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PLC ­ Deadlock and Termination: Brazil: International Joint Ventures
Deadlock and Termination: Brazil: International Joint Ventures
Resource type: Practice note
Status: Law stated as at 01­May­2016
Jurisdiction: Brazil
This Q&A provides country­specific commentary on Practice note, Deadlock and termination: international joint ventures, and forms part
of our international joint ventures transaction guide.
Luciana Monteiro Cossermelli Tornovsky and Gabriel da Câmara Queiroz, Demarest Advogados
Contents
1. In the absence of specific provisions in a company's bye­laws or a shareholders' agreement, are any remedies available at
law in the event of an unresolved dispute between shareholders resulting in deadlock?
If any resolution to be approved in a shareholders' general meeting generates a deadlock situation and the bye­laws' lack specific
procedures to solve such a dispute, a new shareholders' meeting must be called to vote on the resolution in dispute, at least two months
after the meeting in which the deadlock occurred (article 129, §2, Corporations Law). During the period between the votes, the
shareholders can reassess the issue(s) discussed in the general meeting and seek a solution.
A claim should be filed with the courts by any of the shareholders present at a shareholders' general meeting that resulted in a deadlock
situation if:
The dispute between the shareholders persists.
They will not allow a decision to be made on the issue by a third party.
There is no dispute resolution clause in the bye­laws providing that arbitration will apply in a deadlock situation.
It is important to note that the company should not be a party to an eventual claim filed by the shareholders as the dispute relates to a
conflict between the shareholders rather than the company.
2. Is it common practice expressly to provide for a dispute resolution process in a joint venture company for an unresolved
dispute between shareholders resulting in deadlock? If so, are any procedures commonly adopted? In which document
would the relevant provisions commonly be drafted?
As an eventual deadlock situation relates to a conflict between the shareholders, the joint venture or shareholders' agreement usually has
clauses setting out a dispute resolution procedure.
The following dispute resolution mechanisms are commonly seen in joint venture or shareholders' agreements:
Mediation alternatives, such as the appointment of a committee or representatives of the parties to carry out good faith discussions
and negotiations with respect to the unresolved dispute.
Submission of the unresolved dispute to an arbitration court.
The provision of a casting vote to a board member.
A shotgun provision. In a deadlock situation, this gives a party the option to, for instance, deliver a written offer for the acquisition of
its shares for a certain price to the other party. The latter has the option of:
buying the shares of the offering party for the proposed price; or
selling its shares for the same price offered in the written offer to the offering party.
3. Is it common to provide for the compulsory transfer of shares in a joint venture company in any of the following
circumstances? In which document are the relevant provisions likely to be drafted and are they likely to be enforceable?
(a) Insolvency of shareholder.
(b) Change of control of shareholder.
(c) Material breach of the shareholders' agreement or by­laws.
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Shareholders are free to set rules related to compulsory share transfers in a shareholders' agreement. However, it is important to note
that:
On the insolvency of a shareholder, a compulsory transfer of shares could be considered to be a fraudulent conveyance, if it is seen to
be a transfer of assets or property that is made to defer, hinder or defraud creditors to obtain undue advantages and which, as a result,
may cause damages to creditors. As a result, this may:
be declared void by the Brazilian courts, if the aggrieved creditor(s) seeks the assistance of the Brazilian courts;
subject the insolvent shareholder to criminal liability.
If a compulsory transfer results in a change of the controlling shareholder (or the controlling group) of a publicly­held corporation, a
public offer to acquire the shares of the other shareholders that are not part of the transaction must then be carried out before the
compulsory transfer of shares is implemented (interpretation of article 254­A of the Corporations Law).
4. Is it common in a joint venture company to impose restrictions on the transfer of shares? If so, what sorts of restrictions
are commonly imposed and in which document are they likely to be drafted?
In the case of privately­held corporations, there is a common will to form a company, and a more "personal" relationship exists between
the shareholders (known as affectio societatis). As a result, restrictions on the transfer of shares are commonly seen in the bye­laws
and/or shareholder agreements.
In this type of company, rights of first refusal are usually contained in the bye­laws of a company if there is an intention to provide equal
rights to all shareholders (rights of first refusal require the selling shareholder to present a third party's offer to the remaining
shareholder(s) so the latter can exercise the right to buy the selling shareholder's shares under the same or better conditions as those
offered by the third party). Alternatively, a right of first refusal may be provided in a shareholders' agreement where there is an intention to
grant this right to a specific group (rather than all) of the shareholders.
In the context of a joint venture, as the parties to the venture should comprise all of the existing shareholders, either the bye­laws or the
shareholders' agreement are suitable for regulating the right of first refusal, as both documents are enforceable against the company.
Note that a shareholders' agreement governing the purchase and sale of shares:
Must be observed by the corporation if a copy of the agreement is filed at the head office of the corporation.
Is enforceable against third parties if the obligations and encumbrances resulting from it are annotated in the nominative share register
book (and the share certificates, if issued).
In addition to rights of first refusal, it is also common to see the following provisions in shareholders' agreements:
A tag along right, usually granting a minority shareholder the right to sell his or her stake in the company when another shareholder
(usually a majority shareholder) intends to sell his or her equity interest to a third party.
A drag along right, usually granted to a majority shareholder wishing to sell its stake to a third party. The right forces a minority
shareholder to participate in the sale, provided that the same terms and conditions offered to the majority shareholder are offered to the
minority shareholder.
Put and call options, which grant a shareholder the right (but not the obligation) to sell (if a put option) or buy (if a call option) the
shares of another shareholder after a certain period of time and/or on the fulfilment of a certain condition established by the parties.
A look back provision, which ensures that a buyer will not resell, for a certain period of time, the shares to third parties for a price
higher than the price originally paid for such shares.
A shotgun provision (see Question 2).
5. If shares are transferred to a third party in breach of restrictions on transfer (in a shareholder's agreement or by­laws), what
remedies are available to the remaining party?
If shares are transferred to a third party in breach of restrictions provided in a shareholders' agreement, assuming that such an agreement
is duly filed at the company's head office, the transfer is taken not to have been implemented as the company must observe the terms
and conditions of the agreement. As a result, it should not make the necessary annotations in the nominative share register and the
nominative shares' transfer books. This rule also applies to a breach of transfer restrictions provided for in the bye­laws, as the company
is bound by the rules set in relation to these.
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However, if a transfer of shares occurs in breach of restrictions, the aggrieved shareholder(s) can either:
Submit the dispute to an arbitral court, if the shareholders' agreement (or the bye­laws, as the case may be) provides that arbitration is
the appropriate mechanism for dispute resolution.
File a claim with the courts to enforce the rights and obligations set out in the shareholders' agreement (or the bye­laws, as the case
may be).
6. Is it possible to provide that in the event of a joint venture company being wound up, certain assets (such as intellectual
property rights) will be transferred to a specific shareholder? Will such a provision be enforceable in a winding­up?
The shareholders' general meeting approving the winding up of a corporation can also set special conditions for the transfer of any
remaining assets of the company to the shareholders if the following conditions are met (article 2015, §2, Corporations Law):
All of the company's creditors have already been paid.
The apportionment of the remaining assets is approved by at least 90% of the total shares.
The apportionment of any remaining assets is carried out on a book value basis and carried out equally between the shareholders.
If a shareholder does not agree with the apportionment of the company's remaining assets, that shareholder can submit the matter for
determination by the courts within 30 days of the publication of the minutes of the general meeting intended to approve the liquidator's
final accounts. If the court determines that the proposed apportionment favours a specific shareholder (or group of shareholders), this
apportionment procedure will be suspended. If the apportionment has already occurred, the losses borne by the shareholder in
disagreement must be indemnified by the shareholders favoured by the apportionment.
Resource information
Resource ID: 5­627­9588
Law stated date: 01­May­2016
Products: Commercial: International, International Joint Ventures transaction guide, PLC Cross­border, PLC UK Law Department, PLC UK Public
Sector, PLC US Commercial Transactions, PLC US Corporate & Securities, PLC US Corporate and M&A, PLC US Law Department
Series: Country Q&A
Related content
Topics
Company Formation and Constitution (http://uk.practicallaw.com/topic2­103­1146)
Cross­border: Company Law and Corporate Governance (http://uk.practicallaw.com/topic8­200­1621)
Joint Ventures (http://uk.practicallaw.com/topic8­103­1308)
Practice note: overview
Deadlock and termination: international joint ventures (http://uk.practicallaw.comtopic0­107­3948)
Practice note
Shareholders' Agreement and Bye­laws: Brazil : International Joint Ventures (http://uk.practicallaw.comtopic4­629­0416)
Standard documents
Confidentiality agreement: international joint ventures (http://uk.practicallaw.comtopic2­500­4898)
Memorandum of understanding: international joint ventures (http://uk.practicallaw.comtopic6­101­6808)
Shareholders' agreement: international joint ventures (http://uk.practicallaw.comtopic2­101­6810)
Standard clause
Minority shareholder protection: international joint ventures (http://uk.practicallaw.comtopic5­101­6446)
Checklist
Checklist: international joint ventures (http://uk.practicallaw.comtopic4­102­2004)
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