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What is the fair value to be paid to the partner withdrawing the company?

08/01/2019

Limited liability companies are governed by the Brazilian Civil Code.  The Code establishes that, unless otherwise provided in the articles of association, the value to be paid to the partner withdrawing the company in the event of a partial dissolution shall be calculated based on the company’s net worth as stated in its financial statement as of the date of the dissolution. The majority of the limited liability companies in Brazil have this same provision in their articles of association.

Therefore, most of the limited liability companies in Brazil uses the net worth of the company as the base for evaluating the equity value of the quotas.

However, the higher courts in Brazil are rejecting this methodology as they view it not an equitable relief for the withdrawing party.

The Supreme Court (STF) has already ruled that “the partner withdrawing the company must have an equitable relief when calculating the liquidation of its equity”.  Likewise, the Supreme Court of Justice (STJ) has consolidated its understanding that the methodology to value the equity of the partner withdrawing the company established in the articles of association only prevails if there is a consensus between the parties.

In addition, if one of the parties does not agree with the methodology set forth in the articles of association and takes the case to court, the jurisprudence is showing that courts have been rejecting the contractual provision and applying the methodology provided for in the Code of Civil Procedure (CPC).

The CPC provides that, in case of omission of the methodology in the articles of association, the judge will define, the book value of the equity determined in a specific balance sheet, by evaluating the assets and liabilities at an exit price.

It is a confusing methodology, to say the least, as it includes “book value” and “valuation of assets and liabilities at an exit price” in the methodology, that is, there is a mixture of different methodologies for calculation.

Parties should then engage in discussions during the course of the lawsuit, which methodology is to be used by the expert; and if they do not reach an agreement, they are often subject to the decision of a judge who usually is not familiar with business valuation methodologies.

In view of this scenario, parties should negotiate exit clauses that provide for adequate methodologies to evaluate the equity interest in the event of a partial dissolution or other exit scenarios, avoiding a determination to be decided by the courts or accounting experts.

Candido Martins Advogados is at your disposal should you need any clarification.