- Category: Tax
Aiming at counteracting tax planning used by multinationals that take advantage of the heterogeneity of the international system to reduce their overall global tax burden, the Organization for Economic Co-operation and Development (OECD) and the Group of 20 (the so-called G-20, which includes the 19 largest economies in the world and the European Union) started in 2013 the Base Erosion and Profit Shifting (BEPS) Project. As a member of the G-20, Brazil participated in the discussions and implemented some of the measures envisaged, but it still needs to move ahead in specific areas that are crucial to ensure legal certainty for taxpayers operating in Brazil and alignment with international practices.
The current stage of implementation of the measures proposed by the BEPS Project was the topic of the 71st Congress of the International Fiscal Association (IFA), held in Rio de Janeiro at the end of August.
The actions to be developed as part of the BEPS Project are organized into three pillars: (i) introducing coherence into domestic rules dealing with cross-border activities that affect the definition of taxable basis; (ii) reinforcing substantive requirements for structures implemented to follow existing international standards; and (iii) improving transparency, certainty, and predictability of the international system, with due collaboration between tax authorities.
OECD member countries supported the project because they are the most affected by tax base erosion practices. In the case of Brazil, however, the main motivation to cooperate with the BEPS Project is transparency and international exchange of information, given its different investment profile, more focused on attracting foreign capital, not exportation.
In addition, since the mid-1990s, the federal government has implemented Specific Anti-Avoidance Rules (SAARs), which are considered by the Brazilian Federal Revenue Service (RFB) as enough to mitigate the effects of the international tax planning that motivated the BEPS Project. These rules have been implemented in Brazil through legislative changes since 1998, based on the OECD’s recommendations in the Harmful Tax Competition Report.
Examples of SAARs adopted by Brazil are: taxation on worldwide income, transfer pricing rules, a list of low-tax jurisdictions (black list) and privileged tax regimes (grey list), increased rate of income tax on payments to low-tax jurisdictions, limitation on the deductibility of such payments, and thin capitalization rules, among others.
In the context of actions aimed at promoting transparency and the international exchange of information, the RFB issued rules to implement the following measures: (i) Country-by-Country Declaration (RFB Normative Ruling No. 1681/16); (ii) exchange of information regarding rulings (RFB Normative Ruling No. 1,689/17); and (iii) mandatory declaration of the beneficial owner of Brazilian legal entities (RFB Normative Ruling No. 1.634/16). Also focusing on international transparency, two agreements regarding the automatic exchange of financial information were signed by Brazil: the Foreign Account Tax Compliance Act (FATCA) with the United States and the Common Reporting Standard (CRS), within the framework of the Global Forum on Transparency and Exchange of Information for Tax Purposes.
With the above measures, the RFB will receive a substantial amount of information on the international structure of Brazilian taxpayers, which will change tax inspection proceedings. From this, the need to introduce measures that seek to align Brazilian rules with international standards will become even more evident, in order to avoid having international information and concepts used in inspections merely for tax collection purposes.
With regard to the pillars of substance and coherence, Brazil has hardly evolved, which may make it difficult for it to join the OECD in order to attract foreign investment. Unlike the RFB, the National Congress did not follow the developments of the BEPS Project and the need to undertake legislative changes in tax matters aiming at coherence and legal certainty.
Refinement of the rules on taxation of worldwide income, on the legal definition of substantive criteria, and on the possible introduction of a general anti-avoidance rule (internationally known as GAAR) are examples of legislative changes necessary for legal certainty in international tax matters.
The success of the BEPS Project in Brazil and the acceptance of Brazil by the select group of OECD members do not depend only on the RFB's efforts with respect to transparency and effective cooperation between tax authorities. For investors and Brazilian taxpayers, the OECD petition highlights Brazil’s need for aligning with international taxation standards, which should occur through legislative changes preceded by a broad debate with the private sector, aiming at legal certainty and greater competitiveness of Brazilian companies in the global context.
- Category: Labor and employment
The new Outsourcing Law (13,429/2017) allowed for the hiring of third parties for all types of services, including those related to a company’s core business activity,[i] but application of the law is raising questions. For example, does it apply to contracts in force and concluded in the past? Can the new law be applied in lawsuits discussing the legality or not of this type of outsourcing?
In August, Subsection 1 – the Panel Specialized in Individual Disputes (SDI-1) of the Superior Labor Court (TST) decided that the Outsourcing Law should not be applied to discussions regarding the legality of service contracts signed and terminated before the enactment of the new rules.
The TST understood that hiring workers through an intermediate company before the enactment of the new law should be considered illegal, thus establishing an employment relationship directly with the recipient of the services, according to the understanding embodied in Precedent No. 331 of the TST.[ii]
The reporting judge in that decision, Justice João Oreste Dalazen, understood that: "The entry into force of the new law, which has a profound impact on the consolidated case law of the TST, where it substantially altered the Temporary Worker Law, does not apply to employment relations governed and extinguished under the aegis of the old law, under penalty of affront to the acquired right of the employee to much more advantageous working conditions.”
The SDI-1's decision runs in a diametrically opposite direction from decisions rendered by lower courts. Recently, the judge of the 1st Labor Court of São Luiz (in the Brazilian State of Maranhão), in the record of Public Civil Action No. 0017582-53.2014.5.16.0001, understood that, with the advent of Law No. 13,429/2017, there is no longer any legal impediment to companies’ outsourcing their activities. The São Luiz labor judge based his decision on the grounds that, before the new law was in force, there was no legal rule to govern outsourcing. For that reason, the decisions rendered were based on Precedent No. 331 of the TST.
The judge of the 1st Labor Court of Uberlândia (in the Brazilian State of Minas Gerais) followed this same line of reasoning in Labor Claim No. 0011609-17.2015.5.03.0043, which applied the provisions of the Outsourcing Law on the argument that it governed in full the rules relating to outsourcing of services, and for this reason the provisions of Precedent No. 331 of the TST should not be applied any longer, including for cases prior to the advent of the new law.
Although the decision of the SDI-1 of the TST reveals a tendency of the court to settle the issue along these lines, the decisions issued by other judges and courts show that the debate is far from over, which still causes legal uncertainty for businesses.
Probably, the position on the subject will be consolidated and modulated by the Federal Supreme Court (STF), which has been receiving numerous questions about the constitutionality of the Outsourcing Law and of the TST's own Precedent No. 331. As an example, in the record of Action Against the Violation of a Constitutional Right (ADPF) No. 324, brought by the Brazilian Agribusiness Association (ABAG), many associations have joined as amici curiae, requesting that the STF modulate the effects of the application of the new Outsourcing Law in cases already in progress at the time of its enactment.
If the decision on ADPF No. 324 ultimately declares that Precedent No. 331 of the TST is unconstitutional, there is a good chance that the understanding regarding modulation of the new Outsourcing Law will be applied in cases that relate to events that occurred in the past.
For legal practitioners, there will be challenging work ahead for the new law to also be applied in cases initiated before the law regulated the matter.
- Category: Environmental
The Environmental Company of the State of São Paulo (Companhia Ambiental do Estado de São Paulo or “Cetesb”) has already been demanding the payment of the charge for the issuance of technical advice on intervention plans for the reuse of contaminated areas. The charge starts at 750 São Paulo State Fiscal Units (UFESPs), which is currently equivalent to R$ 18,802.50. Such amount must be added to the result of a formula that involves the factor of complexity of the sources of pollution provided for in State Decree No. 8.468/1976, and the total area of the undertaking.
For other requests for technical opinions, a charge of 70 UFESPs is set, which is currently equivalent to R$ 1,754.90. However, Cetesb has already submitted a proposal for revision of these amounts to the Governor of the State, which is still under review.
The new required amounts are the result of the modifications brought in by Board of Officers Decision No. 038/2017/C, published on February 10, 2017, which updated the procedures and guidelines for the management of contaminated areas within its competence. The new regulation repeals Board of Officers Decision No. 103/2007/C /E, published almost 10 years ago, but validated the actions related to the stages of management of contaminated areas that were still in force under the old regulation.
Adaptation of the procedures adopted by Cetesb had been expected since State Law No. 13,577/2009 and State Decree No. 59.263/2013 entered into force and currently govern the management of contaminated areas in the State.
Under the new regulation, Cetesb has transferred greater responsibility and autonomy to legal officers and consultants conducting the management of contaminated areas. In this sense, the technical opinions that were previously issued by the body for each new update in the process, which contemplated a detailed analysis of the procedures adopted, in addition to approvals and detailed recommendations, were replaced by simpler procedures of communication that were limited to the information of approval or disapproval of the measures presented. In case of non-approval, the response must be accompanied by a fine notice detailing all the non-compliances that led to the application of the penalty in order to allow the defendant to present an administrative defense or correct the non-compliances.
Requests for technical opinions became mandatory only at specific stages of the process, such as in the approval stage for an Intervention Plan for Reuse of Contaminated Areas or a Deactivation Plan.
Technical opinions may be requested by those responsible at other times in the process, however, in all cases, the request is subject to the payment of charges. In addition, as a result of the request for an opinion, if inconsistencies in the management of the contaminated area are identified, Cetesb's guideline is to fine the petitioner, which should also discourage the practice of consulting the body for each step of the procedure adopted, thereby incentivizing the hiring of additional consultants to give a second opinions on the technical measures taken. Cetesb’s board stated that it is in the process of publishing a technical instruction to regulate the administrative procedures for the application of administrative sanctions.
Board of Officers Decision No. 038/2017/C is divided into 3 annexes: (i) Procedure for the Protection of Soil and Groundwater Quality; (ii) Procedure for the Management of Contaminated Areas, which was already included in the previous board decision; and (iii) Guidelines for the Management of Contaminated Areas in the Scope of Environmental Licensing. The main aspects of each of these annexes are briefly explained below.
The first annex establishes that certain potentially polluting activities should implement a Preventive Monitoring Program for Soil and Groundwater Quality. This program must be submitted to Cetesb on the occasion of the application for the installation license or renewal of the operating license.
With regard to the second annex, Procedure for the Management of Contaminated Areas, that document brings in a series of modifications and a greater degree of detail when compared to the content of Board of Officers Decision No. 103/2007/C/E. According to Cetesb, this greater detail in the procedures should substantially reduce doubts on the part of technicians on how to conduct the processes of management of contaminated areas.
The Guidelines for the Management of Contaminated Areas in the Scope of Environmental Licensing (third annex) establish that the licensing of enterprises in suspected or potential areas of contamination should be preceded by a preliminary assessment and confirmatory investigation to be submitted to Cetesb. In turn, the concession of an installation license for expansion of activities located in areas with suspected or confirmed contamination is conditioned on compliance with the requirements established by Cetesb.
Also with regard to environmental licensing, the new board decision also established specific procedures for the management of contaminated areas in linear undertakings, such as highways, railroad transportation, pipelines in general, transmission lines, etc. In such cases, the environmental license applicant will be responsible for identifying and rehabilitating contaminated areas found in the course of the undertaking. Authorization for starting construction works and the issuance of the respective environmental licenses may be conditioned on meeting requirements determined by Cetesb.
In addition, in line with the changes promoted in the regulations related to contaminated areas, the State Secretariat for the Environment of São Paulo (SMA) has also issued two resolutions on the subject.
Resolution No. 10, of February 10, 2017, provides a list of potentially contaminating activities, which includes activities related to the chemical, textile, and oil sectors. Pursuant to Board of Officers Decision No. 038/2017/C, total or partial decommissioning and vacating of undertaking where these types of activities were carried out should be preceded by prior communication with Cetesb. In addition, conducting new activities in these areas should be preceded by a preliminary assessment and confirmatory investigation.
In turn, SMA Resolution No. 11, also of February 10, 2017, established the regions identified and delimited as a priority for the purpose of identifying contaminated areas. Currently, all four priority regions are located in the City of São Paulo. They are: Priority Region 1 - Barra Funda; Priority Region 2 - Mooca; Priority Region 3 - Chácara Santo Antônio; and Priority Region 4 - Jurubatuba. In these regions, active enterprises, if they are classified as potentially contaminating activities must carry out preliminary assessments and confirmatory investigations within 180 days from the notice by Cetesb. According to the Agency, this notice began in June through the call of 300 companies.
- Category: Infrastructure and energy
The São Paulo State Government forwarded to the State Legislature Draft Bill No. 659/2017, which provides for the corporate reorganization of Companhia de Saneamento Básico de São Paulo – SABESP (São Paulo Basic Sanitation Company).
Sent on August 3, 2017, the bill provides authorization for the state government to organize, pursuant to Law No. 6,404/1976 (the Brazilian Corporation Law) and Law No. 13,303/2016 (State-Owned Company´s Law), a corporation (controlling company) for the purpose of joining basic sanitation assets with other assets whose exploration is related to its principal purpose, namely, to:
- exercise shareholding control of SABESP, pursuant to article 116 of the Brazilian Corporation Law;
- hold ownership, manage, and explore assets of any nature, seeking to extend the reach and efficiency of basic sanitation services in the State of São Paulo;
- structure and implement fundraising operations to strengthen its capacity to execute strategies and actions;
- assist, by any appropriate legal means, the State of São Paulo and other states in the implementation of public policies;
- explore other business opportunities, inside and outside the State of São Paulo, with support from SABESP;
- use legally appropriate contractual and corporate arrangements to fulfill its corporate purpose, including the creation of wholly-owned subsidiaries, formation of consortia, and participation in the capital of other public or private companies.
If approved, Draft Bill 659/2017 will allow the state government to perform two administrative acts whose validity is, in principle, subordinated to prior discipline by specific law.
The first of these administrative acts consists of transferring ownership of the shares issued by SABESP. Basically, the state government is authorized to pay its shareholding in the capital of the controlling company by transferring the shares (issued by SABESP) that it holds, subject to the specific procedures set forth in the Brazilian Corporation Law. Approval of the acquisition of control of SABESP by the controlling company, however, requires execution of a management contract, in accordance with article 37, paragraph 8, of the Brazilian Constitution.
Under the management contract, the controlling company, SABESP, and the state government, represented by the Ministry of Finance, together with the Department of Sanitation and Water Resources, will reciprocally assume basic obligations that ensure the controlled companies efficient performance, based on principles of corporate governance that favor pragmatic, rather than merely bureaucratic, controls. In addition, the controlled companies are allowed a greater degree of managerial autonomy in consideration for the establishment of performance targets and evaluation and control criteria.
The second of those administrative acts, of greater regulatory complexity, relates to the sale or encumbrance, whatever the appropriate legal form, of the shares of the controlling company, or of the respective subscription rights, as well as the implementation of a corporate or business reorganization through merger or take-over involving other state or private companies. These transactions are subordinated to the requirement that the state government maintain ownership of the majority of the common shares issued by the controlling company.
Under the draft law, therefore, other shareholders, including private companies and state-owned companies from other spheres of government, may participate in the controlling company in a minority stake. Considering these requirements, the by-laws should observe the conditions and corporate structure set forth in article 13 of the State Owned Company´s Law.
The procedure for the admission of shareholders into the ownership structure of the controlling company, according to article 5, paragraph 1, of Draft Bill 659/2017, may occur by any legally applicable means, including through subscription of a capital increase, debt conversion, acquisition of shares, or subscription rights owned by the state government. In addition, it will be preceded by an economic evaluation that considers the peculiarities of the contractual and corporate arrangement, especially liquidity constraints. The selection of shareholders will take into account personal characteristics of potential minority shareholders, especially those arising from their economic potential, their business reputation, and their management capacity or knowledge of the basic sanitation sector.
A question that will arise relates to the prior bidding process among those potential minority shareholders of the controlling company. On that subject, article 28, paragraphs 3 and 4 of the State Owned Company´s Law provides that the bidding procedure is not applied to state-owned enterprises (i) when they carry out direct marketing, delivery, or execution of products or works specifically related to their respective corporate purpose, (ii) when the choice of the partner is associated with its individual characteristics, linked to business opportunities (training, acquisition or sale of shares, and extinction of partnerships and other forms of associations, corporations, and contractual relationships, and operations carried out in the capital markets, subject to the regulations by the respective competent authority) defined and specific, when the impossibility of a competitive procedure is justified. In principle, therefore, private and state-owned companies from other spheres of government, when the above scenarios are demonstrated and justified, could execute directly, that is, regardless of a bidding procedure, legal transactions that are intended to be included in the controlling company's corporate structure.
This inclusion will tend to be linked to the provision of capital, incorporation of funds into the business of the controlling company and SABESP itself, as well as compliance with other conditions for admission into the company, which will be approved by the Board of Directors of the State Privatization Program established by State Law No. 9,361/1996. The procedural rules provided for therein shall be applied, where applicable.
In order to strengthen corporate governance, the participation of private shareholders, pursuant to article 2, paragraph 4, of Draft Bill 659/2017, may involve the assignment of special economic or voting rights, by means of provisions in the by-laws or execution of agreements among the shareholders within the controlling company or SABESP. These corporate instruments may not restrict the controlling shareholder's ability to guide the controlling company in the pursuit of the interests that justified its creation.
In summary, Draft Bill 659/2017 can be understood as an alternative to the privatization processes that are being tested at the federal level, especially in the Investment Partnerships Program (PPI), invariably based on models of privatization in the strict sense (sale of shareholding control), and long-term management contracts (concessions, sub-concessions, and public-private partnerships). The joint effort of the state government and SABESP in the quest for widespread public access, efficiency, and expansion of the quality of services has the chance to be tested by a corporate structure that positions minority shareholders at a greater distance from cash flow generation, at the level of state-enterprise holding company, which would represent a true novelty in the basic sanitation sector.
- Category: Litigation
The 1973 Brazilian Code of Civil Procedure (“1973 CCP”) adopted as a general rule the service of process via mail, according to article 224, as amended by Law No. 8,710/93. This rule resulted from a change made in the previous system for communicating procedural acts, which provided for service of process through court official.
At the time of such change, the legislator was already concerned with the search for a more expeditious and effective form of procedure, considering that the service of process through a court official increased court costs, was slow, and gave way to abusive conduct on the part of the defendant.
However, on the grounds of guaranteeing greater certainty to the service of process procedure, the 1973 CCP expressly forbade the issuance of summons by mail in some scenarios set forth in article 222, including in collection suits (article 222, d). Thus, summons of debtors in collection suits founded on extrajudicially enforceable instruments could only happen through a court official, under penalty of nullity.
With the advent of the 2015 Brazilian Code of Civil Procedure (“2015 CCP”), this prohibition was excluded. According to article 247, service by mail will not be possible only in suits bought by the State; when the person to be served is incapable, an entity governed by public law, or resides in a place not reachable by regular mail; or when the plaintiff justifiably requests the summons in a different manner.
The absence of an express prohibition, however, was not sufficient to confirm the correctness of case-law authorizing service by mail in collection proceedings, insofar as paragraph 1 of article 889 of the 2015 CPP expressly refers to the writ of summons and to acts for attachment and appraisal of assets, which presuppose the participation of a court official at the time of service. This gives room for the understanding that article 889 provides for a specific type of service for collection suits, as an exception to the rule of article 247. In this regard, we cite the decision rendered by the Court of Appeals of São Paulo in interlocutory appeal No. 2175777-09.2016.8.26.0000.
More recently, the same court has held that service of process by mail is possible for collection suits, in view of the absence of a legal prohibition and because it is a measure aimed at protecting creditors. In addition, acts such as attachment and appraisal of assets can be performed at a later stage, after service (Interlocutory Appeal No. 2111105-55.2017.8.26.0000).
New restatement of law by the Federal Justice Council
The matter was the object of a deliberation by the First Working Committee on Civil Procedural Law, held by the Federal Justice Council on August 24 and 25, opportunity when it approved the Restatement of Law No. 85: "In collection suits grounded on extrajudicial or judicial instruments (article 515, Paragraph 1, of the CPC) summons by mail is acceptable.”
This solution to the issue seems to be the most suitable to the 2015 CPP, mainly because the new Code does not set forth an express prohibition on summons by mail in collection proceedings and values speed and efficiency in actions taken by the Judiciary. Effectiveness of judicial relief is guaranteed only when the winner receives everything to which it is entitled to under the law in the shortest possible time and at the lowest possible expense.
It is clear that summons by a court official, in addition to being more onerous on the party and the Judiciary, does not guarantee the desired speediness, especially when the opposing party resides in a different district. It is not uncommon to have delays of two weeks to one month for completing such acts as typing, sending, and completing a summons.
The modernization of the judicial procedural system also made the presence of a court official to cease a debtor’s asset unnecessary whereas online attachment is being widely used in collection proceedings. Electronic proceedings, in turn, allow for immediate knowledge of the entire content of the suit, without the need to explain to the debtor the consequences of not complying with the judicial order. In this sense, there is no obstacle to a full exercise of the defense rights by the defendant.
Organization in order not to miss deadlines
The new procedural rule, however, requires maximum attention to the receipt of judicial correspondence, especially by companies that receive a considerable volume of summonses and subpoenas for court proceedings at their headquarters and branches every day. Indeed, although many companies have established systems for receiving summonses and subpoenas by mail, this type of court correspondence is not immediately referred to the company’s legal department, even when measures relating to collection proceedings are urgently required.
As per article 829 of the 2015 CCP, debtors will be served and notified to pay the owned amounts within three days counted from the service. When this period has elapsed without payment, the debtor’s assets (financial, movable, non-movable) will be subject to attachment. In addition, a 50% reduction in the amount of the attorneys’ fees will only occur if this payment is made within such three-day period (article 827, Paragraph 1).
In this context, although the possibility of service by mail in collection proceedings is an improvement brought by the new Code aimed at ensuring the creditor’s payment , this change will require an even higher level of organization on the part of companies in receiving court correspondence in order to avoid asset attachments without them even being aware of the collection suit, and, in the cases where there is an intent to pay the debt, in order to secure that the companies do so within the legal timeframe that allows for the reduction of fees set forth in paragraph 1 of article 827 of the CPC.
- Category: Infrastructure and energy
The recovery of the Brazilian economy necessarily requires resumption of industrial activities and investments in large infrastructure projects. It is not difficult to conclude that an essential condition for this goal is the agile and direct access to financial resources, both in the traditional debt markets, led mainly by the National Economic and Social Development Bank (Banco Nacional de Desenvolvimento Econômico e Social) (BNDES), and in the capital market, which was essentially marked by issuances of infrastructure debentures (a type of notes or bonds) (Law No. 12.431/2011) over the last years.
It is precisely in this context, in which credit suppliers should be able to rely on the full support of the legal system to receive assets in security and extend credit to business, that an old debate has once again gained the market’s attention and caused concern: to what extent is a fiduciary security interest (specially a fiduciary assignment of credit rights) in fact protected and excluded from the judicial administration regulation? Wasn’t the purpose of these security interests to provide the creditor with a quick and secure means of recovering on the debt, thereby avoiding disputes and competition with debtors’ other creditors? So why is the system for these security interests being relativized, creating uncertainties for the creditors who should benefit from it as a result?
These questions arise from recent judicial decisions in which, instead of recognizing to the fiduciary creditor the right to fully foreclose on the assets received as collateral, even when the debtor is under judicial administration (as per paragraph 3 of article 49 of Law No. 11,101/05), some courts (including higher courts) have imposed limits on these claims.
In the case of fiduciary assignments of credit rights, which have become one of the most important forms of security interest in infrastructure projects in Brazil, the theory is that an increasing number of credits fiduciarily assigned should not, at least in their entirety, be given in security to satisfy creditors if, at the time of enforcement and foreclosure, the debtor is under judicial administration. The concern underlying this view is that the success of the debtors’ judicial administration will only be ensured, aiming to continue business and favor the interests of all other beneficiaries (including non-adjusting creditors), if the debtor can directly manage its assets and revenues. The enhancement of the full enforcement and foreclosure proceedings of the fiduciary assignment of credit rights would create, therefore, obstacles for debtors’ successful judicial administration.
This dispute between the interests of fiduciary creditors, on the one hand, and entrepreneurs and their respective projects and business, on the other, is more evident in cases of fiduciary assignment of credits (in market jargon, "bank account lock-in"), but that raises similar concerns in any type of fiduciary security interest. After all, the clear majority of the infrastructure projects developed in Brazil have all their assets and rights granted in fiduciary security interest to creditors. It is not for other reason that the first studies carried out by the Ministry of Finance in proposing reforms to Law No. 11,101/05 were aimed at extending the restrictions on fiduciary security interests in cases of debtor’s judicial administration, while not excluding essential prerogatives (such as the special foreclosure proceedings and order of priority in relation to other creditors) that place creditors in a favorable position in the event of actual liquidation of the debtor’s assets.
The topic is particularly relevant if considered the current changes in the credit policies of financial institutions, such as BNDES and the Investment Fund of the Compensation for Time of Service Fund (FI-FGTS), which actively participated in the financing and expansion of infrastructure projects in recent years, whether through the granting of long-term incentive financing, in the case of the former, or through investments through shareholdings or debentures, in the case of the latter.
Particularly with respect to BNDES, two points deserve special mention. The first concerns the new operating rules of the bank, which reduced the limits of subsidized participation (TJLP - Tax on Long-term Interest) and instituted criteria and qualifiers for concession of credit that were no longer supported by a sectoral development logic, but rather by the benefits that the projects funded would bring to society.
The second point is related to the replacement of the TJLP interest rate (historically adopted by BNDES) with the TLP (Long-Term Rate), recently created by Provisional Presidential Decree No. 777/2017 and which tends to approximate the interest rates used by BNDES to those applied elsewhere in the market.
These measures not only reinforce the original institutional role of BNDES as an inducer of sustainable development and reduce its high level of indebtedness, but also tend to provide greater opportunities for commercial banks and other financial instruments, which will act as alternative sources of financing for infrastructure projects in Brazil.
However, reforms in BNDES’s credit policies may fail to generate the desired results if other financial institutions are uncomfortable with the legislative and judicial direction of the fiduciary security interest system. The lack of certainty as to the manner of foreclosure and, above all, as to the moment of satisfaction of the debt (whether before or after judicial administration) may increase the risks that the much-needed financing for the structuring of infrastructure projects is not extended to entrepreneurs up to its full potential.
On the other hand, it is unfair not to recognize that relevant infrastructure projects to the national economy also need mechanisms to be protected from financial volatilities in order to ensure the continuity of their operations when the difficulties are merely fleeting rather than structural. In this context, at least in matters of public services, there are legal provisions in force pursuant to which foreclosure on security interests cannot jeopardize the continuity of the service. Some courts have even interpreted this provision as limiting the fiduciary assignment or the pledge of receivables to 30% of debtor’s revenues, on the assumption that the debtor needs at least 70% of its revenues to meet operating and maintenance expenses.
Because of the market concerns, legislative reform initiatives (and, consequently, judicial interpretations arising therefrom) should strike a balance between full satisfaction of debts and recovery of companies in financial distress. Excessive favoring of just one side will certainly not be beneficial to any of them in the long run, in addition to weakening the legal environment that could support the Brazilian economic development.
The questions that remain at this point should not therefore be whether we must regulate the fiduciary security interest system in a more balanced manner, but rather how we can do so.
- Category: Real estate
Brazil's Attorney-General has requested the full suspension of the law dealing, inter alia, with urban and rural land regularization (Law No. 13,465/2017), arising from Provisional Presidential Decree No. 759/2016 and addressed in the e-book "Inovação, celeridade e aumento de eficiência: o que muda no mercado imobiliário com a Lei nº 13.465/17" ["Innovation, speed, and increased efficiency: what changes in the real estate market with Law No. 13,465/17"]. The petition for an injunction was filed in Direct Action of Unconstitutionality ADI No. 5,771, filed on September 1.
The argument for requesting a declaration of unconstitutionality is that Law No. 13,465/17, (i) although converted into ordinary law, originates from a provisional presidential decree devoid of the constitutional requirements of relevance and urgency; (ii) it defies the right to housing, the right to property, the fulfillment of its social function, the protection of the environment, urban development policy, the duty to make the allocation of public and vacant lands compatible with agricultural policy and the National Plan for Agrarian Reform, all fundamental objectives of Brazil, the prohibition on retrocession, the existential minimum, the principle of proportionality, the provision that the payment of indemnities under the agrarian reform will be done via agrarian debt securities, the requirement of popular participation in municipal planning, and the constitutional rules of special urban and rural adverse possession; and (iii) it does not follow the jurisdiction constitutionally reserved for complementary laws and the jurisdiction of the Federal Government to legislate on Civil Procedure Law.
Is possible to affirm that the action has a clear focus on the provisions relating to agrarian reform and the discussions held during the process of conversion of Provisional Presidential Decree No. 759/2016 into law. These provisions are related to the possibility that the legislation may have the effect of facilitating the regularization of land occupancy based on illegal titles, also known as "landgrabbing."
In addition, although Law No. 13,465/2017 remains in full force until a final decision to the contrary is rendered, Brazil's Attorney-General Recommendation No. 1/2017, included in the record of the Direct Action of Unconstitutionality, states that the chairman of the National Institute for Colonization and Agrarian Reform (INCRA) and the Undersecretary of the Terra Legal Program, in general and from now on, should refrain from adopting the provisions of Law No. 13,465/2017 as a basis for determining the values of titles relating to rural property regularization.
- Category: Competition
Companies involved in asset acquisitions need to assess whether or not the transaction should be reported to Cade (the Brazilian antitrust agency). Recent decisions issued by the agency have provided very useful guidelines to conduct this evaluation, which is not always trivial, in view of the vague language of the Antitrust Law (Law No. 12,529/2011) and the lack of specific regulations.
The Antitrust Law that has been in force since 2012 improved Cade's merger control system, including listing the scenarios that constitute economic concentration, such as acquisition of shares or assets and the execution of joint ventures, consortia, or association agreements.
In order to give greater legal certainty to companies, Cade published Resolutions No. 2/2012 and No. 17/2016, which clarify, respectively, in which situations acquisitions of minority shareholdings and associative agreements should be reported.
However, Cade has not yet regulated the scope of the legal rule on the acquisition of assets (Article 90, II, of the Antitrust Law), according to which there is a duty to file the acquisition of control or parts of an undertaking through the acquisition of tangible or intangible assets, by contract or by any other means or form.
Questions on whether the assets are competitively significant for the transaction to merit merger review often arise, especially when dealing with acquisitions of real estate or limited assets.
Since 2012, Cade has reviewed more than 200 merger filings on a vast array of asset deals: assets that comprised a production line; intellectual property rights; mining rights; customer portfolio; communication towers; concession contracts for oil and gas exploration; movable property such as vehicles, storage tanks and vaporizers; urban or rural properties such as land, commercial buildings, quarries, warehouses, planted forests, etc.
In almost all of these cases, Cade understood that filing was indeed mandatory, without elaborating on the reasons for such conclusions.
However, in three recent precedents, in which the parties argued that there was no economic concentration and asked for dismissal of the transactions, Cade provided very useful guidance for assessing the need to file acquisitions of assets.
In one of them, which dealt with the acquisition of land with civil construction, which could be adapted for any purpose, Cade expressed the understanding that acquisition of real estate assets only constitutes concentration when the real estate is a productive asset or an asset that is minimally related to the economic activity to be conducted there by the buyer. In an operation involving the acquisition of a less than 5% stake in real estate assets that make up a shopping mall by a company that already owned more than 51% of these assets and, in addition, acted as administrator of the development, Cade understood that the transaction could be assimilated to a shareholding acquisition since the enterprise resembled a business company. Thus, Cade applied by analogy one of the rules found in Resolution No. 2/2012, according to which it is not mandatory to file with Cade the acquisition of equity interests by the shareholder that already has sole control. In both cases, Cade agreed with the parties and concluded that the transactions were not reportable.
In the third precedent, Cade disagreed with the parties and understood that the acquisition of isolated assets (concrete-mix trucks) relevant to the seller's economic activity, but which had never been used by it, constituted concentration because such assets represented an increase in the buyer's productive capacity. In a conservative and questionable decision, Cade concluded that the purchase of trucks by a cement manufacturer from a competitor) was different from the purchase of trucks from a dealer.
In such cases, therefore, Cade has indicated when an asset acquisition should be subject to its review, provided that the parties meet the legal turnover criteria: when the transferred assets are essential to the activities of the parties; have a minimum relation with the economic activity to be carried out by the buyer; or represent acquisition or increase of productive capacity for the buyer.
In addition, the agency indicated that in some cases it is possible to equate partial acquisitions of assets with acquisitions of minority shareholdings and to guide the analysis based on CADE’s rules established in Resolution No. 2/2012.
- Category: Labor and employment
Among its main pillars, the Labor Reform sought to a) clarify controversies regarding the concept of time at the disposal of the employer; b) give greater autonomy to workers; c) debureaucratize some mandatory procedures for companies; and d) strengthen and encourage collective bargaining, the much-publicized principle of "negotiations over legislative mandates”.
With respect to the first point, there was much controversy over what were considered working hours, due to the broad concept of "time at the disposal of the employer", brought in by article 4 of the Consolidated Labor Laws - CLT. There was no clarity about some activities, such as breakfast offered by companies and the time spent changing uniforms.
The new legislation narrowed down the concept of time at the disposal of the employer, stating that minutes spent on activities carried out at the company's premises, at the employee's personal option, are not a part of working hours. Breakfast and changing uniforms will be a part of work hours only if employees are unable to perform these activities at home. That is to say, if there are work meetings during breakfast or uniforms require special hygiene, for example, these periods will be computed as a part of employees' working hours. If not, then they are not.
Regarding the autonomy of workers, the second pillar of the Labor Reform, the new legislation stated that employees in general are able to negotiate with employers with respect to some issues relating to their day to day work. And it identified a select group of employees, namely those with a university education and a salary greater than two times the ceiling of the highest Social Security benefit level, as being able to negotiate a more comprehensive level of working conditions, given their greater discernment and higher level of education.
This is a recognition of the maturity of employment relations, which removes the presumption of invalidity attributed to agreements and commitments made individually between workers and employers. This recognition relates mainly to issues of working hours, authorizing, for example, individual negotiation of monthly compensation schemes and semiannual or annual, as the case may be, compensatory hours banking.
With regard to the debureaucratization of procedures, the third pillar of the Reform, it is worth highlighting the computerized delivery of documents related to unemployment insurance and FGTS account activity and the end of the requirement of ratification of terminations of employment contracts by the trade union of the professional category.
The application of the new rules to the daily life of workers and employers based on the three abovementioned pillars of the Labor Reform depends on a careful evaluation of the collective rules that guide this relationship within the professional and economic categories or within the scope of the companies.
This is because the fourth pillar of the new legislation seeks to encourage collective bargaining. And the principle of negotiations over legislative mandates is not restricted only to contractual provisions that seek to relax or modernize employment relations. It also extends to those contractual provisions that aim to bureaucratize them or make them more antiquated, including to apply the previous labor law.
A good number of collective bargaining agreements contain contractual provisions that repeat texts of law or recognize concepts of limitations on individual negotiations that were then integrated into employment relations. If these conditions are integrated into collective rules, they will probably be understood as prevailing, even if they are at odds with what was sought with the Labor Reform. Hence, negotiations over legislative mandates.
Below we will cite some contractual provisions commonly identified in collective bargaining agreements that may contradict the new labor legislation and prevail over it:
- "The companies undertake to ratify with the union terminations of employment contracts with their employees who have more than one (1) year of service."
- "Companies may establish an hours bank, provided that it is approved by a general meeting of employees."
- "Regardless of whether public transport is available or the workplace is easily accessible, commuting time is set at one hour per day, which will be computed into the employees’ working hours."
- "The company will provide breakfast to the first shift, the time for which is set by the parties at ten (10) minutes a day and will be a part of the employees’ working hours."
- “Companies in the economic category may only outsource activities not related to the core business, and the use of outsourced labor is prohibited for activities relating to the core business.”
- “Vacation will be granted, by the act of the employer, in a single period. Only in exceptional cases shall vacations be dividied into two (2) separate periods, one of which shall always be equal to or greater than ten (10) days.”
- “The minimum limit of six (6) hours per day and thirty-six (36) hours of work per week is established for employees of companies of the economic category."
- "In any continuous work, whose duration exceeds six (6) hours, it is mandatory to grant a break of at least one (1) hour. If the employee does not fully enjoy the break, he shall be entitled to one (1) hour of overtime."
- "The provisions of this collective agreement are a part of individual employment contracts and can only be modified or abolished through collective bargaining."
Thus, decisions such as establishing individual hours bank agreements for semiannual hours or not considering breakfast as being within the employees' workday can generate undesirable labor liabilities if the agreement or collective bargaining agreement requires different behavior.
For this reason, it is essential that employers' unions and employers carefully analyze their collective rules to find any conflicts with the new text of the law and identify opportunities to revise the contractual provisions in order to adapt them to the new reality brought about by the Labor Reform.
- Category: Banking, insurance and finance
On August 30, the Central Bank of Brazil (Bacen) published Public Consultation Notice No. 55/2017 to receive comments on a proposed resolution on the establishment and operation of two new types of financial institutions specialized in loan transactions through the medium of an electronic platform: direct lending companies (SCD) and interpersonal lending companies (SEP). The new regulation is expected to be issued by early 2018.
The rule is part of the BC+ Agenda, the “Cheaper Credit" pillar, and aims to increase legal certainty in the industry, increase competition among financial institutions, and broaden opportunities for access to the credit market. In addition, it is aimed at financial startups that intensively employ technology in the credit market, known as credit fintechs. We will cover in this article the main characteristics and the most relevant activities that can be conducted by these two new types of financial institutions.
First of all, SCDs will have the purpose of lending exclusively through an electronic platform and with their own equity. Unlike banks, SCDs will not be able to raise funds from the public. However, they may be public companies and, thus, raise funds through the offering of shares in the capital markets.
SCDs may also provide the following services:
- credit analysis for third parties;
- acting as an agent of insurance brokers in the distribution of insurance related to loan transactions through electronic platforms, under the terms of the regulations in force (for this specific activity, it seems to us that the SCDs would act as insurance representatives rather than as agents, since, according to the Federal Insurance Commissioner (SUSEP) regulations, only individuals can act as brokers' agents); and
- issuance of electronic money, in accordance with the regulations in force. By allowing them to act as electronic money issuing payment institutions, the new rule seems to enable funds borrowed to be disbursed into payment accounts managed by the SCDs themselves.
SEPs, in turn, will have the purpose of conducting interpersonal loans between people through an electronic platform, while being forbidden from conducting transactions with their own resources or any type of retention of risks.
The notice defines interpersonal loans through electronic platforms as intermediation operations in which financial resources collected from creditors (individuals or legal entities, as well as investment funds) are directed to debtors (individuals or legal entities, resident or domiciled in Brazil) after negotiation on an electronic platform. It should be noted, therefore, that this is the legal framework that is intended to be given to companies that, through an electronic platform, enable the conducting of loans currently known as peer-to-peer, except that, in the manner set forth in the notice, the SEPs will grant or endorse the lending instrument (that is to say, it is not directly between creditor and borrower).
In addition to interpersonal lending transactions, SEPs may also provide the following services: (i) credit analysis for clients and third parties; (ii) collection relating to interpersonal lending transactions; (iii) acting as an agent of insurance brokers in the distribution of insurance related to their loan transactions, in accordance with the regulations in force; and (iv) issuance of electronic money, in accordance with the regulations in force.
Interpersonal lending transactions shall be processed in the following successive steps: (i) unequivocal manifestation of consent by potential creditors and debtors, in an electronic platform, to enter into the loan transaction; (ii) availability of funds by creditors; (iii) issuance or conclusion of the instrument evidencing the loan (which may be issued by SEPs or in in their name, or entered into with the SEP as a party); (iv) assignment or endorsement to the creditor of the instrument evidencing the loan (assignment or endorsement by SEPs without co-obligation or any type of guarantee and immediately after the issuance or conclusion of the instrument representing the loan) or the instrument evidencing it; and (v) transfer of the funds to the debtors by the SEP within one business day of their availability.
The notice also provides that SEPs should segregate their funds from the funds of creditors and debtors. In addition, SEPs must establish limits on amounts and quantities (for creditors and debtors) relating to interpersonal lending transactions.
In this sense, prior to finalization of the loan, SEPs shall ensure that the total exposure of a single creditor, considering the sum of the debt balances of the transactions carried out through SEPs, is a maximum of R$ 50,000 (creditors who are qualified investors, as defined in the regulations of the Brazilian Securities and Exchange Commission, will not be subject to this ceiling). This limit must be verified by SEPs through a formal declaration by the creditor and consultation of the Credit Information System of the Central Bank (SCR).
According to the notice, SEPs are obliged to provide information to their clients and users about the nature and complexity of the contractual transactions and services offered, in clear and objective language, in order to allow for 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 on the institution's website, accessible on the homepage, as well as in other channels of access to the electronic platform. It should also be included contracts, advertising, and publicity materials and other documents intended for customers and users. In addition, the information should include a warning, with emphasis, that interpersonal lending transactions constitute risky investments, without any guarantee from the Credit Guarantee Fund (FGC).
Both SCDs and the SEPs will not be able to raise funds from the public and must be formed as a corporation, publicly-held or privately-held, and must also permanently observe the minimum limit of R$ 1,000,000 for paid-in capital and liquid assets. In addition, the two types of institutions may be controlled by Brazilian or foreign investment funds.
Interested parties will be able to access the notice on the Bacen website (www.bcb.gov.br) and send suggestions and comments by November 17, 2017, through (i) the link contained in the notice published on the Bacen electronic address; (ii) the e-mail address denor
- Category: Tax
- Category: Infrastructure and energy
On July 25, Brazil’s federal government sent to the National Congress three provisional presidential decrees that reform the mining sector in Brazil. The proposal is to adopt a model that adjusts the reality of this industry in Brazil to the current global economic context and to stimulate revitalization of the sector, seeking greater competitiveness and sharing of mining proceeds. Even so, the initiative has been subject to harsh criticism, especially regarding its burdening of an industry that has been suffering economic slowdown in recent years.
In previous years, the federal government, still under the presidency of Dilma Rousseff, expressed interest in reformulating the regulatory framework of the industry, considering it outdated and unable to leverage the mineralogical potential of Brazil. However, without a consensus on a new model accepted by the industry, the measure did not move forward.
Under the leadership of President Temer, the federal government sought to resume part of the reforms. In this context, provisional presidential decrees nos. 789/17, 790/17, and 791/17 address different issues, seeking to segment the reform and dilute the debates in the National Congress. The aim is to avoid discussions on controversial points from delaying approval of less controversial issues.
By their very nature, provisional presidential decrees must be immediately submitted to the National Congress in order to be converted, or not, into law. This process must occur within 60 days, extendable for the same period. If the matter is not reviewed within 45 days of its submission, the provisional presidential decree enters into an urgency regime, overriding all legislative decisions of the legislative body where it is pending until it is voted on.
At the moment, the three provisional presidential decrees are under review by mixed committees. They should be in force until September 29, 2017 (and are renewable for another 60 days), but with the start of the urgency regime on September 15, 2017.
We seek to summarize below the changes proposed by the federal government that modify more sharply the previous rules and the panorama of the industry.
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- Category: Infrastructure and energy
After a severe financial crisis, the shareholders of the concessionaire Aeroportos Brasil Viracopos S.A. (ABV) decided to request the rebidding of the concession contract for the Viracopos Airport based on Law No. 13,488/2017. This will be the first case of this type and opens up a pathway for others that may come to light because of Brazil’s difficult political and economic situation.
In addition to lower-than-expected passenger demand and reduced freight rates, Brazil’s political and economic situation is among the factors that most contributed to Viracopos's "friendly return" decision. The main shareholders of the concessionaire, UTC Engenharia and Triunfo Participações e Investimentos, have filed, respectively, requests for court and out-of-court reorganization, reported to the market by Material Facts published on July 17 (UTC) and July 22, 2017 (Triunfo). ABV pointed to some data indicating the principal difficulties faced by the operator of Viracopos in a press release issued on July 28, 2017, the date of the extraordinary general meeting at which the decision was made to request the rebidding. The demand for 2016, with an initial forecast of approximately 18 million passengers, was much lower than expected, not reaching the 10 million mark. Freight movement was 40% lower than expected, according to a survey by ABV. The concessionaire also indicates a loss due to the decrease in freight transportation rates, which went from R$ 0.50 to R$ 0.08 per kilogram of merchandise. This cut had a strong negative impact on revenues, which, according to ABV, was composed mainly of these rates (about 60%). It is in the troubled economic context described above that the provisions of the newly created Law No. 13,488/17, which establishes general guidelines for the extension and rebidding of partnership agreements for the road, railway, and airport sectors, will be applied. Pursuant to article 2 of the law, rebidding will depend on prior qualification of the venture in the Investment Partnership Program (PPI). The concept of rebidding is linked to the return of the project and to the amicable termination of the contract, as well as the execution of a new agreement and new conditions that will be signed with new contractors through another bidding process. What is the rebidding process like? The first step in initiating the process of rebidding is to apply to the Council for the Investment Partnership Program (CPPI), which is responsible for qualifying the public venture, in accordance with article 2 of the law. The National Civil Aviation Agency (ANAC), as the granting authority, will be in charge of verifying the relevance, necessity, and reasonableness of the rebidding process, based on the justifications and technical elements that must be submitted by the concessionaire. If Anac chooses to accept the request, the measures relating to the initiation or continuation of forfeiture proceedings will be suspended. Rebidding is also conditional on the execution of an addendum on the irrevocable and irreversible adhesion of the concessionaire to the rebidding and the subsequent amicable termination of the original agreement, pursuant to item I of article 15 of Law No. 13,488/17. The same article also provides for the suspension of investment obligations, as of the date of execution of the addendum, and establishes that the current contractor and the granting authority will need to agree on the minimum conditions of the services that must be provided pending execution of a new concession agreement. The law also provides that Anac will be responsible for preparing a new technical study to be used in the new bidding process, which prohibits the participation of the current contractor (in the case of Viracopos, ABV). If there are no interested parties or if the rebidding process is not completed within 24 months (counting from the date of qualification determined by article 2 of the law), Anac shall take the necessary measures to continue or establish a forfeiture process.
- Category: Labor and employment
The entry into force of Law No. 13,467/2017 (Labor Reform) brings to light a debate already widespread in the US, but very little discussed here in Brazil: the application and enforceability of the clawback clause in employment contracts for executives at publicly traded corporations.
After the economic crises of the last two decades, especially after the collapse of the giant Enron in 2001, governments around the world have begun to devote more attention to the management practices of top executives with the power to impact on domestic and international markets. In response to this scenario, the US has issued a series of laws aimed at curbing deviations by these agents: in 2002, the Sarbanes-Oxley Act was passed; in 2008 and 2009, respectively, the Emergency Economic Stabilization Act (EESA) and the American Recovery and Reinvestment Act (ARRA); and finally, in 2010, after the 2008 crisis, the US government approved the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Among other features, these laws regulate the so-called clawback clause. This provision requires restitution of bonuses and/or financial compensation received in advance by executives who make up the company's management in cases in which accounting restatements occur as a result of misunderstandings or fraud, even if misconduct/mismanagement is not demonstrated. In the US, clawback clause has become quite common in recent years, especially after the entry into force of the Dodd-Frank Act. According to author Sam Sharp, "A recent study by Equilar, a proxy research firm, found that approximately 73% of Fortune 100 companies had clawback policies as of 2009, compared to 18% of those companies in 2006." In Brazil, this trend was evident with the entry into force of the following regulatory acts: (i) Resolution No. 3,921/2010, issued by the Central Bank of Brazil (BACEN); and (ii) Normative Instruction No. 480/2009, issued by the Brazilian Exchange Commission (CVM) and subsequent amendments. The aforementioned standards clearly demonstrate a concern with the compensation of executives tied to risk taking. However, there is still no consistent debate on the implementation of the clawback provisions for listed companies. It seems to us, however, that BACEN Resolution No. 3,921 opened an important door for the introduction of the clawback clause in Brazil, although only for financial institutions. Now, the Labor Reform has further cemented the possibility of including this type of contractual provision in executive contracts in Brazil. This is because one could argue that, due to the fact that these high-level individuals are regular employees of the company, they would automatically be considered in a weaker bargaining position and without negotiating power (autonomy of the will). Thus, clawback provisions in contracts with employees could be taken as abusive and therefore unenforceable. As a means of avoiding this understanding, the argument presented was more along the lines of principle by virtue of the applicability of the principle of pacta sunt servanda and the principle of autonomy of will. The argument in this case would be the impossibility of uncritically accepting that the rules adopted in 1943, when the Brazilian Labor Code (CLT) were enacted, may be be applied in the same way today, without a contextualized analysis. The reality of employment relationships has become more complex and the same has occurred with the standards and qualifications of the Brazilian workforce. Today senior executives have extensive CVs, national and international work history, vast professional experience, and a rich academic background. Obviously, they cannot be equated with truly weaker employees who often have not even completed basic education, precisely the category of employees for whom the CLT’s rules were designed, with a few exceptions. Following this line of reasoning, the Labor Reform changed the sole paragraph of article 444 of the CLT to include expressly that the negotiation of the terms of the employment agreement is free (insofar as one does not contravene labor protection laws, collective bargaining agreements, and decisions of competent authorities) for those employees holding a higher education degree and who receives a monthly salary equal to or greater than twice the maximum benefit limit of the General Social Security System, which today amounts to R$ 11,062.62. Therefore, the labor rule that will be in effect as of November 11, 2017, is that employees deemed to be in a “stronger" position will have unrestricted autonomy to negotiate and renegotiate all clauses of their contract. In this sense, there is no longer any impediment to inclusion of the clawback clause in executives' employment contracts in Brazil. As a practical effect of this change, companies may require the return of incentives (bonuses, PLR, stock options, etc.) advanced to executives to offset significant and measurable losses to the company due to misconduct in the management of the business. For proven willful misconduct, there is an express provision in the CLT regarding the possibility of reimbursement from the employee. This procedure is similar to the rules set forth in article 462, paragraph 1 of the CLT. More precisely, the difference between the discount set forth in that article and the effects provided in the clawback is merely practical, since both mechanisms have the same substantive nature. Instead of clawing back previous incentives advanced to executives, the article in the CLT provides for discounts from future compensation (including bonuses, if eligible) for losses caused. The essence, however, is the same: recovering pecuniary damages caused by employees by reason of misconduct, whether or not willful. Given the subtle difference between the two systems, with the inclusion of clawbacks in employment contracts, it will be possible to obtain reimbursement for losses even from those managers who have already been dismissed if it is proven that they did not fulfill their duty of care. In the case of the discounts set forth in article 462, paragraph 1, of the CLT, discounts could receive successive treatment and, in theory, could occur until the termination of the contract, under the terms of article 477, paragraph 5 of the CLT. With the Labor Reform, one finds that any limitation on amounts (currently it can be argued that discounts are limited to the value of an employee's compensation, per interpretation of article 477, paragraph 5 of the CLT) and as of the moment of the demand for reimbursement (up to contractual termination) it will undergo a major transformation, since “stronger" employees will be able to individually negotiate the terms and conditions of their employment contracts. Therefore, the discounts provided for in article 462, paragraph 1 of the CLT or the provisions of the clawback itself may be freely negotiated between the companies and their executives. Considering the substantial incentives granted to these employees, which are linked to the company's supposed financial success but only returned on the grounds of commission of error/fraud in the financial statements, there is no way of allowing any offsets/discounts to be restricted to the period of employment and subject to the limitations imposed by the CLT. Thus, the employer is granted the right to recover from executives who have acted to the detriment of the company, in an erroneous or intentional manner the exact amounts advanced by it and subsequently associated with errors or fraud committed by them. This applies both during employment and after termination, a more common situation since the conduct can lead to dismissal for cause immediately.
- Category: Infrastructure and energy
The Brazilian Electric Energy Agency – ANEEL is holding a reserve energy contract cancellation auction, or reverse auction, on August 28, 2017, at 10:00 am, in accordance with the rules of the competitive mechanism announcement published at the end of July. Participation in the auction is a good alternative for eligible generation projects that fail to ensure their deployment viability.
The auction has been discussed for some months as an alternative to (i) excess contracting of distributors, in view of the forecast of an average structural surplus of 8.4 GW energy in 2018, and for (ii) the high number of projects with significant delay in deployment, which causes uncertainty as to their viability.
The eligible projects were disclosed by ANEEL through Order No. 2,254, dated July 26, 2017, totaling 4,518.5 MW of power and 1,600.60 average contracted MW. As set forth in Decree No. 9,019/2017, which created the competitive mechanism, these projects will allow for the contract cancellation of reserve energy from wind, hydro, and solar photovoltaic sources.
The criterion to define the winners of the auction will consider the price negotiated in the respective reserve auctions, which represents the advantage of the contract cancellation in relation to the performance of the respective contracts, and the payment of a premium offered by the bidders in the mechanism.
Participation in the auction is subject to acceptance of the conditions set out in the bid notice and its exhibits, including the impossibility for winners to participate in two reserve auctions subsequent to the mechanism (item 12.4 of the notice and exhibit III).
The bidding phase of the auction should take place in two steps: the initial step and the continuous step. For the first, bidders will be able to submit a single bid for each project, equal to or greater than the initial product premium (R $ 33.68/MWh for solar, wind, and hydro products). The ranking will be in descending order of the Premium Classification Index - ICP (corresponding to the bid prize offered plus the contracted sale price).
In the second step, those who offered a premium equal to or greater than the initial premium of the product will participate. In the continuous step, bidders may bid incrementally for a defined period in the system and will also be ranked in descending order of ICP. In the event of a tie in the final bids, a tie-break shall be conducted at the highest contractual price, followed by the criterion of greater contracted quantity.
The bid notice also defined the proposal guarantees to be provided by the bidders in the contract cancellation auction. Quite similar to the guarantee already provided for in the auctions to contract energy in the regulated market spearheaded by ANEEL, the proposal guarantee has as its main features:
- Types of collateral in money, performance bond, bank guarantee, or public debt securities;
- It should be provided via the Internet;
- It should have the Electric Energy Trading Chamber (Câmara de Comercialização de Energia Elétrica ) as beneficiary;
- It should be valid until December 20, 2017; and
- The amounts should correspond to R$ 2,000 for each lot of energy that can be contracted, with each lot of energy = 0.01 average MW.
In the event that the winning bidder desists from any of the obligations assumed in the contract cancellation auction, in addition to the execution of the proposal guarantee, a penalty of temporary suspension of the right to contract or participate in bids spearheaded by ANEEL for a period of two years shall be applied, and this penalty will also extend to direct and indirect controlling shareholders, subsidiaries, and controlled companies with a stake equal to or greater than 5%.
Agents that decommission energy in the auction will have their obligation to performance under their contracts released and will be spared the penalties provided in the reserve energy purchase and sale contract. In turn, they will be unable to participate in the next two auctions contracting for reserve energy.
Although the consequences of contract cancellation may sound discouraging to taking part in the auction, it is important to note that the maintenance of reserve power contracts that are behind schedule may result in the application of even heavier penalties, such as execution on the guarantee of due performance and suspension of the right to contract or participate in auctions held by ANEEL for two years by agents, controlling shareholders, and affiliates, among others.
- Category: Restructuring and insolvency
From January to June of this year, 829 applications for bankruptcy and 685 applications for judicial reorganization were filed for Brazilian companies, according to Serasa Experian. The high numbers reflect Brazil’s unstable economic situation and overwhelm the Judiciary with complex bankruptcy proceedings due to the huge number of participants and the diversity of legal issues involved. To make the situation worse, there are few judicial districts where there are courts specialized in the subject matter, which further hinders the speed and effectiveness of procedures that, as a rule, are already time consuming.
To speed up the resolution of conflicts between creditors and debtors or other issues related to insolvency proceedings, the courts have authorized or ordered the use of alternative methods such as conciliation, mediation, and arbitration. This trend follows guidance No. 45 approved in the First Conference on the Prevention and Extrajudicial Settlement of Litigation in 2016 and authorizes the use of the aforementioned methods for resolving conflicts in bankruptcy and judicial reorganization proceedings.
Very recently, conciliation was authorized by the Judiciary of the State of São Paulo to resolve disputes over claims in judicial reorganization proceedings. Rather than opening an ancillary proceeding to litigate the amount of the debt, companies will be able to rely on conciliation sessions to try to reach an agreement directly with creditors. It is estimated that this represents a time savings of 6 months to 1 year.
Inepar, a company in the process of judicial reorganization since 2015, was a pioneer in adhering to this method in negotiating directly with the creditors that submitted a credit divergence. In total, 28 agreements were executed with unsecured creditors in the first joint effort organized by the company, according to the news piece published by the newspaper "Valor Econômico" on July 31 of this year.
In addition to contributing to speed up the process, the measure saves the company's financial resources, which may be better allocated to improving its financial health and paying creditors.
Governed by Law No. 13,404/15, mediation has also been explored in bankruptcy and judicial reorganization proceedings, as in the Oi case. Even if it is criticized for not abiding by the arbitration clause in the company's corporate documentation, the Superior Court of Justice – STJ has already recognized that this alternative means can be used to resolve conflicts between shareholders (Conflict of Jurisdiction No. 148,728/RJ). This procedure was also elected to litigate the divergence between the parties with respect to the competition of creditors for the debts of Anatel and the claims of smaller unsecured creditors (up to R$ 50,000), which is an extremely high number and may hamper, even in operational terms, the unfolding of a future general meeting of creditors that will deliberate on the reorganization plan. Mediation is still being used to resolve disputes involving essential services (undersea cables) provided by a significant supplier whose contract has a take or pay clause.
Regarding the issue of unsecured creditors with claims of up to R$ 50,000, mediation was suspended by a preliminary decision of the 8th Civil Chamber of the Court of Appeals of the State of Rio de Janeiro (TJ-RJ), issued with respect to interlocutory appeal No. 0033161-06.2017.8.19.0000, on the grounds that it could entail payment before the vote on the reorganization plan.
The mediation method consists of "technical activity performed by an impartial third party without decision-making power, who, chosen or accepted by the parties, helps them and encourages them to identify or develop consensual solutions to the controversy" (article 1, sole paragraph of Law No. 13,140/15). It is compatible with bankruptcy and judicial reorganization proceedings, since the subject-matter of mediation may be related to alienable rights or inalienable rights but which allow for settlements, under the terms of article 3 of Law No. 13,140/15.
In the same manner, arbitration is perfectly applicable to bankruptcy and judicial reorganization proceedings. Despite the collective interest in such procedures, the situations debated in these suits are contractual and deal with alienable rights that are amenable and subject to arbitration, by the free consent of the parties.
In this sense, there are those who argue, such as José Emílio Nunes Pinto,[1] that arbitration agreements can be proposed even in judicial reorganization plans for the resolution of certain matters that relate to equity or are of an alienable nature. As is known, this practice has not yet been adopted, but the Judiciary has recognized the validity of arbitration agreements and has allowed companies in judicial reorganization or bankruptcy to use this extrajudicial method of dispute resolution.
This was the understanding of the STJ in precautionary measure No. 14,295/SP, as taken from the bankruptcy case of Interclínicas Planos de Saúde, and was also the position of the TJ-SP in the bankruptcy of the Diagrama Construtora, in interlocutory appeal No. 531.020.4/3-00. The situation is dealt with in guideline No. 6 of the First Conference on the Prevention and Extrajudicial Settlement of Litigation: "The granting of judicial reorganization or a decree of bankruptcy does not authorize the judicial trustee to refuse effect to arbitration agreements, does not preclude the initiation of an arbitral proceeding, nor does it suspend such a proceeding."
It is therefore hoped that the methods of conciliation, mediation, and arbitration for resolving disputes involving bankruptcy and judicial reorganization will increasingly be used to replace the numerous ancillary proceedings introduced in the course of suits of this nature and will help resolve gridlock related to alienable patrimonial claims.