Publications

Category: Litigation

The Brazilian Arbitration Law (Federal Law No. 9,307/1996) enshrines, in its article 8, sole paragraph, the so-called principle of jurisdiction over jurisdiction, according to which it is up to the arbitrators to decide on their own jurisdiction (subject to subsequent analysis by the Judiciary, in the scenarios set forth for annulment of the arbitration award). The principle establishes, therefore, a limit on interference by the state judge, in view of the parties' choice of arbitration.

As a rule, interference by the Judiciary in the scope of arbitration is only authorized in extremely exceptional situations, such as: (i) when there is urgency in the prayer for relief of any of the parties and the arbitral tribunal is not yet constituted; (ii) when one of the parties resists the initiation of arbitration; (iii) when the arbitration agreement entered into is defective and therefore unenforceable; or (iv) when there is an error in the arbitration award that authorizes its annulment.

The case law of the Superior Court of Justice (STJ) has been increasingly favoring arbitration by repeatedly recognizing that the initial jurisdiction to resolve questions regarding the existence, validity, and effectiveness of the arbitration agreement is exclusively that of the arbitrators.

Conflict of Jurisdiction No. 151.130/SP: decision that gives deference to the will of the parties

In a recent decision handed down in Conflict of Jurisdiction No. 151.130/SP on May 9, 2018, Nancy Andrighi, Justice of the Second Section of the STJ, suspended a decision by the Federal Court of Appeals of the 3rd Circuit (TRF3) that exempted the Federal Government from participating in arbitration proceedings instituted by Petrobras' shareholders in the Market Arbitration Chamber - CAM Bovespa.

The arbitration proceedings were instituted by Petrobras minority shareholders against the company and the Federal Government in its capacity as the controlling shareholder in order to seek redress for losses caused to Petrobras' equity that allegedly resulted from the negative impact caused by Operation Carwash to the company in the capital markets.

In response, the Federal Government filed a lawsuit in the São Paulo Federal Court, whereby it requested that its participation in the arbitration be declared null and void, on the argument that the Federal Government, as the controlling shareholder of Petrobras, is not bound by an arbitration clause contained in the company's bylaws and therefore could not have arbitration proceedings instituted against it. The TRF3 granted the prayer for relief and ruled the Federal Government's participation in the arbitration filed by Petrobras’ minority shareholders to be null and void.

In view of the interference by the Judiciary, Petrobras' minority shareholders instituted Conflict of Jurisdiction No. 151.130/SP before the Superior Court of Justice, whereby they raised the lack of jurisdiction of the São Paulo Federal Court and the TRF3 to decide on the participation of the Federal Government in arbitration, by virtue of article 8 of the Arbitration Law, which establishes the principle of jurisdiction over jurisdiction.

In her written opinion, the reporting judge in the conflict of jurisdiction, Justice Nancy Andrighi, argued that, since there was no arbitration tribunal constituted and, consequently, a final decision on the Federal Government's participation in arbitration, interference by the Judiciary would be inappropriate at that moment since decision would offend and disregard the power and autonomy of the arbitrator's decisions.

Justice Andrighi concluded by stating that "it is the duty of the Judiciary to await the competent response by the arbitral tribunal, which will decide such matters in definitive terms." Finally, it ordered a stay in the lawsuits filed by the Federal Government, as well as suspension of the TRF3’s decision that exempted it from participating in the arbitration proceedings.

Conclusion

In a country with continental dimensions and major regional features such as Brazil, standardization of the case law of state courts in matters of arbitration has not been an easy task.

Decisions such as this, however, certainly help to crystallize the case law of Brazilian higher courts and, at the same time, strengthen the confidence of Brazilian and foreign businessmen and investors in arbitration as an efficient and secure method of dispute resolution.

Category: Infrastructure and energy

After the approval and promulgation of Legislative Decree No. 15/2018 by the Federal Senate, on March 20, the Agreement on Air Transport between Brazil and the United States (Open Skies), signed by former presidents Dilma Rousseff and Barak Obama in 2011, awaits only the promulgation of a presidential decree to be enacted.

Under the current rules, in order for an airline of one of these countries to carry passengers or cargo to the other country, it must undergo an administrative process, or designation process, therein complying with technical and security requirements, as well as requirements of the nationality of the company the operator of the aircraft, among others, with the regulators of the other country, in order to obtain frequencies (schedules) on routes determined for the company’s operation.

Open skies agreements aim to simplify this process by allowing airlines in signatory countries to make international flights without the need for a new agreement to change or increase the number of frequencies available, or even without the company's having to undergo the complex designation process as agreed upon in each open skies agreement and the legislation of each country.

This type of agreement aims to reduce bureaucracy in the air travel sector, thereby eliminating barriers to passenger and cargo transportation, increasing the availability of flights between companies in the signatory countries, creating a segmentation of services and, as a side effect, increasing jobs and contributing to greater exchange of professionals with other sectors of the economy and society.

Among the rights and obligations of the companies covered by the agreement between Brazil and the United States, domestic transportation by foreign companies is not allowed. That is, an American company cannot transport passengers between cities in Brazil and vice versa. In addition, the agreement does not change the current limit of participation of foreign companies or individuals in Brazilian airlines, fixed at 20% of shares with voting rights.

Despite the expectation regarding the abovementioned positive results, possible ratification and promulgation of the agreement is not without controversy. The following arguments in favor of non-ratification were raised during the discussions on the issuance of the legislative decree and in forums with the participation of national market players: (i) there are differences between the legal regimes to which airlines are exposed (differences of a tax, labor, environmental nature, among others that may vary according to the legislation and that would give a competitive advantage to North American companies); (ii) submission of US companies to lower costs, such as fuel, aircraft leasing and maintenance, which usually follow a dollar-indexed pattern, and lower or no exchange costs, since they have revenues and expenses in US dollars, thus avoiding costs for protection against currency fluctuation; and (iii) a possible high differentiated pricing practice due to disproportionality of the size of the companies involved, since the American companies are much larger than the Brazilian ones and could practice better commercial conditions in view of the greater number of routes in which they already operate flights.

All these positive and negative points must be analyzed by the Brazilian President in his decision on whether or not to ratify the agreement that is on his table. The decision is awaited with great expectation, since without doubt, its ratification, or lack thereof, will bring about various changes in the Brazilian aeronautical environment.

Category: Banking, insurance and finance

Heritage funds, also known as endowments or philanthropic funds, have recently been regulated by Presidential Decree No. 851, of September 10, 2018.

These funds are sets of private assets organized, managed, and administered by an asset management organization with the purpose of providing a long-term funding for the supported institutions or the institutions holding the funds. As a general rule, only proceeds of the donations are applied to projects. The fund serves as a regular and stable source of funding for institutions whose purpose is the development of education, science, technology, research and innovation, culture, health, environment, social assistance, and sports activities. For the time being, such institutions may be public or private non-profits.

The regulation delimited the areas of activity of the institutions supported and left out, for example, human rights. Agents involved in the legislative process of the MP suggest the linking of areas of activity according to the broader scope of article 3 of Law No. 9,790, of March 23, 1999 (the OSCIPs Law).

Nonetheless, the MP has made important advances in encouraging donations in Brazil by improving the corporate governance of the fund management organization, therein providing for a separation of responsibilities between those who manage the fund and the institution supported. Also within the scope of corporate governance, the fund's management organization must include in its bylaws, among other things: 

1. which institutions are supported, and a qualified quorum is needed to change them;
2. the obligation to set up a board of directors (CA) and an audit committee (CF) and, for heritage funds with assets over R$ 5 million, investment committees (CI), as well as the rules of composition, competencies, form of election, or nomination of their members and the possibility regarding whether donors may sit on such bodies;
3. the form of approval of policies of management, investment, redemption, and use of the funds of the heritage fund; and
4. prohibition on the allocation of funds for purposes other than those provided for in the bylaws and the granting of guarantees to third parties using the assets owned by the heritage fund. 

The regulation also obliges heritage funds to adopt internal mechanisms and procedures of integrity, auditing, and incentives for reporting irregularities, as well as the preparation of codes of ethics and conduct for managers and employees. Fund management organizations with shareholders' equity exceeding R$ 20 million must have their financial statements submitted to independent auditors.

The MP also provides that the CA should be composed of at least two independent directors and a maximum of seven members for a term of two years, with the possibility of renewal. The MP provides that it is the responsibility of the CA to deliberate on amendments to the bylaws, contrary to the Civil Code, which considers the general meeting exclusively competent in this regard. Another important measure of transparency for investors is the provision that individuals or representatives of donor legal entities representing more than 10% of the total composition of the fund may participate in deliberative meetings of the CA as observers.

The CI, to be appointed by the CA, is responsible for recommending to the CA the investment policy and the rules for the recovery and use of funds, to coordinate and supervise the actions of those responsible for managing funds, and to prepare an annual report on the management of funds. Another important advance of the MP for the professionalization of management of heritage funds is the possibility of hiring, by the management organization, of an entity to manage funds registered with the Brazilian Securities and Exchange Commission (CVM), allowing for the payment of a performance fee.

The CF must be composed of three members nominated by the CA, and members who sat on the CA may not be nominated. The members of the CA, CF, and CI may be remunerated at an amount limited to the highest remuneration of the highest-ranking leader of the institution supported.

Despite the many positive aspects of corporate governance, there is a tightening and bureaucratization of the structure that may increase costs and inhibit donations from large fortunes. It should be observed that there is room for simplification of the governance structure.

It is important that the optional executive body of the executive organization be a non-profit institution or an international entity recognized and represented in Brazil, which is engaged by the managing organization to assist and coordinate the supported institution in the development of projects and programs.

The new rule regulates the relationship between the supported institution and the management organization, therein requiring the execution of a partnership instrument and the execution of programs, which must establish, respectively, (i) the cooperation link between them and determine the purpose of the public interest to be supported; and (ii) how the funds will be spent.

The MP was published days after the fire at the National Museum of Brazil in Rio de Janeiro and, in order to alleviate the tragedy, included permission for a larger percentage of the donations, not just their income, to be invested in the recovery or preservation of works and heritage and in emergency interventions to maintain the services provided by the supported institution.

One of the main innovations of the MP is the matching of financial donations to management organizations that support cultural projects to donations made to cultural projects for the purposes of article 3 of Law No. 8,313, of December 23, 1991 (the Rouanet Law), it being possible to deduct income tax of up to 6% for individuals and up to 4% for legal entities. The limitation of such tax benefit to only cultural projects may have a perverse effect by inhibiting investments in other areas covered by the heritage funds.

It should be noted that, according to Law No. 9,249, of December 26, 1995, and Presidential Decree No. 2,158-35, dated August 24, 2001, the donor legal entity taxed per the actual income regime may deduct the amount of the donation up to the limit of 2% of operating income, in the case of donations to civil society organizations (OSCs). The extension of this benefit to heritage funds would enable the search for new potential sources of funding for such organizations, which mostly work in the aforementioned social areas, delimited by the MP itself.

It is also observed that, in the State of São Paulo, the Tax on Transferences Causa Mortis and Donation of any Assets or Rights (ITCMD) is the responsibility of the grantee, therein applying a rate of 4% (the maximum rate established by the Federal Senate is 8%) over the amount donated. Entities whose social objectives are to promote human rights, culture, or the environment are exempt from this tax. Pursuant to the terms of article 4, item IV, of Decree No. 46,655/02, the ITCMD does not affect the transfer of assets and rights to the equity of educational and social assistance institutions that enjoy immunity only in relation to assets linked to essential purposes, which do not include assets for use as a source of income.^[1] 

Considering that the ITCMD would be applicable to donations to funds and, in most cases, to donations from funds to supported institutions, there is debate regarding possible exemption from the ITCMD in donations to OSCs and heritage funds. According to a study by a researcher with FGV, Rafael Oliva, and the report Sustentabilidade econômica das organizações da sociedade civil – Desafios do ambiente jurídico brasileiro atual ["Economic Sustainability of Civil Society Organizations - Challenges in the Current Brazilian Legal Environment”], FGV Direito SP, the funds raised with ITCMD, including inheritances and donations, correspond to 1 % of net current revenue. By separating the amount raised with ITCMD from the taxable event, it is possible to find that 52% comes from donations, and only 1% of the total collected, or 0.0168% of the net current income of the state, without separating from this amount donations to OSCs.

The MP already has 114 suggestions for amendment. To organize advocacy with respect to the topic, the Institute for Development of Social Investment (IDIS) launched the Coalition for Philanthropic Heritage Funds, of which Machado Meyer is a signatory. Three of the main purposes of the initiative are (i) to expand the area of ​​activity of the supported institutions (article 3 of the OSCIPs Act), (ii) extend the MP tax benefit for all causes; and (iii) reduce governance constraints for managing organizations, in order that large fortunes not be discouraged from donating.

^[1] SPALDING, Erika. Os Fundos Patrimoniais Endowment no Brasil [“Endowment Heritage Funds in Brazil”]. São Paulo, 2016.

Category: Capital markets

CVM Guidance Opinion No. 38, issued on the 25th of this month, deals with the fiduciary duties of managers within the framework of indemnity agreements entered into between publicly-held companies and their management (officers, members of the board of directors or audit committee, members of committees established in bylaws, among others).

This type of agreement aims to ensure payment, reimbursement, or advance of expenses arising from any arbitral, civil, or administrative proceedings instituted to investigate acts carried out in the exercise of the officers and directors' functions. Not provided for in the Brazilian corporate law, this instrument is freely agreed upon between the parties and must always respect the corporate interest of the company.

In recent years, repeated corruption cases involving Brazilian companies have led insurers to raise premiums and reduce D&O insurance coverage or even discontinue the offering of this type of insurance in Brazil. In this scenario, indemnity agreements have come to be seen as a viable alternative to protect officers and directors of companies that are the focus of investigations.

Unlike D&O insurance, in which the company pays only one premium in return for an indemnity offered by the insurer, indemnity agreements can bring about a large financial impact for the company in the event of materialization of an event covered by it, since it effectively obliges it to disburse funds to support the officer or director's risk (whether through advance of amounts or reimbursement). Such instruments also give rise to significant risks of conflicts of interest, since their approval is usually provided by the management bodies that will ultimately be the main beneficiaries of the agreements.

In this context, CVM's new guidance opinion, while recognizing the value of indemnity agreements as a legitimate instrument to attract and retain qualified professionals, recommends the adoption of rules and procedures aimed at ensuring duties assigned to them by Law No. 6,404/76, in order to mitigate the risks of conflicts of interest inherent to this type of agreement and to provide "the necessary balance between, on the one hand, the company's interest in protecting its officers and directors against financial, administrative, or judicial proceedings and, on the other, the company's interest in protecting its assets and ensuring that its officers and directors act in accordance with the standards of conduct expected and required of them by the law."

The guidance opinion provides that indemnities, among other things, are not possible when due to acts carried out by the officers and directors when such acts are:

• conducted in bad faith, willful misconduct, gross negligence, or fraud; or
• in their own interest or those of third parties, to the detriment of the company's corporate interest, including amounts related to indemnities arising from actions for which liability is provided for in or offered under the terms of a consent order.

CVM recommends that the above exceptions be expressly provided for in the indemnity agreement and, when the officer or director requests some disbursement from the company, an investigation of the event in the particular case be conducted before a decision on whether it should be granted.

In the event of advances of expenses by the company before a final decision in the arbitral, judicial, or administrative sphere, the officer or director shall be required to refund the amounts received in the cases in which, after a final decision, it is proved that the act carried out by the officer or director is not indemnifiable.

Regarding the decision-making power to grant an indemnity, the guidance opinion states that the company's management must ensure that the contract includes clear and objective rules, therein specifying:

• the body of the company that will be responsible for evaluating whether the act by the officer or director falls within any of the abovementioned unlawful courses of conduct; and
• the procedures that will be adopted in order to exclude participation by the officers or directors whose expenses may be indemnified from the evaluation process mentioned in the item above, pursuant to article 156 of Law No. 6,404/76.

The officers and directors must, in this case, assess the existence of conflicts of interest and the adoption of additional procedures to protect the independence of decisions on whether to grant an indemnity, which should always be made in the interests of the company.

CVM is of the understanding that additional governance procedures that reinforce the independence of decisions and guidance in the sole interest of the company, such as forwarding of the matter for deliberation by a general meeting, should be considered in situations where:

• more than half of the officers or directors are direct beneficiaries of the resolution regarding the disbursement of funds;
• there is a divergence of understanding regarding the classification of the act by the officer or director as indemnifiable; or
• the financial exposure of the company is significant, considering the amounts involved.

CVM also considers the involvement of shareholders in the decision on the execution of certain contracts to have the potential to mitigate conflicts of interests and decisions made contrary to the company's corporate interest, as well as ensuring the proper disclosure of their main terms and conditions. The participation of the shareholders could be through, for example, the inclusion of a provision in the bylaws authorizing the company to indemnify its officers and directors or to submit the general terms and conditions of the draft agreement to the general meeting.

In addition, CVM recommends that, at a minimum, the following information on the indemnity commitments assumed be disclosed by the Company:

• Whether there is a provision in the bylaws on the indemnity and, if so, its terms;
• If the agreement will have to provide a limit on the amount of the indemnity offered and, if so, what that limit is;
• The coverage period that may be covered by the agreement;
• The officers and directors who may enter into an indemnification agreement with the company;
• The events for which indemnity is excluded;
• The types of expenditure that may be paid, advanced, or reimbursed on the basis of the agreement; and
• The procedures related to decisions regarding the payment, reimbursement, or advance of expenses arising from the indemnity commitment, therein indicating: (i) the company's body that will be responsible for the decisions regarding whether it is granted; and (ii) rules and procedures that will be adopted to mitigate conflicts of interest, ensure the independence of decisions, and ensure that decisions are made in the interests of the company.

Also in the guidance opinion, CVM considers it desirable that the execution of the indemnification agreement be backed by a prior detailed opinion prepared by the board of executive officers and approved by the company's board of directors, explaining the reasons why they believe that the terms and conditions of the agreement mitigate the risks of inherent conflicts of interest.

Regarding the medium for disclosure, CVM recommends that indemnification agreements (accompanied by any exhibits) be sent, within seven business days of signing, to the electronic system available on the agency’s page. The category “Indemnification Agreements" has already been created in the IPE Module of the Empresas.Net System in order to send the aforementioned agreements.

Although the opinion has no normative force, it is recommended that its provisions be followed by companies in order to reduce the risk of investigative actions and/or penalties that may be imposed by CVM. 

Category: Tax

Companies were surprised last September with the enactment of ICMS Convention 106, which aims to regulate the procedures for collection of ICMS applied to transactions with digital goods and merchandise, traded through electronic data transfer, and grants exemption for withdrawals intended for final consumers.

Before discussing the constitutionality of the convention, it is important to point out that the discussion of the possibility of charging ICMS on software made available electronically has long been discussed by state revenue services.

In fact, the states adopt the position that all standardized software, programs, electronic games, applications, electronic files and the like, even if they have been or can be customized, are classified within the concept of merchandise. This is even the logic behind Convention No. 106/2017

In this sense, once classified as merchandise, the marketing and provision of software must follow the general rule of taxation set forth in applicable ICMS legislation.

Considering this logic, it is easy to understand why the states understood that Convention No. 106/2017 did not change the legal framework with respect to taxation of the marketing and provision of software (considering its equivalence to the merchandise). The only exception is the establishment of an exemption in transactions that precede the arrival of the merchandise to the final consumer, per the terms of the section two of the convention.

It so happens, however, that the issue requires much more discussion, in our opinion, especially because of: (i) its establishing the presumption that all transactions with software are internal; (ii) its defining the taxpayers; and (ii) its holding third parties liable without any relation with the ICMS taxable event for the collection of ICMS due on the transaction.

Specifically with respect to items "i" and "ii", the sections three and four of Convention No. 106/2017 provide that:

Section three. The tax shall be collected on internal withdrawals and on imports made through a website or electronic platform that sells or makes available, even if through periodic payment, digital goods and merchandise through electronic transfer of data, in the state where the purchaser of the digital goods or merchandise is domiciled or established.

Section four. Legal entities that own a website or an electronic platform that sells or makes available, even if through periodic payment, digital goods and merchandise through electronic transfer of data, shall be the taxpayer in the transaction and must register with the state in which they carry out the internal withdrawals or importation destined to final consumer, being offered, at the discretion of each state: (...)

From an analysis of the section transcribed above, we believe it possible to argue that Convention 106/2017 invades the jurisdiction of the complementary law by fixing not only the place of transactions for the purpose of collection but also the taxable person, in this case the taxpayer, thus violating article 155, paragraph 2, item XII, "d", of the Federal Constitution.

In this sense, it is worth remembering that, under the terms of article 155, paragraph 2, item XII, "g", of the Federal Constitution, and of article 1 of Complementary Law No. 24/1975, conventions may only govern the granting or revocation of exemptions, incentives, and tax benefits, and this type of regulation is not permitted to govern the method of collecting ICMS or determining who the taxpayer is.

In our view, the convention aims to institute a state taxation system based on the consumption of merchandise (taxation on the destination). However, due to economic and fiscal policies, these taxes are restricted to oil transactions, including lubricants, liquid and gaseous fuels derived from them, and electric energy, according to article 155, X, 'b' of the Federal Constitution.

We understand, therefore, that there are arguments supporting an allegation that Convention No. 106/2017 is unconstitutional due to its attempting to transform a so-called "interstate transaction" into an "internal transaction" without a basis in complementary law. Also because this measure would indirectly violate the jurisdiction of the Federal Senate to define the ICMS rates levied on interstate transactions with goods (under the terms of article 155, paragraph 2, IV, of the Federal Constitution).

Regarding the liability of third parties not related to the ICMS taxable event for collection of the ICMS tax due on the transaction, the Federal Constitution assigns the jurisdiction over defining components of tax rules, such as identity of the taxpayer, taxable event, obligation, among others, to complementary law.

Regarding the ICMS, the Federal Constitution, in order to guarantee greater legal certainty, assigns to complementary law various issues of the overarching rule on application of state tax, among them, the taxpayer, as already explained.

On this point, Article 128 of the National Tax Code stipulates that the law may expressly assign liability for the tax credit to third parties linked to the taxable event.

Thus, there are two requirements for assigning of tax liability, which are: (i) obligation to enact a law; and (ii) the person responsible must be related to the triggering event.

From an analysis of Convention No. 106/2017, we found in its section five an express assignment to third parties of liability for the collection of ICMS. However, in our view, there are arguments to support an allegation of illegality of the convention, in view of the absence of a law authorizing such liability.

In addition, from an analysis of the persons responsible listed in section five, it is our opinion that this link with the taxable event with the state tax is questionable, since in some cases legal entities are only responsible for the mere monetary pass-through.

Considering the above, and despite our understanding on the correct taxation of marketing and provision of software (ISS vs. ICMS), we understand that there are arguments to support an allegation that the form of collection imposed by Convention No. 106/2017 is unconstitutional.

This conclusion is corroborated by the recent injunction granted in the collective application for mandamus presented by Brasscom - Brazilian Association of Information and Communication Technology Companies, against Convention No. 106/2017.

Category: Tax

The 2nd Panel of the Superior Court of Justice (“STJ”) granted a taxpayer’s appeal to recognize that the ICMS cannot be included in the calculation basis of the Social Security Contribution on Gross Revenue (CPRB). The decision was issued in the judgment on Special Appeal No. 1.732.000/SP, on May 3.

The reporting judge, Justice Herman Benjamin, stressed that, although the case under analysis deals with the substitutionary contribution established by Law No. 12,546/11, the Federal Supreme Court (“STF”) and the STJ understand that the debate is similar to Topic of General Repercussion 69 (dealing with exclusion of the ICMS from the PIS/Cofins basis), whose controlling case is Special Appeal RE No. 574.706. The other justices of the 2nd Panel concurred with the Justice’s opinion.

With the decision, the 2nd Panel aligns itself with the position already declared by the 1st Panel and, consequently, unifies the understanding of the panels that make up the 1st Section to the effect that the logic adopted by the STF applies to the CPRB, since, likewise, it deals with taxation that includes the ICMS (which is effectively not part of the taxpayer's assets) in determining the calculation basis for the tax.

The issue may be reviewed by the 1st Section in the judgment on Motion to Harmonize Case Law No. 1.694.357/CE, the written opinion of which is to be drafted by Justice Og Fernandes.