Publications

Category: Tax

• No. 108 – Application of interest over fines;
• No. 115 – Legality of the calculation of transfer price PRL 60 according to Normative Instruction No. 243/02;
• No. 116 - The peremption period for the creation of a tax credit for amortized premium is counted as of the period of its repercussion in the calculation of the tax;
• No. 124 - The production and exportation of non-taxable products do not generate a presumed IPI credit, and;
• No. 127 - The impact of CIDE on technical service contracts provided by a foreign person does not require the transfer of technology. 

Some relevant proposals did not obtain a quorum for approval, among them: (i) the non-deductability of premium expenses generated internally for the economic group, (ii) the possibility of simultaneous application of an isolated fine and a sua sponte fine based on Presidential Decree No. 351/2007, and (iii) the auditor of the Brazilian Federal Revenue Service has authority to supervise PPBs, and its conclusions are not binding on the ZFM’s oversight activity.

Below is a table of the main proposals and their results:

Category: Competition

The Administrative Council for Economic Defense (Cade) launched in October of 2018 the Antitrust Remedy Guidelines. The Guidelines compile the best practices and procedures usually adopted by Cade in the design, application, and monitoring of remedies negotiated with parties to complex mergers. With the publication of the Guidelines, Cade aimed at giving greater predictability and transparency to the remedy negotiation process with parties involved in complex transactions that may not be subject to unconditional clearance.

Antitrust remedies may be structural, when they aim to maintain market structure (such as the sale of equity, independent business units, productive capacity, or intellectual property) or behavioral, when they limit the company's future conduct and generally require monitoring (such as restriction on access to sensitive information, supply obligation, sharing of efficiencies, etc.)

Since Law No. 12,299/2011 entered into force, 33 transactions reported to Cade were cleared with remedies. The agency accepted purely behavioral remedies in 16 of these cases, structural remedies in 10, and hybrid remedies in 7 of them. In the same period, 6 transactions were blocked by Cade, as the competition authority and the merging parties failed to reach a consensus on remedies deemed appropriate to neutralize the competition concerns associated with the transactions. Four of these rejections occurred in the short period between June of 2017 and March of 2018.

In this context of recurring complex transactions under the scrutiny of the competition authority, the publication of the Guidelines is most welcome.

A significant part of the Guidelines is intended to clarify the principles that contribute to the effectiveness of the remedies, which should be observed during the negotiation of an agreement on control of concentration (ACC for its acronym in Portuguese) in order to ensure that the remedies are quick to implement, feasible, monitorable, and proportionate to the competition problems identified.

It is worth highlighting that in the Guidelines Cade has expressed its preference for structural remedies, which ate more efficient and less burdensome than the behavioral remedies. It will be necessary to verify how this preference will be materialize, since the adoption of behavioral remedies by Cade under Law No. 12,299/2011 has been more common. The Guidelines also indicate Cade’s preference for the adoption of a monitoring trustee that will help it monitor and guarantee compliance with the obligations established in the remedies, thus hoping to increase their effectiveness.

The Guidelines detail practical issues relevant to structural remedies (e.g., divestment package, suitable buyer, and divestiture process) and behavioral remedies, as well as provide clarifications on trustees' roles, monitoring of ACCs, and applicable penalties for non-compliance , among other issues.

The Guidelines should streamline remedy negotiations with Cade, insofar as parties to transactions that may generate competition concerns will have concrete elements to discuss and assess in advance possible remedies to be proposed to the agency.

Category: Corporate

The preparation of a business contract involves discussions that translate into a mere allocation of risks from one party to the other. In theory, the risk will be contractually allocated to the party that can bear it more efficiently (and by efficiency we mean the ability to both avoid materialization of the risk and bear risk in a less costly manner, in addition to the risk appetite of each party). Of course, any allocation of risk results in costs - the buyer, having to bear a greater risk, will propose a lower purchase price than it would if it had to bear less risk.

Legal advisors therefore have the function of adding value to the transactions on which they advise, since the more complex the transaction that is the subject matter of the contract, the more sophisticated the contract structures will be. This is precisely the case with M&A contracts, which use representations and warranties and indemnification structures for the allocation of risk between the parties.

Allocating a risk to the other party is not easy and is not always a simple task based on numbers and probabilities. Thus, such discussions, which are extremely relevant in the context of a business contract, may prove to be true bottlenecks in carrying out a transaction. Thus, a transaction that could be more expeditious ends up taking more time for closing, or closing does not even occur if there are deal breakers at the time of discussions regarding allocation of risks. Therefore, it is recommended that the parties seek alternatives that are better fit to the needs of the transactions, one of which is the purchasing of insurance against transactional risks, such as tax indemnity insurance (not yet available in Brazil), or insurance for representations and warranties (R&W insurance), already widespread and used in the United States and Europe. Although they were launched in the Brazilian market only about four years ago, they have been gaining popularity - searches for R&W insurance grew in the first half of this year. The increase was 35% compared to the prospection index for the year 2017.^[1]

R&W insurance is a specialized product that provides to the buyer coverage exclusively for financial loss arising from noncompliance with the content of the representations and warranties provided by the seller, including those relating to tax contingencies, if applicable, and covered by the policy in the context of an M&A.

R&W insurance coverage does not, however, cover any breach of a representation or warranty, but only that which is related to a hidden liability, that is, that which is not known or expected by the seller and buyer. For example, risks known to the buyer, and those risks that are unknown because the matter in question was excluded from due diligence, are not insured. In addition, R&W insurance currently available in Brazil has a mandatory deductible, which is excluded from the insurance coverage or any losses related to the breach of representations and warranties in amounts equal to or less than a de minimis amount and the aggregate deductible (ranging from 1 to 3% of the value of the transaction) as provided in the policy.

Under R&W insurance, the buyer is compensated for amounts it is entitled to claim against the seller, as well as the costs of defending itself up to the maximum guarantee coverage limit of the policy purchased.

The policies are tailor made for the M&A in question based on an assessment of the typical risks of the activities carried out by the target company, the results of the due diligence, the financial statements of the target company, and, as the name already indicates, the representations and warranties provided in the M&A contract.

Thus, R&W insurance represents additional security for investors, particularly in M&A contracts in which the buyer does not have the desired level of indemnification for the post-closing period and/or the desired time frame, or the seller does not have the financial capacity to withstand any hidden liabilities. A potential buyer can even differentiate itself in competitive sales processes by submitting an acquisition proposal that includes the purchase of a R&W insurance. As a practical effect, this can be an advantage for all parties involved in an M&A by helping to reduce (or even eliminate) the use of an escrow account for any payment of indemnification.

As mentioned above, R&W insurance is intended solely to provide a guarantee of insurance indemnification to the buyer in the event of a loss resulting from breach of the representations and warranties provided by the seller in the context of an M&A transaction, but does not eliminate the risks altogether. It is not, therefore, a carte blanche that exonerates the parties from paying due attention to the representations and warranties section or to the due diligence process itself. This applies especially to the seller, against whom the insurer will have a right of recourse, especially in the event of fraud or bad faith in the provision of the representations and warranties.

^[1] Seguro Total Magazine. “Search for insurance for risks related to mergers and acquisitions grows." São Paulo: PubliSeg. No. 191, 2018.

Category: Banking, insurance and finance

After extensive discussion with market participants by means of the Public Consultation No. 55/2017, published by the Central Bank of Brazil (Bacen) on August 30, 2017, the Brazilian National Monetary Council (CMN) issued Resolution No. 4,656 on April 26, which created two new types of financial institutions specialized in loan transactions using electronic platforms: direct lending companies (SCD) and peer-to-peer lending companies (SEP).

Such rule also regulated the granting of loans and financing transactions among individuals using electronic platforms, and set forth the requirements and procedures that must be complied with for purposes of obtaining authorization, license to operate, proceed with corporate reorganization, transfer of control, and, finally, rendering of the license to operate of such new financial institutions.

This regulation is part of the “Cheapest Credit” milestone of the BC+ Agenda and, according to Bacen itself^[1], it provides greater legal certainty to the transactions performed by companies that intensively use technology for the supply of financial products and provision of services in the credit market (i.e., credit fintechs). The idea is to provide conditions to reduce the cost of credit, promote the incorporation of innovation in the National Financial System, and stimulate the participation of new lending institutions. Prior to the issuance of this new resolution, fintechs were allowed to perform their activities only by means of a partnership with a fronting authorized financial institution,.

Direct Lending Company (SCD)

The main purpose of SCDs is to enter into lending and financing transactions, as well as acquisition of credit rights exclusively by means of electronic platforms, using their own equity as financial resource. Unlike banks, SCDs are not allowed to raise funds from the public (by means of deposits, for instance). However, they may be publicly-held companies, thus raising funds through public offering of shares in the capital markets.

SCDs may also provide the following services: (i) credit analysis for third parties; (ii) debt collection for third parties; (iii) acting as an agent in the distribution of insurance products related to the loan/financing transactions by means of electronic platforms, in accordance with the applicable regulations currently in force; and (iv) issuance of electronic currency, in accordance with the applicable regulations currently in force. By allowing them to act as electronic money issuer, this new regulation seems to enable funds borrowed to be deposited into payment accounts managed by the SCDs themselves.

In addition, SCDs may carry out sale/assignment of credits resulting from their transactions solely to: (i) financial institutions; (ii) Credit Rights Investment Funds (FIDCs) whose quotas are intended exclusively for qualified investors; and (iii) securitization companies that distribute securitized assets exclusively to qualified investors.

Peer-to-Peer Lending Company (SEP)

On the other hand, SEPs have as main purpose enabling individuals to enter into lending and financing transactions among themselves, exclusively by means of electronic platforms. Granting of loans with their own funds, as well as any type of risk retention, either directly or indirectly, both by the SEP or by related companies (including by means of co-obligation or provision of guarantees) are not allowed. However, as requested by the market during a public hearing, the resolution provides that SEPs and their subsidiaries or affiliates may acquire subordinated quotas of FIDCs that exclusively invest in credit rights arising from transactions carried out by the SEP itself, provided that such acquisition represents a maximum of 5% of the assets of the fund, and does not constitute the assumption or retention of substantial risks or benefits, according to the applicable regulations currently in force.

This rule defines peer-to-peer lending and financing transactions as financial intermediation transactions, in which funds collected from lenders are destined to debtors after negotiation on an electronic platform. According to the resolution, creditors of such transactions may be: (i) individuals; (ii) financial institutions; (iii) FIDCs whose quotas are intended exclusively for qualified investors; (iv) securitization companies that distribute the securitized assets exclusively to qualified investors; and (v) non-financial entities (other than securitization companies that do not fall within the scope of item “iv” above). In turn, debtors may be individuals or legal entities, as long as they are resident and domiciled in Brazil.

In addition to peer-to-peer lending and financing transactions, SEPs may also provide the following services: (i) credit analysis for clients and third parties; (ii) collection of debts on behalf of clients and third parties; (iii) acting as insurance agents for the distribution of insurance related to their lending and financing transactions, according to the applicable regulations currently in force; and (iv) issuance of electronic money, according to the applicable regulations currently in force.

Peer-to-peer lending transactions must be processed according to the following steps: (i) unequivocal consent by potential creditors and debtors, by means of electronic platforms, to enter into the lending and/or financing transaction; (ii) availability of funds by creditors to the SEP; (iii) issuance or execution, together with debtors, of the instrument evidencing the debt; (iv) issuance or execution together with creditors of an instrument linked to the the instrument representing the debt; and (v) transfer of funds by the SEP to the debtors (within five business days from receipt of funds by the SEP). The instruments mentioned in items “iii” and "iv" above must be issued by or on behalf of the SEP, or must be entered into by the SEP as a party to such instrument.

This is the legal framework that is intended for companies that, by means of electronic platforms, enable the granting of loans currently known as peer-to-peer; except that, pursuant to Resolution No. 4,656, SEPs must intermediate the credit transaction (i.e., it is not a direct relationship between creditor and debtor). In addition, the transaction will have characteristics of a linked asset transaction, in which there is a link between the funds raised from the creditors, and the corresponding transaction (entered into with the debtor), with the respective subordination of the liabilities of the funds delivered by the creditors to the payment flows by the debtors of the credit transaction.

Resolution No. 4,656 also provides that SEPs must segregate their funds from the funds of creditors and debtors of the lending and financing transactions. ,Besides that, this resolution also sets forth that the creditor of the lending and/or financing transaction may not enter into agreements with a single debtor, in the same company, with respect to transactions in which nominal value exceeds the maximum limit of R$ 15,000 (maximum exposure of a creditor to one debtor). This limit does not apply to qualified investors, according to the definitions set forth in the regulations issued by the CVM.

Resolution No. 4,656 also created obligations for SEPs to provide information to their clients and users with respect to the nature and complexity of the contractual transactions and services offered, which must be done in a clear and objective language, in order to allow full understanding of the flow of financial resources and risks incurred. This information must be disclosed and kept up to date in a visible place and legible format in the institution's website, accessible at their homepage, as well as in other channels, by means of which individuals may have access to their electronic platform, and must also be included in the contracts, marketing and promotional materials, and other documents intended for clients and users. In addition, information must include an emphasized warning disclosing that peer-to-peer lending and financing transactions represent risky investments, without any guarantee from the Credit Guarantee Fund (FGC).

The resolution also sets forth that SEPs must use a credit analysis model capable of providing potential creditors with benchmarks that impartially reflect the risk of potential borrowers and lending and financing transactions, as well as monitor their respective transactions, and provide information to the creditors and debtors with respect to such transactions.

From an economic standpoint, the rule also allows for the collection of fees by SEPs in return for the implementation of the loan and financing transactions, and for the provision of related services (as mentioned above), provided that it is set forth in the agreement entered into between the SEP and its clients and users.

Other rules applicable to both types of institutions

Both SCDs and SEPs must be incorporated as corporations, and have paid-up stock capital and shareholders' equity in the amount of R$ 1,000,000. In addition, these institutions may be controlled by investment funds, provided that the respective controlling group is also comprised by individuals or groups of individuals.

Finally, as mentioned by the regulating authority itself^[2], SCDs and SEPs must comply with proportional operational and prudential requirements consistent with their size and profile. According to Bacen, if SCDs and SEPs have a plain risk profile, they may choose to be qualified in the S5 segment, for purposes of the proportional application of prudential rules, which had their criteria adapted by Resolution No. 4,657 in order to allow such companies to expose themselves to securitization instruments (provided that they have a low risk nature), and to carry out activities related to the custody and bookkeeping of securities issued by the institution itself.

Resolution No. 4,656 is immediately applied. Companies that are interested may already start the license to operate process (which is necessary in order for such institution to operate without intermediation of banks). While such proceeding is not finalized, fintechs may continue to act as banking correspondents, just as they are currently operating.

^[1] https://www.bcb.gov.br/pt-br/#!/c/notas/16455

^[2] https://www.bcb.gov.br/pt-br/#!/c/notas/16455  

Category: Corporate

In capital increases of corporations, the share issue price is set by the body responsible for resolving on the capital increase, namely a general shareholders’ meeting or, in the case of companies with authorized capital, the board of directors. However, the resolution approving a capital increase and setting the issue price of new shares may generate controversy and, although discretionary, these decisions cannot be arbitrary.^[1] Therefore, they may be reviewed by the Brazilian Securities and Exchange Commission (CVM) and by the Courts, should they cause unjustified dilution for the shareholders.

Law No. 6,404/76, as amended (the Brazilian Corporations Law), sets forth in its article 170 certain parameters to be considered, alternatively or jointly, for the determination of the issue price: (i) the profitability of the company, which are based on accepted valuation methods, such as discounted cash flows (DCF) and comparable multiples; (ii) the book value per share; and (iii) the quotation of the shares on the stock exchange or organized over-the-counter market, with applicable premium or discount in accordance with market conditions. The current wording of article 170, given by Law No. 9,457/1997, clarifies that the cumulative adoption of the parameters defined therein is not mandatory; a weighting between two or three of the criteria may be done, or a fourth criterion may even be used.

According to Modesto Carvalhosa, the purpose of this legal provision is to ensure that the issue price reflects the actual value of the share, except when fully justified by market reasons.^[2] In other words, the share issuance may be approved at any price, as long as it does not lead to unjustified dilution of the former shareholders. Pursuant to Bill No. 196, of June 24, 1976, which accompanied the Brazilian Corporations Law, unjustified dilution of shareholders is prohibited because the right of first refusal conferred by article 171 of the Brazilian Corporations Law will not always provide adequate protection for all shareholders.

The dominant interpretation is that these criteria should not be understood as absolutely watertight and rigid elements. Along these lines, CVM Administrative Decision RJ 2009/8316 recognizes that "legal criteria should be viewed as guiding parameters which, weighed against the specific aspects of each individual case, allow the determination of an issue price without undue dilution to the shareholders." In the case at hand, the share price was based on negotiations with the company's strategic creditors, which would convert their credits into capital in order to avoid judicial reorganization of the company, and would be supported by a confirmatory valuation report. Commissioner Luciana Dias, recognizing the possibility of using other criteria in addition to article 170, paragraph 1, of the Brazilian Corporations Law, stated her opinion as follows: "The CVM has therefore recognized that the fair value of the shares may be measured by a negotiation process between independent parties and that the issue price in a public offering of shares may be determined by the composition of the investment intentions of parties not related to the company or to the underwriters."

On the bookbuilding process, widely used in public offerings, Nelson Eizirik^[3] believes that this method of pricing, in practice, consists of an indicative of the market price, for which reason it complies with the provisions of article 170, paragraph 1, III, of the Brazilian Corporations Law. However, one can also argue that the bookbuilding process does not fit exactly within the "stock exchange or organized over-the-counter" criterion of article 170, §1º, III, and it may be understood as a fourth criterion expressly admitted by the regulator, both in normative provisions (CVM Instruction No. 400/2003) and in administrative decisions (e.g. CVM Administrative Proceeding No. RJ 2009/83167 and CVM Administrative Proceeding No. RJ 2009/8316).

Along these lines, Fábio Konder Comparato states that the bodies responsible for setting the issue price are assigned "discretionary power", since they are given "a certain latitude, ... a decision-making perimeter ..., a table of references within which the [issue] price may be determined, according to the circumstances of each individual case and according to the minority shareholders' interest."^[4]

The Brazilian Corporations Law does not require that the issue price be set "according to" the three evaluation criteria, but only "in view" of such criteria, which led Alfredo Lamy Filho and José Luiz Bulhões Pedreira to affirm that " in the determination of the issue price there is necessarily an exercise of the discretionary power of the competent body to establish it case by case taking into account the interest of the shareholders."^[5]

In the same vein, the former CVM chairman Marcelo Fernandez Trindade stated in the CVM Administrative Proceeding RJ 2004/3098^[6] "it should be noted that, according to the best legal doctrine, the interpretation of the provisions of paragraph 1 of article 170 must be that the criteria in its subparagraphs are indicative elements which must be reasonably weighed in the determination of the issue price and the criteria must be based on true and consistent grounds, at risk of causing unjustified dilution of the other shareholders."

It should be emphasized, however, that the choice of parameters should be justified in detail in light of their economic aspects, according to paragraph 7 of article 170 of the Brazilian Corporations Law. The adequacy of the criteria used for the company's economic valuation must be explained.^[7] In CVM Administrative Proceeding No. RJ 2013/6294,^[8] analyzing the good standing of the pricing criteria in a capital increase, the reporting Commissioner Pablo Renteria pointed out that "it would not be enough to indicate the criteria that served as the basis for the issue price, as it would be necessary to explain, in detail, the reason for which it was thought best to establish the price based on this or that criterion (or, where more than one criterion is used, the reasons for using those parameters in a combined manner), or the reason for the non-use of another parameter among those listed in the subsections of article 170, paragraph 1, of Law No. 6,404/76."

In the case of discretionary power of the competent body, an allegation of misuse of powers resulting in unjustified dilution will depend on satisfactory evidence that the legal criteria were not followed because of an abusive act, and the burden of proof will always lie with the one alleging this act.^[9] Minority shareholders cannot contest the choice of criterion simply because they consider it not to be the most appropriate. The Brazilian Corporations Law creates a presumption of legitimacy when the competent body follows the legal criteria.^[10]In addition, the Brazilian Corporations Law, in prohibiting "unjustified dilution", admitted, on the contrary, the possibility of a scenario for "justified dilution." Therefore, if there is an economic reason for the capital increase, based on the company's interest, and following the parameters defined in article 170 of the Brazilian Corporations Law, there is justified dilution of the equity interest of shareholders who do not subscribe the capital increase. For example, the São Paulo Court of Appeals has already established that a capital increase of a highly indebted corporation, carried out as a legitimate means of saving it from insolvency, constitutes justifiable dilution, and the plaintiff, in that case, had not met its burden of demonstrating that its stake had been unjustifiably diluted.^[11]

In sum, the mere setting of the share issue price at a value lower than those calculated according to the parameters of article 170 of the Brazilian Corporations Law does not necessarily imply unjustified dilution or an abusive act against the shareholder or management, as it will depend on the circumstances of each individual case. The Brazilian Corporations Law does not prohibit the issuance of shares at a price lower than such parameters.^[12] The legal determination is that such parameters, jointly or alternatively, should guide the determination of the issue price, which should be justified in the capital increase proposal.

[1]     According to CVM PAS No. RJ 2010/16884, the written opinion of which was authored by Commissioner Otavio Yazbek, decided on December 17, 2013.

[2]     CARVALHOSA, Modesto, Comentários à Lei de Sociedades Anônimas ["Comments on the Brazilian Corporations Law"], v. III. p. 611.

[3]     EIZIRIK, Nelson, op. cit., p. 205.

[4]     COMPARATO, Fábio Konder, A fixação do preço de emissão das ações no aumento de capital da sociedade anônima ["Determination of the issue price of shares in capital increases for corporations"], Revista de Direito Mercantil, Industrial, Econômico e Financeiro ["Journal of Commercial, Industrial, Economic, and Financial Law"]. São Paulo: Revista dos Tribunais ["Journal of the Courts"], n. 81, Jan./Mar. 1991, p. 83.

[5]     LAMY FILHO, Alfredo and BULHÕES PEDREIRA, José Luiz, Direito das Companhias ["The Law of Companies"], 2nd ed., Ed. Forense, São Paulo, p. 1,020.

[6]     CVM, Case RJ 2004/3098, Opinion drafted by Commissioner Wladimir Castelo Branco Castro, decided on January 25, 2005.

[7]     EIZIRIK, Nelson, Lei das S.A. Comentada ["Commented Version of the Brazilian Corporations Law"], v. II. p. 502.

[8]    CVM PAS RJ2013/6294, Reporting Commissioner Pablo Renteria, decided on November 14, 2017

[9]     COMPARATO, Fábio Konder, op.cit., p. 83.

[10]    LAMY FILHO, Alfredo and BULHÕES PEDREIRA, José Luiz, op. cit., p. 1,025.

[11]    TJSP, Appeal No. 0517189-28.2000.8.26.0100, Appellate Judge Moreira Viegas writing for the court, decided on February 11, 2015.

[12]    CVM Guidance Opinion No. 01, of September 27, 1978.

Category: Corporate

In the current context of fighting corruption and strengthening a culture of ethics and corporate governance, there may be uncertainty about the role and duties of compliance officers and the insurance coverage for the risks incurred by them.

According to articles 153 to 157 of Law No. 6,404, of December 15, 1976, as amended (the Corporations Law), the main duties of directors and officers include: (i) the duty of diligence; (ii) the duty of loyalty; (iii) the duty of confidentiality; (iv) the duty not to act in conflict of interest; and (v) the duty to inform.

From this list, we highlight the general duty of vigilance that, although not explicit in the Corporations Law, is a corollary of the duty of diligence and may be deduced from paragraphs 1 and 4 of article 158 of the Corporations Law.

This obligation includes, inter alia, the relationship between bodies and the delegation of tasks and attributions. On the one hand, business owners or officers/directors cannot exempt themselves from responsibility if they delivered the management to third parties (professional officers) and did not supervise them properly. Even if an officer did not participate in the illegal act, if she fails to act or remains inert in view of an illegal act of another officer, she may be jointly liable. It is not expected, however, that officers serve as “auditors" of the work of others. The vigilance is expected to be carried out reasonably, based on the information available on which the officer may rely.

Directors and officers will not be personally liable for their business decisions when they act diligently, in a well informed, reflected, and disinterested manner, without deviation of conduct or omission in the exercise of their activities, because their obligation is to act reasonably, not to guarantee a result (the “business judgment rule” principle). However, directors and officers are liable for damages that they cause to third parties when they act within their duties under fault or intent or, also, in violation of the law or the articles of association/bylaws of the company.

The discussion of managerial accountability adds further complexity in the era of compliance. In a few words, compliance in the corporate world is the set of efforts and systems to act in accordance with laws and rules applicable to the company's activities, and following corporate values, ethical principles, and governance practices, taking into account the impacts caused to different stakeholders. In the midst of corruption scandals, companies in Brazil feel increasingly compelled to implement policies consistent with compliance, embodied in internal codes of conduct capable of ensuring compliance with legal norms and avoiding the practice of illegal activities.

In this sense, the compliance department will have the function of mapping the risks related to the company's actions and developing policies, mechanisms, and tools to deal with them. The role of compliance officers generally encompasses three main functions: (i) creation and implementation of the compliance program, in which the compliance officer develops, based on a risk assessment, the internal control measures to be adopted by the entity; (ii) operationalization of the compliance program, in which the compliance officer implements the integrity measures planned, disseminates the compliance program, and performs the training of the company's other employees; and (iii) management and improvement of the compliance program, in which the compliance officer periodically monitors and reviews the integrity structure of the legal entity, investigates any irregularities, and reports to their superiors.

In order to analyze the responsibility of compliance officers, it is necessary first to verify the conformity of their function and their powers, which, due to organizational differences, may yield possibly different answers, with a greater or lesser degree of accountability.

In most organizations, compliance officers are at a lower hierarchical level than the board of directors and the board of executive officers. They are tasked with implementing a system of prevention and detection, training employees, monitoring compliance with legal norms and internal company rules, investigating irregularities, and transmitting information to company management, with or without advice on how to proceed. A figure, therefore, devoid of final decision-making or disciplinary power.

A delegation of tasks that does not involve the transfer of powers to avoid the result would by itself exclude the delegation of the position of guarantor. Thus, the responsibility for avoiding the result caused by illegal acts committed by members of the company against third parties would remain in the hands of the original guarantor, that is, the officer appointed in the bylaws who delegates the power/competence.

If, in the specific case, the compliance officer is only entrusted with supervising compliance with legal norms and internal company rules (directly and through receiving complaints of irregularities), investigating irregularities, and transmitting the information to the company's management, we are faced with a case of partial delegation of the duties of guarantor, since the decision-making powers to intervene and directly avoid the result were not delegated to her. In these terms, the compliance officer would not be required to prevent the outcome from occurring, but only to take all possible steps to prevent it.

Often, the compliance officer's power in response to a misconduct is limited to reporting to her superiors. Thus, compliance officers who reported to their superiors the existence or threat of unlawful acts within under the company’s purview would be free of criminal liability, even if no action was subsequently taken by management to cease or avoid the criminal practice, because compliance officers in general do not have executive power to do so, nor do they have the duty to report to public authorities.

As a result of recent anti-corruption operations in Brazil, executives have turned their attention to protecting their assets. In this scenario, civil liability insurance for directors and officers (in English terminology, D&O insurance or Directors and Officers Insurance) gained prominence in Brazil, and the increase in demand called for changes in legislation.

On May 23, 2017, the Superintendence of Private Insurance (Susep) issued Circular No. 553 to establish general guidelines specifically applicable to civil liability insurance for officers and directors of legal entities. Until then, these rules were generally subject to the provisions of the Civil Code and the administrative rules issued by Susep and applicable to civil liability insurance.

D&O insurance is fairly common in large companies, many of them multinationals, and is purchased as a protection against the risk of damages caused to third parties by management acts by officers, directors, and managers who have acted under fault in their professional activity.

This kind of insurance preserves not only the individual assets of those who hold positions of management (insured), which encourages innovative corporate practices, but also the assets of the company purchasing the insurance and its shareholders, since in the end the company may be called to reimburse its officers and directors for any personal damages.

This insurance coverage does not, however, cover fraudulent acts, especially if committed to personally favor an officer or director to the detriment of the assets of the company. Regarding the subject, in a Special Appeal,^[1] the 3rd Panel of the Superior Court of Justice (STJ), in examining the limits and application of D&O insurance in Brazil, was as follows:

"In order to avoid a strong reduction in diligence or excessive risk-taking by the manager, which would compromise both the company's compliance activity and good corporate governance practices, the D&O insurance policy cannot cover intentional acts, especially if committed to personally favor an officer or director. In fact, the insurance risk guarantee cannot induce irresponsibility. (...) This means that the D&O insurance policy can never cover cases of fraud or willful misconduct, as well as acts by the director or officer motivated by mere personal interests, deteriorating the company’s assets. In fact, the commission of criminal offenses or fraudulent acts, especially against the capital markets, should not be encouraged." (emphasis added)

In the insurance market, insurers tend to expressly exclude from insurance policies coverage for fraudulent acts or corruption of public or private agents. Evidence from government investigations or leniency agreements that do not contain the prior approval of the insurers may cancel D&O insurance coverage. In cases of corruption, those who admit their willful participation by turning state's evidence or those who are convicted by the courts for willful acts will lose insurance coverage and will have to reimburse the insurer if it has advanced the costs of the legal defense.

In a recent appeal,^[2] the 1st Chamber Reserved for Business Law of São Paulo decided that the D&O insurance policy purchased by a contractor involved in Operation Car Wash does not protect officers and directors in cases of unlawful acts confessed through state's evidence turned, let alone intentional acts. If the criminal conviction or confession of crimes is proven through state's evidence turned, the insurance coverage will not apply and the Courts will not protect the officer or director who commits the illegal act.

In the same vein, on September 25, 2018, the Brazilian Securities and Exchange Commission (CVM) issued Guidance Opinion No. 38, with recommendations regarding indemnity agreements entered into between publicly-held companies and their officers and directors. This type of contract aims to ensure payment, reimbursement, or advance of expenses arising from any arbitral, civil, or administrative proceedings initiated to investigate acts carried out in the exercise of the functions of the officers and directors. While recognizing the value of indemnity agreements as legitimate instruments for attracting and retaining qualified professionals, the CVM recommends the adoption of rules and procedures aimed at ensuring that directors and officers comply with their fiduciary duties in order to guarantee balance between, on the one hand, the company's interest in protecting its officers and directors against financial risks arising from the exercise of their functions, in the context of administrative, arbitral, or judicial proceedings and, on the other hand, the company's interest in protecting its assets and in ensuring that its directors and officers act in accordance with the standards of conduct expected of them and required by law.

The guidance opinion establishes that expenses arising from acts of the officers and directors carried out are not subject to indemnification, among others: (i) those that are outside the scope of their duties (ultra vires acts); (ii) acts in bad faith, fraud, gross negligence, or willful misconduct; or (iii) acts in one’s own interests of the interests of a third party to the detriment of the company's corporate interests, including amounts related to indemnities arising from actions for liability or offered under the terms of a settlement. For more information on CVM Guidance Opinion No. 38, click here.

In a time of fight against corruption, accountability of officers and directors tends to gain new contours for compliance officers, considering their role in assessing business risks, developing internal controls, implementing effective compliance programs, and identifying and obstructing unlawful acts or fraud in bidding procedures. Thus, compliance officers’ accountability should be assessed on a case-by-case basis and will depend on their roles and attributions, resources and tools available, and powers of internal intervention, interruption, and disciplinary sanctions. In any case, D&O insurance policies will likely not cover intentional or grossly willful acts, especially if committed to favor an officer or director, to the detriment of the assets of the company.

^[1] REsp 1601555 SP 2015/0231541-7. Adjudicatory Body - 3th PANEL. Published in the Electronic Gazette of the Judiciary on February 20, 2017. Decided on: February 14, 2017. Opinion drafted by Justice Ricardo Villas Bôas Cueva.

^[2] Appeal No. 1011986-32.2017.8.26.0100, São Paulo State Court of Appeals (TJSP ), 1st Chamber Reserved for Business Law. Majority opinion drafted by Appellate Judge Cesar Ciampolini.