Publications

Category: Tax

The Supreme Federal Court (STF) concluded, in March, the analysis of an important tax issue involving the exclusion of presumed credits of Tax on Circulation of Goods and Services (ICMS) from the calculation bases of PIS and Cofins. This is the judgment of an extraordinary appeal brought by the Union, RE No. 835.818/Theme 843 of the General Repercussion – Possibility of excluding the pis and cofins calculation base from the amounts corresponding to presumed ICMS credits arising from tax incentives granted by the states and the Federal District. Although the trial was paralyzed by the request for the view of Minister Dias Toffoli, the votes cast by the other ministers already form a majority by the dismissal of the appeal.

The discussion is not new, but the theme gained prominence with the recognition of its repercussion, which will impact everyone who is subject to this taxation. The trial also drew attention for inserting itself in the new avalanche of tax issues judged by the Supreme Court in 2021.

Regarding the discussion, the taxpayers defended the exclusion of the presumed ICMS credits from the pis and cofins calculation bases. The claim is that these credits could not be considered revenue or billing, which are the basis for calculating the contributions in question.

Another important foundation was pointed out for the non-taxation of these values by PIS and Cofins. The presumed iCMS claim would actually be a tax waiver by the taxing authority (state). Thus, any attempt to tax these amounts could result in violation of the federative pact and emptying of the tax benefit itself.

In turn, the National Treasury argued that the granting of the presumed iCMS credit would lead to a reduction in costs and expenses, which would result in an increase in taxpayer revenue, even if indirectly. From this point of view, the amounts relating to presumed ICMS credits should form the basis for calculating PIS and Cofins.

The National Treasury also maintained that there would be no legal provision for the exclusion intended by the taxpayer, because this exclusion is not included in the list of Art. 1, § 3 of Law No. 10,637/02 and the same article and paragraph of Law No. 10,833/03. For the agency, the non-taxation of presumed ICMS claims by PIS and Cofins would violate Article 150, § 6 of the Federal Constitution of 1988 (CF/88).

The theme, therefore, goes through the question of the concept of billing and revenue for the purposes of pis and cofins incidence, a discussion that is not unprecedented in the Supreme Court.

In other opportunities, the Supreme Court considered that the ICMS could not be the basis for calculating the aforementioned contributions, since it does not constitute the taxpayer's own wealth (it is mentioned, for example, RE No. 574.706/PR and RE No. 240,785/MG, which analyzed the exclusion of the ICMS from the pis and cofins calculation bases).

Reiterating the understanding already established by the Supreme Court, the vote of Minister Marco Aurelio, rapporteur of the case, for whom the presumed credits of ICMS are not confused with the concept of revenue or billing, bases for calculating these contributions (art. 195, I, "b" of the CF/88).

Minister Marco Aurelio suggested the fixation of the following thesis: "It appears incompatible, with the Federal Constitution, the inclusion, in the basis of calculation of Cofins and the contribution to the PIS, of presumed credits of the Tax on Circulation of Goods and Services - ICMS."

The written vote of Minister Edson Fachin was also made available. In addition to accompanying the rapporteur, the Minister examined the subject from another perspective, which involves the very concept of subsidy and the express exclusion of the investment grant (category in which presumed ICMS credits are included) from the pis and cofins calculation bases, provided for by laws no. 10,637/02 and 10,833/03, with the changes promoted by Law No. 12,973/2014 and Complementary Law No. 160/2017.

According to Minister Edson Fachin, the law itself would have already been able to exclude investment subsidies from the calculation bases of pis and cofins, precisely because they are not characterized as revenue. For this reason, the taxation sought by the Union is also, according to the Minister, incompatible with the Federal Constitution.

The disagreement was opened by Minister Alexandre de Moraes, who asserted that the exclusion sought by the taxpayer would not find legal support (art. 1, § 3 of laws no. 10.637/02 and 10.833/03). Making an interpretation "averse" to the federative pact, the minister understood that the granting of presumed ICMS credits by the states could not prevent taxation by the Union in relation to the part that "is its".

The rapporteur accompanied the ministers Edson Fachin, Rosa Weber, Carmen Lucia, Ricardo Lewandowski and Roberto Barroso. Ministers Alexandre de Moraes, Gilmar Mendes, Nunes Marques and Luiz Fux voted unfavorably to the taxpayer. The Minister Dias Toffoli asked for a view of the case, interrupting the trial.

At least to date, a possible modulation of the effects of the decision by the Supreme Court has not been mentioned. If there is no modulation, the decision is valid to ensure future and future values.

Category: Tecnology

Diego Gualda, Vinicius Venancio Costa and Matheus Perez Matsuno

The Third Panel of the Superior Court of Justice (STJ) upheld the decision of the TJ-SP to fine Microsoft Informática Ltda. $310,000 because the company did not provide access information to a specific user's email address. In this case, a director of a brazilian company in Brazil received through his corporate e-mail threats in English from an email account user offered by the provider (the connection provider is outside Brazil).

The threatened director filed a lawsuit against the company to provide the information that would allow him to find the author. The court of first instance granted in advance guardianship the requests of the author, determining the identification of the person responsible for the e-mail account under penalty of daily fine set at R $ 10 thousand. After the decision was not complied with, the execution of the daily fine, which was appealed by the ombudsman, began. The TJ-SP maintained the conviction. The company then filed a special appeal with the STJ challenging that the Brazilian Court was not competent to request the supply, because webmail had as provider the parent company located abroad.

The above case is just the latest in a discussion not yet fully addressed within the judiciary: whether it is legitimate to compel a subsidiary in Brazil to provide information from users who hire a service with another company of the economic group outside Brazil.

Dealing with the scope of Article 11 of the Civil Framework of the Internet (MCI), in this, as in other cases, the Supreme Court considered that there was no offense to the law. According to the court, any operation of personal data, records or communications by internet connection providers and applications that occurin Brazil makes Brazilian law applicable to the case, regardless of whether there is only one device located in the country or the activities carried out are company based abroad. Therefore, for the Supreme Court, there is no way to disagree that the domicile of the demand under discussion is Brazil.

A similar case was also cited in a question-of-order judgment involving Google Brazil and Google Inc.^[1] in the criminal sphere, which forced Google Inc., a foreign company, to submit to Brazilian sovereignty in cases where its subsidiary (located in Brazil), Google Brazil, is referred to in proceedings. Thus, in the case under analysis, the STJ understood that the Brazilian provider is a representative and acts on behalf of its foreign parent company.

The objective of this article is to discuss some perspectives that have not been considered by the Supreme Court in these decisions, in addition to considering the relevance of the entry into force of Law No. 13,709/18 (General Law for the Protection of Personal Data − LGPD) and a recent decision of the Supreme Court recognizing the protection of personal data as a fundamental right.

A first point concerns the legitimacy of the passive pole in the process: should the company based in Brazil be responsible for the requests, considering the context of the right to data protection and the processing of data by the foreign company?

In ADIs 6,387, 6,388, 6,389, 6,390 and 6,393,^[2] in a decision that suspended the effectiveness of Provisional Measure (MP) No. 954, the Supreme Federal Court (STF) recognized the confidentiality of data as an autonomous fundamental right, and consequently as a constitutional guarantee. It also noted the need for data sharing to take into account due process, not only in its formal dimension, but also substantive. In addition to procedural guarantees, the decision requiring sharing must be proportionate in the specific case, taking into account the fundamental rights of the data subject himself. Forcing the sharing of data between companies based in different countries, at risk of causing conflicts of jurisdiction and violation of foreign law to comply with a court decision in Brazil, is this a proportionate measure from the point of view of the protection of personal data? How can we consider the principles of adequacy and necessity in this context?

Regarding the substantive dimension of due process, it seems necessary to evaluate more accurately the implications of considering the Brazilian subsidiary responsible for obtaining and making available the personal data of a user who hires a company from the same group outside Brazil.

A second aspect is related to Article 11 of the MCI, which does not have the jurisdiction of Brazilian courts, so it is not a procedural rule, but material. That is, the article regulates a rule of application of Brazilian law in the specific case. In addition, it is possible to notice technical flaws in the interpretations of §1. The situation of the rule brought by law concerns the case in which an international application provider located outside Brazil carries out the processing of the personal data of a holder located in Brazil. It is for this reason that the article mentions that one of the terminals must be located in Brazil.

However, in the concrete case mentioned above and judged by the STJ, the relationship established between the controller and the holder of the personal data should be better understood and it is necessary to observe whether the concrete evidence indicates whether the person who made the communication object of the breach of confidentiality has any point of connection in Brazil. To illustrate, if a user based in a foreign country hires an international provider and sends an email to a user located in Brazil, the law applicable to the processing of foreign data (located outside Brazil) is not Brazilian law. This does not mean that the Brazilian justice does not have jurisdiction to investigate the case and even require the breach of data confidentiality. But Brazil cannot impose the application of its law on a relationship maintained between two parties (the foreign contractor of the service and the respective provider) without any concrete element of connection with the national territory. With the transmitter located outside Brazil, it would be necessary to observe the inapplicability of the standard due to the absence of the connection element (there is no terminal located in Brazil). Thus, the evaluation of the application of Article 11, §1, of the MCI should consider the condition of the person who has his data confidentiality decreed and not only the fact that he communicated with someone in the national territory. This important nuance seems to have been overconsidered by the Supreme Court.

In addition, Article 11 of the MCI exists to protect the processing of personal data of the data subjects. Its purpose is to ensure that foreign companies are obliged to protect the personal data of holders located in Brazil, according to the parameters of Brazilian law. That is why it sounds at least strange that the device is used as a foundation for breaking data confidentiality. Article 11 values precisely the observation of due process. Therefore, using it with the justification of enabling access to personal data of holders who have contracted services with foreign companies, in any aspect, can be seen as a misimage of their own purpose. Misstatement that only worsens in the face of the recognition of the protection of personal data as a fundamental right, according to the recent decision of the Supreme Court cited above. Thus, not only the Executive and Legislative Branches, but also the Judiciary, in the exercise of jurisdiction, need to carry strictly the principle of due process in its substantive dimension.

The protection of fundamental rights cannot be relativised by a procedural convenience. We need to consider the scope of data protection within the parameters defined by the LGPD and in accordance with the Federal Constitution. Taking these terms seriously means avoiding the temptation to follow procedural shortcuts that weaken the guarantees of rights.

^[1] EDcl on Inq 784/DF, rel. Minister Laurita Vaz, Special Court, tried on 05/15/2013, DJe 08/28/2013

^[2] "STF suspends data sharing of telephone users with IBGE" In SUPREME COURT. Available from: <http://www.stf.jus.br/portal/cms/verNoticiaDetalhe.asp?idConteudo=442902&caixaBusca=N.> Last accessed: 24 Mar. 2021.

Category: Infrastructure and energy

André Camargo Galvão e Frederico Morais Menezes Abdul-Hak Antelo

Through the virtual judgment closed on March 5, the plenary of the Supreme Federal Court (STF) decided, by a majority of votes, that Petróleo Brasileiro S.A. (Petrobras) is not subject to Law No. 8,666/93 (Bidding Law), a rule that provides for the bidding regime of the Public Administration.

The decision was given in the event of Extraordinary Appeal, brought by the Fleet of Oil Tankers of Sul Ltda. (Petrosul) and Brasilmar Navegação S.A. (Brasilmar), which sought to reform the decision of the Court of Justice of Rio Grande do Sul (TJ-RS) which considered valid (i) the termination by Petrobras in 1994 of a contract for chartering vessels for cargo transportation, concluded between Petrobras and Petrosul; and (ii) the subsequent contracting by Petrobras of another company without compliance with the provisions of the Bidding Law. At the time of the decision, the TJ-RS understood that Petrobras would not submit to art. 1, sole paragraph, of the Bidding Law.^[1]

The majority of the Ministers of the Supreme Court followed the vote of the rapporteur, Dias Toffoli, by disavowing extraordinary appeal (RE) no. 441280, thus consolidating the understanding of the Supreme Court regarding the absence of the need for Petrobras to observe the procedures provided for in the Bidding Law. This decision was founded on Article 173, §1, of the Federal Constitution,^[2] the wording of which establishes the subjection of mixed-economy companies to the own regime of private undertakings.

The rapporteur minister also stressed that the contracts concluded by Petrobras for the acquisition of goods and services should follow the Regulation of the Simplified Bidding Procedure of Petrobras, regulated by Decree No. 2,745/98.

According to the vote of the minister rapporteur, the regime provided for in the Bidding Law is incompatible with the performance of Petrobras, because mixed economy companies (petrobras case) are required to have their own agility of companies operating in the private market, driven by intense competition between companies:

"Therefore, I believe that it is inapplicable to mixed-economy companies that exploit the economic activity of private companies, thus competing in the market, with the narrow regime established in Law No. 8,666/93, because it is not possible to reconcile the regime provided for in Law No. 8,666/93 with the agility of this type of market, which, as we know, is driven by intense competition between the companies operating in it.

The agility required of companies operating in the market is absolutely incompatible with a rigid bidding system, such as this imposed by said Law No. 8,666/93."

Ministers Luiz Fux, Ricardo Lewandowski, Celso de Mello (retired), Gilmar Mendes and Alexandre de Moraes followed the vote of the rapporteur minister. They were against the ministers Marco Aurélio Mello, Edson Fachin, Rosa Weber and Carmen Lucia.

^[1] Art. 1 - This law establishes general rules on bids and administrative contracts relevant to works, services, including advertising, purchases, disposals and leases within the powers of the Union, states, the federal district and municipalities.

Single paragraph. The regime of this law, in addition to the organs of direct administration, special funds, municipalities, public foundations, public enterprises, mixed-economy companies and other entities directly or indirectly controlled by the Union, States, Federal District and Municipalities are subordinated.

^[2] Art. 173, § 1 - The law shall establish the legal status of the public company, the mixed-economy company and its subsidiaries that exploit economic activity of production or commercialization of goods or services, with:

(...)

II - the subjection to the legal regime proper to private companies, including civil, commercial, labor and tax rights and obligations;

Category: Litigation

The National Congress partially overturned, on March 17, the vetoes of the President of the Republic to Bill No. 4,458/20, which promoted the reform of the Law on Recoveries and Bankruptcies (Law No. 11,101/05 or LRF). From this deliberation, some provisions approved by the National Congress, but vetoed by the president, will be reinserted in the reform of the LRF, which is already in force.

The partial overthrow of vetoes represents a strengthening of the principles of preserving productive activity and overcoming the economic and financial crisis, both of which are provided for in Art. 47 of the LRF. In addition, there is an effective stimulus to the business environment in Brazil, especially at a time of severe economic, financial and sanitary crisis.

The National Congress maintained vetoes related to the provisions that disciplined (i) the possibility of the Ministry of Agriculture, Livestock and Supply to define which events can be characterized as fortuitous acts and force-greater force for the purpose of possible submission of credits and guarantees linked to rural product notes (CPRs), with physical settlement, to judicial recovery; and (ii) the suspension of labor executions against co-obligations of recoverers.^[1] These issues will therefore be left out of the LRF reform.

In addition to a specific point on cooperatives^[2] and the recognition of non-submission to the effects of judicial recovery of claims and guarantees linked to CPRs with physical settlement, in case of partial or full anticipation of the price, or representative of exchange operation for insums (Barter)^[3], the vetoes overturned by the National Congress involve relevant tax issues and the absence of succession of the acquirer of the debtor's assets. These two aspects are best described below:

• ABSENCE OF SUCCESSION OF THE ACQUIRER OF ASSETS – 60, single paragraph,^[4] and art. 66, §3,^[5] of the LRF

The two new provisions leave no room for doubt that the asset disposed of during the judicial recovery will be free of any encumbrance and that the acquirer will not succeed the debtor in his obligations. Environmental, labor, regulatory, administrative, criminal and anti-corruption obligations were expressly included in these obligations. The tax obligations were already exceptional in the original wording of the LRF.

The previous wording of the LRF was not clear on the subject. It was discussed, first, whether the shield would only apply to cases of sale of isolated production unit (UPI) or to subsidiaries, with the respective provision in judicial recovery plan. In addition, there were doubts as to whether environmental and anti-corruption obligations would be excluded.

Although they had already judged and^[6] who adopted an ampliative interpretation for both points, there were questions whether the sale of other assets through judicial authorization in the form of Art. 66 of the LRF would also be covered by non-succession.

The inclusion of §3 of art. 66 in the LRF closes any discussion and establishes that sales made with judicial authorization are also shielded from encumbrance. Furthermore, the amendment to the sole paragraph of Article 60 makes it clear that the absence of succession refers to all obligations of the debtor, including environmental and anti-corruption obligations.

All of these devices give greater predictability and security to those interested in assets of companies in judicial recovery. As a result, an increase in the number of interested parties for this type of asset is expected, more facility to sell them and an increase in the value of offers to recoverers.

• TAX ISSUES - Art. 6b^[7] and 50-A^[8] of the LRF

The two provisions stipulate, in summary:

• the non-application of the limit of 30% provided for in the tax legislation to offset tax losses with capital gain due to the sale of assets within the context of judicial recoveries and bankruptcies or with gain arising from debt reduction;

• the disregard of accounting revenuestemming from the application of debt discounts such as tax revenues for the purposes of pis and cofins; And

• the deductibility of the obligations assumed in the judicial recovery plan of the calculation bases of corporate income tax (IRPJ) and the Social Contribution on Net Income (CSLL).

The forecasts mentioned above will have a broad practical effect on judicial recoveries, as significant discounting to creditors and the sale of assets by the recovering debtor are among the main means of recovery adopted by debtors.^[9]

The overthrow of vetoes to these devices also represents an important and fair portion of the Tax Code's contribution (which was largely strengthened with the reform of the LRF – as already addressed Previously) for debt restructuring and overcoming the economic and financial crisis, as well as the others involved (debtors and their shareholders, creditors, employees, suppliers and customers) in these processes.

More details on the implications of these tax provisions can be found Here.

^[1] The implications of maintaining the veto on the suspension of labor executions have already been addressed in detail Here.

^[2] The National Congress also overturned the veto on §13 of Article 6 of the LRF, which provides: "§ 13. The effects of judicial recovery are not subject to the effects of judicial recovery, the contracts and obligations arising from cooperative acts committed by cooperative societies with their cooperative members, in the form of Article 79 of Law No. 5,764 of December 16, 1971, consequently, not applying the prohibition contained in item II of Art. 2. when the operating company of health care plan is a medical cooperative."

^[3] Another veto overturned by the National Congress involves the amendment of Art. 11 of Law No. 8,929/94, which establishes: "Art. 11. The claims and guarantees linked to cpr with physical liquidation, in the event of partial or full anticipation of the price, or representative of exchange transaction for insums, shall not be subject to the effects of the judicial recovery.Barter), the creditor shall be entitled to the restitution of such goods which are in the possession of the issuer of the ballot or of any third party, unless the fortuitous case or force greater which is proven to prevent partial or total compliance with the delivery of the product."

^[4] "Single paragraph. The object of disposal shall be free of any encumbrance and there shall be no succession of the bidder in the obligations of the debtor of any nature, including, but not exclusively, those of an environmental, regulatory, administrative, criminal, anti-corruption, tax and labor nature, subject to the provisions of § 1 of Art. 141 of this Law."

^[5] "§ 3º Provided that the disposal is carried out in compliance with the provisions of § 1 of Art. 141 and article 142 of this Law, the object of the disposal shall be free of any encumbrance and there shall be no succession of the acquirer in the obligations of the debtor, including, but not exclusively, those of an environmental, regulatory, administrative, criminal, anti-corruption, tax and labor nature."

^[6] In this sense, Statement No. 104 of the III Business Law Day of the Federal Court Of The Council establishes: "There will be no succession of the acquirer of assets in relation to pecuniary penalties applied to the debtor based on Law No. 12,846/2013 (Anti-Corruption Law), when the disposal occurs on the basis of Art. 60 of Law No. 11,101/2005.

^[7] Art. 6b. The percentage limit of which the arts are treated does not apply. 15 and 16 of Law No. 9,065 of June 20, 1995, to the calculation of income tax and the Social Contribution on Net Income (CSLL) on the portion of the net income resulting from capital gain resulting from the judicial disposal of assets or rights, which deal with the arts. 60, 66 and 141 of this Law, by the legal entity in judicial recovery or with decreed bankruptcy.

Single paragraph. The caput provisions of this article do not apply in the event that the capital gain swerves from a transaction made with:

I - legal entity that is controlling, controlled, affiliated or interconnected; Or

II - natural person who is a controlling shareholder, partner, holder or administrator of the debtor legal entity."

^[8] "Art. 50a. In the case of renegotiation of debts of a legal entity in the context of judicial recovery proceedings, whether or not the debts are subject to it, and the recognition of their effects on the financial statements of the companies, the following provisions shall be observed:

I - the revenue obtained by the debtor will not be computed in the calculation of the calculation basis of the Contribution to the Social Integration Program (PIS) and to the Program for The Formation of the Public Servant's Assets (Pasep) and the Contribution to the Financing of Social Security (Cofins);

II - the gain obtained by the debtor from the reduction of the debt will not be subject to the percentage limit of which the arts deal. 42 and 58 of Law No. 8,981, of January 20, 1995, in the calculation of income tax and CSLL; And

III - expenses corresponding to the obligations assumed in the judicial recovery plan shall be considered deductible in determining the actual profit and calculation basis of the CSLL, provided that they have not been the subject of a previous deduction.

Single paragraph. The caput provisions of this article do not apply to the assumption of debt with:

I - legal entity that is controlling, controlled, affiliated or interconnected; Or

II - natural person who is a controlling shareholder, partner, holder or administrator of the debtor legal entity."

^[9] By statement, the Insolvency Observatory, on the initiative of the Center for The Study of Insolvency Proceedings (NEPI), puc-sp, and the Brazilian Association of Jurimetria (ABJ), found, in judicial recoveries processed in the state of São Paulo, that (i) 82.7% of the judicial recovery plans stipulated discount to chiropractic creditors, and the average discount verified corresponds to 70.8% of the respective claims and (ii) about 35% of the plans approved in specialized courts from 2018 were expected to sale of UPI. This data was extracted from the February 2021 report.

Category: Competition

The Administrative Council for Economic Defense (Cade) has been analyzing the fine line between legitimate and anticompetitive market intelligence practices, and deepened the discussion on the subject in an investigation initiated on March 17 on the exchange of sensitive information in the area of Human Resources (HR) between healthcare companies.

This is the first time that Cade examines the theme, which has gained prominence on the international stage. In 2016, U.S. antitrust agencies published an antitrust guide for Human Resources professionals (Antitrust Guidance for HR Professionals); in 2018, the antitrust agencies of Japan and Hong Kong released studies that also sought to provide parameters for the activities of Human Resources professionals (Report of the Study Group on Human Resource and Competition Policy And Competition Concerns Regarding Certain Practices in the Employment Marketplace in Relation to Hiring and Terms and Conditions of Employment); and in 2019, the Organization for Economic Cooperation and Development (OECD) published a note on antitrust concerns in labour markets (Competition Concerns in Labour Markets).

According to the General Superintendence of Cade, there would be indications that healthcare companies would have systematically exchanged sensitive information about compensation, pay adjustments and benefits offered to their current and future employees. In addition, they would occasionally have fixed prices and commercial conditions with respect to conditions for hiring labour and HR management.

The agency considered that companies compete with each other for the hiring of employees and thus can be considered rivals in a labour contracting market, even if they do not compete in the manufacture of products or the provision of services.

Based on this premise, the exchange of non-aggregated and non-outdated information  relating to current and future intentions, would eliminate uncertainties as to the strategic behavior of competitors, reason why the practice would be  a serious infringement that could be analyzed under the per se approach applicable to cartels. This means that in order to establish antitrust liability and impose fines  Cade would not be required to verify whether the companies involved enjoyed a dominant position or to assess the anticompetitive effects of the exchange of competitively sensitive information. It would suffice to prove that the practice actually occurred.

The General Superintendence of Cade was clear by pointing out that the antitrust exemption granted to collective labour negotiations conducted through unions due to their social objective (improving working conditions) cannot be viewed as a safe harbour for practices related to the conditions of hiring labour and HR management.

In this sense, the following conducts involving labour issues, when practiced by competing companies, can be considered illegal from an antitrust perspective:

• wage fixing agreements;

• no-poach agreements; and

• exchanges of competitively sensitive HR information.

In view of the fact that the labour market is subject to Cade’s scrutiny, the debate over the antitrust impacts of labour issues is still beginning and a number of questions are yet to be answered. How to calculate the market shares of companies in the labour hire market? What is the level of substitutability between certain jobs and functions ? Does the exchange of information on wage and benefits in markets where professional qualification and investments in intellectual capacity are not relevant factors confer some kind of competitive advantage? Is it possible to speak of "pricing" of work by companies in the face of the concrete effects of collective labour negotiations? These are examples of questions that need to be answered from an interdisciplinary analysis that brings labour law to the antitrust debate.

Category: M&A and private equity

Clarissa Freitas, Rafael Costa Silva e Bernardo de Barros Castro

The Cvm's Superintendence of Business Relations (SEP) took a stand against the proposal to change Vale S.A.'s bylaws that sought to change the system of election of the members of the company's board of directors, introducing the possibility of negative voting (or rejection). Under the new system, only candidates who obtained more favorable than negative votes from the company's shareholders would be eligible.

Understanding that the proposal did not represent the best governance practices adopted by true corporations, an independent board member of the company filed with CVM on February 4, a consultation on the lawfulness of the proposed changes in the election system that would be appreciated by the company's shareholders at an extraordinary general meeting convened with this and other objectives.

More precisely, the object of the consultation was restricted to the analysis of items V and VI of the new §10 of Article 11 of the company's bylaws, transcribed below:

"V – Candidates with the highest number of favorable votes will be considered elected, provided that the number of favorable votes are higher than the number of negative votes; in the event of a tie, the candidate who has received the least negative votes or turns out to the oldest will be considered elected successively;

VI – In case there is not candidates in a number corresponding to the composition approved for that mandate eligible according to item V above, a new election will be held in another meeting for the unfilled positions, with the preparation of a new list of candidates , in a number of at least equal to the positions to be filled, and in that period the Board of Directors shall operate with the members already elected."

In the understanding of the board member who made the consultation, the implementation of the negative voting system would make it difficult for minority shareholders to elect candidates on the board of directors, since Vale still has many major shareholders, even though it has become a dispersed capital company. Thus, the candidates nominated by minorities would already count, at first, with a significant amount of negative votes (conferred by the large shareholders). Most likely, this would make them ineligible without further repercussions. It is important to note that this negative voting system would apply only to the "general" election of members of the board of directors. It would not be valid for multiple voting and separate voting modalities.

In addition, the board member pointed out that, in a similar case analyzed by CVM in 2015 (CVM Administrative Procedure No. RJ2015/2925, involving Usiminas), SEP would have already concluded that there would be no negative votes, for the purposes of quorum deliberation, in elections of members of the board of directors.

Defending the proposal, the company argued that, given the absence of any legal fence, the changes would be lawful and, therefore, could integrate its bylaws. Furthermore, it argued that the Usiminas case had never been the subject of scrutiny by the CVM Collegiate, having been analyzed only incidentally.^[1] Finally, it was based on a recent thesis of former CVM director Gustavo Machado Gonzalez that the elections of the companies' boards of directors – according to Law No. 6,404/76 – would not be restricted to the majority voting system. It would be up to each company to adopt the model that would be most convenient for it.^[2]

In its manifestation, SEP stressed that, despite the similarities between the Usiminas case and Vale's, it cannot be concluded that the former represents a precedent for the second. This is mainly because the express prediction that a candidate for the board of directors cannot be elected if he has obtained more negative votes than approvals is, it seems, unprecedented for our corporate law.

The SEP also understood that the amendment proposed by Vale would fragment the procedure of elections to the council, something not provided for in the applicable rules. In the "new" system, those candidates whose vote balance was negative would be excluded. In a second moment, the new advisors would be chosen from among the remaining candidates.

In addition, SEP pointed out that the negative voting system could generate distortions, since one candidate could be elected even if he received fewer favorable votes than another, which would represent a distortion of the election process and the will of shareholders. In this sense, the SEP based that the changes in the elections to the board of directors intended by Vale were not compatible with the system of Law No. 6,404/76, and therefore rejected the lawfulness of the contrary vote.

After SEP’s decision, Vale chose to give up presenting the proposed amendment to its shareholders. The matter was not analyzed by the Collegiate, but it is likely that this decision of the technical area already serves as a disincentive to other companies that want to introduce the system of negative voting in their bylaws.

Under the current CVM's understanding, companies may allow shareholders to vote against a particular candidate. However the registration of this type of vote is only admitted to delimit the shareholder's liability. In practice, the negative vote is equivalent to abstention.

^[1] The CVM Board did not analyze the case because the applicants dropped out.

^[2] GONZALEZ, Gustavo Machado. "Notes on the election of the board of directors by means of majority voting." In: Rodrigo Rocha Monteiro de Castro, Luis André Azevedo and Marcus de Freitas Henriques (coord.). Corporate Law, Capital Markets, Arbitration and Other Topics - Tribute to Nelson Eizirik. São Paulo: Latin Quarter, 2021, p. 446-447.