_ the December │ 2019 edition of our Newsletter has the following highlights:
– Brazilian Securities and Exchange Commission discharges members of the Board of Directors on a charge of non-compliance with the duty of diligence
– Brazilian Securities and Exchange Commission rules on a case of alleged irregularity in the appointment of member of the audit committee
_ Brazilian Securities and Exchange Commission discharges members of the Board of Directors on a charge of non-compliance with the duty of diligence
On November 19th, 2019, the Brazilian Securities and Exchange Commission (“CVM”) decided on the Administrative Proceeding CVM RJ2016 / 7197 (SEI No. 19957.005981 / 2016-86) (“PAS”), filed by the Business Relations Superintendence (“SEP” or “Prosecution”) to ascertain the liability of members of the board of directors of a publicly held corporation (“Company”) for not acting with care and diligence in the exercise of their attributions, in violation of article 153 of Law No. 6.404/76 (“Brazilian Corporate Law”).
According to CVM Director Carlos Alberto Rebello Sobrinho, the PAS was due to a complain regarding the decision taken by the member of the board of directors (“Defendants”), which declared the Share Subscription Option and Other Covenants Agreement (“Option”) entered into by and between the Company and its controlling shareholder to be not enforceable.
The Option granted the Company the right to demand the subscription by the controlling shareholder of common shares issued by the Company at a subscription price of R$ 6.30 to US$ 1 billion. The Option was exercised by the Company’s board of officers, which required the controlling shareholder to immediately pay the amount of US$ 100 million. However, on the same date, the controlling shareholder sent the Company a conflict notice questioning the validity of the exercise of the Option and starting an amicable settlement procedure, as previously agreed on in the option agreement. Afterwards, it was established that the dispute would be settled upon the conclusion of a legal opinion to be rendered by 3 independent legal experts or until one of the parties amicably ended the discussion.
The legal experts concluded that the Option was unenforceable due to the non-implementation of the suspensive condition provided in the agreement. Therefore, at a meeting of the board of directors of the Company, the Defendants unanimously and unreservedly decided to close the dispute regarding the exercise of the Option, declaring it to be unenforceable, based on the legal opinions, giving full discharge to the controlling shareholder.
As pointed out by SEP, the Defendants disregarded several relevant matters, such as the fact that it was not clear which pieces of information were provided to the legal experts in order for them to prepare the legal opinion. Furthermore, the Prosecution added that due to the decision to declare the Option unenforceable and to release the controlling shareholder of its obligations under the agreement, the efforts to satisfy the Company’s rights had not been exhausted, as the dispute was not submitted to arbitration, as provided for in the agreement. Thus, SEP understood that the Defendants’ decision was not taken diligently.
The Defendants did not agree with SEP, arguing that their decision was based on the legal opinions issued by legal experts, which, unanimously, concluded that the Option was unenforceable. Furthermore, they argued that, given the non-implementation of the suspensive condition, there would be no room for any attempt to negotiate with the controlling shareholder and that the costs and risks of bringing the matter to an arbitral decision could be damaging to the Company. Finally, the Defendants claimed that they decided the matter on an informed, thoughtful and disinterested manner, supported by the “right to rely on others”, without any indication that suggested the need for further investigation into the matter. In addition, the Defendants stated that their diligence should be assessed from the perspective of the “business judgment rule”, already consolidated by CVM’s case law.
At the end, CVM Board unanimously decided to discharge the Defendants from the charge of non-compliance with their duty of diligence. CVM Chairman, Marcelo Barbosa, took the opportunity to reinforce that it is important that managers have consistent documents and records to support their decisions, in order to demonstrate compliance with their duty of diligence.
More information on this precedent can be accessed in Portuguese at:
_ Brazilian Securities and Exchange Commission rules on a case of alleged irregularity in the appointment of member of the audit committee
On November 26th, 2019, CVM Board decided on the Administrative Proceeding No. SEI 19957.006822 / 2018-61 (“PAS 2018-61”), in which it was discussed whether a minority shareholder, a party in derivative contracts entered into with the Company’s controlling shareholder, could participate in the separate election of members of the company’s audit committee, pursuant to article 161, paragraph 4th, of the Brazilian Corporate Law.
The technical department at CVM filed the claim because the minority shareholder, attending the company’s General Shareholders’ Meeting, had elected both effective and alternate members of the company’s audit committee by means of the separate voting procedure, surpassing the votes of the other minority shareholders qualified to participate in the said voting procedure.
On the technical department’s point of view, this minority shareholder and the controlling shareholder would have the same interest, since the financial agreements entered into between them had transferred the risk of the appreciation and devaluation of the shares issued by the company to the controlling shareholder. Therefore, when voting in the company’s General Shareholders Meeting, the minority shareholder (i) did not represent the interest of a proper minority shareholder and (ii) was, in fact, a mere extension of the will of the controlling shareholder.
In the judgment of PAS 2018-61, CVM Board ruled, by unanimity of votes, that the minority shareholder should not be prevented from voting in the separate voting procedure of members of the company’s audit committee, since THE FINANCIAL AGREEMENTS ENTERED INTO WITH THE CONTROLLING SHAREHOLDER DID NOT, BY THEMSELVES, REVEAL AN ARRANGEMENT BETWEEN THE PARTIES CAPABLE OF PORTRAYING AN IMPEDIMENT TO VOTE, GIVEN THAT, IN THIS CASE, IT WAS POSSIBLE TO VERIFY (I) THE EXPOSURE OF THE MINORITY SHAREHOLDER TO THE VARIATION OF THE SHARES’ PRICE, AN ESSENTIAL PARAMETER TO DETERMINE IF THERE IS POLITICAL INTEREST AND (II) THAT THE EXISTING POLITICAL INTEREST WAS DEEMED TO REPRESENT THE WILL OF A MINORITY SHAREHOLDER.
More information on this precedent can be accessed in Portuguese at: