Presentation made at the 50th Congress of the Union Internationale des Avocats, on the 1st November 2006, in Salvador, Bahia, Brazil.
According to UNCTAD’s world Investment Report 2005, foreign direct investment (FDI) inflows to developing countries are concentrated on few countries: the top five recipients, China, Hong Kong (China), Brazil, Mexico and Singapore, respectively, accounted for over 60% of total flows. Brazil accounts for 27 % of the total inflows of foreign capital into Latin America, thus consolidating its position as the largest recipient of FDI in the region.
Brazil received in 2003, approximately 9.3 billion US dollars of FDI and occupies ninth position among the top 20 economies.
Differently from other countries where reinvested earnings and inter-company loans represent a great percentage of the total of capital inflows, in Brazil FDI relies heavily on equity capital.
FDI in Brazil, can be effected by purchasing a shareholder participation or subscribing to capital in companies already established in Brazil or by setting up a new company.
In practice, the most common vehicles for foreign capital to participate in Brazil are corporations (The “Sociedade Anônima” – SA) and limited liability companies (the “Sociedade Limitada”). This is due to the fact that both corporate vehicles grant limited liability status to their participants and there is no need for prior authorization from government authorities. In the event of foreign company wishes to opening a branch in Brazil, special authorization will be required from the Federal Government.
2. LIMITED LIABILITY COMPANIES (“LIMITADAS”)
Limited liability companies in Brazil are regulated in Book II, Chapter IV, articles 1052 to 1087 of the Brazilian Civil Code which came into force on January 2003, and revoked Decree Law n. 3.708 of 1919 which until 2003 regulated this corporate structure.
Limited liability companies have only a single class of partners, the limited liability quotaholders. The capital of a limited liability company is divided into quotas of the same or different values and the quotaholders may have one or more quotas. The quota represents the amount (in money or other assets) that a quotaholder has contributed to the formation of the company. Except for “Simple Companies”, not engaged in commercial activities, the law expressly forbids contribution through the rendering of services.
Basically the Articles of Association of a Limited Liability Company must contain the following information: (i) full identification of the partners; (ii) the corporate name, the objectives, the address and term of duration of the company; (iv) the subscribed capital and the respective participation of each partner; and (v) the name of the manager, his powers, limits and duties.
Quotaholders are jointly liable for the payment of the entire amount of the company’s capital. After the payment of the capital the quotaholders do not have, prima facie, further responsibilities towards third parties who contract with the company.
Quotaholders can contribute to corporate capital with assets, and no previous valuation will be required of the same. However, all quotaholders will be jointly liable for the true value of the assets for a period of five years counting from the registration of the articles of association before the commercial registry.
Quotas are not represented by securities or certificates but instead their ownership is registered in the articles of association. Consequently, any transfer of title of the quotas requires an amendment to the articles of association.
In relation to the company’s administration, since 2003, the management of a Limited Liability Company in Brazil must be invested in an individual, quotaholder or not, who must have permanent residence status in Brazil.
Like the partners, prima facie, the managers are not personally responsible for the company liabilities. A manager will however, be personally liable to the company or third parties for any acts which exceed the limits of his or her authority or which violate the law or the company’s articles of association.
At least once a year, within the four months following the end of the corporate year, a general meeting of quotaholders must be held in order to approve the financial statements prepared by the managers.
3. THE SOCIEDADES ANÔNIMAS: “S.A.”
The S.A. is always a commercial entity and its capital is represented by shares. The liability of a shareholder is limited to the amount of the issue price of the subscribed shares. Once their subscription is paid up, the shareholder does not have any further liability to the company or its creditors.
There are two kinds of S.A.: (i) the Listed S.A., whose shares are publicly traded on the stock market, and (ii) the Closed Capital S.A., which obtains its capital through private offerings of its shares.
Notwithstanding the type chosen, there are five basic requirements to incorporate an S.A.: (i) subscription by at least 2 persons of the entire allotted share capital; (ii) at least 10% of the subscribed capital must be paid in cash; (iii) deposit with Banco do Brasil S.A., or any other financial institution authorised by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários (CVM), of 10% of the amount of the subscribed shares; (iv) registration of the Articles of Incorporation with the Commercial Registry (Junta Comercial); and (v) publication of the Articles of Incorporation in the Official Gazette of the federal or state government and in a widely circulated newspaper, within thirty days after their registration.
A Listed S.A. is subject to additional regulations and oversight by the CVM.
The capital of an S.A. is divided into shares representing parts or fractions of the capital. Shares can either have par value or no par value. An S.A. which issues shares with par value cannot issue shares at a price lower than the par value of its outstanding shares. As regards shares without par value, they also have a price: their issue price. The issue price of shares without par value is set at the time the company is formed or by the General Shareholders’ Meeting or the Board of Directors at the time of a capital increase.
Either the Listed S.A. or the Closed S.A. may have their capital structure organised as an authorised capital S.A. An authorised capital S.A. can be incorporated with less capital than that set forth in its by-laws, which will merely represent the limit within which the subscribed capital may be raised without an amendment to its by-laws. In authorised capital S.A.s, the by-laws usually confer to the Board of Directors the authority to increase the subscribed capital within such authorised limit, thus avoiding the necessity of holding a Shareholders’ Meeting and hence facilitating the funding of the company.
Brazilian law does not permit bearer shares. Ownership of all shares must be registered in the Nominative Shares Registry. The transfer of shares is registered in its corporate books in accordance with the corresponding legal evidence of such transfer (agreements, succession, etc.). The law also permits issuance of “Book Shares” which transfer the responsibility for registration of shares to a financial institution.
Generally, shares are fully transferable to third parties without any requirement that preference be given to other shareholders. In a Closed Capital S.A., however, the by-laws can impose some restrictions on the transfer of shares, provided that any restrictions do not prohibit transfer, or require approval of any such transfer, by a majority of the shareholders or by the Board of Directors. In a Listed S.A., shares can only be transferred after at least 30% (thirty) percent of the shares’ issue price has been paid. In a Closed S.A. there is no such requirement.
Shares may be ordinary, preferred or fruition shares, depending on the rights they confer on their holders. Shares of the same class confer the same rights on their owners.
Ordinary shares entitle the holder to common or essential shareholder’s rights, including the right to vote in the Shareholders Meetings. Preferred shares have special rights of a financial or policy nature. Usually, the preferred share confers to its holder financial advantages vis-à-vis the ordinary share as a compensation for the lack of the right to vote. Preferred shares cannot account for more than 50% (fifty percent) of an S.A.’s outstanding shares. Fruition shares result from amortisation of common or preferred shares.
The law expressly permits shareholders to enter into shareholders’ agreements concerning the transfer of shares, pre-emptive rights to purchase shares, and the exercise of voting rights or controlling powers.
To become enforceable before third parties and the company, a shareholders’ agreement must be registered in the S.A.’s corporate books. Any shares subject to a shareholders’ agreement cannot be negotiated on the stock market.
There are two kinds of General Shareholders’ Meetings: (i) Ordinary, which shall be held at least once a year in order to discuss the company’s management and financial statements and to elect members of the Board of Directors and Audit Councils; and (ii) Extraordinary, which can be held at any time to deliberate on issues which do not fall within the competence of an Ordinary Shareholders’ Meeting.
The administration of an S.A. is conducted by one or two corporate bodies, each with specific authority and responsibilities: the Board of Directors (Conselho de Administração) and the Executive Board (Diretoria).
However, from a managerial perspective, the Shareholders’ Meeting may also be considered an administrative body as it has legal responsibility to establish the general business, financial and administrative guidelines for the company.
Every S.A. is required to have an Executive Board. The Board of Directors is mandatory in Listed S.A.s and authorised capital S.A.s, but optional in a Closed Capital S.A.
The Board of Directors is a non-executive body. It must be made up of at least three members. The members must also be shareholders but do not have to be residents in Brazil. The members are elected, and can be removed at any time, by the Shareholders’ Meeting. Their term of office may not exceed three years, but re-election is permitted.
The Board of Directors is responsible for (i) establishing the general business, administrative and financial policies of the company in accordance with guidelines established by the Shareholders’ Meeting, (ii) electing and dismissing the members of the Executive Board, (iii) supervising conduct of the business by the members of the Executive Board, (iv) examining the company books and papers, (v) monitoring the company’s contractual relations and negotiations, (vi) and any other acts related to the company’s business.
The Executive Board is the executive body responsible for the routine operations of the company and for representing the company before third parties in the ordinary course of business.
The Executive Board is made up of at least two officers, who do not have to be shareholders, but who must be resident in Brazil. Officers are appointed, and may be removed at any time, by the Board of Directors or by the Shareholders’ Meeting if the company has no Board. The maximum tenure for officers is 3 years, but re-election is permitted.
The law permits that 1/3 (one third) of the members of the Board of Directors may also serve as members of the Executive Board.
4. FOREIGN INVESTMENT
In accordance with Law n. 4.131/62, no preliminary official authorisation is required for the remittance of funds related to investments in Brazil. Such funds can be used to subscribe or purchase shares in Brazilian companies. However, the funds must be received in Brazil through a banking institution duly authorised by the Central Bank of Brazil (“BACEN”) to deal in foreign exchange.
Foreign capital is defined in law as the assets, machinery and equipment brought into the country without initial capital expenditure which are to be used in the production of goods and services, as well as the financial or monetary funds brought into the country to be invested in economic activities, whether they belong to individuals or corporate entities, resident, domiciled or having head offices abroad.
Thus, there are four main types of foreign capital:
• direct investments, in the form of capital goods, machines and equipment;
• direct investments, in the form of economic and financial funds, i.e., cash and credit;
• foreign currency loans and financing; and
• use of know how, in the form of technical, administrative, scientific or professional assistance, trademark licensing, patent or manufacturing agreements.
In all the above cases, the actual entry of goods, money or know how from a foreign country must be evidenced.
Pursuant to the prevailing regulations of BACEN, an electronic registration of the foreign investment must be carried out by a representative of the Brazilian company (the target of the foreign investment). Accordingly, the representative of the Brazilian company must obtain from BACEN a log-in code and a password to access the Electronic Declaratory Registry of Direct Foreign Investment frame (“RDE-IED”) of the Electronic System of the Central Bank of Brazil (“SISBACEN”).
Before the foreign investor remits funds to Brazil, the Brazilian company must also obtain a number from the RDE-IED corresponding to the “Foreign Investor – Brazilian company” pairing. Such RDE-IED number must be indicated in the respective exchange agreement related to the foreign investment. The Brazilian company must then register the foreign investment with the RDE-IED SISBACEN within 30 days as of the date of the exchange agreement, converting the foreign currency into Brazilian reais.
Without such registration, the repatriation of the capital invested in Brazil will not be permitted.
5. IMMIGRATION ISSUES
The legal framework for entry and permanence of foreigners in Brazil is provided in Law 6815, of 19th August 1980, also called the Law of Aliens, which is regulated by Decree 86715, of 10th December 1981 and several resolutions issued by the Brazilian immigration authorities. According to this law, the Labour Ministry is the governmental body in charge of granting the necessary authorisation for foreign individuals to work in Brazil, without which visas cannot be granted by the Ministry of Foreign Affairs.
The Brazilian immigration policy is selective. According to Article 16 of the Law of Aliens, any application will be examined by the Brazilian immigration authorities to determine whether the immigration is convenient for the country. Under this convenience prerogative the authorities will determine whether the proposed immigration will bring in specialised manpower, as defined by the National Policy of Development, will provide the country with an increase in productivity or with the transfer of new technologies, or whether it will stimulate investment in specific areas.
The main purpose of Article 16 is to protect the national labour force and to restrict immigration only to those cases that contribute to the country’s development. The Brazilian immigration authorities implement such policy by filtering the application for permanent visas and selecting only those belonging to foreigners who, by their expertise, at least theoretically, will contribute to the development of the country while, at the same time, will not deprive a Brazilian worker of a job.
As explained before, in order to become a manager of a Brazilian company, a foreigner must hold a permanent residence visa. In accordance with Law 6815/80, as well as the National Council of Immigration’s Normative Resolution number 62 of 08 December 2004 to be able to apply for a permanent visa for the appointed manager of a Brazilian company, the foreign partners must either:
• proceed with a minimum foreign equity investment of US$ 50,000.00 (fifty thousand US dollars), and hire 10 new employees in the following two years; or
• proceed with a minimum foreign equity investment of US$ 200,000.00 (two hundred US dollars).
A foreign person admitted permanently is under the obligation of registering before the Ministry of Justice within the first 30 days as of his entry in Brazil.