Publications

Category: Real estate

A pioneer in the regulation of the topic in Brazil, São Paulo Municipal Law 17,853 (Law 17,853/22), which regulates establishments made up of sets of industrial kitchens, popularly known as dark kitchens, went into effect on November 30, 2022.

Approved by the City Council in a second and definitive vote and promulgated by Mayor Ricardo Nunes, the law stems from Bill 362/22 - proposed and filed by the Municipal Executive. The text also amends the wording of the article regarding noise limits imposed on large events and shows, provided for in the law that provides for the use and occupation of the soil in the City of São Paulo (Law 16,402/16).

A dark kitchen is a business model consolidated in countries like the United States, United Kingdom, and India. The concept involves equipping a conglomerate of kitchens and selling these spaces to various restaurants that work exclusively with a delivery service. In parallel, services are offered that range from maintenance and cleaning of the space to centralization of digital order platforms, which facilitates day to day operations.

The growth of dark kitchens in several predominantly residential neighborhoods in the City of São Paulo had been causing various nuisances - noise pollution, the presence of many drivers and delivery motorcycles at the door of the establishment hindering traffic and causing noise in the surroundings, nuisance from smoke from active kitchens, among others.

With the regulation, the aim was to reduce these problems. The law divided the operations of dark kitchens into two groups and established permitted Occupancy Use Zones for their installation.

For a warehouse of up to 500 m² with 3 to 10 kitchens, it is understood that the activity is compatible with a residential neighborhood. Their installation, therefore, is allowed in most of the city's use zones, with the exception of Corridor Zones (ZCOR), zones located in the Environmental Protection and Recovery Macrozone, and preservation zones, such as the Exclusively Residential Zones (ZER) and the Special Environmental Protection Zones (Zepam).

For a warehouse with an area larger than 500 m² or with more than ten kitchens, the activity is considered to generate urban and environmental impacts. For this reason, their installation is restricted to Predominantly Industrial Zones (ZPI-1 and ZPI-2) and Economic Development Zone 2 (ZDE-2).

The text also highlights the need for dark kitchens already installed to adapt within 90 days after the law comes into effect, that is, the beginning of March of this year. Among the main measures are the following:

• adjust the minimum area of each kitchen to the limit determined.
• comply with the minimum distance between an existing or licensed dark kitchen and another;
• submit to the Municipal Secretary of Green and Environment a memorandum characterizing the enterprise;
• install, in a visible place, the data and licenses concerning each ongoing operation;
• adjust the noise levels generated by the establishment to the limits of the legislation in effect.

Another issue addressed in the law has generated a lot of controversy because it is unrelated to dark kitchens. This is a change in the sound pressure limit to 75 decibels in the place or surroundings where large events and shows will be held.

Overall, Law 17,853/22 brings more security to both citizens and operators/entrepreneurs of dark kitchens, by defining installation and operation rules to minimize impacts to their surroundings and facilitate coexistence with other municipal facilities. The classification standard is noteworthy because it makes it clear that the installation of dark kitchens in strictly residential areas - a great nightmare for residents - is not allowed.

Category: ESG and Impact businesses

Published on March 2 and in effect since March 9, Decree 11,427/23 approves the regulatory structure and the table of commissioned posts and functions of trust of the Ministry of Development, Industry, Trade, and Services. One of the innovations is the creation of the Bureau for Development of Green Economy, Decarbonization, and Bioeconomy, within the scope of industry, trade, and services.

Among the attributions and authority of the new bureau are the following:

• propose, implement, and evaluate public policies that encourage and support the development of businesses that generate social and environmental impact, integrate strategies for decarbonization of productive sectors, and foster the bioindustry in Brazil;
• encourage public and private access to capital for businesses that generate social and environmental impact;
• engage in discussions with public and private organizations involved in environmental, social, and governance issues to promote regulatory advancement and ensure conditions for the economy to develop on a sustainable model;
• propose, implement, and evaluate policies to promote industrial complexity related to the sustainable use of biomass, genetic heritage, and traditional knowledge associated with it;
• propose strategies for decarbonizing the economy;
• support and encourage the development of the economy;
• propose and articulate strategies to improve national and international legal arrangements related to the sustainable use of biodiversity and associated traditional knowledge by the productive sectors and climate change that may impact on the productive sectors.

The new bureau will include the following departments: Genetic Heritage and Productive Chains of the Biomes and the Amazon, Decarbonization and Green Finance, New Economies and Bioindustry, and Strategic Health Inputs.

The Genetic Heritage and Productive Chains of the Biomes and the Amazon department is responsible for, among other functions:

• participate in the drafting, implementation, and evaluation of proposals related to genetic heritage and productive chains of the biomes and the Amazon;
• propose, implement, and evaluate policies to foster the creation and consolidation of innovative businesses based on the sustainable use of genetic heritage and associated traditional knowledge in the Brazilian biomes and the Amazon;
• propose, implement, and evaluate policies to disseminate good practices in biodiversity-intensive sectors, especially those related to community protocols of indigenous peoples, traditional communities, and family farmers.

Within the purview of the Decarbonization and Green Finance department are the following:

• plan and coordinate the ministry's actions in international financial institutions for sustainable development, environment, and climate change;
• propose, implement, and evaluate policies to promote and prepare the productive sectors for the energy transition process and change to a low carbon economy;
• track the decarbonization targets of the international industry in relation to the Brazilian targets for the sector and future mechanisms to be implemented;
• participate in the proposal of measures and standards for the implementation and improvement of the carbon market;
• propose, collaborate on, and monitor economic and non-economic regulations related to decarbonization of the economy;
• propose, implement, and evaluate proposals for economic and financial mechanisms that enable the process of energy transition and low carbon production in the economy.

In relation to the New Economies department, the following competencies stand out:

• encourage, support, and mobilize social and environmental business entrepreneurs;
• encourage the mobilization of public and private capital to support intermediary organizations and funding organizations of social and environmental impact businesses;
• propose policies that encourage the emergence and development of investments and businesses of social and environmental impact;
• promote a favorable regulatory environment for the development of impact investment instruments and social and environmental businesses;
• propose public policies that encourage public purchases of businesses that generate positive social and environmental impact and encourage the integration of social and environmental impact businesses in the production chains of large companies and corporations.

As for the Bioindustry Strategic Health Inputs department, the following competencies stand out:

• coordinate the development, implementation, and evaluation of policies to promote modernization of industrial processes and the incorporation of new technologies in the productive sectors of the bioindustry and strategic health inputs; and
• promote professional technological, corporate management, and innovation training for bio-based industries, especially in areas related to the production of biofuels, biomaterials, pharmaceuticals, cosmetics, and functional foods.

The decree is an important step towards fostering the green economy and businesses that seek to bring about corporate solutions to environmental and social problems. The expectation is that a regulatory and legal framework capable of promoting decarbonization of the economy and emergence of new impact businesses will be increasingly developed.

Category: Arbitration

Gisela Mation, Maria Dória, and Sávio Andrade

The potential of artificial intelligence is enormous and its use can bring about extraordinary developments. However, because it is not an easily applicable binary technology, there are a number of challenges to be faced in order to take full advantage of its potential.

In general, artificial intelligence operates with algorithms that perform inferences from data and accumulate knowledge and learning from previous experiences.

Over time, the system will improve itself and should always make it possible to trace the patterns detected so that we can understand its mechanisms and understand how the conclusions presented were reached.

However, this is not always the case. Machine learning is often not mappable, constituting a veritable black box that is neither accessible nor sufficiently intelligible by humans.

Moreover, the international community has already pointed out several cases of mistaken conclusions that occur when artificial intelligence is used for more sophisticated issues, different from repetitive operational tasks guided by humans.

Not surprisingly, global discussions are underway regarding problems related to the difficulty of tracking the conclusion of algorithms, the bias of the data used - leading to biased conclusions - and accountability arising from the use of artificial intelligence.

In Brazil, there is still no specific regulation on the subject, since the legal framework of artificial intelligence, approved by the House of Representatives in September 2021, is still pending in the Federal Senate.

However, it is imperative that, from the outset, the use of artificial intelligence observe ethical and legal principles and adhere to technical criteria of reliability, traceability, and accountability. It is essential to establish a minimum stringency to provide security for those involved.

Also in the second half of 2021, the Federal Judicial Board (CJF) held the II Conference for the Prevention and Out-of-Court Resolution of Disputes in order to seek efficient solutions to the large number of lawsuits in Brazil. Among the pronouncements approved, 106 stands out,^[1], which encourages the use of artificial intelligence in arbitrations.

Today it is already possible to imagine, for example, the use of artificial intelligence in transcriptions and translations, document analysis and systematization, or even in supporting the appointment of arbitrators, for competence verification and conflict checking.

There are various possibilities of employing artificial intelligence techniques to contribute to the improvement of efficiency in procedural acts in arbitration proceedings. These acts include those performed by arbitrators as well as by lawyers and experts. They also cover activities performed within the proceeding itself and preparatory activities.

Necessary care

The intention to encourage the use of artificial intelligence in favor of dispute resolution is laudable and necessary. To achieve greater efficiency, the incentive must be accompanied by guidance on the limits for the use of this technology, the phases in which it can be applied, and the means of verifying how it has helped the result obtained. In other words, due process of law needs to be updated to accommodate the use of artificial intelligence.

In this context, the CJF was right to point out, in the justification of the aforementioned pronouncement, the need for "this phenomenon to observe the constitutional guarantees of due process of law, especially the right to participation and the right to an adversarial process.

The ponderation was pertinent not least because caution is even more recommended in arbitration proceedings. One should avoid giving the other party elements to support a possible action for vacatur, which could harm both speed and legal certainty, two of the main advantages of arbitration proceedings.

This is not to reject the use of artificial intelligence in dispute resolution. As the CJF rightly pointed out, its use can contribute to disputes being resolved more efficiently and with less delay. However, its employment deserves care and diligence.

In the absence of specific regulations, it is essential that lawyers be aware and work to ensure that the use of artificial intelligence tools respects a broad defense, the adversarial process, and the guarantee of the arbitrator's free persuasion.

The direct consequences of technological advances have already arrived and, more than ever, the parties need to be well advised by multidisciplinary professionals who not only master the law, but also have the knowledge necessary to understand, in real time, how the application of artificial intelligence can impact on resolution of the dispute. In this manner, they can act quickly on behalf of their client.

^[1] Pronouncement 106: It is admissible in arbitration to make use of artificial intelligence technology tools to assist the parties and the arbitrator during the course of the proceedings.

Category: Arbitration

Marcela Volponi, Ciro Starling, and Henrique Buldrini

Presumed moral damage (in re ipsa), that is, inherent to the fact itself, is applied and recognized by the case law of the Superior Court of Appeals (STJ) in several situations involving consumer relations in Brazil, such as in cases involving:

• moral damage due to contamination of food with a foreign body;^[1]
• trademark misuse;^[2]
• improper registration in a delinquent debtor registry;^[3]
• refusal of the health plan to authorize emergency medical treatment;^[4]
• marketing and sale of personal data in a database.^[5]

Regarding the last topic, the 3rd Panel of the STJ, on November 12, 2019, in the judgment of Special Appeal 1.758.799 (REsp 1.758.799), in an opinion drafted by Justice Nancy Andrighi, defined that the provision or marketing and sale of personal data of a consumer contained in a database, without the knowledge of its holder, even if they do not fit in the concept of sensitive or confidential data, constitutes a case of moral damage in re ipsa.

Nevertheless, the 2nd Panel of the Superior Court, in the recent judgment of Interlocutory Appeal in Special Appeal 2130619/SP (AREsp 2130619/SP), handed down on March 7, 2023, and the opinion of which was drafted by Justice Francisco Falcão, the Court held that, although the leaking and sharing of consumers' personal data is not a desirable act, this event does not have the power, on its own, to establish presumed moral damage.

In the special appeal, it was argued that the decision handed down by the São Paulo Court of Appeal (TJSP), according to which a simple leak of reserved data would be sufficient to establish fault in the provision of services and presumed moral damages to the consumer, violated articles 42, 43, II and III, 46 and 48, of the General Data Protection Law (LGPD) and article 14, paragraph 3, of the Consumer Protection Code (CDC), which deals with the strict liability of suppliers.

According to the unanimous understanding of the STJ, data of an ordinary nature, personal and not intimate, capable of identifying an individual, should not be classified, under the LGPD, as sensitive. Thus, in case of mere leakage and/or sharing of the consumer's personal data, a finding of presumed moral damage would be ruled out.

Hearing the AREsp, admitting the REsp in part and granting relief in that part, the STJ entered into the concepts of "personal data" and "sensitive personal data" provided for in sections I and II of article 5 of the LGPD. The Court recognized that the rule provided for in subsection II of this article provides "a list of what would be sensitive personal data and, because they have this condition, require different treatment, as provided for in article 11 of the same LGPD."

Thus, it concluded that the leaking of sensitive data, because they are related to the intimacy of an individual, constitutes moral damage in re ipsa. Therefore, differently from what the TJSP concluded, the personal data leaked would not be sensitive data, since they do not fit within the exhaustive list (and not in the list of examples) of the rule.

Although, in this case, the contents of articles 42, 43, II and III, 46 and 48, of the LGPD and article 14, paragraph 3, of the CDC were not analyzed by the STJ - because for the reporting justice these provisions were not preserved for appeal - it should be remembered that the head paragraph of article 42 of the LGPD provides that "the controller or operator that, by virtue of the exercise of the activity of processing personal data, causes another person economic, non-economic, individual, or collective damage, in violation of the legislation for the protection of personal data, is obliged to repair it.”

In this context, processors will not be held liable only when they prove that they did not perform any data processing, that there was no violation of data protection legislation, or that the damage is the result of the exclusive fault of the data subject or a third party, as provided for in articles 43, 46, and 48 of the LGPD.

Article 42, paragraph 2, of the LGPD allows the judge, at his discretion, to reverse the burden of proof in favor of the data subject in the following cases:

• likelihood of his allegations;
• weaker position to produce evidence; or
• when the production of evidence by the holder becomes excessively burdensome.

Producing evidence regarding possible damages suffered by consumers in cases of leakage and/or sharing of data, however, is not a simple matter, either because of the difficulty of accessing information, the speed and agility with which information travels over the Internet, or the lack of transparency and ease ofin tracking the means of sharing data on the Internet.

TJSP and STJ decisions on the topic generate questions

It seems that the recent decision of the STJ has the potential to create a great debate about the definition of the concept of privacy, intimacy, and protection of sensitive personal data of consumers, due to the great number of interests and rights protected in the name of personal data privacy.

The classic formula for viewing privacy and intimacy - "the right to be let alone"^[6] - no longer fits today's reality, considering the exponential technological evolution.

From a reading of the decisions handed down by the TJSP and the STJ, some questions inevitably arise:

• Is it possible to state that the list of sensitive personal data provided for in the LGPD is exhaustive and not exemplary?
• Are all the cases provided for in the LGPD sufficient to guarantee the defense of the sensitive personal data of Brazilian citizens?
• Are there different levels of damage depending on the nature of the data leaked?
• Can it be said that all persons who have personally identifiable data leaked due to a security breach by a supplier responsible for handling personal data, in the context of a consumer relationship, do not suffer presumed moral damages?
• Should people/public figures be treated differently?

Another pertinent question is related to the possible application, by analogy, of strict liability and the establishment of presumed damage in cases of personal data leakage by credit protection databases and consumer data records. The joint and several liability between databases and suppliers, in this case, is guaranteed by the sole paragraph of article 7 of the CDC and article 16 of the Credit History Records Law (12,414/11).

There are still no definitive answers to all the questions, not least because this recent understanding is one of the first opportunities that the STJ has had to discuss part of the matter involving consumer rights and guarantees based on the LGPD, which entered into force in September of 2020. More analysis will probably occur on other occasions.

Since the LGPD entered into force, which guarantees, as one of its fundamental principles, the security and prevention of personal data (articles 6, subsections VII and VIII, 42, 43, 44, 45, and 46 of the LGPD) - there was (and still is) a fear on the part of companies regarding the application of civil, administrative, and criminal sanctions related to the activity of collection, storage, use, and transmission of personal data.

Although the STJ's understanding has not been established under the system of repetitive appeals, it seems that the result of the judgment has the ability to ensure, albeit temporarily, greater security for companies that perform data processing, by preventing the insetting of the well-known moral damages industry.

^[1] STJ, REsp 1.899.304/SP, opinion drafted by Justice Nancy Andrighi, decided on November 30, 2021.

^[2] STJ, REsp 1.507.920/SP, opinion drafted by Justice Maria Isabel Gallotti, decided on November 20, 2019.

^[3] STJ, AgRg no AREsp 821839/SP, opinion drafted by Justice Antonio Carlos Ferreira, decided on April 26, 2016.

^[4] STJ, REsp 1.839.506/RS, opinion drafted by Justice Ricardo Villas Bôas Cueva, decided on October 26, 2020.

^[5] STJ, REsp 1.758.799/MG, opinion drafted by Justice Nancy Andrighi, decided on November 12, 2019.

^[6] BENJAMIN, Antonio Herman; Marques, Claudia Lima; BESSA, Leonardo. Manual de Direito do Consumidor [“Handbook of Consumer Law”], 8th Ed., Revista dos Tribunais, Thomson Reuters, 2017.

Category: Tax

The Chamber of Deputies approved, on March 30, the conversion project of Provisional Presidential Decree 1,152/22 (“MP 1,152/22”), which introduced the new Brazilian transfer pricing policy. Among the innovations in the conversion process, the following stand out:

• the expansion of the criteria used in the case of commodities (Article 13 of the MP),^[1] which now admit the use of prices charged between unrelated parties and public prices, in addition to the quotation prices already provided for in the original wording;
• the exclusion of the secondary adjustment (Articles 17, IV, and 19 of the MP),^[2]-[3] since it would "encourage taxpayer to seek the compensatory adjustment [...], adjusting not only the tax base [...], but also the negotiated prices";^[4] and
• the exclusion of the prohibition on the deductibility of royalty and technical assistance payments involving parties residing in favorable tax jurisdiction or entitled to privileged tax regimes (Article 45, I, of the MP),^[5] "because the mere fact that the entity [...] is located in a tax haven does not mean that the deduction is not due".^[6]

The conversion project was sent to the Senate, which is expected to analyze and approve it in the coming days. The conversion of MP 1,152/22 shall be completed by June 1 to maintain its efficacy.

For a better understanding of the subject, we examine, in this Article, the normative grounds that justify the new Brazilian transfer pricing policy.

The arm's length principle

According to Article 2 of the MP, the new Brazilian transfer pricing policy is guided by the arm's length principle, which determines that the "tax base [of the corporate income tax (IRPJ) and the social contribution/tax on net income (CSLL) shall observe] [...] the terms and conditions [...] that would be established between unrelated parties in comparable transactions."

Next, Article 3 describes transactions that are controlled and therefore subject to the transfer pricing policy, as all "commercial or financial relationships between two or more related parties, established or carried out directly or indirectly, including contracts or arrangements in any form and series of transactions."

Article 4 adds that the "parties are related when at least one of them is subject to the influence, exercised directly or indirectly by another [...], which may lead to the establishment of terms and conditions in their transactions that differ from those that would be established between unrelated parties [...]". The hypotheses are exemplified in § 1.

The English expression adopted by Brazilian legislation, arm's length, literally means the distance of an arm. Given that the corporate or personal proximity between the contracting parties can influence the business conditions, the law uses this metaphor to require that a distance between related parties must be considered. With this, it is possible to analyze the transaction as if it had been concluded between independent parties under similar business conditions.

For example, imagine that the parents decide to sell something to their children. The conditions of this contract – price, terms and forms of payment, and guarantee – are generally different from those applied when the contract involves unrelated parties. That is, the family relationship and the consequent proximity between the contract parties influence and allow the business conditions to differ from those applied in the market, creating benefits and losses that ordinarily would not exist.

Nevertheless, the proximity between contract parties does not constitute abuse or refer to an unlawful act. Economic science even explains the impact of this phenomenon with the transaction costs theory of Ronald Coase^[7] – Nobel Prize in Economics.

According to him, there are costs intrinsic to contracting in the market – such as costs to negotiate, draft contracts, and ensure the execution of these. The market is itself costly and imperfect. Coordination between economic agents, in turn, makes it possible to reduce this cost. This shows the intrinsic synergy between the related parties, since the corporate and personal relationships between them reduce the costs.

On the other hand, the presence of these more beneficial or harmful terms and conditions constitutes an instrument for related parties to transfer or maintain income in jurisdictions with lower tax burden, intending to reduce the overall tax burden. This fact causes the progressive erosion of the tax bases of the states.

To this macro perspective is added the tax equality, considering that other taxpayers, who follow market conditions, should bear a greater tax burden.

In a competitive scenario with the absence of transfer pricing rules, a tax advantage is created, in addition to the existing economic one, which can violate the freedom of competition and the principle of tax neutrality.

A mechanism to correct tax treatment

In this sense, the transfer pricing policy constitutes a mechanism for correcting the tax treatment to determine the tax base consistently with the market income.^[8]

It is not, therefore, a question of nullifying the synergy between related parties, but of correcting the tax treatment and preventing it from being an additional disturbance to competition, beyond the already existing economic advantage.

For this reason, when it is held that there should be adjustments in the tax base, the underlying private relationship is not altered. It is only recognized that, for tax purposes only, the price of the transaction, for example, shall be a different one from the real one.

The transfer pricing rules are not intended to question the legitimacy of the transaction and its prices, that is, one should not talk about fraudulent overpricing or under invoicing, since the parties effectively contract the prices in a real way. The tax law is limited to comparing these prices with those that would be obtained under market conditions (at arm's length) and adjusts them to calculate the tax bases.

Hence, there is a difficulty that is intrinsic to the application of transfer pricing rules: how to identify market conditions?

In most cases, there is no single price, form, and contractual conditions. In fact, it is difficult to define market conditions, because of the range of options available.

It is noticed, therefore, that this construction impacts the control by the tax authorities, since, under the principle of arm's length, it must turn to the hypotheses in which there is a substantial deviation of market behavior and conditions.

The application of the new Brazilian transfer pricing policy, consequently, will reveal to what extent tax authorities are attending to these fundamentals, and this may result in the litigation regarding the subject.

^[1] Conversion project of MP 1,152/22: "Article 13. Where there is reliable information on comparable independent prices for the traded commodity, including quotation prices or prices charged between unrelated parties (internal comparables), the PIC method shall be considered the most appropriate for determining the value of the commodity transferred in the controlled transaction, unless it can be established in accordance with the facts and circumstances of the transaction and other elements of Article 11, including the assets, functions, and risks of each entity in the value chain, that another method is more appropriate to observe the principle outlined in Article 2.

[...]

• 2 The adjustments provided for in § 1 shall not be made if the comparability adjustments affect the reliability of the PIC method and justify the consideration of other transfer pricing methods, in accordance with Article 11.

[...]

• 5 - The public prices shall be used for the control of transfer pricing in the same way as they would be used by unrelated parties in comparable transactions.
• 6 - In extraordinary cases, the use of public prices shall not be appropriate for the control of transfer pricing if it leads to a result incompatible with the principle provided for in Article 2. [...]

^[2] MP 1,152/22: "Article 17. For the purposes of this Provisional Presidential Decree, it is considered:

[...]

IV - secondary adjustment - that used as a result of the adjustments provided for in items I or III of the caput."

Conversion project of MP 1,152/22: Excluded item IV of Article 17 of MP 1,152/22.

^[3] MP 1,152/22: "Article 19. If the spontaneous adjustment or the primary adjustment referred to in items I and III of the caput of Article 17 are made, the secondary adjustment shall also be made, which shall be determined based on the following criteria:

I - the adjusted amount will be considered as credit granted to the related parties involved in the controlled transaction, remunerated at the interest rate of twelve percent per year;

II - the interest provided for in item I shall be considered due from January 1 of the year following the period of calculation until the date on which the amount considered as credit is fully reimbursed to the legal entity resident in Brazil and shall be subject to taxation of the IRPJ and CSLL;

III - the interest rate will be reduced to zero if the amount considered as credit is fully reimbursed to the taxpayer in Brazil within ninety days, counted from:

(a) January 1^st of the year following the calculation period that caused the spontaneous adjustment; or

(b) the date of the notification of the tax notice regarding the primary adjustment."

Conversion project of MP 1,152/22: Excluded Article 19 of MP 1,152/22.

^[4]Office of the Deputy Da Vitória - PP / ES, opinion of the Joint Committee on the Provisional Presidential Decree 1.152/22, p. 35.

^[5] MP 1,152/22: "Article 45. In determining the actual profit and the tax base of IRPJ and CSLL, the amounts paid, credited, delivered, employed, or remitted as royalties and technical, scientific, administrative, or similar assistance are not deductible:

I - entities resident or domiciled in favorable tax jurisdiction or entitled to privileged tax regimes, as referred to in Articles 24 and 24-A of Law No. 9,430 of 1996; or [...]"

Conversion project of MP 1,152/22: Excluded item I of Article 45 of MP 1,152/22.

^[6] Office of the Deputy Da Vitória – PP/ES, Opinion of the Joint Committee on Provisional Presidential Decree 1.152/22, p. 34.

^[7] R. H. Coase, The firm, the market and the law, University of Chicago Press, 1988.

^[8] Paul Kirchhoff, Tributação no Estado Constitucional, São Paulo: Quartier Latin, 2016, p. 105.

Category: Capital markets

The Brazilian Securities and Exchange Commission (CVM) released, on February 28, 2023, the Annual Circular Letter 2023 – CVM/SEP containing the main guidelines regarding the obligations of publicly-held, foreign and incentivized companies before the autarchy.

The annual circular letters of the Superintendence of Relations with Companies (SEP) are great references for companies, as they facilitate the understanding of the procedures to be adopted in their routine obligations, in addition to bringing information about the rule interpretations of the CVM and SEP.

We highlight below some points of the Circular Letter.

• Presentation of the DFP in the context of the registration as a publicly-held company

In item 2.10 of the Official Letter, the CVM clarified that it is not necessary to present the DFP (Form of Standardized Financial Statements) during the process of registration of public companies when financial statements are presented for registration purposes with a date later than the last fiscal year, either due to a material change in the conditions of the issuer or because the issuer was constituted throughout the fiscal year.

The CVM stated that, in these cases, the DFP is not necessary for the financial statements for registration purposes or for the financial statements of the last fiscal year.

• Appeal against the imposition of a punitive fine

In relation to item 2.16 of the letter, it is worth analyzing the excerpt below:

"Pursuant to article 16 of CVM Resolution No. 47/21, as amended by CVM Resolution No. 159/22, the decision to apply punitive fines may be appealed to the CVM Collegiate to the superintendent of the area, in the second and last instance and without suspensive effect, within 10 (ten) days from the date of signature of the return receipt of the Office at the company's headquarters. Only in cases where the punitive fine is applied by the General Superintendence or by a member of the Collegiate who acts as Rapporteur will it be up to appeal to the Collegiate. (emphasis added)"

The excerpt highlighted above should not be interpreted as a possibility that the appeal against the decision to impose a punitive fine may be addressed, in any case, to the CVM Collegiate. This possibility was excluded by the modification brought by CVM Resolution 159/22, and the small excerpt highlighted, in our understanding, seems to be a mere error, considering the modifications of the aforementioned resolution.

The text of the letter itself confirms this understanding when it correctly highlights that the CVM Collegiate could only be triggered for this appeal if the penalty was applied by the "General Superintendence or by a member of the Collegiate who acts as Rapporteur."

• Financial statements

For the financial statements, the CVM also brought some new considerations, highlighted below.

• Disclosure of the Value Added Statement (DVA)

The CVM warned that some companies have not presented the DVA in their financial statements, quarterly information and DFP, with all the details required in Technical Pronouncement CPC No. 09, citing its items 15, 30 and 33, Models I, II and III.

• Early Disclosure of Financial Information

In item 3.2.2, the CVM brought a new recommendation for companies that disclose financial information in advance to adopt a disclosure policy that provides for and establishes criteria for such communications.

The letter also deals with this issue in item 4.24 (Operational data and metrics), emphasizing that companies often disclose operational information through communications to the market, and not by material facts. These are the well-known "operating previews" and other communications that show results prior to the disclosure of quarterly financial statements (ITRs) and financial statements.

Considering the recommendations expressed in the previous annual letter and the new considerations, below are the items to be observed by companies for this type of communication:

• The disclosure of financial information in advance should be done in an exceptional way.

• If the financial data is anticipated, in any case, the company must do so in an equitable manner and emphasize that the information is preliminary, adding whether or not it has been audited or reviewed by the independent auditors. Such information must be true, complete, consistent and not misleading.

• This information should, as a rule, be disclosed in a material fact. In SEP's view, information from the financial statements is presumably a material fact.

• However, there is no impediment to such disclosures occurring via a notice to the market, provided that the information disclosed (i) does not allow inferring the financial result or (ii) represents a multiple commonly used for the valuation of companies in that sector. Management should assess the relevance of the material fact in each disclosure.

• If it is not an exceptional disclosure, and the Company has the practice of anticipating financial information, it is recommended that it adopts a disclosure policy that:

"(i) establishes what data or metrics will be disclosed, containing a precise definition of the indicator, if necessary;

(ii) defines the periodicity of disclosure (monthly, quarterly, etc.);

(iii) fixes the date, or period, for such disclosure (e.g., between the 5th and 7th business day of each month); and

(iv) determines that disclosure be made on a regular basis, thereby avoiding discretion in disclosure."

• In the event of a change in the disclosure policy that deals with the anticipation of financial information, the company must previously disclose a material fact about the modification.

Considering this, we believe that the CVM signals that it may closely evaluate the previous operational and other disclosures that may anticipate information on the companies' results, and it is highly recommended that the companies adopt the suggestions contained in the letter.

• Acquisition of a company – disclosure of information

Regarding communications about acquisitions, it was already recommended that publicly-held companies disclose such operations with complete information and that would allow investors to analyze the business carried out. Therefore, there isn’t a regulatory change that motivates the CVM's recommendation brought in item 4.1.2 of the letter.

In this sense, the recommendation for companies to disclose a material fact or a communication to the market containing "relevant information available that allows the understanding of the business by the public to which the information is intended, which includes the main conditions of the business (price, form of payment, etc.), as well as financial information (revenue, EBITDA, profit, etc.) and / or operational of the acquired business" , denotes a concern of the autarchy with disclosures that did not bring sufficient information about the business done.

In their new disclosures about acquisitions, therefore, the companies should seek to provide information in line with this new excerpt of the letter.

• Related Party Transaction Communication

In the item about the communication of transactions between related parties (4.16), the CVM brought a new recommendation as a "good practice". Although it is not mandatory, it is recommended that companies disclose the transaction with a related party under the terms of article 33, item XXXII, of CVM Resolution 80/22, at the time of its approval by the competent corporate bodies, even if it mentions its conditions for the implementation of the operation.

The deadline established by CVM Resolution 80/22 continues to be seven business days, counted from the occurrence of the transaction, pursuant to article 33, item XXXII, of the resolution.

• Fiscal Council – replacement of an alternate member

In its item 7.1.4, the letter highlights the need to hold a general meeting to elect an alternate member of the fiscal council when a member resigns. This requirement stems from the provisions  of the Brazilian Corporate Law, which in its article 161, paragraph 1, establishes that the fiscal council must have alternate members in equal number to the number of effective members.

This excerpt from the letter demonstrates the CVM's concern with cases in which the replacement of the alternate member of the fiscal council is prolonged, leaving the composition of the body in disagreement with the provisions of the Brazilian Corporate Law.

Although the legislation does not set a deadline, the excerpt signals that the CVM will not allow companies to simply wait for a new and not yet scheduled meeting. Thus, it is recommended that companies convene such an assembly in the shortest possible time.

It is also noteworthy that, pursuant to article 26, first paragraph, item II, paragraph "a", of CVM Resolution 81, the election of a member of the fiscal council in companies registered in category A, and that have outstanding shares, will require the procedures for remote voting.

• Communication on the closure of repurchase programs

In its item 7.14, the CVM recommended that companies disclose the closure of their repurchase programs informing at least the number of shares acquired and the intended destination for the repurchased shares.

• Modifications introduced by Law 14.195/21

The letter brings changes resulting from the important changes promoted  by Law 14.195/21, among which stand out those related to the plural vote and the composition of the board of directors, with the requirement of occupation of the positions by independent members, as well as with the prohibition of cumulation of positions for the positions of chairman of the board and chief executive of the company.

On these topics, we recommend reading our e-book, as well as an article on the modifications brought by CVM Resolution 168.

• New Reference Form

The letter has new guidelines on the completion of the Reference Form, a topic of great interest to issuers, due to the changes contained in CVM Resolution 80/22, as amended by CVM Resolution 59/21.

In addition, the completion of the "New Reference Form" will take place on the CVM's web platform, pursuant to Circular Letter 7/2022-CVM/SEP, modifying the operational aspect of the presentation of the information.

Soon, we will analyze in this portal the CVM guidelines for completing the new Reference Form.