After months of intense debate between the Executive and Legislative Branches, Civil Society, and market players, the Economic Freedom Executive Order (Executive Order No. 881, of April 30, 2019) was finally converted into law on September 20 (Law No. 13,874/19), effective immediately. In order to reduce the day-to-day bureaucracy for Brazilian entrepreneurs, to establish free market guarantees, and to provide greater legal certainty for Brazil's business environment, the new law promotes changes in various areas of law, including civil, administrative, company, corporate, and labor law.

In a series of four articles, we will explain the main changes brought about by Law No. 13,874/19 from a business perspective, going through issues that should have an impact on the Brazilian business environment and will require companies to adapt to the newly-created rules.

Corporate and contract aspects
The law amended the Civil Code with regard to piercing the corporate veil, clarifying the definitions of misuse of purpose and commingling of assets that fueled legal debates regarding its reach and legal implications, in order to provide greater asset protection for Brazilian entrepreneurs.

In addition, the law created in the Brazilian legal system the concept of a wholly-owned entity as an alternative to both the limited liability company, which as a rule requires at least two partners, as well as the Individual Limited Liability Company (Eireli), which, although characterized by the existence of only one partner, was never widely adopted in Brazil, due to the requirement to pay-in 100 minimum wages into the capital stock in the act of incorporation and the prohibition on having a legal entity as partner.

The new law also reinforces contractual freedom in negotiations among private entities, giving preference to the parties’ contractual freedom over statutory provisions of Brazilian law. It has incorporated into the text of the Civil Code rules of interpretation aimed at giving more weight to the parties' agreement and discouraging revision of contracts by judicial courts and arbitration chambers.

The changes brought in by Law No. 13,874/19 sought to adapt to the digital age the daily activities of Brazilian companies. The digital version of documents that are already in the government’s database and whose integrity has already been verified will have the force of an original. Along the same lines, public records held in a notary office may be stored electronically, such as the civil registry of individuals, the incorporation of legal entities, and the recording of real estate.

Regarding the incorporation and winding-up of companies and the registration of corporate acts, deadlines were set for the commercial boards to review the relevant documents and formalize the respective records, with automatic approval in the event of lack of response by the board in certain situations.

Acts, documents, and statements containing merely registration information were also allowed to be automatically recorded if it is possible to obtain them from other databases available from public agencies. The goal is to better integrate the government’s registration bodies.

Flexibility for “low risk” activities
Companies and businesses that carry out activities considered “low risk” by the Executive Power are exempt from obtaining and maintaining their permits and operating licenses, without any “public act of release.” Small businesses and startups should benefit from this rule.

Labor aspects
Important changes were brought about in the labor sphere, through changes made directly in the legal text of the Consolidated Labor Laws (CLT). These include the end of the Digital Bookkeeping System for Tax, Social Security, and Labor Obligations (e-Social), which will be replaced by a simpler system.

Following the same trend of modernization of labor relations and digitization of public and private documents, an electronic employee work history ledger was created, which will use the CPF number as the sole form of identification.

Another innovation aimed at favoring small businesses and startups was the limitation on recording of mandatory entry and exit times (time card registration) only to companies with more than 20 employees, a rule previously provided for companies with more than 10 employees.

Investment funds
Law No. 13,874/19 also amended the Civil Code in order to establish new rules for investment funds and give the strength of ordinary law to rules previously restricted to the regulations of the Brazilian Securities and Exchange Commission (CVM). The liability of unitholders/quotaholders of investment funds may be limited to the value of their units/quotas, and that of service providers (such as managers, directors and officers) may be limited to the scope of the services provided. The creation of separate equity for each class of units/quotas was also allowed, with different rights and obligations and with regulations to be later released by the CVM.

In the next articles in this series, we will look more closely at the changes described above, with practical recommendations and points for attention that companies and investors should consider.