- Category: Real estate
In lawsuits relating to rural properties, the Public Registers Law (article 225, paragraph 3) determines that judges must require precise identification of the characteristics, boundaries, and location of the property by the parties, which is known as geo-referencing. This modern surveying technique considers the coordinates of the vertices, measured with the help of GPS and magnetic coordinates by satellite (UTM) in order to specify the area, shape, and location of a rural property.
From a legal point of view, in order for a rural property to be considered geo-referenced, it is not enough to merely comply with the technical requirements for surveying points and measurements, namely: (i) a technical survey in the field conducted by a professional qualified with the aid of GPS; (ii) preparation of a descriptive memorial; and (iii) payment of the respective Technical Responsibility Note (ART). Rural property will only be considered geo-referenced when its descriptive memorial is certified by INCRA (Brazilian Institute of Colonization and Agrarian Reform) and annotated in the title and enrolment certificate of the property with the Real Estate Registry Office. What guarantees security in the system is precisely the certification of INCRA, because it is the responsibility of the agency to verify whether there are overlapping areas between the property for which one seeks certification and other rural properties already certified or in the process of certification. The objective is to avoid the issuance of separate titles for the same territorial area (duplicate title and enrolment certificates). The requirement of geo-referencing was introduced into the Brazilian legal system by Federal Law No. 10,267/2001. The objective was to try to guarantee greater legal certainty to rural properties, thereby standardizing technical parameters and objectives in identifying, characterizing, and locating rural properties. These parameters are in accordance with the recording principle of the objective specialty. They avoid descriptions and precarious characterizations, which previously prevented correct verification of the location of the property, and this helps to reduce Brazilian land ownership problems. According to current legislation, all rural properties with an area of 100 ha or more must necessarily have geo-referencing. In order to enforce this obligation, the law provides for geo-referencing as an essential requirement in two moments: (i) with the Real Estate Registry Office in cases of division, parceling, gathering, or any situation involving voluntary transfer of rural properties, subject to legal deadlines of enforceability (grace periods); and (ii) with the Judiciary, in the event of lawsuits relating to rural properties. Compulsory observance of this legal provision by the Judiciary is essential in order to avoid judgments that, although final and unappealable, do not produce practical effects from the real estate recording point of view. This is because a geo-referenced description of the rural property is an objective requirement for a judicial decision. It can be said that judicial decisions that fail to observe the geo-referenced area do not necessarily refer to the same rural property and, therefore, must be reviewed. An example: if there is a court ruling favorable to adverse possession of a rural property, but the geo-referenced descriptive memorial and the INCRA certification were not requested and registered in the real property’s title, the judicial decision cannot be registered in the title and enrollment certificate pertaining to the real property. With legal support, it will be incumbent upon the Real Estate Registry Office to require geo-referencing of the rural property to be conducted prior to recording of the judgment or, even that a new decision be rendered and then be recorded. This, unfortunately, is not always so simple. In an attempt to certify the descriptive memorial of a rural property with INCRA, it is often discovered that part of that same territorial area is already subject to another certification in progress and that there are overlapping areas between the plat maps. When this situation occurs, it is essential to open an administrative proceeding with INCRA to ascertain the overlap. This may lead to the conclusion that the certification sought is not legitimate. If this had occurred in the example cited, the adverse possessor and plaintiff would not become the owner of the adversely possessed rural property, even if it is the beneficiary of a final court decision. For all the reasons above, it is advisable to conduct geo-referencing of rural properties, even if the legal term of their enforceability, according to the territorial area, has not expired, in order to avoid very common debates relating to overlapping areas during geo-referencing processes. It should be noted that grace periods for geo-referencing based on the area of the property do not apply to lawsuits brought after October 31, 2005. It is important to emphasize that not every lawsuit that deals with rural property has as a procedural requirement the submission of proof of geo-referencing of the property in order to validate the decision. This requirement shall apply only in lawsuits in which the rural property is the core of the suit and which result in the creation or modification of in rem rights relating to the property or in changes in its recording status. Lawsuits that deal, for example, with possession of rural properties (such as reintegration of tenure) are not included in this list. On the other hand, adverse possession lawsuits, judicial rectification of recordings, expropriation, establishment of administrative easements, division, and demarcation will necessarily need to observe this rule in order to guarantee legal certainty. The understanding that the geo-referencing of rural properties is essential to the resolution of most Brazilian land problems is a settled understanding. In order to achieve this much-desired goal, however, it is necessary that all parties involved, including the Judiciary, observe the applicable rule and avoid judicial decisions that violate recording rules. Failure to require proof of geo-referencing of rural properties opens up the legal possibility of land grabbing, with the issuance of judgments that order change of the land registry situation without being sure about which land surface is actually affected by the decision.
- Category: Labor and employment
Much has been debated whether, with the Labor Reform, the annual bonuses paid by companies have ceased to be part of the remuneration of their employees for the purposes of calculating employment and social security charges. This is due to changes made to article 457 of the Brazilian Labor Laws (CLT) and article 28 of Law No. 8,212/1991, which governs remuneration.
Currently, it can be deduced from the current article 457 of the CLT that the remuneration of employees for employment purposes is composed not only of the fixed monthly salary but also of the adjusted bonuses paid in consideration for the services rendered. According to case-law, the concept of adjusted bonus comprises contractually agreed upon amounts and those paid on a regular basis, such as annual bonuses. At the same time, the current article 28 of Law No. 8,212/1991 establishes that the remuneration of employees for social security purposes is composed of all income paid, due, or credited in any way, to compensate the work, both for the services rendered, and for the time available for work.
Based on the systematic interpretation of these articles, both the Brazilian Labor Courts, in the employment sphere, and the Administrative Council of Tax Appeals (CARF) and Federal Courts, in the social security sphere, established the understanding that annual bonuses comprise the remuneration of employees and, therefore, should be a part of the calculation basis for employment and social security charges. According to the current understanding in case-law and legal scholarship, only bonuses paid in a lump sum, in a non-habitual manner and that were not contractually agreed upon would not be part of the remuneration, as they are not adjusted bonuses, but rather merely eventual income.
The Labor Reform, however, not only eliminated the term “adjusted bonus" from the text of the law, but also established that the remuneration for employment and social security purposes does not include amounts, even if they are customary, paid by way of rewards, that being understood as “liberalities granted by the employer in the form of goods, services, or cash amounts to the employee or group of employees due to performance above that ordinarily expected in the performance of their activities."
Due to this alteration brought by the Labor Reform, amounts paid by the employer, by way of mere liberality, spontaneously and unexpectedly, "due to performance above that ordinarily expected,” are not part of remuneration for employment and social security purposes.
In view of this, much has been debated regarding whether the scope of the new concept of “reward” implemented by the Labor Reform would also include annual bonuses paid by the companies and whether such payments have ceased to be part of the remuneration of the employees for the purposes of calculating employment and social security charges.
This debate stems from a lack of clarity in the definition of the term "liberality" and the expression “due to performance above that ordinarily expected." What would be liberality granted by an employer? What would be performance above that ordinarily expected that would authorize the payment of rewards?
With regard to the concept of liberality, there are two possible interpretations.
The first interpretation is that liberality would be all that is granted by the company, but not required by applicable law. In this case, it would be possible to argue that the new concept of a reward would cover any and all forms of variable remuneration, even if contractually agreed upon, since in most cases the company is not obliged to pay variable remuneration beyond the fixed salary of its employees.
A second interpretation is that liberality would be all that is granted by the company, but not required by applicable law, and that has also not been contractually agreed upon. In this case, the new concept of reward would be limited only to payments made to employees at the sole discretion of the company, spontaneously and unexpectedly. Thus, a reward paid by way of mere liberality could not be equated with a reward contractually agreed upon (in agreements, policies, job offers, etc.), since, once contractually agreed upon, its payment would cease to be mere liberality and would come to be a contractual obligation assumed by the company. That is, the unpredictability of the payment would be an element to be evaluated in classifying the payment within the concept of a reward provided for by the Labor Reform.
In this context, rewards paid by way of mere liberality would approximate the current concept of occasional and not contractually adjusted bonus, which, even before the Labor Reform, was not part of the remuneration for employment and social security purposes. In turn, contractually agreed upon rewards would approximate the current concept of adjusted bonuses, which, according to the established case-law of Brazilian Labor Courts, is part of the remuneration. That being the case, the Labor Reform brings in an innovation only in that it clarifies that rewards paid by way of mere liberality, even if on a regular basis, are not part of the remuneration, contrary to the current understanding in case-law according to which these payments made on a regular basis imply a tacit arrangement.
Likewise, there are two possible interpretations of the expression "performance above that ordinarily expected." The first is that the fixed salary would compensate normally expected performance, and variable remuneration would compensate performance above that ordinarily expected. The second is that only the part of the variable remuneration due to exceeding targets would compensate performance above the ordinary.
In view of this, considering the tendency of the Brazilian Labor Courts observed in recent years, it seems to us that the greater chances of prevailing in the administrative and judicial spheres lie with the understanding that only payments that have not been previously agreed upon will be considered as rewards, even if the payment compensates the employee for going beyond previously established targets.
In any case, it would be possible to argue that the qualification of a payment as a reward should be done taking into account the characteristics of each case in order to determine whether the payment would or would not compensate a performance above that ordinarily expected.
In view of this, at least at this early stage of the discussions on the impacts of the Labor Reform, it seems to us that contractually agreed upon annual bonuses tend to continue to be considered part of the employees' remuneration and, therefore, calculation basis for employment and social security charges.
- Category: Labor and employment
The need to control workers' workdays in Brazil is established by article 74, paragraph 2, of the Consolidated Labor Laws - CLT, according to which the recording of arrival and departure, also known as time cards, is mandatory in establishments with more than ten employees. Control of workdays can be manual, mechanical, or electronic, according to the CLT and instructions from the Ministry of Labor.
With the evolution of technology, which has altered different aspects of personal and work relationships, this control has become a much simpler, more modern and effective procedure with time card recording methods including biometrics, electronic records, and even cell phone applications. Even so, much is still discussed regarding the need to get the employee's signature on the time cards in order to validate control of workdays. There are several factors to consider in relation to this topic.
It is unquestionable that there is no obligation in the Brazilian legal system to sign time cards, regardless of the time tracking system used by the employer. It may be argued that, under the terms of article 5, item II of the Federal Constitution ("No one shall be obliged to do something or refrain from doing something other than by law"), the employee's signature would be dispensed with to validate the time cards due to lack of corresponding legal provision in article 74, paragraph 2, of the CLT.
In this sense, the Superior Labor Court (TST) has taken the majority position that the mere absence of signature on the time cards does not invalidate the documents as evidence. This understanding is shared by the Labor Appellate Court (TRT) of the 2nd Circuit - São Paulo, which even issued a circuit-wide binding restatement in this sense, thereby assigning to the employee the burden of disproving the time cards, even those without a signature, as a means of evidence.
However, there are still decisions in Brazilian courts to the opposite effect, often in the TRT of the 1st Circuit, Rio de Janeiro, which are based on conjectures regarding the inability of employees to check the electronic control records pertaining to them. It is therefore certain that the matter is not settled among Brazilian courts.
It is important to emphasize that the submission of records proving controls of workdays is the burden of the employer, as established in Precedent 338 of the TST. But, once the time cards have been submitted to the Judiciary, it is the employee's burden to disprove these documents as evidence.
In order to protect against possible allegations of time card fraud, the employer must use the Electronic Time Registration System (SREP), established in Ministerial Ordinance No. 1,510/2009 of the Ministry of Labor and Employment. It may also use the means of recording working hours authorized in collective bargaining agreements, as was approved in the Labor Reform.
In this context, it is possible to say that signatures on time cards have fallen into disuse, thanks to the modern means of recording time now accepted, and signatures may now be dispensed with in validating controls of workdays, a situation that is coming to be accepted by the majority of Brazilian courts.
- Category: Capital markets
In July, the Brazilian Securities and Exchange Commission (CVM) issued regulations pertaining to public offerings of securities on crowdfunding platforms (collaborative financing). As a result of Public Hearing SDM 06/2016, CVM Instruction No. 588/2017 governs "public offers for distribution of securities issued by small businesses conducted with exemption from registration through an electronic investment platform."
In addition to representing a major willingness on the part of the Brazilian capital markets regulator to innovate, the regulation provides more certainty for the various stakeholders and, in the long run, should contribute to the development of this kind of fundraising mechanism.
The new rules for the so-called equity crowdfunding and investment crowdfunding in Brazil expressly exclude from their scope the activity of loans granted by individuals to individuals or legal entities, through the internet, without the issuance of securities (peer-to-peer loans). However, the regulation did not limit the type of security to be offered. That being the case, small businesses may issue shares, debentures, or other securities, as long as legally available.
A small business must be registered with the competent public registry and not be registered with the CVM as a securities issuer. It must have gross annual revenues of no more than R$ 10 million, calculated in the fiscal year immediately prior to the public offering (or a proportional amount when it has been in operation for less than 12 months). If the issuer is controlled by another legal entity or investment fund, the aforementioned amount must be calculated on an aggregated basis.
The public offering must take place through an electronic platform duly incorporated in Brazil and registered with the CVM. The platform will be the entity responsible for verifying compliance by the issuer and the offering with the requirements of CVM Instruction No. 588.
In attendance to the requests of market agents, the CVM established 180 days as the maximum period for raising funds via platforms. This is the time frame, for example, for public offerings with restricted distribution efforts. The draft regulation submitted for public consultation provided 90 days, but the time frame was extended in order to mitigate the risk of failure of this type of offer, which may depend on a longer offering period in order to reach the issuer’s funding objectives.
The offers are intended for any investor, provided that the investment limit of R$ 10,000 per calendar year is observed for securities offered under the regime created by this instruction. The exceptions are the offering’s lead investor (type of angel investor with prior experience recognized by the platform), qualified investors (as per applicable regulations), and investors who have annual gross revenues or financial investments exceeding R$ 100,000. In the latter case, the annual investment limit may be increased by up to 10% of the higher of these two amounts, per calendar year.
After an investor's expression of interest in participating in the public offering on the platform, a minimum period of seven days must be guaranteed for withdrawal, without the application of any fines or penalties.
The platforms may admit into their electronic environment the grouping of investors supporting a lead investor in so-called "participatory investment syndicates." The creation of an investment vehicle for the syndicate is acceptable, provided that each vehicle only participates in one public offering and does not expose the supporting investors to risks other than those they would be subject to, had they invested individually in the same public offering.
The maximum amount of funding for the public offering will be R$ 5 million, a limit that must also be observed for all the public offerings made by the same issuer based on CVM Instruction No. 588 within the same calendar year. It is possible to make a partial distribution of the offering, provided that the offeror establishes the minimum and maximum funding target amounts (the minimum must be equal to or greater than 2/3 of the maximum).
Once the public offering is closed, the platform will have five business days to arrange for the transfer of the total amount raised to the issuer or to return the amounts to the investors if the offer has not been able to reach the minimum funding target amount.
Although the regulations of equity crowdfunding by the CVM are new and have brought in a number of new elements and requirements for those who intend to use this framework for public distribution of securities, this type of investment had already been taking place in Brazil for approximately three years at a considerable level of sophistication. The first equity crowdfunding offer in Brazil was made in June of 2014, through the Broota platform, with the objective of raising funds to finance the start-up of the platform's own activities. The transaction was structured by Broota and counted on the legal advice of Machado Meyer.
- Category: Real estate
The real estate market received a large - and very welcome - legal stimulus on last July 11 due to the conversion of Provisional Presidential Decree No. 759, in effect since December 2016, into Federal Law No. 13,465/2017.
In the midst of many criticisms of its approach to some issues, especially those related to land regularization, the fact is that the new legislation has covered all at once a series of issues that may affect contracts and business transactions involving, directly or indirectly, urban or rural properties.
The prospect of practical results is quite positive, especially the adjustments to the concept of out-of-court procedure for adverse possession, the increased speed expected in land regularization procedures, improvement in the execution of fiduciary alienation guarantees, and transactions involving the direito de laje (“slab rights” i.e., the severability of titles when one or more floors are added as an autonomous unit to a previously existing dwelling).
It will be important to monitor judicial interpretation of these provisions and the practical application of these new instruments and rules in market transactions. Undoubtedly, the vast majority of the changes were designed to boost the real estate sector. The expectation is that computerized systems, safer procedures for the execution of security interests in real estate, and more effective procedures to facilitate real estate regularization will bring in very favorable responses.
Out-of-court procedure for Adverse Possession
The amendment to the Public Registers Law (Law No. 6,015/1973) promises to leverage the use of out-of-court procedures for adverse possession in Brazil. Initially envisaged to relieve the Judiciary through non-litigious proceedings, out-of-court procedures for adverse possession had been instituted with a requirement that caused a major bottleneck: express consent of the holders of real property rights registered in the recording of the property.
After being in effect for a little more than a year without having seen much application in practice, the legislature seems to have realized that this requirement is incompatible with acquisition by adverse possession. Except in cases where it is difficult to obtain documents to complete an already negotiated sale and purchase process, it would be difficult for people to agree to dispose of a right in favor of a squatter.
In this sense, the new law provides that holders of real property rights will still have the opportunity to express their opposition to the proceeding, but, if they do not submit an opposition, they are presumed to agree with the procedure. If they oppose, the procedure will be referred to the Judiciary and will follow the general procedural path of adverse possession. Also, in order to guarantee greater efficiency in this process, the new law does away with the consent of the owners of the contiguous autonomous units and, if the contiguous property is a condominium building, the consent of the condominium association will suffice (instead of the consent of all the owners of all units).
Fiduciary alienation of real property
Considered one of the most efficient forms of real estate collateral in business transactions, the fiduciary alienation underwent a small reform and "modernization", with changes that promise to boost out-of-court foreclosure and avoid procedures aimed only at delaying the public auction or at avoiding payment of the guaranteed obligations.
Among the novelties, we highlight the establishment of the market value appraised by the municipality (for urban properties) or the value of the bare land (for rural properties) as the basis for sale in the first out-of-court auction; the recognition of validity of notices given by means of a building condominium posting; and the possibility of communicating dates, times, and locations of the auctions by means of an electronic address in the contract.
For the benefit of the owner, the rule establishes preemptive rights in the acquisition of the property until the date of the second auction. The legislator also clarified that the creditor could also charge a legal penalty in the event of refusal by the owner to vacate the property, covering the period between the consolidation of the property and actual vacancy.
The most celebrated change, however, relates to real estate financing transactions. It was established that discussions with respect to the terms of the contract or the enforcement procedure could no longer impede the continuation of the auctions and should be resolved in damages. This should put an end to the dilatory actions that are used to hinder real estate foreclosures. It is important to note, however, that, according to the text of the law, such improvements are restricted to "real estate financing transactions."
The legislature did not enter into the area of fiduciary alienations in guarantee of loans other than real estate financing transactions. In this sense, it also did not slip in a provision to avoid automatic extinction of secured debt when the sum offered in the second auction is below the sum of the principal of the debt plus charges and expenses (provided in paragraph 5, of article 27 of Law No. 9,514/1997). This provision is clearly focused on the real estate financing system, but its applicability to other types of debt generates much discussions.
Land regularization
The issue of land regularization is controversial in Brazil. MP 759 made the rules for the regularization of rural properties more flexible and, during the process of its conversion into law, gained the nickname “the fraudsters MP" in the media. This is because it increased the area limit subject to regularization in occupations of rural lands owned by the Federal Government in the legal limits of the Amazon from 1,500 to 2,500 hectares.
As for the urban areas, that are less controversial, the new legislation has a clear focus: to facilitate the regularization of informal urban centers and to guarantee legal certainty for property owners located in these areas. The main tool will be Reurb, which constitutes a more flexible regime of urban land regularization of social interest aimed at low-income populations (Reurb-S) and, for other cases, land regularization of a specific interest (Reurb-E).
The greatest flexibility, undeniably, is the possibility of not applying some of the general land subdivision rules contained in Federal Law No. 6,766/1979, such as the exemption of requirements regarding the minimum size of lots to be regularized or flexibility of the percentage and dimensions of areas intended for public use.
Direito de Laje ("Slab Rights")
In the real estate legislation package, the rule also establishes a new real property right in the Brazilian Civil Code. This is the “direito de laje” or “slab right", a real and autonomous right to the upper or lower surface of a base-construction (the "slab"). It will be subject to a separate recording with the Real Estate Registry, and may be sold to third parties and even be subject to a security interest.
A new slab may be constructed over the slab. That is, the slab holder may assign the surface of his construction for the constitution of a new real property right, to third parties, provided that he obtains consent from the owner of the base construction and from the holders of the other overlapping slabs, if applicable. In the event of sale of the slab, the owner of the base-construction slab is granted a preemptive right and, subsequently, the owners of the other overlapping slabs, if any.
Collective organizations: condominiums and closed subdivisions
In relation to the regulation of developments for collective use, the law expressly allows condominiums by lots, controlled access housing subdivisions, and simple urban condominiums.
The first is composed of private lots with exclusive ownership and private common areas for the use of all condominium owners, unlike a common housing subdivision, where the common areas are donated to the municipality and therefore become public.
The controlled access housing subdivision, in turn, is nothing more than a “closed housing subdivision." According to the new regulations and subject to the supplementary regulations of the municipalities, it will only be partially closed, as it is prohibited to prevent access to properly identified or registered non-residents.
Condominiums by lots and the closed housing subdivisions were already in some manner allowed and regulated, case by case, but not expressly in federal legislation. The big novelty in relation to this topic is the simple urban condominium, applicable to the constructions of houses or rooms belonging to the same property. In the process of conversion of MP 759 into law, this provision was restricted to situations of urban land regularization of social interest or specific interest. In the final phase of the discussions, however, the legislator thought it best to expand it to any real estate situation.
With the simple urban condominium, it is expected that regularization of situations of division of autonomous units built on the same property will be faster and less bureaucratic. This will be possible with the delimitation of the common areas (apart from each private autonomous unit, which will have its own recordings with the Real Estate Registry Office) and with the individualization and independence of the private autonomous units in relation to the other units expressed and recorded with the Real Estate Registry Office.
Properties owned by the Federal Government
The legislation dispensed with the prior list of properties that can be acquired by individuals or companies, expressly provided for in the regulations in force since the end of 2015 as a necessary requirement for acquisition of federal owned properties. The objective was to facilitate transactions with real estate owned by the Federal Government that are not tied to a public purpose, including marine land. Any interested party may submit a proposal for acquisition to the Federal Government for properties falling within this category.
Other relevant novelties include the use of the water surface for nautical structures installed by the ocean, rivers, and lakes in the Federal Government's domain. The new legislation establishes a discount for those who occupy these areas in an irregular manner and request their regularization by December 31, 2018. The discount will be 50% of the amount of the public price for the private use of the area relating to the period prior to December 22, 2016. This provision may affect developments that use public water to operate, such as private port terminals and cargo transfer stations.
National Recording Code (CNM)
Finally, Brazil will have a single and unified real estate registry numbering system for properties located in its territory. The new law establishes the National Recording Code (CNM), with exclusive numbering for each real estate recording. It is also expected that the Electronic Property Recording System (SREI) will be effectively implemented at the national level. The implementation of the CNM still depends on a regulatory act of the National Judiciary Oversight Board of the National Council of Justice (CNJ).
Abandonment of Property
The new law regulates the procedure for collection in the event of abandonment of property. The absence of a response by the owner against the proceeding will be interpreted as agreement. In order for the property collected to meet the social objectives for which it is intended, the municipality or the Federal District, as the case may be, may make the investments necessary directly or through third parties. These properties may be assigned to the Reurb-S or to civil entities that have philanthropic, charitable, educational, sports, or related purposes.
- Category: Labor and employment
In considering the use of the application WhatsApp for procedural summons as valid, the National Justice Council (CNJ) has set an important precedent for using this tool for communication in all courts in Brazil. The decision was reached in the judgment of an Administrative Control Procedure[1] filed against Ordinance No. 01/2015, adopted by the Special Civil and Criminal Court of the District of Piracanjuba (GO).
According to the ordinance, WhatsApp may be used for procedural summons, subpoenas, and other communications in an optional manner by the Court, when the parties voluntarily adhere to the terms established. In addition, for the summons to be valid, it is also necessary that the receipt of the message be confirmed on the same day that it is sent. If this does not occur, the summons must be served in the conventional manner (postal service or process server).
In its decision, the CNJ understood that procedural communications via WhatsApp are in accordance with article 19 of Law No. 9,999/1995, which stipulated that notices, subpoenas, and summons shall be served in the manner provided for in them, or by any other suitable means of communication.
The CNJ also relied on Law No. 11,419/2006, which provides for the computerization of judicial process and, in the opinion of the council, has made technological innovation an important ally of the Judiciary.
Based on the guarantee of procedural speed and efficiency, the decision represents an incentive for procedural communication via electronic application to be adopted by all courts in Brazil. Considering the principles governing labor procedure, especially the principles of speed, simplicity of forms, and procedural economy, the application of this measure by the regional courts of labor appeals will certainly be well received. It is worth remembering that labor procedure substantially resembles the procedure of courts with special subject-matter jurisdiction, mainly due to its focus on simplicity and informality.
Accompanying this technological advance, the 5th Labor Court of São Bernardo do Campo (SP) held, in May of this year, attempts at settlement via WhatsApp. The physical hearing only occurred in order to ratify the settlement agreement entered into in the electronic application.
Before this, a labor judge on the Labor Court of Plácido de Castro, in the State of Acre, had already opted to use of WhatsApp in summoning the parties, alleging reduction in deadlines and costs in resolving cases.
The same was done by a judge on the Labor Court of Tucuruí, in the State of Pará, who after several attempts at service of process, contacts by email, and even by telephone, used WhatsApp to serve the respondent and finally got the company to respond to the claim.
These examples demonstrate how technology can contribute to improvement in the Brazilian Judiciary. It is certain that the use of WhatsApp in communications between the parties and the Court in the course of judicial proceedings is coming to be a constant, legal, and effective practice in the near future.
- Category: Banking, insurance and finance
Provisional Measure No. 784, published on June 8 ("MP 784"), brought in profound changes to the administrative disciplinary process in the Brazilian financial system and capital markets, within the sphere of action of the Central Bank of Brazil ("Bacen") and the Brazilian Securities and Exchange Commission ("CVM").
Innovative in relation to various topics, the promulgation of this MP784 sparkled great controversy, to the point that 97 amendments were submitted to its original text and even a direct action of unconstitutionality (ADI) was filed challenging the mechanism of issuance of the rule and some of its provisions. In large part for this reason, there is still much uncertainty about the actual extent of the new disciplinary regime. In some points, the text awaits regulations from the National Monetary Council ("CMN"), Bacen, and the CVM. In the view of the authorities, the new rule, which took effect immediately, aims to ensure:- greater effectiveness to disciplinary administrative proceedings in order to improve them as an effective instrument of guidance to the subjects of the regulatory activity;
- expansion of alternative sanctions and regulatory instruments to deal with various types of irregularities in a more adequate and proportionate manner;
- creation of conditions for authorities to obtain faster and more effective results in supervisory actions, thereby strengthening their role of deterrence of commissions of infractions;
- standardization of the parameters used to apply penalties to the various segments overseen by Bacen; and
- improvement of the criteria for grading and applying penalties by Bacen.
- up to R$ 500 million (previously it was R$ 500 thousand);
- up to twice the value of the irregular issuance or transaction (previously it was 50%);
- up to three times the amount of the economic advantage obtained or the loss avoided as a result of the wrongful act; or
- up to 20% of the total individual or aggregate turnover of the economic group obtained in the fiscal year prior to the institution of the administrative disciplinary proceeding in the case of a legal entity.
- Category: Banking, insurance and finance
The House of Representatives will discuss in a public hearing the Draft Law No. 2,303/2015, which proposes the inclusion of virtual currencies, such as bitcoin, and air mileage programs in the definition of payment arrangements under the supervision of the Central Bank of Brazil (Bacen). To this end, the draft bill provides for amendments to Law No. 12,865/13 and Law No. 9,613/98.
According to the draft bill's justification, "both Bacen and the Financial Activities Oversight Council (COAF) and the consumer agencies are already charged with overseeing and regulating virtual currencies." However, there are still some legal and regulatory challenges with regard to the regulation of virtual currencies.
In 2014, Bacen expressed its views on the subject in Statement No. 25,306, which states, in sum, that:
- virtual currencies are not issued or guaranteed by a monetary authority;
- virtual currencies are not guaranteed conversion into the official currency;
- because of the low volume of transactions with virtual currencies, variation in their prices can be very large and fast;
- any application of prudential, coercive, or punitive measures on the use of virtual currencies by monetary authorities of any country may significantly affect the price of such currencies or even the ability to trade them;
- virtual currencies may be used for illicit activities; and
- by storing virtual currencies in so-called electronic wallets, the holder of these assets runs the risk of suffering losses due to attacks by criminals operating in cyberspace.
Also, according to the statement, although virtual currencies have not yet shown themselves capable of posing risks to the National Financial System, Bacen is monitoring the evolution of the use of these instruments and, if necessary, will adopt measures within its purview. However, to date there has been no conclusive position on the part of Bacen with respect to the feasibility and risks of adopting virtual currencies in Brazil.
The main difficulty in regulating these instruments (despite their designation as "currencies") is in defining their legal nature. In fact, they have some characteristics that resemble currencies, among them: use and acceptance as a means of payment (thus having the fiduciary character of currencies), high liquidity, reserve of value (even if subject to fluctuations), and ease of movement and storage. However, there are other parameters that, from a legal point of view, impede this characterization, such as the reserve of authority granted by the Constitution to Bacen to issue currency in Brazil and the mandatory legal tender of the Brazilian real established in Law No. 9,069/95 (the Brazilian Currency Plan, or “Plano Real”).
There are also problems in classifying virtual currencies as securities in accordance with the definition established in Law No. 6,385/76 (Capital Markets Law). This is due to the fact that the value of these instruments does not depend on variables related to a determinable person or entity, but predominantly to their supply and demand and exogenous factors of a political and economic nature. Therefore, it would be difficult to classify virtual currencies as a security or collective investment agreement, as mentioned in article 2 of the law.
Accordingly, another alternative would be to classify them merely as assets, of an intangible nature and of high liquidity, in line with the understanding already expressed by the Federal Revenue Service. However, their final classification for the purpose of establishing payment arrangements is still pending.
A second difficulty in regulating virtual currencies is related to Brazilian exchange legislation. Considering its high liquidity, ease of movement, and difficulty in determining its location and its owners, there is a risk of questioning by Bacen in cases where virtual currencies are used as an indirect means to place funds in foreign currency abroad, without closing a corresponding exchange transaction. In addition, international transactions with virtual currencies could also set up illegitimate foreign exchange transactions or even private offsets of international credits, in view of the non-involvement of banks authorized to trade in exchange.
Finally, a third difficulty is related to the legislation on customer identification and prevention of money laundering crimes, since transactions with virtual currencies could present obstacles to proper identification of the parties involved. There are also some notable cases of illicit activities involving bitcoins, such as the Silk Road black market site and the Costa Rican centralized Liberty Reserve.
The recent increase in activities involving bitcoins and other virtual currencies, their economic potential, and the growth of their acceptance among consumers makes a discussion of their regulations increasingly necessary. However, this discussion presents relevant challenges related to analysis of the impacts of virtual currencies on the economy, their potential risks for consumers, and their harmonization with the other rules of the National Financial System.
- Category: Infrastructure and energy
The National Bank for Economic and Social Development (BNDES) settled an agreement at the end of June to share guarantees with public and private banks that act as guarantors in infrastructure projects. The measure allows for greater predictability in the allocation of risks to these banks and reinforces the funding of projects. The objective is to increase financing to the infrastructure sector by attracting new investors, especially large international financial institutions.
The initiative was a response to the market's criticism of BNDES’s positions that ended up hindering some financing projects. This was because, at the same time that it required too much collateral or corporate assets of the companies or their partners, BNDES also obliged commercial banks to accept mere subrogation as the only form of guarantee.
The new practice will apply to financial institutions that individually or jointly guarantee at least 40% of the total amount of the financing of a project or individually hold at least a 20% stake. With these financial institutions, BNDES will now begin to share the rights emerging from the projects, as well as the corporate guarantees.
The agreement reached satisfies three requirements necessary for infrastructure projects:
- Security in the granting of guarantees in the pre-completion phase, prior to completion of the project’s works and, therefore, of greater risk. In previous practices, there was an informational, conditional, and temporal asymmetry due to the fact that the companies offered sureties in the proportion that they had disbursements to receive, which compromised this security.
- Reduction in financing costs, due to greater competitiveness among banks, given that issues such as sharing of guarantees, greater predictability, and better (and fairer) allocation of risks are ensured.
- Extension of the term of concession of sureties, which, according to BNDES's note, previously did not cover the four or five years required for projects to acquire operational viability.
In order for sharing to take place and banks to no longer be exposing themselves to project risk, the conditions for declaring the physical and financial completion of the projects' works have also been agreed upon with BNDES, which meets the aforementioned requirements and provides greater predictability. For this, it will be necessary for a project (i) to be completed and generate the anticipated cash flow and (ii) to provide a minimum debt service coverage ratio of 1.3 times cash generation for the last two financial years.
The new BNDES guarantee-sharing policy follows in lock-step the federal government's initiatives to attract capital and solve the deficit problem with the public coffers through a series of reforms and projects. One of the last measures in this direction was the opening of a credit line of approximately R$ 12 billion to support infrastructure projects in states and municipalities in the sectors of urban transport, public lighting, basic sanitation, and solid waste treatment.
The sharing of the BNDES guarantees with other banks will already be applied to the financing of the concessions for the Fortaleza, Salvador, Porto Alegre, and Florianópolis airports and the São Paulo State highways. Other projects may also benefit from the new policy.
This measure certainly represents a major step towards ensuring predictability and security in the financing of infrastructure projects. However, the market and investors in general are waiting for BNDES’ position on the next financing operations to confirm the actual implementation of this new policy in the programs favored by the federal government.
- Category: Tax
Covenant No. 52/2017, recently issued by Confaz (National Finance Policy Council), followed the understanding of the Second Panel of the STJ (Superior Court of Justice) in the sense that the ICMS due under the withholding regime (ICMS-ST) is embedded in its own calculation basis. This means that the ICMS-ST should also be assessed on a gross-up basis, as is the regular ICMS’ case (Special Appeal No. 1.454.184/MG). The rationale for such understanding is that the ICMS-ST is not different from the regular ICMS.
The ICMS-ST is a regime of tax collection, by means of which a given taxpayer is responsible for the payment of the ICMS due by itself and the ICMS to be paid in any future resale of goods within the same state (e.g., State of São Paulo). This procedure is used by the states to collect taxes from sectors such as beverages, cigarettes, fuels, electricity, and medicines, among others.
The debate regarding its calculation basis is far from being settled, contrary to what is the case with the debate regarding the need to gross up the regular ICMS calculation basis. It is noteworthy that the gross-up calculation basis of the regular ICMS has already been ruled as a constitutional measure by the Federal Supreme Court (STF).
However, there is great concern that the formation of the ICMS-ST calculation basis will be understood as equivalent to that of the regular ICMS, a trend that seems to be strengthening and with which it is not possible to agree, since it violates the principle of non-cumulativity, which is in turn rooted in the Constitution Federal.
In fact, as understood by the Second Panel of the STJ in Special Appeal No. 1.454.184/MG, the ICMS and ICMS-ST are one and the same tax. In addition, it is also clear that the ICMS-ST is only a technique that aims at allowing tax authorities to collect tax and perform audit procedures in an easier way. However, there is no way to agree with the proposition that a technique of collection should ultimately increase tax revenues. This was not what the STJ sought to do, but it was what it, in a roundabout manner, and perhaps without realizing the scale of the effects of its understanding, eventually validated.
It is important to remember that the calculation of the ICMS-ST for a large part of the products subject to tax substitution is done by applying a value-added margin (MVA) over the selling price of the substituted taxpayer (which pays the ICMS due on the entire chain). This margin is established "on the basis of prices usually agreed upon in the market concerned, obtained by survey, even if by sampling or by means of information and other elements provided by entities representing the respective sectors, adopting the weighted average of the prices collected, and these criteria are to be set by law” (Complementary Law No. 87/1996, article 8, paragraph 4).
On top of that, one must bear in mind that in October of last year, the STF ruled out that the ICMS-ST is not a definitive tax. Therefore, if the “price actually agreed upon" (effective basis) is lower than the "usual price agreed upon in the market" (estimated basis), it is possible to recover the ICMS-ST paid in excess to the state.
Of course, when the "weighted average" of the "price usually agreed upon in the market" is established to stipulate the MVA of a product that will be taxed in the system of tax substitution thereafter, this price does not include the ICMS calculated inside of the ICMS-ST, simply because the ICMS-ST is not yet due in transactions with these products.
Thus, applying the MVA on a gross-up calculation basis will mathematically generate a higher value than the one used in the survey. This reasoning shows that, although the ICMS and ICMS-ST are the same tax, embedding the regular ICMS within the ICMS-ST calculation basis causes a distortion in the price and increases collection.
More serious than this increase, the grossed-up calculation basis of the ICMS-ST also breaches the principle of non-cumulativity. This is because, in the same case cited above, in which the ICMS-ST is to be demanded of a given product, it is intuitive that the weighted average of the price usually agreed upon in the market considers the system of ICMS debits and credits.
However, we know that within the ICMS-ST system, ICMS credits may end up being disallowed. Along these lines, the grossed-up calculation basis of the ICMS-ST is a procedure that does not give rise to the correct effects of the credits mechanism in the marketing chain of the product. It is, therefore, an eminently unconstitutional practice, due to its violating the non-cumulativity principle.
Therefore, we understand that Special Appeal REsp No. 1.454.184/MG, in addition to endorsing a practice not provided for in the Federal Constitution and in Complementary Law No. 87/1996 (the only instrument constitutionally authorized to provide a calculation basis for the ICMS and ICMS-ST), goes in a direction opposite to the STF, since its understanding virtually results in a situation where the "effective price agreed upon" (effective basis) is less than the estimated basis due to the mathematical distortion of the latter value.
The Ministry of Transparency, Supervision and Control (CGU) and the Federal Attorney General's Office (AGU) announced on July 11 a leniency agreement with UTC Engenharia, the second one signed under the terms of the Anti-Corruption Law (12,846/2013) and the only one in force in Brazil, signed by an internal control agency.
Leniency agreements are recognized for their relevance in enhancing the effectiveness of actions to combat and prevent unlawful activities, as they improve asset recovery indicators and allow the Government to discover and prosecute offenses efficiently. Likewise, they provide private entities with an opportunity to mitigate possible reputational and economic damage and offer them a negotiated alternative and quick resolution for crisis situations.
However, the lack of frequency of agreements executed under the Anti-Corruption Law, that is, involving the CGU when it comes to acts against the federal government, contrasts with the success of the existing leniency program for infractions of an anti-competitive nature, involving the Administrative Council for Economic Defense (Cade), even when taking into account the atypical agreements that some companies have signed with the Federal Public Prosecutor's Office within the framework of Operation Carwash (Operação Lava Jato).
There are a number of reasons why agreements based specifically on the Anti-Corruption Law are rare, but it is undeniable that the absence of legal certainty for businesses plays a decisive role. Unlike what occurs in the Brazilian Defense of Competition System, in which Cade plays a central role and the leniency program is already well-established, the suppression of corruption-related unlawful acts is governed by a set of norms (such as the Anti-Corruption Law, the Administrative Corruption Law, the Public Procurement Law, among others) and applied by a multiplicity of agencies (like the CGU, Public Prosecutors, Public Attorneys, Courts of Accounts, etc.). For this reason, companies are never sure that one particular institution will respect what has been agreed upon with another.
In this sense, the execution of agreements in cases of corruption has been restricted to the episodes in which the company signing the agreement already has a high degree of certainty that it will receive a punishment or that it is, in some way, cooperating with the investigations through its agents. This is illustrated by the fact that most of the agreements were concluded/executed/entered into with the Federal Public Prosecutor’s Office, individually, in the criminal sphere of the executives of the companies signing such agreements.
Although, in these cases, there remains a debate regarding the effectiveness of the agreement before other public bodies and the consequent exposure of the company to new sanctions, the agreement allows the company to continue its operations on new bases after the crisis, to assume a public commitment to change practices, and to mitigate legal or reputational damages that have already materialized or, are at least, probable.
However, when the company is faced with an unlawful act that has not yet been investigated by the authorities, many experts affirm that the current legal dynamics do not provide enough certainty to self-report, either because it does not cover all the agencies with jurisdiction over an investigation or because, contrary to what happens outside of Brazil, Brazilian law excludes from leniency agreements the possibility of negotiating the criminal sanctions on the individuals involved, which increases the complexity of the process to the point of placing the company and its managers in conflicting positions.
It is necessary to resolve these shortcomings in the legislative and institutional spheres, such that the leniency agreement, set forth in the Anti-Corruption Law, can fulfill its role as a mean of cooperation in cases that have not yet arisen. This will enhance the ability of public authorities to detect new illicit acts, thus helping to combat corruption and offering companies an assertive response to cases of breach of integrity detected by their internal control mechanisms.
The Anti-Corruption Law itself and its federal regulations have encouraged companies to adopt programs to prevent and detect illicit acts, such as whistleblower channels and even internal investigations in cases of suspicion. That being the case, there is nothing more logical than to also provide a sure path, so that, when such mechanisms detect an undesirable episode, companies can report it to the authorities and adequately mitigate their risk.
- Category: Infrastructure and energy
The attention of participants in the electric sector will be directed, until August 4, to discussions of Public Consultation No. 33/2017. It was launched by the Ministry of Mines and Energy with the ambitious purpose of discussing proposals for legal measures that would enable the long-term sustainable future of the electricity sector.
The document that will guide the discussions on the proposed measures is Technical Note No. 5/2017, which, in an educational and pragmatic manner, recognizes the need to improve the regulatory and commercial model in force in Brazil in order to identify what has been conventionally called “basic elements of a vision of the future."
If mere description of the purpose of the discussions is enough to get an idea for the size of the challenge proposed by Public Consultation No. 33/2017, the list of the "basic elements of a vision of the future" confirms that the task, in addition to being necessary, will in fact be arduous.
Removal of barriers to the entry of participants, respect for contracts in force and institutional formalities, incentives to align individual and systemic interests, respect for individual business decisions and economic signaling, adequate allocation of risks, rate stability, security of supply, and socio-environmental sustainability are goals to be achieved and harmonized.
A good part of these issues appeared in the discussions of Public Consultation No. 21/2016, whose purpose was to obtain the view of different participants on the risks and benefits involved in the expansion of the free market. It is precisely for this reason that, the propositions of Technical Note No. 5/2017 revolve, to a greater or lesser extent, around improvements in the business model of the electric sector.
In this sense, the proposals were divided into four different groups, namely:
- Reform commitments and elements of cohesion - with emphasis on the new rules of self-generation and gradual reduction of the limits on access to the free market, measures aimed at encouraging expansion in generation.
- Unlocking measures - a group which includes the proposals that are the most incipient and which need to be further developed and specifically regulated, including: the possibility of segregated marketing of availability and energy products; reduction of transmission costs and their centralized settlement with repercussions for existing contracts; and new mechanisms for price formation, with express provision for the creation of a business grant fund.
- Allocation of costs and rationing - a group in which are found the measures that have been discussed for a long time among the participants in the sector and whose need for adoption, with some degree of variation, is recognized by them. They can be summarized as: recognition of migration as an involuntary exposure of distributors and greater flexibility for relief mechanisms; segregation of tariff components; change in the type of subsidies for incentivized sources that will no longer enjoy discounts in network tariffs in exchange for a premium for effective production; and return of types of contracts based on quantity and availability, with preference given to the first option.
- Sustainability and litigation abatement measures - possibly the most urgent and, therefore, most controversial measures due to the plurality of interests involved, such as: removal of price restrictions for privatized plants, the return of the RGR (Global Reversion Reserve) and the allocation of its resources for the payment of compensation for transmission concessions; anticipation of the CDE (Energy Development Account); and the easing the frequency of litigation with respect to hydrological risk, by offsetting the compensation for the hydroelectric displacement to 2013, thus reaching all energy not renegotiated and not litigated in that period.
As one can see, the agenda is vast and the time is quite scarce. However, it is a unique opportunity to revisit the Brazilian electric sector model with depth and responsibility. Many participants in the industry will certainly do their best to converge around a cohesive proposal, even if this entails mutual concessions. We all know that the last thing the industry needs is to relive the recent experience of "unmeasured government edicts" and "normative patchwork."
- Category: Capital markets
The changes in the rules of the B3 (Brasil, Bolsa, Balcão) segment called Novo Mercado, approved in June by listed companies, will now be submitted to the Brazilian Securities Commission (CVM) for approval. After this stage, companies will be notified of the final content of the regulation and the deadline for complying with the new rules.
As companies listed in Level 2 did not approve the changes, there will be a difference between the rules applicable to the two segments for the first time since they were created. It is not yet possible to assess the impacts, if any.
The outcome of the vote on the proposed changes to Level 2 and Novo Mercado regulations was announced by B3 on June 23rd. The changes were being discussed with listed companies in these segments and with market players since March, 2016.
The voting by the companies was divided into two parts. The first, called the basic regulation, proposed to amend, inter alia, the rules concerning:
- outstanding shares: the percentage of outstanding shares may be 25% of the share capital, as provided for in current regulations, or 15% of the share capital if the average daily trading volume of the company's shares remains equal to or higher than R$ 25 million when taking into account trades carried out in the last 12 months;
- dispersion of shares: exempts companies from using their best efforts to achieve share dispersion in public offerings with restricted placement efforts;
- composition of the board of directors: the board must have at least two independent directors or 20%, whichever is greater;
- public offerings of shares of pre-operating companies: should be directed only to qualified investors - trading among non-qualified investors may only occur when the company has net operating revenues;
- supervision and control: companies must create an auditing committee, whether or not provided for in the bylaws, and have their own internal audit department. They must also implement compliance, internal controls, and corporate risks functions, which cannot be combined with the company's operational activities;
- public offers for purchase of shares to exit the segment (OPA): must be approved by shareholders owning more than 1/3 of the outstanding shares, or a higher percentage if defined in the bylaws;
- corporate reorganization: if it involves companies that do not intend to apply for entry into the segment, the majority of the holders of the company's outstanding shares present at the general meeting must approve the proposed structure.
Of the 131 companies listed on the Novo Mercado on March 15, 2017, 65 voted in favor of the basic regulation, 35 voted against, and 29 abstained. Accordingly, the basic regulation was approved. The specific rules, with the exception of those relating to the assessment of management, were rejected.
The situation was different with Level 2. Of the 19 companies listed there, 11 rejected the amendment to the basic regulation, and the specific rules were also rejected by more than 1/3 of the companies.
- Category: Tax
Decree No. 9,042, promulgated by the President of Brazil in early May, modified the rules for determining the reference price of oil and the basis for calculating royalties and special participations by adding provisions to Decree No. 2,705/1998.
According to the new decree, by December 2017, the reference price for oil will continue to correspond to (i) the weighted average selling prices practiced by the concessionaire under normal market conditions or (ii) the Minimum Reference Price (MRP) established by the National Petroleum Agency (ANP), whichever is greater. The MRP is currently calculated based on the formula defined in ANP Ordinance No. 206/2000, which considers the international quotation of Brent oil as a benchmark for the pricing of oil produced in Brazil.
Starting in 2018, the reference price of oil should be exclusively established by the ANP based on a standard basket of up to four types of oil listed on the international market, with similar physicochemical characteristics and competitiveness equivalent to that produced in Brazil. The use of the weighted average of the prices practiced in the sale is discarded.
There is great expectation on the part of oil concessionaires regarding the changes introduced by Decree No. 9,042, especially regarding the regulations on the matter by the ANP scheduled for the coming days.
At first, there was doubt as to whether the rules would be in some measure self-enforcing and would dispense with the regulation by the ANP for application of the standard basket.
However, because the decree does not set objective criteria for using the standard basket and certain guidelines to carry out the controversial analysis of similarity between oil types, there is a consensus that regulations with respect to the new rules is imperative. The ANP has already expressed its opinion in this regard, noting that it should submit a new draft resolution for public review by the end of July and that the new oil reference price will be "introduced in a gradual manner, in four years", starting on January 1, 2018.¹
The regulations must comply with the provisions of the Petroleum Law (Law No. 9,478/1997) regarding the need for the criteria for calculating royalties to be determined based on (i) market prices for oil, (ii) specifications for the product, and (iii) the location of the field.
To that end, proper use of the standard basket in defining the reference price depends on the application of a differential that represents the repercussion of several factors in the pricing process. These are factors related to product specifications and the location of the field, logistics and production and transportation costs, production flow stability, field volume, and the oil’s liquidity in the international market, among others.
It is expected that the new ANP draft resolution will be compatible with the Petroleum Law, thereby ensuring the legal stability and legal certainty necessary for existing investments and concessions and for the next rounds of block bids for exploration and production of oil.
_________________
¹ ANP will apply new guidelines established by the National Energy Policy Council - CNPE for calculating the minimum oil price for the purposes of royalties and special participation starting in 2018. Available at: http://www.anp.gov.br/wwwanp/noticias/anp-e-p/3758-anp-aplicara-novas-diretrizes-estabelecidas-pelo-cnpe-para-o-calculo-do-preco-minimo-do-petroleo-para-fins-de-royalties-e-participacao-especial-a-partir-de-2018. Published on May 12, 2017. Accessed on July 5, 2017.
- Category: Litigation
In April of this year, Brazil ratified the Convention on the Taking of Evidence Abroad in Civil or Commercial Matters. This is one of the main multilateral instruments for international legal cooperation and brings in improvements to the speed and effectiveness of measures to produce evidence abroad. Brazil had signed the Convention in 2008, but its entry into force only occurred with the enactment of Decree-Law No. 9,039, of April 27, 2017.
In practice, the convention allows a judge in the courts of a signatory country to request the taking or production of evidence in another signatory country by means of a letter rogatory. As in other bilateral and multilateral agreements on international legal cooperation, each country designates a central authority (in the case of Brazil, the Ministry of Justice) to receive requests and replies from its domestic judges and forward them to the foreign central authority, which in turn handles communication with the local Judiciary.
The Convention provides that evidence may be produced not only by judges but also by diplomatic representatives or consular agents. Brazil, however, approved the Convention with reservations and will only accept that evidence be produced in Brazilian territory by the Judiciary.
With more than 50 signatory countries, the Convention can be used to perform any other judicial act, and not only for the production of evidence. Along the same lines, Articles 26 and 27 of the New Brazilian Code of Civil Procedure established that instruments of international legal cooperation may also be used for summons, subpoenas, recognition, and enforcement of a decision and granting of injunctive measures.
The production of evidence abroad through legal cooperation between the courts of different countries, based on international treaties, is not, however, the only instrument to be considered by the parties when defining their litigation strategy. It is also possible to initiate an independent proceeding for production of evidence directly in the country where the evidence is found. Depending on the specific circumstances of the case, this may be more convenient for the parties.
In the United States, for example, Section 1782 of the U.S. Code expressly allows for a suit for production of evidence to assist cases in other countries, regardless of whether a letter rogatory is submitted.
In Brazil, Article 381 of the New Code of Civil Procedure provides for the possibility of filing for early production of evidence in three cases, where: (i) "there is reasoned fear that it will become impossible or very difficult to verify certain facts while the action is pending"; (ii) "the evidence to be produced is capable of facilitating a settlement or other appropriate means of conflict resolution"; or (iii) "prior knowledge of the facts may justify or avoid the filing of an action".
Although Brazilian courts have not ruled on the possibility of using an action for early production of evidence for suits that may be filed in other countries, they have not specifically prohibited it. To permit the application of Article 381, in particular its item III, to justify the production of evidence that could eventually be used in legal proceedings abroad would reflect precisely the spirit of the New Code of Civil Procedure, which values speed and settlements of the proceedings.
- Category: Capital markets
Offering safe alternatives for companies and investors to carry out investments and raise funds is undoubtedly crucial in fostering Brazil's economic activity and capital markets, especially in a crisis scenario.
An instrument widely used in day-to-day operations of Brazilian companies are the preferred shares. In addition to allowing greater flexibility in defining the capital structure without a loss of corporate control, preferred shares may offer a wide range of rights to investors, thereby attracting those investors who have no interest in participating in the management of the company.
Since they do not usually grant voting rights to their holders, but rather award them, in exchange, with preferences that often resemble the economic advantages inherent to debt instruments, preferred shares are usually considered as hybrid instruments. This fact was taken into account in the analysis of financial statements, but did not result, until 2010, in the obligation to account for certain preferred shares as financial liabilities.
Since 2010, when large Brazilian companies and enterprises began to adopt the Brazilian Accounting Board - CPC Rule No. 39 - "Financial Instruments: Presentation", drafted based on the IAS 32 - Financial Instruments: Presentation (IASB) (CPC 39), even shares, which by their nature represent a portion of capital stock, can be considered as financial liabilities. That is, regardless of the legal form, analysis of the essential characteristics of a given instrument is fundamental for properly classifying it as a liability or an asset.
The application of IAS 32 and CPC 39 has raised and continues to raise many questions and controversies at the international and national levels. Some foreign and local studies argue that preferred shares, regardless of their characteristics, should be classified as a financial liability. These analyses also show that the application of IAS 32 would have resulted in the disuse of preferred shares in certain countries, such as the Netherlands.
Given the great practical importance of its guidelines and the significant impacts of classifying them as assets or liabilities in the capital structure of a company, CPC 39 remains a topic of debate in the market and its implementation often presents a challenge for companies.
In this context, we have analyzed the circumstances that would allow for classification of preferred shares as financial liabilities based on the legal instruments of the Brazilian Corporation Law and the guidelines set forth in CPC 39.
Pursuant to Article 17 of the Brazilian Corporation Law, preferred shares may have the following advantages: (i) priority in the distribution of dividends, whether minimum or fixed; (ii) priority in the reimbursement of capital, with or without a premium; and/or (iii) accumulation of the foregoing preferences.
Priority in capital reimbursement, with or without premium, is a right that can easily be classified within the concept of equity, since it addresses a residual interest in the assets of the company. Meanwhile, priority in the distribution of dividends, whether fixed or minimum, is a right that more closely resembles the concept of a liability.
A liability can be defined as: (i) a contractual obligation to deliver, or exchange under unfavorable circumstances, cash or financial assets with another person, or (ii) a present obligation arising from past events, the settlement of which is expected to result in the outflow of funds from an entity capable of generating economic benefits.
For example, fixed dividends and prefixed interest are similar in the sense that such disbursements can be fixed on a predetermined basis, often related to the invested capital itself. However, despite the similarity, it seems incorrect to classify preferred shares as financial liabilities based solely on this characteristic. This is because the distribution is conditioned to the future generation of profits. That is to say, the company does not, per se, have a present obligation to pay in this case.
Therefore, in principle, we understand that preferred shares, in essence, should be classified within the concept of assets. It so happens that various other rights may be linked to the preferred shares and provided for in the company's bylaws, such as (i) partial or full rights of redemption of the investment and/or (ii) rights that affect the company's discretion in the distribution of dividends.
CPC 39 expressly provides that preferred shares are considered financial liabilities whenever they grant a right of redemption to be exercised on a determined date or at the discretion of the holder, regardless of the potential inability of the company to redeem such shares. On the other hand, when redemption is at the discretion of the company, such preferred shares do not represent a present obligation and, therefore, do not meet the requirements of a financial liability.
In addition to redemption, CPC 39 also indicates that preferred shares with priority in dividend distributions, whether or not cumulative, will be considered assets, provided that distributions can be made at the issuer's discretion. That is, if there is any obligation of distribution on the part of the issuer, such shares, on the contrary, should be considered as financial liabilities.
CPC 39 gives no other concrete examples; it establishes that all other rights conferred by a certain preferred share should be analyzed to identify whether it has fundamental characteristics of an asset or a financial liability.
Because CPC 39 is not exhaustive, the correct classification of preferred shares should reflect the essence of the rights granted thereby within the concepts of liabilities and assets. Often, this makes classification complex, especially in unconventional fundraising structures with various nuances.
Companies should evaluate, as soon as possible, the substance of the rights linked to preferred shares under the Brazilian Corporation Law and CPC 39 in order to avoid any surprises or questions regarding the accounting of such investment.
If the accounting is different from the initial intent, the impacts may be material in what concerns to financial covenants, which may lead to acceleration of debt and cross-default on financial agreements. In addition, considering the different tax treatment of dividend income and debt instruments (interest), incorrect classification may result in tax liabilities for both the holders and the company.
The correct classification of preferred shares is fundamental for the financial standings of a company to be properly reflected in its financial statements, thereby avoiding asymmetries of information within the market which could harm creditors and investors.