BRAZIL Law and Practice Contributed by: Rafael Lacerda, Eric Nahum, Rômulo Martins and Fernando Oliveira, Lacerda Diniz Advogados
misaligned with shareholder interests. In practice, they are heavily negotiated and carefully calibrated to balance management retention with investor protec - tion, and have become a cornerstone of private equity incentive planning in Brazil. 8.4 Restrictions on Manager Shareholders In Brazil, restrictive covenants such as lock-ups, non- competes, non-solicitation and confidentiality provi - sions are frequently included in partnership and stock option programmes as a means of protecting inves - tor value and ensuring management alignment. These covenants are typically enforceable when linked to equity participation and carefully structured in con - nection with incentive plans. By contrast, in the context of employment contracts, restrictive covenants are far less common and may even be challenged as unenforceable if deemed to unduly limit an employee’s constitutional right to work. Brazilian case law has developed the understanding that post-employment non-compete clauses can only be enforced where they are reasonable in scope, duration and geography, and where adequate finan - cial compensation is paid. Courts have often char - acterised such compensation as a form of “comple - mentary salary” payable to the professional during the restricted period. As a result, best practice in private equity transac - tions is to include restrictive covenants within equity incentive agreements rather than purely in employ - ment contracts, and to provide for specific considera - tion in the event of post-termination non-competes. This approach balances enforceability with fairness and aligns with prevailing Brazilian jurisprudence. 8.5 Minority Protection for Manager Shareholders As noted in 8.1 Equity Incentivisation and Owner- ship , the governance rights of management share - holders in Brazil vary significantly depending on the size and structure of the company. In mid-market transactions, it is not unusual for management to be granted veto rights over certain operational or techni - cal matters within their area of expertise, particularly where their contribution is considered essential to the success of the business. Such rights typically relate
to day-to-day operations or specialised areas, rather than broader corporate strategy. By contrast, when it comes to more complex or strate - gic corporate decisions – such as the admission or exit of a private equity fund, capital increases, reorganisa - tions or liquidity events – management shareholders rarely hold veto powers. While minority protections may prevent undue dilution of their equity stake, ulti - mate control over strategic direction remains with the sponsor or majority investors. This balance reflects prevailing Brazilian practice: management shareholders are given a meaningful voice in operational matters to secure alignment and retention, but strategic decisions with direct impact on ownership and exit are reserved to the controlling investor. 9. Portfolio Company Oversight 9.1 Shareholder Control and Information Rights Private equity funds in Brazil typically secure the right to appoint at least one member of the board of direc - tors, with additional seats proportional to their equity stake. In majority deals, it is common to appoint the board chair and non-voting board observers. For sig - nificant minority positions, funds often negotiate the right to appoint a C-level executive (usually the CFO). Where the fund is structured as a Fundo de Investi- mento em Participações (FIP), there is a statutory obli - gation to exercise effective influence over the portfolio company’s decision-making. Shareholders’ agreements generally set out reserved matters requiring qualified approval, such as: • amendments to the company’s certificate of incor - poration or by-laws; • M&A transactions and corporate reorganisations; • indebtedness above pre-set thresholds; • related-party transactions; • dividend policy; • annual budget approval; and • hiring or dismissal of key executives.
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