Ano: 2020

June 2020

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

– COVID-19: Law regarding private legal relations in the pandemic period published

– Brazilian Department of Business Registration edits Normative Instruction which improves registrations before Boards of Trade

_ Covid-19: Law regarding private legal relations in the pandemic period published

 

On June 12th, 2020, Law No. 14.010 was published (“Law No. 14.010/20”), which sets forth an emergency and transitional legal regime regarding private legal relations during the COVID-19 pandemic.

 

The original text, initially presented to the Brazilian Senate on March 31st, 2020, as Legislative Proposal No. 1.179, was prepared with the assistance of several professors from the best law schools in the country and coordinated by Brazilian Supreme Court Chief, Minister Dias Toffoli. After several discussions in the two legislative houses, the final text was sanctioned by the Brazilian President on June 10th, 2020, in which some of the provision were vetoed,.

 

Law No. 14.010/20 suspended the statute of limitations and for the acquisition of property by adverse possession from June 12, 2020 to October 30, 2020 and, in addition, extended the deadline for opening inventory and legal partition procedures of successions commencing from February to October, 2020. Also, within the civil sphere, the application of article 49 of the Brazilian Consumer Defense Code, which sets forth consumer’s right of regret, in case of home delivery of perishable or immediate consumption products and medicines, is suspended until October 30, 2020, as well as regular arrests for alimony debtors, which shall only face house-arrests.

 

As for legal persons under private law, it is worth mentioning that, after several changes in its text and the presidential vetoes, the final version of Law No. 14.010/20 may create different understandings regarding the deadline for holding shareholders’ meetings. However, through an interpretation of the law with the vetoes explanations, the term of October 30, 2020 established in its article 5 refers exclusively to associations and foundations meetings. The deadline for shareholders’ meetings of limited liability companies, corporations and cooperatives remains the one provided for by Provisional Measure No. 931/2020 (i.e. for companies whose fiscal year ends between December 31, 2019 and March 31, 2020, the shareholders’ meetings shall be held within 7 months from the end of the fiscal year).

 

In the competition law field, it is suspended until October 30, 2020 the possibility of considering the sale of goods or rendering of services unjustifiably below cost price as an infringement of Brazilian Competition Law (article 36, paragraph 3, item XV of Brazilian Law 12.529/11), as well as to partially or totally cease the company’s activities without just cause (art. 36, §3, item XVII of Brazilian Law 12.529/11), and the classification of entering into an association, consortium or joint venture agreement between two or more companies as an act of concentration is ineffective until the aforementioned date (art. 90, item IV of Brazilian Law 12.529/11). However, the suspension does not rule out the possibility of subsequent analysis of the concentration act or of investigations on agreements that are not necessary to combat or mitigate the consequences of the coronavirus pandemic.

 

Finally, with respect to the Brazilian Data Protection Law (Law No. 13.709/2018), Law No. 14.010/20 postponed the entry into force regarding the application of administrative sanctions to August 1, 2021. The entry into force regarding the other articles is expected, for now, for May 3, 2021, according to Provisional Measure No. 959/2020 (still pending appreciation by Congress).

 

Law No. 14.010/2020 can be accessed in Portuguese at the link below:

 

http://www.planalto.gov.br/ccivil_03/_Ato2019-2022/2020/Lei/L14010.htm

 

_ Brazilian Department of Business Registration edits Normative Instruction which improves registrations before Boards of Trade

 

On June 15th, 2020, Normative Instruction No. 81 (“IN DREI 81“) was published, which was issued by the National Department of Business Registration and Integration (Departamento Nacional de Registro Empresarial e Integração) (“DREI“), combining in a single document the general rules for public registration of companies in Brazil. The measure was taken with the purpose to simplify and de-bureaucratize business creation, better enabling the business environment for economic development.

 

We highlight the following news set forth by IN DREI 81:

 

  • Notarization of signatures and authentication of documents: the requirement of signatures notarization and documents authentication for filings before the Boards of Trade has been waived, the document may be authenticated by the representative of the respective Board of Trade himself (by means of comparison of the original version with the copy) or by the lawyer or accountant of the interested party presenting a statement of authenticity alongside the documents, as long as such professional has signed the registration request.

 

  • EIRELI’s capital stock: the payment of the capital stock for the incorporation of an individual limited liability company known as EIRELI shall be immediate only in relation to the legal minimum amount (i.e. 100 times the highest minimum wage in the country), the amount exceeding such legal minimum can be paid in a future date.

 

  • Automatic registration: the filing of an instrument of incorporation, alteration and extinction for individual businessmen, EIRELIs and limited liability companies (except public companies) shall be automatic when (i) prior consultations on the viability of the corporate name and location, when applicable, are completed; (ii) the instrument contains only the standardized clauses contained in the respective manuals edited by DREI; and (iii) the mandatory documents for filing are also presented, also according to the manuals edited by DREI. It is worth mentioning that the automatic registration does not apply to corporate acts which approve transformation, merger or spin-off and capital payment with quotas of another company.

 

  • Preferred Quotas in Limited Liability Companies: IN DREI 81 consolidates the doctrinal understanding that it is possible to issue preferred quotas of different classes in limited liability companies, with different political and economic rights (item 5.3.1 of the Limited Liability Company Manual). Furthermore, the understanding that non-voting preferred quotas would not be considered for purposes of installation and deliberation quorums was confirmed.

 

IN DREI 81 enters into force on July 1st, 2020, and the automatic registrations will only be effective in October 13th, 2020.

 

It is not yet clear how the new rules of IN DREI 81 will be applied by each Board of Trade and how the COVID-19 pandemic period could affect their implementation.

 

IN DREI 81 can be accessed in Portuguese at the link below:

 

http://www.in.gov.br/en/web/dou/-/instrucao-normativa-n-81-de-10-de-junho-de-2020-261499054

 

May 2020

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

– Board of Trade of the State of São Paulo resumes its activities

– Digital Shareholders’ Meetings during COVID-19 Pandemic

– Brazilian Securities and Exchange Commission regulates debenture holders’ meetings

– Decree No.10.278/2020 establishes techniques and requirements for scanning public or private documents

– Resolution No. 55/2020 simplifies the opening of startups under the Inova Simples regime

_ Board of Trade of the State of São Paulo resumes its activities

The Board of Trade of the State of São Paulo (“JUCESP”) resumed its activities on May 12, 2020, in accordance with official public health regulations.

The opening hours are from 8am to 4pm, by appointment. To ensure social distance, services will be rendered by post or drive-thru. If the delivery of documents is made by post, the protocol numbers will be sent by e-mail and, in the event of further requirements, JUCESP will allow people to schedule an appointment for withdrawal.

Thus, for the purposes of the provisions of article 6 of Provisional Measure No. 931/2020, since May 12, 2020, the term for filing corporate acts before JUCESP which were executed from February 16, 2020, has started (for purposes of retroacting the effects of filing to the execution date, pursuant to Article 36 of Law No. 8.934/1994).

For more information on JUCESP’s services during quarantine in Portuguese, access:

http://www.institucional.jucesp.sp.gov.br/homepage.php

_ Digital Shareholders’ Meetings during COVID-19 Pandemic

The virtual shareholder’s meeting of limited liability companies, cooperatives, closed and publicly-held companies, made possible by Provisional Measure No. 931/2020 (“MP 931”) and regulated by the National Department of Business Registration and Integration in its Normative Instruction No. 79/2020 and by the Brazilian Securities Commission in its Instruction No. 622/2020 (“ICVM 622“), have become an excellent alternative for holding general meetings in a period of social distancing.

In an article published by “Valor Econômico” Newspaper on April 30th, 2020 a survey on publicly-held companies was presented, showing that 19 meetings had already been called to be entirely held digitally, while 20 other companies had called hybrid meetings, in which it is possible to attend the meeting physically or digitally. Although there has been no survey regarding virtual meetings on closed corporations, as well as limited liability companies and cooperatives, the possibility of carrying out corporate resolutions, especially regarding the approval of the management’s accounts and financial statements and the distribution of dividends, without shareholders exposure to a potential contamination by the new coronavirus, it is an alternative that meets the economic and health interests of the shareholders and, in this sense, tends to be used with profusion in Brazil.

Nevertheless, when choosing to hold a virtual shareholders’ meeting, certain additional precautions should be taken by managers. Starting with calling the meeting, which should point out the possibilities of remote participation, until its installation, with additional care for a correct identification of shareholders, as well as the resolutions, which should be taken in platforms which allow for debates, clarifications and decision making, the management of the company will have to act with exceptional diligence on holding this kind of meeting, in order to ensure the proper exercise of shareholders’ rights. 

Although such innovations have come from an urgent need of companies to adapt their legal obligations to the exceptionality of a pandemic, it is worth highlighting that virtual meetings are gaining strength to become a permanent option for companies in Brazil, as it already happens in other countries. 

_ Brazilian Securities and Exchange Commission regulates debenture holders’ meetings

On May 14th, 2020, the Brazilian Securities and Exchange Commission (“CVM”) issued Instruction No. 625 (“ICVM 625”), after holding a public hearing, in order to regulate participation and remote voting by holders of debentures in their meetings, as well as holders of promissory notes and certificates of real estate or agribusiness receivables.

The debenture holders’ meeting provided for in article 71 of Law 6.404/76 (“Brazilian Corporate Law”) was not regulated by CVM until the edition of ICVM 625, with only a few specific provisions in CVM Instruction No. 583/2016. The need for a specific instruction for this matter arose in the scenario of the new coronavirus pandemic, in line with Provisional Measure 931/2020 and the recent amendment to CVM Instruction No. 481/2009.

We emphasize that, in addition to the expansion of the scope provided for in the public hearing to cover securities issued by companies not registered before CVM and which issued securities in a public offer with restricted efforts under the terms of CVM Instruction No. 476/2009, ICVM 625 provides that the responsibilities attributed to the issuing company or the fiduciary agent are related to which of these agents has called the meeting and that the minutes of the meetings must indicate the number of votes for and against and abstentions in relation to each proposal on the agenda, showing the division by series, when applicable.

ICVM 625 came into force on the date of its publication, i.e. May 15, 2020, and can already be applied to meetings of existing securities holders, including those that have already been called, except in cases where the issuance deed expressly prevents remote voting.

ICVM 625 can be accessed in Portuguese at:

http://www.cvm.gov.br/export/sites/cvm/legislacao/instrucoes/anexos/600/inst625.pdf

_ Decree No. 10.278/2020 establishes techniques and requirements for scanning public or private documents

On March 19th, 2020, Decree No. 10.278 (“Decree No. 10.278/2020”) was published in the Union Official Gazette to establish the technique and requirements for scanning public or private documents, so that the scanned documents have the same legal effects as original documents.

In accordance with article 2, the Decree No. 10.278/2020 is applicable to scanned documents that are produced by (i) public legal entities, even if it involves their relationship with private entities and by (ii) private legal entities or natural persons before (a) public legal entities or (b) other private legal entities or natural persons.

In addition, article 4 of Decree No. 10.278/2020 provides that the procedures and technologies used in the scanning of documents must ensure the integrity and reliability of the document, the traceability and auditability of the used procedures, the technical scanning standards, confidentiality, when applicable and interoperability between computerized systems.

As far as the specific requirements for scanning documents are concerned, in order for them to be compared to physical documents before a pubic legal person, the scanned documents must (i) be digitally signed with digital certification under the Brazilian Public Key Infrastructure (Infraestrutura de Chaves Públicas Brasileira – ICP-Brasil) standards; (ii) follow the minimum technical standards provided for in Schedule I of said Decree and (iii) contain, at least, the metadata specified in Schedule II of said Decree.

Regarding documents that involve private entities or individuals, any means of proving authorship, integrity and, if necessary, the confidentiality of scanned documents, will be valid, as long as defined by mutual consent or accepted by the person to whom the document is opposed. If there is no agreement between the parties, the same rules and requirements listed above will apply, as if the document were to be presented before a public legal person.

After the scanning process is carried out as provided for in the Decree, the physical document may be discarded, except for those which content has an historical value.

Finally, regarding the storage of such scanned documents, the following must be ensured: (i) the protection of the scanned document against changes, destruction and, when applicable, against unauthorized access and reproduction and (ii) the indexing of metadata which allows (ii.a) the location and management of the scanned document and (ii.b) checking the scanning process adopted. Scanned documents whose content does not have an historical value shall be stored, at least, until the expiry of the statute of limitations or lapse of rights to which they refer.

The Decree No. 10.278/2020 can be accessed in Portuguese through the link below:

http://www.planalto.gov.br/ccivil_03/_Ato2019-2022/2020/Decreto/D10278.htm 

_ Resolution No. 55/2020 simplifies the opening of startups under the Inova Simples regime

On March 24th, 2020, Resolution No. 55 was published in the Union Official Gazette by the National Network Management Committee for Simplification of Registration and Legalization of Companies and Businesses (Comitê para Gestão da Rede Nacional para s Simplificação do Registro e da Legalização de Empresas e Negócios – CGSIM), which provides a simplified special procedure for the Simple Innovation Company – Inova Simples (“Resolution No. 55/2020”), established by Complementary Law No. 167, of April 24th, 2019.

Resolution No. 55/2020 aims at defining the procedure for incorporating, amending and liquidating companies under the Inova Simples regime, which will take place in a simplified and automatic way, in the Web Portal of the National Network for the Simplification of Registration and Legalization of Companies and Businesses (“Portal Redesim”). The Portal Redesim will provide a digital form to be filled out and, after filling it out, the National Registry of Legal Entities (CNPJ) number will be automatically issued (according to article 3, second paragraph of Resolution No. 55/2020).

Under the terms of article 4 of Resolution No. 55/2020, the legal status of Simple Innovation Company is exclusive to the Inova Simples regime. Therefore, the transformation of an entity that already exists for the Simple Innovation Company is forbidden. However, it is allowed to request the transformation of the Simple Innovation Company into other types of companies.

Finally, it is worth mentioning that Resolution No. 55/2020 will only come into force after 240 days as of the date of its publication, i.e. on November 19, 2020.

The Resolution No. 55/2020 can be accessed in Portuguese through the link below:

http://www.mdic.gov.br/images/REPOSITORIO/SEMPE/DREI/RESOLUCOES_CGSIM/Resoluo_55_de_2020.pdf 

April 2020

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

– Publication of Normative Instruction DREI Nr. 76, dated March 9, 2020, regarding procedures to be adopted by Boards of Trade for preventing money laundering and terrorism financing

– Publication of Provisional Measure Nr. 931/20 and Brazilian Securities and Exchange Commission Resolution Nr. 849/20

– MAC clauses (material adverse effect) in M&A agreements and the coronavirus crisis

– Legal possibilities for deferral and retention of dividends

– Breach of contract and force majeure in pandemic times

_ Publication of Normative Instruction DREI Nr. 76, dated March 9, 2020, regarding procedures to be adopted by Boards of Trade for preventing money laundering and terrorism financing

On March 9th, 2020, the Brazilian National Department of Business Registration and Integration (DREI) issued Normative Instruction Nr. 76 (“IN DREI 76”), which provides the policies, procedures and controls to be adopted by Boards of Trade to comply with the provisions of Law Nr. 9,613/98, regarding the prevention of money laundering and terrorism financing activities and Law Nr. 13,810/19, regarding the compliance with United Nations Security Council determinations regarding unavailability of assets.

IN DREI 76, which comes into force on July 1st, 2020, provides that each Board of Trade must establish and implement their own procedures and controls to prevent money laundering and terrorism financing. Article 2 of said normative instruction sets forth the following minimum procedures that must be adopted by each Board of Trade:

“(i) to identify the customers and others involved in the filings presented before the Board of Trade, including the ultimate beneficial owner;

(ii) to identify situations that should be notified to the Financial Activities Control Council (COAF), pursuant to article 11 of Law Nr. 9,613/1998;

(iii) to identify politically exposed persons (PEP), under the terms defined by COAF;

(iv) to identify the existence of determinations issued by the United Nations Security Council regarding the unavailability of assets owned by individuals and/or legal entities which are subject to the sanctions referred to in Law Nr. 13,810, 2019 and

(v) to periodically verify the effectiveness of the procedures and internal controls adopted (by the Boards of Trade).”

Article 3 of IN DREI 76 lists certain situations that should be specially monitored, selected and analyzed by the Boards of Trade and, if considered suspicious, reported by them to COAF. 

Among the situations listed as suspicious, the following stand out (i) incorporation of more than 1 legal entity, in less than 6 months, by the same individual or legal entity or which has the same manager or attorney-in-fact ; (ii) registration of a legal entity, whose quotaholders, shareholders, attorneys-in-fact or managers are domiciled in locations characterized as a tax heaven; (iii) registration of a company in which a minor, a person deemed incapable or a person over 80 years of age is a quotaholder or shareholder; (iv) registration of a legal entity with a capital stock that is flagrantly incongruous or incompatible with its corporate purpose; (v) registration of different legal entities incorporated at the same address, without an economic justification; (vi) frequent changes in the company’s corporate structure or purpose without apparent justification.

The Boards of Trade have not yet commented on the procedures that will be adopted by them to comply with the provisions of IN DREI 76.

IN DREI 76 can be accessed in Portuguese at:

http://www.mdic.gov.br/images/REPOSITORIO/SEMPE/DREI/INs_EM_VIGOR/IN_DREI_76_2020.pdf

_Publication of Provisional Measure Nr. 931/20 and Brazilian Securities and Exchange Commission Resolution Nr. 849/20

Considering COVID-19 pandemic and its impact on economic activity, more specifically in the fulfillment of obligations by limited liability companies and corporations, Brazilian Federal Government enacted Provisional Measure Nr. 931/2020 (“MP 931”) and, following such legal document, the Brazilian Securities and Exchange Commission (“CVM”) published CVM Resolution Nr. 849/2020 (“Resolution 849”), which extends several deadlines for periodic obligations related to publicly-held corporations. We highlight below the main provisions:

  • Ordinary Shareholders’ Meeting: the term to hold these meetings was extended for an additional term of 3 months, i.e. they must be held within 7 months from the end of the fiscal year.
  • Term of Office of Members of Management: extended until the Ordinary Shareholders’ Meeting or until the Board of Directors’ meeting that follows the Ordinary Shareholders’ Meeting, as the case may be.
  • Digital Shareholders’ Meeting: CVM may authorize publicly-held corporations to hold digital meetings. With this regard, CVM has already issued a public consultation regarding a new regulation on this matter (“CVM Public Consultation”). DREI, which regulates limited liability companies and privately-held corporations, has just issued Normative Instruction 79 (“DREI IN 79”), which regulates digital meeting and the digital voting process applicable to these entities.
  • Dividends: The Company’s Board of Directors or, in its absence, the Board of Officers may declare dividends, until the Ordinary’s Shareholders Meeting is held, regardless of the provisions sets forth in the company’s By-Laws.
  • Filing of corporate acts before the Boards of Trade: the deadline for filing corporate acts executed as of February 16th, 2020 shall be counted from the date when the respective Board of Trade reestablishes its services.

Specifically for publicly-held corporations, the deadline for the disclosure of their Financial Statements, the annual update of their Reference Form (Formulário de Referência), the annual update of their Registration Form (Formulário Cadastral) and of their Corporate Governance Report (Informe de Governança Corporativa) was extended for an additional period of 2 months. Moreover, the deadline for the disclosure of their quarterly information form – ITR for the 1st  quarter of 2020 was postponed in 45 days, pursuant to CVM Instruction Nr. 480/09.

MP 931, Deliberation 849, CVM Public Consultation and DREI IN 79 can be accessed through the links below, respectively:

http://www.planalto.gov.br/ccivil_03/_Ato2019-2022/2020/Mpv/mpv931.htm 

http://www.cvm.gov.br/legislacao/deliberacoes/deli0800/deli849.html 

http://www.cvm.gov.br/audiencias_publicas/ap_sdm/2020/sdm0320.html

http://www.in.gov.br/web/dou/-/instrucao-normativa-drei-n-79-de-14-de-abril-de-2020-252498337

_ MAC clauses (material adverse effect) in M&A agreements and the coronavirus crisis

Material adverse effect clauses, known as MAC clauses, are usually used in merger and acquisition agreements as a preventive tool to achieve the results desired by the parties. Such clause must specify any events that may cause a material adverse effect on the activities, financial or operational situation of the target company between the signing of the agreements and the closing of the transaction which, in case they occur, may generate relevant losses to the potential investor, as well as must specify the metrics negotiated by the parties to deal with this risk, which may even include the non-closing of the transaction.

Due to COVID-19, many investors who were in the middle of negotiations, specially between signing and closing of the transaction, have questioned the possibility of MAC clauses provided in the agreement encompass the effects caused by the pandemic, which, depending on the negotiated terms, could allow the investor to withdraw from the transaction.

In cases where the MAC clause is not provided in the sale and purchase agreement, parties can evaluate the applicability of article 478 of the Brazilian Civil Code, which allows the a party to terminate an agreement if the obligations of one of the parties become excessively costly, with extreme advantage to the other, due to extraordinary and unpredictable events.

Moreover, in times of uncertainty, such as the one we are experiencing now, it is important to also review the provisions of the Brazilian Civil Code on general agreement provisions, which sets forth that the following principles shall prevail in the interpretation of contractual provisions: minimum intervention and exceptional agreement amendment, as well as the principle of the parties autonomy to execute agreements. 

_Legal possibilities for deferral and retention of dividends

Due to COVID-19, many companies are uncertain on how to proceed with the distribution and payment of dividends. In a situation of global quarantine and forecasts of recession at worrying levels, controlling shareholders and members of management question how to proceed to avoid the breach of the obligation to distribute dividends and, at the same time, to maintain the company’s financial health. In these cases, there are three legal possibilities to be considered: the retention of mandatory dividends, the postponement of the payment of dividends and the retention of profits.

The possibility of retaining mandatory dividends is provided for in art. 202, §4 of the Brazilian Corporate Law, which constitutes a legal exception for cases in which the management bodies inform the Ordinary Shareholders’ Meeting  that such distribution is incompatible with the corporation’s financial situation. The Audit Committee (Conselho Fiscal), if in operation, must issue an opinion on this information and, for publicly-held corporations, its managers will forward to CVM, within 5 days of the shareholders’ meeting, a justified explanation on the information given to the shareholders. In this case, profits that are not distributed should be recorded as a special profit reserve and, if not absorbed by losses in subsequent years, should be paid as dividends as soon as the company’s financial situation allows.

In view of the difficulty in demonstrating such incompatibility due to an uncertain future economic crisis, there are companies evaluating the possibility of postponing the payment of dividends. Under the Brazilian Corporate Law, the legal term for dividend payment is 60 days from the date in which they are approved, unless otherwise decided by the shareholders’ meeting, provided that, in any case, they are paid within the fiscal year they were approved. Thus, it would be possible to propose to the shareholders the approval of the dividends and the postponement of its payment until the end of 2020 fiscal year, in order to give management time to analyze the concrete effects of COVID-19 on the company.

It is worth mentioning that the decision to postpone payment of dividends is more complex if they have already been approved, since, in theory, such dividends would be an unquestionable and due debt of the company before its shareholders. However, there are precedents by CVM and São Paulo State Supreme Court on the possibility of deferring the payment of dividends already approved due to a supervening fact, i.e., in case the company’s economic situation has changed in a way that paying the dividends already approved would compromise the company’s operations, or even in the event of reversal of future expectations, for the purpose of preserving its social interest (according to CVM Sanctioning Administrative Procedure No. RJ2008/8046, judged on October 30th, 2018 and Civil Appeal No. 1002982-64.2017.8.26.0554).

Finally, there is also the possibility of retaining profits, other than the mandatory dividend, pursuant to art. 196 of Brazilian Corporate Law, which regulates the retention of profits based on a capital budget approved by the shareholders. The budget to be submitted for approval by the shareholder’ meeting shall justify the proposed profit retention and shall indicate all sources of funds and capital investments, whether fixed or current. 

In all cases, it is note-worthy that CVM is aware of the impacts that COVID-19 may have on corporations, having already approved changes in regulatory deadlines and given guidelines on the treatment and disclosure of the effects of the pandemic on financial statements, as mentioned above. In this sense, CVM has recommended in its Circular Letter SNC/SEP 02/2020 that the companies should evaluate, in each case, guidances and estimates related to the risks of COVID-19 in the preparation of their Reference Form (Formulário de Referência) and the need to disclose relevant facts (Fatos Relevantes) to the market, in order to provide information that reflects the economic reality of the company.

More information about Circular Letter SNC/SEP 02/2020 and the aforementioned precedents can be accessed through the links below:

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

http://www.cvm.gov.br/export/sites/cvm/sancionadores/sancionador/anexos/2018/RJ20088046_Construtora_Lix_da_Cunha.pdf 

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_Breach of contract and force majeure in pandemic times

In a scenario of uncertain global economy, with worldwide quarantines, the possibility of contractual breach concerns both creditors and debtors. Much is discussed about the possibility of not complying with contractual requirements under COVID-19 and, moreover, if there is a legal justification for doing so. Thus, many questions about the new coronavirus’ impact on contracts arise, whether it can be considered a reason of force majeure for contractual purposes and, if so, what would be its effects.

First, it is worth remembering that the concept of force majeure is provided for in art. 393 of the Brazilian Civil Code and considered a cause for debtor’s liability exclusion, resulting in an exemption for indemnification obligation on the part of the debtor and the removal of the incidence of fines related to contractual default. There are three fundamental aspects of force majeure characterization: (i) unpredictability, (ii) being out of control of the parties, and (iii) making contractual compliance impossible in the contracted time, place and form.

Once the above requirements are fulfilled, it will be necessary to verify if there is no contractual provision modulating the hypotheses of force majeure and its contractual consequences. In addition, it should be analyzed whether the risk of non-compliance is linked to the nature of the contract itself and if the contract can be fulfilled in another way, outlining or mitigating the risks involved. An example of this situation would be entities that provide educational services that, in view of the prohibition to hold presential classes, opt to hold online classes to continue providing educational services to its students.

The burden is on the debtor to prove that the global effects of COVID-19 have become an insuperable difficulty to comply with the contract, even if in a mitigated way. Therefore, it is advisable that the debtor formally notifies the creditor regarding the occurrence of a force majeure event. Further, the parties shall act in good faith and negotiate alternatives for compliance with the contract or term extensions, including for reimbursement of amounts already paid, since a force majeure event cannot, in any way, authorize unjust enrichment.

At last, in international contracts, it is fundamental to analyze the applicable law and agreed dispute resolution jurisdiction, since the interpretation of force majeure may be different in other jurisdictions. 

March 2020

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

Brazilian Securities and Exchange Commission and the impacts of the Coronavirus on publicly-held corporations

Anticipation of adaptation to the new rules related to the Board of Directors of publicly-held corporations listed at Novo Mercado 

Brazilian Securities and Exchange Commission releases Circular Letter with general guidelines for publicly-held corporations

Brazilian Central Bank simplifies approval of foreign investment in financial institutions based in Brazil

_ Brazilian Securities and Exchange Commission and the impacts of the Coronavirus on publicly-held corporations

The CODIV-19 pandemic arrives at a time when the Brazilian corporations are getting ready for holding their annual shareholders meetings and are finalizing and releasing their financial statements.

Given the relevant impacts of this pandemic in several sectors of the economy and in the capital markets in Brazil and around the world, on March 10th, 2020, the Brazilian Securities and Exchange Commission – CVM issued CVM/SNC/SEP Circular Letter No. 02/2020, which highlights the importance publicly-held corporations and their independent auditors carefully consider the impacts of COVID-19 on the corporations businesses and report the main identified risks and uncertainties in their financial statements, observing the applicable accounting and auditing rules.

CVM points out that special attention should be paid to the economic events as far as business continuity and/or accounting estimates (such as those related to asset recoverability, measurement of fair value, provisions and active and passive contingencies, revenue recognition and provisions for losses) are concerned.

For corporations whose fiscal year ended on December 31st, 2019, CVM advises that such impacts should be recorded as a “subsequent event”, pursuant to CPC (accounting committee) 24.

Further, pursuant to the aforementioned Circular Letter, corporations shall also evaluate the need to disclose relevant facts and to include projections and estimates related to COVID-19 risks in the preparation of their reference form (Formulário de Referência), pursuant to CVM Instruction No. 480/2009.

As far as the holding of the annual shareholders meeting is concerned, the biggest uncertainty is whether CVM or the Brazilian Government will, in any way, adapt the rules for these meetings, given the recommendations of the Brazilian sanitary authorities, as the SEC did in the U.S. However, CVM’s power in this case is limited, since it has no authority to postpone the deadline for the holding of annual meetings, once it is set by law. The annual shareholders meetings shall take place within the four-month period following the end of the fiscal year, which means, for most corporations, that their annual meetings shall take place until the end of April, i.e., in the middle of the expected pandemic pick in Brazil.

In this regard, on March 17th, 2020, CVM revoked CVM Instruction 559/2015, related to Depositary Receipt programs by Brazilian company to trade offshore. With the revocation of said instruction, the obligation of corporations that have issued such depositary receipts to call their shareholders meetings with at least 30-day notice is also revoked.

The Portuguese version of the Circular Letter can be accessed at: http://www.cvm.gov.br/export/sites/cvm/legislacao/oficios-circulares/snc-sep/anexos/ocsncsep0220.pdf 

_ Anticipation of adaptation to the new rules related to the Board of Directors of publicly-held corporations listed at Novo Mercado

Pursuant to Circular Letter No. 618/2017-DRE of B3 S.A. – Brasil, Bolsa, Balcão (“B3”), the corporations listed at Novo Mercado trading segment, which Board of Directors mandate is of 02 years and terminates in 2020,  shall anticipate their adaptation to the new rules related to the composition of the Board of Directors, pursuant to the new Novo Mercado Regiment.

These corporations shall already comply with the following new rules at their annual shareholders meeting to be held in 2020:

  1. the number of independent directors at the Board shall be the higher between 2 and 20% of the Board members; 
  2. amendment to the definition of independent director pursuant to the new rules and delivery of an independence statement by each nominee;
  3. management proposal shall include statement by the board of directors as to the adherence to the company’s nomination policy by all the nominees included in the proposal and as to the independence of the nominees said to be independent.

B3’s Circular Letter and the new Novo Mercado Regiment can be accessed at:

http://www.bmfbovespa.com.br/pt_br/listagem/acoes/segmentos-de-listagem/novo-mercado/

_ Brazilian Securities and Exchange Commission releases Circular Letter with general guidelines for publicly-held corporations

In February, CVM issued CVM/SEP Circular Letter No. 02/2020, which contains general guidelines for publicly-held corporations regarding disclosure of information and the performance of certain transactions.

The annual release of these guidelines by CVM is usual and brings a consolidation of the entity’s general rules and understandings regarding relevant issues or the day-to-day obligations.

We highlight the following updates in this year’s Circular Letter:

  • Sanctioning procedures (CVM Instruction No. 607/2019): possibility of submitting to CVM a proposal for a term of commitment, by the person being investigated or by the defendant.
  • Amendments to the amount of fines (CVM Instruction No. 608/2019): in the event of non-compliance with the deadlines for the delivery of periodic and occasional information;
  • Changes in periodic and occasional documents (CVM Instruction No. 609/2019): the preparation of management proposals for general meetings is now only mandatory for corporations registered in Category A before CVM, authorized to trade shares in the stock exchange, and that have outstanding shares; and

 

  • Recent relevant decisions granted by CVM’s Board, such as the one related to the dismissal of the obligation to issue a press release regarding transactions with related parties, under certain circumstances.

 

CVM CLARIFIED THAT THE CIRCULAR LETTER HAS THE PURPOSE OF STIMULATING THE CORPORATIONS’ INFORMATION DISCLOSURE IN A COHERENT WAY AND ALIGNED WITH THE BEST CORPORATE GOVERNANCE PRACTICES, AIMING AT TRANSPARENCY, AS WELL AS REDUCING THE NEED OF POSSIBLE IRREGULARITIES.

The Portuguese version of the Circular Letter can be accessed at: 

http://www.cvm.gov.br/legislacao/oficios-circulares/sep/oc-sep-0220.html 

_ Brazilian Central Bank simplifies approval of foreign investment in financial institutions based in Brazil

On January 24th, 2020, Circular No. 3,977 was published by the Brazilian Central Bank, which, based on Decree No. 10,029, issued on September 26th, 2019, recognized foreign investment in the capital stock of financial institutions based in Brazil as being of interest to the Brazilian government, no longer requiring a specific authorization for said foreign investment.

The rule regulates Decree No. 10,029, which gave the Central Bank the power to recognize foreign investment in financial institutions as of national interest, in compliance with the provisions of article 192 of the Brazilian Federal Constitution and dismissing the provisions set forth in article 52 of the Transitional Constitutional Provisions Act.

Thus, BACEN authorization processes for foreign or national investments in financial institutions are now the same.

Circular 3,977 can be accessed in Portuguese at:

http://www.in.gov.br/en/web/dou/-/circular-n-3.977-de-22-de-janeiro-de-2020-239630515

February 2020

_ the February │ 2020 edition of our Newsletter has the following highlights:

– Securities and Exchange Commission judges procedures involving violation of fiduciary duty

– Ordinary Shareholders’ Meetings and quotaholders’ annual meetings

– Brazilian Investment Offshore – Deadline for presenting the Annual Declaration of Brazilian Capital Abroad – DCBE 2020 before the Brazilian Central Bank

– Foreign Investment in Brazil – Deadline for presenting the financial and economic statement before the Brazilian Central Bank before the Brazilian Central Bank

_ Securities and Exchange Commissions judges procedures involving violation of fiduciary duty

On January 30th, 2020, the Securities and Exchange Commission (“CVM”) judged the sanctioning administrative procedures No. RJ2014/13977 and No. RJ2016/7961, in which the violation of fiduciary duties by publicly-held company managers was discussed in carrying out certain transactions.

In this case, the company, directly and through a controlled company, executed numerous loan agreements to lend funds to an entity that leased commercial establishments operated by the company in the expansion of its activities. This transaction was justified as the lessor went through an insolvency process, which represented a risk to its assets, including those leased by the company (“Transaction 1”).

Once the insolvency was overcome and due to the lack of interest in the activity explored in the leased establishments, the parties decided to settle the loans by (i) increasing the stock capital of a recently incorporated company (“NewCo”), with the consequent transfer of the leased assets, and (ii) payment in kind with NewCo’s shares, subscribed by the lessor, to the company. Subsequently, the company sold NewCo’s shares to a potential buyer, with payment of the acquisition price in two installments (“Transaction 2”).

Within the scope of Transaction 1, the prosecution assessed that such agreements had not been entered into under fair conditions or in the best interest of the company, since they provided for financial remuneration that was lower than market rates. CVM Reporting Director pointed out that the defendants presented solid arguments that indicated that the loans were on the company’s interest, however, as the company refrained from collecting any financial remuneration, there was no explanation for this behavior, which was why the company’s officer responsible for this transaction should be held responsible for failure to comply with his duty of diligence.

With respect to Transaction 2, on the other hand, the prosecution reported the existence of other agreements which had not been reported to the board of directors, audit council (conselho fiscal) or independent auditors, as well as e-mails, which indicated that the value of the second installment of the acquisition price had been included in the agreement only to equalize the sales price to the acquisition cost of said assets, therefore, the amount negotiated was less than the one set forth in the purchase agreement and reported in the company’ financial statements.

CVM Council,  following CVM Reporting Director Gustavo Gonzales’ vote, declared, with respect to Transaction 1, the extinction of the punishment against the officer responsible for this transaction, due to his death. However, regarding Transaction 2, due to the large number of defendants in this process, CVM Reporting Director chose to separate them into 2 groups, the members of group 1 were the defendants involved in the fraudulent structure of Transaction 2 and the members of group 2 were the defendants involved in the failure to fulfill their duty of diligence. Further, CVM Council decided, by unanimous votel, to apply penalties ranging from the payment of a fine to the temporary disqualification to exercise the position of manager or member of the audit council of publicly-held companies to certain members of group 1.

More information related to these procedures can be accessed in Portuguese at:

http://www.cvm.gov.br/noticias/arquivos/2020/20200130-3.html#PAS_CVM_RJ2014_13977

_ Ordinary Shareholders’ Meetings and quotaholders’ annual meetings

In the upcoming months, corporations and limited liability companies shall disclose their financial statements and call their Ordinary Shareholders’ Meetings or quotaholders’ annual meetings, as appropriate, regarding the financial year ended on December 31st, 2019.

All corporations, publicly-held and closely-held ones, need to hold, within the first 4 months following the end of the fiscal year, an Ordinary Shareholders’ Meeting: (i) to examine the management accounts, analyze, discuss and vote the financial statements; (ii) to deliberate on the destination of the net profit of the relevant financial year and on the distribution of dividends; and (iii) to appoint management and the members of the Audit Council (Conselho Fiscal), as necessary.

Regarding limited-liability companies, within the first 4 months following the end of the fiscal year, they need to hold a meeting in order: (i) to examine the management accounts, analyze, discuss and vote the financial statements; (ii) to appoint management, as necessary. The meeting is not necessary in case all of the shareholders decide, in writing, on the aforementioned matters.

IT IS IMPORTANT TO HIGHLIGHT THAT COMPANIES, OR GROUP OF COMPANIES UNDER COMMON CONTROL, WHICH, IN THE 2019 FISCAL YEAR, RECORDED ASSETS IN AN AMOUNT HIGHER THAN R$240 MILLION OR ANNUAL GROSS REVENUE IN AN AMOUNT HIGHER THAN R$300 MILLION SHALL: (A) PREPARE THEIR FINANCIAL STATEMENTS IN AGREEMENT WITH THE APPLICABLE RUKLES SET FORTH IN THE BRASILIAN CORPORATIONS LAW; (B) SUBMIT THE FINANCIAL STATEMENTS TO THE APPRECIATION OF AN INDEPENDENT AUDITOR REGISTERED AT CVM, AND (C) PUBLISH THE FINANCIAL STATEMENTS PRIOR TO THE DATE OF THE GENERAL ANNUAL MEETING.

_ Brazilian Investment Offshore – Deadline for presenting the Annual Declaration of Brazilian Capital Abroad – DCBE 2020 before the Brazilian Central Bank

Between February 15th, 2020 and April 5th, 2020, all individuals and legal entities resident, domiciled or headquartered in Brazil, which, on December 31st, 2019, held assets abroad in an amount equivalent to or higher than US$100 thousand must submit the annual declaration of Brazilian capital abroad to the Brazilian Central Bank (“Annual Declaration 2020”)

Besides the Annual Declaration, it is mandatory to quarterly submit the Declaration of Brazilian Capital Abroad if the amount of goods and rights held abroad is equivalent to or higher than US$100 million, based on the following schedule:

Base DateDeadline
03.31.202004.30 – 06.05.2020
06.30.202007.31 – 09.05.2020
09.30.202010.31 – 12.05.2020

Late submission of the Annual Declaration 2020 or its submission with false, inaccurate, incomplete or incorrect information may result in fines of up to R$250 thousand

_ Foreign Investment in Brazil – Deadline for presenting the financial and economic statement before the Brazilian Central Bank before the Brazilian CentraBank

It is mandatory that all Brazilian companies that has received foreign investment, regardless of the amount, inform, until March 31st, 2020, the value of their net equity and paid-up stock capital as of December 31st, 2019 (“Financial and Economic Statement”).

Please note that Brazilian companies with assets or net equity equal to or higher than R$250 million must submit 4 Financial and Economic Statements per year, according to the schedule below:

Base DateDeadline
03.31.2020until 06.30.2020
06.30.2020until 09.30.2020
09.30.2020Until 12.31.2020

Late submission of the Financial and Economic Statement or its submission with false, inaccurate, incomplete or incorrect information may result in fines of up to R$250 thousand.

January 2020

_ the January │ 2020 edition of our Newsletter has the following highlights:

Provisional Measure No. 892 regarding publications ordered by the Brazilian Corporate Law loses its effectiveness

Brazilian Securities and Exchange Commission amends Instruction No. 361 regarding tender offers

_ Provisional Measure No. 892 regarding publications ordered by the Brazilian Corporate Law loses its effectiveness

The Provisional Measure 892, of September 27th, 2019 (“MP 892”), which granted a new wording to article 289 of Law No. 6.404/1976 (“Brazilian Corporate Law”) by extinguishing the mandatory publications set forth therein in the official press and in mass circulation newspapers, was not converted into a Law by Brazilian Congress within the term established by the Federal Constitution (i.e. 60 days extendable for an additional 60 days) and, therefore, became void.

Pursuant to the Federal Constitution, the publications made during the term of MP 892, and as provided for therein, are still subject to a legislative decree which shall be issued by the National Congress within 60 days from the loss of effectiveness of MP 892, i.e. December 3rd, 2019. If the legislative decree is not issued in such period, the publications made during its term shall remain valid and effective.

In this regards, the Brazilian Securities and Exchange Commission (“CVM”) revoked CVM Resolution No. 829/2019, which regulated the publications set forth in the Brazilian Corporate Law for publicly-held companies after the new wording provided for in MP 892.

Finally, the wording of article 289 of the Brazilian Corporate Law prior to MP 892 shall be maintained and Brazilian corporations shall once again print the publications set forth in the Brazilian Corporate Law in the official press and in mass circulation newspapers.

The declaration of loss of effectiveness of MP 892 can be accessed in Portuguese at:

http://www.planalto.gov.br/ccivil_03/_ato2019-2022/2019/Congresso/adc-68-mpv892.htm

_ Brazilian Securities and Exchange Commission amends the Instruction No. 361 regarding tender offers

On December 3rd, 2019, the chairman of CVM issued the Normative Ruling No. 616 (“ICVM 616”) in order to amend and add new provisions to CVM’s Normative Ruling No. 361, issued on March 5th, 2002, which regulates on the proceedings regarding tender offers of publicly held companies (“OPA”).

Among the modifications introduced by ICVM 616, are worth stressing:

  1. the optional publishing of the OPA announcement, except for takeover bids, in which case such publishing remains mandatory;
  2. in case of combined OPAs, the price submitted must meet the requirements of all OPAs intended to be combined, in such case the offeror may include more than one payment option;
  3. exclusion of the prohibition to acquire between 1/3 and 2/3 of outstanding shares in case of OPAs arising from the increase of equity participation or from the exit of special listing segment;
  4. prohibition of buyer interferences during takeover bids, in this case, it is necessary to launch competing offers trhough public announcements.

ICVM 616 came into force and effect on the same date it was published in the Brazilian official press, i.e., on December 4th, 2019.

More information on ICVM 616 can be accessed in Portuguese at:

http://www.cvm.gov.br/noticias/arquivos/2019/20191203-1.html?utm_campaign=semana_-_091219&utm_medium=email&utm_source=RD+Station