Officers and Directors duties in M&A Transactions in Brazil
- Brazil
- 04/19/2010
- Azevedo Sette Advogados
Introduction
Brazilian Law assigns several duties to officers and directors of Brazilian companies, such as the duty of care, the duty to act in a diligent manner, and the duty to act with loyalty to the company. Moreover, officers and directors of listed companies must also comply with special regulation, including the rules issued by the Brazilian Securities Exchange Commission (Comissão de Valores Mobiliários - CVM), such as to disclose material information regarding the company’s business, to keep confidential information that has not yet been disclosed to the market, as well as to not act or participate in any transaction in which they have conflicting interest.
The duties assigned to officers and directors are especially applicable in M&A; transactions and the violation of such duties may lead to criminal, civil, and administrative charges against officers and directors, as detailed below. CVM’s rules regulate in detail the officers and directors’ duties set forth by the Brazilian Corporation Law, defining and classifying the degree of the violations, as well as the penalties applicable to each case (see for instance, Rules # 131/1990, 202/93, 358/2002 and 367/2002 issued by the CVM). In addition to civil and criminal liability, whenever applicable, the CVM may apply the following penalties to officers and directors of listed companies: infraction notice, monetary penalty, suspension or disqualification to exercise the function. The monetary penalty applicable by CVM may not exceed the higher of the following amounts: (i) R$500,000; (ii) 50% of the value of the irregular transaction; or (iii) three times the amount of (a) the illegal advantage obtained or (b) the loss prevented by the practice of the illegal act.
Insider trading
The duty of confidentiality is especially important with regards to listed companies. In this sense, officers and directors must keep confidential all information that has not yet been disclosed to the market and they must not use confidential information to obtain any advantage either for themselves or for third parties. Such practice that is known as “insider trading” is considered crime in Brazil since 2001 (Law # 10,303) and the penalty varies from 1 to 5 years of prison plus a monetary penalty of up to three times the amount of the illegal advantage that was obtained by the insider. The insider is also subject to administrative penalties assessed by the CVM.
Ownership and negotiation with the company’s shares
The CVM requires officers, directors, members of the audit committee, and members of any other technical or consultant body of the company to inform to the company of the ownership of and negotiations made with any securities issued by the company, its controlling companies or subsidiaries, if the controlling companies or subsidiaries are also listed companies (Rule # 358).
The violation of such rules is considered a gross violation and the applicable penalties are suspension to exercise the function; temporary disqualification to exercise the function, limited to twenty years; suspension or cancellation of the authorization to exercise activities in the securities market; temporary prohibition to practice certain activities and operations which require authorization or registration before the CVM, limited to twenty years; and temporary prohibition to act, directly or indirectly, in one or more type of transactions in the securities market, limited to ten years.
M&A; transactions with related parties
The CVM has recently issued Opinion # 35 (September 1st, 2008) regarding officers and directors fiduciary duties in amalgamation and merger operations, as well as in merger of stocks involving a controlling company and its subsidiaries or companies under the same corporate control. The CVM Opinion # 35 gives examples of proceedings that officers and directors may follow in order to fulfill their legal duties in such operations.
According to CVM Opinion # 35, the Scheme of Amalgamation or Merger that will be submitted to the general shareholders’ meeting must be negotiated by officers and directors in an independent manner and on the interest of the company and of its shareholders, in order to guarantee that the corporate rights and shares that will no longer exist after the transaction, will be duly and fairly substituted by shares of the new company or of the succeeding company, as the case may be.
Among the examples provided in CVM Opinion # 35, the following proceedings may be followed by officers and directors: (i) the beginning of the negotiations shall be immediately disclosed to the market, unless the company’s corporate interest requires the operation to be kept confidential; (ii) officers and directors shall seek the best terms and conditions for the company’s shareholders; (iii) officers and directors shall consider alternative ways to close the operation, such as offering the acquisition of the shares or a share swap; (iv) officers and directors shall reject the operation if the substitution of shares and other terms and conditions of the transaction are not suitable to the company’s interest; (v) the officers and directors’ final decision on the matter shall be duly justified and documented.
Although the proceedings listed in CVM Opinion # 35 are not mandatory to officers and directors, it is strongly recommended that officers and directors follow the standards indicated in such opinion in order to guarantee a minimum level of disclosure and compliance.
M&A; transactions and the controlling shareholder right to vote
Brazilian law forbids a shareholder to vote on matters that would benefit particularly such shareholder or on matters that a shareholder has a conflicting interest, being such rule also applicable to M&A; transactions.
On merger operations and on merger of stocks involving listed companies, CVM understands that in the event that the corporate rights and shares that will no longer exist after the transaction are substituted by shares of the new company or of the succeeding company, as the case may be, on a disproportionate manner, shareholders that benefit from such disproportion are prevented to vote on the shareholders’ general meeting that will approve or disapprove the transaction (CVM Opinion # 36).
Recently, in the case involving the merger of Duratex S.A. with Satipel Industrial S.A., CVM forbade the exercise of the right to vote by the Duratex’s controlling shareholders. In such case, Duratex’s minority shareholders would receive a number of shares 16,67% lower than the number of shares that would be received by Duratex’s controlling shareholders.
Therefore, officers and directors of listed companies shall be aware of CVM’s understanding with regards to shareholders corporate rights in M&A; transactions in order to better plan and negotiate such transactions.
Poison Pills: CVM’s recent understanding
Although the Brazilian securities market is still characterized by listed companies with a concentrated corporate control, the CVM has recently issued Opinion # 36 (June 23st, 2009) regarding the existence of poison pills provisions in the articles of association of listed companies. Poison pills provisions aims to prevent the company’s takeover by creating mechanisms that would difficult or increase the costs of a takeover. The corporate control of a company is directly related to the appointment of officers and directors, thus, poison pills provisions may lead to the maintenance of the company’s management, which may not be of the interest of the non controlling shareholders. Also, such provisions, in certain cases, may block an M&A; operation that could increase value to the shareholder.
The CVM understands that provisions aiming to prevent or difficult the suppression of or changes to poison pills provisions violate some of the Brazilian Corporation Law rules and principles, such as the sovereignty of the general shareholders meeting to decide on matters involving the company’s business. The CVM Opinion # 36 states that shareholders may vote (i) favorably to the exclusion of poison pills provisions in the company’s articles of association and (ii) against the obligation to make a public offer, even if the company’s articles of association forbids or provides so, respectively.
Furthermore, CVM will not apply administrative penalties to the shareholders that decide to vote against the poison pills provisions contained in the company’s articles of association.
Conclusion
Officers and directors should be aware of and comply with all duties and obligations assigned by law and in the company´s articles of association and by-laws, including when working on M&A; deals.
If officers and directors fail to comply with their duties and obligations, they may be charged personally in civil, criminal, and administrative courts. The shareholders and the company may charge officers and directors for the damages caused and ask for indemnification. It is also important to note that, even if an “ultra vires” act (in excess of powers) is cancelled by a general shareholders’ meeting, officers and directors will not be rendered exempt from their duties and may still be charged by the illegal conduct.
Note that under Brazilian Law, civil liability is generally based on three requirements (i) will of the party; (ii) occurrence of damages; and (iii) causation. However, under certain circumstances officers and directors may be liable only because they violated the law or the company´s internal rules, despite their will to do so, such as in tax and antitrust matters.
Therefore, officers and directors acting within the limits of the law and of the company’s by-laws and internal rules may not be personally liable for their conduct. However, officers and directors may be liable when acting in violation of the law or of the company’s by-laws and internal rules, causing losses and damages to company.
In this sense, it is important that the company’s articles of association and by-laws set forth officers and directors duties and liabilities in a detailed and clear manner. If the company’s internal rules omit certain matter, it is strongly recommended that officers and directors obtain a ratification of their conduct from the board of directors or from the general shareholders meeting, as the case may be.
Finally, it is important to highlight the suitability to hire a D&O; insurance police in order to protect officers and directors from personal liability charges as a result of the performance of their duties.
Officers and Directors Duties in M&A; transactions in Brazil, Juliana Soares Porto Fonseca, Latin America Law & Business Report, Volume 17, December (2009), Thomson Reuters/WorldTrade Executive - www.wtexecutive.com
