Mês: March

_ Brazilian Capital Abroad – Deadline for submitting periodic statements to the Central Bank in 2024

Individuals or legal entities resident, domiciled or headquartered in Brazil and holders of values, assets, rights, and assets of any nature abroad (“Brazilian Capital Abroad“) are required to periodically submit to the Central Bank statements on such Brazilian Capital Abroad, subject to the following framework rules:

• Annual Statement of Brazilian Capital Abroad: applicable to holders of Brazilian Capital Abroad in an amount equal to or greater than US$1,000,000.00 (one million United States dollars) or its equivalent in other currencies, on the base date of December 31 of the immediately preceding year. In the year 2024, this annual statement (with a base date of 12/31/2023, therefore) must be provided between 02/15/2024 and 04/05/2024.

• Quarterly Statement of Brazilian Capital Abroad: applicable to holders of Brazilian Capital Abroad in an amount equal to or greater than US$100,000,000.00 (one hundred million United States dollars) or its equivalent in other currencies, on the base dates of March 31, June 30 and September 30 of each year. In the year 2024, these quarterly statements must be submitted according to the schedule below:

_ Foreign Capital in Brazil – Deadline for submitting periodic statements to the Central Bank in 2024

Entities incorporated or organized in Brazil under Brazilian law, with or without profit, with or without legal personality, and which are recipients of foreign direct investment (“FDI Recipients“) are required to periodically submit to the Central Bank statements on such investments. The rules regarding such declarations have been updated in recent years, especially through BCB Resolutions No. 278/2022 and 281/2022, amended in the last quarter of 2023 by BCB Resolution No. 348/2023.

In general terms, and following the regulations in force, the rules regarding periodic declarations applicable to FDI Recipients, specifically for the year 2024, are:

• Quarterly Statement of FDI Recipients: applicable to FDI Recipients that, on the base dates indicated below, have total assets in an amount equal to or greater than R$300 million, according to the schedule below:

The Quarterly Declarations must be provided in the Foreign Direct Investment Foreign Capital Information System (SCE-IED), through the functionality of economic-financial declarations.

• Annual Statement of FDI Recipients: applicable to FDI Recipients who, on the base date of 12/31/2023, have net equity equal to or greater than the equivalent of US$100 million, according to the dollar exchange rate released by the Central Bank of Brazil on 12/31/2023, i.e., R$484,070,000.00.

The Annual Statement must be provided through the Foreign Capital Census system, within the deadline between 07/01/2024 and 6 pm on 08/15/2024.

• Five-Year Declaration of FDI Recipients: The base date of this declaration is December 31 of a calendar year ending in 0 (zero) or 5 (five), and must be provided by FDI Recipients who, on the base date of reference, have total assets in an amount equal to or greater than R$100,000.00 (one hundred thousand reais). In 2024 there will be no delivery of the five-year declaration.

_ CVM publishes an annual circular letter with general guidelines on procedures to be observed by publicly held companies in 2024

On March 7, 2024, the Brazilian Securities and Exchange Commission (“CVM“) released the CIRCULAR/ANNUAL-2024-CVM/SEP letter, which updates the general guidelines on procedures to be observed by publicly held companies (“Annual Letter“).

As usual, the Annual Letter brings together the main obligations of publicly held companies and reflects regulatory changes, in addition to highlighting important decisions of the CVM board.

This year, among the highlights of the Annual Letter, is the inclusion of a specific annex containing the “Panel of Companies with ESG Aspects”. The inclusion was certainly due to the entry into force of CVM Resolution No. 59/21 in 2023, which requires publicly held companies to include indicators related to Environmental, Social and Governance (“ESG“) practices in their reference forms. Thus, the Annual Letter compiled the ESG information of the forms delivered from 2023 to January 2024, revealing a significant number of incorrect and/or incomplete fillings, leading the CVM to implement notices in the online system to warn about inappropriate fillings and reinforcing the importance of the matter.

The Annual Letter also highlighted the guidelines on the reporting of financial information related to sustainability, based on the international standard issued by the International Sustainability Standards Board (“ISSB“) implemented by CVM Resolution No. 193/23. As highlighted in the Annual Letter, CVM Resolution No. 193/23 allows companies, securitization companies and investment funds to voluntarily disclose the fiscal years 2024 and 2025 and, for publicly held companies, such measure becomes mandatory, and no longer optional, as of the fiscal years starting on or after January 1, 2026.

Another clarification made by the Annual Letter is the definition of “corporate demands” provided for in article 33 of CVM Resolution No. 80/22, which obliges issuers to communicate such demands under the terms and deadlines established in Annex I of that Resolution. As clarified in the Annual Letter, “corporate claims” are any judicial or arbitration proceeding whose requests are, in whole or in part, based on corporate or securities market legislation, or on the rules issued by the CVM. In the specific case of initiation of an arbitration proceeding, the issuer must communicate its initiation or receipt of the initiation within seven (7) business days from the sending/receipt of the initiation.

The Annual Letter can be accessed through the link below:

https://conteudo.cvm.gov.br/legislacao/oficios-circulares/sep/oc-anual-sep-2024.html

_ Season of Annual General Meetings and Annual Meetings of Members

In the coming months, corporations and limited liability companies must disclose their financial information, as well as convene and hold the Annual General Meetings (“AGM“) or the annual meetings of their shareholders (“Meeting“) for the fiscal year ending December 31, 2023.

Deliberations and Preparatory Procedures for the AGM and the Meeting

As provided for in article 132 of the Brazilian Corporations Law, all corporations, both open and privately held, must hold, in the first 4 months following the end of each fiscal year, an AGM to: (i) take the accounts of the managers, examine, discuss and vote on the financial statements; (ii) to resolve on the allocation of net income for the year and the distribution of dividends and (iii) to elect the management and members of the fiscal council, if applicable.

In addition, corporations must prepare the documents indicated in article 133 of the Brazilian Corporations Law and publish a notice informing their shareholders that such documents are available for consultation at the company’s headquarters; in the case of publicly-held companies, the documents must also be made available on the company’s websites, CVM and B3 S.A. – Brasil, Exchange, Counter (“B3“). The publication of the notice is waived if the companies publish their financial statements up to 1 month before the date scheduled for the AGM or when the AGM meets all shareholders.

Notwithstanding, companies must publish their financial statements prior to the AGM, provided that:

• those whose annual gross revenues are equal to or less than R$78 million may do so electronically through the Central Balance Sheet of the Public Digital Bookkeeping System – SPED, according to article 294, item III, of the Brazilian Corporations Law and, under ME Ordinance No. 12,071/2021 and ME Ordinance No. 10.031/2022.

• publicly held companies whose individual gross revenues earned are less than R$500 million in the last fiscal year, considered to be smaller under the terms of article 294-B of the Brazilian Corporation Law and CVM Resolution No. 166/2022 (“RCVM 166“), may do so electronically through the Empresas.NET system; and

• for other companies, the publication must be made in a newspaper of wide circulation, which may be carried out in a summarized form, in compliance with the provisions of the Brazilian Corporate Law and CVM Guidance Opinion No. 39, applicable to publicly-held companies, with simultaneous disclosure of the full documents on the website of the same newspaper, which must provide digital certification of the authenticity of the documents kept on the proper page issued by a certifying authority accredited within the scope of the Brazilian Public Key Infrastructure (ICP-Brasil).

Concerning limited liability companies, as provided for in article 1,078 of the Civil Code, also in the first 4 months following the end of the fiscal year, a Meeting shall be held to (i) take the accounts of the managers and deliberate on the balance sheet and the economic result and (ii) appoint managers, when necessary. The meeting is dispensable if all the members deliberate in writing on the matters that would be the subject of it.

Financial Statements of Large Companies

Under Law No. 11,638/2007, limited liability companies, or a group of companies under common control, that registered in the fiscal year 2023 total assets greater than R$ 240 million or annual gross revenue greater than R$ 300 million, must (a) prepare their financial statements by the rules applicable to corporations; and (b) submit the financial statements to an independent auditor registered with the Brazilian Securities and Exchange Commission.

After the publication of SEI Circular Letter No. 4742/2022/ME by the DREI (National Department of Business Registration and Integration), the understanding that the publication of financial statements is optional was confirmed, and the Boards of Trade are advised to comply with this guideline, so that the filings of corporate acts of such companies are not required, nor are they rejected,  alleging that the aforementioned publications were not substantiated.

AGOs and Digital Meetings

According to Law No. 14,030/2020, AGMs and Meetings may be held partially or exclusively digitally and must comply with the applicable rules established by CVM Resolution No. 81/2022, as amended, in the case of publicly held companies, and/or those of the National Department of Business Registration and Integration (“DREI”), in the case of privately held corporations and limited liability companies.

_the march│2023 edition of our Newsletter has the following highlight:

– Ordinary Shareholders’ Meetings and Quotaholders’ annual meetings

– CVM’s Annual Letter News

– Institutional Shareholder Services (ISS) discloses proxy voting guidelines

_ 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, 2022.

Matters to be Discussed and Preparatory Proceedings to Ordinary Shareholders’ Meetings and Quotaholders’ Annual Meetings

All corporations, listed and non-listed, 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 managers and the members of the Fiscal Council (Conselho Fiscal), as applicable.

Additionally, corporations must prepare the documents listed in art. 133 of Law No. 6.404/1976 (“Brazilian Corporate Law“) and publish a notice informing its shareholders that such documents are available at the company’s headquarters; in the case of listed companies, the documents must also be available on the company’s IR website, as well as in the Brazilian Securities and Exchange Commission (“CVM“), and B3 S.A. – Brasil, Bolsa, Balcão (“B3“) websites. This publication is waived if the companies publish their financial statements up to 1 month before the date set for the Ordinary Shareholders’ Meeting or when such meeting gathers all the shareholders.

Nevertheless, corporations must publish their financial statements before the Ordinary Shareholders’ Meeting is held, according to the instructions below:

• Those whose annual gross revenue is up to R$78 million may do so electronically through the SPED System (Central de Balanços do Sistema Público de Escrituração Digital – SPED), pursuant to article 294, III, of the Brazilian Corporate Law and, according to Ordinance ME No. 12.071/2021 and Ordinance Nº 10.031/2022;

• Listed companies with individual gross revenues of less than 500 million Brazilian Reais in the last fiscal year, classified as small sized companies pursuant to article 294-B of the Brazilian Corporate Law and CVM Resolution 166/2022 (“RCVM 166“), may do so electronically through the Empresas.NET system (CVM’s system for disclosure of documents); and

• For other companies, the publication must be carried out in a widely circulated newspaper, and it may be done in a summarized form, subject to the provisions of article 289, II of the Brazilian Corporate Law and Opinion CVM No. 39, applicable to listed companies, with simultaneous disclosure of the full documents on the same newspaper’s website, which must provide digital certification of the authenticity of the documents maintained on its own page issued by a certifying authority accredited within the Brazilian Public Key Infrastructure (ICP-Brasil).

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 the shareholders decide, in writing, on the aforementioned matters.

Financial Statements of Large Companies

Pursuant to Law No. 11.638/2007, limited liability companies, or group of companies under common control, which, in the 2022 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 rules set forth in the Brazilian Corporate Law; and (b) submit the financial statements to the appreciation of an independent auditor registered at Brazilian CVM.

After the publication of Circular Letter SEI No. 4742/2022/ME by the National Department of Business Registration and Integration -DREI, the understanding that the publication of financial statements for these companies is optional was confirmed, and Boards of Trade were instructed to follow this guideline, so that the filing of corporate acts of such companies will not be rejected on the grounds of lack of proof of said publications.

Digital Meetings

Pursuant to Law No. 14.030/2020, the ordinary shareholders’ meetings and quotaholder’s annual meetings may be held partially or exclusively in a digital form, and must comply with the applicable rules established by CVM Resolution No. 81/2022, as amended, in the case of listed companies, and/or those of the National Department of Business Registration and Integration (“DREI“), in the case of closely-held corporations and limited liability companies.

_ CVM’s Annual Letter News

CVM’s Superintendence of Corporate Relations (“SEP“) disclosed, on February 28, 2023, the Annual Circular Letter 2023 (“Letter“), which provides guidance on regulatory updates and on the procedures that listed, foreign and supported companies must comply with, in addition to pointing out important CVM’s board rulings (“Annual Letter“).

Among the new guidelines, the following stand out:

• Publications: flexibility in carrying out publications ordered by the Brazilian Corporate Law or provided in CVM regulations by small sized listed companies (i.e., those with annual gross revenue of less than R$ 500,000,000.00 (five hundred million reais), based on the financial statements of the last fiscal year), according to RCVM 166, which allows for such publications to be made through the Empresas.NET systems;

• Acquisition of a company or corporate interest by listed companies: guidance on the minimum information that shall be included in the document disclosing the operation (material fact or communication to the market, subject to the applicable regulation) to enable better understanding of the transaction, including the main conditions of the business (such as price and payment terms), as well as financial and/or operational information about the acquired business;

• Business Environment Improvement Law: CVM Resolution No. 168/2022 regulated and gave practical applicability to Law No. 14.195/2021, which provides for (i) the mandatory separation between the functions of chairman of the board of directors and CEO or principal executive of listed companies whose consolidated gross revenue is less than R$ 500,000,000.00 (five hundred million Brazilian Reais); and (ii) the mandatory presence of at least 20% independent members on the board of directors of listed companies that cumulatively meet the following criteria: (a) registered in category A, (b) have securities admitted for trading on a stock exchange, and (c) have shares or depositary receipts outstanding; and

• Guidelines to fill out the Reference Form (Formulário de Referência), according to its new structure provided for in CVM Resolution No. 59/2022.

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

https://conteudo.cvm.gov.br/legislacao/oficios-circulares/sep/oc-anual-sep-2023.html

_ Institutional Shareholder Services (ISS) discloses proxy voting guidelines

As usual, Institutional Shareholder Services (ISS) proxy advisory firm released the Benchmark Policy Recommendations for shareholders’ meetings to be held from February 2023. It is a guide of voting guidelines for meetings based on best corporate governance practices.

Among the recommendations included in the guidelines, the following are worth highlighting:

• Election of the Board of Directors: recommendation to vote against (i) bundled election or individual members if the board’s composition after the election does not have any female members; and (ii) members who are already part of the board of directors of more than 5 companies;

• Board of Directors Structure: recommendation to vote against changes in the board of directors’ structure or number of members within the context of company control divergences;

• Installation of the Fiscal Council: recommendation to vote in favor of the installation of the fiscal council, except if candidates have not been indicated/disclosed by management or minority shareholders in a timely manner. In this case, the recommendation is to abstain from this deliberation;

• Management Compensation: in general, the recommendation is to vote in favor of the management compensation, provided that they are presented within the applicable regulatory deadline containing all the elements required by CVM regulation. The recommendation to vote against applies to compensation proposals that are not adequately detailed or clear.

The Benchmark Policy Recommendations can be accessed through the link below:

https://www.issgovernance.com/file/policy/active/americas/Brazil-Voting-Guidelines.pdf

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

– CVM publishes Circular Letter with general orientations regarding the rules and procedures that must be observed by listed companies

– The Role of Corporate Governance in the ESG Agenda

– Understanding Shareholders’ Agreement: Tag Along and Drag Along

– Understanding Shareholders’ Agreement: Preemptive Right and Right of First Offer

_CVM publishes Circular Letter with general orientations regarding the rules and procedures that must be observed by listed companies

On February 24, 2022, the Brazilian Securities and Exchange Commission (“CVM“) published their annual Circular Notice (“CVM Notice/2022“)which outlines general guidelines from the Superintendency of Company Relations (“SEP“) on procedures to be observed by listed companies, especially regarding the disclosure of periodic and eventual information. Among the updated matters, we highlight:

1. Summary Publications: due to the new wording of Article 289 of Law No. 6404/76 (“Corporation Law“), the mandatory publications made as of January 1, 2022, regardless of the period to which they refer, may occur in a summarized form and only in a large circulation newspaper, no longer being mandatory to publish them in the Official Gazette. According to SEP, it is sufficient for listed companies to update their Registration Form, item “Channels of Disclosure”, and disclose a Notice to Shareholders explaining that the update was motivated by the change in legislation. The full version of the corporate acts and the financial statements published in summary form must be available for access on the web page of the newspaper, with digital certification of the authenticity of the documents, according to the procedures established in the CVM Guidance Opinion No. 39, issued on December 20, 2021.
2. (Update of the Reference Form: in the event of a change in the number of treasury shares resulting from the execution of a buy-back program, SEP understands that it is not necessary to update the Reference Form. However, if the number of shares acquired during the program reaches the levels of 5%, 10%, 15%, and so on, of the same type or class of shares, due to the possibility of variation in the percentage of all shareholders, their recommendation is to update item 15.1/2 of the Reference Form.
3. Uninterrupted Ownership of Shares in Separate Elections of the Board of Directors: Pursuant to paragraph 6 of article 141 of the Corporation Law, only shareholders who prove the uninterrupted ownership of shares, during the period of at least 3 months immediately prior to the shareholders´ meeting, may exercise the right to elect and remove a member and his alternate from the Board of Directors, in a separate vote. Since CVM Instruction 481/09, does not contain any provision regarding the submission of supporting documentation of uninterrupted ownership by shareholders wishing to exercise this right, SEP clarifies that the aforementioned Instruction requires that the shareholder itself verify the uninterrupted ownership of its shares when filling out the items on the remote voting bulletin, being possible to carry out a prior alignment with the custodian bank to verify the uninterrupted ownership of the shares before sending the reports on the remote voting to the companies. However, according to SEP, regarding the bulletins sent directly to the company, it is up to the companies’ management to guarantee the integrity of the remote voting process, and that any documental requirements should not represent an unnecessary creation of obstacles to the shareholders’ participation in the meetings.
4. Delays in Periodic and Eventual Disclosures: companies shall inform the market if they have difficulties in meeting deadlines for the submission of periodic and eventual disclosures, and the Investor Relation Officer is responsible for assessing the form of this disclosure, which shall contain, at least: (a) that the company will not disclose the periodic information within the deadlines established in the Corporate Law or in specific rules regarding the subject; (b) the reasons why the company will not be able to meet the deadline; (c) the effective measures that are being adopted to correct the problem; and (d) the estimated deadline, within reasonability, for disclosure of the periodic information that will not be timely disclosed.

The full text of CVM Notice/2022 can be accessed in Portuguese through the following link:

https://conteudo.cvm.gov.br/legislacao/oficios-circulares/sep/oc-anual-sep-2022.html

_The Role of Corporate Governance in the ESG Agenda

Over the past few years, it is possible to observe a significant increase in discussions involving ESG topics in the management of companies around the world. Although social and environmental aspects are gaining increasing prominence, the most advanced pillar in Brazil today is corporate governance.

Since the creation of the Novo Mercado segment of the B3 stock exchange in 2000, the Brazilian market has been establishing a high standard of governance, with the adhesion of specific practices and obligations aiming at increasing transparency in the disclosure of information for the decision-making process of shareholders and investors.

In this context, unsurprisingly, the result of a recent survey by AMBIMA (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais – which stands for the Brazilian Association of Financial and Capital Market Entities)[1] with 209 asset managers, released earlier this year, indicated that governance is the ESG aspect most observed by asset managers, with ethics and transparency being the factors most mentioned by them (92%).

Among the governance priorities, labor policies and relations (79%), data privacy and security (77%), board independence (75%), and board compensation (54%) were also mentioned.

The survey’s conclusion is encouraging, since pillar G is the core of ESG. Without good corporate governance, it is impossible to effectively implement social and environmental actions and align the company’s objectives with the creation of long-term value not only for its shareholders, but also for society in general.

Under the scope of governance, the rules and procedures to be observed in the decision making of companies are defined, from the elaboration of policies to the determination of rights and responsibilities among its different participants, including the board of directors, officers, shareholders, stakeholders, and the market in general. Thus, the increase in corporate governance standards is directly related to an increase in the transparency with which companies relate and communicate with the market and their shareholders, managers, employees, and partners in general.

It is no coincidence that over the past few years, companies with good corporate governance practices have outperformed the general market indexes in both the US and Brazil.

In this line, an S&P Global survey (2020)[2] on governance factors showed that companies rated below average in relation to good governance are more susceptible to mismanagement. Therefore, failures in governance policies may expose companies to unacceptable levels of risk, significantly compromising their business

Given the evolution of the Brazilian market on the subject, the simple disclosure of information on integrity, policies and codes of ethics and conduct is not enough. It is essential that companies realize the value that the effective adoption of good corporate governance practices generates in their relationships, in the management of their business, and in their perception before the market and the community in which they operate.

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

https://legislacaoemercados.capitalaberto.com.br/o-papel-da-governanca-corporativa-na-agenda-esg/

[1] Accessed at https://www.anbima.com.br/pt_br/imprensa/governanca-e-o-aspecto-do-esg-mais-observado-pelas-gestoras-de-recursos-8A2AB2887E4BC696017E54173A2C381B-00.htm.

[2] Accessed at https://www.spglobal.com/en/research-insights/articles/what-is-the-g-in-esg

_Understanding Shareholders’ Agreement: Tag Along and Drag Along

It is very common for shareholders’ agreements to have clauses with the purpose of regulating the transfer of shares issued by the company, both for the shareholders themselves and for third parties. In this context, shareholders’ agreements may contain mechanisms used to protect controlling and minority shareholders in case of transfer of shares, such as Tag Along and Drag Along clauses.

The Tag Along mechanism in general aims to protect minority shareholders. The term “Tag Along” translated into Portuguese means, literally, “to go together”, since the Tag Along clause grants the right to sell the shares held by the minority shareholder together with the shares held by the controlling shareholder, in case of receiving a proposal to sell its shares.

Minority shareholders shall have the option to exercise or not the tag along right, so that they can choose between selling their shares together with the controlling shareholder or remaining in the company after the entrance of the acquiror of control. If they decide for the joint sale, they will have the right to demand that the acquirer offers the equivalent value, or a percentage thereof to be established in the shareholders’ agreement, of the amount paid per share to the controlling shareholder, under the same terms and conditions offered to the controlling shareholder.

The Drag Along mechanism, also known as the right to demand the sale, generally aims to protect the controlling shareholder, since it guarantees the controlling shareholder the right to compel the minority shareholder to sell its shares in the event of receiving an offer from a third party to acquire all of the company’s shares. In this regard, the main idea is to prevent good opportunities to sell the company from being lost.

Since it is a “forced sale”, it is quite common that minimum conditions are established so that the controlling shareholder can exercise his Drag Along right, such as the determination of a minimum offer price and the form of payment of the acquisition price.

In the event of applying the Drag Along clause, the price to be paid for the minority shareholder’s shares may be equivalent to the price received by the majority shareholder or a percentage thereof to be determined in the shareholders’ agreement, which may establish other criteria for setting the value, as well as payment terms and conditions.

It is important to emphasize that Tag Along and Drag Along clauses can be used in other shareholding structures, including in companies that do not have the figure of a controlling and minority shareholders. In any case, the scenario and characteristics of each company and its shareholders must be analyzed in order to establish the best mechanisms for share transfers to be used in each case.

The text above was published in Portuguese in the Legislação & Mercado section of Capital Aberto on February 15, 2022, and can be accessed via the link below:

https://legislacaoemercados.capitalaberto.com.br/entendendo-o-acordo-de-acionistas-tag-along-e-drag-along/

_Understanding Shareholders’ Agreement: Preemptive Right and Right of First Offer

Unlike listed companies, whose basic principle is the free circulation of shares, article 36 of Law No. 6.404 of December 15, 1976, as amended (“Corporation Law“), allows some limitations to be imposed on the circulation of shares issued by closely-held corporations, since these limitations are strictly regulated in the by-laws and their negotiation is not prevented or conditioned to the approval of the company’s management bodies or by the majority of shareholders.

The possibility of limiting the circulation of shares is mainly due to the personal character (intuitu personae) that often prevails in closely-held corporations, in which the identity or some attribute of the shareholders is highly relevant. Thus, in these companies, shareholders seek ways to have greater control over the shareholding structure of the company, precisely to prevent their shares from being sold to someone who does not have the same attributes as the transferee shareholder or in whom the other shareholders do not have the same confidence.

Among the possibilities of mechanisms restricting the free circulation of shares, two of them are very common in shareholders’ agreements and in some by-laws: (i) the Right of First Refusal and (ii) the Right of First Offer.

1. Right of First Refusal

The most common mechanism to restrict the transfer of shares is the right of first refusal. If any shareholder wishes to sell his shares (“seller“), this mechanism guarantees that the other shareholders (or part of the other shareholders, as the case may be) (“offerees“) have preference in the acquisition of such shares, on equal terms with the potential buyer, which may be another shareholder or a third party

The right of first refusal usually originates with the receipt of an irrevocable and irreversible proposal from a third party to the seller for acquisition of the shares. For it to be efficient, it is recommended that the right of first refusal clause provide for the obligation of the seller to notify the offerees of the proposed acquisition of the shares, containing the conditions presented by the third party, so that the offerees can evaluate whether or not to exercise their preference to acquire the shares offered under the same conditions proposed by the third party.

The right of first refusal clause may also establish that if more than one shareholder is interested in exercising the right of first refusal, the acquisition of the shares must be proportional to their holdings in the company’s capital stock.

If no offered party chooses to exercise the right of first refusal within a certain period established by the parties, then the seller may proceed with the sale to the third-party bidder.

1. Right of First Offer

In the right of first offer, in contrast to the right of first refusal, the procedures do not depend on an offer from an interested third party, the seller’s intention to sell is sufficient. In this case, the seller must, before offering its shares to any third party, present its intention to the other shareholders (or part of the shareholders, as the case may be).

In practice, after the seller communicates to the offerees about its intention to sell, the period begins for the offerees to send their proposals to acquire the shares.

If more than one offeree sends a proposal to acquire the shares, the seller may choose, at its sole discretion, the one that presents the best terms and conditions.

If no offeree chooses to exercise the right of first offer within the period defined by the parties, then the seller may request offers from third parties. If it receives offers from third parties on more favorable terms than those submitted by the offerees, the seller may sell its shares to such third parties.

• Other Considerations

Both right of first refusal and right of first offer allow their beneficiaries to have some control over the process of entrance of new shareholders in the company. The most notable difference between these two modalities of limiting the circulation of shares is whether or not a third-party proposal is required to initiate the procedures.

In other words, in the case of the right of first refusal, since the initial offer is sent by a third party, the offeree may have more assurance as to the market value of the company. Thus, this modality can become advantageous for minority shareholders or for shareholders who do not have a clear vision of the company’s value. On the other hand, the right of first refusal can make it difficult for the seller to obtain a good offer, since the potential buyer knows that his offer, even if accepted, will be subject to the right of first refusal of the other shareholders.

In cases where the offeree already has a clearer view of the company’s market value, it is likely that it will be better prepared to evaluate its investment and send a good proposal to the seller, so that, in this case, the application of the right of first offer may be more advantageous than the right of first refusal. In this case, the offeror will have greater liquidity in its sale process to third parties, since the potential interested party that may present a proposal knows that, once accepted, there will be no more uncertainty as to the possible acquisition by another shareholder.

Some shareholders’ agreements and by-laws provide for a combination of these mechanisms, starting with the right of first offer and then applying the right of first refusal. In this case, the offerees have, in fact, the possibility of covering a third party’s proposal that is more favorable than the one initially presented by them. This structure is usually well-suited to family businesses, where keeping the shares in the family is seen as essential by the shareholders.

In addition, it is quite common that if minority shareholders do not have the right of first offer, they are guaranteed with tag along rights, which will be covered in our next article in this series.

The text above was published in Portuguese in the Legislação & Mercado section of Capital Aberto on December 21, 2021, and can be accessed via the link below

https://legislacaoemercados.capitalaberto.com.br/entendendo-o-acordo-de-acionistas-direito-de-preferencia-e-direito-de-primeira-oferta/