This article has the purpose of debating the legal provisions related to the annual ordinary meetings of the limited liability companies, the risks, benefits and consequences, in the view of the company, the shareholders and the officers.
The publication of the Civil Code of 2002 (Law 10,406 of 01.10.2002 that came into force after a year – “Civil Code”), has innovated the corporate scope, by disciplining the limited liability companies (once nominated as limited liability companies by quotas, regulated by Decree no. 3,708, of 01.10.1919).
Although the Civil Code has already completed 10 years of validity, some of its provisions are not yet fully implemented by companies disciplined by it.
Among these points, one that stands out is the obligation to hold a regular meeting of shareholders annually as disciplined in the art. 1078 of the Civil Code and on which it is intended to discuss its legal grounds, commands, benefits and consequences.
- Legal Provision
The Civil Code provides on its Article 1.078:
Article 1.078 - The shareholders' meeting shall be held at least once a year, in the four months following the end of the fiscal year, with the purpose of:
I - to render the accounts and decide on the balance sheet and the economic outcome;
II - to appoint officers, when appropriate;
III - address any other subject on the agenda.
§ 1º Up to thirty days prior to the scheduled meeting, the documents referred to in item I of this Article shall be made in writing and with proof of its receipt, to the members who do not exercise management.
§ 2º Once installed the meeting, the reading of the documents referred to in the preceding paragraph shall be performed, which will be submitted by the President, the discussion and voting, in which the management members shall not take part and, if any, members of audit board.
§3º The approval, without any reserve, of the balance sheet and economic result, except wilful misconduct, essential error or simulation, releases the responsibility of the officers and, if any, of the audit board.
§4º It is extinguished in two years the right to annul the approval of the referred subject matters in the preceding paragraph.
It is verified from the legal provision that:
(a) It is mandatory to hold the annual shareholders’ ordinary meeting;
(b) The matters to be addressed at this meeting are mandatory and must include the specific approval of the officer’s accounts, balance sheet and economic results, including its destination - distribution of profits or others.
However it is a fact that many of the limited liability companies do not end up accomplishing such legal provisions. Failure in conducting the annual meeting may cause severe consequences, as to the company, its shareholders and officers.
To perform the ordinary meeting, some provisions must be taken:
- Closing the statutory financial statements - in the case of limited liability companies, balance sheet, profit and loss statements; others, if required by the articles of association or other formalities, in case of large companies;
- Proposal regarding the destination of profits;
- Availability of documents to the members 30 days prior to the meeting of shareholders to discuss the matter;
- Notice - the deadlines established in the company’s articles of association or in the Civil Code must be fully observed; the ordinary meeting shall be held within the first 4 following months of the closing of the financial year (considering that companies usually adopt the calendar year, the meeting should be held until the end of April of the following year).
If not performed in the determined period, or not called within 60 days after the expiration of such period, any shareholder has the right to call it, pursuant to article 1073, I, of the Civil Code.
Presentation of the Management Report, which shall indicate the activities carried out by the officer, submitted to the shareholders and approved by them, is also recommended, in order to demonstrate all that has been performed in the fiscal year under discussion.
- Consequences to the Company
The approval of the accounts of the company demonstrates the fulfilment of the legal provision contained in Article 1.078 of the Civil Code and its requirements, and shall be used as proof of compliance regarding the company’s legal corporate aspects. The continuous approval of the accounts every fiscal year is an effective demonstration of the good faith and due care on the conduction of the business of the company.
On the other side, the fact that the accounts are not approved in accordance to the stipulated on the provided in Article 1.078 of the Civil Code implies in irregularity of the company, considering the non-fulfillment of the legal provisions above indicated. Consequently, the company may be under possible questionings raised by the shareholders, especially minor shareholders and the ones that are not officers or part of management.
It is a legitimate right to any shareholder to request the ordinary meeting to be held, in order to have the accounts presented and discussed and, once exceeded the term of 60 days stipulated in the article 1073, I, of the Civil Code, as mentioned above, the possibility to call the meeting is given to any shareholder. And, to make the situation even more delicate, the legal provision appoints a term of 8 days for the performance of such act. In other words, the company will have to hold such meeting in a very narrow time frame, no matter if any previous measure is needed.
It should also be stressed that an inadequate rendering and approval of the accounts can become the grounds to any shareholder to point or to question possible responsibilities to the shareholder or officer. In a worst case scenario, it may also legitimate the pursuit of any form of intervention or interference in the management of the company.
There is a term of two years referred to in paragraph 4, to challenge the decisions taken at the shareholders’ meetings, but the provision does not make any reference to accounts not approved. Since no reference is made to the accounts, it is understood that the term of 2 years will not be started until accounts are approved. Therefore, any of the shareholders may challenge the accounts at any time, until after 2 years as of the decision on the accounts.
The actions to defend the company of questionings made by shareholders implies in allocating time and financial resources, to the detriment of the core business and the likelihood to incur in losses.
Shareholders may rise questionings at any time, even if the accounts have been properly approved. However, having the accounts duly approved will result in eliminating much of the grounds of the shareholder to call meetings and dare the activities of management and even the financial statements, since all of these subject matters have already been properly discussed and approved at the relevant meetings and in compliance with the law. In this case, contesting shareholder shall make effective proof of what is alleging and to construct the case. In summary, the approval of the accounts at the annual ordinary meeting observing all formalities stipulated by law hinders future potential questionings.
- Consequences for the Officers
The approval of the accounts, as foreseen in paragraph 3 of article 1,078 of Civil Code, exempts the company's officers of responsibility related to the approved fiscal year.
The exemption of liability will not become absolute only in case of essential error, fraud or simulation.
Thus, by the approval of accounts, potential liability resulting from the fiscal year and the activities of the company shall be attributed to the shareholders of the company, and not to its officers any more.
- Consequences for the Shareholders
The approval of accounts at the ordinary meeting, as discussed above, exempts officers, transferring responsibilities to shareholders. Nonetheless, the approval of accounts should be understood as healthy measure, considering that, to achieve the approval of the accounts, the necessary documents, statements, submissions, information and data were prepared and disclosed and, presumably, have been duly analyzed, verified and challenged, to enable the approval of such accounts. The shareholder that approves the accounts will, then, hold the relevant information about the specific fiscal year and therefore be provided with the necessary for defense in case of any questioning.
This diligence is essential, considering that improper approvals render unlimited responsibility for the participants on the decision, according to article 1080 of the Civil Code:
Article 1.080. The deliberations of infringing the articles of association or the law render unlimited liability for the one who expressly made such approval.
The approval of accounts, as seen, is an important measure aiming the compliance of the corporate legal aspects, demonstrating diligence and due care of officers and shareholders in conducting the company businesses.
From the view of the company, is an effective sign of proper conduct and good faith of their business.
As to the officers, the approval of the accounts exempt them from liability resulting from the fiscal year exercise, unless defect in the practice - error, fraud or simulation.
Even as to the shareholders, despite the assumption of responsibility for the acts of the officers, in order to achieve the approval of accounts, the shareholders will be provided with the documents and information about the management of the company and will have the necessary grounds for its defense in case of further questionings.