Publications

Category: Labor and employment

With the end of the term for Executive Order No. 927 (MP 927) to be converted into law on July 19, the measures proposed in it to tackle the covid-19 pandemic can no longer be used.

Published on March 22, MP 927 put into place various changes in the laws and regulations to preserve employment and income and to face the financial crisis during the state of public calamity, making rights and procedures under the Consolidated Labor Laws (CLT) more flexible, among which we highlight:

• Possibility of changing in-person work arrangements to teleworking at the employer's discretion

• Acceleration of individual vacations

• Granting of company-wide vacations

• Enjoyment and acceleration of holidays

• Hours bank with offsetting period of up to 180 days

• Suspension of administrative requirements in occupational safety and health

• Deferment of payment of the Guarantee Fund for Length of Service (FGTS)

After the expiration of MP 927, employers will no longer be able to avail themselves of such measures in the forms and with the features proposed therein. The exact terms of the CLT control again. The great concern is: what happens to the legal relationships established during the term of the MP and in the form it provides?

As of July 21, the Brazilian Congress will have 60 days to issue a legislative decree regulating the issues arising under relations that occurred during the period of validity of MP 927, especially regarding its future effects. If the Brazilian Congress does not respond within this period, the guidelines of Executive Order 927 will be applied to the acts carried out during its validity.

We will continue to monitor the evolution of this topic and any developments.

Category: Tax

Section 28 of Law 13,988/20, which resulted from the conversion of Executive Order No. 899/19 into law, put an end to the casting vote in the decisions of the Administrative Tax Appeals Board (Carf) and brought relief for taxpayers who, not infrequently, saw tax debts maintained due to the double vote granted to the judge representing the National Treasury.

The change occurs in a context in which CARF’s decisions had begun to prioritize tax collection and in which judgments involving complex legislation, the interpretations of which the tax authorities have changed over the years (e.g., cases of transfer pricing and goodwill), began to be decided by a casting vote in favor of the tax authorities, awakening in society a feeling of injustice and legal uncertainty.

Section 28 is currently being questioned from both formal and substantive points of view in the  Direct Actions of Unconstitutionality (ADIs)[1] filed before the Federal Supreme Court and in the Public Civil Action (ACP)[2] filed before Federal Court[3].

Validity of the rule under review

The allegation most frequently used in questioning section 28 is that the change in the casting vote was made by "jabuti” or "legislative smuggling", conduct rejected by the STF in ADI No. 5.127, ruled in 2015.

In general terms, the lawsuits filed against the new law provision claims that the Appended Amendment No. 01, which aimed to append the texts of Amendments 9 and 162 to the PLV 02/2020, lacks of thematic relevance. According to the rationale adopted, MP 899 deals with extrajudicial negotiation of existing and established claims, while section 28, setting forth a tie-breaking rule in an administrative decision, disciplines the procedure for determining and demanding the tax debt.

Besides the fact that ADI No. 5,127 deals with a completely different factual and normative context, the truth is that the interpretation intended by the plaintiffs in the ADIs and the ACP removes from the Legislative Branch the constitutional prerogative of effective participation in the process of conversion of an executive provisional measure into law.

Far from allowing the legislative bodies to use the legislative procedures to approve matters completely dissociated from the matter selected as relevant and urgent by the Executive Branch, the hindering of the legislative activity to the point of preventing improvement of the measures is an affront to the constitutional text.

In fact, the new rule is proving to be one of the greatest instruments of tax justice ever introduced in the legal system. As is known, the current tax laws are the result of extensive regulations, many times amended, quite complex, and impregnated with technical inaccuracies, ambiguities, and gaps.

The cost to society (State and taxpayers) is immense. Excessive litigation, very high penalties (75% and 150%), costs with guarantees, increase in the state apparatus (number of attorneys, tax agents, advisors, etc.), enormous uncertainty for investors and companies, increase in business costs (infrastructure, personnel, attorneys, etc.), fees for losses in litigation (State and taxpayer), among others.

In this case, the thematic relevance of the new provision is very high. The transcription of part of the explanatory memorandum of MP 899 leaves no doubt and, in fact, seems to have been written tailor-made to justify the end of the casting vote: "6. (...) it is an instrument of solution or resolution, through appropriate means, of tax disputes, bringing with it, far beyond a tax collection purpose, which is extremely important in a scenario of tax crisis, of cost reduction and correct treatment of taxpayers, whether those who no longer have the capacity to pay, or those who have been assessed, not infrequently, due to the complexity of the legislation that allowed a reasonable interpretation contrary to that considered appropriate by the tax authorities."

The rule extinguishing the casting vote, therefore, is added to the set of provisions dealing with tax settlements, in order to achieve a common purpose.

Having overcome the first claim, two additional arguments are raised to support the illegality of section 28.

One of them concerns the supposed invasion of private initiative by the Brazilian Presidency. The lawsuits filed maintain that the discipline of the organization and functioning of the administrative bodies is reserved to the initiative of the President and that, therefore, change of the casting vote should have been subject to a bill or order authored by him.

It so happens that section 28 does not interfere with CARF’s structure. The rule concerns to the proclamation of a result in the event of a tie in the administrative proceeding, ruling for extinguishment of the tax debt in this case. It is therefore a tax matter that influences the final issuance of the tax debt.

The last argument, which, in our view, does not merit in-depth discussion, is based on the logic that the issuance of general rules on assessments is reserved for complementary laws and that, in these terms, the National Tax Code (CTN) is responsible for regulating the matter. Under CTN’s guidelines, the assessment is exclusively within the competence of the tax authority.

This point, which was addressed in the PCA, seems to us to be a hermeneutical construction that goes beyond the text of the law. It suffices to note that section 28 in no way affected the assessment activity of tax agents.

Application of the rule to pending cases

The remaining question is the effects of the end of the casting vote for cases pending of analysis in the administrative and judicial spheres. Some people believe that the rule is purely procedural in nature and, as such, only applies prospectively.

Section 28 provides that the facts indicated in the assessment shall no longer be defined as an infraction in the event of a tie in the quorum for voting. When there is a tie in the judgment, it is assumed that there was no typical fact apt to give rise to tax collection.

This is the understanding that best aligns the provision with the tax system. This is because, in accordance with the dynamics adopted prior, the doubt regarding maintenance of the tax assessment was always transformed into certainty of the double vote by a judge representing the National Treasury, in flagrant violation of the principles of due administrative process, equal protection, strict legality, tax consistency, and, especially, the provisions of section 112, II, of the CTN, according to which the tax law should be interpreted in the manner most favorable to the taxpayer.

From this one can extract that in dubio pro taxpayer: if there is doubt about the factual circumstances justifying application of the law, the interpretation most favorable to the taxpayer should prevail.

Section 28 only established as positive law a guideline that was already emanating from the legal and tax systems with the intention of privileging the idea that dubious interpretations are decided in favor of the taxpayer and reinforcing the value of closed consistency (see section 112 of the CTN mentioned above and sections 5, II, and 150, I, of the Federal Constitution, which deal with the Principle of Legality at the general level of the Law and the Principle of Closed Consistency in the Tax Law, respectively).

In a certain manner, it is an instrument to rescue the concept of a tax enshrined in section 3 of the CTN, which is an obligation instituted by law and charged through fully binding administrative activity. More than the simple reading of this provision suggests that the important thing is to note that, in order to be a tax, one must be sure of its institution and collection, two qualities that are missing in cases decided by a casting vote.

Section 28 is also harmonious with the command of section 204 of the CTN, which provides for a presumption of certainty and fixed value of the debt registered. Assessments that, in an administrative review process, have the same number of judges opining for and against their legitimacy do not preserve these attributes of certainty, fixed value, and enforceability.

Section 28 is a hybrid rule, with a predominant characteristic of substantive law. It goes far beyond a simple rule concerning administrative procedure. It provides that tax debts are only valid when there is reasonable certainty that the facts will be subsumed under the overarching rule of application, bringing to the ordinary legislative level a scenario for extinguishment of the tax debt, within the framework of section 156, IX and sole paragraph, of the CTN.

In this context, section 106, II, "a" of the CTN expressly states that the law applies to past acts or facts, provided they are not definitively judged, when it excludes a situation from the infraction framework. Pursuant to section 5, XXXVI, of the Federal Constitution and section 502 of the Civil Procedure Code only final and unappealable judicial decisions have the force of being definitive. Thus, the application of section 28, under the cloak of section 106, covers all cases already decided in the administrative sphere, as well as those in progress that have already had appellate decisions in favor of the tax authorities based on a tied decision.

Because it brings in new rules to the legal relationship between taxpayers and the Federal Government, that is, a supervening law, section 28 should be applied to ongoing cases, regardless of their procedural stage. In general, considering the specific case, a request for review in the judicial level must be included in the complaint or be part of an unnamed petition, bringing to the case the news of the supervening rule.

In the administrative level, a request for review of cases in progress must be made by means of a motion for clarification, appeal, or unnamed petition, the latter in the event that the appeal has already been filed. Once the request for review has been accepted, the result of the administrative decision shall be amended to reflect the command of section 28. Following this, the opportunity for motions and appeals should be opened for the Attorney for the National Treasury. It is not a question of conducting a new judgment, in view of the most complete lack of a normative provision in this regard but recognizing a different result.[4]

In view of the above, since this is not a rule of an exclusively procedural nature and since it provides for elements that interfere with the tax relationship itself between the taxpayer and the tax authorities, establishing a scenario for extinguishment of the tax debt, we believe that the provision can cover all cases in which the merits of the tax debt are still under discussion (i.e, all the cases that do not have a final and unappealable judicial decision).

It is not yet known how panels of the Carf will act in the face of this legislative change, but, for us, one thing is certain: although surrounded by uncertainty, the end of the casting vote brings about a perception of improvement in the tax judiciary. We will continue to hope that the board members will adopt the most appropriate interpretation of the issue and give priority to the intention of the legislator.

[1] (i) ADI No. 6399, filed by Augusto Aras, attorney-general of the Republic; (ii) ADI No. 6,403, filed by the Brazilian Socialist Party (PSB); and (iii) ADI No. 6,415, filed by the National Association of Tax Auditors of the Federal Revenue Service of Brazil (Anfip).

[2]Public Civil Action 1023961-69.2020.4.01.3400, filed by the Institute of Defense in Administrative Proceedings (Indepad).

[3] At the request of the STF, under ADI No. 6399, filed by the PGR, the House, the Senate, the Presidency, and the AGU have already expressed an opinion in favor of its legality.

[4] We disagree, therefore, with the guidance adopted in the recent decision issued in Ordinary Action No. 5094299-45.2019.4.02.5101/RJ, of May 29, 2020.

Category: Competition

The Administrative Council for Economic Defense (Cade) submitted to public consultation a preliminary version of the Cartel Fine Calculation Guidelines, which is intended to clarify the criteria used in the application of the fines established in the Competition Law (Law No. 12,529/11). For legal entities, these fines may vary from 0.1% to 20% of the gross revenue of the company or of its economic group or conglomerate, in the sector of business activity affected by the violation.

The guidelines are based on the agency's decision-making practice in cartel investigations from 2012 to July, 2019 and, therefore, does not consider the decisions held by the current composition of Cade’s Administrative Tribunal.

According to the Competition Law, the calculation basis of the fine is the annual gross revenue in the sector of business activity (as defined in Cade Resolution No. 3/2012) in the year prior to the launch of the administrative proceeding. The use of the revenue in the "sector of business activity", a concept that does not necessarily correspond to the market affected by the cartel, was widely criticized after the enactment of the law and debated in some precedents. The guidelines suggest that, when the application of the revenue in the sector of business activity results in calculation basis that is disproportionate or unreasonable, Cade should instead take into account the revenue in the market affected by the conduct.

The guidelines also clarify that the revenue to be considered is, in principle, that generated by the company involved in the wrongdoing (the use of the revenue of the economic group to which it belongs would be an exception, for example to avoid maneuvers aimed at deliberately reducing the calculation basis) in the year prior to the launch of the administrative proceeding, and updated per the Selic rate until the month prior to Cade’s decision. When it is not possible to obtain the revenue in the year prior to the launch of the administrative proceeding (if the company has, for example, ceased its activities) or the amount reported by the company is not considered appropriate (if the company has experienced significant growth), the guide proposes to alternatively consider, for example, the year prior to Cade’s decision, the year of the public bidding subject of the investigation, or even the highest revenue obtained during the period the cartel was active or the average revenue obtained in the referred period.

The document also provides for the possibility of adjusting the calculation basis when the revenue encompasses a geographic area wider than that affected by the cartel. In these cases, Cade may alternatively consider a projection of the revenue the company would virtually obtain, taking into consideration how much the affected area represented from the wider geographic market, or use estimates of indirect sales as the calculation basis.

Regarding the reference fine rate, the guidelines recommend the use of the fine rates that have already been adopted by Cade in its decisions:

• 17% (with a minimum of 14%) for cartels in public bidding;

• 15% (with a minimum of 12%) for hardcore cartels, that is, agreements or exchanges of information related to prices, or to shares, clients or geographical area allocation, , with mechanisms for monitoring/punishing deviation and for ensuring perpetuity; and

• 8% (with a minimum of 5%) for other types of concerted practices (e.g. sporadic or non-systematic exchanges of information, unilateral disclosure of information, price fixing, etc.).

However, the fine rate to be applied in each specific case may be higher or lower than the reference fine rate, depending on the Cade's discretionary assessment of the aggravating and mitigating circumstances provided for by the law:

• seriousness of the violation (its role in the conduct, for example being the cartel leader or making use of coercion);

• good faith of the offender (awareness of illegality of the conduct, whether the affected market comprised essential services/products, cooperation with the investigation);

• benefit gained or sought by the offender (if it can be estimated);

• consummation or not of the violation;

• degree of harm, or of the threat of harm to free competition, to the Brazilian economy, to consumers, or to third parties (by type of conduct, for example);

• negative economic effects to the market (compensation of cartel victims before Cade’s decision on the cartel, for example, could mitigate the fine);

• economic situation of the offender (mitigating factor for those under proven compromised financial capacity); and

• recidivism.

The guidelines demonstrate Cade's commitment with the systematization and transparency of the parameters for calculating cartel fines, thus giving greater predictability on Cade’s cartel rulings. The document is in public consultation until August 8. Contributions can be sent to This email address is being protected from spambots. You need JavaScript enabled to view it..

Category: Tecnology

In a decision handed down on July 16, the Court of Justice of the European Union (CJEU) changed the understanding of the European Commission on international transfer of personal data between the United States and the European Union.

The decision, issued in the Schrems II Case,^[1] raised two main issues:

• The first relates to the validity of the EU-U.S. Privacy Shield, which used to authorize the transfer of personal data of individuals located in the European Union to the United States. It was questioned whether this instrument would actually meet the requirements of the European Union's General Data Protection Regulation (GDPR), in view of the US government's surveillance programs, which authorize the country's public security authorities to access and use personal data imported from the European Union.

• The second issue concerns the validity of the standard contractual clauses approved by the European Commission as adequate and sufficient instruments for the international transfer of personal data, in cases in which there is no adequacy decision handed down by the European Commission in relation to the country receiving such data.

Privacy Shield Invalidation: consequences for international transfer of personal data

In 2016, the US Department of Commerce and the European Commission entered into the agreement known as Privacy Shield, which established a set of principles and safeguards to be guaranteed by the companies that are party to the agreement, in order to enable the transfer of personal data of individuals located in the European Union to those companies located in the United States.

Until now, the Privacy Shield was an instrument recognized by the European Commission as adequate to ensuring a level of protection compatible with the one afforded by the GDPR[2] and, as a result, adherence to the agreement was sufficient to authorize the transfer of data from individuals located in the European Union to companies and organizations located in the United States that were adhering to the Privacy Shield, without the need for additional safeguards or authorizations from the data protection authorities of each of the European Union member states.

However, the recent decision rendered by the CJEU in the Schrems II Case invalidated that understanding, ceasing to recognize the adequacy of Privacy Shield as a legal basis for the international transfer of personal data. According to CJEU’s understanding, the surveillance programs implemented by the US government represent a disproportionate violation of the rights to privacy and data protection guaranteed by the GDPR. This is because, by failing to make clear the limitations on the powers granted to the intelligence services, the surveillance programs ultimately allow the public authorities to commit excesses and are not limited to what is strictly necessary to guarantee national security, as provided by the GDPR.

Furthermore, for the CJEU, US law does not guarantee judicial or other effective means for the data subjects to enforce the protection of their data against access and misuse by public authorities, nor the right to request rectification or deletion of their data.

That said, the CJEU concluded that US legislation and practices are not adequate to the GDPR and that the Privacy Shield is not sufficient to remedy these problems and, therefore, does not constitute a valid legal basis to legitimize the transfer of data from individuals located in the European Union to the United States.

Standard Contractual Clauses: guarantee of protection in international transfer of personal data?

Standard contractual clauses consist of standard template provisions, pre-approved by the European Commission, which should be included in contracts involving the international transfer of personal data as a safeguard measure to ensure minimum standards of security and protection of rights, as guaranteed by the GDPR. Since 1987, such clauses have been recognized by the European Commission as a valid and appropriate mechanism for authorizing international transfers of personal data, as laid down in decision No. 2010/87.

This understanding was confirmed by the CJEU in the Schrems II Case. However, the CJEU highlighted that the validity of standard contractual clauses is not absolute and is conditioned to their practical effectiveness in light of the laws, regulations and practices of the destination country, and it would be up to the controller to carry out this analysis.

That is, before transferring personal data to other countries, the controller must assess whether the standard contractual clauses will actually be effective or whether the data importer will be prevented from complying with them by legal provisions or by orders issued by the local public authorities, since the standard contractual clauses only bind the parties to the contract (data exporter and data importer), but not the public authorities of the destination country.

Should the controller believe that the standard contractual clauses will not be effective to ensure the protection of personal data, it must adopt additional safeguard measures. Otherwise, the controller may be prohibited by the data protection authorities of the European Union member states from transferring data to such countries. The CJEU also emphasized that this analysis shall be carried out periodically and that the controller must suspend the transfer of data if circumstances in the destination country change.

Consequences of the Schrems II Case at the global and national level

The decision in the Schrems II Case will have a great impact on the global market, since more than five thousand US companies used to resort to the Privacy Shield to legitimize the transfer of data from people located in the European Union, and now they will have to adopt new safeguard measures, as is already the case in other countries that have not had their adequacy recognized by the European Commission, such as Brazil.

In addition, the decision made it clear that standard contractual clauses are not absolute, which means that their mere insertion in the contracts may no longer be sufficient to legitimize the international transfer of data, especially in the case of countries whose laws and practices make their effectiveness unfeasible.

Finally, the decision highlights the importance of having local laws and practices compatible with the level of protection guaranteed by the GDPR, since the non-compliance may result in increased costs for the data transfer (due to the additional safeguards to be adopted by the controller) or, further, in the prohibition of transfer.

In this context, the entry into force of the Brazilian General Data Protection Law (LGPD) and the formation of the Brazilian Data Protection Authority (ANPD) become even more urgent. This is because, although it is clearly inspired by the GDPR, which may facilitate recognition of its adequacy, the LGPD must become effective and Brazil must have an independent ANPD capable of guaranteeing the effectiveness of the LGPD and, consequently, the protection of personal data processed here.

[1] The Schrems II Case arose from a complaint lodged by the Austrian data protection activist Maximillian Schrems with the Irish supervisory authority, seeking to prohibit the transfer of his personal data from Facebook Ireland to Facebook Inc, located in the United States, on the grounds that U.S. law and practices did not provide adequate protection against access to personal data by public authorities.

[2] The legal structure and standards set established in the Privacy Shield were subject to a decision by the European Commission (decision No. 2016/1250), issued in August 2016. It was recognized that the Privacy Shield is an appropriate tool to legitimize the international transfer of data between the US and the European Union.

Category: Labor and employment

With the end of the validity of Executive Order 927 (MP 927) on July 19, 2020, employers can no longer use its provisions. Within the time frame of 60 days, as of July 20, the Brazilian Congress may issue a Legislative Decree to govern any impacts resulting from the loss of validity of MP 927.

In paragraph 11 of article 62 of the Federal Constitution, the legislator provided that if the Brazilian Congress does not issue a Legislative Decree, "the legal relationships created and resulting from acts performed during its validity shall continue to be governed by it.”

In other words, the legal relationships arising from MP 927 will remain valid until the end of the state of public calamity recognized by Legislative Decree No. 6/2020, in principle, December 31 of this year.

Individual agreements

According to MP 927, during the state of public calamity, employers and employees could enter into individual written agreements to ensure the maintenance of employment. This agreement would control over the law and agreements and/or collective bargaining agreements, provided that constitutional guarantees are respected.

Despite the controversy surrounding this measure and its effectiveness after the loss of the validity of MP 927, we believe it is defensible to maintain the measures agreed upon individually with employees until the end of the state of public calamity, subject to the constitutional provision mentioned above. However, companies will no longer be able to use such measures after the executive order has expired, failing which the act will be null and void.

Acceleration of holidays

MP 927 also authorized the acceleration of holidays unilaterally by the employer in cases of civil holidays or, with the individual consent of the employee, in the case of religious days.

Faced with the loss of validity of MP 927 and the withdrawal of its rules from the legal system, employers may no longer advance the enjoyment of holidays, except, however, per agreement via collective bargaining rule with the labor union of the category. Holidays already advanced may be offset, even if the actual date of the holiday occurs after the loss of effectiveness of MP 927.

Vacations

The rules for granting vacations, both individual and company-wide, have also undergone significant changes with MP 927, such as the acceleration of individual vacation periods, forms of payment, acceleration of the vacation announcements, etc.

After the loss of validity of MP 927, the employer will no longer be able to conduct new acceleration of vacation or disrespect the deadlines for communicating on whether they are granted.

In the case of vacations granted during the term of MP 927 and that had payment of the constitutional one third premium scheduled by the date of payment of the 13^th salary, employers will not need to revise the procedure and immediately pay the corresponding amount. Likewise, vacation days advanced will be valid, even if referring to future accrual periods.

Telework

The specific regulations of the Consolidated Labor Laws on the subject had been relaxed by MP 927. We believe it is not necessary to draw up a mutual agreement and record it as a contractual amendment for the maintenance of teleworking employees, although the initiative is recommended to guarantee even more effectiveness on a tailor-made basis, as long as this condition only last during the period of public calamity.

In the case of new agreements aimed at changing the employee's working arrangements to teleworking, individual agreements and the rules established in the Consolidated Labor Laws will have to be applied.

Occupational health and safety

MP 927 also made compliance with occupational health and safety rules more flexible, such as: (i) suspension of the mandatory medical examinations conducted upon hiring and periodically, which may be conducted within 60 days of the end of the state of public calamity; (ii) waiver of the examination upon dismissal in the event that an occupational medical examination has been conducted less than 180 days ago; (iii) suspension of training, which may be conducted within 90 days of the end of the state of public calamity; and (iv) maintenance of the CIPA, even if the term of office are ended, and suspension of the electoral processes in progress.

Unlike the scenarios mentioned in the previous topics, this is not a completed legal act, but possible lawsuits on the grounds of omissions by employers. It occurs that, once the condition that authorized the above-mentioned suspensions no longer exists, that is to say, MP 927 itself, companies must adopt the procedures and legal deadlines established in the Consolidated Labor Laws and in regulatory rules.

As for the CIPA, we believe that the employers who chose to extend the terms of office of the then sworn-in executive board and suspend electoral processes must resume the procedures necessary for the new board to take office.

Hours bank

Considering the impossibility for some establishments to continue their operations, MP 927 authorized the institution of hours bank for offsetting within up to 18 months from the date of the end of the state of public calamity.

Since, according to the rules of MP 927, it would be necessary to sign a formal individual agreement to establish an hours bank, we believe that a completed legal act has been formed that has in its essence a provision for prospective effects: use in the abovementioned period.

Thus, not only because of the constitutional provision presented in the introduction of this article, but also in order to maintain the balance of what was agreed upon, rule regarding use must be preserved.

FGTS

Another measure brought about by MP 927 to relieve companies' cash flow was suspension of FGTS payments related to the March, April, and May 2020 periods, which were due in the immediately following month. It was also established that collection for these periods could be deferred in up to six installments from July of 2020, with maturity on the seventh day of each month.

Faced with the loss of validity of MP 927, employers who have chosen to defer payment thereof may continue to respect the payment dates provided for in the executive order.

Employees' work hours at healthcare facilities

Executive Order 927 also authorized health care professionals, pursuant to a written individual agreement, to work overtime beyond the legal and/or negotiated limit, including in the period reserved for rest periods between work days. The only exception was weekly paid rest of 24 hours, which had to be respected.

With the loss of validity of MP 927, it will be possible to maintain adjustments of these terms until the end of the state of public calamity, due to the completed legal act formed per the constitutional provision, provided that the agreement was entered into before July 20.

New agreements entered into after July 20 must be adapted to the Consolidated Labor Laws. The measures established by MP 927 may no longer be applied.

Category: Corporate

One of the innovations brought about by Normative Instruction No. 81 of the Department of Business Registration and Integration (DREI), issued on June 10 of this year, is the express provision for the filling of limited liability companies' articles of association containing preferred quotas with voting restrictions or without voting rights.

A specific item included in the filling manual for limited liability companies (5.3.1) expressly establishes that quotas of different classes are admitted in these companies, and the articles of association are used to establish the proportions and conditions attached to such quotas. These preferred quotas may grant their holders various economic and voting rights. They may even eliminate or limit the voting right of the holder of such preferred quota, subject to the limits of Law No. 6,404/76 (the Brazilian Corporations Law), applied in a supplementary manner.[1]

The DREI also expressly stated that if there is any preferred quota without voting rights, it will not be computed for the purposes of calculating the quorums for call to order and resolutions provided for in the Civil Code.

Preferred shares are those that confer on their holders equity advantages and/or special privileges not attributed to other quotas, accompanied, in most cases, by restrictions on voting rights.

Since the entry into force of the new Civil Code on January 10, 2002, the possibility that the capital stock of a limited liability company may include preferred quotas has been discussed, considering that the Civil Code is silent on this matter. Despite this silence, part of the legal scholarship came to the understanding that preferred quotas should no longer be admitted on the basis of the prevalence of the nature of a company of persons (intuitu personae) intrinsic to limited liability companies.

It is important to emphasize that, when dealing with the freedom of a limited liability company to perform an act not prohibited by law, such as contemplating preferred quotas in its capital stock, we must consider certain principles that are the basis of private law, including private autonomy, contractual freedom, and legality.

Private autonomy and contractual freedom materialize the right of the contracting parties to choose whether or not to enter into a contract, as well as the content and conditions thereof, provided that they are agreed upon in good faith, respecting the social function of the contract, and not contradicting any provisions of law. The principle of legality, in turn, is provided for in article 5, subsection II, of the Federal Constitution, according to which all are equal before the law, without distinction of any kind, and no one shall be obliged to do or refrain from doing anything except by virtue of the law. From the point of view of private law, this principle stipulates that private individuals may do anything that is not forbidden by law, which includes performing any act not provided for by law. Thus, there would be no legal impediment for limited liability companies to include preferred quotas in their articles of association.

It so happens that, before Normative Instruction No. 81, there was no uniform understanding on the part of the various boards of trade regarding this controversy. Some accepted the recording of articles of association including quotas without voting rights or with restricted voting rights, while others rejected this possibility.

Since 2017, with the enactment of DREI Normative Instruction No. 38, the possibility of establishing preferred quotas in limited liability companies was already included in the registration manual for limited liability companies. At the time, the provision had been placed in item 1.4, subsection II, letter "b" of the manual for registration of limited liability companies so that the supplementary regulation of the Brazilian Corporations Law would be presumed for limited liability companies that had preferred quotas. Even so, there were differences in the legal scholarship as to its validity and legality, and as regards the details linked to the division of the capital stock into such quotas, for example the possibility of eliminating or limiting the right to vote. This difference in understanding has always generated great legal uncertainty regarding the subject and has served to make it impossible in practice for limited liability companies to create preferred quotas.

Although the change brought about by Normative Instruction No. 81 is very welcome as a way to standardize the understanding regarding of the filling agencies, some controversial issues still need to be clarified. The first revolves around the competence of the DREI to establish the possibility of creating preferred quotas in limited liability companies, given that the DREI is a body whose legal purpose is to hand down standards to resolve doubts regarding the interpretation of laws and regulations on the registration of companies, under the terms of article 4 of Law No. 8,934/94. Therefore, any quotaholder of a limited liability company that may feel harmed by the division of the capital stock into preferred quotas may bring the matter to be discussed in the judicial sphere, on the grounds of incompetence of the DREI to "legislate" regarding preferred quotas in limited liability companies.

Furthermore, Normative Instruction 81 does not indicate exactly which advantages may be assigned to preferred quotas. In other words, it is not clear whether limited liability companies will be restricted to the use of the advantages allowed by the Brazilian Corporations Law, which must be applied in a supplementary manner, or whether they will be able to innovate with other advantages not provided for by law.

Thus, from the standpoint of company registration, some issues relating to the use of preferred quotas by limited liability companies have been clarified and standardized by Normative Instruction No. 81. However, given the controversy that the subject generates in Brazilian legal scholarship, the underlying issue still generates controversy and conflicting understandings.

[1]The Brazilian Corporations Law, in turn, expressly allows companies to issue preferred shares, which give shareholders certain preferences, such as (i) priority in the distribution of fixed or minimum dividends, (ii) priority in the reimbursement of capital, with or without a premium, or (iii) accumulation of the preferences and advantages mentioned in items (i) and (ii), as provided for in article 17 of the same law. In addition, the bylaws may limit certain rights relating to the preferred shares, such as the right to vote.