The Issuance of Bonds by Limited Liability Companies: a Necessary (re)Discussion of the Brazilian Law of Economic Liberty

The issuance of bonds by limited liability companies: a necessary (re)discussion of the Brazilian Law of Economic Liberty

By Francisco Andre Moura.

Introduction.

Recently, the Brazilian Congress enacted in law, a provisory measure from the executive branch that instituted the so-called Law of Economic Liberty. Big changes were promoted, especially concerning the regulation of the limited liability companies (hereinafter, LLCs).

Some of the changes approved were the possibility of having an LLC with only one partner, the authorization for issuance of stocks with different classes and purposes, the obligation of a faster procedure on the creation of the company by the states’ boards of commerce and so on.

The propositions are essential to permit more dynamism in the regulatory system and to try to overcome the economic downturn. Excessive bureaucracy and anachronic rules regarding LLCs causes, amongst other harmful effects, a rise in the “Brazil cost”[1], especially when considering that LLCs are by far, the most popular model of enterprise in Brazil, with a total number, according to the Brazilian Revenue Authority[2], of 3,5 million , as opposed to corporations, which count only for 1.040.

With the proposed changes, Brazilian LLCs finally became a modern instrument of local and global investments.

However, one specific point, which is the possibility of LLCs to issue bonds, that was present in the presidential document, was not enacted from the provisory measure into the Congress law. The approval of this rule would strongly impact the possibilities of financing structures, especially regarding small and medium enterprises which are the majority in the Brazilian economy.

In this context, this article intends to first analyze the subject of bonds issuance by LLCs regarding Brazilian legislation and legal doctrine; second, cite the cons and the changes LLCs need to embrace to be able to issue bonds with certainty; and third, identify if relevant foreign experiences could be a good mirror for Brazilian legal system in the subject.

Regulatory Framework on Issuance of Bonds

Brazil has specific rules regarding corporations, which is the Law of Corporations number 6.404/1976 (“Corporations’ Rules”). “The Corporations Rules cover the entire framework regarding corporations, including incorporation, issuance of capital, management, accounts and liquidation. For a general understanding, the Brazilian Corporations’ Rule is similar to the Model Business Corporations Act from the United States.”]The legal framework for LLCs is derived from a specific chapter from the Civil Code. The mentioned chapter defines the LLCs, it´s rules for incorporation, deliberating quorum, forms of organization and partner´s obligations and liabilities. [Francisco – can you add a similar line for the LLC chapter from the Civil Code?] However, LLCs could use the Corporations’ Rules as a subsidiary resource when it doesn’t conflict with their mains rules.

Moreover, Brazilian literature[3] defines bonds[4] as an abstract debt title that corporations have the prerogative to issue, serving to provide the company with long term resources at lower rates. In fact, this prerogative is exclusive of Corporations, although there is some divergence among writers[5].

Some scholars argue that since the use of Corporations’ Rules is subsidiary to LLC’s norms, they are allowed to issue bonds because the Civil Code, which regulates the limited liability companies, is silent in this subject.

However, a Brazilian legal scholar (Borba, 2014)[6], has argued that, even though the Corporations’ Rules could be used as subsidiary to LLCs in certain topics, the subject of bonds in the actual corporate legislation is unsuitable to LLC major principles and purposes.

Because of this divergence of scholarly views and the factual impossibility of bonds issuance by LLC, it has been a longstanding hope that the approval of a Congress’ bill expressly authorizing it, would facilitate access to capital, especially by the small and medium enterprises.

Need for Express Authorization

Before the provisory measure issued earlier this year by the executive branch, the House of Representatives and the Senate have debated at least four bills containing the authorization to LLCs to issue bonds[7]. Amid all the proposals, one that got closer to effectively authorize the issuance was the cited provisory measure converted in law. Yet, without public consultation and minimal reasoning, the Congress took out from the final text the authorization to LLC issue bonds.

This omission is likely to prove counterproductive.

As stated above, Limited Liability Corporations are so far the most used enterprise model in Brazil. Further,bonds are one of the most used financial instruments when concerns to domestic issuance, responding for 62% of the Corporations’ capitalization, according to ANBIMA’s (Brazilian Financial and Capital Market Association)[8] report.

It is clear that would be a natural market flow the LLCs start using bonds as a financial instrument since both are well accepted by Brazilian players. As was written by the scholar Mariana Maduro[9], small and medium-sized entrepreneurs would be able to venture into a new form of financing, often the most effective and least disruptive in their daily lives.

One point that goes against the possibility of bonds’ issuance by LLCs is the reduced transparency of this type of enterprise. LLCs are less subject to public scrutiny regarding governance and compliance rules. For instance, Corporations shall quarterly publicize their accounting balances for the shareholders and the market. This is not mandatory for LLCs.

Concerning this point, ANBIMA (Brazilian Financial and Capital Market Association) published an agenda for development[10], in which they suggest that an authorization for limited companies to issue bonds would need to be succeeded by rules that could guarantee a minimum disclosure and transparency for LLCs – as well as is necessary for privately held Corporations.

Also, the executive branch in the justification that accompanies the proposed law of economic liberty, explained that even if the possibility of issuing bonds was extended to LLCs, several characteristics would be lacking for the proper functioning of this debt instrument, as, for example, an appropriate information regime for the monitoring of investments by bonds’ holders[11].

Certainly, the LLCs needs to modernize disclosure and compliance procedures in the case of been approved the authorization of bonds issuance, but not only for that, since one of the purposes of the law here discussed is making LLC a modern instrument of entrepreneurship and investment, the advancement of governance rules are sine qua non conditions.

As a comparison, other countries recently authorized the issuance of the bonds by private limited liability countries. Luxembourg is an example where the commercial companies’ law from 1915 was altered to permit LLCs (there called SARL) and other enterprise models to have access to this financing instrument[12].

As a final consideration, not intending to end the debate but to propose a discussion, this article demonstrated the importance of the Law of Economic Liberty for Brazilian economy, as a way of inserting LLCs into modern parameters, however, it also tried to defend that the law failed in the subject of not permitting LLCs to issue bonds, which is a topic that needs to be (re)discussed and approved by Congress.

* * *

[1] Brazil Cost refers to the increased operational costs associated with doing business in Brazil. Available on: <https://www.reuters.com/article/us-brazil-security/epic-bank-heist-exposes-brazils-security-flaws-idUSTRE79C0OD20111013>; Accessed on September 26th, 2019.

[2] Available at: https://valor.globo.com/legislacao/noticia/2019/07/31/mp-da-liberdade-economica-preve-emissao-de-debentures-por-limitadas.ghtml; Accessed on September 25th, 2019. Own translation.

[3] BORBA, José Edwaldo Tavares. Direito Societário. 14ª edição. São Paulo: Atlas, 2014, p. 276.

[4] In Portuguese called “Debêntures”. Own translation.

[5] Available in: https://www.jota.info/opiniao-e-analise/artigos/emissao-de-debentures-por-limitada-final-feliz-a-vista-21052018; Accessed on September 30th, 2019. Own translation.

[6] BORBA, José Edwaldo Tavares. Direito Societário. 14ª edição. São Paulo: Atlas, 2014, p. 123.

[7] Two of the bills was proposed in Senate and has the numbers 487/2013 and 11/2018; The other two was proposed in the house of representatives and has the numbers 1572/2011 and 6.322/2013. Own translation.

[8] Available in Portuguese at:

<https://www.migalhas.com.br/dePeso/16,MI308550,91041-As+sociedades+limitadas+como+instrumento+de+investimento+globalizado>; Accessed on September 30th, 2019.

[9] Ibid. Own translation.

[10] Available in Portuguese at: <https://www.anbima.com.br/data/files/0A/D6/9F/C5/D9A956105B26D856A9A80AC2/Relatorio-Agenda-Mercado-de-Capitais-ANBIMA-B3-Digital.pdf>; Accessed on September 30th, 2019. Own translation.

[11] Available in Portuguese at:

<https://legis.senado.leg.br/sdleg-getter/documento?dm=7946806&ts=1570126153081&disposition=inline>; Accessed on October 3rd, 2019.

[12] Available in: <https://www.elvingerhoss.lu/sites/default/files/documents/publications/EHP-Law-of-10th-August-1915-on-commercial-companies.pdf>; Accessed on October 3rd, 2019.