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Artigo06.06.2019

The Provisional Measure on Economic Freedom: A new paradigm for the Brazilian economy

Por:

José Luiz Homem de Mello; Leonardo Baptista Rodrigues Cruz

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​On April 30, 2018, the President of the Republic issued Provisional Measure No. 881 (MP 881), instituting the "Declaration of Economic Freedom Rights." Announced as an effort to cut red tape in the Brazilian economy, MP 881 has put in place a set of principles aimed at reassuring the free market status of the country's economy. The new rule has also changed specific legal provisions to bring a forthright response and solution to chronic problems those doing business in Brazil have to grapple with routinely. This is a framework rule and, as such, is yet to be regulated – but attests to the interest of government authorities in promoting business in Brazil.

Below is an overview of the key issues addressed in MP 881, which must be passed into law within 60 days (extendable for a like period) or else become void.

Before moving further into the content of MP 881 itself, a few remarks are worth making about the legislative path that the President of the Republic has chosen to tread. Under article 62 of the Federal Constitution, a 'provisional measure' (similar to an executive order) has force of law and is to be issued by the President of the Republic under certain relevant and urgent circumstances. The provisional measure becomes effective outright, but is conditioned to its eventual passage into law by the National Congress. The matters dealt with in MP 881 are indeed relevant, but their urgency could perhaps be cast into doubt. Some also claim that the legislative technique adopted in MP 881 is defective in several aspects. Constitutional law scholars are already tackling these issues, and the National Congress is to follow suit as the legislative process develops.

For ease of reference, our comments will follow the same sequence of legal provisions in MP 881. This is only an overview of the more relevant aspects, and does not dispense with a more in-depth analysis of the several matters covered by this new rule.

Preliminary provisions
The keystone of MP 881 is that its provisions are meant for use in applying and interpreting civil, corporate, urban and labor laws, also extending to the public rules governing professional, board of trade, production, consumption and environment protection activities. The primary objective is to foster free enterprise and a market economy in the Brazilian society, but to that end it is necessary to overcome outdated dogmas ingrained in our legal system and, by extension, to change the mindset of some government bodies that end up not contributing much to the country's economic development.

Within this context, the guiding principles of MP 881 are: (i) the presumption of freedom in doing business; (ii) the presumption of good-faith on the part of private persons; and (iii) the minimal, extraordinary and subsidiary intervention of the State in the exercise of economic activities.

It stands to reason that such principles are somehow already envisaged in the Brazilian legal system, but MP 881 clearly seeks to break through the economic model long prevailing in the country, where state intervention in core economic activities is far from being an exception to the rule. To illustrate this central presence of the State in the economy in recent past, see the role played by the Brazilian development bank (BNDES) on turning some domestic companies into 'national champions' to bolster the Brazilian economy, or else the fuel price control policy adopted by Petrobras with an eye on macroeconomic results (e.g., as an inflation control mechanism).

MP 881 is the 'visiting card' of the new Administration on economic terms. Only time will tell if the proposed changes will come into being and relations between private persons and the State will embrace a new mindset. For now, it will be helpful to understand what the government is proposing to put into shape.

Economic Freedom Rights
In the form of open principles, MP 881 sets a list of rights accorded to individuals and legal entities as being essential 'to the country's economic growth and development.' Some of those rights are outlined below.

The first worthy of note refers to the right 'to receive equitable treatment from public administration bodies and entities in their public acts for business clearance, which shall thus be subject to the same interpretation criteria as those adopted in similar past administrative decisions, subject to the regulatory provisions in this regard.'

It is known to all that any license or authorization for doing business in Brazil only comes after wrestling with massive red tape – at federal, state and local levels alike. And it goes without saying that such state of affairs may be a source of corruption involving government officials. 'Tipping' is an ingrained cultural trait to be fiercely fought against. In this sense, the right pointed out above has come in handy on establishing that the authorization granted by government officials within a given context will operate as a binding precedent for them in future similar cases. This right in and of itself is not expected to stamp out once and for all the current profligacy in licensing procedures, but is surely a first step forward that will enable citizens to look to the courts whenever they feel cornered by a corrupt government official.

The second topic worth noting refers to the right to 'develop, put in practice, run or commercialize new types of products and services when statutory rules become outdated vis-à-vis established international technology developments, as provided in prevailing regulations, which shall govern the requirements for ascertainment of the concrete circumstances, as well as the procedures, timing and conditions to reach the expected effects.' Verbiage aside, the purpose of this rule is clearly to cater to the so-called disruptive technologies, which oftentimes fall short of any legal backing at their inception. Currently, technology innovations emerge at a much faster clip than legislative developments, which would thus justify the creation of such right to encourage the launch of new products and services. It should be pointed out, however, that such rule is not self-applicable – each concrete case must be governed by specific regulation (to be conceivably issued by the corresponding regulatory agencies and existing independent entities).

MP 881 has also institutionalized the so-called 'sandbox', a type of regulation by which a proposed business can test the waters before obtaining governmental licensing for it. In this regard, MP 881 gives its support to 'implementing, testing and offering, free of charge or on a remunerated basis, a new product or service to a private and restricted group of capable persons of age, relying solely on property of their own or owned by third parties upon consent, after obtaining a free and informed consent from the offerees, which shall be dispensed from any public act or requirement for business clearance, unless in the events involving national security, public or sanitary safety or public health, when the prevailing laws shall then apply (including with regard to intellectual property matters).' This is also welcome to foster innovation and development.[1]

Another right set out in MP 881 relates to strengthening the pacta sunt servanda in business-to-business relations. This basic tenet of the law, which establishes that 'the contract is law among its signatories', was relaxed in the Brazilian legal system over the years, based on several arguments –  the rebus sic stantibus doctrine, the objective good faith of contracts doctrine, the economic imbalance between contracting parties doctrine, to name a few. To bring the pacta sunt servanda doctrine back to center stage, MP 881 establishes as a right '(...) being assured that business-to-business transactions will be freely agreed on between the parties, whereupon all corporate law rules shall only apply in a subsidiary manner to the resulting agreement; hence, no rule of public policy on this matter shall be resorted to in an attempt to benefit the party that had agreed to rule out its applicability, unless such is otherwise meant to safeguard the rights protected by the public administration or else those held by third parties unrelated to the agreement.' If MP 881 is eventually passed into law, it will be interesting to see how the courts will cope with this provision. In our opinion, this is an intelligent provision that will give greater certainty to contractual relations and bring the Brazilian law closer to common law precepts. The purpose is to defend the contractual negotiations and arrangements between parties with equal bargaining power, with minimal intervention of the State.

As a last remark on the economic freedom rights, it is worth noting the deadline that MP 881 has imposed on the government authorities to analyze the applications for engaging in an economic activity. In this specific regard, MP 881 states as a right 'being assured that, on applying for public acts for business clearance under this Provisional Measure, once all supporting elements are put forth, the private party shall be forthwith informed of a deadline for business clearance review, after which, if the competent authority has remained silent, a tacit approval shall be deemed granted for all purposes and effects, with due regard for the events expressly prohibited by law.' This is undoubtedly a welcome initiative in that it seeks to give greater efficiency to the role of public officials on reviewing applications for licenses and authorizations in general. On their own initiative, however, some public institutions had already undertaken a similar commitment, such as the Central Bank of Brazil within the context of its program Agenda BC+.

Assured freedom of enterprise
MP 881 devoted a specific chapter to free enterprise assurances. In brief, wide-ranging duties were imposed on the government authorities to mitigate the impact of the State's regulatory power on economic activities. It is worth citing, for instance, two limitations applying to government officials: (i) not to create for a given economic segment an exclusive privilege that is denied to the other segments; and (ii) not to create a market reserve as a result of favoring, in the respective regulation, an economic or professional group in detriment to the other competitors.

Regarding the first item, it is a measure of isonomy, which intends to attack the so-called 'sectorial corporatism' that for years has influenced politics and the economy in Brazil. It is worth noting, however, that this restriction does not apply to tax issues (e.g. exemptions and tax incentives). For the second item, there is already much speculation in the legal environment about the real scope of such a restriction given the broadness of the wording adopted by the law.

Regulatory impact assessment
MP 881 also innovated by introducing the need of regulatory impact assessment when any change in existing rules or new federal rules are proposed. Any such proposals must be preceded by a regulatory impact assessment, comprising information and data on the potential effects of such regulatory act so as to verify whether the economic impact is reasonable. Specific regulations are still required for bringing such rule into being.

Disregard of legal entity
The first practical change introduced by MP 881 (and possibly enforceable outright) refers to the disregard of legal entities. To that end, MP 881 made significant changes in article 50 of the Civil Code to narrow the piercing of corporate veil, which has increasingly become a rule over the last years – notably in labor disputes.

The requirements for applying the disregard doctrine remain unchanged, namely: abuse of corporate form, or intermingling of corporate and personal assets.

With regard to the abuse of corporate form, MP 881 reads that '(...) an abuse of form stands for malicious use of a legal entity for the purpose of injuring creditors and engaging in wrongdoing of any kind.' As can be seen, evidence of malice is required – the mere existence of fault will not suffice to trigger this concept.

As for the commingling of corporate and personal assets, MP 881 states that such is characterized by (i) the company's recurrent fulfillment of obligations attributable to its partner or senior manager, or vice versa; (ii) transfer of assets or liabilities without valuable consideration, except those made for a proportionally negligible value; and (iii) other acts implying the non-observance of segregation of assets. The first element – recurrent fulfillment of obligations – is questionable in that dissipation of assets may take place by way of one single transfer only. In the second element, the subjectivity in the word 'negligible' may also lead to some confusion.

The social role of contracts
Another relevant novelty in MP 881 lies in the interpretation given to the 'social role of contracts' under article 421 of the Civil Code, which reads that enforcement of contracts must factor into the interests of society as a whole, beyond the individual interests of the contracting parties themselves. Since enactment of the 2002 Civil Code, this wide-ranging, open-ended concept has given the Judiciary free rein to intervene in a vast array of contracts, being applied differently on a case-by-case basis at the judge's whim and discretion. MP 881 is now attempting to get back to the model adopted in the 1916 Civil Code, which favored thepacta sunt servanda (agreements must be kept) rule without much outer interference. In this regard, the sole paragraph of article 421 of the Civil Code, as currently worded by MP 881, establishes that 'in private contractual relations, the principle of minimum intervention of the State at whatever instance shall prevail, and contract review prompted other than by the parties shall be an exception to the rule.'

Adhesion contracts and the rule of interpretation of equal bargaining power
MP 881 made two changes to article 423 of the Civil Code. First, the new rule sought to bring greater certainty for adhering parties to an adhesion (boilerplate) contract by making its wording clear, as follows: 'If the adhesion contract contains any provision that raises any interpretive doubts, the interpretation that is most favorable to the adhering party shall be adopted.' There are no major conceptual innovations here, only an improvement in legislative wording to keep abreast of past court rulings on this matter, notably in the consumer protection arena. For its part, the sole paragraph added to that same article signals a new rule of interpretation for contracts whose clauses were negotiated between parties with equal bargaining power: 'For contracts not covered by the provisions in the main section, unless otherwise specifically prescribed by law, the interpretive doubt shall be construed in the most beneficial manner for the party that has not drafted the controversial provision.'

Interpretation in business-to-business relations 
Two new articles were introduced in the Civil Code to deal with business-to-business relations:

'Article 480-A. In business-to-business transactions, the contracting parties may lawfully set objective standards for review and termination of the contract.
Article 480-B. In business-to-business transactions, a symmetry between the contracting parties shall be presumed, and the allocation of risks as defined by them shall be observed.'

As can be seen, the proposed articles seek to accord a specific treatment to contracts entered into between businesses. Specifically with regard to article 480-A, perhaps it would have been more expedient to set objective standards for interpretation of contracts, before issuing MP 881. Like the other points raised above, there is no major breakthrough in terms of civil law concerning this matter.

As for article 480-B, it stands to reason that the symmetry aspect (equal bargaining power) was already an essential characteristic of all contracts, whether between businesses or not. Nevertheless, the wording of this new rule seems to have the intention of strengthening the pacta sunt servanda doctrine and its applicability in interpreting contracts when all parties are coming to negotiations with equal bargaining power. This is even more relevant for contracts involving the purchase of companies and assets, in which several risks are allocated by mutual agreement of the parties.

Single-member limited liability company
MP 881 extinguished an outdated rule in the Civil Code by which limited liability companies should be owned by at least two members. Under the new rule, limited liability companies may be held by one single member throughout their duration. Some legal writers are wondering whether this new rule does not overshadow another type of sole-member limited liability – the so-called Eireli. This may hold true from a corporate perspective, as the minimum capital stock of an Eireli is one hundred minimum wages, while there is no requirement of this kind for the new single-member limited liability company (sociedade limitada unipessoal).

Investment funds
Under Brazilian Law, investment funds take the legal form of a collective investment vehicle organized as condominia (condomínios), which consist of pools of jointly owned assets aimed at investing in a diversified portfolio of financial assets and other specific assets in accordance with their investment policy and applicable regulations. Differently put, funds can also be understood as unincorporated entities through which joint ownership is exercised by an investor pool. This concept has prevailed and many of the more recently created investment vehicles targeted at non-resident investors are also organized as condominia.[2]

MP 881 introduced a specific chapter in the Civil Code to deal with investment funds. The highlight is that the following provisions may now be expressly established in the fund bylaws: (i) a limitation of liability imputable to shareholders, capped at the value of their respective shares in the fund; and (ii) a limitation of liability imputable to those rendering fiduciary services for the fund, both towards the fund and among the providers themselves, with regard to fulfillment of their respective fiduciary duties (i.e., without creating a joint and several liability among them).

As a rule, until the advent of MP 881, shareholders in investment funds were answerable for losses and negative returns, causing a great deal of anxiety among investors. The second effect of this new rule is to bring greater legal certainty to those providing services for investment funds.

_______________
[1] The Brazilian Securities Commission (CVM) has recently signaled the intention of launching its sandbox program for fintechs.
[2] Legally speaking, a condominium consists of a type of business entity in which two or more persons hold joint title over certain assets, each holder (a condômino or co-owner) being attributed a proportional share (fração ideal) in such assets, which share is commonly referred to in Brazil as quotas. The quotas (shares) in a fund, however, may be owned by a single investor and applicable regulations even expressly allow this possibility by permitting certain fund classes, for instance, to be organized as "exclusive" funds, provided that they are aimed at a single professional investor as shareholder. The condominium itself has no legal personality apart from that of its owners.

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