Apesar de haver mecanismos de avaliação dos investidores, nem sempre se presta a devida atenção ao assunto
– 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
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:
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
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
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:
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.
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.
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.
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
Brazilian Securities and Exchange Commission publishes Circular Letter with general orientations regarding the rules and procedures that must be observed by publicly held corporations
Brazilian Securities and Exchange Commission refuses term of commitment with company’s controlling shareholders and managers in proceeding regarding the approval of their own accounts and compensation
On February 26th, 2021, the Brazilian Securities and Exchange Commission (“CVM“) published the Circular Letter/CVM/SEP/Nº1/2021 (“Ofício CVM/2021”), which provided the Superintendence of Relations with Companies (Superintendência de Relações com Empresas) (“SEP”) general orientations regarding the rules and procedures that must be observed by publicly held corporations. Among this years’ news, we highlight:
(i) Communications regarding lives on social media: the same rules set forth in the legal regulations that treats the disclosure of relevant information (Instruction CVM nº 358/02) and establish general rules about the content and way of the information that the issuers must observe (articles 14 to 19 of the Instruction CVM nº 480/09) are applied to lives on social media. In this sense, CVM recommends the disclosure, in advance, of a notice to the market informing the date, time and the internet address where the live is going to be transmitted, as well as the material presented in meetings with analysts, at the same day of the meeting or presentation. In addition, CVM recommends that companies include in their disclosure policy all the possible and necessary information to grant the market predictability on how the company handles disclosures in general.
(ii) Electronic signature – Remote Voting Bulletin: companies should not require from shareholders who wish to vote remotely, the delivery of physical documents to ratify the electronic remittance of documents mentioned in the meeting’s call notice, when said documents are electronically signed using the ICP-Brasil certification.
(iii) Management’s Compensation: CVM’s board decided (No. 19957.007457/2018-109) that the social contributions burden by the employer shall not integrate the amounts of the global compensation which is approved annually by the general shareholders’ meeting. Therefore, companies shall not disclose said amount in the charts of item 13 of the Reference Form (Formulário de Referência), but may do so, at their discretion, as “Other information deemed relevant”.
(iv) Related Party Transactions: Although, as a rule, the negotiations of agreements with related parties is not a matter subject to the board of directors’ approval, it is not possible to dissociate it completely from the liabilities inherent to those agreements, notably due to the obligation of monitoring the officers, in order to ensure that such agreements comply with the corporate law.
Oficio CVM/2021 may be accessed in Portuguese through the link below:
http://conteudo.cvm.gov.br/legislacao/oficios-circulares/sep/oc-sep-0121.html
The Administrative Proceeding CVM SEI 19957.003922/2020-50, was initiated by SEP, in order to determine irregularities practiced by controlling shareholders of a publicly held company, which were also its CEO and VP, on voting and approving their own (i) management accounts and (ii) compensation as managers without considering the company’s financial situation.
The accusation originated from a complaint of a shareholder regarding the transaction with the aforementioned CEO and VP, who would no longer receive compensation as managers and would be hired and consultants, which would generate savings in expenses. After the analysis, by SEP, of several documents released by the company, signs of irregularities were identified in matters involving the approval of the accounts and the compensation for the officers, which could be considered abusive compared to the company’s revenue, net loss and net worth.
The shareholders presented a proposal to execute a term of commitment through which they were willing to ensure the maintenance of the management’s compensation in the average of the parameters determined by the Brazilian Institute of Corporate Governance (Instituto Brasileiro de Governança Corporativa – IBGC).
CVM’s board, in line with the conclusion of the Term of Commitment Committee, rejected the term of commitment in this case, considering thar (i) the defendants did not propose an indemnity for the company’s losses and did not correct the practices considered irregular, and (ii) the importance of the matter to the capital market.
More information about the term of commitment can be accessed in Portuguese through the link below:
https://www.gov.br/cvm/pt-br/assuntos/noticias/cvm-rejeita-acordo-com-acionistas-de-companhia
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
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:
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/
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:
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
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
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