The legal representative in Brazil
July 2014 | EXPERT BRIEFING | RISK MANAGEMENT
When doing business in Brazil, the foreign company must permanently maintain a legal representative with powers to sign on behalf of the foreign partners, solve issues related to the business, respond in a legal capacity, and receive summons on behalf of the overseas company.
This appointed legal representative does not necessarily have to be a Brazilian and it is not necessary to have a Brazilian partner either. However, if the legal representative is a foreigner he must be resident and domiciled in Brazil with a permanent visa.
Usually, when a foreign company commences activities in Brazil, it looks for an attorney to act as its representative. Because this position involves considerable risk, most lawyers and accountants do not perform such a service, or accept the position only on a temporary basis, until the company hires a senior manager to control the local company.
Risks associated with acting as the legal representative
The Brazilian Civil Code stipulates the legal representative or the administrator, in the exercise of his obligations, must be diligent and conscious just like every executive or senior manager conducting business. However, it is important to understand the role, the potential liabilities and the risks that come with this position. When acting on behalf of the company, liabilities may be of a civil, administrative and criminal nature.
Cases are judged by common law applicable to civil responsibility. The legal representative is held personally liable for damages to the organisation, its shareholders and third parties, in cases of improper or illegal actions, conduct and intentions. The company may request compensation for any losses.
Liabilities will arise if he acts against the interests of the company infringing the local legislation or the company’s Articles of Association.
Therefore, it is imperative to take precautionary measures, such as filing statutory documents with the Board of Trade, registering shareholder’s minutes with approvals, filing financial statements with explanatory notes, and meeting all reporting requirements established by law, with approvals from the shareholders, at least on a yearly basis. This will prove that all transactions and activities are in accordance with standard principles and corporate guidelines.
In line with this, the new Anticorruption Law (Law 12.846/13) took effect at the beginning of 2014. The purpose of such regulation is to create strict liability for companies who participate in acts of corruption against public, local or foreign administrations. The new law is intended to fill a gap in the Brazilian legislation, providing a new mechanism to combat and suppress corruption both inside and outside the country.
The law stipulates that companies, in addition to compensating losses and independently of proof of guilt, according to strict liability, can be fined up to 20 percent of gross revenues if any administrator or employee is involved in acts of corruption.
The new law may increase fear of the so-called ‘penalty for solidarity’, when the company responds for civil and administrative acts by its officers and employees.
However, while not changing the degree of responsibility of administrators, the anti-corruption law increases the personal exposure of administrators for acts performed by the company and any of its subordinates which may lead to financial losses, impairment of assets and possible actions for accountability and damages.
To minimise the risks, administrators can protect themselves by considering the options set out below.
D&O insurance. D&O insurance coverage can extend to lawsuits, actual or alleged wrongful acts committed by the officer of the insured company, securities claims, and employment-related claims. Common language in a D&O document includes ‘Side A’ and ‘Side B”’, where Side A protects officers for personal financial liabilities, for example, in cases of bankruptcy or dissolution, and Side B covers the company by establishing indemnities for directors and officers. The exclusions may include regulatory claims, fines and penalties, taxes, fraudulent conduct, pollution, gases control, climate change, illegal personal profit, securities lawsuits with shareholders over M&A, and property damage, among others.
Comfort letter. The comfort letter is a commitment between the company and his partners, on one side, and the administrator, on the other, in which the company undertakes to defray any prejudice which the administrator suffers as a result of lawsuits and claims. In practice, the comfort letter provides less security for administrators (non-partners) than D&O insurance for two reasons: (i) risk of financial failure if the company fails to honour its commitment; and (ii) the existing conflict of interest when the entrepreneur society itself blames the administrator.
Finally, the Asset Protection Law aims to adopt a set of legal preventive measures to safeguard the personal assets of the directors from administrative or judicial demands arising from civil liability actions.
It is noteworthy that none of the preventive measures will suffice when the responsibility assigned to the legal representative arises from deceit or fraud.
However, both D&O insurance and comfort letters safeguard assets perfectly, or support administrators preemptively, ensuring their good performance in the management of large corporations.
Gabriel de Carvalho Jacintho is founder of G.Jacintho. He can be contacted on +55 11 3124 2555.
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Gabriel de Carvalho Jacintho