The main changes to corporate governance in Brazil in 2020 and 2021 – Corporate Law/Commercial Law


Brazil: The main changes to corporate governance in Brazil in 2020 and 2021

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The last two years have been difficult and challenging for all countries and the situation has not been different for Brazil.

It is estimated that in Brazil, more than 700,000 companies (mainly small businesses) ceased operations in the first half of 2020 due to the economic crisis caused by the Covid-19 pandemic.

For large companies in need of capital to expand their businesses, the crisis has limited the supply of financial resources available in Brazil, reinforcing the tendency of Brazilian companies to list their shares on stock exchanges in other countries.

This scenario posed unprecedented challenges both for businesses – which were forced to innovate in order to survive – and for the government – which was forced to adopt measures and enact rules aimed at improving corporate governance. company that attracted investors and fostered entrepreneurship in the midst of a crisis.

In this brief article, we will discuss some relevant legislative changes that impacted corporate governance and entrepreneurship in Brazil in 2020 and 2021, as well as what to expect for 2022.

Virtual shareholder meetings

The confinement imposed during the Covid-19 pandemic hit Brazil just at the time of the annual general meetings (AGM) of shareholders of public and private companies. These meetings are compulsory and their purpose is to approve the accounts, the management accounts, the election of the members of the management and tax council and the distribution of dividends.

To make matters worse, Brazilian company law was very strict regarding the location of general meetings. As a general rule, presence at the company’s headquarters was compulsory. General meetings could not be held elsewhere than at the registered office in the event of force majeure (like a pandemic), but they must still be held in person.

Considering the importance of the annual general meeting for companies, the government correctly reformed, in 2020, the law 6404 (law on companies), the civil code and the law on cooperatives to allow private companies and listed companies, limited liability companies and cooperatives to hold their general meetings physically or exclusively in a virtual or hybrid manner (i.e. a combination of face-to-face and virtual).

The reform has proven itself and many companies have adopted the hybrid or virtual format for their general meetings because, in addition to the lower cost, they allow greater shareholder participation.

Business Environment Improvement Act

The Business Environment Improvement Law (Law 14195/2021), enacted in 2021, brought relevant changes to entrepreneurship and corporate governance of Brazilian companies, including:

  • Start a business. According to the World Bank, in 2019, Brazil ranked 124th (out of a total of 190 countries) when it comes to opening new businesses. The new law significantly reduced the bureaucracy for opening new businesses in Brazil by streamlining the organization and making it easier to obtain licenses and permits to operate new entities.

  • Superior Voting Shares. Until the promulgation of Law 14195/2021, each share of a Brazilian company only gave the right to one vote at general meetings. With the new law, public and private companies will be able to issue common shares of different classes and each share will be entitled to a maximum of ten votes (high voting shares). However, certain restrictions have been created to avoid a misalignment between shareholders’ interests, such as: publicly traded companies can only adopt shares with superior voting rights before publicly trading their shares; qualified quorum for the issuance of shares with multiple voting rights; a maximum duration of seven years for the duration of the shares with increased voting rights (extendable under certain conditions); circumstance of automatic conversion of shares with superior voting rights into shares deprived of this right (for example, voting agreement with shareholders who do not hold shares with superior voting rights).

  • Appointment of a civil servant residing abroad.Another important change was the possibility of appointing persons residing abroad as a statutory officer, provided that these officers maintain a local lawyer entitled to receive procedural services in Brazil. Until then, only the members of the board of directors could be non-resident natural persons, while the managers (who are responsible for the day-to-day management of Brazilian companies) had to be natural persons residing in Brazil.

  • Separation of CEO and Chairman of the Board. In pursuit of best corporate governance practices, the law expressly prohibits the CEO from also serving as chairman of the board of directors in publicly listed companies. The Brazilian Securities and Exchange Commission (CVM) may exempt small public companies (i.e. with annual gross turnover of less than BRL 500 million) from complying with this rule.

  • Independent members of the board of directors. Listed companies must appoint independent directors to their board of directors, in accordance with regulations to be issued by the CVM.

Legal framework for startups and innovative entrepreneurship

Also in 2021, the Legal Framework for Startups and Innovative Entrepreneurship (Complementary Law 182/2021) entered into force, bringing important innovations to Brazilian companies:

  • Officers. Until June 2021, Brazilian companies (sociedades por ações) should have, at least, two directors, which could represent a high cost for startups. With the legal framework for startups, the minimum number of statutory directors has been reduced to one member, who must be a natural person, resident or not in Brazil (as authorized by Law 14195/2021).

  • Publication of corporate acts. Private companies whose annual gross turnover does not exceed BRL 78 million are now authorized to make the legal publication of their corporate acts electronically and free of charge on a government platform (rejecting publication in the Official Gazette and in a mass-circulation newspaper), and replace its business books with mechanized or electronic records.

  • Access to capital market for small businesses. The CVM can regulate easier conditions for small companies to access the Brazilian capital market and establish simplified procedures for the registration of issuers and the public distribution of securities. In addition, the CVM can create special conditions or renounce these companies with regard to the mandatory installation of a tax adviser at the request of the shareholders, the intermediation of a financial institution in the public distributions of securities and the distribution of mandatory dividends.

In 2021, Brazilian corporate law made great advances that favored the opening of new companies and strengthened corporate governance. We hope that in 2022, the Brazilian capital market will grow again with the new rules that will be regulated by the CVM, despite the economic impact of the election of a new president in the same year.

Originally published March 7, 2022.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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Helen D. Jessen