The Right to be Lonely

The Right to be Lonely

By Eduardo Ludmer*

Just like a person has the right to be single, a legal entity must have the right to choose whether to associate with others or to conduct its business alone.

It took some time for Brazil to finally allow a legal entity to be a single shareholder of a company. When Law # 12,441/2011 came into effect establishing the possibility of incorporating a Single Limited Liability Company (known in Portuguese as “Eireli”), most legal practitioners and scholars thought that this Brazilian peculiarity would be over for both individuals and legal entities. Although the law immediately applied for individuals, it took another 6.5 years for the Department of Business Registration and Integration – DREI to enact Normative Instruction # 38/2017, effective as of May/2017, (“Instruction 38”) revoking Normative Instruction # 10/2013, to finally allow national and foreign legal entities alike to be the holders of an Eireli.

The prerequisite for incorporating an Eireli remains the same: a minimum corporate capital of 100 minimum wages (currently approximately R$97,000.00), which must be paid up upon its incorporation.

According to Article 980-A §2 of the Brazilian Civil Code, an individual can be the owner of only one Eireli. It is not clear whether this rule was replicated by Instruction 38. Although such rule determines that individuals who are the shareholders of an Eireli are not entitled to incorporate more than one Eireli, there is no provision with regards to the number of Eirelis that can be incorporated by a legal entity. This lacuna is likely to generate uncertainty as to whether a legal entity (including an Eireli) may create and own two or more Eirelis.

Despite the legal novelty brought by the creation of the Eireli and, in particular, by Instruction 38, Brazilian individuals and companies are still forbidden to incorporate corporations (known in Portuguese as Sociedade Anômima) and/or Limited Liability Companies (known in Portuguese as Sociedade Limitada – Ltda.) on their own, and in order to go solo, they need to put together the minimum corporate capital required to form an Eireli.

Further, since the Eireli has the same legal treatment given to a Sociedade Limitada, they may not issue securities and other negotiable instruments.

There is no reason for differentiating between a single shareholder and a multiple shareholder company. The imposition of a minimum corporate capital of 100 minimum wages wholly paid-up upon incorporation as a condition for the formation of a company, only because the entrepreneur decided to go on his own, can be economically prohibitive for many people with great ideas.

When looking to the laws of other countries, it is rare to find this odd distinction. Under Israeli law, for instance, Art. 3 of Company´s Law 5759-1999 explicitly provides that a company can have a single shareholder. This same rule is established by the UK Companies Act 2006 under Art. 7 and by many of the corporation laws of the various states of the U.S.

As it is the case with a lot of other things, Brazilians have always found a creative solution to live with the minimum 2 shareholders rule: whilst individuals count on the good-will of a family member or a good friend, the legal entity usually brings together an individual to be the other shareholder, either one of the shareholders or a third person specifically engaged (and usually paid) to figure as the second shareholder. The result is familiar: more paperwork, bureaucracy and transaction costs.

The novelty brought by the Eireli and the rules under Instruction 38 are welcome but are only second best to revoking the plurality of shareholders rule for incorporating Sociedades Limitadas and Sociedades Anônimas. It is time for Brazilian lawmakers to allow their constituents to go freely by the old Brazilian proverb: Better alone than in bad company.

*Eduardo Ludmer is associate in the Corporate M&A team. Co-author, Joyl Gondim de Alencar F., partner in Azevedo Sette Advogados.