BRAZIL Law and Practice Contributed by: Rafael Lacerda, Eric Nahum, Rômulo Martins and Fernando Oliveira, Lacerda Diniz Advogados
actions is relatively rare in Brazil, because of the typi - cal structure of Brazilian publicly traded companies, which usually have a controlling shareholder or a group rather than widely dispersed ownership. 8. Management Incentives 8.1 Equity Incentivisation and Ownership Over the past two decades, partnership and stock option programmes have become widely used in Bra - zil as strategic tools to attract and retain key manage - ment talent, while providing competitive compensa - tion structures. The distinction between market segments is relevant. In middle-market companies, equity incentive plans often emphasise not only economic rights but also governance participation, granting management a voice in corporate decision-making and alignment with shareholders in operational matters. By contrast, in larger companies, incentive structures are primar - ily oriented towards economic rights, with a stronger focus on linking management rewards to financial per - formance and long-term value creation, rather than day-to-day governance. 8.2 Management Participation In Brazil, partnership and stock option programmes are most commonly structured through sweet equity mechanisms, aimed at aligning management’s inter - ests with those of the private equity sponsor and incentivising long-term value creation. Under this model, managers are typically granted equity instru - ments at favourable terms, which generate returns only if the investment is successful, thereby linking compensation directly to company performance and exit outcomes. These participations may take the form of different classes of shares or quotas, depending on whether the company is organised as a corporation ( sociedade por ações ) or limited liability company ( limitada ). They are usually subject to vesting conditions, which may be tied to time of service, achievement of performance targets, or completion of an exit transaction. In prac - tice, vesting is frequently structured on a three-to-
five-year schedule, often combined with partial cliff periods and incremental vesting thereafter. It is also market practice to include good leaver and bad leaver provisions, establishing differentiated treatment for management depending on the circum - stances of departure, as well as forfeiture clauses to prevent unvested equity from remaining with execu - tives who leave the company prematurely. In addition, equity incentive arrangements are often combined with drag-along and tag-along rights, ensuring align - ment between managers and sponsors in the context of an exit. Overall, Brazilian sweet equity structures have become increasingly sophisticated over the past decade, reflecting both global private equity practice and the requirements of local corporate law and CVM regula - tion. They are now a standard feature in management incentive planning, particularly in mid- to large-cap transactions. 8.3 Vesting/Leaver Provisions In Brazil, vesting and leaver provisions are standard features of management equity incentive structures, serving primarily as retention tools to ensure long- term alignment between management and investors. Vesting schedules are commonly structured on a time basis (typically three to five years) and may also be linked to performance milestones or an exit event, ensuring that management incentives are tied to value creation over the life of the investment. Leaver provisions are typically divided into two cat - egories: good leaver and bad leaver. Good leaver provisions generally apply in cases such as retire - ment, death, disability or termination without cause, allowing the departing executive to retain all or part of the vested equity at fair market value. Bad leaver provisions, on the other hand, cover situations such as voluntary resignation, dismissal for cause or breach of fiduciary duties, often requiring the executive to forfeit unvested equity and to sell any vested equity back to the company or sponsor at a discounted price. These provisions are crucial to determining the val - ue attribution of management shares at the time of departure, and act as a deterrent against conduct
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