Signed by the President of the Republic on September 20, Executive Order No. 881/19, the Economic Freedom Executive Order, was converted into Law No. 13,874/19, instituting the Declaration of Rights of Economic Freedom, which establishes rules for the protection of free initiative and the free exercise of economic activity.

The principles that guide the new law are (i) freedom as a guarantee in the exercise of economic activities; (ii) the good faith of the private party before the public power; (iii) the secondary and exceptional intervention by the State in the exercise of economic activities; and (iv) recognition of the vulnerability of the private party before the State.

To instrumentalize these principles and the rights on which they are based, Law No. 13,874/19 amends provisions in specific legislation. Under the Civil Code, the rules for piercing of the corporate veil were modified to hinder improper loosening of the institute of legal personality. To this end, article 49-A has been included and the wording of article 50 has been amended.

In line with what is already provided for in article 1,024 of the Civil Code,^[1] article 49-A embodies the principle of equity autonomy in stating that “a legal entity is not to be confused with its partners, associates, founders, and officers and directors.” The sole paragraph of article 49-A provides that equity autonomy is a lawful means of allocation and segregation of risk between the equity of the partner and the company.

As regards article 50, the original wording stated generally that abuse of legal personality, characterized by misuse of purpose or mixing of assets, would authorize piercing of the corporate veil in order to reach the assets of the partners or officers and directors of the legal entity.

The new wording of article 50 brought in by Law No. 13,874/19 rightly stiffened the scenarios giving rise to piercing of the corporate veil. Among the changes implemented we highlight the possibility of piercing the corporate veil of only the partner or officer or director who has benefited, even if indirectly, from the abuse. Paragraphs were also inserted into article 50 that regulate the alternative requirements to be fulfilled in order to allow the corporate veil to be pierced.

The requirement of misuse of purpose shall be fulfilled when the legal entity is used for the purpose of harming creditors or for the commission of unlawful acts of any kind. In the original wording of the Executive Order, the term “intentional” was stated, that is, deviation of purpose is only occurs when the element of willfulness or intent is present in the commission of the injury. However, the term was deleted from the final wording of the law.

Still in relation to the requirement of mixing of assets, paragraph 5 establishes that “mere expansion or alteration of the original purpose of the economic activity” does not constitute deviation of purpose for the purposes of piercing the corporate veil.

Law No. 13,874/2019 clarifies that mixing of assets is the absence of de facto separation between the assets and shall be characterized by:

“I - repetitive fulfillment by the company of obligations of the partner or the officer or director or vice versa;

II - transfer of assets or liabilities without effective consideration, except for those of proportionally insignificant value; and

III - other acts of non-compliance with equity autonomy.”

Based on the wording of paragraph 3 of article 50, it may be stated that the requirements of deviation of purpose and mixing of assets also apply to extension of obligations of the partners or officers and directors to the legal entity.

Another relevant change is contained in paragraph 4 of the new wording of article 50. This provision expressly establishes that the mere existence of an economic group does not authorize piercing of the corporate veil of the legal entity in order to reach the equity of parent companies or affiliates. The article in question formalizes the understanding that, even in cases of an economic group, it is necessary to demonstrate the requirements have been met, either of misuse of purpose or of mixing of assets among the companies.

Although the premise that the legal entity is not to be confused with the economic group is obvious, there are judgments that admit improper loosening of the institute of piercing of the corporate veil. To this end, they find that the existence of an economic group gives rise to a presumption of fulfillment of the requirement of mixing of assets, especially when one of the companies is in judicial reorganization or insolvency, or even in the case of family businesses.

The fact that the new wording makes it clear that the existence of an economic group, by itself, does not allow piercing of the corporate veil will hinder the abuses committed based on the improper loosening of the institute.

Thus, the changes brought about by the new law regarding piercing of the corporate veil, while privileging the equity autonomy of companies, make the scenarios for application of the piercing more restricted, which is positive, since piercing of the corporate veil must be exceptional.

^[1] Article 1,024. The private assets of the partners cannot be foreclosed on for the debts of the company, only after the corporate assets have been executed.