The dissolution of a company is a highly relevant issue in corporate law. Whether total or partial, the withdrawal, exclusion or death of a partner can lead to conflicts between those involved, especially as regards the calculation of assets to be paid to the withdrawing or excluded partner or their successors.

The Civil Code provides general guidelines for partial dissolution and the determination of assets, but in practice there are debates about the methodology to be used, especially in the face of different doctrinal and jurisprudential interpretations. One of the points of greatest discussion is the non-application of discounted cash flow as the main method, according to an understanding consolidated by the Superior Court of Justice (STJ), following the judgment of RESP nº 1.877.331 – SP, in 2021.

Against this backdrop, this article will address the regulatory aspects of the partial dissolution of a company and the methods of calculating assets, analyzing the main court decisions on the subject. It will also discuss the importance of well-structured contractual clauses and the signing of a partners’ agreement to regulate the procedure, as well as the relationship between these conditions and the proposal to amend the Civil Code, recently presented to the Federal Senate.

PartialPartial Dissolution of a Company: General Aspects and Provisions in the Civil Code

Partial dissolution occurs when one or more partners leave the company, without the complete closure of business activities. The Civil Code regulates partial dissolution in the following cases:

• Unmotivated withdrawal of a shareholder (art. 1.029, CC) – possible in companies with an indefinite term, by giving at least 60 days’ notice, and in those with a fixed term, by proving just cause in court.
• Exclusion for just cause (art. 1.030 and 1.085, CC) – occurs when a partner violates his duties or performs acts that jeopardize the continuity of the company, and may be excluded by decision of the other partners or by court.
• Death of the partner (art. 1.028, CC) – unless otherwise provided in the articles of association, the heirs of the deceased partner must be compensated for the corresponding assets.

The calculation of assets is the process that determines the value of the shareholding of the partner who leaves the company. Article 1.031 of the Civil Code states that, in the absence of a different provision in the articles of association, the liquidation of the withdrawing partner’s stake must be based on the company’s assets on the date of the event that caused the partial dissolution.

To this end, the law requires that a balance sheet be drawn up specifically on the date of the company’s dissolution, which means that the accounting records must accurately reflect the company’s equity position at that time. The legal criterion for assessing the withdrawing partner’s assets is the accounting net worth, which corresponds, in short, to the difference between the company’s assets (goods and rights) and liabilities (obligations), as recorded in the accounts.

To complement the concept of civil legislation, the Code of Civil Procedure, in its article 606, establishes that, when drawing up the balance sheet of determination, the assets and rights of the company, both tangible and intangible, must be valued at the exit price, as well as the liabilities, which must be calculated using the same criteria. This means that the accountant or economist must value the company as if it were in the process of total liquidation, determining the amount to which each shareholder would be entitled.

However, it is debated whether this method adequately reflects the real value of the withdrawing partner’s stake. In some situations, there may be undervalued assets or liabilities that are not properly recorded, which can lead to distortions in the calculation. For this reason, alternatives such as adjusted shareholders’ equity have come into use, correcting certain asset values to better reflect the company’s economic reality.

Methods of determining assets and perspectives on case law

Until April 2021, when the Superior Court of Justice ruled on RESP No. 1.877.331 – SP, the most widely used methodology for determining assets was the discounted cash flow (“DCF”).

Conceptually, DCF is a method that defines the value of an asset by the present value of its expected future cash benefits, discounted by an attractiveness rate that reflects the shareholders’ opportunity cost. In simpler words, it is a method that estimates the asset’s future profitability.

One of the main controversies regarding the non-application of the DCF in the determination of assets is related to the valuation of intangible assets, such as a company’s brand. This is because the balance sheet, when drawn up, simulates the total dissolution of the company’s net assets, while intangible assets have an economic value linked to the company’s activity and its ability to generate future results. Thus, when the company is treated as dissolved, these assets lose their usual valuation, as their market value depends directly on the operation of the business.

However, the intention of jurists and the legislator was precisely to prevent the dissenting partner from benefiting exclusively from the projection of future profitability provided by the DCF, without assuming the risks inherent in the continuity of the company. In other words, it would be unreasonable for his shareholding to be valued on the basis of expectations of future results, while he would not be liable for any losses from the operation.

It is therefore recommended to use the discounted cash flow method in corporate transactions involving valuations based on market metrics, such as acquisitions, takeovers or mergers, in which the projections of the target companies’ future results are taken into account exclusively. In other words, when thinking about investment.

In the case of the partial dissolution of a company, the valuation of the shareholding of the withdrawing or excluded partner must be determined based on the company’s equity situation on the date of the resolution, in accordance with the criteria detailed above.

The Importance of Contractual Clauses and the Partners’ Agreement

As elucidated above, until 2021, the discounted cash flow method was widely used to value the shares of a withdrawing partner, which reveals the legal uncertainty generated by controversial decisions in the judicial spheres and the continuous changes in paradigms.

To avoid the lengthy legal corporate proceedings, which often drag on for years and often, when concluded, result in inactive companies with no resources to pay the withdrawing partner, it is essential that the partners establish clear criteria for the future valuation of assets as soon as the company is incorporated.

In this sense, the partners can structure metrics or objective criteria to define how the company will be valued in the event of a partner leaving, exclusion or sale. Although no one starts a business expecting it to end, it is of the utmost importance that the partners structure a partners’ agreement with clauses that condition the future revision of the valuation criteria, based on a certain amount of increase in the company’s turnover and results. In this way, the partners will be able to revisit the criteria and reflect the company’s current situation in the event of a partial or total liquidation.

It is therefore important for entrepreneurs to consider that corporate instruments are the main allies of the parties and can accurately reflect the real intentions of the partners.

Proposed Changes to the Civil Code: Possible Advances

With the aim of providing clearer and more specific regulations to reduce the litigation associated with these processes, the draft reform of the Civil Code, currently before the Federal Senate, proposes significant changes regarding the determination of assets in cases of partial dissolution of companies.

As mentioned above, article 1.031 of the Civil Code establishes that, in the absence of a contractual provision to the contrary, the calculation of the withdrawing partner’s assets must be carried out on the basis of the company’s assets on the date of the resolution, verified by means of a specially drawn up balance sheet. The draft suggests reformulating this article to bring it into line with the concept already existing in the Code of Civil Procedure, detailing the criteria and procedures to be adopted in the calculation of assets and seeking to standardize practices and minimize interpretative differences.

The aim of the draft bill is to reduce judicial intervention in company contracts, providing greater legal certainty and predictability for partners, to the effect that when they set up their companies, they draw up the contract in detail to provide greater certainty for their interests. However, there is criticism that the proposed changes may not be specific enough to achieve this goal, maintaining the possibility of legal disputes due to divergent interpretations.

In short, the proposal to amend the Civil Code represents an important step in the search for greater legal certainty in corporate relations. However, in order for the intended advances to materialize, it is necessary for the legislator to detail the methods and criteria for determining assets, making suggestions so that the partners can define the best evaluation criteria, minimizing ambiguities and reducing litigation in the corporate sphere.

Conclusion

Considering these aspects, it is essential to have specialized legal support to ensure the correct drafting of corporate acts, such as articles of association and shareholders’ agreements, preventing disputes and ensuring compliance with current legislation. Adequate technical support contributes to strategic decision-making and minimizes risks in the event of a partial dissolution of the company.

Maria Luisa Carvalho Teixeira and Liège Fernandes Vargas

Corporate Law | CPDMA Team

REFERENCES:

Special Appeal nº 1.877.331 – SP, Third Panel, Superior Court of Justice, Rapporteur: Ricardo Villas Bôas Cueva, judged on 13/04/2021.

ASSAF NETO, Alexandre. Valuation: value metrics & company valuation. 2. ed. São Paulo: Atalhas, 2017.

NERY JUNIOR, Nelson; NERY, Rosa Maria de Andrade. Commentary on the Civil Code. 11. ed. São Paulo: Revista dos Tribunais, 2014.

BRAZIL. Civil Code. Law no. 10.406, of January 10, 2002. Federal Official Gazette: section 1, Brasília, DF, January 11, 2002.

BRAZIL.Code of Civil Procedure. Law No. 13.105, of March 16, 2015. Federal Official Gazette: section 1, Brasília, DF, March 17, 2015.