In Brazil, investment funds are established in the form of "condominiums" (community of assets) and not corporations, i.e., they do not comprise a legal identity. As a result, if the assets of a fund are not sufficient to cover a debt that results from its investments, the shareholders ("joint tenants") will be held liable for paying those outstanding obligations.

Private equity funds, known as FIPs in Brazil (fundos de investimento em participações), aim to acquire ownership stakes in several different companies. If a target company is unable to honor its legal obligations and its legal identity is disregarded, those obligations may affect any investment fund with a stake in the company. Should a fund lack the resources to defray them, they will be passed on to its shareholders.

In principle, as the FIP in question is a shareholder in the target company, its liability is limited to the issuance price of the shares that it holds. The company's equity is therefore separate from its investors' equity and the target company must account for its own debts.

However, some alterations to legislation and jurisprudence, aiming to correct abusive or fraudulent use of legal identity, have created exceptions to the principle of limited liability, especially when it comes to obligations related to labor, consumer rights and environmental law. Thus, jurisprudence has begun to allow that a company's legal identity could be disregarded in some cases, thereby imposing liability upon its shareholders.

Regarding private obligations in general, the matter was regulated by the Civil Code of 2002. In addition, separate laws were created to address disregard of legal identity in specific situations.

In recent times, one could say that the principle of disregard has been applied in an exaggerated manner. In some situations, proof of fraud or abuse is not even required for a partner to be held liable, and verifying that the company does not have the assets to honor its obligations is considered sufficient grounds. This situation generates much insecurity in the business environment and, over time, could have serious negative repercussions on the economy. After all, the separation of liabilities was a conscious legislative choice that has allowed enormous economic development in the modern world.

In an attempt to mitigate the problem, Bill 3401/2008 is currently working its way through the Brazilian Congress. The bill aims to regulate the procedures for disregard of legal identity, allowing the interested party to present a defense before disregard is decreed.

However, the current scenario points to a relevant degree of FIP exposure as regards the obligations of their target companies. This consequently exposes the funds' shareholders, who may be compelled to defray these obligations if the fund has insufficient funds to do so.

This reveals the importance of competently auditing a target company, not only to fulfill a requirement for a stake acquisition, but also to identify any procedural and/or financial problems that could impose liability upon a FIP. Furthermore, having the preliminary information about a target company in hand, a fund should make sure to provide for the adequate mechanism in its investment agreement or shareholder agreement, so as to guarantee its access to information on the day-to-day proceedings of the target company in question.