- Preferred Quotas in Limited Liability Companies (“sociedades limitadas”): What Are They and How Are They Regulated Today?
Preferred quotas are a type of equity participation that grants the quotaholder certain privileges over other members. Under the Brazilian Corporations Law (“Lei das Sociedades por Ações”), preferred shares may provide benefits such as (i) priority in the distribution of fixed or minimum dividends; (ii) priority in capital reimbursement, with or without premium; (iii) accumulation of these advantages; or even (iv) other benefits granted to shareholders without voting rights or with restricted voting rights.
However, such advantages may be structured in a way that they are not very significant in practice. This structure allows the use of preferred shares to limit or exclude certain rights normally granted to common shares, including voting rights (which may also be granted with restrictions to preferred shares). This opens the possibility of negotiating voting rights specifically through preferred shares.
Despite the existence of clear rules on preferred shares, the use of preferred quotas in limited liability companies (“sociedades limitadas”) has always been somewhat controversial. Currently, the creation of preferred quotas in limited liability companies—including preferred quotas without voting rights—is recognized by the National Department of Business Registration and Integration (DREI), pursuant to Annex IV of DREI Normative Instruction No. 81/2020. This instruction permits the creation of quotas with differentiated rights based on the principle of contractual freedom, provided there is express provision in the articles of association.
- Civil Code Reform and Preferred Quotas
The proposed reform of the Brazilian Civil Code (based on recommendations from a Commission established by the Senate in 2023) introduces changes to the legal framework governing limited liability companies. One of the suggested changes is the express inclusion of the possibility to create preferred quotas in the legislation.
This change would essentially incorporate into the Civil Code the existing DREI framework regarding preferred quotas.
- Specific Legal Consequences:
The rules on preferred quotas have the following noteworthy implications:
– Simple or Business-Oriented Limited Liability Companies: Since activities deemed “simple” under Brazilian law may adopt the form of limited liability companies, such entities may also benefit from the structure of preferred quotas—even if their articles of association are filed with a Notary Office instead of a Board of Trade.
– Taxation: Although the rules on preferred quotas do not directly address tax aspects, any change in the economic rights of members (such as profit-sharing preferences) must be assessed in light of income tax legislation and the ancillary obligations of companies.
- Recommendations:
– Companies undergoing corporate restructuring: Evaluate the advisability of implementing preferred quotas under the current regulatory regime, considering the risks and implications of various corporate arrangements.
– Legislative monitoring: Closely follow the progress of the Civil Code reform in the National Congress, as approval may proceed swiftly or result in substantial amendments to the current draft.
Our law firm is available to assist your company with contractual adjustments and corporate planning, in light of the various structuring options. Schedule a consultation with our specialized team.
Franco Advogados
