Category: Competition

The opinion of the Administrative Council for Economic Defense (Cade) on freight price tables, issued on June 17, brought to light an important discussion that goes beyond the limits of this concrete case: the application of the antitrust exemption.

Presidential Decree No. 832/2018, which instituted the Policy of Minimum Prices for Road Transportation of Cargo in response to the crisis generated by the truck drivers' strike, was the target of harsh criticism from the Brazilian business community for a variety of reasons, including reduction of competition in the sector. In a statement presented to the Brazilian Federal Supreme Court (STF), Cade expressed the understanding that, although the establishment of minimum prices does not benefit the market or consumers, the agency would not have the authority to discuss the merits of the public policy adopted by the federal government for that industry.

The Brazilian Competition Law (Law No. 12,529/2011) applies to acts carried out by individuals or legal entities, whether public or private, national or foreign, regardless of the sector of economic activity involved. The law does not prevent Cade from punishing any practice that could harm free competition, even if the conduct is encouraged or sanctioned by state agencies.

However, Cade recognizes that, in order to achieve certain public policies, the State may exercise its regulatory power over the economic order in a way that leads to reduction of competition in a given sector. It further recognizes that in such cases, the antitrust authority cannot impose fines or non-pecuniary penalties on those who acted within the bounds set by regulations.

The success, at Cade level, of a defense based on the antitrust exemption theory depends on whether three criteria are met in the specific case. The first one concerns the degree of autonomy the company had in relation to the conduct. Has it acted in accordance with the regulatory rule, or could it have acted differently? If there was an alternative less harmful to competition, the regulation could be used as a mitigating factor in the calculation of the penalty, but not to prevent the application of the penalty. The second criterion is the effective supervision by the regulator, who should be able to supervise and punish companies that do not comply with the rule. The last criterion concerns the existence of a clear industry policy of antitrust exemption, which should be a public policy decision made to ensure that the benefits aimed by the regulation outweigh the harm resulting from the reduction or elimination of competition in the industry.

Category: Environmental

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Category: Tax

• No. 108 – Application of interest over fines;
• No. 115 – Legality of the calculation of transfer price PRL 60 according to Normative Instruction No. 243/02;
• No. 116 - The peremption period for the creation of a tax credit for amortized premium is counted as of the period of its repercussion in the calculation of the tax;
• No. 124 - The production and exportation of non-taxable products do not generate a presumed IPI credit, and;
• No. 127 - The impact of CIDE on technical service contracts provided by a foreign person does not require the transfer of technology. 

Some relevant proposals did not obtain a quorum for approval, among them: (i) the non-deductability of premium expenses generated internally for the economic group, (ii) the possibility of simultaneous application of an isolated fine and a sua sponte fine based on Presidential Decree No. 351/2007, and (iii) the auditor of the Brazilian Federal Revenue Service has authority to supervise PPBs, and its conclusions are not binding on the ZFM’s oversight activity.

Below is a table of the main proposals and their results:

Category: Competition

The Administrative Council for Economic Defense (Cade) launched in October of 2018 the Antitrust Remedy Guidelines. The Guidelines compile the best practices and procedures usually adopted by Cade in the design, application, and monitoring of remedies negotiated with parties to complex mergers. With the publication of the Guidelines, Cade aimed at giving greater predictability and transparency to the remedy negotiation process with parties involved in complex transactions that may not be subject to unconditional clearance.

Antitrust remedies may be structural, when they aim to maintain market structure (such as the sale of equity, independent business units, productive capacity, or intellectual property) or behavioral, when they limit the company's future conduct and generally require monitoring (such as restriction on access to sensitive information, supply obligation, sharing of efficiencies, etc.)

Since Law No. 12,299/2011 entered into force, 33 transactions reported to Cade were cleared with remedies. The agency accepted purely behavioral remedies in 16 of these cases, structural remedies in 10, and hybrid remedies in 7 of them. In the same period, 6 transactions were blocked by Cade, as the competition authority and the merging parties failed to reach a consensus on remedies deemed appropriate to neutralize the competition concerns associated with the transactions. Four of these rejections occurred in the short period between June of 2017 and March of 2018.

In this context of recurring complex transactions under the scrutiny of the competition authority, the publication of the Guidelines is most welcome.

A significant part of the Guidelines is intended to clarify the principles that contribute to the effectiveness of the remedies, which should be observed during the negotiation of an agreement on control of concentration (ACC for its acronym in Portuguese) in order to ensure that the remedies are quick to implement, feasible, monitorable, and proportionate to the competition problems identified.

It is worth highlighting that in the Guidelines Cade has expressed its preference for structural remedies, which ate more efficient and less burdensome than the behavioral remedies. It will be necessary to verify how this preference will be materialize, since the adoption of behavioral remedies by Cade under Law No. 12,299/2011 has been more common. The Guidelines also indicate Cade’s preference for the adoption of a monitoring trustee that will help it monitor and guarantee compliance with the obligations established in the remedies, thus hoping to increase their effectiveness.

The Guidelines detail practical issues relevant to structural remedies (e.g., divestment package, suitable buyer, and divestiture process) and behavioral remedies, as well as provide clarifications on trustees' roles, monitoring of ACCs, and applicable penalties for non-compliance , among other issues.

The Guidelines should streamline remedy negotiations with Cade, insofar as parties to transactions that may generate competition concerns will have concrete elements to discuss and assess in advance possible remedies to be proposed to the agency.

Category: Corporate

The preparation of a business contract involves discussions that translate into a mere allocation of risks from one party to the other. In theory, the risk will be contractually allocated to the party that can bear it more efficiently (and by efficiency we mean the ability to both avoid materialization of the risk and bear risk in a less costly manner, in addition to the risk appetite of each party). Of course, any allocation of risk results in costs - the buyer, having to bear a greater risk, will propose a lower purchase price than it would if it had to bear less risk.

Legal advisors therefore have the function of adding value to the transactions on which they advise, since the more complex the transaction that is the subject matter of the contract, the more sophisticated the contract structures will be. This is precisely the case with M&A contracts, which use representations and warranties and indemnification structures for the allocation of risk between the parties.

Allocating a risk to the other party is not easy and is not always a simple task based on numbers and probabilities. Thus, such discussions, which are extremely relevant in the context of a business contract, may prove to be true bottlenecks in carrying out a transaction. Thus, a transaction that could be more expeditious ends up taking more time for closing, or closing does not even occur if there are deal breakers at the time of discussions regarding allocation of risks. Therefore, it is recommended that the parties seek alternatives that are better fit to the needs of the transactions, one of which is the purchasing of insurance against transactional risks, such as tax indemnity insurance (not yet available in Brazil), or insurance for representations and warranties (R&W insurance), already widespread and used in the United States and Europe. Although they were launched in the Brazilian market only about four years ago, they have been gaining popularity - searches for R&W insurance grew in the first half of this year. The increase was 35% compared to the prospection index for the year 2017.^[1]

R&W insurance is a specialized product that provides to the buyer coverage exclusively for financial loss arising from noncompliance with the content of the representations and warranties provided by the seller, including those relating to tax contingencies, if applicable, and covered by the policy in the context of an M&A.

R&W insurance coverage does not, however, cover any breach of a representation or warranty, but only that which is related to a hidden liability, that is, that which is not known or expected by the seller and buyer. For example, risks known to the buyer, and those risks that are unknown because the matter in question was excluded from due diligence, are not insured. In addition, R&W insurance currently available in Brazil has a mandatory deductible, which is excluded from the insurance coverage or any losses related to the breach of representations and warranties in amounts equal to or less than a de minimis amount and the aggregate deductible (ranging from 1 to 3% of the value of the transaction) as provided in the policy.

Under R&W insurance, the buyer is compensated for amounts it is entitled to claim against the seller, as well as the costs of defending itself up to the maximum guarantee coverage limit of the policy purchased.

The policies are tailor made for the M&A in question based on an assessment of the typical risks of the activities carried out by the target company, the results of the due diligence, the financial statements of the target company, and, as the name already indicates, the representations and warranties provided in the M&A contract.

Thus, R&W insurance represents additional security for investors, particularly in M&A contracts in which the buyer does not have the desired level of indemnification for the post-closing period and/or the desired time frame, or the seller does not have the financial capacity to withstand any hidden liabilities. A potential buyer can even differentiate itself in competitive sales processes by submitting an acquisition proposal that includes the purchase of a R&W insurance. As a practical effect, this can be an advantage for all parties involved in an M&A by helping to reduce (or even eliminate) the use of an escrow account for any payment of indemnification.

As mentioned above, R&W insurance is intended solely to provide a guarantee of insurance indemnification to the buyer in the event of a loss resulting from breach of the representations and warranties provided by the seller in the context of an M&A transaction, but does not eliminate the risks altogether. It is not, therefore, a carte blanche that exonerates the parties from paying due attention to the representations and warranties section or to the due diligence process itself. This applies especially to the seller, against whom the insurer will have a right of recourse, especially in the event of fraud or bad faith in the provision of the representations and warranties.

^[1] Seguro Total Magazine. “Search for insurance for risks related to mergers and acquisitions grows." São Paulo: PubliSeg. No. 191, 2018.

Category: Banking, insurance and finance

After extensive discussion with market participants by means of the Public Consultation No. 55/2017, published by the Central Bank of Brazil (Bacen) on August 30, 2017, the Brazilian National Monetary Council (CMN) issued Resolution No. 4,656 on April 26, which created two new types of financial institutions specialized in loan transactions using electronic platforms: direct lending companies (SCD) and peer-to-peer lending companies (SEP).

Such rule also regulated the granting of loans and financing transactions among individuals using electronic platforms, and set forth the requirements and procedures that must be complied with for purposes of obtaining authorization, license to operate, proceed with corporate reorganization, transfer of control, and, finally, rendering of the license to operate of such new financial institutions.

This regulation is part of the “Cheapest Credit” milestone of the BC+ Agenda and, according to Bacen itself^[1], it provides greater legal certainty to the transactions performed by companies that intensively use technology for the supply of financial products and provision of services in the credit market (i.e., credit fintechs). The idea is to provide conditions to reduce the cost of credit, promote the incorporation of innovation in the National Financial System, and stimulate the participation of new lending institutions. Prior to the issuance of this new resolution, fintechs were allowed to perform their activities only by means of a partnership with a fronting authorized financial institution,.

Direct Lending Company (SCD)

The main purpose of SCDs is to enter into lending and financing transactions, as well as acquisition of credit rights exclusively by means of electronic platforms, using their own equity as financial resource. Unlike banks, SCDs are not allowed to raise funds from the public (by means of deposits, for instance). However, they may be publicly-held companies, thus raising funds through public offering of shares in the capital markets.

SCDs may also provide the following services: (i) credit analysis for third parties; (ii) debt collection for third parties; (iii) acting as an agent in the distribution of insurance products related to the loan/financing transactions by means of electronic platforms, in accordance with the applicable regulations currently in force; and (iv) issuance of electronic currency, in accordance with the applicable regulations currently in force. By allowing them to act as electronic money issuer, this new regulation seems to enable funds borrowed to be deposited into payment accounts managed by the SCDs themselves.

In addition, SCDs may carry out sale/assignment of credits resulting from their transactions solely to: (i) financial institutions; (ii) Credit Rights Investment Funds (FIDCs) whose quotas are intended exclusively for qualified investors; and (iii) securitization companies that distribute securitized assets exclusively to qualified investors.

Peer-to-Peer Lending Company (SEP)

On the other hand, SEPs have as main purpose enabling individuals to enter into lending and financing transactions among themselves, exclusively by means of electronic platforms. Granting of loans with their own funds, as well as any type of risk retention, either directly or indirectly, both by the SEP or by related companies (including by means of co-obligation or provision of guarantees) are not allowed. However, as requested by the market during a public hearing, the resolution provides that SEPs and their subsidiaries or affiliates may acquire subordinated quotas of FIDCs that exclusively invest in credit rights arising from transactions carried out by the SEP itself, provided that such acquisition represents a maximum of 5% of the assets of the fund, and does not constitute the assumption or retention of substantial risks or benefits, according to the applicable regulations currently in force.

This rule defines peer-to-peer lending and financing transactions as financial intermediation transactions, in which funds collected from lenders are destined to debtors after negotiation on an electronic platform. According to the resolution, creditors of such transactions may be: (i) individuals; (ii) financial institutions; (iii) FIDCs whose quotas are intended exclusively for qualified investors; (iv) securitization companies that distribute the securitized assets exclusively to qualified investors; and (v) non-financial entities (other than securitization companies that do not fall within the scope of item “iv” above). In turn, debtors may be individuals or legal entities, as long as they are resident and domiciled in Brazil.

In addition to peer-to-peer lending and financing transactions, SEPs may also provide the following services: (i) credit analysis for clients and third parties; (ii) collection of debts on behalf of clients and third parties; (iii) acting as insurance agents for the distribution of insurance related to their lending and financing transactions, according to the applicable regulations currently in force; and (iv) issuance of electronic money, according to the applicable regulations currently in force.

Peer-to-peer lending transactions must be processed according to the following steps: (i) unequivocal consent by potential creditors and debtors, by means of electronic platforms, to enter into the lending and/or financing transaction; (ii) availability of funds by creditors to the SEP; (iii) issuance or execution, together with debtors, of the instrument evidencing the debt; (iv) issuance or execution together with creditors of an instrument linked to the the instrument representing the debt; and (v) transfer of funds by the SEP to the debtors (within five business days from receipt of funds by the SEP). The instruments mentioned in items “iii” and "iv" above must be issued by or on behalf of the SEP, or must be entered into by the SEP as a party to such instrument.

This is the legal framework that is intended for companies that, by means of electronic platforms, enable the granting of loans currently known as peer-to-peer; except that, pursuant to Resolution No. 4,656, SEPs must intermediate the credit transaction (i.e., it is not a direct relationship between creditor and debtor). In addition, the transaction will have characteristics of a linked asset transaction, in which there is a link between the funds raised from the creditors, and the corresponding transaction (entered into with the debtor), with the respective subordination of the liabilities of the funds delivered by the creditors to the payment flows by the debtors of the credit transaction.

Resolution No. 4,656 also provides that SEPs must segregate their funds from the funds of creditors and debtors of the lending and financing transactions. ,Besides that, this resolution also sets forth that the creditor of the lending and/or financing transaction may not enter into agreements with a single debtor, in the same company, with respect to transactions in which nominal value exceeds the maximum limit of R$ 15,000 (maximum exposure of a creditor to one debtor). This limit does not apply to qualified investors, according to the definitions set forth in the regulations issued by the CVM.

Resolution No. 4,656 also created obligations for SEPs to provide information to their clients and users with respect to the nature and complexity of the contractual transactions and services offered, which must be done in a clear and objective language, in order to allow full understanding of the flow of financial resources and risks incurred. This information must be disclosed and kept up to date in a visible place and legible format in the institution's website, accessible at their homepage, as well as in other channels, by means of which individuals may have access to their electronic platform, and must also be included in the contracts, marketing and promotional materials, and other documents intended for clients and users. In addition, information must include an emphasized warning disclosing that peer-to-peer lending and financing transactions represent risky investments, without any guarantee from the Credit Guarantee Fund (FGC).

The resolution also sets forth that SEPs must use a credit analysis model capable of providing potential creditors with benchmarks that impartially reflect the risk of potential borrowers and lending and financing transactions, as well as monitor their respective transactions, and provide information to the creditors and debtors with respect to such transactions.

From an economic standpoint, the rule also allows for the collection of fees by SEPs in return for the implementation of the loan and financing transactions, and for the provision of related services (as mentioned above), provided that it is set forth in the agreement entered into between the SEP and its clients and users.

Other rules applicable to both types of institutions

Both SCDs and SEPs must be incorporated as corporations, and have paid-up stock capital and shareholders' equity in the amount of R$ 1,000,000. In addition, these institutions may be controlled by investment funds, provided that the respective controlling group is also comprised by individuals or groups of individuals.

Finally, as mentioned by the regulating authority itself^[2], SCDs and SEPs must comply with proportional operational and prudential requirements consistent with their size and profile. According to Bacen, if SCDs and SEPs have a plain risk profile, they may choose to be qualified in the S5 segment, for purposes of the proportional application of prudential rules, which had their criteria adapted by Resolution No. 4,657 in order to allow such companies to expose themselves to securitization instruments (provided that they have a low risk nature), and to carry out activities related to the custody and bookkeeping of securities issued by the institution itself.

Resolution No. 4,656 is immediately applied. Companies that are interested may already start the license to operate process (which is necessary in order for such institution to operate without intermediation of banks). While such proceeding is not finalized, fintechs may continue to act as banking correspondents, just as they are currently operating.

^[1] https://www.bcb.gov.br/pt-br/#!/c/notas/16455

^[2] https://www.bcb.gov.br/pt-br/#!/c/notas/16455  

Category: Corporate

In capital increases of corporations, the share issue price is set by the body responsible for resolving on the capital increase, namely a general shareholders’ meeting or, in the case of companies with authorized capital, the board of directors. However, the resolution approving a capital increase and setting the issue price of new shares may generate controversy and, although discretionary, these decisions cannot be arbitrary.^[1] Therefore, they may be reviewed by the Brazilian Securities and Exchange Commission (CVM) and by the Courts, should they cause unjustified dilution for the shareholders.

Law No. 6,404/76, as amended (the Brazilian Corporations Law), sets forth in its article 170 certain parameters to be considered, alternatively or jointly, for the determination of the issue price: (i) the profitability of the company, which are based on accepted valuation methods, such as discounted cash flows (DCF) and comparable multiples; (ii) the book value per share; and (iii) the quotation of the shares on the stock exchange or organized over-the-counter market, with applicable premium or discount in accordance with market conditions. The current wording of article 170, given by Law No. 9,457/1997, clarifies that the cumulative adoption of the parameters defined therein is not mandatory; a weighting between two or three of the criteria may be done, or a fourth criterion may even be used.

According to Modesto Carvalhosa, the purpose of this legal provision is to ensure that the issue price reflects the actual value of the share, except when fully justified by market reasons.^[2] In other words, the share issuance may be approved at any price, as long as it does not lead to unjustified dilution of the former shareholders. Pursuant to Bill No. 196, of June 24, 1976, which accompanied the Brazilian Corporations Law, unjustified dilution of shareholders is prohibited because the right of first refusal conferred by article 171 of the Brazilian Corporations Law will not always provide adequate protection for all shareholders.

The dominant interpretation is that these criteria should not be understood as absolutely watertight and rigid elements. Along these lines, CVM Administrative Decision RJ 2009/8316 recognizes that "legal criteria should be viewed as guiding parameters which, weighed against the specific aspects of each individual case, allow the determination of an issue price without undue dilution to the shareholders." In the case at hand, the share price was based on negotiations with the company's strategic creditors, which would convert their credits into capital in order to avoid judicial reorganization of the company, and would be supported by a confirmatory valuation report. Commissioner Luciana Dias, recognizing the possibility of using other criteria in addition to article 170, paragraph 1, of the Brazilian Corporations Law, stated her opinion as follows: "The CVM has therefore recognized that the fair value of the shares may be measured by a negotiation process between independent parties and that the issue price in a public offering of shares may be determined by the composition of the investment intentions of parties not related to the company or to the underwriters."

On the bookbuilding process, widely used in public offerings, Nelson Eizirik^[3] believes that this method of pricing, in practice, consists of an indicative of the market price, for which reason it complies with the provisions of article 170, paragraph 1, III, of the Brazilian Corporations Law. However, one can also argue that the bookbuilding process does not fit exactly within the "stock exchange or organized over-the-counter" criterion of article 170, §1º, III, and it may be understood as a fourth criterion expressly admitted by the regulator, both in normative provisions (CVM Instruction No. 400/2003) and in administrative decisions (e.g. CVM Administrative Proceeding No. RJ 2009/83167 and CVM Administrative Proceeding No. RJ 2009/8316).

Along these lines, Fábio Konder Comparato states that the bodies responsible for setting the issue price are assigned "discretionary power", since they are given "a certain latitude, ... a decision-making perimeter ..., a table of references within which the [issue] price may be determined, according to the circumstances of each individual case and according to the minority shareholders' interest."^[4]

The Brazilian Corporations Law does not require that the issue price be set "according to" the three evaluation criteria, but only "in view" of such criteria, which led Alfredo Lamy Filho and José Luiz Bulhões Pedreira to affirm that " in the determination of the issue price there is necessarily an exercise of the discretionary power of the competent body to establish it case by case taking into account the interest of the shareholders."^[5]

In the same vein, the former CVM chairman Marcelo Fernandez Trindade stated in the CVM Administrative Proceeding RJ 2004/3098^[6] "it should be noted that, according to the best legal doctrine, the interpretation of the provisions of paragraph 1 of article 170 must be that the criteria in its subparagraphs are indicative elements which must be reasonably weighed in the determination of the issue price and the criteria must be based on true and consistent grounds, at risk of causing unjustified dilution of the other shareholders."

It should be emphasized, however, that the choice of parameters should be justified in detail in light of their economic aspects, according to paragraph 7 of article 170 of the Brazilian Corporations Law. The adequacy of the criteria used for the company's economic valuation must be explained.^[7] In CVM Administrative Proceeding No. RJ 2013/6294,^[8] analyzing the good standing of the pricing criteria in a capital increase, the reporting Commissioner Pablo Renteria pointed out that "it would not be enough to indicate the criteria that served as the basis for the issue price, as it would be necessary to explain, in detail, the reason for which it was thought best to establish the price based on this or that criterion (or, where more than one criterion is used, the reasons for using those parameters in a combined manner), or the reason for the non-use of another parameter among those listed in the subsections of article 170, paragraph 1, of Law No. 6,404/76."

In the case of discretionary power of the competent body, an allegation of misuse of powers resulting in unjustified dilution will depend on satisfactory evidence that the legal criteria were not followed because of an abusive act, and the burden of proof will always lie with the one alleging this act.^[9] Minority shareholders cannot contest the choice of criterion simply because they consider it not to be the most appropriate. The Brazilian Corporations Law creates a presumption of legitimacy when the competent body follows the legal criteria.^[10]In addition, the Brazilian Corporations Law, in prohibiting "unjustified dilution", admitted, on the contrary, the possibility of a scenario for "justified dilution." Therefore, if there is an economic reason for the capital increase, based on the company's interest, and following the parameters defined in article 170 of the Brazilian Corporations Law, there is justified dilution of the equity interest of shareholders who do not subscribe the capital increase. For example, the São Paulo Court of Appeals has already established that a capital increase of a highly indebted corporation, carried out as a legitimate means of saving it from insolvency, constitutes justifiable dilution, and the plaintiff, in that case, had not met its burden of demonstrating that its stake had been unjustifiably diluted.^[11]

In sum, the mere setting of the share issue price at a value lower than those calculated according to the parameters of article 170 of the Brazilian Corporations Law does not necessarily imply unjustified dilution or an abusive act against the shareholder or management, as it will depend on the circumstances of each individual case. The Brazilian Corporations Law does not prohibit the issuance of shares at a price lower than such parameters.^[12] The legal determination is that such parameters, jointly or alternatively, should guide the determination of the issue price, which should be justified in the capital increase proposal.

[1]     According to CVM PAS No. RJ 2010/16884, the written opinion of which was authored by Commissioner Otavio Yazbek, decided on December 17, 2013.

[2]     CARVALHOSA, Modesto, Comentários à Lei de Sociedades Anônimas ["Comments on the Brazilian Corporations Law"], v. III. p. 611.

[3]     EIZIRIK, Nelson, op. cit., p. 205.

[4]     COMPARATO, Fábio Konder, A fixação do preço de emissão das ações no aumento de capital da sociedade anônima ["Determination of the issue price of shares in capital increases for corporations"], Revista de Direito Mercantil, Industrial, Econômico e Financeiro ["Journal of Commercial, Industrial, Economic, and Financial Law"]. São Paulo: Revista dos Tribunais ["Journal of the Courts"], n. 81, Jan./Mar. 1991, p. 83.

[5]     LAMY FILHO, Alfredo and BULHÕES PEDREIRA, José Luiz, Direito das Companhias ["The Law of Companies"], 2nd ed., Ed. Forense, São Paulo, p. 1,020.

[6]     CVM, Case RJ 2004/3098, Opinion drafted by Commissioner Wladimir Castelo Branco Castro, decided on January 25, 2005.

[7]     EIZIRIK, Nelson, Lei das S.A. Comentada ["Commented Version of the Brazilian Corporations Law"], v. II. p. 502.

[8]    CVM PAS RJ2013/6294, Reporting Commissioner Pablo Renteria, decided on November 14, 2017

[9]     COMPARATO, Fábio Konder, op.cit., p. 83.

[10]    LAMY FILHO, Alfredo and BULHÕES PEDREIRA, José Luiz, op. cit., p. 1,025.

[11]    TJSP, Appeal No. 0517189-28.2000.8.26.0100, Appellate Judge Moreira Viegas writing for the court, decided on February 11, 2015.

[12]    CVM Guidance Opinion No. 01, of September 27, 1978.

Category: Corporate

In the current context of fighting corruption and strengthening a culture of ethics and corporate governance, there may be uncertainty about the role and duties of compliance officers and the insurance coverage for the risks incurred by them.

According to articles 153 to 157 of Law No. 6,404, of December 15, 1976, as amended (the Corporations Law), the main duties of directors and officers include: (i) the duty of diligence; (ii) the duty of loyalty; (iii) the duty of confidentiality; (iv) the duty not to act in conflict of interest; and (v) the duty to inform.

From this list, we highlight the general duty of vigilance that, although not explicit in the Corporations Law, is a corollary of the duty of diligence and may be deduced from paragraphs 1 and 4 of article 158 of the Corporations Law.

This obligation includes, inter alia, the relationship between bodies and the delegation of tasks and attributions. On the one hand, business owners or officers/directors cannot exempt themselves from responsibility if they delivered the management to third parties (professional officers) and did not supervise them properly. Even if an officer did not participate in the illegal act, if she fails to act or remains inert in view of an illegal act of another officer, she may be jointly liable. It is not expected, however, that officers serve as “auditors" of the work of others. The vigilance is expected to be carried out reasonably, based on the information available on which the officer may rely.

Directors and officers will not be personally liable for their business decisions when they act diligently, in a well informed, reflected, and disinterested manner, without deviation of conduct or omission in the exercise of their activities, because their obligation is to act reasonably, not to guarantee a result (the “business judgment rule” principle). However, directors and officers are liable for damages that they cause to third parties when they act within their duties under fault or intent or, also, in violation of the law or the articles of association/bylaws of the company.

The discussion of managerial accountability adds further complexity in the era of compliance. In a few words, compliance in the corporate world is the set of efforts and systems to act in accordance with laws and rules applicable to the company's activities, and following corporate values, ethical principles, and governance practices, taking into account the impacts caused to different stakeholders. In the midst of corruption scandals, companies in Brazil feel increasingly compelled to implement policies consistent with compliance, embodied in internal codes of conduct capable of ensuring compliance with legal norms and avoiding the practice of illegal activities.

In this sense, the compliance department will have the function of mapping the risks related to the company's actions and developing policies, mechanisms, and tools to deal with them. The role of compliance officers generally encompasses three main functions: (i) creation and implementation of the compliance program, in which the compliance officer develops, based on a risk assessment, the internal control measures to be adopted by the entity; (ii) operationalization of the compliance program, in which the compliance officer implements the integrity measures planned, disseminates the compliance program, and performs the training of the company's other employees; and (iii) management and improvement of the compliance program, in which the compliance officer periodically monitors and reviews the integrity structure of the legal entity, investigates any irregularities, and reports to their superiors.

In order to analyze the responsibility of compliance officers, it is necessary first to verify the conformity of their function and their powers, which, due to organizational differences, may yield possibly different answers, with a greater or lesser degree of accountability.

In most organizations, compliance officers are at a lower hierarchical level than the board of directors and the board of executive officers. They are tasked with implementing a system of prevention and detection, training employees, monitoring compliance with legal norms and internal company rules, investigating irregularities, and transmitting information to company management, with or without advice on how to proceed. A figure, therefore, devoid of final decision-making or disciplinary power.

A delegation of tasks that does not involve the transfer of powers to avoid the result would by itself exclude the delegation of the position of guarantor. Thus, the responsibility for avoiding the result caused by illegal acts committed by members of the company against third parties would remain in the hands of the original guarantor, that is, the officer appointed in the bylaws who delegates the power/competence.

If, in the specific case, the compliance officer is only entrusted with supervising compliance with legal norms and internal company rules (directly and through receiving complaints of irregularities), investigating irregularities, and transmitting the information to the company's management, we are faced with a case of partial delegation of the duties of guarantor, since the decision-making powers to intervene and directly avoid the result were not delegated to her. In these terms, the compliance officer would not be required to prevent the outcome from occurring, but only to take all possible steps to prevent it.

Often, the compliance officer's power in response to a misconduct is limited to reporting to her superiors. Thus, compliance officers who reported to their superiors the existence or threat of unlawful acts within under the company’s purview would be free of criminal liability, even if no action was subsequently taken by management to cease or avoid the criminal practice, because compliance officers in general do not have executive power to do so, nor do they have the duty to report to public authorities.

As a result of recent anti-corruption operations in Brazil, executives have turned their attention to protecting their assets. In this scenario, civil liability insurance for directors and officers (in English terminology, D&O insurance or Directors and Officers Insurance) gained prominence in Brazil, and the increase in demand called for changes in legislation.

On May 23, 2017, the Superintendence of Private Insurance (Susep) issued Circular No. 553 to establish general guidelines specifically applicable to civil liability insurance for officers and directors of legal entities. Until then, these rules were generally subject to the provisions of the Civil Code and the administrative rules issued by Susep and applicable to civil liability insurance.

D&O insurance is fairly common in large companies, many of them multinationals, and is purchased as a protection against the risk of damages caused to third parties by management acts by officers, directors, and managers who have acted under fault in their professional activity.

This kind of insurance preserves not only the individual assets of those who hold positions of management (insured), which encourages innovative corporate practices, but also the assets of the company purchasing the insurance and its shareholders, since in the end the company may be called to reimburse its officers and directors for any personal damages.

This insurance coverage does not, however, cover fraudulent acts, especially if committed to personally favor an officer or director to the detriment of the assets of the company. Regarding the subject, in a Special Appeal,^[1] the 3rd Panel of the Superior Court of Justice (STJ), in examining the limits and application of D&O insurance in Brazil, was as follows:

"In order to avoid a strong reduction in diligence or excessive risk-taking by the manager, which would compromise both the company's compliance activity and good corporate governance practices, the D&O insurance policy cannot cover intentional acts, especially if committed to personally favor an officer or director. In fact, the insurance risk guarantee cannot induce irresponsibility. (...) This means that the D&O insurance policy can never cover cases of fraud or willful misconduct, as well as acts by the director or officer motivated by mere personal interests, deteriorating the company’s assets. In fact, the commission of criminal offenses or fraudulent acts, especially against the capital markets, should not be encouraged." (emphasis added)

In the insurance market, insurers tend to expressly exclude from insurance policies coverage for fraudulent acts or corruption of public or private agents. Evidence from government investigations or leniency agreements that do not contain the prior approval of the insurers may cancel D&O insurance coverage. In cases of corruption, those who admit their willful participation by turning state's evidence or those who are convicted by the courts for willful acts will lose insurance coverage and will have to reimburse the insurer if it has advanced the costs of the legal defense.

In a recent appeal,^[2] the 1st Chamber Reserved for Business Law of São Paulo decided that the D&O insurance policy purchased by a contractor involved in Operation Car Wash does not protect officers and directors in cases of unlawful acts confessed through state's evidence turned, let alone intentional acts. If the criminal conviction or confession of crimes is proven through state's evidence turned, the insurance coverage will not apply and the Courts will not protect the officer or director who commits the illegal act.

In the same vein, on September 25, 2018, the Brazilian Securities and Exchange Commission (CVM) issued Guidance Opinion No. 38, with recommendations regarding indemnity agreements entered into between publicly-held companies and their officers and directors. This type of contract aims to ensure payment, reimbursement, or advance of expenses arising from any arbitral, civil, or administrative proceedings initiated to investigate acts carried out in the exercise of the functions of the officers and directors. While recognizing the value of indemnity agreements as legitimate instruments for attracting and retaining qualified professionals, the CVM recommends the adoption of rules and procedures aimed at ensuring that directors and officers comply with their fiduciary duties in order to guarantee balance between, on the one hand, the company's interest in protecting its officers and directors against financial risks arising from the exercise of their functions, in the context of administrative, arbitral, or judicial proceedings and, on the other hand, the company's interest in protecting its assets and in ensuring that its directors and officers act in accordance with the standards of conduct expected of them and required by law.

The guidance opinion establishes that expenses arising from acts of the officers and directors carried out are not subject to indemnification, among others: (i) those that are outside the scope of their duties (ultra vires acts); (ii) acts in bad faith, fraud, gross negligence, or willful misconduct; or (iii) acts in one’s own interests of the interests of a third party to the detriment of the company's corporate interests, including amounts related to indemnities arising from actions for liability or offered under the terms of a settlement. For more information on CVM Guidance Opinion No. 38, click here.

In a time of fight against corruption, accountability of officers and directors tends to gain new contours for compliance officers, considering their role in assessing business risks, developing internal controls, implementing effective compliance programs, and identifying and obstructing unlawful acts or fraud in bidding procedures. Thus, compliance officers’ accountability should be assessed on a case-by-case basis and will depend on their roles and attributions, resources and tools available, and powers of internal intervention, interruption, and disciplinary sanctions. In any case, D&O insurance policies will likely not cover intentional or grossly willful acts, especially if committed to favor an officer or director, to the detriment of the assets of the company.

^[1] REsp 1601555 SP 2015/0231541-7. Adjudicatory Body - 3th PANEL. Published in the Electronic Gazette of the Judiciary on February 20, 2017. Decided on: February 14, 2017. Opinion drafted by Justice Ricardo Villas Bôas Cueva.

^[2] Appeal No. 1011986-32.2017.8.26.0100, São Paulo State Court of Appeals (TJSP ), 1st Chamber Reserved for Business Law. Majority opinion drafted by Appellate Judge Cesar Ciampolini.

Category: Labor and employment

Since the enactment of the Labor Reform (Law No. 13,467/2017, effective as of November 11, 2017), there has been much debate about the possibility of applying the changes in the rules of substantive law to employment agreements entered into before the Reform.

The discussion in legal scholarship revolves around two distinct scenarios related to the applicability of the new legal provisions: (i) to employment agreements that terminated before the beginning of the Reform; and (ii) to employment agreements entered into prior to its entry into force and which remain active after the expiration of the vacatio legis of Law No. 13,467/17.

Regarding the first scenario, article 5, XXXVI, of the Federal Constitution and article 6 of the Law of Introduction to the Rules of Brazilian Law (the "Law of Introduction") put an end to any discussion. They clearly provide for the immediate applicability of the innovations brought in by the Labor Reform to new hires and, therefore, the inapplicability of the Labor Reform in relation to the employment agreements entered into prior to its enactment.

Article 6 of the Law of Introduction is clear in its head paragraph that the law in force, in this case the Labor Reform, has immediate and general effect, which leads us to conclude that, when the employment agreement is entered into after November 11, 2017, the law in force being Law No. 13,467/17, all legal provisions brought in by the Labor Reform will be fully applicable to such agreement.

Concerning agreements entered into prior to the Labor Reform, it should be pointed out that article 6 of the Law of Introduction deals precisely with matters relating to perfected legal acts and res judicata, thus prohibiting a subsequent law from prejudicing an accrued right. It is undeniable that employment agreements entered into before November 11, 2017, are perfected legal acts, as they were consummated according to the law then in force.

Thus, the main controversy concerns the application of the Labor Reform to labor agreements entered into before its enactment and which remain in force. In the field of legal scholarship, there is debate regarding whether the application of the innovations brought in by the Reform to these agreements would imply violation of accrued labor rights that were provided for in the legislation that was amended or repealed by the Reform.

For example, prior to the Reform, employees who worked in remote locations without collective transportation were entitled to receive "hours in itinere" for the time spent commuting to work. The Labor Reform changed the legal wording and now, even if there is no collective transportation to the workplace, employees do not have the right to receive "hours in itinere".

The discussion after the Reform is whether the company can withdraw the payment of "hours in itinere" from all employees or only from persons hired after the entry into force of the new law. Have employees hired under the previous law accrued the right to receive "hours in itinere"?

The controversy was so great that the government ended up including article 2 in Presidential Decree No. 808/2017, therein expressly providing that "the provisions of Law No. 13,467 of July 13, 2017, applies in full to employment agreements currently in force." However, with the expiration of the term of effectiveness of Presidential Decree No. 808/2017, on April 23, 2017, article 2 had its legal effectiveness vacated, thereby bringing back the issue of the application of the Reform to agreements in force entered into before it.

In order to resolve this issue, it is necessary to differentiate accrued rights from expectations of a right. While the former can be characterized as the scenario in which all the mandatory requirements for a particular right have been fulfilled, the second is translated into the scenario in which all the conditions for the regular exercise of the right have not yet been fulfilled.

As is well known, employment agreements are characterized as relations of successive treatment between the employer and the employee, in which the obligations inherent to the agreement are renewed periodically, like cycles of renewal of rights.

One example is the right to vacation: it cannot be argued that employees with a six-month employment relationship have the accrued right to take vacation. Employees only have an expectation that, after fulfilling the legal requirements, they will have the right to use their vacation. Such an understanding can be applied to other rights arising from an employment agreement.

Taking this understanding as a basis, it is found that, when the factual support that substantiates the guarantee of a certain right or the legal support that guarantees the enforceability of a certain right is modified, a right cannot be said to have been accrued. Thus, the continuation of the legal regime prior to the new law is unenforceable and it is concluded that, for labor agreements entered into before the Labor Reform was in force, the legal innovations brought in by it are applicable to them only after the date of enactment of Law No. 13,467/17.

Thus, answering the question of "hours in itinere", one concludes that the employees simply were not entitled to receive them; they only have the expectation of a right, based on the law that guaranteed them this right. Once the law has been amended in this regard, it is entirely possible that the employee's expectation of a right is also altered and that the payment of "hours in itinere" is abolished after the enactment of the Labor Reform.

For the time being, there is still no unified position from the labor courts on this issue. Anamatra (National Association of Magistrates of the Labor Judiciary) issued non-binding restatements of law regarding the Labor Reform, indicating that the magistrates would walk in the opposite direction because they understood that the agreements entered into before the Labor Reform included an accrued right to the maintenance of the substantive rights envisaged in the previous law.

This understanding, in addition to being contrary to the law and to the best interpretation of the subject, would require companies to have parallel Human Resources controls and policies applicable to employees according to the date of their hiring, which, in addition to being absurd, is fatally mistaken.

More in line with the constitutional and basic principles of Brazilian law, the Ministry of Labor issued on May 14, 2018, an opinion concluding that, even after the loss of the effectiveness of article 2 of Presidential Decree No. 808/2017, the legal provisions brought in by the Labor Reform are applicable in a general, comprehensive, and immediate manner to all employment agreements governed by the Consolidated Labor Laws, including those entered into before the Reform expires and remain in force after November 11, 2017.

On May 16, 2018, a commission of justices of the TST also published an opinion on the amendments brought in by Law No. 13,467/2000, in which the justices concluded that, as far as substantive law is concerned, there should be jurisprudential construction of the changes based on judgments of concrete cases.

Therefore, despite the opinion of the commission of justices of the TST relegating the issue of formation of case law, the fact is that, according to the principles of the application of the norms of Brazilian law, the provisions of the Labor Reform are generally, comprehensively, and immediately applicable to all employment agreements governed by the Consolidated Labor Laws, including those entered into before the Reform was enacted and continue in force after November 11, 2017.

Category: Environmental

If the high costs resulting from the construction and maintenance of offshore wind farms were not enough, the sector also faces legal uncertainty due to the lack of regulations for environmental licensing.

On July 25, 2014, the National Environmental Council (Conama) Resolution No. 462/2014 was published, which establishes procedures for the environmental licensing of projects to generate electricity from a wind farm on a land surface. The rule is clear in stating that it applies only to onshore wind farms.

In

Despite the absence of a specific rule, there is no obstacle to the licensing of these activities based on the current rules on environmental licensing. Currently, there are three projects for offshore wind farms in Brazil, all under environmental licensing with the Brazilian Institute for the Environment and Renewable Natural Resources (IBAMA). Jurisdiction is determined by Federal Decree No. 8,437/2015, which granted the agency the jurisdiction to license wind farms offshore and in land-sea transition zones.

Offshore wind farms may be considered potential sources of noise pollution because they produce high amplitude sounds, and are sources of visual pollution since their towers can compromise the landscape where they are installed. These potential impacts may be mitigated when they are installed at the sea in a distance far enough offshore for such adverse sound and visual effects to be reduced or eliminated.

Wind farms also pose risks to birds of all species, which may fly close to their blades and turbines. Preventing the installation of wind farms in areas known to be migratory bird routes is one way to reduce these risks.

Other impacts of the offshore wind farms are: vibration, emission of electromagnetic fields, high maintenance and supervision costs, soil degradation, and disturbances to benthic seabed organisms.

As opposed to high maintenance and installation costs, offshore wind farms stand out due to the permanence and uniformity of the winds, which results in less interference from turbulence. In addition, in the high seas the speed of the winds is higher, which increases the energy production capacity.

Because offshore wind farms are far from the coast, there is also a significant reduction in negative externalities, such as noise emissions, impacts to the neighborhood, and non-occupation of potential dwellings of traditional communities or arable land in that space.

Another positive factor is the possibility of installing larger turbines, since there is no weight limit on the transportation of components via sea vessels, a common problem for onshore installations due to road transport.

Despite all the advantages that offshore wind farms have, particularly with regard to viability, the absence of specific legislation is a major barrier to investment in these structures. A vast potential for clean energy production is being wasted, a phenomenon observed in a study published in 2011 on the Brazilian Exclusive Economic Zone (EEZ) regarding the wind potential available on Brazil's shoreline.^[1] According to this study, the energy potential of the EEZ is approximately 12 times greater than that of the Brazilian onshore continental area, with a length {an extension} of 200 nautical miles.

Based on international regulations and existing regulations, the first steps towards greater legal certainty for the installation of offshore wind farms in Brazil are specific environmental regulations based on Conama Resolution 462/2014, which establishes objective criteria for defining environmental impact studies appropriate in each situation (whether simplified studies, such as the Simplified Environmental Report (RAS), or more complex studies such as the Environmental Impact Study and the Environmental Impact Report (EIA/Rima)), and propose the content of the terms of reference for such studies.

^[1] ORTIZ, G.P.; KAMPEL, M. Potencial de energia eólica offshore na margem do Brasil [“Offshore wind potential on the Brazilian coast”]. V Simpósio Brasileiro de Oceanografia [“V Brazilian Symposium on Oceanography”].

Category: Environmental

Ordinance No. 01/2017 of the Genetic Heritage Management Council (CGEN) and Federal Law No. 13,123/15 (the new legal framework for biodiversity, which repealed Presidential Decree No. 2,186-16/2001) established the date of November 6, 2018, as the final deadline for regularization or adaptation in the National System of Management of Genetic Heritage and Associated Traditional Knowledge (SisGen).

Those who performed activities of access to Genetic Heritage (PG) and Associated Traditional Knowledge (CTA); shipment abroad of PG samples and economic exploration of a finished product or reproductive material resulting from access to PG or CTA are subject to the requirements of the new legal framework for biodiversity.

Access to PG or to CTA completed before June 30, 2000 (date of the first enactment of Presidential Decree No. 2,186/2001) and economic exploration of a finished product or reproductive material resulting therefrom are not subject to regularization or adaptation in SisGen required in the new legal framework for biodiversity.

In this case, an interpretation of the legislation leads to the understanding that it is the duty of the user to demonstrate that all stages of access, including technological development, were completed before June 30, 2000, through the presentation of some of the following documents: patent application; cultivar record; registration of the product with public agencies, or proof of commercialization of the product.

Activities carried out after that date are subject to regularization or adaptation, depending on whether or not the activities were carried out in accordance with Presidential Decree No. 2,186-16/2001. Thus, those that obtained authorization for access or economic exploration during the term of Presidential Decree No. 2,186-16/2001 and, according to it, were obliged to carry out the process of adaptation by registering access and reporting the finished product or reproductive material in SisGen.

For the adaptation, the user must distribute the benefits related to the economic exploration carried out as of the date of entry into force of Law No. 13,123/15, except when it was so done in the manner set forth in Presidential Decree No. 2,186-16/2001.

Regularization, on the other hand, is conditioned on the signature of a consent order, since it is applied to those who carried out the following activities in disagreement with Presidential Decree No. 2,186-16/2001:

-      Access to PG or associated CTA;
-      Access and economic exploration of a product or process arising from access to PG or CTA, which is dealt with in Presidential Decree No. 2,186-16, of August 23, 2001;
-      Shipment of PG samples abroad; or
-      Dissemination, transmission, or retransmission of data or information that are or constitute CTA.

The execution of a consent order between the user and the Federal Government is an essential condition for the regularization of activities and must provide for the following obligations: registration or authorization of access or remittance of PG or CTA; reporting of the product or process originating from access to PG or CTA; or distribution of the benefits obtained with respect to the time in which the product developed after June 30, 2000 based on access to PG or CTA was made available on the market, up to five years prior to the execution of the consent order. Once the consent order has been signed, the application and enforceability of administrative penalties shall be suspended.

In the event of access to PG or CTA solely for the purpose of scientific research, the user shall be exempt from signing a consent order and may be regularized by means of registration or authorization of the activity.

If the procedures for adaptation or regularization have not been carried out by November 6, 2018, according to the new legal framework for biodiversity, the ser shall be subject to penalties, including penalties of up to R$ 10 million, warnings, and product seizures.

Category: Banking, insurance and finance

The Superior Court of Justice (STJ) established an understanding that electronic loan agreements signed through the Brazilian Public Keys Infrastructure (ICP-Brasil) have the enforceability of an enforceable instrument, thus dispensing with the need for signature by two witnesses. The opinion was obtained in the judgment of Special Appeal No. 1.495.920/DF, of the authorship of Justice Paulo de Tarso Sanseverino, on May 15, 2018.

An electronic contract is nothing more than a contract in which the declarations of will of the parties express themselves through the electronic transmission of data. It is not, therefore, a new type of contract, but only a new means by which the declarations of will of the parties are manifested. This concept of electronic contracts covers agreements signed remotely by the parties as well as electronic means the so-called smart contracts, written as code in a programming language and executed on a computer in order to reduce the transaction costs of the parties to the contract.

As determined by the Code of Civil Procedure (CPC), private documents signed by the debtor and by two witnesses is considered an enforceable instrument, but there is no provision regarding the waiver of witnesses in the case of digitally signed electronic contracts.

Presidential Decree No. 2,200/01 created ICP-Brasil "to guarantee the authenticity, integrity, and legal validity of electronic documents, support applications, and registered applications that use digital certificates, as well as the execution of secure electronic transactions." The Presidential Decree provides that declarations contained in the documents in electronic form produced using the certification process made available by ICP-Brasil are assumed to be true in relation to the signatories. The decree did not, however, provide for effective enforceability of contracts signed through ICP-Brasil.

Despite the absence of an express legal provision as to the enforceability of contracts signed through ICP-Brasil, the central argument formulated in the special appeal is that, although the CPC does not mention electronic contracts digitally signed by ICP-Brasil as an enforceable instrument, they must be so considered as they have been repeatedly entered into these days because they embody a liquid, certain, and enforceable obligation to pay, and especially because certification by ICP-Brasil has a function similar to that of the signing of the contract by witnesses.

This decision attends to the expectations of market participants operating in the digital credit market since, considering the costs of ICP-Brasil, signature by two witnesses on electronic loan contracts in order to impart enforceable effect to these documents represents a significant impediment to such transactions (especially in retail). It is important to point out, however, that the agreement established in the appellate decision has not yet been reiterated by the STJ, in addition to there being a divergence between the justices (presented in the dissenting opinion by Justice Ricardo Villas Bôas Cueva to the effect of not admitting loan agreements signed by ICP-Brasil as an enforceable instrument).

Thus, although the decision is in line with market expectations (especially with the recent regulations of credit fintechs), it does not circumvent the need for specific regulations that address the instruments necessary to carry out credit transactions by electronic means in order to define parameters that provide legal certainty and promote the growth and development of such transactions.

Category: Tax

Brazil has for years been witnessing an intense debate regarding the constitutional jurisdiction to tax the most varied of legal deals involving digital assets, more precisely software, whether it is the ICMS, ISS, or neither of the two.

Law No. 16,757/2017, published by the municipality of São Paulo, established as a new tax triggering event for the ISS, among others, the "provision, without definitive assignment, of audio, video, image, and text content through the Internet, respecting the immunity of books, newspapers, and periodicals."

In this manner, streaming started to be taxed at the rate of 2.9% in the city of São Paulo. This occurred as a side effect of Complementary Law No. 157/2016, which authorized municipalities to commence collection.

Streaming could be another example of a dispute between states and municipalities. The ICMS covers goods and services of communication and transportation. The ISS covers the remainder and the most varied of services. In the digital economy, where activities would not fit clearly into either of the two fields of taxation, the ground for disputes is fertile.

Confaz, through Agreement No. 106/2017, authorized the states and the Federal District to charge the ICMS for transactions with digital goods and merchandise, such as software, programs, electronic games, applications, electronic archives, and standardized similar items (even if they have been or might be customized) and marketed through electronic transfer of data.

The agreement, which began to take effect on April 1, 2018, establishes that the ICMS will be collected upon shipment from the manufacturer and on imports done through a website or electronic platform that sells or makes available, even if via periodic payment (such as subscriptions), digital goods and merchandise through electronic transfer of data, at the state where the purchaser of the digital goods or merchandise is domiciled or established.

The São Paulo State Revenue Department recently published CAT Ordinance No. 24, of March 24, 2018, to detail how the application of the ICMS on digital goods and merchandise in the state will occur. It mentions that digital goods and merchandise are considered "all those that are not personified, embedded in a mass marketing chain, like those that were offered for sale on physical media, "such as "audio, video, image and, text content, with definitive assignment (download)", thus meaning that there will be no ICMS tax on streaming (availability without definitive assignment).

In fact, we are of the opinion that there would be no transfer of ownership of goods in streaming that would be capable of giving rise to application of the ICMS tax, just as it does not apply in other situations in which subscribers access temporarily purchased content.

The definition of tax jurisdictions, especially with regard to potential conflicts between the ISS and ICMS, is commendable. It reduces legal uncertainty, as well as all costs associated with it, and contributes to improving the business environment and encouraging investment.

Clarification on the non-application of the ICMS is therefore beneficial. However, one may still debate the constitutionality of application of the ISS on streaming because it does not fit perfectly within the traditional concept of services that involve an obligation "to do” something, and not an obligation to "give" something.

Although it acted well in clarifying the non-taxation of streaming, the State of São Paulo, as expected, maintained taxation on transactions involving software download. It also maintained taxation on access to software in the cloud. In the latter case, in addition to all the issues surrounding the long discussion on taxation of software downloads, there are peculiarities that further distort the concept of mere marketing and sale of merchandise. Accessing the cloud, in addition to not involving transfer of ownership, may encompass various utilities, such as storage, provision of content, among others, which in no way resemble the marketing and sale of merchandise.

From all the foregoing, one can see that developments towards legal certainty in this area may show some progress, but it is still a difficult road ahead.

Category: Environmental

The Brazilian Institute for the Environment and Renewable Natural Resources (Ibama) published on August 14, 2018, Normative Instruction (IN) No. 18/2018, in order to allow more covered parties to join the fines conversion program. The new standard changes the transition rules set out in IN 06/2018 and, in practice, extends to 60 days the period originally established for covered parties to submit their requests to convert fines. With the change, adherence to the program may be requested until October 15, 2018.

The rules in force require that requests to convert fines be submitted by the interested parties up to the point of submission of final arguments for new proceedings. For the infraction notices drawn up prior to entrance into force of IN 06/2018, as a transitional rule, a period of 180 days was originally granted as of the publication of IN 06/2018, which would end on August 15.

The possibility of converting these monetary sums ​into services for preservation, improvement, and recovery of the quality of the environment was already provided for in Federal Law No. 9,605/1998 and Federal Decree No. 6,514/2008. However, there was no regulation for the substitution of fines to be effectively adopted by environmental agencies.

In the federal sphere, the procedure for the conversion of fines imposed by IBAMA was regulated by IN No. 06/2018, published on February 16 of this year. In general, the rules establish which projects will be considered services of preservation, improvement, and recovery of the quality of the environment, the procedure to be followed by the interested party to request the conversion, and the characteristics of direct and indirect conversion modalities, hitherto unpublished in Brazilian legislation.

Also as a change, Ibama provides important restrictions on granting the conversion of environmental fines. As an example, IN No. 06/2018 provides that requests in this regard will be denied when: (i) the environmental violation results in human death; (ii) the covered party is included in the official register of employers who have submitted workers to conditions analogous to those of slavery; (iii) in the inspection procedure evidence is found that the covered party exploits child labor; and (iv) the offense is committed through the use of cruel methods for slaughter or capture of animals.

Upon choosing to convert a fine, the covered party will have its administrative proceeding suspended and, depending on the modality chosen (direct or indirect), it may have a discount of up to 60% of the amount of the fine imposed. Once the conversion is granted, the covered party must appear before Ibama to sign the commitment agreement (consent order) that will govern the environmental services to be provided, in addition to the general rules of validity, a fine in the event of any breach, a deadline for compliance with the obligations, etc.

IN No. 06/2018 and IN No. 18/2018 are applicable only to administrative proceedings in progress before IBAMA. The conversion of fines imposed by infraction notices issued by the other environmental agencies must follow the specific rules of the competent body, if there are any. With the regulation regarding the subject by the federal authority, the expectation is that other environmental agencies will issue rules on the conversion of fines or opt to apply the provisions applicable in the federal sphere.

Category: Environmental

Polychlorinated biphenyls, known as PCBs, are synthetic substances formed by a mixture of 209 chlorinated compounds. The Stockholm Convention, of which Brazil is a signatory, has classified PCBs as one of the twelve types of persistent organic pollutants (POPs), which are extremely polluting substances, which pose serious risks to the environment and human health and which should be phased out, according to the convention.

In Brazil, PCBs were generally marketed in the form of ascarel and used as an electric fluid in transformers, capacitors, and other electrical equipment dispersed in businesses throughout Brazil.

Given the proven toxicity of PCBs and the international movement to promote their extinction, Brazil banned the commercialization and manufacture of PCBs through Interministerial Ordinance No. 19, of January 29, 1981. Subsequently, it gave effect to the Stockholm Convention, through Decree No. 5,472/2005, assuming the commitment to eliminate PCBs in the Brazilian territory by 2028.

However, the fulfillment of the obligations assumed internationally has been an immense challenge. One highlights as a factor of difficulty the fact that many transformers, although originally designed to use mineral oil, have been contaminated by PCBs due to improper maintenance. In this scenario, most owners of contaminated equipment are not even aware of the situation of their equipment and of their subjection to administrative and criminal sanctions, as provided for in Decree No. 6,514/2008[1] and Law No. 9,605/98.[2]

Considering that PCBs have an average lifetime of 60 years and were installed before the interministerial ordinance, these substances should already be at the end of their life cycle. Thus, equipment employing these substances should be properly stored or discarded. To handle them, it will be necessary to enter into contact with the environmental agency, since inappropriate disposal may cause contamination and subjects the responsible persons to remediation of the area, with significant costs and years of work.

To ensure compliance with the obligations assumed by the Stockholm Convention, the state of São Paulo already has its own legislation[3] to guarantee the elimination of PCBs in its territory. In addition, the Brazilian Congress is in the drafting phases of a bill[4] to regulate the obligations of users of equipment contaminated by PCBs.

However, there are still gaps regarding the regulation of appropriate forms of maintenance and disposal of these materials and there are few final destination units specialized in the management of PCBs and contaminated equipment in Brazil.

For all of this, the elimination of PCBs in Brazil represents a great challenge that must be faced by the Public Power and by businesses in the coming years, with the promotion of incentives for the creation of companies specialized in the management of PCBs and effective regulations that allow the compliance with the obligations and supervision by the competent bodies.

[1] Article 61. To cause pollution of any nature at levels that result or may result in damage to human health, or that lead to the death of animals or significant destruction of biodiversity:

A fine of five thousand Brazilian Reais (R$ 5,000.00) to fifty million Brazilian Reais (R$ 50,000,000.00).

Article 62. They incur the same fines as set forth in article 61 who:

VI - fail, those who have an obligation, to give an environmentally appropriate destination to products, by-products, packaging, waste, or substances when so determined by law or regulatory act;

[2] Article 56. Produce, process, pack, import, export, market, supply, transport, store, stock, warehouse, or use a product or substance that is toxic, dangerous, or harmful to human health or the environment, contrary to the requirements established by the law or in its regulations:

Penalty - Incarceration, from one (1) to eight (8) years, and a fine.

Paragraph 1 - They incur the same penalties who

II - handle, condition, store, collect, transport, reuse, recycle, or dispose of hazardous waste in a manner different from that which is established by law or regulations.

[3] State Law No. 12,288/2006.

[4] Bill No. 4,707/2012

Category: Intellectual property

The Attorney General's Office (PGR) opined in October in favor of hearing and granting relief to Extraordinary Appeal (RE) 1037396, in order that article 19 of Law No. 12,965/2014, the Brazilian Civil Rights Framework for the Internet, be declared constitutional by the Federal Supreme Court (STF).

In March of this year, the STF recognized, via a majority opinion, the existence of a general repercussion of the issue raised in the RE regarding the constitutionality of article 19, which determines that internet application providers may only be held civilly liable for damages arising from content generated by third parties if, after a specific court order, they do not take steps to make unavailable content that is deemed infringing.

The RE was presented by Facebook after a decision by the Board of Appeals of Piracicaba (SP), which ruled out the applicability of the article and ordered Facebook to pay compensation for moral damages to the plaintiff due to its not having withdrawn content after being extrajudicially notified by the plaintiff.

The PGR maintains in its opinion that the objective of article 19 is to harmonize the application of the constitutional principles and rights of freedom of expression, inviolability of privacy, private life, honor, and image of persons.

It also explains that the objective of the article is to avoid compromising freedom of expression and free circulation of ideas, since if mere non-compliance with an extrajudicial notice submitted to the application provider demanding removal of content were sufficient for them to be held liable, the provider itself would be charged with carrying out a weighing and balancing of fundamental rights.

The PGR also points out that the Brazilian Civil Rights Framework for the Internet itself, in its article 21, makes exceptions to the rule of article 19, providing for situations in which withdrawal of the content dispenses with the need for a judicial decision in order for the provider to be held liable. Such situations are those in which celerity in removal of the content is fundamental and the filing of a judicial action is, therefore, dispensable.

The scenarios provided for in article 21 relate to the removal of content containing scenes of nudity or sexual acts of a private nature. In such cases, therefore, the internet application provider must remove the content under penalty of being considered civilly liable, in a secondary manner.

The PGR concludes its opinion in this sense, proposing to set the following theory for all other cases that deal with the constitutionality of article 19 of the Brazilian Civil Rights Framework for the Internet: “Article 19 of Law No. 12,965/2014 (Civil Rights Framework for the Internet) does not offend article 5, X and XXXII, of the Federal Constitution, which conditions breach of a prior and specific court order to remove content in order to establish the civil liability of an internet application provider for damages resulting from torts carried out by third parties."

The record of the RE is currently pending with the reporting judge, Justice Dias Toffoli, and as of now there is no date set for the trial decision.

If the STF declares the constitutionality of article 19 of the Brazilian Civil Rights Framework for the Internet, this will represent a great relief for application providers insofar as it will bring about greater legal certainty regarding the accountability of these companies in cases of removal of content from the air.

This is not the only article of the Brazilian Civil Rights Framework for the Internet whose constitutionality is debated. In 2016, the Party of the Republic (PR) filed a direct action of unconstitutionality (ADI 5527) requesting a declaration of unconstitutionality of items III and IV of article 12 of the Brazilian Civil Rights Framework for the Internet. These sections of the law deal with sanctions for temporary suspension of activities and prohibition on activities involving collection, storage, custody, and processing of records of personal data or communications by internet connection and application providers in which at least one of these acts occur in Brazilian territory, in the event of violation of certain provisions of the Brazilian Civil Rights Framework for the Internet. The record of the ADI is also pending with the reporting judge, who in this case is Justice Rosa Weber, and as of now there is no date set for the trial decision.