Publications
- Category: Infrastructure and energy
Signed into law by President Jair Bolsonaro with a partial veto, Executive Order (MP) No. 863/18 was converted on June 17th into Law No. 13,842, which extinguished the 20% limit on the participation of foreign capital in Brazilian airlines.
Aside from repealing the articles of the Brazilian Aeronautical Code (CBA) providing for a limit on foreign ownership of airlines and other requirements for their operation in Brazil, MP 863 reinstated the minimum baggage allowance per passenger, in opposition to Resolution No. 400 of the National Civil Aviation Agency (Anac), which authorized this charge starting in 2017. The allowance would be up to 23 kilograms for aircraft above 31 seats, up to 18 kilograms for aircraft from 21 to 30 seats, and up to 10 kilograms for aircraft of up to 20 seats. Only the excess could be charged separately.
The president, however, vetoed the articles with the final text related to the minimum baggage allowance, arguing that this topic was outside the purpose of MP 863, which was restricted to the participation of foreign capital in Brazilian airlines and, therefore, would violate the democratic principle and due process of law. Bolsonaro also argued that re-establishing the allowance runs counter to the public interest and does not benefit the air transport market, which needs more competition.
Since the publication of Resolution 400, airlines have been advocating charging as a way to lower the price of air tickets for consumers who travel with only one small carry-on bag. According to the airlines, the reduced ticket price plus the amount charged per bag would not exceed the amount to be paid for a ticket with a minimum baggage allowance included.
With the new rules, Brazilian companies come into compliance with the low-cost model existing abroad, which may increase the interest on the part of foreign investors in our air services market. As domestic competition increases, prices are expected to fall for end consumers.
For a complete review of the new rules for the industry, please review “Changes in the proposed opening of the capital of airlines to foreign investment.”
- Category: Banking, insurance and finance
Executive Order No. 881 (MP 881), issued on April 30 of this year, aims to ensure and foster economic freedom in Brazil, as well as reduce bureaucracy in various industries.
The principles that guide the text are: (i) presumption of freedom in the exercise of economic activities; (ii) presumption of good faith by private entities; and (iii) minimal intervention by the federal government in the economy. A practical example of these principles is that MP 881 expressly provides that that which is agreed upon by the parties prevails over regulations by the public order, with some specific exceptions.
Already in its article 1, the presidential decree reflects a liberal view of the law, in line with the basis of free enterprise, provided for in article 1, IV, of the Federal Constitution. As we shall see below, the text eliminates various formalities for business activity, including more stringent requirements in order to pierce the corporate veil.
MP 881, which should be read in conjunction with some infra-legal rules, ensures that individuals and legal entities are protected by a set of rights under the Federal Constitution, especially as regards private property and its social function, free competition, and encouragement of small businesses. Certain provisions of Law No. 10,406/2002 (the Civil Code), for example, have been amended to give greater legal certainty to contracts.
The presidential decree also amended article 421 of the Civil Code, stating that, in agreements between individuals, State intervention must be minimal. This makes any revision of contractual provisions an exception rather than a rule. This provision is relevant because it addresses the fact that Brazilian courts often adopt a broad interpretation of powers to revise contracts. For the same reason, the new article 480-A has been included in the Civil Code to allow parties to set objective parameters for revision of contracts and requirements for termination.
Article 480-B has also been included to establish that in commercial transactions it should be assumed that the parties had equal bargaining powers and that their allocation of risks should be respected. The aim is to avoid interpretation against the weaker party in business dealings and to restrict judicial revision of contracts.
For the investment fund segment, MP 881 brought in changes by introducing articles 1,368-C to 1,368-E in the Civil Code. The highlight is the limitation on liability of unitholders of funds and fiduciary service providers. The articles in question apply to all classes of investment funds, including those governed by CVM Instructions 555/14 and 578/16. Regarding the activities of fiduciary service providers, it is estimated that the changes brought in by MP 881 will encourage these agents to engage in the entire process of operations involving investment funds.
Presidential decrees have the same force as federal law, but are only effective for 60 days (extendable for another 60 days). During this period, the National Congress may (i) convert them into law, as originally written or amended; or (ii) reject them in their entirety, thus making them no longer effective.
MP 881 brings in significant advances related to economic activity as a whole. However, it is necessary to determine whether it will be converted into law and even then such provisions will still be subject to the Judiciary and regulations by public agencies.
- Category: Intellectual property
Last month the Brazilian Federal Senate approved the Legislative Decree Bill (PDL) No. 98/2019, regarding Brazil's accession to the Madrid Protocol and its Common Regulations, in order to facilitate the international registration of trademarks. The promulgation of the presidential decree on the agreement and the deposit of the accession instrument with the World Intellectual Property Organization (WIPO) are still pending.
In force since April of 1996, the Madrid Protocol has more than 104 signatory countries (which jointly represent 80% of the world economy)[1] and is administered by the WIPO, a UN agency focused on the international protection of intangible goods - notably trademarks, patents, industrial designs, and copyrights - and is responsible for publishing measures for this purpose, such as the treaty discussed in this article.
The agreement establishes the simultaneous international registration of trademarks, through a single deposit that may cover other applications to the remaining signatory countries. In Brazil, the application for trademark registration will be requested to the National Institute of Industrial Property (INPI), the governmental body responsible for forwarding it to the International Bureau of the WIPO. Thereafter, the WIPO will receive the notification and forward it to the other signatory countries for which the applications were originally claimed.
Likewise, if a foreign party wants to register its trademark in Brazil, it must apply to the industrial property office of its own country, which will send it to the WIPO and the same procedure will be adopted. The application examination will be carried out by the office of the member country of the filing for which registration is sought.
From a practical point of view, it is estimated that the Madrid Protocol will be in force in Brazil as of October of this year and its accession will bring benefits for individuals and legal entities, both foreign and domestic, among which we highlight:
- Cost reduction of administrative fees, as only one fee will be paid;
- Simplification of the trademark registration procedure, since a single deposit may be made with an indication of whether or not there is an intent to register the trademark in other countries; and
- Decrease in the time for review of applications, limited to 18 months. The average time for the INPI to review trademark applications was 24 to 48 months in 2017, and fell to 12 to 13 months in 2018. Currently, the INPI’s review takes an average of 11 months, which is in line with the content of the protocol. Backlog decrease was urged by Brazil's intention to accede to the Madrid Protocol.
The approval of the Madrid Protocol is undoubtedly a step forward in simplifying bureaucratic procedures and reducing costs related to international trademark protection, which will consequently boost the economy, making Brazil more competitive on the global scenario.
- Category: Capital markets
In late June the CVM (Brazilian Securities and Exchange Commission) published four new rules establishing a new regulatory framework for procedures related to sanctioning actions by the authority. The first of them was CVM Instruction No. 607, of June 18. A week later, it was followed by CVM Instructions No. 608 and No. 609, which update the framework and the values for punitive fines, consolidating the applicable values of fines into a unified standard, and CVM Resolution No. 819, which amends procedures applicable to appeals to boards of the body against decisions issued by its commissioners.
With the initiative, the CVM systematized previously sparse provisions in various resolutions and instructions into a single rule regarding sanctioning administrative proceedings within its purview. The following rules were repealed: (i) CVM Resolution No. 390/01, regarding the execution of Consent Orders; (ii) CVM Resolution No. 538/08, regarding sanctioning administrative proceedings; (iii) CVM Resolution No. 542/08, on the adoption of preventive and supervisory procedures in the scope of CVM's supervisory activity; (iv) CVM Resolution No. 552/08, on CVM Resolution No. 538/08; (v) CVM Resolution No. 775/17, regarding the simplified procedure for sanctioning administrative proceedings within the purview of the CVM; and (vi) CVM Instruction No. 491/11, on cases of serious infringement, pursuant to paragraph 3 of article 11 of Law No. 12,715/2012.
The systematization of the content related to sanctioning administrative proceedings within the purview of the CVM seeks essentially to adjust the regulations to the new rules established by Law No. 13,506/17, which, among other measures, increased the limit of the maximum penalty that may be applied by the CVM and introduced the administrative settlement in supervisory proceedings, reinforcing the regulatory framework for measures that may be used by the CVM as a securities market oversight body in Brazil. In addition, by means of CVM Instruction 607, the regulator sought to provide greater legal certainty to covered parties in relation to the procedures for the CVM's sanctioning actions.
In this manner, CVM Instruction 607 sought to clarify, simplify, and objectify, among other issues, the rules, procedures, and deadlines for the performance of procedural acts both by covered parties and by the CVM itself, its departments, and the Specialized Federal Prosecution Office. In addition, the new norm establishes objective parameters for the initiation of sanctioning proceedings and the dosimetry of the penalties that may be applied, by defining the base penalties, mitigating and aggravating conditions, and their impacts.
Some specific points which we will discuss below draw attention to these parameters and should be considered by the managers of public companies and other entities subject to the CVM’s supervision.
One of the main points of CVM Instruction 607 is the concern with complying with the command of paragraph 4 of article 9 of Law No. 6,385/76, as amended by Law No. 13,506/17, to the effect that the sanctioning actions of the body should prioritize infractions of a serious nature in order to provide greater educational and preventive effect for market participants.
In the same vein, the norm makes clear the discretion of CVM's departments so that they, considering the information obtained in the investigation of administrative infractions, may refrain from presenting a charging document when the conduct under investigation is of little relevance or the significance of the threat or harm to the legal goods protected by the rules infringed is low. It is at the discretion of the departments to also use other supervisory instruments or measures.
Although this is a subjective analysis by the CVM, the standard sought to establish the parameters that should be considered in this evaluation of the relevance of the conduct or significance of the harm, including: (i) the degree of reprehensiveness or repercussion of the conduct; (ii) the significance of the sums associated with the conduct; (iii) the significance of the losses caused to investors and other market participants; (iv) the impact of the conduct on the credibility of the capital markets; (v) the background and good faith of the persons involved; and (v) the reimbursement of the investors harmed.
Thus, while on the one hand the subjectivity of the assessment removes legal certainty from the covered parties, on the other the specification of the factors that must be taken into consideration allows covered parties and their attorneys to better define a defense strategy.
Another issue that draws attention in CVM Instruction 607 is the concern with making the procedures and procedural deadlines clear. In this sense, one sought to establish transparent and objective criteria for summons, presentation of charging documents, presentation of defenses, requests for the production of evidence, judgment of cases, appeals, production of effects of decisions, and other eminently procedural issues.
The counting of deadlines was unified and aligned with the rules of the Brazilian Code of Civil Procedure, thus reducing the divergence in understanding on the subject among the departments of the CVM. Henceforth deadlines shall be calculated exclusively in business days, excluding the first day and including the last day. Filings shall be considered valid until 11:59 pm of the last day of the deadline.
In a very efficient manner, the norm allowed the use of electronic means for the communication of the procedural acts of sanctioning administrative proceedings by establishing management and processing of cases exclusively via digital means and mentioning the requirements for the summons and subpoenas of the parties and for the counting of deadlines.
Such changes represent a gain in legal certainty for the covered parties to act in their defenses.
Another point that draws attention is the special focus on the principle of administrative law regarding the validation of administrative acts. The norm even allows the reformulation of charging documents when the requirements related thereto are not met. It also makes clear that absolute nullity of acts will be exceptional.
Also noteworthy is the application of confidentiality to administrative sanctioning proceedings, which will become the rule, contrary to the fundamental precept of law that administrative proceedings are public, and may proceed under seal on an exceptional basis. With the new rule, only the parties and their attorneys will have access to the record, and access by third parties should be evaluated by the reporting judge.
CVM Instruction 607 also established objective criteria for the dosimetry of penalties that may be applied by the CVM, which now have very high bases for pecuniary sanctions and with objectively defined mitigating and aggravating factors to guide the calculation of the final penalties. Thus, the norm gives greater predictability to penalties according to the type of conduct and its severity.
To set the base penalties for fines with a limitation criteria up to R$ 50 million (there are other criteria for setting the fine, such as three times the economic advantage obtained or twice the damage caused to investors, among others), the new rule establishes different values and limits depending on the nature of the infringement. To this end, the CVM divided administrative offenses into five large groups and established for each of them a maximum value for the base penalty. Below are some examples of conduct and the respective maximum values of the base monetary penalty:
- Group I (infractions related to the preparation and maintenance of the corporate books, failure to disclose periodic and occasional information, among others): R$ 300,000;
- Group II (non-disclosure or untimely disclosure of a material fact, non-preparation or preparation of periodic and occasional information not in compliance with regulations, among others): R$ 600,000;
- Group III (infractions related to the preparation of financial statements and non-compliance with the fiduciary duties of the audit committee, among others): R$ 3,000,000;
- Group IV (infractions related to the exercise of the voting rights of shareholders, directors and officers in a conflict of interest situation, among others): R$ 10,000,000; and
- Group V (infractions related to non-compliance with the fiduciary duties of directors and officers, abuse of control and voting rights, and use of information not yet disclosed to the market, among others): R$ 20,000,000.
Once the base penalty has been established, it is necessary to check for mitigating or aggravating circumstances. Each occurrence of a mitigating or aggravating circumstance will add to or reduce the base penalty by up to 25%.
Examples of aggravating circumstances are: (i) systematic or repeated performance of irregular conduct; (ii) high damage caused; and (iii) significant advantage obtained by the offender, among others. Examples of mitigating circumstances include: (i) confession to the offense or provision of information regarding its commission; (ii) the good record of the offender; (iii) reversion of the infraction; and (iv) effective adoption of internal integrity procedures and application of codes of conduct and ethics, among others.
The CVM board will also consider, for dosimetry of the penalty, any sanctions related to the same facts that have already been or will be applied by other authorities.
The new standard also includes procedural rules regarding Consent Decrees and Supervisory Settlements, established by Law No. 13,506/17.
The wording of CVM Instruction 607 implies that there will be a hardening on the part of the regulator with respect to the application of much higher penalties. Because of this, it is important to encourage effective adoption of internal integrity, audit, and reporting mechanisms and procedures, as well as effective application of codes of ethics and conduct within publicly-traded companies, as this is considered a mitigating circumstance in the application of the penalties provided for and may reduce them by up to 25%.
It is prudent, therefore, that publicly-traded companies and their directors and officers adopt a more proactive stance with respect to compliance with the CVM rules applicable to them by enhancing their corporate governance structures in order to prevent infractions.
CVM Instruction 607 enters into effect on September 1, 2019, and will be immediately applicable to ongoing proceedings, without prejudice to acts that have been performed thus far. CVM Instruction 608, in turn, will enter into force on January 1, 2020, and will apply to periodic or occasional information whose delivery period expires after its entry into force, as well as with respect to non-compliance with specific orders issued by the CVM after that date. Finally, CVM Instruction 609 also enters into effect on January 1, 2020, amending and adding provisions to various other instructions, including CVM Instruction 480/09, which sets forth the main periodic and contingent obligations applicable to publicly-traded companies in Brazil.
- Category: Real estate
Discussions on the issue of regulating the process of acquisition of rural real estate by foreigners should gain momentum following the presentation to the Federal Senate of Bill No. 2,963/19, dating from the end of May of this year. The text of the bill addresses various problems that the market faces with current laws and regulations, which depends on an extremely bureaucratic, uneven procedure and no operational resources for its implementation. All of this makes the acquisition process time consuming and affects the legal security of investment projects.
Until recently, the subject was being addressed under Bill No. 2,289/07, which, with its five other related bills, has been awaiting review by the Chamber of Deputies since September of 2015. Although discussions must now start at square one, a more up-to-date text may facilitate the approval process in the houses of the Legislature.
The main amendment proposed by Bill 2,963/19 is the treatment given to Brazilian companies controlled by foreigners. Currently, Brazilian companies directly or indirectly controlled by foreign individuals or legal entities are subject to the authorization procedure for acquisition of rural land provided for by law, as they are equated, for this purpose, to foreign companies.
According to the proposed text, Brazilian companies incorporated under Brazilian law will no longer be subject to any restrictions, except in certain specific and pointed cases. In other words, the proposed rule is of a general permission with exceptions instead of the current rule of general restrictions with specific authorizations.
Situations that will remain subject to restrictions, including those requiring approval by the National Defense Committee and regardless of whether the company is Brazilian, include the following: companies owned and controlled by sovereign wealth funds; foreign controlled companies when the property is located in the Amazon Biome and is subject to a legal reserve of 80% or more; and non-governmental organizations and private foundations funded by the same foreign person.
With the probable intent of addressing difficulties faced in the provision of public services, the bill proposes that such restrictions should not apply in the case of acquisition or possession intended for the execution or operation of a public service concession, permission, or authorization. The text expressly mentions the activities of generation, transmission, and distribution of electric energy as examples.
Another issue addressed by the text of the law is the problem faced by foreign creditors in foreclosing on fiduciary sales over rural property, when, in the second auction, the property is not sold and automatically remains under the creditor’s ownership. The law’s solution is to provide that, in such cases, ownership of the property must remain within the conditioned ownership of the creditor for two years, renewable for another two. During this period, the creditor will be required to dispose of the property to third parties, under penalty of returning the property to the original owner (that is, the guarantor).
The bill also stipulates that failure to comply with the restrictions, when applicable, will render the act annullable and not automatically null and void, as the laws and regulations currently provide. Although it seems like a mere legal technicality, this change means that irregular acts may be validated if they are later brought into good standing, in line with the understanding already handed down by the Superior Court of Appeals (STJ) on the subject.
Bill 2,963/19 also provides that all acquisitions and leases of rural real estate by foreigners made in disagreement with current laws and regulations will be validated, which would bring into good standing situations considered void under the current rules.
Other general rules were maintained in the text, such as the maximum municipal occupancy limit, kept at one quarter of the area of the municipality, with the occupancy restriction limited to 40% of said limit by nationality (that is, 10% of the municipal area).
This is still a bill, and will require the proper legal approval procedure, including a review by appropriate subject-matter committees of each legislative house. Its conversion into law, if confirmed, will have a significant impact on the acquisition of rural properties in Brazil, especially due to clarification of the complex situations faced daily in projects involving these acquisitions.
- Category: Capital markets
Companies that want to access the capital markets or gain visibility as public companies should begin preparing the organization and its documentation in advance of the start of the registration process per se in order to make it more efficient and less costly.
The objective of this article is to point out some of the challenges of this journey, which mainly involve financial and corporate issues. The idea, therefore, is not to list all the requirements and steps necessary to obtain registration as a public company.
In addition to preliminary issues, such as verifying the need to carrying out a corporate reorganization prior to filing or entering into a shareholders' agreement, one of the relevant topics is the financial statements.
The Brazilian Securities and Exchange Commission (CVM) requires the presentation of financial statements that meet all the requirements of the Brazilian Corporations Law (Law No. 6,404/76) and the CVM’s regulations specially prepared for the purposes of the registration application. The document must be audited and contain an unmodified audit opinion. Even for those cases where the company's financial statements have already been audited, an additional review will be required in order to include the level of detail required by the CVM’s regulations, such as opening revenue by segments and details on transactions with related parties. This process demands work, time, and back and forth with the independent auditors.
Another relevant topic involves the company's governance. At the least, the by-laws should be adapted in order to contain the provisions of the laws and regulations governing corporations applicable to publicly-held companies, such as the mandatory establishment of a board of directors. There should also be minimum provisions in the by-laws related to the trading segment chosen for listing the company and its shares in B3 S.A. - Brasil, Bolsa, Balcão, if applicable.
The company must have at least one policy for disclosure of material acts and facts. For those who will also apply for listing on B3, several other policies are required, especially in Novo Mercado, the trading segment with the most demanding rules. These policies include risk management, related party transactions, and compensation.
The reference form is an extensive document that contains information on activities, risks, governance, compensation of managers, and the financial situation of the company involving, in general, the last three fiscal years. The document should be prepared with care because, in addition to being evaluated by the regulator in order to authorize the registration, the CEO and the officer of investor relations are responsible for its content.
In the reference form, the company must include all material risks involved in its business, including industry, regulatory, and market risks, without mitigation, that is, without mitigating or justifying the risk. Although it appears to be negative information, disclosure of the risks to which the company is exposed protects the organization and its managers from future claims should any of the scenarios reported materialize.
Finally, as important as the planning for the application for registration as a publicly-held company is the development of a culture and the preparation of personnel for routine operation after the granting of registration by the CVM. After all, as of that moment the company will be obliged to disclose various documents to the market within the time limits and in the manner established in the regulations, observing specific rules of greater complexity that were not a part of its day to day. Failure to comply with the disclosure rules and obligations for public companies subject the organization and its officers and directors to penalties, and this can be avoided with good preparation.