations and Joint Ventures under Brazilian Law

Published in Latin American Report by Unisa Centre for Latin American Studies, University of South Africa – UNISA, Pretoria, South Africa, January 1998.

1.1.- Brazil’s privatisation initiatives gained momentum during the current administration of President Cardoso and have evolved dynamically at both the federal and State levels. These policies, long required, have been very well received both internally, where they enjoy strong popular support, and abroad, where they have contributed to the increasingly favourable foreign investment climate at an institutional level, as well as promoting concrete business opportunities.

1.2.- For this to be possible, a major legislative effort was required from both executive and legislative branches of government to create the legal structure necessary for this endeavour, including constitutional reforms, which are always difficult to achieve. This effort is far from finished and some anachronisms remain in Brazilian legislation, many of which are, however, already being addressed by means of bills currently before Congress. In spite of these problems, the privatization initiatives have not been hindered (3) and have, from the perspective of the private sector, (both nationally and internationally), benefited from a quite efficient legislative infra-structure for business.


Brazil’s 1989 federal constitution has enshrined the principle of equality in contracts with the public administration, including those dealing with privatization. (4) However noble the principles and intentions of the drafters of the Constitution, such equality originally excluded foreign capital, as article 171 made a distinction between Brazilian companies controlled by Brazilians and those controlled by foreigners. In addition, preference was given to national capital to the detriment of foreign capital for the acquisition of assets and services with respect to contracts with the public administration. This preference was removed by the 6th Constitutional amendment of 15th August 1995, which assured equal legal treatment to all companies incorporated under Brazilian law, irrespective of the origin of their capital. (5) Accordingly, the new privatization law (6) allows foreign individuals or entities to acquire up to one hundred per cent of assets being privatized, unless a lower percentage is established for specific cases.

2.2.- The 8th Constitutional amendment of 15th August 1995 allowed the government to grant telecommunications services concessions to the private sector, specifically the so called “Band B” mobile telephone services, which started in April of 1997. In this particular case, the invitation to bid presented by the Brazilian government required bidding parties to have at least 51 per cent of their voting capital held by Brazilians. (7) Preparations are now underway for the privatization of the National Telecommunications Company, Telebrás, including its “Band A” mobile telephone services subsidiaries, and new laws and norms have been recently enacted to regulate this initiative. (8) It has already been determined that for “Band A”, the same type of format adopted for “Band B” in terms of Brazilian majority control will be maintained. This restriction shall be valid for both until 20th July 1999. (9)

2.3.- With respect to oil and gas, the 9th Constitutional amendment of 9th November 1995 allowed the state to hire private sector companies for the drilling, refining, international marketing and transportation of oil, oil based derivatives and natural gas. In August of 1996 (10), the 44 year old state monopoly of the oil sector was terminated and a new agency (11) created to act as regulator of the sector.


3.1.- Whilst the Brazilian Commercial Code (12), enacted into law in 1850 and modelled after French and Italian laws, has the precise legal institutes corresponding to general partnership (sociedade em nome coletivo) (13) and limited partnership (sociedade em comandita) (14), these are now rarely used and have thus fallen into disuse. The basic reason why business normally eschews these institutes is the unlimited and several responsibility of the partners. Thus, the usual company types preferred by business, widely utilized in Brazil are limited liability ones: the company by shares (S.A.) (15) and the company by quotas (LTDA.) (16). Accordingly, joint ventures are structured around these types, as will be pointed out below.

3.2.- On the other hand, the so called “memoranda of understandings” or “heads of agreement” are best used with extreme caution and great reluctante, in view of the fact that, under Brazilian law, an obligation to contract and even a business proposal is binding (17), unless some legally defined circumstances prevent the transaction from being implemented (18), and a default under a memorandum of understandings will be subject to damages and lost profits, to which one should add Court fees and legal costs. Therefore, it is best to execute a final agreement or else to have a final agreement with a suspensive condition for implementation at a later date.

3.3.- For joint ventures pertaining to privatization, it has been common to use “consortia”, a type of contract regulated by the S.A. law, which consequently do not have legal personality, and to incorporate only after the objective of the “consortium” has been secured. At the beginning of the privatization process, some agents of the public administration suggested to the interested parties that they execute “contracts of association” as an alternative for non-incorporation, alongside “consortia” (19). Very quickly, the legal establishment advised clients against such a path based on the position that “associations”, rather than being contracts, are legal entities (20) without profitable ends, duly defined and regulated by the Brazilian Civil Code, and must be duly incorporated. Unlimited and several responsibility of the partners derive from “associations” (21). The legal treatment of “consortia” under Brazilian law will be discussed below.


4.1.- “Consortia” are contracts regulated by the S.A. law (22) with the purpose of implementing a given project. Therefore, the “Consortium” is not a legal entity and the parties to the respective contract are individually responsible and exclusively liable (23) to the amount of their corresponding participation in the transaction at hand. Bankruptcy of one “consortium” member is not extensible to the others; amounts eventually due to a bankrupt member will be paid in accordance with the terms of the agreement.

4.2.- The formation of a “consortium” requires a written agreement, which may indicate a name to designate the venture. The object of the enterprise must be defined, as well as its duration and headquarters. The obligations of each of its members should be clearly indicated, as well as any contributions and share of common expenses. In addition, the contract should regulate how the revenue is to be received and how results are going to be shared. Of course, the administration of the “consortium” has to be dealt with in the agreement, as well as the accounting of the same. It is important to define a system for voting and to establish the necessary quorum for deliberations, which may vary depending on the nature of the concern. The “consortium” agreement and its eventual amendments must be filed at the Board of Trade (24) of the State in which it has its headquarters.

4.3.- A typical “consortium” contract for privatization purposes would establish as its objective the purpose of bidding for the specific company or rights, in accordance with a given bidding notice. The mechanics and quorum for the determination of the bidding price should be established. Choice of counsel for representation before the bidding commission (and eventually in Court) should also be made. Contemplated action in case of a victorious bid would include the incorporation of a company and the basic operational and financial agreements applicable thereto. It is not unusual to have appendixes in great detail governing these aspects. Choice of laws and courts should be made bearing in mind that the company to be eventually incorporated as a result of a successful bid may be established in a different State from the “consortium”.


5.1.- The S.A. is a company by shares and the most efficient type of company in Brazil for joint ventures in general, irrespective of the magnitude of the business, in spite of its relatively higher maintenance cost deriving from the transparency requirements established by law. Shares can be common or preferred. Common shares entitle the holder to common shareholders’ rights in addition to voting rights. The latter can be regulated by shareholders’ agreements, as we shall see below. Preferred shares confer upon the shareholder rights of an economic or financial nature, such as a higher dividend, priority in the distribution of dividends and/or in the refund of capital. Preferred shares are usually deprived of voting rights by the by-laws. The S.A. is legally allowed to structure its capital with a balance of up to two thirds of preferred shares to one third of common shares. This can be very convenient when structuring a joint venture between national and international parties, whenever there is a quantitative restriction on international participation, such as in the telecommunications area.

5.2.- Depending on its by-laws or on its nature (25), an S.A. may be managed by a board of directors (26), its executive body, or by a board of directors and by an administrative council (27), the latter being responsible for giving general guidelines and electing the board of directors. The administrative council must have at least three members, whereas the board of directors must have at least two; all of these without exception, must be resident in the country. The S.A. must hold an annual shareholders’ meeting and publish its respective minutes and its annual financial statements in the local press. The S.A. law provides detailed protection of minority interests (28) as well as of preferred shareholders (29).

5.3.- The S.A. law contemplates the institution of shareholders’ agreements (30), which has greatly contributed to making the S.A. the ideal joint venture company form in Brazil. This is because the S.A. law allows for the specific performance of obligations, in a country where, traditionally, the default of obligations is resolved by the determination of losses and lost profits, a slow procedure in the Courts, because of the nature of the proof required and also an inadequate procedure for most company law situations (31). Shareholders’ agreements should be in writing, filed with the company’s management and have a fixed final term rather than an indeterminate one.


6.1.- The LTDA. is the simplest and cheapest type of company in Brazil and is ideally suited for sole enterprises that forego a diversity of partner interests. The LTDA. is created by a contract (32) and its capital is represented by quotas, rather than shares. This distinction is significant because quotas are not represented by independent certificates; they are simply referred to in the contract. Because of this characteristic, a transfer of quotas requires an amendment to be signed by all the quotaholders or at least those representing the majority of the capital (33). Management of the LTDA. is incumbent on the quotaholders and may be delegated to officers, which always happens when the partner resides abroad.

6.2.- Several attempts in legal doctrine have been made to transform the LTDA. from a limited liability partnership of personal nature into a limited liability capital partnership. These attempts have included the structuring of the LTDA. with a board of directors, with preferred quotas and with quotaholder meetings, often with more success with the Board of Trade than with the Judiciary. Brazilian courts have consistently seen the LTDAS. as personal partnerships and will grant the dissolution of the company upon the application of any disgruntled or dissenting quotaholder.


7.1.- Given the limited scope of this article, this has been largely a topical exercise and, accordingly, only some of the most important aspects of the subject matter have been outlined. Lastly, a word about financial matters. Brazil still maintains exchange controls, in spite of significant liberalization in the recent past. Exchange legislation and regulation from the Central Bank of Brazil is in place and should be carefully considered whenever a venture in Brazil is considered.


1 – Text of the presentation made at the Canning House, in London, United Kingdom, on the 28th November 1997, for the seminar “Brazil – Privatisation & Joint Venture Developments”.All RIGHTS RESERVED.

2 – Member of the Brazilian and Portuguese Bars, senior partner of Noronha-Advogados, Sao Paulo, Rio de Janeiro, Brasilia, London, Lisbon, Buenos Aires and Miami.

3 – Judicial challenges to the privatisation process have been addressed rapidly by the Judiciary and attempted filibusters by the opposition in Congress have not succeeded.

4 – See article 37 and paragraphs of the Federal Constitution.

5 – A serious inconsistency remains in the public bidding law, law 8666/93, although there is already a bill in Congress designed to eliminate it and such law is, of course, of lower hierarchy than the Constitution.

6 – See article 12 of Law 9491 of 9th September 1997.

7 – Bid 001/96 – SFO/MC, article 4.1.

8 – See law 9472 of 16th July 1997, regulated by Decree 2338 of 7th October 1997.

9 – See article 11, sole paragraph, of law 9.295 of 19th July 1996-+.

10 – Law 9478 of 6th August 1997.

11 – Denominated National Petroleum Agency (ANP).

12 – Law 556 of 25th June 1850.

13 – See article 314 of the Commercial Code.

14 – See article 311 of the Commercial Code.

15 – “Sociedade Anonima”, regulated by law 6404/ 1976, as amended.

16 – “Sociedade por Quotas de Responsabilidade Limitada”, regulated by law


17 – See article 1080 of the Brazilian Civil Code.

18 – See articles 1081/8 of the Brazilian Civil Code.

19 – This occurred, for example, in the initial stages of the privatisation of CVRD, in connection with the bidding for consultants.

20 – See article 16 of the Brazilian Civil Code.

21 – See, “inter alia”, article 1380 combined with article 1386, iii of the Brazilian Civil Code.

22 – Articles 278 and 279 and paragraphs.

23 – Presumption of joint-responsibility is actually excluded by the 1st paragraph of article 278 of the S.A. Law.

24 – In Portuguese, “Registro do Comércio”. The Board of Trade is regulated by Law 8934/1994 and exists in every state and in the Federal District. Protection of the trade name is separate from intellectual property protection and must be obtained separately in all states and Federal District.

25 – Public companies must have both board of directors and administrative council.

26 – ” Diretoria”, in Portuguese. The directors are actually officers, in charge of day to day management.

27 – “Conselho de Administracao”, in Portuguese.

28 – See, for instance, articles 137 and 230 of the S.A. Law.

29 – See, for instance, article 136, I, of the S.A. Law.

30 – See article 118.

31 – For a comprehensive analysis of shareholders’ agreements and minority rights under the S.A. law, refer to “Direitos dos Acionistas Minoritarios na Lei de Sociedades Anonimas”, by Durval de Noronha Goyos Jr., Editora Resenha Universitaria, Sao Paulo, 1977.

32 – Called, in Portuguese, “Contrato Social” or “social contract”.

33 – In case this is allowed by the “Contrato Social”.