Non-Assignment Clauses in Equity Interests: Validity, Time Limits, and Protection of Third Parties

This article analyzes the validity and legal boundaries of non-assignment clauses in equity interests (quotas) in limited liability companies (LLCs), focusing on their contractual admissibility, the effects on third-party transferees, and potential conflicts with property rights and the free transferability of corporate interests. Such clauses are common in articles of association, shareholders’ agreements, or family holding structures, aiming to preserve corporate governance and control. The analysis considers provisions of the Brazilian Civil Code, specialized legal doctrine, and recent case law, also addressing the effects of unenforceability against good-faith third parties and drafting best practices for enforceability.

In Brazilian limited liability companies (sociedades limitadas), contractual freedom allows partners to regulate, through the articles of association or separate agreements, matters related to the transfer of equity interests, including restrictions on their sale, assignment, or transfer. Among such restrictions, the non-assignment clause stands out, by which the partners agree not to transfer their corporate participation to third parties (or even to other partners) for a certain period or under certain conditions.

These clauses aim to ensure corporate stability, maintain control, protect assets, and preserve affinity among partners. However, they also raise important legal questions concerning the limits of party autonomy, enforceability against third parties, and potential infringement of property rights.

This article offers an analysis of the main legal, doctrinal, and jurisprudential aspects of such clauses, along with practical suggestions for drafting valid and effective provisions.

2. Legal Basis and Contractual Autonomy

The Brazilian Civil Code, when regulating limited liability companies, ensures broad contractual freedom among partners:

Art. 1.053. In the absence of specific provisions in this chapter, the rules applicable to simple partnerships shall govern limited liability companies. Sole paragraph. The articles of association may provide for rules on management, decision-making, and assignment of equity interests, among others.

Art. 421-A. In commercial contracts, parity and symmetry between the parties shall be presumed, unless proven otherwise, and the business risks assumed by the parties must be respected.

Based on these provisions, it is legitimate to include restrictive clauses on the transfer of equity interests, provided that proportionality, reasonable time limits, and adequate disclosure—especially in relation to third-party enforceability—are observed.

3. Types of Restrictions on Equity Transfers

The most common clauses include:

• Fixed-term non-assignment clause: temporary prohibition on the sale or transfer of interests;

• Prior consent clause: requiring approval from partners before transferring to third parties;

• Right of first refusal clause, in accordance with Civil Code Art. 1,057;

• Lock-up clause: often used in investment agreements;

• Anti-dilution clause: protects minority partners from loss of ownership interest.

  
  

These clauses may be included in the articles of association or in separate shareholders’ agreements. However, for the restrictions to produce erga omnes effects, it is strongly recommended that they be expressly included in the articles of association.

4. Legal Limits on Non-Assignment Clauses

To be valid and effective, non-assignment clauses must comply with specific legal limits:

4.1 Reasonable time limits

Clauses that prohibit the transfer of interests indefinitely or for excessively long periods may be declared void for violating the social function of the contract and the principle of free disposal of property.

Doctrine suggests that the duration should be proportionate to the purpose of the restriction, such as preserving control during a transition period, ensuring family succession, or honoring an investor lock-up.

4.2 Prohibition of absolute and irreversible restrictions

A clause that absolutely and irrevocably prohibits the transfer of equity interests is not permissible, as it infringes on property rights and the free disposition of assets (Civil Code Art. 1,228).

4.3 Legitimate business purpose

The clause must serve a legitimate business purpose (e.g., protecting family unity, corporate governance, asset shielding), or else it may be deemed an abusive or oppressive retention mechanism.

5. Enforceability Against Third Parties: Registration and Notice

A non-assignment clause creates binding obligations between the partners, but it is only enforceable against third parties if included in the articles of association and duly filed with the Board of Trade (Junta Comercial).

“A non-assignment clause in equity interests is only enforceable against good-faith third-party transferees if it is set forth in the articles of association and properly filed.”(TJSP, Civil Appeal No. 1008791-42.2021.8.26.0100, judgment on 10/20/2023)

“A shareholders’ agreement, if not recorded in the articles of association, binds only the signatories and is not enforceable against third-party transferees.”(STJ, REsp 1.157.676/SP, Reporting Justice Luis Felipe Salomão, judgment on 09/18/2014)

Therefore, the enforceability of non-assignment clauses against third parties depends on transparency, proper registration, and effective notice.

6. Consequences of Breaching a Non-Assignment Clause

If equity interests are transferred in breach of a non-assignment clause, potential consequences include:

• Relative nullity of the transaction, if the clause is set forth in the articles of association;

• Compensation for damages suffered by the aggrieved party;

• Enforcement of contractual penalties under the shareholders’ agreement;

• Exercise of preemptive rights or forced buyback, if contractually provided.

  
  

It is essential that the contract includes clear enforcement mechanisms for breaches, including termination clauses, arbitration provisions, and specific performance remedies.

7. Contractual Best Practices

• Include restrictive clauses directly in the filed articles of association;

• Establish a specific and reasonable term for the restriction;

• Define exceptions or consensual approval mechanisms;

• Clearly state the penalties applicable in the event of breach;

• Provide for fair exit mechanisms, such as third-party valuation and buyout clauses.

  
  

8. Final Considerations

Non-assignment clauses are lawful mechanisms for protecting corporate stability, widely used in limited liability companies and family business structures. However, their validity depends on compliance with core contractual principles, such as the social function of the contract, the reasonableness of restrictions, and proper disclosure to third parties.

The effectiveness and legal certainty of such clauses lie in clear drafting, objective limits, and formal registration, combined with good faith among partners and a preventive approach to corporate disputes.