Doing business in Brazil: why foreign companies should be represented by an independent lawyer?
Instead of establishing a local branch, which procedure is bureaucratic and subject to government authorizations, usually is recommendable for foreign companies establish their businesses in Brazil by incorporating a Brazilian entity.
One of the requirements to be met by foreign companies to hold equity investments in Brazil is appoint a local attorney-in-fact for legal purposes. According to the Brazilian legislation, the attorney-in-fact appointed by the foreign shareholder must be:
- An individual resident in Brazil, who must have in the Country his/her permanent home and habitual abode;
- National of Brazil or foreign that holds a permanent visa granted by the Brazilian Government; and
- Authorized by the foreign shareholder to, at least, manage its goods and assets held in Brazil, receive the service of process upon it and act in its behalf towards the Brazilian tax authorities.
To meet such requirement, it is usual that foreign shareholders appoint one of the directors of the Brazilian entity as their attorney-in-fact, who must be resident in Brazil to take such office. In many cases the director is not even paid for such specific appointment. Being paid or not and despite of being allowed by the law, provided that the other requirements are met, appointing directors of the Brazilian subsidiary is not recommendable in most of the cases.
Obviously, the appointment of an attorney-in-fact is not an empty formality and there are important consequences that may arise from it. For example, if certain director appointed as attorney-in-fact is removed from his office, his authority granted by the power of attorney is maintained unless the foreign shareholder formally replaces its attorney-in-fact. In this sense, is prohibited the power of attorney that provides automatic removal of the director’s authority by him being removed from his primary office.
Maintaining his authority while the replacement of the attorney-in-fact does not come into effect, the former director can manage assets of the foreign company in Brazil and be notified for any legal or tax matters in its behalf. This situation puts both sides in jeopardy: the former director can assume liabilities from any debts owed by the foreign shareholder; and the foreign shareholder, in its turn, can be compelled to indemnity the former director for liabilities extended to him under the exercise of his authority and also may be compelled to pay for the representation itself, considering that the director no longer receives any remuneration from its primary position.
These and other related risks can be avoided by entering into an agreement whereby the foreign shareholder is represented by an independent lawyer and the authority, liabilities and obligations assumed by such lawyer as its attorney in Brazil are carefully outlined. There are several reasons why being represented by an independent lawyer in Brazil is recommendable for foreign shareholders, such as:
- Avoids eventual conflict of interest with the Brazilian subsidiary’s management, granting authority for legal matters in Brazil to an individual unrelated to the local management.
- Eliminates the risk of the foreign shareholder being compelled to indemnity any director of the Brazilian subsidiary for assuming its liabilities in Brazil.
- Prevents from being represented for an individual with no longer relation to the group, even temporarily, which is the case when the director appointed as its attorney-in-fact is removed from his office at the Brazilian subsidiary.
- Liabilities and constraints can be further outlined on an agency agreement, whereby the foreign shareholder can set the agenda and the formalities to be fulfilled by the attorney.
- Communications with lawyers are inviolable by the Brazilian Law.
It is also recommendable for the foreign shareholder contract a law firm in Brazil with expertise on representation of foreign shareholders, mostly when the POA granted comprehends powers to attend shareholder’s meetings.
We at Pinheiro Villela have broad expertise on representation of foreign shareholders in Brazil, please feel free to reach out to us with any questions you may have.