Ano: 2020

December 2020

_the December│2020 edition of our Newsletter has the following highlights:

– Brazilian Securities and Exchange Commission accepts Term of Commitment with Officer that traded shares during the blackout period

– Administrative Tax Appeals Council decides that Corporate Income Tax does not apply to property exchange transactions

– Brazilian National Department of Business Registration and Integration opens public consultation on corporate and accounting books exclusively in digital form

_ Brazilian Securities and Exchange Commission accepts Term of Commitment with Officer that traded shares during the blackout period

 

On November 10th, 2020, the Board of the Brazilian Securities and Exchange Commission (“CVM“) accepted the Term of Commitment Committee’ opinion (“CTC“) in the Administrative Proceeding CVM SEI 19957.006799/2019-95 to enter into the term of commitment presented by an officer of a publicly-held company. The officer agreed to pay in a single installment BRL120,000.00 (one hundred and twenty thousand reais) in benefit of the securities market as a result of the negotiation of preferred shares issued by the company in possession of relevant information not yet disclosed to the market.

 

This proceeding was initiated after CVM’s Superintendence of Relations with Companies (“SEP“) verified the sale of preferred shares by such officer in a period immediately prior to the disclosure of the company’s third quarter information of 2018, in violation of art. 13 of CVM Instruction 358/2002 (“ICVM 358“).

 

In his defense, the officer informed that he traded such preferred shares according to the blackout period informed by the company’s compliance area, with the sole purpose of obtaining liquidity. He also claimed that there was no capital gain from the operation.

 

However, SEP pointed out that the officer carried out said trade of shares on the first day of the blackout period applicable to the disclosure of its quarterly financial statements, as set forth in the company’s corporate events calendar. In addition, SEP also mentioned that regardless of the objective term of the blackout period set forth in paragraph 4 of art. 13 of ICVM 358 (15-day period prior to the disclosure of quarterly and annual financial statements), in which share trading is prohibited by those who are aware of the content of the company’s financial statements prior to its disclosure, which, according to the company, occurred with the officer in question.

 

Prior to drawing up the officers’ indictment, he presented a proposal to enter into a Term of Commitment with the payment of BRL15,000.00 (fifteen thousand reais), considering that such amount would exceed the triple of the benefit he earned with said transaction, in his accounts. The CTC, considering the minimum amount in other terms of commitment, the phase in which the proceeding was at and the fact it was the officers’ first infraction, presented a counterproposal in the amount of BRL120,000.00 (one hundred and twenty thousand reais), to be paid in a single installment. Although the officer first proposed to pay such amount in four installments, he later agreed with the CTC counterproposal, which was accepted by CVM’s Board.

 

More information on the case, may be accessed through the link below (in Portuguese only):

 

http://www.cvm.gov.br/export/sites/cvm/noticias/anexos/2020/20201110_PA_CVM_SEI_19957_006799_2019_95_parecer_comite_termo_de_compromisso.pdf

_Administrative Tax Appeals Council decides that Corporate Income Tax does not apply to property exchange transactions

 

On November 10th, 2020, the last instance of the Administrative Tax Appeals Council (“Carf”), Superior Chamber on Tax Revenue (“CSRF”), decided on proceeding No. 11080.001020/2005-94, stating the corporate income tax (“IRPJ”) should not be imposed on real estate exchange transactions between companies in the taxation system of the presumed profit.

 

According to the Brazilian Federal Revenue, exchange transactions shall be totally taxed, since they are part of the gross revenue of legal entities. The reporting counselor of the proceeding, Edeli Pereira Bessa, agreed with said understanding, however she had a losing vote. The reporting counselor understands that the exchange may be compared to a purchase and sale transaction, which means the entire revenue shall be subject to taxation by the IRPJ.

 

On the other hand, according to counselor Caio Cesar Nader Quintella, who cast the winning vote, the exchange and purchase and sale transactions cannot be compared, since they have different natures, so that the values of said transaction are not part of real estate revenue. Quintella pointed out that exchange transactions create mobility for players and take place within the scope of exchanging assets of the same value. By taxing an exchange transaction and afterwards selling the property, there is a double taxation for the taxpayer, since it will also be taxed when selling the property.

 

Finally, the Superior Court of Justice (STJ) has also expressed its opinion on the matter when judging REsp No. 1733560/SC, in which the reporting Minister Herman Benjamin understood that the concept of sales revenue does not include the exchange transaction.

 

More information on the CARF proceeding No. 11080.001020/2005-94 and judgment of REsp No. 1733560/SC, may be accessed in Portuguese at:

 

https://carf.fazenda.gov.br/sincon/public/pages/ConsultarJurisprudencia/listaJurisprudencia.jsf?idAcordao=4697539

 

https://processo.stj.jus.br/processo/revista/documento/mediado/?componente=ATC&sequencial=82795997&num_registro=201800765116&data=20181121&tipo=5&formato=PDF

 

_Brazilian National Department of Business Registration and Integration opens public consultation on corporate and accounting books exclusively in digital form

 

The Brazilian National Department of Business Registration and Integration (“DREI“) opened a public consultation on November 27th, 2020 regarding the authentication of the terms of opening and closing of accounting books and others books of individual businessmen, individual limited liability companies (“EIRELIs“), companies and auxiliary agents of commerce (DREI 03/2020).

 

According to the normative instruction’s draft presented for discussion, bookkeeping instruments, corporate books and books of auxiliary agents of commerce must be exclusively digital, being produced or launched on electronic platforms, stored or not on the servers of the boards of trade. Their opening and closing terms shall be signed by the entrepreneur or its attorney-in-fact, if applicable, and the accountant, via digital certificate or any other means of proof of authorship and integrity of documents in electronic form.

 

In this sense, the normative instruction’s draft points out that the boards of trade shall only verify the extrinsic formalities of the data presented in the opening and closing terms, being the companies and the accountants responsible for the content of such books. Moreover, the authentication of these terms must be granted automatically when the interested party (i) signs a declaration that it has fulfilled all legal formalities and (ii) presents to the board of trade the receipt of the payment form. Furthermore, such draft reinforces that it is not within the competence of the boards of trade to verify the sequence of the books’ order number and its period of bookkeeping – thus, it is possible to authenticate a book regardless of the presentation of the previously authenticated books to the board. In addition, the books and financial statements for previous periods may be signed by those responsible for the period to which the bookkeeping refers to or by those currently responsible.

 

The Public Consultation DREI 03/2020 will be open until December 14th, 2020 for comments and suggestions. More information may be accessed through the link below (in Portuguese only):

 

https://www.gov.br/economia/pt-br/assuntos/drei/consultas-publicas/consultas-abertas

 

 

November 2020

_the November│2020 edition of our Newsletter has the following highlights:

– Board of Trade of the State of São Paulo authorizes share capital payment with cryptocurrency

– Brazilian Securities and Exchange Commission judges case on managers’ failure to comply with fiduciary duties

– Abuse of power by minority shareholders

_ Board of Trade of the State of São Paulo authorizes share capital payment with cryptocurrency

 

The Birigui Regional Office of the Board of Trade of the State of São Paulo (“JUCESP“) issued on October 20th, 2020 a harmonization of understandings, by which it acknowledged that it would be possible to pay-in share capital with cryptocurrency, such as bitcoin.

 

Cryptocurrency are, in short, digital currencies that only exist in electronic format, with no link to any sovereign government-issuing state authority, without ballast in real assets of any kind. The most popular of these is the bitcoin, whose growing popularity has led entrepreneurs to question whether they could use it to pay in the share capital of companies.

 

Pursuant to Law No. 10.406/2002 (“Brazilian Civil Code”) and Law No. 6.404/1976 (“Brazilian Corporation Law”), the share capital may be paid in with cash or assets which may evaluated in monetary terms. For purposes of capital payment of limited liability companies, the only requirement is the approval by partners of the assets’ value. In the case of corporations, it is necessary to have the assets evaluated by a specialized company or three experts, followed by the approval of such valuation in a shareholders meeting.

 

Cryptocurrency is not currency in strict sense pursuant to the Brazilian legislation, therefore they should be considered as assets which may evaluated in monetary terms for purposes of capital payment. There is a peculiarity to be considered, which is that the volatility of the cryptocurrency market hinders its pricing and there is no official recommendation on the valuation method which shall be used for this purpose. Finally, as this is something new, it is not yet clear how this possibility will be applied by the regional offices of JUCESP.

 

_Brazilian Securities and Exchange Commission judges case on managers’ failure to comply with fiduciary duties

 

On August 24th, 2020, the judgment of PAS CVM SEI 19957.010647/2019-97 (05/2016) was initiated, to determine the responsibility of a publicly held company’s managers for failure to comply with their fiduciary duties in the development of a project, with possible infringement of arts. 153, 154, §2º, ‘c’ and 155 of the Brazilian Corporation Law, among other accusations.

 

According to the prosecution, the company used a specific methodology for implementing investment projects, which required (i) the presentation of technical and economic feasibility studies; and (ii) the verification of international project management standards. The application of this methodology was important to avoid excessive cost increases during projects to be implemented by the company, so eventual changes would still occur in the initial phase.

 

The company’s officer approved an initial schedule for the project and, after approximately three (3) months, approved the implementation of an anticipation plan, which advanced the start of said project by approximately 1 (one) year and, consequently, the cost for its construction increased expressively. According to the prosecution, the anticipation of the project occurred without sufficient technical support, considering the uncertainties that still permeated the project’s planning phase.

 

In addition, the prosecution pointed out that several aspects related to the approval of the anticipation plan indicated that the officers had not been diligent in examining the matter. The proposal prior to said resolution, would have already provided for very risky anticipations, contrary to the procedures recommended by the methodology usually adopted by the company. On the other hand, the executive board could disregard such procedures, if duly supported by suitable documentation, which did not happen, since the objective criteria of the aforementioned methodology were ignored.

 

In this sense, the Reporting Director, Mr. Henrique Machado, mentions in his vote that the DUTY OF DILIGENCE IMPOSES ON THE MANAGERS OF PUBLICLY-HELD COMPANIES THE CARE THAT EVERY ACTIVE AND REASONABLE MAN USUALLY EMPLOYS IN THE MANAGEMENT OF THEIR OWN BUSINESSES, THUS REQUIRING PROFESSIONAL CAPACITY WITH TECHNICAL CHARACTER. FOR THIS REASON, WHEN USING THE RESOURCES DELIVERED BY THE SHAREHOLDERS TO THE COMPANY, THE MANAGER SHALL USE THEM IN A RATIONAL AND JUSTIFIED MANNER, MAKING TECHNICAL DECISIONS BASED ON RELEVANT INFORMATION AVAILABLE.

 

Notwithstanding, it is worth mentioning the Brazilian Securities and Exchange Commission – CVM adopts the business judgment rule review standard to assess the pertinence of business decisions made by company managers. That is, in the absence of assumptions that demonstrate the manager’s bad faith, fraud, interest or conflict, and in view of the procedural adequacy of the respective decision-making process, the decisions of a manager should, in principle, be considered regular. That is, such decisions are presumed to be made seeking the best social interest.

 

Regarding the anticipation of the project implementation, approved by the officers, the Reporting Director understood that there was no change in the scenario of when the schedule was approved that could minimally justify the anticipation of the beginning of the project, which was even surrounded by circumstances which pointed against its implementation.

 

In addition, throughout the process, several documents that challenged the reliability of the project’s viability were made available to the executive board, as well as recommendations for changes to be evaluated, so, according to the Reporting Director, it was the board’s duty to seek additional clarification on these issues until they were sure they were handling the situation correctly. The duty of care imposes on managers a duty of care that should have given them greater scrutiny on the information submitted to them and the damage that was possibly being imposed on the company, so, they should take the necessary steps to avoid such risk.

 

On the other hand, in their defense, members of the board of directors and officers mentioned they discussed all the risks involved in said anticipation, even though the minutes of the meetings, which were drawn in summary form, state only the approval of the matters, without further details. As analyzed by Director Gustavo Gonzalez, the vast majority of Brazilian publicly-held companies choose to draw up minutes of meetings in summary form, pursuant to art. 130, Paragraph 1 of the Brazilian Corporation Law, with generic descriptions of the deliberated matters and, in this sense, he understands that the absence of detailed records is not able to demonstrate neither the diligence nor the lack of diligence of a manager. Therefore, the prosecution is responsible for demonstrating the failure to comply with the duty of diligence by the company’s managers – thus, if it is understood that the failure to record the reasons of the manager in the minutes of the meetings, in itself, is proof of the lack of diligence, this leads, in practice, to an inversion of the burden of proof, which is inadmissible in the context of a sanctioning process.

 

Director Flávia Perlingeiro adds that the difficulty to be faced in terms of the probative burden is evident, as it is the mental process of knowledge and convincing applied by the managers themselves, to make a decision in which, in principle, by the circumstances of the case, are protected by the business judgment rule.

 

Finally, regarding the accusation of failure to comply with their duty of diligence when approving the anticipation of the project, the managers remained acquitted, due to the examination of the decision-making process under the procedural prism applicable when examining this case, since the prosecution was unable to invert the probative burden it was subject to in order to prove that the managers did not analyze carefully the information available to make a decision.

 

More information regarding PAS CVM SEI 19957.010647 / 2019-97 (05/2016) can be accessed through the link below:

 

http://www.cvm.gov.br/noticias/arquivos/2020/20201103-5.html

 

_Abuse of power by minority shareholders

 

Every shareholder position gives its holder rights and powers, greater or lesser, which can be exercised in a correct or abusive manner. However, while abuses by the controlling shareholder are deeply studied in the academy and frequently discussed in Brazilian case law, the abuse from the minority does not drive the same attention. Regarding the Brazilian corporate law, while Law No. 6,404/1976 (“Brazilian Corporate Law”) provides for in its article 117, §1º some hypotheses of abusive exercise of power by the controlling shareholder, there is no reference of the abuse of power by the minority.

 

In this sense, the only provision established in the Brazilian Corporate Law would be the vote against the company’s interests, pursuant to article 115, such as the disapproval of management accounts without justification. This, in fact, is a typical example of potential minority abuse, but it is not its only possibility.

 

Thus, it is essential to understand the legal position of a minority shareholder and its particularities in order to really understand the abuse of power. More than that, it must be understood that “minority shareholder” is not a unitary concept, it may be someone who has one share among millions or even a shareholder who holds 49.99% of the company’s corporate interest, depending on the situation. Subjectively, there are also various profiles of minority shareholders, ranging from investment funds and professional shareholders to individual shareholders, or even relatives in family businesses and, as diverse as their profiles, may their attitudes be.

 

Among the examples of potential abusive exercise of power by minority shareholders, commissive or omissive, we highlight the deliberations taken by the minority against the legally impeded majority, as in the case of the approval of the management accounts in a company in which the controlling shareholder is also a manager. The veto by the minority in matters that have a qualified quorum for collegiate deliberation can also be a tool for abuse of power, thus being extremely important that shareholders take this into account when setting different quorums in bylaws and shareholders’ agreements. For example, the refusal of a minority shareholder to approve a necessary capital increase, in a compatible amount and at a justified price, can be considered an abuse of minority power, since the protection against its dilution of interest is not a justifiable reason to prevent the investment of another shareholder.

 

The abuse of minority power can also be observed in the hypothesis of proposing abusive judicial measures, such as an action to invalidate decisions taken at a general shareholders’ meeting (article 286 of the Corporation Law), whose active legitimacy does not depend on the percentage of interest, or series of judicial measures against the company and its managers (strike suits), with the purpose to hinder the regular course of business and, consequently, forcing the company and the other shareholders to buy or sell its shares on more favorable terms.

 

In this sense, a minority shareholder who represents 5% or more of the share capital could even use a lawsuit to dissolve the company (article 206, I, b, of the Brazilian Corporate Law). Although such measures may not be successful, as it is known that the harmful effects of an unfounded action are independent of the outcome of the judgment.

 

Nevertheless, the abuse of power by the minority cannot be presumed, and it is necessary to prove it by those who seek to establish it. Although the controlling shareholder is often tempted to frame any refusal or exercise of rights by the minority as an abusive behavior, it is important to note that the minority rights provided for by law, in the bylaws and shareholders’ agreements are valid and legitimate. In this sense, the framing of a certain action or exercise of rights by a minority shareholder as abusive depends on a careful analysis on a case-by-case basis.

 

October 2020

_the October│2020 edition of our Newsletter has the following highlights:

– CVM holds public hearing regarding insider trading

– CVM condemns publicly-held company’s managers for irregularities in capital increase

_ CVM holds public hearing regarding insider trading

 

The Brazilian Securities and Exchange Commission (“CVM“) has submitted to public hearing a proposal to reform the current CVM Instruction No. 358/02 ( “ICVM 358/02“),  in order to improve the wording and consolidate CVM’s jurisprudence on insider trading. The draft presented in the Public Hearing Notice SDM 06/20 proposes the following amendments:

 

  • Relative Presumptions: In the current wording of article 13 of ICVM 358/02, the literality of the article may be interpreted as an absolute prohibition to trade securities issued by the company before the disclosure of a relevant act or fact by those who, by virtue of their position or function in the company, its controlling company, its subsidiaries or affiliates, have knowledge of the information relating to such relevant act or fact. However, CVM’s Board has already consolidated the understanding that these are relative presumptions of (i) existence of relevant information (presumption of relevance), (ii) access to privileged information (presumption of access) and (iii) use of privileged information in negotiations (presumption of use), which may be uncharacterized by evidence to the contrary. In this sense, the new wording of the article would incorporate such presumptions into the normative text;

 

  • Objective trading prohibition before disclosure of ITR and DFP: creation of an autonomous and objective prohibition to trade securities issued by the company 15 days prior to the disclosure of the company’s quarterly information (“ITR”) and annual information (“DFP”);

 

  • Investment/disinvestment plans: proposal to relax the current rules for investment plans, reducing the minimum period for plans to come into force from six to two months;

 

  • Disclosure policy: in line with CVM’s compliance costs project, proposal to amend article 16 of ICVM 358/02, to provide that only publicly-held companies registered in category A before CVM, authorized by a market management entity to trade shares on the stock exchange and outstanding shares, would be required to prepare a disclosure policy for relevant acts or facts.

 

The public hearing is open for suggestions until November 13th, 2020. More information on the public hearing may be accessed through  the link below (in Portuguese only):

http://www.cvm.gov.br/audiencias_publicas/ap_sdm/2020/sdm0620.html

 

 

_ CVM condemns publicly-held company’s managers for irregularities in capital increase

 

On September 29, 2020, the CVM’s Board judged PAS CVM nº RJ2016/7929 (SEI Electronic Process nº 19957.007552/2016-43), in which it analyzed the responsibility of two managers of a publicly-held company (the “Defendants”), due to irregularities in a capital increase carried out by the company.

 

In summary, the Defendants, as members of the company’s board of directors, approved the execution of some agreements with their subsidiaries, which provided that the Defendants would grant the company a personal guarantee to their obligations and, in return, they would be remunerated on the guaranteed debt (“Agreements”). In addition, the company would hire an insurance (D&O) in favor of the Defendants to protect them from certain risks arising from the exercise of the position of officer, a position that both also held in the company. If the referred insurance was not contracted, the company itself should keep the Defendants free from possible risks and compensate them regarding labor, tax and social security debts arising from statutory liabilities. Therefore, the Defendants started to hold credits against the company, which were not reflected in the company’s financial statements from 2011 to 2015.

 

Afterwards, the company issued a notice to shareholders informing the approval of a capital increase at a meeting of the board of directors, through the subscription of shares in cash and credits, with the issuance of common and preferred shares. As a result of the capital increase, the other shareholders would be diluted by 91.84%. After a request for clarification to the company, it confirmed that related parties, including the Defendants, would subscribe shares with  credits held against the company, as well as that some of these credits were a result from the aforementioned Agreements.

 

The Reporting Director, Flávia Perlingeiro, pointed out several irregularities that occurred in the capital increase. The first of them, is the violation of Article 156 of Law No. 6,404/1976 (“Brazilian Corporation Law.”), which deals with conflict of interest. In this sense, it shall be noted that the Defendants entered into the Agreements with the company not only on behalf of their subsidiaries, but also, in their own name.

 

In this line, Flávia Perlingeiro mentioned that the Defendants’ conflict of interest (a priori) would be present. In other words, subject to the provisions of Article 156 of the Brazilian Corporation Law, in addition to being prevented from deliberating on the transaction with themselves and having to reveal the conflict to those who should speak out about it, the Defendants should also have refrained from even participating in the negotiations on the transaction, both as officers of the company, and as directors, which did not happen.

 

Additionally, SEP also accused the managers for not having reflected the credits arising from the Agreements in the financial statements from 2011 to 2015, representing a concealment of the company’s liabilities and of transactions with related parties. According to the Reporting Director’s vote, Pronouncement CPC 05 (R1) (“CPC Pronouncement”) clarifies that it constitutes a transaction with a related party  the transfer of resources, services or obligations between an entity that reports the information and a related party, regardless if there are any charges in return.

 

CPC Pronouncement also provides that if transactions between related parties occur during the period covered by the financial statements, the nature of their relationship, the information on the transactions, balances, commitments, shall be disclosed in said statements. Thus, the information referring to the Agreements should have been included in explanatory notes to the financial statements, characterizing a violation to the Brazilian Corporation Law and the CPC Pronouncement.

 

Finally, the Defendants also failed to comply with Article 157, §4 of the Brazilian Corporate Law combined with Article 3, caput, of ICVM 358/02, considering that one of the Defendants, who also held the position of Investor Relations Officer of the company, did not disclose a relevant fact regarding the capital increase, instead only a notice to shareholders was published.

 

Although a capital increase is not a situation expressly disposed among those considered as a potentially relevant act or fact, under the terms of ICVM 385/02, the list provided in said instruction is exemplary. As already decided by CVM, the list neither exhaust the possibilities of a relevant fact, nor determines a relevant fact, always being necessary to analyze the fact and the company to which it refers.

 

The Reporting Director also took the opportunity to distinguish a relevant fact from a notice to shareholders, in the first case the disclosure of a relevant fact aims to publicize situations with the potential to influence the decision to buy, hold or sell shares issued by a company. Therefore, it is a communication aimed at the market in general, covering the entire investing public. The notice to shareholders, on the other hand, is the title given to communications addressed to the company’s shareholders, provided in the Brazilian Corporation Law and CVM regulation. Therefore, it is a communication with a more restricted scope and audience than those applicable to relevant facts.

 

When the capital increase was carried out, the notice to shareholders then released by the company was intended only for its own shareholders, and had no emphasis to the high dilution potential resulting from such transaction. However, precisely due to this dilution, a relevant fact should have been disclosed to provide broad communication to the market.

 

Therefore, the Reporting Director concluded that the fact that there was no complaint by the other shareholders, investors or creditors, as well as that there was no unusual variation in the trading of the shares issued by the company, when the information was disclosed, does not exempt the Investor Relations Officer for failing to carry out the communication required by ICVM 358/02.

 

CVM’s Board decided to condemn the Defendants, as members of the board of directors and officers of the company (one of them being the Investor Relations Officer – DRI) to pay a fine for failing to comply with Articles 156, 176, §5 and 177, §3 of the Brazilian Corporation Law and the CPC Pronouncement and to give the DRI a warning for not disclosing a relevant fact regarding the capital increase.

 

More information regarding PAS CVM 19957.010904/2018-18 (RJ2018/8378) can be accessed, in Portuguese, at the link below:

 

http://www.cvm.gov.br/noticias/arquivos/2020/20200929-4.html

September 2020

_the September│2020 edition of our Newsletter has the following highlights:

– Brazilian Securities and Exchange Commission fines managers for using assets of publicly held company for private purposes

– Brazilian Securities and Exchange Commission judges proceeding regarding the disclosure of guidance

– São Paulo’s Board of Trade regulates the use of electronic signatures in corporate acts

_ Brazilian Securities and Exchange Commission fines managers for using assets of publicly held company for private purposes

 

The Administrative Sanctioning Process of the Brazilian Securities and Exchange Commission (“CVM”) No. 19957.010904/2018-18 (RJ2018/8378) aimed to determine the responsibility of (i) the Chairman of the Board of Directors of a publicly held company for using an aircraft owned by the company for private purposes, in breach of the provisions set forth in article 154, Paragraph 2, paragraph “b” of the Brazilian Corporate Law (which prohibits the use of company assets, for personal reasons, without prior authorization from the general shareholders’ meeting or the board of directors);  and (ii) the Chief Executive Officer for failing to comply with his duty of diligence (article 153 of the Brazilian Corporate Law) considering that he granted authorization for the aircraft use for personal reasons, as well as did not implement control mechanisms to ensure that the company’s assets and services were only used in accordance with its objectives.

 

The investigations by the Superintendence of Corporate Relations (Superintendência de Relações com Empresas – SEP) began due to news published in the media stating the Chairman of the Board of Directors had traveled with his family in an aircraft owned by the company. The company claimed that the use of the airplane was essential to safeguard the personal safety of its chairman, a measure that would be in line with the company’s interests. Furthermore, it argued that the travel expenses were minimal, and that the approval of the management accounts at the ordinary shareholders’ meeting had already released the company’s managers from their responsibilities regarding this matter. As for the authorization to use the airplane, they informed there were non-formalized procedures regarding its use and that it was not reasonable to expect the CEO to bear the responsibility to establish internal controls for matters of “minor nature”.

 

The prosecution, however, understood that neither the use of the company’s airplane was necessary nor the only way to guarantee the safety of the chairman, who could bear the costs of such trip or, at least, reimburse such incurred expenses. In addition, the use of the aircraft was not considered as part of the management’s indirect compensation, therefore could not be considered as a benefit given to the company’s executives. They also recalled that the company had previously informed that there were no formal procedures for the use of the company’s airplanes and that the CEO personally granted authorization for their use, which is why he should be held responsible for the improper use of such assets.

 

In the vote of the reporting director, President Mr. Marcelo Barbosa, he reinforced the following topics:

  • the approval of the management accounts does not exclude CVM’s punitive right, this only applies to civil claims;
  • the use of the airplane could not be considered as a benefit granted to company’s executives, as it was not part of their indirect compensation;
  • a prior specific authorization of the general shareholders’ meeting or of the board of directors to use the airplane was not proven in the records, according to the provisions of article 154, § 2, item “b” of the Brazilian Corporate Law. In this case there was only an authorization by the CEO;
  • no plausible justification was provided for why the company should bear the expenses of the chairman’s trip;
  • the low amount involved in the use of the airplane could not rule out the illicit act performed by such managers, under the terms of said article 154, §2, item “b” of the Brazilian Corporate Law;
  • the creation of internal controls is part of the CEO’ powers, according to the company’s bylaws and is also essential in order to fulfill the duty of diligence, mainly due to the difficulties inherent in the inspection of the company’s management acts;
  • considering the highly procedural nature of the duty of diligence, especially in the inspection field, it is important that adequate records of internal processes are maintained, and when in need of consultation, such record should show the diligent conduct. In this case, the procedure described by the company did not provide for requirements, nor did it generate records capable of demonstrating the convergence of the manager’s act with the best interests of the company, a situation which disfavors the creation of an environment averse to acts in deviation of purpose.

 

Finally, CVM’s Board, unanimously and following the reporting director’s vote, decided to condemn:

 

  • the chairman to a penalty fine in the amount of R$400.000,00 for the non-compliance with the provisions of article 154, § 2, item “b”, of the Brazilian Corporate Law, for using the airplane owned by the company for private purposes; and
  • the CEO to a penalty of (i) fine in the amount of R$400.000,00 for the non-compliance with the provisions of article 154, § 2, item “b”, of the Brazilian Corporate Law, for authorizing the use of the referred airplane by the chairman; and (ii) fine in the amount of R$300.000,00 for the non-compliance with the provisions of article 153 of the Brazilian Corporate Law, for disrespecting the duty of diligence due to the lack of adoption of procedures and caution required in the management of publicly-held companies when making decisions regarding the implementation of controls and allowing the use of the company’s airplanes.

 

More information regarding PAS CVM 19957.010904/2018-18 (RJ2018/8378) can be accessed, in Portuguese, at the link below:

 

http://www.cvm.gov.br/export/sites/cvm/noticias/anexos/2020/20200721_PAS_CVM_SEI_19957_010904_2018_18_voto_presidente_marcelo_barbosa.pdf

 

 

_ Brazilian Securities and Exchange Commission judges proceeding regarding the disclosure of guidance

 

On August 18, 2020, CVM judged the Administrative Sanctioning Process SEI 19957.011190 / 2019-38 (RJ2019 / 9652), established by SEP to ascertain the responsibility of a member of the board of directors for disclosing guidance , which had not yet been disclosed to the market, in breach of article 155, § 1 of the Brazilian Corporate Law and article 8 of CVM Resolution No. 358/2002.

 

The proceeding originated from investigations carried out by SEP, due to an article published in a newspaper which presented some statements of the director regarding the company’s guidance for the year. On the same date of said publication, the company disclosed a material fact confirming the existence of internal documents that foresaw the estimative mentioned by the director and, after being questioned by SEP, the company informed that the director had received a presentation and attended a board of directors’ meeting in which said presentation was presented.

 

The director stated that the disclosure of confidential information was made at a meeting in response to statements issued by an entrepreneur (with no apparent ties to the company), due to his institutional duty.

 

However, according to the vote of the reporting director, President Mr. Marcelo Barbosa, there is no basis in the information and documents provided in the case which support the allegations of the director. At that time, the market did not have enough information to create assumptions about said company’s guidance.

 

IN HIS VOTE, MR. BARBOSA REINFORCED THAT GUIDANCE, DUE TO ITS NATURE, HAS THE POTENTIAL TO INFLUENCE IN THE DECISION TO INVEST IN A COMPANY, WHICH IS WHY CVM ESTABLISHES APPROPRIATE RULES AND PROCEDURES FOR THEIR DISCLOSURE AND/OR MODIFICATION, SHOULD THE COMPANIES CHOOSE TO DO SO, IN ORDER TO AVOID INFORMATIONAL ASYMMETRIES.

 

In this case, it was proved that the guidance disclosed was a confidential and relevant to the market, considering that it was related to the reduction of the company’s EBITDA for said year. Therefore, the Company properly disclosed a material fact regarding this matter, on the same day the article was published, which corroborates the reporting director’s understanding of breach of the director’s duty of confidentiality.

 

In this sense, CVM’s Board decided, unanimously and following the reporting director’s vote, to convict the director to a fine of R$100,000.00, due to the non-compliance with article 155, § 1, of the Brazilian Corporate Law, combined with article 8 of CVM Resolution No. 358/2002.

 

More information regarding PAS CVM SEI 19957.011190/2019-38 (RJ2019/9652) can be accessed, in Portuguese, at the link below:

 

http://www.cvm.gov.br/noticias/arquivos/2020/20200818-3.html

 

_ São Paulo’s Board of Trade regulates the use of electronic signatures in corporate acts

 

On August 20, 2020, Resolution No. 01 of the Board of Trade of the State of São Paulo (“Resolution No. 01”) was published, which explains the form of presentation and filing of corporate acts which are electronically signed, in line with the provisions of SEI Circular Letter nº 2563/2020/ME also published in August. Pursuant to Resolution No. 01, the following signature classifications will be accepted: (i) qualified electronic signature, which uses an eCPF digital certificate, standard ICP-Brasil; (ii) advanced electronic signature, which shall be associated with the signatory in an unequivocal way and shall indicate its temporality; and (iii) personal signature. Corporate acts which contain simple electronic signatures shall not be accepted, and, those which do not comply with the levels and parameters presented in Resolution No. 01, will not be eligible for registration either. Finally, while the full digital system is not implemented, all corporate acts may be scanned, signed by the parties or attorneys-in-fact, provided that they have specific powers and the grantor’s notarized signature.

 

Further information on Resolution No. 01 (in Portuguese) and SEI Circular Letter No. 2563/2020/ME (in English) can be accessed through the links below, respectively:

 

http://www.institucional.jucesp.sp.gov.br/downloads/deliberacao_%2001_2020_assinatura_19_08.pdf

https://www.cdoadv.com.br/en/publicacoes/august-2020/

August 2020

_the August│2020 edition of our Newsletter has the following highlights:

– Brazilian National Department of Business Registration issues Circular Letter regarding electronic signatures

– Bill proposes the issuance of debentures by limited liability companies and cooperatives

– STF decides to maintain ITBI assessment on real estate’s contributions regarding the amount exceeding the capital to be paid up

_ Brazilian National Department of Business Registration issues Circular Letter regarding electronic signatures

 

On August 11th, 2020, the Brazilian National Department of Business Registration and Integration (Departamento Nacional de Registro Empresarial e Integração – DREI) issued the Circular Letter SEI No. 2563/2020/ME, which establishes the department’s understanding regarding electronic signatures, which must be followed by all Boards of Trade of the country. This matter was addressed by DREI after entities operating in the area questioned the department dabout the divergence of understanding on the specificities that should be followed for electronic signature of documents by Boards of Trade throughout the country.

 

Initially, DREI pointed out that Provisional Measure No. 2200-2 of 2001, which created the Brazilian Public Key Infrastructure (Infraestrutura de Chaves Públicas Brasileira – ICP-Brasil), does not prevent the use of other means of proof of authorship and integrity of documents in electronic form other than those of ICP-Brasil. Moreover, with the publication of Provisional Measure No. 983 in June 2020, which regulates, among other matters, electronic signatures in communications with public entities, electronic signatures were categorized as follows:

 

  • simple: allows the identification of the signatory and attaches or associates data with other data in electronic format.
  • advanced: is uniquely associated with the signatory, uses data to create an electronic signature whose signatory can, with a high level of certainty, operate under its exclusive control, and is related to the data associated with it in such a way that any subsequent modification is detectable.
  • qualified: uses a digital certificate, pursuant to Provisional Measure No. 2200-2.

 

Furthermore, article 3 of Provisional Measure No. 983 expressly provides for the possibility of using the advanced electronic signature in the registration of acts before Boards of Trade, aside from, of course, the qualified electronic signature.

 

THUS, THERE BEING NO OBSTACLE FOR THE ACCEPTANCE OF ADVANCED AND QUALIFIED ELECTRONIC SIGNATURES BY BOARDS OF TRADE, THE AUTHENTICITY AND INTEGRITY OF THE DOCUMENTS IS GUARANTEED, SO THERE IS NO NEED TO CHECK ALL DOCUMENTS, BECAUSE THE VERACITY AND CONFIRMATION OF INFORMATION IS THE SIGNATORY’S SOLE RESPONSIBILITY.

 

Finally, in case of printing digital documents, the authenticity of the document may occur by means of authentication by the lawyer, accountant or accounting technician of the interested party, as the printed document becomes a simple copy.

 

More information may be accessed in Portuguese through the link below:

https://sei.fazenda.gov.br/sei/controlador_externo.php?acao=documento_conferir&codigo_verificador=9527270&codigo_crc=E39836DB&hash_download=a9ef7f48a561aafc79d260ef891d3f3536846abc5c7f7856e5b934a5adfe379ba486ea9428c5c45e2bf8101b5d7e5227dd45a77008266c0ba0591d89f6f1c9cd&visualizacao=1&id_orgao_acesso_externo=0

 

 

_ Bill proposes issuance of debentures by limited liability companies and cooperatives

 

In June 2020, Senator Flávio Bolsonaro presented Bill No. 3324/2020 (“PL 3324/20“), which allows the issuance of debentures by limited liability companies and cooperatives. The explanation presented to the Brazilian Federal Senate points out the need to expand the forms of fundraising by these corporate types as a result of the COVID-19 pandemic.

 

ALTHOUGH THERE IS NO LEGAL PROHIBITION FOR THE ISSUANCE OF DEBENTURES BY SUCH CORPORATE TYPES UNDER BRAZILIAN LAW, SOME LOCAL BOARDS OF TRADE DO NOT ACCEPT THE FILING OF THESE SECURITIES, WHICH MAKES THEIR ISSUANCE IMPOSSIBLE. IN THIS SENSE, THE EXISTENCE OF A SPECIFIC LAW ON THE MATTER WILL FACILITATE THE ACCESS OF SMALL AND MEDIUM COMPANIES TO CREDIT AT A NATIONAL LEVEL.

 

There are other bills in progress in the Legislative on the same matter, such as Bill No. 6322/2013, proposed by Federal Congressman Carlos Bezerra, and Senate Bill No. 11/2018, proposed by the Joint Commission of Debureaucratization of the Brazilian National Congress. The matter is also dealt with by the two projects of a New Brazilian Commercial Code. However, there is a certain expectation that this matter will be treated by Congress with greater vehemence given the health and economic crisis in which the country finds itself, as it is an additional way of financing the local business activities.

 

It is ought to be said that, currently, debentures have great relevance in the national capital market, being a consolidated debt security in the country. The formal possibility to issue debentures by limited liability companies, which is the legal structure most Brazilian companies have, would provide considerable legal security for the issuer and debenture holder.

 

Bill No. 3324/20 is currently in progress in the Federal Senate. More information can be accessed in Portuguese through the link below:

 

https://www25.senado.leg.br/web/atividade/materias/-/materia/142510

 

_ STF decides to maintain ITBI assessment on real estate’s contributions regarding the amount exceeding the capital to be paid up

 

On August 5, 2020, the Superior Federal Court (“STF”) judged Extraordinary Appeal No. 796376 and decided, by majority of votes, to maintain the assessment of the Real Estate Transfer Tax (Imposto de Transmissão de Bens Imóveis – ITBI) on real estate’s contributions to capital stock in the amount that exceeds the capital to be paid up.

 

Pursuant to article 156, item II, of the Federal Constitution, the municipalities may impose taxes on the transmission “inter vivos”, under any title, by onerous act, of real estate and real rights over real estate, except for guarantee, as well as assignment of rights to its acquisition. However, paragraph 2, item I of the aforementioned article, provides immunity for the transfer of assets or rights contributed to a society by means of payment of the capital, as well as for the transfer of assets or rights resulting from a merger, incorporation, spin-off or extinction of any legal entity, unless, in such cases, the acquirer’s predominant activity is the purchase and sale of these assets or rights, lease of real estate or leasing.

 

The case judged by STF arises from a capital increase of a company with the subsequent use of real estates to pay up the subscribed capital stock. However, the total value of the real estates exceeded the pending capital payment amount, so the excess amount was allocated to the company’s capital reserve. When trying to issue the document for payment of the ITBI with full immunity, the company was surprised with the understanding of the secretary of the municipal finance that the ITBI should be paid on the amount allocated to the capital reserve (which exceeded the pending capital payment amount).

 

The plaintiff filed a writ of mandamus against such act issued by the secretary of finance of São João Batista, in the State of Santa Catarina, who denied the immunity aforementioned, stating that the total amount of the properties would greatly exceed the paid-in capital. Subsequently, the first-degree court recognized the immunity and waived the ITBI charge. However, the Santa Catarina Court of Justice granted an appeal filed by the municipality alleging that the immunity is restricted to the amount which is destined to the company’s capital stock.

 

In the STF, the appellant stated that no tax is levied on the transfer of assets incorporated into the equity of a legal entity, since there are no limitations regarding the ITBI’s immunity in the realization of capital. However, by majority, the STF ministers voted to maintain the incidence of ITBI on the amount that exceeded the value allocated to the capital stock, claiming that it cannot be admitted that, under the pretext of creating a capital reserve, it could be granted immunity over the value of properties in excess to the subscribed quotas, which is contrary to the constitutional norm and to the detriment of the municipal tax authorities.

 

Finally, the general repercussion thesis was set as follows: The immunity in relation to ITBI, provided for in item I of paragraph 2 of article 156 of the Federal Constitution, does not reach the value of the assets which exceeds the limit of the  capital stock to be paid in.

 

More information regarding RE 796376 can be accessed, in Portuguese, at the link below:

 

http://portal.stf.jus.br/processos/detalhe.asp?incidente=4529914

July 2020

_the July│2020 edition of our Newsletter has the following highlights:

– CVM publishes Instruction reducing the minimum percentages of corporate interest required for filing lawsuits and exercise of related rights

– Publicly-held company is forced to provide list of its shareholders for purposes of the filing of a management liability lawsuit

– CVM acquits officer accused of insider trading for lack of intention to obtain undue advantage

_ CVM publishes Instruction reducing the minimum percentages of corporate interest required for filing lawsuits and exercise of related rights

 

On June 22, 2020, the Brazilian Securities Exchange Commission (“CVM“) published Instruction No. 627 (“ICVM 627“), which establishes a scale reducing, based on the capital stock, the minimum percentages of corporate interest required for the exercise of some of the rights set forth in Law No. 6.404 of 1976 (“Brazilian Corporation Law“).

 

Pursuant to the 1st article of ICVM 627, the reduced percentages shall apply to the shareholder who wishes to exercise the following rights:

  • filing of a suit to request the full presentation of the company’s books (article 105 of the Brazilian Corporation Law);
  • calling of a shareholders’ meeting in case the managers fail to call it within eith days upon a justified request (paragraph “c”, sole paragraph, article 123 of the Brazilian Corporation Law);
  • the request, in a shareholders meeting, for information regarding the shares and options held by the managers, the benefits and advantages paid to the managers by the company and correlated entities, the conditions of the managers and high executives’ labor agreements, as well as any material facts of the company (paragraph 1, article 157 of the Brazilian Corporation Law). );
  • filing of a derivative suit against the company’s managers, i.e., when the shareholders meeting decides not to file the suit (paragraph 4, article 159 of the Brazilian Corporation Law);
  • the request for information to the audit committee (Conselho Fiscal) on matters within its authority (paragraph 6, article 163 of the Brazilian Corporation Law); and
  • filing of a civil liability suit against the controlling company without the provision of a guarantee (paragraph “a”, paragraph 1, article 246 of the Brazilian Corporation Law).

 

As of July 1st, 2020, when ICVM 627 came into force, the percentage provided for in the aforementioned articles (i.e. 5% of the capital stock), was reduced according to the capital stock of the publicly-held company and is applicable as follows:

 

Capital Stock (R$)Minimum Percentage%
0 to 100,000,0005
100,000,001 to 1,000,000,0004
1,000,000,001 to 5,000,000,0003
5,000,000,001 to 10,000,000,0002
over 10,000,000,0001

 

ICVM 627 and the report of its public hearing can be accessed at the link below, in Portuguese:

 

http://www.cvm.gov.br/legislacao/instrucoes/inst627.html

 

http://www.cvm.gov.br/export/sites/cvm/audiencias_publicas/ap_sdm/anexos/2019/sdm0719_relatorio_de_analise.pdf

 

 

_ Publicly-held company is forced to provide list of its shareholders for purposes of the filing of a management liability lawsuit

 

CVM’s Board has decided, in Procedure SEI 19957.010274/2019-54, in favor of the request made by minority shareholders, regarding the delivery by a publicly-held company of a list of its shareholders, with their names and number of their shares, pursuant to article 100, §1st, of the Brazilian Corporation Law, in order to fulfill the minimum quorum for the proposal of a civil liability suit against the company’s managers.

 

The company had rejected the shareholders’ request stating that there was no specific reason to justify the request for information, according precedents of CVM’s Board, declaring the shareholders were not able to support the alleged right to be defended, as required pursuant to article 100, § 1st of the Brazilian Corporation Law.

 

THE MEMBERS OF THE BOARD UNANIMOUSLY DECIDED TO FOLLOW THE TECHNICAL AREA’S REPORT, WHICH EXPRESSED SAID THAT THE LIST SHOULD BE PROVIDED IF THE REQUEST OF A SHAREHOLDER (I) COMPLIED WITH THE LEGAL REQUIREMENTS OF ARTICLE 100, § 1ST, OF BRAZILIAN CORPORATION LAW, THAT IS, IF IT WAS BASED ON THE BINOMIAL “DEFENSE OF RIGHTS” AND “CLARIFICATION OF SITUATIONS”, (II) WAS AIMED AT THE DEFENSE OF A RIGHT INHERENT TO ITS CONDITION AS SHAREHOLDER AND, THEREFORE, OF INTEREST TO ALL SHAREHOLDERS; AND (III) BASED ITS REQUEST, EVEN IF BRIEFLY, IDENTIFYING THE RIGHT TO BE DEFENDED OR THE SITUATION TO BE CLARIFIED. IN THIS SENSE, IT WOULD NOT BE FOR THE COMPANY TO ANALYZE THE MERIT OF THE REQUEST MADE BY THE SHAREHOLDERS, BUT ONLY TO VERIFY THAT THE LEGAL REQUIREMENTS FOR THE PROVISION OF THE LIST OF SHAREHOLDERS HAVE BEEN MET.

 

The decision is in line with the precedents of CVM’s Board in recent decisions and with the guidance of SEP (Superintendência de Relações com Empresas) contained in Circular Letter/CVM/SEP/No. 2/2020, which understand that, although requests that are justified to facilitate the mobilization of shareholders in order to discuss issues related to the company and participating in shareholders’ meetings (such as the adoption of a multiple vote or separate election of members of the Board of Directors and of the audit committee (Conselho Fiscal)), do not find support in article 100, § 1st, of the Brazilian Corporation Law, in the event that shareholders have to act together to defend any right that, due to the applicable legislation or the bylaws of the company, there is a minimum quorum to be met (such as a liability action against managers to be proposed by shareholders, such as the case examined herein, or the action for the full presentation of the company’s books), the list shall be provided.

 

More information can be accessed at the link below, in Portuguese:

 

http://www.cvm.gov.br/decisoes/2020/20200114_R1.html

 

_ CVM acquits officer accused of insider trading for lack of intention to obtain undue advantage

 

CVM’s Board unanimously acquitted, following CVM’s reporting officer, when ruling on Administrative Proceeding CVM No. 19957.005966/2016-38, an officer of a publicly held company of the accusation of insider trading, in violation to article 13 of CVM Instruction No. 358/02 (“ICVM 358“).

 

The officer sold part of the shares he held after receiving financial information regarding the company during the quiet period, provided in article 13, §4th of ICVM 358. The defenses’ main argument was that the sale of shares was made to bear extraordinary personal expenses he incurred during such period, due to renovations he was carrying out on his property.

 

In the reporting officer’s vote, the four elements that would characterize an insider trading were: (i) existence of relevant information, not yet disclosed to the market; (ii) access to such information by the accused; (iii) use of the information when trading; and (iv) purpose to take advantage for themselves or for third parties. In addition, there is a relative presumption, against the accused, regarding the use of the relevant information with the intention to obtain an undue advantage for himself or for others, pursuant to ICVM 358, which can be dismissed if there is evidence to the contrary.

 

In this sense, the numerous receipts presented by the defense, which identified extraordinary expenses whose value could justify the sale of shares, were taken into consideration by the reporting officer and, considered along with the other arguments of the defense, such as the low securities volume operated and the inexpressive amount of the supposed avoided loss, caused her to create a reasonable doubt regarding the officer’s misconduct, therefore, voting for the acquittance of the accused, in accordance to the principle in dubio pro reo.

 

For more information on this case in Portuguese, please access the link below:

 

http://www.cvm.gov.br/noticias/arquivos/2020/20200616-1.html