Publications

Category: Capital markets

Brazilian companies have been waiting for more than a decade for a new window of opportunity to raise funds in Brazil's capital markets through initial or follow-on public offers of equity-linked shares or securities (public equity offers). Since 2006 and 2007, it has been years of low or no funding through these transactions. In 2019, the market expected constant growth in these offers, with an effective resumption (boom) expected by 2020.

The information on applications for registration of public equity offers available for consultation on the website of the Brazilian Securities and Exchange Commission (CVM) confirms these expectations: on March 16, 2020, there were 27 applications undergoing CVM review, pursuant to CVM Instruction No. 400/03, as amended, in contrast to ten recorded throughout 2019 (not considering the offers under review on a strictly confidential basis).

With the news about the rapid spread of the coronavirus causing covid-19 in China at the end of 2019, issuing companies and other agents involved in public equity offers in Brazil began to discuss the need to include in the documentation of these applications a risk factor that would address potential deterioration of the world economy and, consequently, of the activities, business, and revenue of the issuing companies. This risk, however, became a reality with the spread of the coronavirus to other countries, including Brazil, and with the outbreak of an unprecedented crisis with the decree by the World Health Organization (WHO) on March 11, 2020, that covid-19 is a pandemic.

As a result of this scenario, in recent weeks there has been enormous volatility in the price of securities of companies around the world and a significant deterioration in their market prices, which many experts are classifying as an even more serious crisis than the one experienced in 2008 due to subprime mortgages. The viability of public equity offers in a period of such uncertainty and global economic crisis has been called into question, and the CVM has had to review some rules and interpretations applicable to the Brazilian capital market.

With respect to public offers of securities governed by CVM Instruction 400, which include public equity offers, the CVM has disclosed, as of March 13, three important and unprecedented measures for the exclusive purpose of, at least for the time being, trying to prevent a flurry of requests for cancellation (i) of public offers of securities registered with the CVM that have not yet been settled (registered public offers) and (ii) of public equity offers and other public offers of securities currently under review by the regulator.

The first guideline disclosed by the Bureau of Securities Registration of the CVM (SRE), through Circular Letter No. 2/2020-CVM/SRE, is applicable to the public offers registered. The agency sought to clarify that, as a result of the impacts of coronavirus on the world capital markets and, especially, on the Brazilian market, the CVM will automatically respond to requests for modifications to these offers (in consideration for the agency's prerogative, set forth in the head paragraph of article 25 of CVM Instruction 400, to accept or deny the request for modification), provided that such request is related to the impacts of the coronavirus on such offer. In addition, the CVM granted an additional time period for the modified offer to be held, which went from up to 90 days, as provided for in paragraph 2 of article 25 of CVM Instruction 400, to up to 180 days.

The guidance disclosed by the CVM was well received by the market, inasmuch as it gave the issuing companies and other agents involved in the registered public offers the assurance that the CVM will not prevent such offers from being modified (automatic acceptance of requests for modification) to the detriment of being cancelled or discontinued. This gives the parties involved in structuring the offer greater flexibility and predictability in relation to its effective settlement.

The second move made by the CVM culminated in the promulgation of CVM Resolution No. 846, of March 16, 2020. The measure changed the maximum period of interruption from 60 to 180 business days for the review period for public equity offers (and other public offers governed by CVM Instruction 400) by the SRE and by the Company Relations Bureau of the CVM (SEP), provided that the application for registration as a securities issuer (a publicly-held company) with the CVM is made at the same time as the application for registration of a public equity offer with the SRE. Faced with the impossibility of predicting the impacts of the coronavirus on the market, the CVM, in practice, has granted issuing companies and other agents involved in structuring public equity offers the possibility of interrupting registration procedures for an additional period. This increases the chances that the market and stock prices will recover at least partially and may prevent cancellations of offers.

The third and last measure presented by the CVM was Circular Letter No. 3/2020-CVM/SRE, of March 18, 2020. Seeking once again to encourage the maintenance of public equity offers (as well as the other public offers governed by CVM Instruction 400), the CVM has decided to  make more flexible the understanding regarding the applicability of article 48 of CVM Instruction 400 to offers during the interruption period. On an exceptional basis and in view of the lengthening of the period during which an offer may be interrupted, the CVM clarified that the expression "decided or projected" in the article, which is the basis for defining the beginning of the silent period during the course of an offer, will now be interpreted as the moment when the issuing companies decide to resume review of the application for registration of the public equity offer.

The measure, certainly correct in the exclusive context of fostering the market, eliminated a major motivator for the cancellation of public equity offers, i.e. the issuing companies and other agents involved are no longer subject to compliance with the rules regarding the silent period provided for in article 48 of CVM Instruction 400.

Regarding postponement of the decision to cancel the public equity offer, two possible alternatives must be currently evaluated by the issuing companies and the other agents involved in structuring the transaction: (i) use the regulatory deadlines to meet the CVM's requirements (which, in relation to the first requirements letter, may reach 60 business days) and, if applicable, after this time has elapsed, request from the CVM interruption of the review deadlines (which went from up to 60 business days to up to 180 business days); or (ii) request, at any time, including after the receipt of the first requirements letter, interruption of the review deadlines with the CVM (which went from up to 60 business days to up to 180 business days) and, if applicable, use the regulatory deadlines to meet the CVM's requirements (up to 60 business days).

The review of the best pathway to be adopted usually depends on factors intrinsic to each issuing company, but it is important to note that the CVM reserved the right to reassess the content of CVM Resolution 846 30 days after of its publication. This means that issuers that do not opt to discontinue the public equity offer now (or at least within 30 days from the date of the resolution) may eventually no longer enjoy the extended deadline. On the other hand, since interruption of review causes the CVM's deadlines to start running again as if a new registration application had been made, opting to interrupt a public equity offer at this time in order to benefit from extension of the deadline may lead to a loss of agility in the transaction schedule, which does not occur in the case of a decision to use the regulatory deadlines to meet the CVM's requirements.

Category: Tax

The Judiciary, although not in a uniform manner, has formalized some guidelines for confronting the coronavirus pandemic. Some courts have suspended attendance to the public, hearings, in-person trial sessions, except for urgent measures and the possibility of the performance of acts by electronic means.

The procedural deadlines have been suspended in some courts, but there is still no uniformity of measures. Some have thus far adopted no suspension measures, others have formalized suspension for 14 days, extendable, others are still suspending the deadlines until March 30, and there are some who have established suspension measures for 30 days. The Federal Supreme Court (STF), for example, has not issued acts suspending deadlines and has thus far maintained in-person trials, with restricted access.

It is essential to monitor the acts issued by each court and the information that is being updated almost daily.

The following is a list of some of the rules promulgated thus far:

Category: Public and regulatory law

The declaration of state of emergency in the municipality of São Paulo (Decree No. 59,283/20), on March 17, sheds light on a determining aspect of the global crisis unleashed by the coronavirus pandemic (covid-19): its pervasive effects on various areas of Brazilian and international law.

Among the various challenges imposed on this legal analysis are the unfeasibility of fulfilling contractual obligations and the consequent loss of functionality of commercial contracts, the potential liability of employers and/or service providers for infections contracted on their premises, or the increased risk of insolvency and unsustainability of corporate debts.

The pandemic also has a number of implications for public law in Brazil resulting especially from (i) the urgent need for specific laws and regulations to deal with this public calamity; (ii) the possible conflict between, on the one hand, the measures proposed to prevent contamination and, on the other, individual rights or other aspects of Brazil's legal system; and (iii) the repercussions of this crisis for public services, the infrastructure sectors, and any of their private suppliers.

The regulations designed to confront the coronavirus originates from Ordinance 188 of the Ministry of Health, of February 3, 2020, responsible for the declaration of state of emergency in public health of national importance (pursuant to Decree No. 7,616/11). The ministerial regulation initially sought to issue guidelines for health and sanitary authorities to contain the epidemic.

Immediately after the declaration of state of emergency, on February 6, 2020, Law No. 13,979 (the Coronavirus Law, later regulated by MS Ordinance No. 356, of March 11) was passed, which provides for measures related to combating the covid-19 outbreak, such as: (i) provision for isolation, quarantines, compulsory examinations and tests, or temporary closure of Brazil's borders; (ii) the waiving of bidding for the acquisition of goods and services intended to deal with the emergency and the authorization to request goods and services from individuals and legal entities (notably private hospitals, without the need to enter into an administrative contract, and health professionals, without the formation of employment relationships), therein ensuring fair compensation; and (iii) the obligation, even for legal entities under private law to disclose information that may contribute in identifying persons infected or suspected of being infected by covid-19, if requested by a health authority.

After the official declaration of the coronavirus pandemic by the World Health Organization (WHO) on March 11, a series of state (and even municipal) decrees, such as the recent declaration of state of emergency in the municipality of São Paulo, have been added to the federal program. Among the states that provided for emergency prevention measures are: (i) Minas Gerais (Decree No. 47,886, of March 12, 2020); (ii) São Paulo (Decree No. 64,862, of March 13, 2020); (iii) Rio de Janeiro (Decree No. 46,970, of March 13, 2020); (iv) Rio Grande do Sul (Decree No. 55,115, of March 13, 2020); (v) Espírito Santo (Decree No. 4,593-R, of March 13, 2020); and (vi) the Federal District (Decree No. 40,520, of March 14, 2020).

The provisions of the aforementioned state decrees range from mere internalization, in the respective state legal systems, of the provisions and instruments contained in the Coronavirus Law; issuance of commands binding on state government agencies and entities, to suspension of events, collective activities, and classes for a determined period of time. Some provisions, however, gain prominence, particularly in the decrees of the Federal District and Rio de Janeiro. The instrument from Brasília, in its article 5, states that it will be considered an abuse of economic power to increase prices, without just cause, with the purpose of arbitrarily increasing profits on inputs and services related to the confrontation of covid-19 (both in the manner set forth in Law No. 12,529/11 and Decree No. 52,025/63). The Rio de Janeiro decree, in turn, provides, in its article 6, that "private legal entities providing services to the general public should observe the good practices provided by the World Health Organization."

However, despite the seriousness of the outbreak that plagues the country (in social, economic, and political terms), conflicts may arise regarding the interventions proposed to contain covid-19, especially the most severe remedies, such as mandatory hospitalization of contaminated people or mandatory closure of commercial establishments.

On the one hand, there are those who argue that, even under such circumstances, such strict restrictions on individual rights, such as freedom of movement or free initiative, would demand a decree of state of emergency, with a view to "preserving or promptly restoring, in restricted and determined places, public order or social peace threatened by serious and imminent institutional instability or affected by calamities of great proportions in nature" (pursuant to article 136 of the Federal Constitution). On the other hand, it can be argued that, in the balance between individual rights and the collective rights to health, protection, safety, and assistance, the latter would prevail, especially in such a critical context as a pandemic.

Another legal issue to be considered involves the regulation of the recommendations released by various public authorities in the current context (such as the Minister of Health himself, governors, mayors, and emergency health operation centers at various levels), in addition to the legal effects arising from non-compliance therewith, especially with regard to liability regimes, at least in the civil sphere.

From a Brazilian public law perspective, the coronavirus outbreak also brings about profound challenges related to the provision of public services and essential public infrastructure by private partners. Examples include risks such as (i) frustration of demand projections in concession contracts, either due to a spontaneous fall in the circulation of people or to the compulsory imposition of a curfew to prevent contagion; (ii) acute exchange rate variations resulting from volatility in domestic and international financial markets, all the more accentuated by the simultaneous oil crisis; or (iii) the generalized increase in risks identified by rating agencies that affect the bankability of strategic projects. A clear example of these risks is the plan for emergency measures currently under consideration by the federal government to provide financial assistance to airlines.

Although the treatment of each case will depend fundamentally on how such risks have been addressed in the respective contracts, some institutes will gain particular relevance and should soon be brought before judicial and administrative bodies. Force majeure provisions (for which China alone has already issued more than US$ 38 billion in certificates to exempt its exporters from fault for breaches of contract), unforeseen circumstances, and claims for economic and financial rebalancing should play a key role in accommodating contracts and enabling continuity of the services affected.

Category: Competition

The Administrative Council for Economic Defense (Cade) took another step to encourage private suits before the judiciary for damages for competitive violations, a measure considered important in the fight against cartels.

Ordinance No. 869/19, published in November, details the procedures for conferring on interested third parties access to sensitive documents and information produced in administrative proceedings initiated to investigate violations of the Defense of Competition Law (Law No. 12,529/11).

As a general rule, it will be incumbent on the rapporteur, when the administrative proceeding is decided by the Cade Administrative Court, to indicate which documents and information will be disclosed in the public record upon final decision by the Council.

Ultra-sensitive documents and information, such as self-accusatory material arising from leniency agreements and consent decrees (TCC), frustrated or entered into, including the history of conduct and the documentary evidence produced by those seeking to turn state’s evidence will be kept confidential even after the Cade Administrative Court's final decision. They may not be supplied to interested third parties, as already provided for in Resolution No. 21/18.

The office of Cade’s chairman shall be responsible for examining requests for access to documents and information made before the judgment in the proceeding based on an express legal determination, specific judicial decision, authorization by the signatory of the leniency agreement or party to the consent decree, or international legal cooperation. The parties investigated in the proceeding in question shall be notified in advance of the need to maintain the confidentiality of the documents, except in the case of an express legal order or specific judicial decision.

In the event of an application for access to documents and information contained in cases decided before the entry into force of Resolution No. 21/18, it shall incumbent on the commissioner writing for the court (or the Chairman’s office in cases where such commissioner's term of office has expired) to decide on a case-by-case basis whether or not to grant access. In a recent judgment, the current Cade commissioners expressed the understanding that the mandatory disclosure of documents contained in Resolution No. 21/18 only applies to settlements entered into after publication of the standard.

Also as part of the effort to facilitate the compensation of parties injured due to competitive violations, Cade will disclose on its website the list of cases decided, with an indication of the information and documents made available.

Category: Tax

ME Ordinance No. 13/20, issued on February 13, made a series of amendments to MF Ordinance No. 479/00, which deals with the accreditation of financial institutions to provide federal revenue collection services.

One of them is the change in the conditions for accreditation of legal entities to offer such services. The requirement of registration with the Central Bank of Brazil (Bacen) to operate as a commercial department has been replaced by that of a bank reserve account or settlement account at Bacen.

From a regulatory point of view, fintechs would then be formally authorized to request technical registration from the Brazilian Federal Revenue Service (RFB) to provide such services and offer them to their clients.

However, doubts may arise as to the need for the RFB to issue a specific regulatory act to regulate the changes, especially since MF Ordinance No. 479/00, as amended, delegates to the RFB the competence to accredit institutions to provide federal revenue collection services.

Based on a comparative analysis between the prior text and the amended text of MF Ordinance No. 479/00, one of the conditions necessary for institutions to be accredited by the RFB to provide the service is changed, but not a "new" delegation of powers to the RFB, which would require the regulation of a specific procedure for accreditation and registration of new institutions that meet the current requirements of the ordinance.

Thus, it is understood that the delegation of regulatory powers to the RFB has already been exercised through SRF Ordinance No. 2.609/01, which governs the activities of the collection network. This same act establishes in articles 3 to 6 the procedure for accrediting and registering financial institutions to provide federal revenue collection services, becoming applicable also to fintechs that wish to do so.

Institutions that meet the conditions of MF Ordinance No. 479/00 and wish to qualify as collection agents must submit the following documents:

• bylaws of the financial institution
• minutes of the general meeting that elected the board of directors
• minutes of the board of directors that elected the officers
• ratification by Bacen of the election of the officers

According to article 5 of SRF Ordinance No. 2.609/01, after the accreditation and before the beginning of the services, the institution must:

• sign an administrative contract for the provision of services with the Federal Government.
• appoint a legal representative.
• report to the unit of the RFB that oversees the matrix of the information regarding the agencies that will do the collection (e.g., name, address, CNPJ).

From an isolated reading of the last item, it would be possible to argue that there is an incompatibility between SRF Ordinance No. 2.609/01 and the way fintechs operate, since these companies do not have physical collection agencies and do not follow the patterns of traditional banks, to which, no doubt, the regulation was addressed when it was promulgated.

Although it is desirable to change the provision to adapt it to the operational model of fintechs and to the new reality of federal revenue collection by such institutions due to the promulgation of ME Ordinance No. 13/20, we believe that the references contained in SRF Ordinance No. 2.609/01 to agencies should not be interpreted as evidence of incompatibility between the standards under review.

Category: Real estate

The paid purchase of real estate is a taxable event that generates the Property Transfer Tax (ITBI), paid by purchasers. The rate of this municipal tax varies between 2% and 5% of the transaction value or reference value of the property (calculated based on what each municipality considers to be its market value), whichever is higher.

In the acquisition of real estate by public auction, via judicial auctions, it is common for the purchase values to be well below the market average, due to the logic of the process itself. As a result, the charging of ITBI over on the reference value assigned by the municipalities ends up resulting in payment of a much higher tax than that calculated based on the price actually paid by the purchaser.

In these cases, some cities, such as Rio de Janeiro and Brasília, already provided for an ITBI calculation basis that would be the value of the auction. The judiciary has also decided to the effect and determined that the ITBI should be calculated on the basis of the value of the asset, not the reference value or assessed value assigned by the city government.

Purchasers of real estate at judicial auctions need to be aware of this issue. If the form for payment of the ITBI is issued by the city government considering a calculation basis other than the price actually paid at the auction, it is fitting to evaluate the judicial questioning of the value.