Mês: October

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

– CVM holds public hearing regarding insider trading

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

_ CVM holds public hearing regarding insider trading

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

_ the October │ 2019 edition of our Newsletter has the following highlights:

– Provisional Measure regarding Declaration of Rights of Economic Freedom is converted into Law

– Brazilian Federal Senate approves councilors’ nomination and CADE’s quorum is restored

– CVM regulates the electronic publication of corporate acts

_ Provisional Measure regarding Declaration of Rights of Economic Freedom was converted into Law 

On September 20^th, 2019, Provisional Measure No. 881/19 (“MP”) was sanctioned by the Brazilian President and converted into Law No. 13.874/19, which establishes the Declaration of Rights of Economic Freedom. This Law establishes rules regarding the protection of free enterprise and the free exercise of economic activity, the actions of the State as normative and regulatory agent and other measures.

Among the changes regarding corporate aspects, we highlight the following: (i) disregard of legal entity; (ii) single-member limited liability company; and (iii) new rules regarding corporate acts’ file before the Boards of Trade.

Disregard of Legal Entity: the Brazilian Civil Code was amended to provide the following new requirements for the disregard of a legal entity: distortion of the legal entity purpose, which consists in the fraudulent use of the legal entity for the purpose of harming creditors and for the practice of illegal acts of any nature, or fraude (confusão patrimonial), which is the improper confusion between the companies’ and the partners’ assets. The mere existence of an economic group without the presence of the other requirements does not authorize the disregard of the legal entity. The mere expansion or change in the original purpose of the legal entity does not represent a distortion of the legal entity purpose. The disregard of legal entity is also applicable to the extension of the obligation of partners or directors to the legal entity.

Single-member Limited Liability Company: the Brazilian Civil Code was also amended to allow the constitution of a limited liability company by a single quotaholder, and the single partner’s constitution document shall observe the article of associations’ provisions, when applicable. Unlike EIRELI, it is not required for a Single-Quotaholder Limited Liability Company to have a capital stock equivalent to, at least, one hundred (100) minimum wages and the same individual may have more than one Single-Quotaholder Limited Liability Company.

New rules regarding corporate acts’ file before the Board of Trade: Law No. 8.934/34 (Trade Registration Act) was amended to provide the possibility of automatic file of documents and declarations regarding mere register information before the Board of Trade,  as well as certain corporate acts which follow DREI’s instruments standards. For other corporate acts, Law No. 13.874/19 provides that the analyses and registration before the Boards of Trade shall take up to five business days, depending on the case.

Law No. 13.874/19 can be accessed in Portuguese at:

http://www.planalto.gov.br/ccivil_03/_ato2019-2022/2019/lei/L13874.htm

_ Brazilian Senate approves councilors’ nomination and CADE’s quorum is restored

On October 1^st and 2^nd, 2019, the Brazilian Federal Senate (“Senate”) approved the appointment of four new members of the Administrative Council of Economic Defense (“CADE”).

Indicated by Brazilian President Jair Bolsonaro, the following members were elected as new CADE’s councilors: Lenisa Rodrigues Prado, Sérgio Costa Ravagnani, Luiz Augusto Hoffman and Luis Henrique Bertolino Braido (“New Counselors”).

After the publication of his appointment in the Brazilian Official Journal (“DOU”), on October 7^th, 2019, Councilor Sérgio Costa Ravagnani took office. As a result, the minimum quorum of four Counselours for the establishment of CADE’s Court (“Court”) was restored and cases that were suspended since mid-July are being processed again.

The other members elected shall take office within the next days, after the publication of their appointment in the DOU.

More information regarding the appointment of New Counselors can be accessed in Portuguese at:

https://www12.senado.leg.br/noticias/materias/2019/10/01/senado-reconduz-procurador-geral-do-cade-e-aprova-tres-conselheiros

https://www12.senado.leg.br/noticias/materias/2019/10/02/plenario-aprova-luiz-augusto-hoffmann-no-conselho-do-cade

_ CVM regulates the electronic publication of corporate acts

On August 5^th, 2019, Provisional Measure No. 892 (“MP 892”) was issued, which amended article 289 of Law No. 6.404 of December 15^th, 1976 (“Brazilian Corporation Law”), establishing that publications ordered by the referred law shall be made electronically, provided that (i) publicly-held companies shall follow the regulation issued by the Brazilian Securities and Exchange Commission (“CVM”); and (ii) closely-held companies shall follow the regulation issued by the Ministry of Economy (“ME”).

In accordance with MP 892, on September 30^th, 2019, CVM’s Resolution No. 829 (“Resolution 829”) and ME’s Ordinance No. 529 (“Ordinance 529”), regarding corporation acts’ electronic publications proceedings, were published in the Brazilian Official Journal (“DOU”, and, jointly with Resolution 829, the “Regulations”).

Regarding publicly-held companies’ publications, Resolution 829 provides that:

1. publications shall be made on NET system;
2. documents will be considered as published on the date of their disclosure on NET system;
3. in case of Articles 151 and 258 of the Brazilian Corporation Law, regarding publication of a manager’s resignation letter and the notice for public offer to acquire control, as well as in other situations provided for in the Brazilian Corporation Law or in CVM’s Ruling in which the publication is made by third parties, the publication shall be made by sending the documents to the company, with a copy to the Corporate Relations Superintendence (“SEP”).The company shall immediately make the publication on NET system.
4. publications will be made without previous analyses by CVM and B3 and do not imply their agreement with the content of the documents;
5. publicly-held companies shall continue to disclose on their website the publications provided by the Brazilian Corporation Law; and
6. the obligation for publicly-held companies to file documents before the Boards of Trade is maintained in cases provided by the Brazilian Corporation Law.

Closely-held companies’ publications shall be at the Public Digital Bookkeeping System (“SPED”), pursuant to Ordinance 529. Such publications authenticity will be digitally certified by an authority registered before the Brazilian Public Key Infrastructure (“ICP Brazil”). SPED will also allow the issuance of documents that prove the authenticity, inalterability and the date of publication of corporate acts.

We highlight that Resolution 829 and Ordinance 529 may be amended or revoked if MP 892’s wording is modified during the National Congress decision regarding the conversion of MP 892 into Law until December 3^rd, 2019.

More information regarding the Regulations can be accessed in Portuguese at:

http://www.cvm.gov.br/legislacao/deliberacoes/deli0800/Deli829.html

http://www.in.gov.br/web/dou/-/portaria-n-529-de-20-de-setembro-de-2019-217770815?inheritRedirect=true&redirect=%2Fweb%2Fguest%2Fsearch%3FqSearch%3DPORTARIA%2520N%25C2%25BA%2520529%252C%2520DE%252020%2520DE%2520SETEMBRO%2520DE%25202019

_the October | 2018 edition of our Newsletter has the following highlights:

São Paulo Court of Justice decides on the removal of a partner from a limited liability company due to serious misconduct

Brazilian Federal Revenue Counsel acknowledges the regularity of a corporate reorganization structure involving the sale of corporate stakes by investment funds (FIP)

Brazilian Superior Court of Justice decides on the prescriptive period applicable to the breach of contractual obligations

_São Paulo Court of Justice decides on the removal of a partner from a limited liability company due to serious misconduct

On August 22^nd, 2018, the 1^st Reserved Chamber of Corporate Law of São Paulo’s Court of Justice, by unanimous decision, granted the appeal (“Appeal”) filed by a limited company and its majority quotaholder to remove the minority quotaholder due to his serious misconduct practices.

The Appeal intended to reform an award enacted within a limited liability company’s partial dissolution claim, which was dismissed and kept the minority quotaholder – who was also the company’s manager – as a quotaholder of the company based on the following grounds: (i) the serious misconduct practices attributed to the minority quotaholder were not proved; and (ii) the breach of the affection societatis is not sufficient motive to judicially remove a quotaholder from a limited liability company corporate structure.

At the decision on the Appeal, the reporting judge acknowledged that it was not possible to remove a quotaholder from a limited liability company solely based on a mere lack of affectio societatis. However, the reporting judge reformed the award enacted by the ordinary courts, as it was proved that: (i) the minority quotaholder disposed of the company’s assets to pay personal expenses, regardless of the necessary independence between his personal belongings and the company’s assets; and (ii) the conflicts between the quotaholders prevented the management and the operation of the company, compromising the regular course of the corporate business.

The reporting judge understood that the acts undertaken by the minority quotaholder consists not only in the breach of the affectio societatis – an essential element for the incorporation of limited liability companies, but also represented a serious misconduct, therefore there was sufficient reason to determine the company’s partial liquidation, with the removal of the quotaholder who incurred in the aforementioned misconduct and later calculation of his compensation in view of such a removal.

More information on the Appeal can be accessed in Portuguese at:

https://esaj.tjsp.jus.br/cjsg/getArquivo.do?conversationId=&cdAcordao=11745292&cdForo=0&uuidCaptcha=sajcaptcha_3e3e7b0c37594949960ecd3e0a6494e4&vlCaptcha=XQf&novoVlCaptcha

_Brazilian Federal Revenue Counsel acknowledges the regularity of a corporate reorganization structure involving the sale of corporate stakes by an investment fund (FIP)

On June 15^th, 2018, the 1^st Ordinary Panel of the 2^nd Chamber of the Brazilian Federal Revenue Counsel (“CARF”) ruled upon an administrative proceeding (“Administrative Proceeding”) in which it acknowledged the regularity of a corporate reorganization structure involving the transfer of corporate interest to an investment fund (“FIP”) followed by the sale of such corporate interest to a third party, which resulted on the reduction of capital gains taxes (“Corporate Reorganization”).

The Administrative Proceeding was originated from a tax assessment notice issued by the Brazilian Federal Revenue Services regarding the collection of corporate income tax (“IRPJ”) and social contribution on net profits (“CSLL”) on the sale of shares by a FIP because the FIP had only been incorporated as an instrument for tax evasion.

Within the Corporate Reorganization, a holding company controlled by the FIP had its capital stock reduced, with the payment of the amount due to the FIP made with the transfer of the shares then held by such holding company in its subsidiaries. As a result, the FIP became the direct quotaholder of the subsidiaries and,  in the following steps of the Corporate Reorganization, was able to sell these shares in a more tax efficient way.

The Brazilian Federal Revenue Services argued that the FIP was incorporated as an instrument for tax evasion, once the taxation of capital gains arising from the sale of its assets, such as the shares issued by the subsidiaries, is different and results in the reduction of the IRPJ and CSLL that would be due in case the holding company had sold these shares and recorded said capital gain.

Therefore, Brazilian tax authorities asked that the sale of the shares directly by the FIP not be enforceable for tax purposes, as it was deemed to be a simulated transaction, in order to levy the IRPJ and CSLL on capital gains as if the holding company had sold the shares of its subsidiaries held by it before the capital stock reduction.

The reporting judge, followed by the majority of the judges, sustained that, in the Corporate reorganization structure: (i) the FIP was not incorporated only as an instrument to allow the reduction of taxes on capital gains; (ii) the FIP’s role was to consolidate the management of assets, which may cause some assets to be sold for the acquisition of more profitable ones; and (iii) the funds obtained with the sale of the shares did not return to the holding company; instead, they were used by the FIP to acquire other assets, which, between 2009 and 2015, resulted in the increase of the FIP’s net worth in more than R$300 million, which emphasizes the negotiation purpose of the FIP’s incorporation.

It is important to mention that in October 2017, the Brazilian Federal Revenue Services enacted Provisional Measure No. 806, which caused the taxation of capital gains arising from the sale of assets by a FIP to be the same as the taxation of capital gains arising from the sale of assets by a company. The aforementioned Provisional Measure was not converted into law and has lost its validity in April 2018.

More information on the Administrative Proceeding can be accessed in Portuguese at:

https://carf.fazenda.gov.br/sincon/public/pages/ConsultarJurisprudencia/listaJurisprudenciaCarf.jsf

_Brazilian Superior Court of Justice decides on the prescriptive period applicable to the breach of contractual obligations

On June 27^th, 2018, the 2^nd Section of the Superior Court of Justice (“STJ”), by majority of votes, denied the Divergence Appeal filed on a Special Appeal (“Divergence Appeal”) in order to maintain the decision that fixed the prescriptive period of 10 years to file a motion for indemnification in case of breach of contractual obligations.

On the Divergence Appeal it was discussed whether, in case of breach of contractual obligations, the limitation period for the creditor to charge the debtor for the nonperformance of a contractual obligation would be decennial, pursuant to the Article 205 of the Brazilian Civil Code, or triennial, pursuant to Article 206, paragraph 3^th, subparagraph V of the aforementioned code.

In the Divergence Appeal judgement, Justice Nancy Andrighi, followed by the majority of STJ justices, clarified that:

(i) The expression “civil repair” in Article 206, paragraph 3^th, subparagraph V, of the Brazilian Civil Code does not include the indemnification of any and all negative, patrimonial or extra patrimonial, consequences arising from the breach of legal duties, but only the civil liability arising from illegal extra-contractual acts;

(ii) In case of contractual civil liability, i. e., the liability arising from the breach of a contracted duty, whatever the creditor claim may be – specific performance of the contracted obligations, reimbursement of damages and losses or contractual resolution, the prescriptive period is always decennial; and

(iii) The different treatment given to the contractual civil liability, which prescriptive period is decennial, and the extra-contractual civil liability, which prescriptive period is triennial, does not violate the equality principle, since the circumstances that generate them are absolutely distinct.

More information on the Divergence Appeal can be accessed in Portuguese at:

https://ww2.stj.jus.br/processo/revista/inteiroteor/?num_registro=201101903977&dt_publicacao=02/08/2018