Publications
- Category: Competition
Discussions among the commissioners of the Administrative Tribunal of the Administrative Council for Economic Defense (Cade) on the need to change the calculation of fines in cartel cases have created an environment of uncertainty for the legal and business community, especially after judgments issued at the end of last year. As a way to increase the effectiveness of the policy of repression and deterrence of antitrust violations, some commissioners argue that, instead of applying a percentage over the revenue of the cartelists, the fine should be tied to the gains deriving from the wrongdoing.
These discussions have their origin in provisions of the Competition Law (No. 12.529/11), by which companies involved in anti-competitive practices are subject to a fine between 0.1% and 20% over their gross revenue in the sector of economic activity affected by the violation, in the fiscal year prior to the initiation of the administrative proceeding. The fine should never be less than the gains obtained, when it is possible to estimate it.
Since the entry into force of the law, fines imposed on participants in hard-core cartels have been set by Cade’s Tribunal Court between at least 13% to 15% of their gross revenues.
On December 7, 2016, however, the methodology based on the revenue criterion traditionally adopted by Cade , was questioned in two cases considered at the Tribunal's 96th Ordinary Session of Judgments (SOJ). The first of them concerned a cartel investigation in the market for the distribution of liquefied petroleum gas (LPG) in the State of Pará; the second concerned a cartel investigation among milk producers in the Pelotas region in the State of Rio Grande do Sul.
On that occasion, the reporting commissioner advised that the calculation of the fine should take into account the gains to the participants, i.e. how much each company or group of companies would have profited from the overprice of a particular product or service. This position was supported by one more commissioner.
The four other commissioners at the time disagreed with this position. According to them, the Competition Law provides that the gain obtained is only one of the factors considered in the dosimetry of the fine, which must also be based on the economic and financial situation of the wrongdoer and on such aspects as severity of the violation, consummation, degree of injury or threat of injury to the consumer/economy, negative economic effects, and recurrence.
The commissioners also argued that in a number of cases (such as market allocation cartels or cartels involving heterogeneous products) estimating the gains to the cartelists can be an impossible task, extremely costly, and/or produce questionable results. In addition, calculating the fine on the basis of the gains could lead to the underpunishment of an unimplemented anti-competitive practice.
The discussions on the subject of fine calculation at Cade’s Tribunal have even affected the ratification of cartel settlement agreements (TCCs). At the 98th SOJ, held on February 1, most commissioners rejected three agreements negotiated by class entities investigated for price fixing, boycott, and the imposition of a price list for surgeons’ fees. The rejection was based on the argument that the TCCs, in the form negotiated with the reporting commissioner, provided for fines much lower than those expected if the calculation methodology traditionally adopted by Cade had been followed.
While the discussions continue, companies investigated by Cade have difficulty in estimating the amount of a potential judgment for the purposes, for example, of provisioning reserves or assessing the advisability of negotiating a TCC.
It is debatable whether a review of the Cade’s fine calculation methodology would bring concrete benefits. Undoubtedly, the defense of a new methodology, in line with an express and written legal standard, should be welcome. On the other hand, since the criterion of the gains deriving from the cartel is less objective than the revenue criterion, its adoption could subject Cade’s decisions to even more extensive litigation in court.
In addition, a significant increase in the volume of leniency agreements and TCCs over the past five years, coupled with companies' growing concern in aligning their business practices with the provisions of the Competition Law, shows that the traditional methodology has effectively produced dissuasive effects. Cade is expected to carefully weigh these factors in its future decisions and issue guidelines that reduce current uncertainties about the issue.
Innovative in several respects, the Clean Company Act or Anti-Corruption Law (No. 12,846/2013) incorporated provisions already in force in other countries, such as the United States and the United Kingdom, into the Brazilian legal system. Some examples are the application of heavy fines for companies involved in corrupt practices in Brazil and abroad and the incentive to adopt preventive mechanisms (compliance programs), referred to as integrity programs in the Clean Company Act.
If, on the one hand, enforcement of the punitive provisions of the legal text is still in the early stages (throughout all of Brazil, there are very few cases of penalties applied on the basis of the law and there are no cases at the federal level), on the other, provisions that establish incentives to implement an ethical corporate environment have altered the day-to-day activities of companies operating in Brazil.
It is interesting to note that the legislator did not force companies to implement compliance programs. The transformation we have seen is driven in large part by the mitigating circumstances expressly granted in the calculation of the penalty for companies which, in the event of a penalty, demonstrate that - at the time of the occurrence – there was in place an efficient and robust compliance program in accordance with best market practices,.
The strict liability provided by the law, the heavy penalties it establishes and the deep reputational damage caused by involvement in corruption scandals also serve as an argument for the adoption of preventive practices. Added to these aspects is the need to include in compliance programs mechanisms for the individual protection of shareholders, directors, officers, and advisors.
It is quite true that the legal text on the duties of officers and directors has not changed. In general terms, the lesson remains that officers and directors should have the same diligence and care in the business of the company as they would in their own business. Their performance should exhibit reasonable prudence and all the professionalism one would expect from someone in charge of running a complex business entity. However, the interpretation of what is considered reasonable prudence and professionalism can and should vary in measure in the current Brazilian scenario.
The Anti-Corruption Act has profoundly increased the punitive risks corporations face in committing acts of corruption, and the current situation, in which large corporations have lost significant market value by having their names associated with cases of breach of integrity, indicates that preventing illicit acts is not only an ethical imperative but an indispensable practice for the survival of a business.
The increase in the severity of such risks and the fact that the Anti-Corruption Law and its regulations explicitly indicate prevention mechanisms may reinforce the argument that failure to implement such measures should be considered a breach of the fiduciary duties of directors and officers.
The omission to implement preventive initiatives could not only expose executives to sanctions by specific regulatory agencies, such as the CVM, but also make them the target of possible suits for reparations by company shareholders in the event of damages caused to the company by acts of corruption.
Naturally, this does not imply that the obligation for executives to implement a complete integrity program in the companies they serve is already in place in Brazil. However, it is undeniable, depending on the size, complexity, and degree of exposure of the company to risk, that the adoption of preventive initiatives should be on the priority list of business directors and officers.
The importance of these mechanisms for companies, officers and directors already seems to have been noticed. There is a growing number of organizations of various sizes and from various industries that have been employing initiatives to identify and prevent the risks of breach of integrity, including elements such as the adoption of an internal communication channel and a Code of Ethics, the creation of an internal structure for management of risks related to corruption, oversight of third-party activities, and the execution of specific anti-corruption efforts in M&A operations.
- Category: Real estate
The decision by the Federal Revenue Service of Brazil (RFB) to include sub-condominiums among entities required to register with the National Register of Corporate Taxpayers (CNPJ) is a measure that should contribute to the administrative efficiency of businesses structured in the form of condominiums. The change was announced on December 29, 2016, with the amendment of Article 4, item II, of Federal Revenue Rule No. 1,634/2016.
The provision requires that sub-condominiums that have been established by a condominium agreement must be registered with the CNPJ in the capacity of affiliates of the condominiums of which they are part. With the change, the RFB puts an end to a discussion that had already reached the Judiciary due to the lack of legal provision for separate registration and as a result of the agency's denials of these requests. It is important to note, however, that this change does not mean the segregation of in rem liability for debts contracted by the different sub-condominiums in relation to the master condominium.
Context. Due to the growing demand for nearby areas for leisure, work, and housing in large urban centers, it is increasingly common to have multi-purpose real estate developments consisting of condominial sectors with quite different purposes such as residential, commercial, shopping centers, hotels etc. The relationship between these various sectors is complex, as there are very heterogeneous interests and concerns among the condominiums.
In order to facilitate the management of this type of multipurpose development, it is common to create different condominial sectors, the "sub-condominiums”, that take care of their specific interests, leaving to the "master condominium" the more complex issues that affect all the condominiums. However, without the possibility of assigning an individualized taxpayer registration for each of the sub-condominiums, this administrative segregation ended up being hampered in practice.
How to apply. The new instruction solves accounting and tax problems that hindered the management of these multipurpose developments. In order to obtain a taxpayer identification as an affiliate of the sub-condominiums, it is necessary that the establishment of these sub-condominiums be provided for in the agreement registered with the competent Real Estate Registry. At the time of registration of the taxpayer identification of the condominium, the registration of sub-condominiums, as affiliates, is also done.
In Rem liability. Although administrative segregation by CNPJ facilitates the operation of multipurpose developments, as well as the oversight activity, it does not separate the liability for civil, tax, labor, and social security debts incurred by the sub-condominiums. Thus, it is still very important to regulate the legal autonomy between the master condominium and the sub-condominiums in the bylaws.
The decision by the Federal Revenue Service of Brazil (RFB) to include sub-condominiums among entities required to register with the National Register of Corporate Taxpayers (CNPJ) is a measure that should contribute to the administrative efficiency of businesses structured in the form of condominiums. The change was announced on December 29, 2016, with the amendment of Article 4, item II, of Federal Revenue Rule No. 1,634/2016.
The provision requires that sub-condominiums that have been established by a condominium agreement must be registered with the CNPJ in the capacity of affiliates of the condominiums of which they are part. With the change, the RFB puts an end to a discussion that had already reached the Judiciary due to the lack of legal provision for separate registration and as a result of the agency's denials of these requests. It is important to note, however, that this change does not mean the segregation of in rem liability for debts contracted by the different sub-condominiums in relation to the master condominium.
Context. Due to the growing demand for nearby areas for leisure, work, and housing in large urban centers, it is increasingly common to have multi-purpose real estate developments consisting of condominial sectors with quite different purposes such as residential, commercial, shopping centers, hotels etc. The relationship between these various sectors is complex, as there are very heterogeneous interests and concerns among the condominiums.
In order to facilitate the management of this type of multipurpose development, it is common to create different condominial sectors, the "sub-condominiums”, that take care of their specific interests, leaving to the "master condominium" the more complex issues that affect all the condominiums. However, without the possibility of assigning an individualized taxpayer registration for each of the sub-condominiums, this administrative segregation ended up being hampered in practice.
How to apply. The new instruction solves accounting and tax problems that hindered the management of these multipurpose developments. In order to obtain a taxpayer identification as an affiliate of the sub-condominiums, it is necessary that the establishment of these sub-condominiums be provided for in the agreement registered with the competent Real Estate Registry. At the time of registration of the taxpayer identification of the condominium, the registration of sub-condominiums, as affiliates, is also done.
In Rem liability. Although administrative segregation by CNPJ facilitates the operation of multipurpose developments, as well as the oversight activity, it does not separate the liability for civil, tax, labor, and social security debts incurred by the sub-condominiums. Thus, it is still very important to regulate the legal autonomy between the master condominium and the sub-condominiums in the bylaws.
- Category: M&A and private equity
On May 2, 2017, Normative Instruction No. 40 (“IN 40”), issued by the Department of Integration and Company Registration (“DREI”), was published, amending Article 2 of Normative Instruction No. 34 (“IN 34”), also issued by DREI, which required non-resident investors to grant a power of attorney, with special powers, to a legal representative in Brazil, for an indefinite term.