Fiduciary transfer of equity interests as security for payment of the price

Where the price of a transaction is paid over time, the seller's position reverses. After closing, the seller becomes a creditor of the party that has just acquired the business.

Among the available forms of security, the fiduciary transfer of the very equity interest sold occupies a singular position. It attaches to the asset the buyer has just acquired, is enforced more quickly than traditional security and, above all, withstands the debtor's insolvency.

Why fiduciary transfer rather than pledge

The central difference lies in title. Under a pledge, the asset remains the debtor's and the creditor holds a security interest over it. Under a fiduciary transfer, resoluble ownership passes to the creditor, who returns it when the obligation is performed. That distinction has consequences in a distress scenario.

Paragraph 3 of article 49 of Law No. 11,101/2005 provides that the claim of a creditor holding the position of fiduciary owner of movable or immovable property is not subject to the effects of court reorganization, with property rights over the asset and the contractual terms prevailing. A pledgee, by contrast, is a secured creditor subject to the proceeding, bears the effects of the plan and may see its claim restructured against its will.

Shares in a corporation

Article 40 of Law No. 6,404/1976 provides that usufruct, fideicommissum, fiduciary transfer by way of security and any clauses or encumbrances affecting a share must be recorded, for registered shares in the Registered Share Book and, for book-entry shares, in the records of the depositary financial institution, which notes them on the account statement. The sole paragraph adds that, through such recording, a promise to sell the share and rights of first refusal over it become enforceable against third parties.

Without proper recording in the appropriate book, the security may be valid between the parties but will not produce the intended effect against third parties. Reviewing the company's corporate books before closing ceases to be a formality and becomes a condition of effectiveness.

Quotas in a limited liability company

There is, for quotas, no provision equivalent to article 40 of the Corporations Law, and scholarship is divided on the extent to which the regime for fiduciary transfer of movable property, under articles 1,361 and following of the Civil Code, applies to interests in a limited liability company. Quotas are movable property, and article 1,361 of the Civil Code confines fiduciary ownership to non-fungible movable property, a limitation overcome by article 66-B, paragraph 3, of Law No. 4,728/1965, which permits the fiduciary transfer of fungible property and the fiduciary assignment of rights, applicable by virtue of the reference in article 1,368-A of the Civil Code to special statutes. In that setting, formalization calls for greater care.

The first step is an express provision in the articles of association, or their amendment in the same act, authorizing the encumbrance of the quotas and disapplying any consent clause that would frustrate it. The second is registration of the security instrument with the competent commercial registry, together, where indicated, with registration at the Registry of Deeds and Documents, which reinforces publicity and enforceability against third parties. The third is detailed treatment of the exercise of corporate rights while the security is in force.

Points to address

Once the security is created, the company continues to operate normally, but the rights and duties of those involved should be regulated.

1. Who exercises voting rights while there is no default, and which matters require the fiduciary creditor's prior consent.
2. Who is entitled to dividends, and whether the creditor may retain them or apply them against the outstanding balance.
3. Which events constitute default.
4. How the interest is valued on enforcement, with an objective standard set in advance, so that enforcement does not turn into a dispute over valuation.
5. How ownership is consolidated and what happens to any remaining balance, positive or negative, after enforcement.

Enforcing the security

The practical advantage of the fiduciary transfer lies in the possibility of enforcement without the delay of judicial execution, with consolidation of ownership in the creditor's name and subsequent sale of the asset, applying the proceeds against the outstanding balance. The procedures vary with the applicable regime and with what the contract provides.

The statutory basis is article 66-B, paragraph 3, of Law No. 4,728/1965, which permits sale to third parties without auction or any judicial or extrajudicial step, requiring the creditor to apply the proceeds to the debt and expenses and to deliver any surplus with a statement of account. Two cautions stand out. Notice to the debtor must strictly follow the agreed form and time limits. And the sale of the enforced interest should follow a procedure evidencing an effort to obtain the best price, with the process documented, failing which later argument about unjust enrichment becomes available.

This piece reflects the firm’s analysis of the subject as at the date of publication. It is informative in nature and does not constitute legal advice on any specific matter. For advice on a particular situation, please contact our team.

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