Distribution Of Partial Dividends By Brazilian Corporations: A Practical Approach In View Of M&A Transactions

According to Brazilian law, the dividends distributed to the shareholders are exempt from income taxes. As a consequence, M&A transactions in Brazil are commonly negotiated by the involved parties under the condition that the existing profits are distributed to the original shareholders previously to such transactions.

The comprehension of Brazilian law as regards the distribution of partial dividends is essential for the negotiation of M&A transactions in Brazil, especially considering the legal restrictions imposed thereto.

The distribution of partial dividend by corporations is regulated by Section 204 of Brazilian Corporations Law, being such dividend classified either as interim (intermediário) or intercalary (intercalar).

The interim dividend corresponds to the amount of the profits ascertained in the previous corporate years and distributed to the shareholders. Such profits were contained in the financial statements related to the last years, already approved by the shareholders in specific Annual Shareholders' Meetings and, for some reason, were retained as accrued profits or as profits reserve.

According to Section 204, paragraph 2 of Brazilian Corporations Law, "the bylaws may authorize the administrative bodies to declare an interim dividend from the accrued profits or profit reserves existing in the last annual or semi-annual balance sheet".

Therefore, the interim dividend may only be distributed under the following conditions: (i) the profits shall be contained in the last annual or semi-annual financial statements and approved in the previous Annual Shareholders' Meeting; (ii) the amount to be distributed shall be limited to the accrued profits or to the profits reserve; (iii) the company's bylaws must authorize the distribution (which will be further ratified by the shareholders); and (iv) the decision on the distribution of dividends must be taken by the administrative bodies of the company (Board of Directors or Officers, as the case may be). Once verified such conditions, the interim dividends may be distributed to the shareholders.

On the other hand, the distribution of intercalary dividend may imply severe restriction to a M&A transaction. Such dividends corresponds to the distribution of the profits ascertained in the financial statements related to the corporate year currently in force and is regulated by the main paragraph and the paragraph 1 of Section 204 of Brazilian Corporations Law, which sets forth the...