Legal guide for company directors and CEOs in Brazil

Solvency

The highest priority is to address the short- and long-term financial sustainability of the company. This will require a careful assessment of projected cash flow solvency as well as balance sheet solvency. Directors must ensure that they have up-to-date management information on which to base their decisions, together with a firm grasp on how the company’s markets and prospects are likely to be affected by the crisis. Uncertainty over the timetable for exit from current lockdown rules, and the speed of economic recovery, means that directors will have to plan for a variety of different scenarios and develop alternative plans that can be implemented as necessary, particularly if the worst case outcomes seem likely. Directors of companies threatened with insolvency should: (i) seek specialist advice, both legal and financial; (ii) ensure that all directors and key stakeholders are kept informed and onside; and (iii) keep a clear record of their decision-making and the materials available to them to review. Where the company is part of a wider group, the directors must keep in mind that they owe their duties to the company itself and not to the wider group or the parent company.

Risk

Even if the company’s solvency is not in question, directors are likely to be faced with a number of difficult decisions as they develop their strategy for the company. For example, the need to ensure safe working conditions for staff will often conflict with purely commercial objectives. Consumer-facing companies will also have to manage new reputational issues as public expectations of those companies shift as a result of the crisis, and ensure their communication strategy is adequately prioritised. Directors need to find a way to balance these competing considerations in the long-term interest of the company.

Logistics

Directors should address the logistical challenges which international lockdown rules and social distancing create. Existing operations including supply and distribution chains, and internal processes such as accounting, reporting and HR management, will be disrupted. During the crisis, it may be difficult for directors to hold meetings in the normal way. There is no restriction under Brazilian law on holding virtual meetings and the Brazilian government has passed new rules during the crisis to further regulate those (although the company’s constitution should be checked). Methods of communication with shareholders should be reviewed and consideration given to any upcoming shareholder meetings or shareholder authorisations required. Many shareholder authorisations may be obtained by written resolution, and communications to shareholders can be sent electronically (subject to any prohibitions in the company’s constitution).

In considering the issues noted above, directors need to be aware of the measures that have been announced by government authorities to assist companies through the crisis, and determine which ones are relevant to the company. 

In Brazil, the most relevant measures for companies include: 

• flexing of employment laws to allow temporary reduction of working hours and salaries, as well as to allow the suspension of employment contracts
• emergency finance facilities specially to: (i) fund payroll expenses for small- and medium-sized businesses; and (ii) fund FinTechs
• deferment of payment of several taxes and social security contributions
• an extension of 3 months to the deadline for filing accounts at Company Registries, and
• relaxation of administrative and judicial collection of overdue taxes. 

These relief measures are covered in more detail in other CMS publications (see our COVID-19 page at  [*]). More generally, directors’ duties remain as before, as set out in the rest of this guide. The key duty is to promote the success of the company for the benefit of its members as a whole, and that should be the guiding principle for all actions taken by directors. 

No significant changes have been made to directors’ duties in Brazil as a consequence of the COVID-19 crisis, the only change being the extension of the deadline for approving, submitting to the relevant Company Registry and publishing (the latter in case of publicly-traded companies) the 2019 accounts. All other checks and balances to ensure directors continue to fulfil their legal duties and obligations remain in place.

This guide focuses primarily on the rules in the Civil Code (Law 10,406 of 2002) relating to the private limited liability company, the “sociedade limitada”  or limitada, which is the most common type of company in Brazil. However, where relevant we have given some details on the structure of a corporation, the “sociedade anönima” or SA, which may be subject to additional rules. This guide does not cover the rules governing partnerships, sole traders or other corporate entities.
Brazilian law does not provide for a board structure for a limitada, which is usually managed by one or more administrators. However, the company’s articles of association may establish that the administrators work as an executive board.

SAs must have an executive board (“diretoria”) of at least two members, and may have also a supervisory board (“conselho de administração”) of at least three members. 

In the case that the quotaholders of a Brazilian limitada decide to establish a board in its articles of association, such board may comprise both executive directors and non-executive directors; while a SA, when opting to have both an executive board and a supervisory board, has different roles for each: the executive board manages the daily affairs and represents the company before third parties, while the supervisory board decides on strategic and reserved matters and elects the executive board, directly representing the interests of the shareholders. 

This guide concentrates on the rules applicable to executive directors; that is, directors who have an executive role within the company. However, in general, the law does not distinguish between executive and non-executive directors. Consequently much of the information in this guide will apply equally to non-executive (or supervisory) directors.

Administrators of a limitada and members of a SA’s executive board must be resident in Brazil (either Brazilian nationals or foreigners holding Brazilian permanent visas).
Members of a SA’s supervisory board do not have to be resident in Brazil, but must either be shareholders of the company or individuals appointed by corporate shareholders to represent them.
In addition to the requirements above, no individual who has been convicted of certain types of crimes can be appointed as an administrator, executive director or member of the supervisory board. 

The most usual way to appoint an administrator is by amendment to the articles of association (“contrato social”). Quotaholder approval is required to do this, with the level of approval depending on whether or not the administrator is also a quotaholder. The appointment of an administrator who is also a quota¬holder is subject to approval by a simple majority of quotaholders. The appointment of an administrator who is not a quotaholder is subject to unanimous approval (if the quota capital has not been fully paid up by the quotaholders), or to approval by two thirds of the quota capital (if the quota capital has been fully paid up by quotaholders). All amendments to the articles of association, quotaholders’ resolutions and minutes of quotaholders’ meetings must be filed with the Company Registry (Junta Comercial) in the state of incorporation.

Dismissal of an administrator is a similar process requiring an amendment to the articles of association and quotaholder approval. For the dismissal of a quotaholding administrator, the required level of approval is two thirds of the total quota capital if the articles of association are silent on this, or such other level established by the articles of association, subject to a minimum approval of 50% of the quota capital plus one quota. Dismissal of a non-quotaholding administrator is subject to approval by a simple majority. An administrator may be removed at any time.

In addition, an administrator may resign his/her office at any time by notice to the company.

Administrators are the only individuals empowered to represent the company before third parties under the law. Although administrators’ powers generally derive from the law, usually such powers are also specifically set out in the articles of association. This may establish routine actions that can be performed by one administrator acting alone and provide that certain strategic matters are subject to joint representation (co-signature) with another administrator or require the prior approval of the majority of quotaholders. The limitada has a one-tier governance structure, which means that it has no separate supervisory board.

Usually the administrators of a limitada, even when more than one is appointed by the quotaholders, act independently from one another, except when the articles of association require joint action by two or more administrators in certain matters. Therefore, administrators do not usually operate as a board.

However, it is common for the articles of association to contain provisions requiring joint action by two or more administrators, or consent from quotaholders representing specific quora in sensitive matters, in which case such consent is usually given by the passing of a quotaholders’ resolution or deliberation at a quotaholders’ meeting, which may take place virtually provided that, for certain matters, it is later transcribed into minutes signed by all those “present” and registered with the relevant Company Registry.

An administrator cannot delegate his/her powers as a whole to anyone (be it another administrator, a manager, a key employee, etc.), but he/she can grant specific powers to any number of attorneys-in-fact.

8. What contractual relationship does the director have with the company?

Where the administrator is also a quotaholder, which is common, the administrator remains subject to the articles of association regarding quotaholders and the obligations in any quotaholders’ agreement which is in force. Where the administrator is not a quotaholder, the administrator is often an employee of either the limitada or a parent company. Quotaholding administrators may receive specific compensation for such duties. Administrators who are also employees generally receive no extra salary. An administrator who is neither an employee nor quotaholder would usually negotiate a service agreement which would establish the terms for the performance of his/her activities as the company’s administrator and for remuneration.

Brazilian law does not have specific legal provisions regulating conflicts of interest relating to administrators of a limitada. Nevertheless, it does establish conduct rules, specifying that administrators shall have a duty of loyalty towards the limitada. It is generally accepted that administrators should not make decisions when there is a conflict of interest situation (i.e. the administrator has a personal interest which may not be in line with the limitada’s interest). In such cases, the administrator may be liable to the limitada for any damages resulting from breach of this duty.

Although it is not provided for by law, unless the quota¬holders give their consent, administrators should not conduct, directly or indirectly, any competing activity with the limitada. Brazilian law does establish a general prohibition on the limitada entering into agreements with administrators, unless the quotaholders have previously passed a resolution approving this. In addition, Brazilian law also establishes a specific prohibition on the limitada facilitating loans to administrators, making payments on their behalf or creating guarantees to cover their obligations, unless previously authorised by the quotaholders.

Administrators must disclose management accounts, balance sheets and corporate documents to quota¬holders. Specific duties depend upon the articles of association as the Civil Code contains no direct provisions relating to administrators’ duties and responsibilities. Where there is more than one administrator and specific responsibilities have been allocated to a different administrator, the other administrators have a supervisory obligation. In order to fulfil this duty, administrators must inform each other on a regular basis about what is going on in their respective divisions. Some general duties (such as filing for insolvency; general decisions on the business activities of the company; specific obligations under tax and social security laws) remain the responsibility of all administrators.

The administrator’s duties are owed to the limitada itself, rather than to its shareholders. In practice, when the limitada is solvent, this means acting in the best interests of the quotaholders as a whole. 

Where a company is threatened with insolvency, directors will need to give increased attention to the interests of creditors. In particular, once the directors know (or ought to know) that the company is likely to become insolvent, they must consider the interests of the creditors as paramount and take those interests into account when carrying out their duties to the company. The judicial administrator and the district attorney’s office have the power to review the conduct of directors in the period leading up to bankruptcy, and the administrator of a limitada must, in the course of judicial recovery proceedings, disclose a list of personal assets.

In addition, administrators of limitadas are commonly held liable for the employment, tax and social security debts of the company. That is because non-payment of such debts may be considered as illegal, which gives rise to personal liability of the administrators, as described in item 13 below.
As soon as directors are aware that a company is in financial difficulty, they should seek external advice.

Administrators are not liable where their acts, performed on behalf of the limitada, are regular, in the interests of the limitada, comply with applicable law and comply with the articles of association. Administrators are only personally liable to the limitada or its quotaholders for losses or damages caused by actions carried out on behalf of the limitada which:

• are contrary to the instructions of the quotaholders
• are contrary to, or exceed, the corporate purposes of the limitada
• exceed their powers as administrator
• are illegal, or
• constitute fraud. 

An administrator might also be found personally liable for crimes defined in Brazil’s Criminal Code, especially for economic or environmental crimes committed during the performance of his/her duties.

An administrator’s liability cannot be fully excluded by any kind of general agreement. The limitada may, however, indemnify the administrator against liability to the limitada or third parties, except where such liability arises through a breach of Brazilian law. As mentioned above, the limitada can allocate specific responsibilities in its articles of association to specific administrators. However, if the articles of association specifically establish that administrators shall act as a board by consensus, all management decisions are considered as decisions of all administrators. Therefore administrators are jointly and severally liable, except if a dissenting administrator requires such dissent to be recorded, in which case such administrator may be exempt from liability for such action. Quota¬holders are generally only liable for the amount of capital they have subscribed in the company.