Preferred Stocks in “Limitadas”
Lower-body regulation enacted by DREI (Federal Business Registration Department) under number 38 on March 2, 2017 expressly authorizes the creation and issuance of preferred shares in limited-liability legal entities in Brazil. The understanding is that henceforth limited liability entities or simply “limitadas” are free “borrow” the capital share structure as provided for under Law n. 6.404/1976 applicable to corporations in Brazil, so such closely-held entities can now issue up to 50% of all capital stock in preferred shares (with no voting-rights), thereby making room for larger investments along with the expansion of the capital base in the rather simplified and low-cost corporate structure of limitadas while preserving control in the hands current controlling shareholders. As a consequence, much of the time-consuming negotiation and drafting of complex shareholders’ agreements (whose enforcement may prove cumbersome), should be at least in part reduced or simplified, the same with other creative or improvised tools investors have traditionally used in Brazil to pour in money in target companies without the purchase of equity (e.g., loans convertible into equity). In principle, therefore, controlling shareholder can under the newly-passed regulation dilute its capital stake and still maintain control provided it preserves 75% of half of all capital base or 37,5% of preferred shares, assuming a 50%/50% common and preferred share ratio. The new regulation also allows for the use treasury stocks, with further and interesting impact on dilution and control. Any such matters will require in-depth legal review in light of real-life case and clients’ specific needs and preoccupations.