Publications

Category: Labor and employment

In August of this year, the Federal Supreme Court (STF) ruled that outsourcing is lawful in all stages of the production process, be it ancillary or main activities, in deciding Argument of Breach of a Basic Precept (ADPF) No. 324.

As a practical application of this understanding, the STF en banc also concluded that the lawfulness of outsourcing applies to the call center service of telephone companies upon deciding Extraordinary Appeal with Interlocutory Appeal No. 791932, with recognized general repercussion.

Since the STF had already considered the outsourcing of a company’s primary activity lawful and recognized the unconstitutionality of the TST's Precedent No. 331, Justice Alexandre de Moraes, writing for the court, ruled that this situation would not constitute an employment relationship between the parties. In the words of the justice ‘there is no way to confuse outsourcing of one of the stages of the flow of production with the scenario of unlawful intermediation of labor, as did the judgment under appeal.’

Accordingly, the STF granted relief to the extraordinary appeal, declaring the nullity of the decision by the TST, which had concluded that call center services are among the main activities of telephone companies. As a consequence, the trial decision rendered by the 19th Labor Court of Belo Horizonte (MG) was reinstated, which ruled out the existence of an employment relationship between the telephone company and the call center operator.

To date, the STF has not dampened the effects of the decision that recognized as lawful the outsourcing of a main business activity and declared unconstitutional items I, III, IV, and VI of Precedent No. 331 of the TST. However, the recent judgment on the outsourcing of call center services may serve as a guideline for what will be decided by the Supreme Court.

Historically, there are two theories about the effects of a declaration of unconstitutionality: nullity of the unconstitutional norm or its annulability. According to the theory of nullity, the understanding is that the unconstitutional norm is absolutely null, which affects its validity and effectiveness as of the beginning of its existence. Therefore, a declaration of unconstitutionality produces retroactive effects as of the beginning of the enactment of the norm. As a consequence, all the past effects produced under the aegis of that norm must be disregarded since its invalidity is recognized as of the enactment.

The theory of annulability, however, maintains the understanding that the unconstitutional norm is anullable, that is, it affects its effectiveness as of the creation of this status of invalidity. In this case, as a rule, there is no retroactive effect, but rather prospective effect, since all the legal effects produced by the norm before recognition of its invalidity are untouched.

Brazilian case law and legal scholarship are mostly based on the theory of nullity of unconstitutional laws, which is the understanding of the STF. To date, the Supreme Court has issued only one decision that adhered to the annulability theory, and it was proclaimed in Extraordinary Appeal No. 79.343/BA, with Justice Leitão de Abreu writing for the court.

The decision regarding the legality of the outsourcing of call center services of telephone companies, by reinstating the trial decision in which no employment relationship between the telephone operator and the attendant had been recognized, may indicate that, once again, the STF will adopt the theory of nullity and will decide that the effects produced under the aegis of Precedent No. 331 of the TST must be disregarded, thus leaving only doubts about the time frame to be set for such disregard.

The concern, however, is the reception of this new understanding in the Labor Courts, which until today reject the institute of outsourcing and probably will find other means to bar its application.

In this sense, the National Association of Labor Magistrates (Anamatra) has already reported that the Labor Courts will be responsible for evaluating the conditions under which the outsourcing was carried out. Anamatra's understanding in this sense is that it will be incumbent on the judges to review any prejudicial conditions.

According to Guilherme Feliciano, president of Anamatra, "what will be discussed is whether such outsourcing concretely led to prejudicial conditions, whether fraud occurred, and whether equal pay rules were violated. (...) With the decision, no judge will declare at first glance that the outsourcing of a main business activity constitutes fraud at the outset, but will review evidence to see whether in the specific case there were prejudicial conditions because of it."

In view of this scenario, it is recommended that telephone companies look into the existence of cases in which an employment relationship with outsourced call center workers was recognized based on the argument that they carried out a main business activity. Accordingly, it will be possible to try to reverse these decisions on appeal using the recent decision by the STF.

Category: Capital markets

Por Gustavo Rugani do Couto e Silva, Wagner Eustáquio Duarte Júnior, Paulo Estevão Henriques Carneiro Miranda e Arthur de Oliveira Cunha Miranda

The Brazilian Corporations Law, in its article 115,^[1] provides that shareholders must abstain from voting at meetings on matters in which their interests and those of the companies are in conflict. The purpose of the law is to protect the company's (corporate) interest to the detriment of the individual interests of the shareholders. Therefore, the legal provision imposes on shareholders with a conflict the duty of abstention, under penalty of the vote being considered abusive and even cause for annulment of the resolution.

Among the situations in which a conflict of interest is present, we highlight the approval of the management accounts and, consequently, the annual financial statements of the companies by the controlling shareholder who is also an officer or director. The law is exhaustive in this case and imposes a prohibition on a vote by the controlling shareholder who is an officer or director. Nonetheless, every year, when general shareholders' meetings are in session, controlling shareholders who act as officers or directors, especially of public companies, adopt different approaches to the issue (with a gradual increase in abstention rates in recent years).

However, the premise of abstention of the controlling shareholder who also acts as an officer or director should be assessed based on the specific circumstances of each case. In fact, there is at least one factual context which merits further evaluation. There are a number of cases in which controlling shareholders enter into shareholders' agreements to define, among other obligations, the ways in which control over their respective companies can be exercised, which are almost always translated into a requirement for block voting in corporate resolutions. Thus, the controlling shareholder acting as an officer or director who is a party to a shareholders' agreement that contains a block voting obligation may have his shares used by the other controlling shareholders to agree on the vote in the controlling block. Such a situation may result in apparent non-compliance with the law with respect to the provision that the controlling shareholder acting as an officer or director cannot vote on the approval of his accounts.

Legal scholarship on the subject considers regulating the use of the controlling shareholder’s shares by the control block and, as Modesto Carvalhosa argues, "the regime of common exercise of control entails binding the parties to the agreement to the will expressed by a majority of the its signatories, obtained in a prior meeting."^[3] The author also asserts that:

"(...) the majority resolutions of the prior meeting constitute the declaration of the will of the community of controlling shareholders and, in this sense, fall into the category of a plurilateral legal deal, formed by the coincidence of individual wills of the present signatories, which merge to express, by absolute or qualified majority, the will of the parties."^[4]

How then can the controlling shareholder acting as an officer or director protect himself in these cases?

The answer is usually given by the mechanism provided in the shareholders' agreement of each company in order to determine the voting guidance of the controlling block. In general, this mechanism involves the holding of a prior meeting in which the signatories of the agreement define the voting guidance of the block for the matters submitted for a resolution at the shareholders' meeting.

In our opinion, it will be incumbent on the controlling shareholder to avail himself of this meeting to declare his abstention when discussing management accounts (with this abstention being recorded in the minutes) and thus comply with the provisions of the corporations law, even though, at the meeting, his shares are used by the block to approve the accounts.

Paragraph 2 of article 118 of the Brazilian Corporations Law, however, provides that shareholders' agreements may not be relied upon to exempt shareholders from responsibility in the exercise of voting rights,^[5] thus leading some to conclude further that, in view of an abstention expressed at the prior meeting, the duty of abstention should also prevail in the resolution of the general assembly.

In our view, however, votes issued in a prior meeting demonstrate that the shareholder's will was different from the vote cast by the controlling block. Along the same lines, and in a reasoning extending to Nelson Eizirik's understanding that "although his shares are used to be part of the block of the agreement, he cannot be held responsible for any abuses committed against his will",^[6] it must be considered that, since the shareholder abstained from voting on resolutions at the prior meeting, it cannot be said that these legal provisions were breached.

Therefore, if the controlling shareholder acting as an officer or director abstains at the prior meeting in which the vote on the management accounts will be defined, it must be considered that the shares of the controlling shareholder acting as an officer or director were used by the controlling block under the agreement between the parties, thus complying with the contractual obligation assumed by the shareholder, in a valid manner and without any affront to the Brazilian Corporations Law.

Despite the above, there are still cases in which the controlling shareholders acting as officers of directors are afraid to comply with the legal duty of abstention because they are of the position that, in not voting with their shares in order to approve the management accounts, the other shareholders may reject them. However, rejection of the management accounts must always be reasoned and cannot be used by the shareholders as a mere instrument for manipulation or coercion of the company's officers and directors. Rejection of accounts may even be considered abusive conduct on the part of the shareholder, as Ricardo Tepedino believes:

"The approval of financial statements is mandatory, such that to reject them purely and simply, without dictating the course of their re-development, constitutes abusive exercise of the right to vote (...). Consequently, contrary to the general rule that dispenses with grounds for the shareholder’s vote, which is contrary to the exoneration from liability of the directors, and the one who rejects financial statements must necessarily do so with cause, lest it constitute abusive exercise of the right to vote."^[7]In light of the foregoing, in the event that the shareholder is a signatory of a shareholders' agreement that contains a block vote, the use of the shares of the controlling shareholder by the block to vote favorably in resolutions in which there may be a conflict of interest, in our opinion, will not be a breach of current law, provided that the controlling shareholder acting as an officer or director has complied with the duty to abstain in the voting on the respective matter at a prior meeting of shareholders (or, in the absence of a prior meeting, another form of formal voting by other shareholders who are signatories of the agreement). Such abstention may even be used as evidence in the event of the initiation of administrative proceedings by the CVM (which, so far, has not expressly ruled on the matter).

Caution is therefore required on the part of the shareholders in voting on matters in which there may be a conflict of interests between them and the company, especially in approving the management accounts, in order to avoid affront to the Brazilian Corporations Law and possible sanctions proceedings by the CVM, when it relates to a publicly-held company. However, such caution must be exercised within the limits and circumstances of each specific case, and there are appropriate instances to exempt shareholders from liability even when their shares are used by the controlling block in a situation of apparent conflict, as shown above.

^[1] “Article 115: Shareholders must exercise the right to vote in the interests of the company; votes exercised for the purpose of causing harm to the company or other shareholders or to obtain, for themselves or for others, an advantage to which they are not entitled and which results or may result in harm to the company or other shareholders are considered abusive.

Paragraph 1: Shareholders may not vote in resolutions of general meetings regarding the appraisal report of assets with which they compete for the formation of the capital stock and approval of their accounts as officer or director, nor in any other deliberations that may benefit them in a particular way, or in which they have interests conflicting with that of the company."

^[2] CVM Administrative Sanctions Proceeding No. RJ2014/10060.

^[3] CARVALHOSA, Modesto. Acordo de acionistas: homenagem a Celso Barbi Filho [“Shareholders’ agreements: homage to Celso Barbi Filho”]. São Paulo: Saraiva, 2011, p. 118.

^[4] CARVALHOSA, Modesto. Op. cit., p. 224.

^[5] “Article 118: Shareholders' agreements on the purchase and sale of their shares, preference to acquire them, exercise of voting rights, or power of control shall be observed by the company when filed at its headquarters.

(…)

Paragraph 2: Such agreements may not be relied upon to exempt shareholders from responsibility in the exercise of voting rights (article 115) or from the power of control (articles 116 and 117)."

^[6] EIZIRIK, Nelson. Comments on the Brazilian Corporations Law [“A Lei das S/A Comentada”]. Volume I – Articles 1 to 120. São Paulo: Quartier Latin, 2011, p. 709.

^[7] TEPEDINO, Ricardo; et. al. The law of companies [“Direito das companhias.”] Alfredo Lamy Filho and José Luiz Bulhões Pedreira (coord). Rio de Janeiro: Forense, 2009, v. I, p. 1017-1018.

Category: Real estate

Brazil already has rules to regulate the legal regime of multi-ownership and registration of real properties. It is Law No. 13,777/2018, which amended and introduced new provisions in the Civil Code and in the Public Registers Law. Published in the Official Gazette on Friday, the 21st, it originated in Bill No. 10.287/2018, passed the previous day, and enters into force on February 4, 2019 (45 days after its publication).

Multi-ownership is a kind of time-sharing, and although it does not constitute a new doctrine in Brazil, the market expectation is that, with the respective regulations, investors and consumers will have more legal certainty and interest in conducting this type of business. It represents a modern way of sharing real estate, optimizing resources and making the dream of a second home for moments of rest and leisure more feasible for the general population. The trend is increasingly evident in an era marked by the use of technology to share services and spaces, such as Airbnb, WeWork, and Uber, and the increasing concern with the best use of the resources available.

The system of timeshares allows the same property, a beach or country house, flat, village or hotel room, among others, to be held in a shared manner by several multi-owners, with a fractional division of time for use and enjoyment of the property between them. Each multi-owner uses his quota of time to enjoy the property in a certain period (for example, a week), which can be fixed, floating, or a mix of the two each year. The existence of the so-called "three-dimensional property" (a thing in time and space) has been recognized, in which each multi-owner has the exclusive right to fully enjoy a particular property during a fixed period, during which time he may use the asset, lease it, give it via a free lease, or simply not occupy it. All expenses with the asset (IPTU, condominium fees, etc.) are apportioned among the multi-owners based on their respective co-participation.

With the promulgation of the new law and the recognition of multi-ownership as a real right, which provides for the individualization of time units of each multi-owner in the Real Estate Registry, part of the debates on the subject will be resolved. However, some controversial issues still need to be regulated and clarified by the market and by the judiciary. The question of foreclosure against the multi-owner's share of debts (for example, condominium fees and IPTU taxes), the regulation of what happens in the case of a waiver of ownership by one of the multi-owners and other sensitive issues will depend on specific rules to be established in the bylaws of each condominium.

The success of this type of venture and the good coexistence between the multi-owners is directly associated with a good legal structure for the contracts that will govern this relationship, especially the condominium by-laws. The law itself required that ventures in which the time-share regime has been instituted, in whole or in part, be managed necessarily by a professional manager.

Category: Infrastructure and energy

On December 13, President Michel Temer signed Presidential Decree (MP) No. 863, which extinguished the 20% limit on the participation of foreign capital in Brazilian airlines.

With immediate effect, the MP will allow foreigners to hold up to 100% of the share capital of companies in the airline sector. Other points of the Brazilian Aeronautical Code (Law No. 7,565/86) were also repealed, such as the prohibition on foreign officers in charge of Brazilian airlines; the limitation on the issuance of preferred shares, and the need for governmental approval for the transfer of shares, among others.

Therefore, foreign airlines will be able to acquire or increase their ownership interest in Brazilian companies, including by acquiring their corporate control, or even creating Brazilian subsidiaries to provide domestic air services in Brazil. Today, the main Brazilian airlines that already have part of their share capital held by foreign companies are Gol (Delta and KLM), Azul (United), and LATAM (Lan Chile).

This is not the first time that the issue of foreign capital in airlines has been debated. Since 2015, a proposal has been pending in the Brazilian Congress for the enactment of a new Brazilian Aeronautical Code (Bill No. 258/2016), which provides for an end on the limitation on foreign capital. In 2016, the Dilma Rousseff government issued Presidential Decree No. 714, which raised the limit on foreign participation from 20% to 49%, but the Brazilian Congress did not convert the text into law, thus bringing the percentage back to 20% in the same year.

Although the MP still has to be converted into law by the Brazilian Congress within 120 days in order to prevent the limit from returning to the previous level, Brazil now follows, albeit belatedly, the policy of the other South American countries, namely Argentina, Bolivia, Chile, Colombia, Paraguay, and Uruguay, which do not impose limits on foreign investment in air carriers established in their countries.

As a justification for MP No. 863, the government recognizes that Brazil is among the countries with the greatest aversion to foreign investment in air transport, being only ahead of Ethiopia, Haiti, Saudi Arabia, and Venezuela, among others.

The new measure seeks to overcome obstacles and allow greater investment in airlines, thereby contributing to increased competition in the air carrier market and, consequently, to developing the Brazilian air network. Among the positive effects expected by the government is the reduction of air fares, increased use of Brazilian airport infrastructure, stimulation of regional aviation by the emergence of new companies and new routes, introduction of new models of airline management, and improvement in the conditions for obtaining investment by Brazilian companies.

The new MP was issued a few days after the request for judicial reorganization of Avianca Brasil, the fourth largest Brazilian airline, due to financial hardship, mainly with the lessors of its aircraft. Avianca would now have legal support to receive a capital injection from some foreign airline, which could in theory alleviate the reorganization of the Brazilian company in order to get its finances in order.

The initiative to open Brazil's airlines to foreign capital undoubtedly represents an important advance for Brazilian commercial aviation, which, if confirmed by Congress, will give new momentum to the sector in the coming years with the entry of new players in the market, increase in investments, and improvements in the services offered to passengers. 

Category: Tax

Ordinance CAT No. 24/2018, enacted on March 23, governed, among other issues, transactions with digital goods and merchandise traded through electronic data transfer.

The objective was to regulate the changes implemented by Convention 106, of September 29, 2017, internalized in the State of São Paulo through the changes introduced in the ICMS Regulation by Decree No. 63.099/2017.

Considering the importance of the matter, we list below the most relevant points of Ordinance CAT No. 24/2018:

(i)    Concept of digital goods and merchandise  - in accordance with article 1 of the ordinance, digital goods and merchandise are "all those not personified, inserted in a mass marketing chain, as were the cases of those put on sale in a physical means: (a) Software, programs, electronic games, electronic files, and similar applications that are standardized (off the shelf), whether or not they have been or can be adapted, whether used by the purchaser through download or in the cloud; and (b) audio, video, images, and text content, with definitive assignment (download), subject to the immunities of books, newspapers, and periodicals."

(ii)    Issuance of NFs: pursuant to article 2 of the ordinance, "establishments that market or make available digital goods or merchandise are required to issue NFes". Although the obligation set forth in the head paragraph of article 2, paragraph 1, of that article is capable of allowing establishments "to issue by the 5th business day of each month NFes consolidating all exits of digital goods and merchandise destined for people domiciled or established in the same municipality carried out in the previous month.” Regarding the obligation to issue NFes, article 4 of the Ordinance states that “the issuance of a tax document is not required in transactions carried out by means of electronic data transfer with goods and merchandise prior to transfer to the final consumer."

(iii)    State registration obligation: pursuant to article 5, the ordinance provided that "the websites and electronic platforms referred to in item IV of article 16 of RICMS/2000 must have a registration in the ICMS Taxpayer Registry of the State of São Paulo specific to carrying out transaction with digital goods and merchandise destined to a person domiciled or established in this State.” Also on this topic, this article provides further that "considering that it is a virtual establishment, the address should be filled with the following information: Praça da Sé, no number, CEP 01001-000, São Paulo, SP, and the address for correspondence must be filled in with the taxpayer's information.” One should note that, under the terms of paragraph 5 of article 5 of the Ordinance, this obligation "also applies to websites and electronic platforms that sell directly to final consumers goods and merchandise that are exempt or not taxed."

Notwithstanding the date of its enactment, CAT Ordinance No. 24/2018 will enter into effect on April 1, 2018. We note that the above analysis contains a summary of the main points of CAT Ordinance No. 24/2018. It is important to carry out a careful analysis of each individual case and all its particularities.

Category: Tax

State Law No. 7,988/18 - RJ, published on June 15, revoked Article 75-A of Law No. 2,657/96 (the ICMS Law) in order to establish new rules regarding the procedures that the tax auditor of the Rio de Janeiro state revenue office must observe in order to disregard legal acts or transactions carried out for the purpose of concealing the occurrence of a taxable event or the nature of the elements giving rise to a tax obligation.

The attempt was to implement new elements to allow the application of article 116, sole paragraph of the National Tax Code, a controversial provision known as the “anti-avoidance clause". It would give power to the tax authorities to draw up tax assessments, levies, and penalties for the taxpayer, even in situations where the occurrence of a taxable event is not clearly found, on the grounds that, through subterfuge, its occurrence had been disguised.

Legal scholarship severely criticizes the validity of these provisions in the Brazilian tax law precisely because there is a conflict between this article and the principles and guarantees of the taxpayer, such as the principle of legality, the prohibition on taxation by analogy, and legal certainty.

There is also a certain consensus that this is a rule of limited effectiveness, because it depends on regulations by law. As no federal law has been issued regulating the application of the anti-avoidance clause, the federal tax authority avoids using it as a legal basis in assessments, even though it may sometimes rely on it as grounds for lack of a business purpose, abuse of form, or lack of substance.

With the enactment of State Law No. 7,988/18, the State of Rio de Janeiro seeks to remedy this lack of regulations in order to enable the application of the sole paragraph of article 116 of the National Tax Code.

The law establishes that the act of disregard will be done by drawing up an infraction notice, which must be based on the elements or facts that demonstrated the concealment, as well as the acts or deal to be taxed, therein indicating the respective standards applicable. Therefore, prior to the issuance of the infraction notice, the tax auditor should:

1. Subpoena the taxpayer to provide clarifications and information within 30 days about the facts, causes, reasons, and circumstances that led to the undertaking of the legal act or deal with “indicia" of concealment (failure to comply with the subpoena or the presentation of incomplete information or clarification will result in disregard);

1. If the clarifications are not enough, or do not convince the tax authority, an infraction notice will be drawn up and administrative litigation regarding the infraction notice will follow, with right to an adversarial proceeding and full defense. 

It should be noted that there is no definition in the rule of what is meant by "act or deal undertaken for the purpose of concealing the occurrence of the triggering event." This opens a wide margin of discretion so for the state tax authority to assign to certain situations a finding of concealment, even those in which a taxable event does not occur.

An attempt has already been made to create a federal law to regulate the application of an anti-avoidance clause by Presidential Decree No. 66/02. In this case, the Presidential Decree brought in even more elements regarding the concepts to be used in disregarding the legal act or deal, therein expressly mentioning the lack of a business purpose and abuse of form, and assigning their respective meanings in the legal text itself. The rule also required that the tax assessment be accompanied by evidence gathered by the auditor. Even so, these provisions were broadly rejected and ended up not being part of the text of the law that resulted from the conversion of the Presidential Decree.

Another attempt was made at the federal level with the enactment of Presidential Decree No. 685/15. It provided that the taxpayer would be required to make a prior annual declaration to the Federal Revenue Service of legal acts or deals (i) that had no relevant non-tax reason; and (ii) whose adopted form was not usual, was an indirect legal deal, or had a contractual provision that was not typical for contracts. These statements would be submitted as consultations to the Federal Revenue Service, which would express its opinion on the validity of the acts and possible disregard of them. Again, these provisions have not been converted into law.

Therefore, taxpayers in the State of Rio de Janeiro should be attentive, since the enacctment of Law No. 7,988/18 is inserted into a context of various legal controversies, which brings in uncertainty regarding its application by the tax authorities and uncertainty as to the position that will be adopted in any discussion in administrative and judicial courts.

The enactment of the law conveys the message that the state revenue service intends to use this type of anti-avoidance argument more frequently in order to prepare new tax assessments, which will certainly require even greater attention from taxpayers who intend to show that the tax assessment is unfounded.