Ano: 2022

December 2022

_the december│2022 edition of our Newsletter has the following highlight:

– CVM changes its position regarding votes in conflict-of-interests

– Crypto currencies law is sanctioned

– DREI discloses letter regarding publishing of financial statements of large sized companies

– Revocation of the need for electronic publications to be made available on the website of closely held companies

 

_CVM changes its position regarding votes in conflict-of-interests

 

The Brazilian Securities and Exchange Commission (“CVM”) changed its position on shareholder voting in conflict-of-interest situations after two recent decisions: CVM PAS No. 1957.004392/2020-67, which analyzed the regularity of the procedure for sales of companies controlled by a listed company to its controlling shareholders, and CVM PAS No. 19957.003175/2020-50, which analyzed the legality of votes cast by the controlling shareholders of a listed company in a resolution concerning the company’s capital increase.

 

Pursuant to Article 115 of Law 6,404/1976, as amended (“Brazilian Corporate Law”), a vote cast by a shareholder with the aim of causing damage to the company or other shareholders, or to obtain, for himself or for others, an advantage to which he/she is not entitled and which results, or may result, in damage to the company or to other shareholders is considered abusive. Paragraph 1 of this article establishes situations in which the shareholder must refrain from exercising his right to vote: approval of the appraisal report of assets with which to contribute to the formation of the share capital; approving your own accounts as an administrator; deliberations that may benefit him in a particular way, or in which he has conflicting interests with the company’s.

 

Regarding managers, article 156 of the Brazilian Corporate Law forbids the intervention of the manager in a transaction in which he/she has a conflicting interest with the company, as well as in the decision taken by the other managers.

 

In the recent decision aforementioned, by majority of CVM’s board, the theory of the “material” conflict of interests prevailed, by which it is necessary to analyze the merits of the resolution taken by a shareholder or manager who has conflicting interests with the company to determine whether the vote in question should be annulled, there is no need to be prevented from voting before such verification. Previously, the theory of the “formal” conflict of interests was dominantly adopted by CVM, which prohibits the vote of a shareholder or manager in such situations.

 

The current position adopted by CVM is based on a systematic interpretation of the Brazilian Corporate Law and in the principle of good faith of the shareholder and/or manager. As the validity control of these votes is therefore a posteriori, the new understanding requires the shareholder to justify his vote and demonstrate that the decision was considerate and taken in accordance with the company’s best interests, under the risk of being declared null and void.

 

Director Flávia Perlingeiro presented dissenting votes in both proceedings regarding the applicability of the theory of the “material” conflict of interest but highlighted that both theories (material and formal) present insufficiencies and inadequacies for a clear legal treatment of the matter in Brazil.

 

CVM’s president informed, following the decisions mentioned above, that CVM will work on a guidance opinion on the matter. The objective is not to determine which theory is applicable for the interpretation of conflict of interests, but to clarify whether the shareholder with a potential conflict of interest will be able to vote, if duly prepared and with proper justifications.

 

We contributed on this subject in an article published in the Legislação & Mercado section of Capital Aberto on December 01, 2022, which can be accessed in Portuguese through the link bellow:

https://legislacaoemercados.capitalaberto.com.br/mudanca-da-cvm-demanda-cuidados-das-companhias/

 

_Crypto currencies law is sanctioned

 

Bill of Law Bill 4401/2021, also known as the legal landmark of crypto currencies, was sanctioned on December 22, 2022 and became Law No. 14.478, which will enter into force in 180 days.

 

The law considers as a virtual asset a digital representation of values that can be traded or transferred by electronic means and used to make payments or for investment purposes. Traditional currencies, foreign currencies, points, and rewards from rewards programs are excluded from the definition, as well as securities and financial assets that already have specific regulation.

 

In addition to guidelines to rendering services with crypto assets, the following matters of the law stand out:

  • provision for appointment, by the Executive Branch, of a body or entity of the federal public administration that will be responsible for the supervision and establishment of parameters for the performance of crypto asset service providers.
  • inclusion of a new criminal type of fraud in the Penal Code (Fraud with the use of virtual assets, securities, or financial assets).
  • equivalence of the legal entity that offers services related to operations with virtual assets, including intermediation, negotiation or custody to financial institutions, for the purposes of the White-Collar Law (Law No. 7,492/1986)
  • inclusion of an aggravating factor for repeated crimes committed through virtual assets in the Money Laundering Law (Law No. 9.613/1998).

 

Despite representing a milestone for the legislation on the provision of virtual assets and for the regulation of crypto asset service providers in Brazil, specific rules on the matter still depend on the regulation to be issued by the future body or entity appointed for this purpose.

 

Law No. 14.478 can be accessed in Portuguese through the link below:

https://www.in.gov.br/en/web/dou/-/lei-n-14.478-de-21-de-dezembro-de-2022-452739729

 

_DREI discloses letter regarding publishing of financial statements of large sized companies

 

On November 25, 2022, the Brazilian National Department of Business Registration and Integration (“DREI“) published the Letter SEI No. 4742/2022 (“DREI Letter“) regarding the disclosure of legal publications required for large sized limited liability companies or group of companies under common control, understood as those having total assets exceeding 240 million Brazilian Reais in the previous fiscal year or annual gross revenues exceeding 300 million Brazilian Reais .

 

Law No. 11.638, of December 15, 2007, determines that the provisions of the Brazilian Corporate Law apply to large sized companies regarding bookkeeping and preparation of financial statements and the obligation of an independent audit by an auditor registered with CVM. For this reason, some Boards of Trade considered that these companies would also be obliged to publish their financial statements under the terms set forth in the Brazilian Corporate Law, which was subject of great debate, including in the judicial sphere.

 

The DREI Official Letter confirms and reiterates that the publication of financial statements by large sized companies is optional and mentions that Boards of Trade shall accept such understanding, so that the filing of corporate acts of such companies are not rejected, under the allegation of non-compliance with the aforementioned publications.

 

DREI Letter SEI No. 4742/2022 can be accessed in Portuguese through the link below:

https://www.gov.br/economia/pt-br/assuntos/drei/legislacao/arquivos/oficios-circulares-drei/2022/SEI_29794658_Oficio_Circular_4742.pdf

 

_Revocation of the need for electronic publications to be made available on the website of closely held companies

 

On December 1st, 2022, ordinance No. 10,031 of the Ministry of Economy (“Ordinance”), came into force, revoking Paragraph 2 of article 1 of Ordinance No. 12,071/2021, also from the Ministry of Economy, which provided for the obligation of closely held companies with annual gross revenues of up to 78 million Brazilian Reais to disclose publications and other documents on their own website, pursuant to article 294 of the Brazilian Corporate Law.

 

With the revocation, only the requirement for electronic publications and disclosure of the acts of closely-held companies, as provided for in the Brazilian Corporation Law, with annual gross revenues of up to 78 million Brazilian Reais through the “Central de Balanços do Sistema Público de Escrituração Digital – SPED” is maintained.

 

The Ordinance can be accessed in Portuguese through the link below:

http://normas.receita.fazenda.gov.br/sijut2consulta/link.action?idAto=127389

November 2022

_the november│2022 edition of our Newsletter has the following highlight:

– CVM publishes guidance opinion consolidating its understandings about crypto assets and explaining the scope of its regulation

– New Reference Form demands companies’ attention on ESG, climate and diversity aspects

– CVM softens rules for small sized companies

 

_CVM publishes guidance opinion consolidating its understandings about crypto assets and explaining the scope of its regulation

 

The Brazilian Securities and Exchange Commission (“CVM”) published on October 11, 2022, Guidance Opinion No. 40 (“Opinion 40”), which unifies and synthetizes its understandings about the classification of crypto assets as securities. Opinion 40 aims to clarify CVM’s jurisdiction and to establish its powers to regulate, supervise and discipline activities of capital market members.

 

Definition of crypto assets and tokens

 

CVM defines crypto assets as digitally represented assets, protected by cryptography, which can be subject to transactions executed and stored by Distributed Ledger Technologies – DLTs. Usually, crypto assets (or their ownership) are represented by tokens, which are intangible digital securities.

 

Opinion 40 presents three token classifications: 1) payment token, which aims to replicate currency functions; 2) utility token, used to purchase or access products and services; and 3) asset-backed token, which represents one or more assets, tangible or intangible, and can fall into one or more categories.

 

On the classification of crypto assets as securities

 

Pursuant Opinion 40, crypto assets are considered as securities when it is possible to identify a digital representation of any securities exhaustively provided for in items I to VIII of article No. 2 of Law 6.385/76 and/or provided for as receivable certificates in general, according to Law 14.430/22; or when they fit into the open concept of securities provided for in item IX of article 2 of Law 6.385/76, as long as it is a collective investment contract.

 

CVM’s scope of regulation

 

In Opinion 40, CVM emphasizes that tokenization on itself is not subject to any prior approval or registration towards it, but if securities are issued for the purpose of public distribution, both the public offering itself and issuers of crypto asset tokens, market agents and market intermediaries that act, directly or indirectly, in their offering will be subject to applicable regulations.

 

Crypto economy market scholars and entrepreneurs have pointed out their concern about Opinion 40 effective legal certainty, especially regarding criteria used to disqualify a token as a security and about the omission of some issues, such as rules for investment funds. Despite this, Opinion 40 formalized previous CVM understandings, indicated future paths to be observed by legislators, and shows CVM’s openness to discussions and consultations on the subject.

 

We contributed on this subject in an article published in the Legislação & Mercado section of Capital Aberto on November 02, 2022, which can be accessed in Portuguese through the link bellow:

https://legislacaoemercados.capitalaberto.com.br/cvm-esclarece-atuacao-com-criptoativos/

 

_New Reference Form demands companies’ attention on ESG, climate and diversity aspects

 

On December 22, 2021, CVM published Resolution 59 (“RCVM 59“) to reframe the structure of the reference form (Formulário de Referência). The new reference form presented a substantial structure improvement, which is simpler and reduced the amount of information that must be disclosed by listed companies.

 

On the other hand, the new reference form requires the disclosure of information related to environmental, social and governance (ESG) aspects, social diversity in the company’s management team and comparative employee payment. It is worth mentioning that RCVM 59 adopted the “comply or explain” approach, already used in the Corporate Governance Report, for the disclosure of some information regarding ESG aspects.

 

The new reference form modifications follow global standards of information disclosure adopted by listed companies, reflect new interests of investors, and encourage initiatives implementation, in addition to reducing operational costs related to complying with regulatory obligations. The new simplified version of the reference form comes into force on January 2, 2023.

 

We contributed on this subject in an article published in the Legislação & Mercado section of Capital Aberto on November 09, 2022, which can be accessed in Portuguese through the link bellow:

https://legislacaoemercados.capitalaberto.com.br/novo-formulario-de-referencia-demanda-atencao/

 

_CVM softens rules for small sized companies

 

CVM Resolutions 166 and 168 brought more flexibility to publications required by law and to the composition of top management in small sized companies, whose definition is established in article 294-B of Law 6.404/76 (“Brazilian Corporate Law“) and applies to companies with gross revenues of less than 500 million Brazilian Reais in the last fiscal year.

 

Published on September 1st of this year, Resolution 166 allows small sized companies to make legal publications through the Empresas.NET or Fundos.NET systems, in order to reduce costs.

 

Resolution 168, published on September 20, was created to regulate changes made by Law No. 14.195/2021 to the Brazilian Corporate Law, which aimed, among other goals, to make it easier to open a company and to reduce corporate bureaucracy. The resolution allows the same professional to accumulate the position of chairman of the board of directors and the position of chief executive officer (or main executive) of a company.

 

With the flexibility introduced by both resolutions, more companies are expected to list themselves.

 

We contributed on this subject in an article published in the Legislação & Mercado section of Capital Aberto on November 15, 2022, which can be accessed in Portuguese through the link bellow:

https://legislacaoemercados.capitalaberto.com.br/companhias-de-menor-porte-contam-com-flexibilizacoes/

October 2022

_the october│2022 edition of our Newsletter has the following highlight:

– CVM publishes guidelines regarding crypto assets considered securities

– Research shows that values of settlement agreements closed with CVM have increased

– B3 launches tool to monitor illegal practices of employees or related people who have access to inside information

 

_CVM publishes guidelines regarding crypto assets considered securities

 

On October 11, 2022, the Brazilian Securities and Exchange Commission (“CVM“) published Guidance Opinion No. 40 (“Opinion 40“) consolidating its understandings on crypto assets classified as securities. Although technologies involved in crypto assets aren’t subject to CVM regulation and supervision, their issuance and trading as securities, including intermediation services, bookkeeping, custody, centralized deposit, registration, clearing and settlement of transactions, shall comply with its applicable rules.

 

The Opinion 40 defines crypto assets as digitally represented assets protected by cryptography, which are generally represented by intangible digital securities (tokens). A token will be classified as a security when:

 

  • it is a digital representation of any security provided for in items I to VIII of article No. 2 of Law No. 6.385/1976 (“Capital Markets Law“), or of a receivable certificate, according to Law No. 14.430/2022 (“Securitization Framework“); and/or
  • it is a security or collective investment agreement, with public offering, that generates participation, partnership, or remuneration rights, including those resulting from rendering services, whose income comes from efforts of entrepreneurs or third parties, as provided for in item IX of art. 2 of the Capital Markets Law.

 

To classify tokens and consequently reveal their legal status, CVM adopted a functional criteria, according to which there are three categories:

 

  • Cryptocurrency or Payment token: seeks to replicate functions of currency, notably as a unit of account, means of exchange and store of value;

 

  • Utility token: used to acquire or access certain products or services;

 

  • Asset-backed token: represents one or more assets, tangible or not.

 

Market players should carefully examine the classification of these types of assets, since the divisions are neither exclusive nor restraining, which means a crypto asset may simultaneously belong to more than one of these categories.

 

CVM points out that there is still no specific legislation in Brazil on this matter, and, for this reason, Opinion 40 criteria are subject to future amendments, such as those proposed by Bill No. 4.401/2021, whose content involves transactions regarding crypto assets and is currently being analyzed by Brazil’s House of Representatives (Câmara dos Deputados).

 

Opinion 40’s goal is to enhance transparency regarding crypto assets classified as securities and its disclosure regime. In addition, according to CVM’s president, João Pedro Nascimento, Opinion 40 is a recommendation and a guide to the market, whose aim is to ensure greater certainty and security for all, as well as to contribute towards protecting investors and savings of the general public, and to promote a favorable environment for developing crypto economy, with integrity and adherence to relevant constitutional and legal principles.

 

Opinion No. 40 can be accessed in Portuguese through the link bellow:

https://conteudo.cvm.gov.br/export/sites/cvm/legislacao/pareceres-orientacao/anexos/Pare040.pdf

 

 

_Research shows that values of settlement agreements closed with CVM have increased

 

According to an article published by the Brazilian newspaper Valor Econômico on October 17, 2022, settlement agreements closed into in administrative sanctioning proceedings by CVM are more expensive since the edition of Law No. 13.506/2017, which provides for the administrative sanctioning proceedings (“PAS“) within the scope of CVM, and amended the Capital Markets Law and CVM Resolution No. 45, 2021 (“RCVM 45“).

 

The new legislation increased CVM’s economic punitive power, whose absolute maximum sum of fines grew from R$ 500 thousand to R$ 50 million. As an example of the new sums imposed by CVM, the newspaper points out settlement agreements originated from violations related to disclosure of information. Previously, these agreements costed proponents R$200 thousand; if adjusted by IPCA (consumer prices index), the sum would be around R$240 thousand. Currently, however, the cost has been, on average, R$350 thousand.

 

The article also found that the execution of terms of commitment is now also more frequent, a practice that is in line with CVM’s aim for RCVM 45, which encourages and privileges alternative instruments for resolving irregularities.

 

The article published by Valor Econômico can be accessed in Portuguese through the link below:

https://valor.globo.com/financas/noticia/2022/10/17/acordo-com-cvm-fica-mais-caro-diz-levantamento.ghtml

 

 

_B3 launches tool to monitor illegal practices of employees or related people who have access to inside information

 

B3 has added to its services portfolio a tool that allows to investigate and monitor investments of employees and related people who have access to inside information, with is the purpose to help listed companies to restrain the practice of criminal use of nonpublic information in the financial market, such as front running and insider trading.

 

Called “Monitora PIP”, the software provides a broad view of the employee’s investments in B3’ environment, as it checks, on a daily basis, besides the initial and final position of listed company investors, data on day trades and operations with options and derivatives.

 

The tool is targeted to listed companies, as well as law firms, banks, and consulting firms.

 

To obtain these data, Monitora PIP uses the employee’s CPF (Brazilian Individual Taxpayer Identification Number), who should be advised on the company’s monitoring system. To avoid undue monitoring of individuals who are not on the list of employees or who are not related people, B3 clarifies that there are regular audits to curb the practice and that the software identifies when a CPF is monitored by more than one company at the same time.

 

September 2022

_the september│2022 edition of our Newsletter has the following highlight:

– CVM eases rules for legal publications of small sized listed companies

– CVM regulates on rules of the Brazilian Corporate Law on plural voting and on the composition of the Board of Directors of listed companies

– The online version of the 2023 reference form (Formulário de Referência) is now available

 

_CVM eases rules for legal publications for small sized listed companies

 

On September 1, 2022, the Brazilian Securities and Exchange Commission (“CVM“) edited CVM Resolution No. 166 (“RCVM 166“) in order to make easier to disclosure publications required by Law No. 6404, of December 15, 1976, as amended (“Brazilian Corporate Law“) for small sized listed companies, considered as those whose annual gross revenues are lower than five hundred million reais (R$500,000,000.00).

 

RCVM 166 allows small sized companies to disclosure the publications required by the Brazilian Corporate Law and by CVM itself through Empresas.Net or Fundos.Net systems, with no additional charges. The publications will be considered to have been disclosed on the dates they were released on the aforementioned systems.

 

Regarding the publications carried out by third parties, as it is the case of a bid offer, provided for in article No. 258 of the Brazilian Corporate Act, the third party may send the applicable documents to the company, which will be responsible for the immediate publication in the Empresas.Net or Fundos.Net systems. If the company does not disclose the documents sent, the third party shall arrange its disclosure in a wide circulation newspaper published at the same place of the company’s headquarters.

 

According to João Pedro Barroso do Nascimento, current President of CVM, RCVM No. 166, which will come into effect on October 3, 2022, brings important modernization, which will make companies and the business environment more flexible and unburdened. It is a flexibilization that generates cost reduction.

 

RCVM 166 can be accessed in Portuguese through the link below:

https://conteudo.cvm.gov.br/export/sites/cvm/legislacao/resolucoes/anexos/100/resol166.pdf

 

 

_CVM regulates on rules of the Brazilian Corporate Law on plural voting and on the composition of the Board of Directors of listed companies

 

On September 20, 2022, CVM edited CVM Resolution No. 168 (“RCVM 168”), which seeks to regulate legal provisions introduced by Law No. 14.195/2021 in the Brazilian Corporate Law, regarding the composition of the board of directors of listed companies and plural voting on shareholders’ meetings.

 

Among the changes is the possibility of accumulating the positions of chief executive officer and of chairman of the board of directors in small sized companies whose annual gross revenues are less than five hundred million reais (R$500,000,000.00).

 

The RCVM 168 also determined that, pursuant to article 140, 2nd paragraph of the Brazilian Corporate Law, it is mandatory for independent directors to participate in listed companies’ board of directors who cumulatively meet the following requirements::

 

  • are registered in category A;
  • have securities admitted for trade on the stock exchange market by an entity that manages an organized market; and
  • have shares or Depositary Receipts outstanding.

 

Regarding the classification of members of the board of directors as independent, RCVM 168 adopted equivalent criteria as those covered in the Novo Mercado Regulation.

 

In addition, RCVM 168 also established that plural voting does not apply to shareholders’ meetings that resolve on related party transactions that must be disclosed pursuant to Appendix F of CVM Resolution No. 80, which addresses the related party transaction communication.

 

The changes will come into effect on October 3, 2022,  provided that the changes regarding the management of companies only apply to managers’ terms starting from January 1, 2023 on.

 

RCVM 168 can be accessed in Portuguese through the link below:

https://conteudo.cvm.gov.br/export/sites/cvm/legislacao/resolucoes/anexos/100/resol168.pdf

 

 

_The online version of the 2023’ reference form (Formulário de Referência) is now available

 

On August 28, 2022, CVM/SEP Letter No. 04/2022 was published by the CVM to inform listed and foreign companies about the continuity of the migration process of structured forms to online platform Empresas.Net system.

 

The measure promises to bring more agility in navigating the Empresas.Net system by eliminating the need to download and run the application on a computer.

 

In this regard, the test period of the new platform for sending the reference form (Formulário de Referência), FRe Online, began on September 1, 2022, and is now available on Empresas.Net system.

 

During the test period, companies may send CVM suggestions for improvements to enhance its navigation. This is extremely important since the use of the new platform will be mandatory from January 1, 2023.

 

FRe Online already reflects the new structure of the reference form established by CVM Resolution No. 59, which will come into force on January 02, 2023. If, on one hand, the resolution, among another measures, simplified the structure of the reference form by excluding some items, on the other hand it included the requirement for disclosure of new information, such as, for example, information related to ESG topics and practices.

 

The full CVM Letter No. 04/2022 and the Empresas.Net System can be accessed in Portuguese through the following links:

 

CVM Letter:

https://conteudo.cvm.gov.br/legislacao/oficios-circulares/sep/oc-sep-0422.html

 

Empresas.Net System website

https://www.rad.cvm.gov.br/ENET

August 2022

_the august│2022 edition of our Newsletter has the following highlight:

– Bill of Law proposes to revise the quorums for corporate resolutions set forth in the Brazilian Civil Code

– Courts establish jurisprudence on procedural succession of shareholders

– Brazilian Securities and Exchange Commission acquits listed company in case of abuse of controlling power

– B3 submits to public hearing proposal to include ESG goals and increase diversity in the management of Brazilian issuers

 

_Bill of Law proposes to revise the quorums for corporate resolutions set forth in the Brazilian Civil Code

 

Bill of Law No. 1212/2022 (“Bill“), which changes the quorums for corporate resolutions in limited liability companies, was approved by the Constitution, Justice and Citizenship Committee and will be sent to the Senate for voting.

 

Currently, the Brazilian Civil Code determines the minimum quorum of three quarters of the capital stock for the approval of the following resolutions: 1) amendment to the articles of association; 2) incorporation, merger, or dissolution of the company; and 3) termination of liquidation. The Bill proposes that the quorum for these decisions changes to a simple majority one.

 

According to the Bill, the quorum for appointments and dismissals of directors would also be of simple majority. Today, the quorum required for these choices is of absolute majority. For the appointment of a non-partner director, the Civil Code determines quorums that vary according to the paid-up capital stock: if it has not yet been paid-up, the partners’ unanimity is required to appoint a non-partner director; if it has already been fully paid-up, the quorum is reduced to 2/3 of the partners. The Bill suggests that the mentioned quorums should be replaced, respectively, by two-thirds of the partners and by simple majority.

 

The text of the Bill can be accessed in Portuguese through the link below:

https://legis.senado.leg.br/sdleg-getter/documento?dm=9156767&ts=1659641373140&disposition=inline

 

 

_Courts establish jurisprudence on procedural succession of shareholders

 

Creditors of dissolved companies now have a new judicial way to recover amounts due. Recently, the São Paulo Court of Justice and the Superior Court of Justice in Brazil decided that partners of extinguished companies may be held liable for debts owed to creditors if assets were returned to them upon the company’s dissolution, according to lawsuits No. 2008757-80.2022.8.26.0000, 2150408-37.2021.8.26.0000, 2145773-13.2021.8.26.0000, REsp 1652592 and REsp 1784032.

 

Called “procedural succession of the partner”, this thesis arose by analogy to the succession of assets, provided for in article 110 of the Brazilian Code of Civil Procedure, combined with the rules of execution proceedings (article 779, II), and establishes that, just as the heirs are liable for the debts of the deceased up to the limit of the assets inherited, the partners of extinguished companies are liable for the company’s debts up to the limit of the assets returned at the time of dissolution.

 

Creditors shall only have to prove the extinction of the company and capital stock composition. It should be noted, however, that if the debt exceeds the amounts received within the scope of the dissolution of the company, it is still necessary to prove misuse of purpose or confusion of assets in the procedure for piercing of the corporate veil in order to reach the personal assets of the partners and obtain the amounts due.

 

The lawsuits mentioned above can be accessed in Portuguese through the links below:

Processo n. 2008757-80.2022.8.26.0000

Processo n. 2150408-37.2021.8.26.0000

Processo n. 2145773-13.2021.8.26.0000

REsp 1652592

REsp 1784032

 

 

_Brazilian Securities and Exchange Commission acquits listed company in case of abuse of controlling power

 

On July 12, 2022, the Brazilian Securities and Exchange Commission (“CVM“) judged the Sanctioning Proceeding SEI 19957.011341/2018-77, started to determine the liability of a controlling shareholder for alleged abusive exercise of power, provided for in article 117 of Law 6.404/76 (Brazilian Corporate Law).

 

According to the prosecution, in order to approve the execution of a contract supposedly contrary to the interests of controlled company A (a listed company) in a meeting of the Board of Directors, the controlling shareholder used a control structure of contractual nature, i.e., a shareholders’ agreement of subsidiary A and a quotaholders’ agreement of an investment fund also controlled by the controlling shareholder, which was also a shareholder of subsidiary A, to bind the votes of the members of the Board of Directors elected by minority shareholders.

 

The prosecution alleged that the controlling shareholder interference in the Board of Directors of controlled company A by binding the votes of members of the Board of Directors appointed by minority shareholders to its orientation would characterize an abuse of the controlling power since it would prevent these directors from engaging in the company’s management, subordinating the company’s interests to the wishes of the controlling shareholder. It also raised the point that even if the controlling shareholder could determine how the members of the Board of Directors appointed by other shareholders should vote, the exercise of this power would be prohibited when dealing with a matter that (i) is contrary to the interests of the company or (ii) is of exclusive competence of the Board of Directors, by legal provision.

 

The central issue in this case, therefore, was the assessment of the limits of binding the members of the board of directors appointed under a shareholders’ agreement, as authorized by article 118 of the Brazilian Corporate Law.

 

The defense claimed, mainly, that according to paragraphs 8 and 9 of art. 118 of the Brazilian Corporate Law, the shareholders’ agreement’s rules bind all the company’s resolutions, including board meetings, and that, regardless of this, CVM has no jurisdiction to discipline shareholders’ agreements.

 

For the reporting director, Marcelo Barbosa, the defense is right to point out that the managers are also bound by the shareholders’ agreement guidelines, since the Brazilian Corporate Law itself admits the alignment between the orientation of the controlling block and the administration’s performance for the exercise of the power-duty of control, also mentioning that a different interpretation would be to deny the effectiveness of the shareholders’ agreement in the most relevant deliberations for the ordinary course of a company’s business and make this instrument unviable as a mechanism for regulating the conduct of shareholders and managers, eliminating the predictability of the outcome of disagreements precisely in situations in which the parties sought to foresee the disagreement and agree on a solution. He then dismissed the hypothesis that CVM intended to evaluate the validity and effectiveness of the clauses of the shareholders’ agreement, and emphasized that, in this case, it would limit itself to determine the existence of abuse of controlling power by the shareholder when using the shareholders’ agreement.

 

Nevertheless, regarding the binding nature regarding the members of the Board of Directors, he pointed out that managers are not prevented from acting autonomously and exercising their usual functions. In this case, the members of the board of directors stated their position and were not prevented from engaging in the administration. Thus, there is no characterization of abuse of controlling power.

 

The reporting director also expressed himself contrary to the prosecution’s subsidiary thesis, stating that there is no legal limitation for binding the vote of managers on matters that are of exclusive responsibility of the board of directors, closing that such an understanding would result in the ineptitude of shareholders’ agreements that have the purpose of establishing rules for the exercise of controlling power.

 

Therefore, the reporting director voted to acquit the controlling shareholder due to the lack of illegal exercise of its controlling power, and his vote was unanimously followed by CVM’s board.

 

The report of the Sanctioning Proceeding is available in Portuguese through the following link:

https://www.gov.br/cvm/pt-br/assuntos/noticias/anexos/2022/20220712_PAS_CVM_19957_011341_2018_77_voto_presidente_marcelo_barbosa.pdf

 

The reporting director’s vote is available in Portuguese through the following link:

https://www.gov.br/cvm/pt-br/assuntos/noticias/anexos/2022/20220712_PAS_CVM_19957_011341_2018_77_voto_presidente_marcelo_barbosa.pdf

 

 

_B3 submits to public hearing proposal to include ESG goals and increase diversity in the administration of Brazilian issuers

 

On August 17, 2022, B3 submitted to public hearing a proposal to include Environmental, Social and Corporate Governance (ESG) measures to be adopted by listed companies in a “apply-or-explain” model in which issuers that do not adopt B3’s recommendations must explain to the market and investors the reasons that prevented their development.

 

In summary, B3’s proposals are the following:

 

  • election of at least 1 (one) woman and 1 (one) member a minority community as effective members of the companies’ board of directors or as officers;

 

  • inclusion, in its bylaws or in its appointment policy, of procedures for the nomination of members of the board of directors or board of officers, contemplating, at least, criteria of complementarity of experiences and diversity regarding gender, sexual orientation, color or race, age group and inclusion of people with disabilities

 

  • definition of performance indicators linked to ESG themes or goals in the variable compensation policies of the members of the board of directors or board of officers; and

 

  • preparation and disclosure of a document approved by the board of directors on ESG guidelines and practices, contemplating, at least, issues related to socio-environmental responsibility, fighting discrimination, respect for human rights and labor relations, defense against suffering and mistreatment of animals, environmental protection, treatment of solid waste and hazardous chemicals, and corporate governance and compliance mechanisms that indicate how such ESG guidelines and practices are being implemented by the company.

 

Upon the eventual implementation of the proposals submitted by B3, companies will be required to include discussions related to ESG issues in their daily operations and consequently experience diversity in the composition of their management structures.

 

B3 will receive comments on the proposals contained in the public notice until September 16, 2022, by e-mail to sre@b3.com.br.

 

The public notice can be found in Portuguese at the link below:

https://www.b3.com.br/data/files/77/67/BC/DB/8ABA2810F9BC5928AC094EA8/20220817_B3%20ASG_Edital%20de%20Audiencia%20Publica.pdf

 

July 2022

_the july│2022 edition of our Newsletter has the following highlight:

– Execution of a non-definitive agreement: when is it necessary to disclose a material fact?

– Understanding Shareholder’s Agreements: liquidity and exit mechanism

– Deadline to submit the Annual Census of Foreign Capital statement to the Brazilian Central Bank

– Publication of Letter No. 37 by DREI changes procedural rules for enrollment of members of the board of directors’ and officers’ residing abroad

 

_Execution of a non-definitive agreement: when is it necessary to disclose a material fact?

 

Much has been said about the duty of listed companies to disclose material facts. It is one of the main obligations of controlling shareholders and managers, especially of the investor relations officer, and is a constant inspection target by the Brazilian Securities and Exchange Commission (CVM).

 

In general terms, CVM regulation considers as material fact any act or fact of political-administrative, technical, transactional, or economic-financial character occurred or related to the company’s business that may impact the quotation of the securities issued by the company or related to them, the investors’ decision to negotiate the securities, and the investors’ decision to exercise rights inherent to the condition of holder of securities issued by the company or related to them.

 

The Brazilian Corporation Law and CVM regulations determine that material information must be immediately disclosed to the market and to the shareholders to prevent insider trading and to make the pricing of traded securities more efficient since shareholders and the market will have access to such information simultaneously.

 

However, listed companies are frequently in doubt as to whether it is necessary to disclose a material fact due to the execution of a non-definitive material contract, such as a non-binding memorandum of understanding, or a relevant contract that has a real and concrete possibility of being ended.

 

On this subject, CVM’s board understands that an information doesn’t need to be definitive for it to be considered relevant. It is possible that non-definitive facts that carry a certain degree of uncertainty are material – that is, assuming it’s concrete, the fact may be qualified as relevant.

 

Investor Relations’ assessment on whether to disclose a material fact

 

According to the consolidated understanding of CVM’s board, what is expected from the investor relations officer when evaluating the need to disclose a material fact is a two-step judgment. The first is about the probability of the act or fact to impact on the decision to trade securities issued by the company. The second is a judgment that involves counterbalancing the magnitude of the potential impact and the likelihood of its occurrence (CVM Sanctioning Proceeding No. RJ2018/6282).

 

As an exception to the duty to immediately disclose a material fact, CVM regulation stipulates that the secrecy of a material fact may be maintained if its managers or controlling shareholders understand that said disclosure will put legitimate interest of the company at risk.

 

This exception, however, is no longer applicable (i.e., the mandatory disclosure rule is restored) if the information is beyond the company’s control or if there is an atypical oscillation in the quotation, price, or traded quantity of its securities. In these cases, the company shall immediately disclose the material fact.

 

The text above was published in Portuguese in the Legislação & Mercado section of Capital Aberto on June 22, 2022, and can be accessed through the link below:

https://legislacaoemercados.capitalaberto.com.br/celebracao-de-contrato-nao-definitivo-quando-e-necessario-divulgar-fato-relevante/

 

 

_Understanding Shareholder’s Agreements: liquidity and exit mechanism

 

When one talks about liquidity and exit mechanisms regarding shareholders’ agreement, one seeks to regulate ways for a certain shareholder to leave the company. In other words, a liquidity and exit mechanism is a structure that guarantees to a certain shareholder the right to convert his or her shares into cash in addition to his or her withdrawal from the company.

 

These structures are quite common in agreements made after an external investment. In this regard, it is possible to come across clauses concerning a put option, registration rights and clawback, which will be detailed below, in addition to tag along and drag along clauses, which have already been subject of another article in our series on shareholder agreements.

 

Put option

 

The put option is one of the simplest liquidity mechanisms and can be granted by a shareholder to another shareholder or by the company itself and may contemplate part or the totality of the shares. Thus, if the shareholder who holds the put option wishes to exercise it, he may require the other shareholder or the company, according to the circumstances, to acquire the shares held by him or her as stated in the terms and conditions established in the shareholders’ agreement, including the ones related to valuation and the payment method.

 

As it is a lower cost mechanism when compared to carrying out an initial public offering (IPO) (registration rights clause), for example, the put option is more common in operations involving investment funds since they have a liquidity period for their investments and need to have greater ease and flexibility to sell their shares when the deadline approaches. This mechanism is also common to grant original shareholders the option to withdraw the company in situations in which the investing shareholder considers it essential to remain in the shareholding structure and/or in the company’s board for a certain amount of time.

 

Registration rights

 

The right to demand an IPO (also known as registration rights) may be granted in favor of a certain shareholder, who may exercise it upon the compliance with certain conditions to be verified within a reasonable period. This type of clause is often found in mergers and acquisitions transactions, especially in the context of private equity investments involving investment funds.

 

This occurs mainly due to the need to balance the liquidity risks of the operation with the best interests of the new investor, the company, and the original shareholders. This mechanism is known for offering investors a safe way to reduce or liquidate their stake in the company, benefiting from the premiums that are usually paid by the market in an IPO at favorable times for this type of operation.

 

Clawback

 

Although they are not considered a liquidity mechanism per se, value recovery clauses are important in the context of divestments to preserve the reaming shareholders’ principle of good faith in situations of greater distrust between the parties. These clauses guarantee the shareholder who withdrew from the company the right to claim amounts arising from any increase in valuation of the shares sold after his departure (within a contractually stipulated period), most often due to the sale of control or an IPO.

 

The importance of liquidity and exit mechanisms

 

Depending on the nature of the investment or the objectives of the shareholders, the provision of liquidity and exit mechanisms in shareholders’ agreements is fundamental, not only as a form of legal security, but also as a strategy to allow a shareholder to leave the company’s shareholder structure under pre-established conditions without jeopardizing the performance of the activities or even the continuity of the company.

 

The text above was published in Portuguese in the Legislação & Mercado section of Capital Aberto on May 09, 2022, and can be accessed through the link below:

https://legislacaoemercados.capitalaberto.com.br/entendendo-o-acordo-de-acionistas-mecanismos-de-liquidez-e-saida/

 

 

_Deadline to submit the Annual Census of Foreign Capital statement to the Brazilian Central Bank

 

Between July 1st and August 15th, some entities with foreign capital must submit to the Brazilian Central Bank the Annual Foreign Capital Census statement for the 2021 base year. The filling of the aforementioned statement is mandatory for:

 

  • legal entities headquartered in Brazil that have direct participation of non-residents in their capital stock, in any amount and with net equity equal to or greater than the equivalent of US$100 million on December 31st, 2021;
  • legal entities headquartered in Brazil that have a total outstanding balance of short-term commercial credits (payable within 360 days) granted by non-residents equal to or greater than the equivalent of US$10 million on December 31st, 2021;
  • investment funds with non-resident quotaholders and with net equity equal to or greater than US$100 million, on December 31st, 2021, through their managers.

 

The following are exempt from submitting the statement: natural people; the Union, States, Federal District and Counties’ administration; legal entities that are borrowers of on lending foreign credits granted by institutions headquartered in the country; and non-profit entities funded by non-residents contributions.

 

Finally, failure to submit the statement within the deadline, as well as the provision of false, incomplete or incorrect information, may subject those responsible to a fine.

 

 

_Publication of Letter No. 37 by DREI changes procedural rules for enrollment of members of the board of directors’ and officers’ residing abroad

 

On June 20, 2022, the Brazilian National Department of Business Registration and Integration (DREI) published a letter to revoke the need for the following procedures:

 

  • Enrollment of members of the board of directors in the Shareholders and Executive Chart in the company’s directory before the Brazilian Federal Revenue (Quadro de Sócios e Administradores – QSA);
  • Enrollment of members of the board of directors residing abroad with the Brazilian Individual Taxpayer Registration Number (CPF);
  • Presentation of the Basic Entry Document (Documento Básico de Entrada – DBE) when filing corporate acts that include the appointment of officers residing abroad. This is an issue related to the system of the Brazilian Federal Revenue, which, for the time being, will depend on the support of the Boards of Trade to update the information before the Brazilian Federal Revenue.

 

Letter No. 37 of DREI can be accessed in Portuguese through the link below:

https://www.gov.br/economia/pt-br/assuntos/drei/legislacao/arquivos/oficios-circulares-drei/2022/OFCIOCONJUNTOSEIN372022ME.pdf