Category: Labor and employment

As an alternative measure to tackle the current crisis scenario caused by covid-19, Executive Order No. 936/20 was published on April 1 (MP 936), which stipulates the conditions for a proportional reduction in the hours and wages of employees and for the temporary suspension of employment contracts.

The emergency program for maintaining employment and income also covers intermittent employment contracts provided for in article 443 of the Consolidated Labor Laws (CLT), provided that they have been formalized by the date of publication of the executive order. According to the article, such contracts are those in which individuals render services in a discontinuous manner, in alternate periods of work and inactivity, which may be determined by hours, days, or months, regardless of the activities of the employer or employee.

According to MP 936, employees with intermittent employment contracts will be entitled to a monthly emergency benefit in the amount of R$ 600 for a period of three months, starting on the date of publication of MP 936 and with payment within 30 days (the grant and payment procedure will be regulated by an act of the Ministry of Economy).

In order to fulfill the social function of this rule, payment of the benefit was stipulated regardless of compliance with any accrual period, employment period, and number of salaries received.

No employee is entitled to the benefit who:

• holds a public office or employment, position of trust of free appointment and dismissal or holder of elective office; or
• is receiving a benefit of the General Social Security System or of the Special Social Security Systems, except pensions due to death or accident aid (sole paragraph of article 124 of Law No. 8,213/91); unemployment insurance, of any type; of professional training scholarships intended for employees who have their employment contracts suspended due to their participation in a course or professional training program offered by their employer (article 2-A of Law No. 7,998/90).

If there is more than one intermittent employment contract, no more than one monthly emergency benefit will be granted, i.e., there is one benefit, regardless of the number of intermittent employment contracts entered into by the employee. The monthly aid also cannot be combined with the payment of other emergency aid.

The benefit will be funded with funds from the Federal Government and will be managed and paid by the Ministry of Economy.

Should the Emergency Benefit for Preservation of Employment and Income be paid unduly or paid in excess of the amount due, the debts created as a result thereof will be enrolled as outstanding debt of the Federal Government and the provisions of Law No. 6,830/80 will be applied for judicial enforcement.

Category: Labor and employment

Executive Order 936/20 (MP 936/20), published on April 1, aims to mitigate the damage caused by the covid-19 pandemic by introducing measures such as a proportional reduction in work hours and salary and temporary suspension of employment contracts. The text also amends provisions of the CLT and presents rules on employment guarantees and on the actions of labor inspection agencies.

Executive Order 927/20 (MP 927/20), published on March 22, refers to the actions of labor inspectors of the Ministry of Economy, making changes in the inspection of labor issues. For a period of 180 days after the publication of the order (according to article 31), agents shall serve to provide guidance regarding irregularities found.

During this period, infraction notices shall be issued only for serious infractions, provided for in subsections I and IV of article 31. Auditors shall be charged with guiding companies on how to remedy other irregularities, instead of fining them.

MP 936/20 complements the provisions of MP 927/20 on labor inspection by establishing that failure to comply with the procedures for reaching agreements to reduce work hours and wages or to temporarily suspend employment contracts will lead to the issuance of an infraction notice.

The sole paragraph of article 14 provides that the process of inspection, notice, assessment, and imposition of fines must comply with the rules contained in Title VII of the Consolidated Labor Laws (CLT), which deals with the penalties and the processing of administrative proceedings, establishing the inapplicability of the criterion of the double visit and the rule of article 31 of MP 927/20.

In the event of non-compliance with the procedures relating to the measures provided for in MP 936/20, pursuant to the head paragraph of article 14, a fine shall be imposed, as provided for in article 25 of Law No. 7,998/90, which regulates the Unemployment Insurance Program. This provision refers to the fine provided for in subsection I of article 634-A of the CLT, as amended by Executive Order 905/19 (MP 905/19), which establishes a scoring system in accordance with letters "a" to "d".

Although MP 905/19, known for introducing the Green and Yellow Employment Contract, provides for new criteria for the imposition of administrative fines, no specific regulations have yet been defined by the Federal Executive Branch regarding the classification of the seriousness of violations, whether light, medium, serious, or very serious.

Thus, in the event of violation of the procedures for adoption of the measures introduced by MP 936/20, one applies the rule set forth in article 25 of Law No. 7,998/90, before the amendment provided by MP 905/19.[1] The amounts vary between R$ 2,132.98 and R$ 213,297.65, fixed according to the number of employees affected. The fine may be doubled in the event of recidivism, opposition to supervision, or contempt of authority.

In view of this scenario, MP 936/20 reiterates the federal government's concern with the inspection and fining of companies in the event of non-compliance with serious obligations, activities of extreme importance, especially for the procedures applicable to the proportional reduction of work hours and salary and temporary suspension of employment contracts.

Article 19 of MP 936/20 itself proves the federal government's intention to reinforce the need for companies to comply with labor rules, especially those regulating occupational safety and health.

After various criticisms of the provisions of article 31 of MP 927/20 regarding the actions of guidance by labor inspectors, blocking, for 180 days, the issuance of infraction notices on matters other than those set forth in subsections I to IV, the inclusion of article 19 in MP 936/20 demonstrates the unequivocal need for companies to continue complying with other labor obligations.

[1] Employers who violate the provisions of this law will be subject to fines of 400 to 40 thousand BTN, according to the nature of the violation, its extent, and the offender’s intent. The amount shall be doubled in the event of recidivism, opposition to supervision, or contempt of authority.

Category: Public and regulatory law

In the wake of actions to mitigate the effects of the covid-19 crisis, the federal government decided to suspend the annual adjustment of drug prices for 60 days. It was Executive Order No. 933/20, published on May 31, that implemented the suspension, postponing the annual adjustment of drug prices to June 1.

In Brazil, medications have a price schedule. The Medications Market Regulation Chamber (CMED) provides criteria to determine this price and discloses to consumers a table with the maximum prices to be charged by pharmacies. The inter-ministerial body responsible for the economic regulation of the drug market in Brazil is also in charge of determining the price adjustment, which occurs every year as of April 1st. The formula for calculating the annual adjustment currently takes into account the Broad Consumer Price Index (IPCA) for inflation, market characteristics, changes in input costs, and productivity gains of drug manufacturers.

The pharmaceutical industry is one of the examples of the use of regulatory mechanisms by the State to control prices in the production, marketing, and sale chain. From the economic point of view, state regulation of this industry aims to stimulate the supply of medicines, in order to allow monitoring of trade and the application of sanctions in the event of non-compliance with economic regulations. The near-term effects are protection of consumers of these products, which are relevant to public health, and promotion of pharmaceutical assistance to the population.

The essentiality of the drug market and the exceptional context in which Brazil finds itself may mean that debates on the constitutionality and legitimacy of price control in this particular case, as has occurred and is occurring in other contexts and economic sectors, may not be raised. In the case of drugs, the government acted preventively in face of the automatic regulatory mechanism already in place as a result of Law No. 10,742/03. On the other hand, the same factual reasons may justify the establishment of maximum prices in sectors in which, until now, a system of price freedom is in force.

Implementing a regulatory pricing policy under a tariff, freeze, or some form of binding adjustment, in certain circumstances and in relation to specific sectors, can be an important instrument to combat inflationary outbreaks and protect consumers against opportunism from economic players (especially in situations such as imminent shortages). As an example, it has been seen that the market is currently experiencing an increase in the price of items such as sanitizer, masks, and even cooking gas, in the face of insufficient supply in relatoin to strong and growing demand. In these cases, the institution of a price policy could meet the constitutional requirements that legitimize this type of economic regulation by the state, along with the sectors of the highest relevance for confrontation of the current crisis, such as drugs, where greater clarity is lacking.

Price control in the market stems from the constitutional requirement assigned to the State to act as a "normative agent and regulator of economic activity" (article 174 of the Federal Constitution). This form of state intervention on and in the economy runs counter to some fundamental dictates of the economic order idealized by the framers of the 1988 Constitution, among them free enterprise. For this reason, price control is an extreme measure that can only be justified if it is applied in circumstances of real need, under penalty of violating constitutional principles. Obviously, as is proper for the administrative legal framework, the exceptionality of the measure imposes a more intense burden as regarding justification of the reasons for the measure, and this need to justify more rigorously is placed as a true material limit.

Obviously, price control also encounters a formal limit: it does not dispense with legislative authorization for exercise thereof. In accordance with article 174 of the Federal Constitution, economic regulation can only be exercised by the Government if there is a law that establishes its limits and, consequently, if the regulation is found within these legal limits.

The Executive Branch's compliance with this competence cannot neglect freedom of initiative or business competition, values so dear to our legal system. However, as we have mentioned, it is undeniable that such principles are not absolute in their extent and may have relaxed application in the face of protection of other founding principles of the economic order, whose pillars are, aside from free initiative, the value of labor work and the objectives of ensuring a dignified existence for all, according to the dictates of social justice. In addition, consumer interests, the search for full employment, and environmental protection are principles applicable to the economic order (article 170 of the Federal Constitution). The justified protection of these legal assets therefore justifies the legitimacy of the State’s parameterizing economic relations and imposing restrictions on business freedom.

A proportionality must be observed, and in the case of medicines, for example, the President of the Brazil could not have ordered a definitive freeze on the price, and he did not. This is because, as we have said, the application of (somewhat opposing) fundamental principles in the economic order leads to a greater link between market containment measures and the reasons for them. Indeed, price control should be extraordinary and transitory. In these terms, the legal scholarship and case law of the Federal Supreme Court (STF) signals a consensus on the acceptability of price control and the limits thereof.

The STF has considered price regulation to be legally feasible in the face of public interest justifications. Examples of this are the occasions on which the higher court has accepted grounds based on the public interest associated with preservation of the right to health (ADI 2435-RJ, decided in 2003); protection of the right to education (ADI 319-DF, decided in 1993); and promotion of culture and leisure (ADI 1950-SP, decided in 2005, and ADI 2163-RJ, decided in 2018). On those occasions, the STF ruled price control constitutional to the detriment of the freedom of initiative of economic players. The grounds were based on reasons of public law deemed to legitimize State intervention in the economy.

The STF's assumptions in these precedents are that the Brazilian state is not subordinated to the classic liberal model and that it is permeated by social and public interest issues that support indirect State intervention through price control. In addition, it seems to be a general perception among judges that price control does not constitute abuse of economic power, market domination, elimination of competition, or arbitrary increases in profit.

On the other hand, the STF has already decided that State intervention in the economic domain is not lawful when based on mere discretion as to the measure's meeting public needs observed in the economic context, since such action may infringe on public freedoms, as well as cause unfair harm to individuals. In an emblematic case, the STF held that strict liability is applicable to the State, ordering the Federal Government to compensate the sugar-alcohol sector due to damage caused to this productive sector as a result of the pricing of the sector's products at values lower than the cost research conducted by the Getulio Vargas Foundation (cf. General Repercussion in Extraordinary Appeal with Interlocutory Appeal - RG REA 884325 - DF, decided in 2015). In this case, the STF held that there was violation of the constitutional value of free enterprise.

The topic is currently on the STF’s agenda, but there is a more conciliatory trend. ADIs 5956, 5959, and 5964 have as their subject matter discussion of the constitutionality of the establishment of minimum price for freight via road transport of loads provided for by Law 13,703/18, originated by Executive Order No. 832/18, in addition to ANTT Resolution No. 5,820. In 2018, Justice Luiz Fux, reporting judge in the case, granted an injunction suspending the imposition of fines for non-compliance with the floors provided for in Law No. 13,703/18. This decision was based on the harmful economic impacts of the establishment of a minimum price for the freight, in addition to the following allegations of the plaintiff that the minimum price represents "an affront to free enterprise, a fundamental principle applied under the Rule of Law (article 1, IV, and 170, head paragraph), to free competition (article 170, IV), consumer protection (article 170, V), to the provision of state intervention in private activity in an indicative manner only (article 174) and all other norms of the Federal Constitution that establish capitalism as the Brazilian economic system." In February of 2019, Justice Fux suspended all proceedings relating to MP 832/18 and reinstated the imposition of a fine for failure to following the minimum freight price. Before the joint judgment of the ADIs, postponed to April of 2020, the Justice coordinated a conciliation hearing that included representatives of truck drivers and businessmen who are members of the Brazilian Highway Freight Transport Association, the Confederation of Agriculture and Livestock of Brazil (CNA), and the National Confederation of Industry (CNI), signaling the possibility of settlement, to be determined in future rounds of negotiation among the same players.

It is clear that, given the specific circumstances of the market and of the Brazilian economy and the relevance of the activity regulated, it is necessary to find an optimal midpoint between (i) individual rights and respect for the freedom of economic players; and (ii) protection of the public interest and constitutional principles that privilege social and consumer rights.

The adversities observed in the current scenario make it obvious and urgent that the Government should resort to economic regulation for certain products and services. In addition to allowing for management of the current crisis, price control can prevent the charging of abusive pricing for essential items, in addition to protecting consumers and, especially, the most vulnerable from the economic point of view. However, it is essential that, in these times and in the future, State intervention through price control be restricted, and proportional, to the real need, so that all the principles and rights involved are safeguarded simultaneously.

Category: Tax

In a change of position, the Superior Court of Justice (STJ) ruled that it is possible to include the cost of wharfage services (loading, unloading, and handling of goods) in the customs value for the purposes of the import duties calculation base (II).[1] The decision was reached on March 1 by the 1st Section of the STJ by majority vote and in the context of a decision adjudicating multiple repetitive appeals on the same issue. The previous understanding, until then settled by both panels making up the 1st Section (1st and 2nd), was favorable to taxpayers, i.e., it did not include wharfage services in the customs value.[2]

In summary, this time the understanding set out in the dissenting opinion of Justice Francisco Falcão prevailed (with Justices Herman Benjamin, Og Fernandes, Sérgio Kukina, and Napoleão Nunes concurring),[3] to the effect that wharfage services provided inside the port, airport, or customs area should be maintained in the calculation base for II, on the grounds that this conclusion is drawn from a joint analysis of articles 77 and 79 of Decree No. 6,759/09 (which enacted the Customs Regulation).

More specifically, the winning argument found that, according to these provisions of the decree, wharfage services would be included in the concept of customs value, since such activities (loading, unloading, handling, among others) would be performed both inside the port and at the customs border point, being, therefore, within the scenarios provided for in article 77 of the Customs Regulations.

According to article 2 of Decree-Law No. 37/66 (as amended by Decree-Law No. 2.472/88), the customs value, which is the calculation base for II, is established in accordance with the rules of article 7 of the General Agreement on Tariffs and Trade (Gatt), better known as the Customs Valuation Agreement (AVA).

The AVA is mandatory for all member countries of the World Trade Organization (WTO), as is the case of Brazil, and was internalized in our legal system by Decree No. 1,355/94. The internalization was done precisely to avoid the exacerbated protectionism of Brazilian products over imported ones and to establish a market balance.

In short summary, the customs valuation agreement establishes the parameters that must be observed in order to determine the value of the imported products, which will be used as a calculation base for the taxes levied on imports. Thus, the AVA rules must be applied to all goods subject to import clearance in Brazil. This is exactly what article 76 itself of the Customs Regulations states.

In view of this, what is understood to be the customs value is relevant for the purposes of identifying the calculation base of II. This discussion is not recent: it has already been the subject of review in other important judgments, such as the one conducted by the Federal Supreme Court (STF) in the judgment on the unconstitutionality of the PIS/Cofins-Import calculation base, provided for by article 7, I, of Law No. 7,865/04, especially in the part that added the amount of the ICMS tax to the calculation basis of these contributions (RE 559.937/RS).

At the time of this judgment, faced with the necessary analysis of the concept of customs value, the STF found that the concept adopted by the Federal Constitution, considering the internalization of the international rules on the subject, is exactly what is defined in the AVA, i.e., what is provided for in its article 7 (Customs Valuation Rules).

Analyzing the provisions of article 7, articles 1 and 8 of the Agreement on the Implementation of article VII of the AVA have relevance for the topic "expenses with wharfage services." These provisions expressly list what expenditures will be considered by the member country to determine the customs value (which is the value of the transaction). These are: (i) the cost of transporting the imported goods to the port or place of import; and (ii) the costs of loading, unloading, and handling associated with the transport of the imported goods to the port or place of import.

This means that any expenditure on wharfage services incurred in unloading and handling the goods at the port of destination after the arrival in Brazil of the imported goods cannot be included in the customs value. It is very clear in the AVA that only the expenses with loading, unloading, and handling of the imported goods until the bonded port can be computed in the customs value, an understanding that, in the end, was settled by the STF.

In clear contradiction to the provisions of the AVA, however, the Brazilian Federal Revenue Service (RFB) issued Normative Instruction No. 327/03 (IN 327/03), which establishes rules and procedures for the declaration and control of the customs value of imported goods. According to the rule, the expenses related to loading, unloading, and handling associated with the transportation of imported goods in Brazilian territory must be included in the customs value.

In view of this, because they believe that the provisions of IN 327/03 violate the terms of the AVA, with regard to the possibility of including the cost of the wharfage service in the customs value even when such expenditure occurred outside the limits of the customs port, the taxpayers resorted to the Judiciary. After years of struggle with the Attorney General of the National Treasury (PGFN), the issue had finally been settled by the STJ, which concluded that inclusion was illegal. As a result, all taxpayers who litigated the subject began to exclude expenditure on wharfage fees from customs valuation for the purpose of collecting the import duties.

To everyone's surprise, however, an issue for which there was no longer any discussion gained new attention with the judgment handed down last March 11, when the 1st Section of the STJ found exactly the opposite of what had been defined more than three years ago, so as to reverse the scenario that had been favorable to taxpayers until then, by granting the appeals filed by the PGFN.

The change in the STJ's settled stand ends up going against the very concept of customs value set forth in the AVA (which overlaps with the Brazil's domestic laws) and ratified by the STF. The interpretation given to articles 77 and 79 of the Customs Regulations is simply not in line with the AVA itself.

In addition, the change in understanding undermines the principle of legal certainty, the pillar of the rule of law, and leads litigants to distrust the Judiciary. This breakdown in legal certainty entails serious damage to Brazil, since the requirement for reliability of the decisions handed down has not been met. It is an element that tends to increase the risk of doing business in Brazil and drive away foreign investors.

And what is worse: as the judgment issued by the 1st Section of the STJ took place in the context of an appeal under the procedure for deciding multiple appeals with similar issues, it must be observed by all judges and courts in Brazil, with immediate application to all cases that have the same ongoing discussion, as determined in articles 926 and 927 of the Code of Civil Procedure of 2015.

We need to await publication of the judgment, but, in principle, it is possible that this issue will be reviewed again, now by the STF, especially in the light of article 153, I, of the Federal Constitution of 1988, combined with the AVA itself, as occurred with RE 559.937/RS, mentioned above.

All taxpayers that already had favorable decisions in their cases still in progress in the courts will suffer from the reversal of the STJ’s position. We will not address here possible questions on the part of the PGFN as to final judgments that might have been handed down in closed cases for some taxpayers. This "thorny" issue deserves to be addressed in another article.

In practice, it is not known how the newly decided issue will be dealt with in relation to the past, since there was no debate in the judgment handed down by the 1st Section of the STJ regarding potential softening of the effects of the decision. In our understanding, and so that legal certainty is not further compromised, this softening, if it occurs, should only have prospective application.

[1] Topic 1014 – REsp 1799306/1799308/1799309.

[2] AgInt no REsp 1566410/SC, Opinion drafted by Justice Benedito Gonçalves, first panel, decided on October 18, 2016, published in the Electronic Gazette of the Judiciary on October 27, 2016, AgRg no REsp 1434650/CE, Opinion drafted by Justice Herman Benjamin, second panel, decided on May 26, 2015, published in the Electronic Gazette of the Judiciary on June 30, 2015.

[3] Justices Gurgel de Faria, Regina Helena Costa, Assusete Magalhães, and Mauro Campbell dissented. They found that wharfage expenses should not be included in the customs value, which makes up the calculation base for import duties.

Category: Restructuring and insolvency

The impacts of the covid-19 pandemic are undeniable and the three branches of government have been adopting measures to mitigate public health risks while dealing with the effects of the economic and financial crisis.

In this scenario, the National Council of Justice (CNJ) issued Recommendation No. 63, on March 31, 2020, to guide judges throughout Brazil in conducting the insolvency proceedings already underway, suggesting that acts for them to proceed normally can help reduce the difficulties and limitations imposed by measures to combat the pandemic.

The CNJ was also concerned with recommending immediate solutions to the crisis as a way to preserve companies, including mitigating, when justifiable, the consequences provided for in the Reorganization and Bankruptcy Law (LRF), for example, noncompliance with obligations provided for in the judicial reorganization plan, which, under the terms of article 73, would be decree of bankruptcy.

Among the main provisions of CNJ Recommendation No. 63, the following should be highlighted:

• Suspension of in-person general meetings of creditors (AGC). It is recommended that they be authorized to be held virtually. The judicial trustee shall, if possible, arrange for the necessary measures.

• In cases where it is necessary to postpone the holding of the AGC, it advises extending the stay period (period in which the running of the statute of limitations and all actions and executions in relation to the debtor are suspended) pending the resolution at the AGC.

• For judicial reorganizations with plans already approved, it suggests authorization to submit an amendment to the plan, provided that (i) the debtor proves that, due to the pandemic, its capacity to comply with obligations has been reduced; and (ii) the obligations contained in the current plan were being fulfilled. Modification of the plan must be resolved on in the AGC, to be held within a reasonable time.

• The judicial trustee shall continue to perform his duties, especially supervision of the business activities of the debtors in possession, in a virtual or remote manner, as well as present the monthly activity reports on its website.

• The general guideline is for judges to assess with special caution the granting of emergency measures relating to obligations in default during the state of public emergency declared in Legislative Decree No. 6/20.

The CNJ’s recommendation has no binding effect on the Judiciary. However, we noted that some of these guidelines were already being adopted and discussed by judges, such as relaxation or deferment of obligations under reorganization plans and the possibility of virtual AGCs.

However, it is crucial that the Judiciary adopt the exceptional measures with parsimony and with respect for legal security, lest, in the long run, problems occur that are even more serious than the crisis generated by covid-19.

Category: Environmental

Federal Supreme Court (STF) Justice Ricardo Lewandowski granted an injunction to suspend the effectiveness of a Ministry of Agriculture, Livestock, and Supply (Mapa) ordinance that allowed the tacit release of pesticides and chemical products without prior review by environmental and health oversight authorities.[1] The decision was handed down in the judgment of the Suit for Breach of a Fundamental Precept (ADPF) 656, on March 27. Lewandowski was accompanied in his opinion by Justices Dias Toffoli, Edson Fachin, and Alexandre de Moraes. Justice Roberto Barroso asked to see the record and there is still no forecast for when the judgment will continue.

For Lewandowski, the reporting judge designated for the case, “to allow an indiscriminate release, as is intended by means of the Ordinance contested, in my opinion, would further increase the chaos that has been established in our public health system, which is already highly overloaded with the uncontrolled pandemic [referring to the covid-19 pandemic]."

The party Rede Sustentabilidade [“Sustainability Network”] had filed ADPF No. 656 on March 3 against items 64 to 68 in Table 1 of article 2 of Mapa Ordinance No. 43. Published on February 27, 2020, the ordinance establishes deadlines for, in the absence of any response by certain public agencies, tacit approval for public acts of release from liability by the Bureau of Agricultural Defense (SDA) of Mapa, based on Federal Decree No. 10,178/19, the regulator of the Economic Freedom Law (Law No. 13,874/19).

Soon after the publication of the Economic Freedom Law, we analyzed in an article on this portal the potential impacts of the new measures on environmental laws and regulations. At the time, although we concluded that environmental licenses, strictly speaking, could not be granted tacitly, due to express prohibition by article 14 of Complementary Law No. 140/2011, we argued that this understanding would not apply to environmental and regulatory authorizations in general. This is because the Economic Freedom Law established as an essential right for the development and economic growth of Brazil the establishment of a maximum term, or public agencies to review requests for the release of economic activity.

On December 18, 2019, Decree No. 10,178 was published, regulating the Economic Freedom Law and providing criteria and procedures for the risk classification of economic activities. It sets a deadline for public agencies to respond to requests by regulated parties that, if not complied with, give rise to tacit approval due to the administrative agency's inertia. The decree provides that the highest authority of the agency or entity responsible for the public act of release will set the deadline for responding to the request by the regulated party. The text provides the express proviso that tacit approval shall not apply to administrative processes for environmental licensing or to other public acts of release of activities with significant impact on the environment.

Based on these provisions, Rede Sustentabilidade argues that Mapa Ordinance No. 43/20 created a "mechanism for tacit release of pesticides and other chemicals that are extremely dangerous to human health and the environment," taking the position that such approval would violate the fundamental right to an ecologically balanced environment, provided for in article 225 of the Federal Constitution. Considering this understanding, it is alleged that there would be breach of a fundamental principle in the right to protection of life (article 5 of the Federal Constitution) and to human health (articles 6, 7, and 196 of the Federal Constitution). The party also alleges violation of the general principles of economic activity, arguing that the ordinance hinders compatibility between economic activity and defense of the environment (article 170, VI, of the Federal Constitution) and offends the social function of property (article 8, III, of the Federal Constitution).

Rede also states that Decree No. 10,178/19 prevents tacit authorization when the approval by the administrative agency is tantamount to financial compromise for the Government, so as to then argue that Mapa Ordinance No. 43/20 would have a direct impact on public health spending, causing greater burdens than economic and financial benefits.

The ordinance provides for a period of 180 days for SDA/Mapa to respond regarding the registration of fertilizers, correctives, inoculants, biofertilizers, remineralizers, and substrates for plants; and 60 days regarding agrochemicals and the like. After these deadlines, the absence of a conclusive response by the SDA would entail tacit approval of the public act of release of these products. It is important to emphasize, however, that Decree No. 10,178/2019 provides that release granted in the form of tacit approval does not exempt the applicant from complying with the rules applicable to the conduct of the economic activity, nor does it remove the need to carry out the adjustments identified by the public authorities in subsequent inspections.

The process for registering new agricultural defensives, as a rule, goes through Mapa, the Ministry of Health (through Anvisa), and the Ministry of the Environment (through Ibama). In the present case, Mapa enacted the ordinance commented on here, Anvisa defined a period of four years per product to be review, and a position from Ibama is still forthcoming. Communication between the three administrative agencies is important to optimize and make more efficient the regulation of agricultural production activity.

[1] According to the Justice writing for the court, “[i]t is not possible, unless the STF decides otherwise en banc, to admit the tacit release of agrochemicals and chemicals, without an in-depth analysis of each case by the environmental and health oversight authorities. To allow an indiscriminate release, as is intended by means of the Ordinance contested, in my opinion, would further increase the chaos that has been established in our public health system, which is already highly overloaded with the uncontrolled pandemic."

Category: Real estate

On March 30, the acting presiding officer of the Senate, Antonio Anastasia, proposed Bill No. 1179/20, which creates the Emergency and Transitional Legal Framework for Private Law Relations (RJET) for the period of the covid-19 pandemic.

The bill includes emergency measures similar to those approved by parliaments in various countries, such as the United States, England, and Germany. It is also inspired by the Faillot Act of January 21, 1918, which created exceptional rules for the application of the theory of unpredictability in France.

In Germany, for example, legislative measures deal with contract, corporate, bankruptcy, and criminal law.

In Brazil, the bill is limited to private law and does not deal with bankruptcy and reorganization matters, as explained in its principles.

On April 3, the bill was passed in the Federal Senate, in the form of its replacement, partially accepting some amendments presented.

In this article, we will focus our analysis on the provisions of the RJET relevant to commercial contracts.

Principles of the RJET

In its justification, it is stated that the RJET has four principles:

• Maintenance of the separation between equal (or parity) relations, i.e., civil law and commercial law relations in general, and asymmetric relations (of consumer law and urban property leases);

• Non-alteration of the laws in force, considering the emergency nature of the pandemic, but the creation of transitional rules that, in some cases, temporarily suspend the application of existing provisions of law;

• Treatment of predominantly private matters, leaving tax and administrative matters for other bills; and

• Absence of treatment of bankruptcy and reorganization matters, which are the subject of other bills in the Brazilian Congress.

Although it does not expressly deal with the issues below as principles, the RJET recognizes that:

• The Civil Code and the Consumer Protection Code already have adequate rules for termination or revision of contracts, whether due to unforeseen circumstances or excessive burdensomeness (also called objective basis of the deal); and

• It is necessary to contain any excesses committed in the name of unforeseeable circumstances and force majeure, but also to prevent vulnerable segments of society from suffering restrictions on the right to housing.

Structure of the RJET and general provisions

The RJET deals broadly with the most varied of legal relationships in private law in 13 chapters and in a section of final provisions, structured as follows:

• Chapter I - General provisions

• Chapter II - Statute of limitations and lapse

• Chapter III - Legal entities governed by private law

• Chapter IV - Termination, rescission, and revision of contracts

• Chapter V - Consumer relations

• Chapter VI - Urban property leases

• Chapter VII - Adverse possession

• Chapter VIII - Building condominiums

• Chapter IX - Corporate arrangement

• Chapter X - Competition arrangement

• Chapter XI - Family law and succession

• Final provisions

In the general provisions, the sole paragraph of article 1 defines the initial term of the events derived from the covid-19 pandemic: March 20, 2020, date of publication of Legislative Decree No. 6.

Article 2 states that suspension of the application of standards referred to in the RJET does not mean their repeal or amendment.

Provisions relating to commercial contracts

The RJET addresses the consequences of the covid-19 pandemic for commercial contracts in its articles 6 and 7.

Article 6 states that the consequences of the pandemic on the performance of contracts, including those arising from unforeseeable circumstances and force majeure, shall not have retroactive legal effects.

Article 7 provides, in its head paragraph, that, for the purposes of applying the theory of unpredictability and excessive burdensomeness of the Civil Code (contained in its articles 317, 478, 479, and 480), increase in inflation, foreign exchange rate variation, devaluation or substitution of the monetary standard are not considered unpredictable facts.

It adds, in its paragraphs 1 and 2, that the rules on contractual revision of the Consumer Protection Code (also called the theory of the objective basis of the deal) and the Urban Real Estate Lease Law are not subject to the provisions of the head paragraph. It also establishes that consumer protection rules do not apply to contractual relations subject to the Civil Code, including those entered into exclusively between companies or businessmen.

Even if it is not in the articles of the RJET, there is in its justification a provision that the effects of the pandemic are equivalent to those of unforeseeable circumstances or force majeure, but that they do not take apply to obligations due before the recognition of the pandemic.

Opinion

In relation to commercial contracts, the RJET did not bring in innovations, but rather a legal consolidation of doctrinal and jurisprudential majority positions on the institutes dealing with supervening change of contractual circumstances.

Article 6 makes explicit the non-retroactivity of the effects of the pandemic, including those arising from unforeseeable circumstances and force majeure, which is also reinforced in the justification of the RJET, where it is stated that these effects do not apply to obligations that fell due before the recognition of the pandemic. This is already the standard of Brazilian civil law.

It is settled case law that situations resulting from macroeconomic crises in Brazil, such as increased inflation, foreign exchange rate variation, devaluation, or replacement of the monetary standard, are not considered unpredictable for contractual relations under the Civil Code. The head paragraph of article 7 consolidated this case law. It seems to us that the list of events contained in this provision is merely illustrative, thus not excluding others that may be considered predictable.

In turn, paragraphs 1 and 2 of article 7 consolidate jurisprudential and doctrinal positions to the effect that: (i) the contractual revision of the Civil Code is different from the contractual revision of the Consumer Protection Code and the Urban Real Estate Lease Law; and (ii) the rules of the Consumer Protection Code are special, and do not apply to legal relationships that are exclusively subordinate to the Civil Code.

Considering the principles mentioned above, especially that of maintaining the separation between parity and asymmetrical relations, the RJET is aimed at avoiding interference in parity relations and favoring the mechanisms of risk allocation in commercial contracts arising from this type of relationship.

Even the rapporteur in the Senate, Simone Tebet, indicated during the deliberations that she considers one of the most relevant points of the RJET to be the distinction between parity and asymmetrical relations, especially for the purposes of applying the rules of contractual revision.

In view of this, the text aims to bring about greater legal security by providing general and binding effects for the Brazilian population, since this did not derive from the existence of the jurisprudential and doctrinal positions mentioned above.

In relation to commercial contracts, the guidance is reinforced that the problem of the effects of the pandemic always require a circumstantial analysis, considering the characteristics and provisions of each contract.

A criticism should be made, however, of the general manner in which the RJET treats the pandemic as a form of unforeseeable circumstance and force majeure. Extensive and detailed legal rules are not considered necessary, but it should be remembered that the effects of the covid-19 pandemic will not always be equivalent to unforeseeable circumstances and force majeure, especially in parity relations, where the parties have ample freedom to decide on the cases and effects of unforeseeable circumstances and force majeure. In addition, depending on the circumstances of each contract, it may be the case that the pandemic does not constitute an actual impediment to the fulfillment of obligations. We believe that the requirements provided for in the sole paragraph of article 393 of the Civil Code (“Unforeseeable circumstances or force majeure are found in necessary facts, the effects of which could not be avoided or prevented”) continue to apply, and must be ascertained on a case-by-case basis.

This problem is highlighted in the justification of the RJET, where it is peremptorily stated that the effects of the pandemic are equivalent to those of unforeseeable circumstances and force majeure. If this were not enough, on April 2, Senator Marcos Rogério presented Amendment No. 11, in which he proposed adding another paragraph to article 1 to expressly state that "for the purposes of this Law, the impacts caused by the pandemic are considered cases of unforeseeable circumstances or force majeure. Fortunately, after the deliberation on April 3, this amendment was rejected.

Thus, although the pandemic is an unpredictable event and beyond the control of the parties (and there is no doubt about this), it is the consolidated understanding in Brazilian legal scholarship and case law that a finding of the occurrence of unforeseeable circumstances or force majeure requires an analysis of the specific case. The inclusion of legal provisions that could eliminate or limit this analysis is very harmful, not least because it could lead to disregard for the conduct of the parties in taking measures to mitigate the effects of the pandemic and potential harm to the other party.

Conclusion

The text should continue to be processed quickly. Considering the reactions that have already occurred, the provisions on commercial contracts do not give rise to much discussion, unlike the provisions on urban property leases and the General Data Protection Law, for example. Therefore, the expectation is that there will be no significant changes with respect to the provisions applicable to commercial contracts.

Finally, it is also important to note that the justification of the RJET states that some of the rules contained therein will be presented by the Chief Justice of the Supreme Court (STF) to the National Council of Justice (CNJ), in the form of a recommendation to Brazilian magistrates.

We are monitoring the proceedings and, after the vote, if there are any relevant changes in relation to commercial contracts, we will conduct further analysis.

Category: Restructuring and insolvency

Congressman Hugo Leal submitted to the Chamber of Deputies, on April 2, Bill No. 1,397/20 (PL 1,397/20), which contemplates emergency measures, including amendments to Law No. 11,101/05 (the Bankruptcy and Corporate Reorganization Law - LFR), to deal with the effects related to the covid-19 pandemic. The proposal is to institute transitional measures until December 31, 2020, or during the period of public emergency recognized by the federal government under Legislative Decree No. 6/20, with the objective of helping companies and other economic players restructure their businesses and minimize the impacts of the crisis.

Among the innovations brought about by PL 1,397/20, the following stand out:

• the creation of a period of legal suspension, for 60 days from the effective date of the law, during which legal actions of an execution nature involving discussion or performance of obligations due after March 20, 2020, as well as contract revision actions, are suspended;

• the creation of a voluntary judicial procedure called preventive negotiation, which may be initiated by economic players who meet certain formal requirements; and

• provisional amendments to the LFR, which will apply only to proceedings initiated or amended during the period of validity of the law proposed by PL 1,397/20.

According to the text of PL 1,397/20, the measures provided for in items (a) and (b) above shall apply to so-called economic players, defined in the bill as individuals and legal entities that exercise or have as their corporate purpose the exercise of economic activity in their own name, regardless of their registration or the business nature of their activity. The consumer, as defined in article 2 of Law No. 8.708/90, will not be included in such definition.

Legal suspension

During the legal suspension period, in addition to suspension of the suits indicated in item (a) above, the following acts are also prohibited: (i) judicial or extrajudicial execution of secured guarantees, unsecured guarantees, fiduciary guarantees and co-obligations; (ii) decree of bankruptcy; (iii) eviction due to lack of payment or other economic element of the contract; and (iv) unilateral termination of bilateral contracts, with any contractual provision to this effect being null, including early maturity.

This suspension period shall not apply to obligations arising from contracts entered into or renegotiated after March 20, 2020.

Preventive negotiation

At the end of the legal suspension period, an economic player with a reduction of 30% or more in revenue compared to the average of the last quarter, as attested to by an accounting professional, may begin a preventive negotiation procedure only once. The application shall be assigned to the court of the debtor's principal place of business.

If the application is granted by the judge, via merely formal examination of the necessary requirements, executions against the debtor will continue to be suspended for a maximum and non-extendable period of 60 additional days, with the debtor continuing to have the same protections applicable to the legal suspension period discussed above. No response, brief, or any kind of inquiry or expert investigation regarding the application for preventive negotiation shall be entertained.

During these 60 days, the debtor will seek to renegotiate the terms and conditions of its debts, with any agreements having binding force only in relation to the creditors who agree to them. If it is in its interest, the debtor may retain the help of a negotiator who will be paid at its own expense. The negotiator may be an individual or legal entity, with well-known credibility and professional capacity.

The bill establishes that, in the event that a petition for judicial reorganization is filed thereafter, the legal suspension period shall be deducted from the 180-day stay period already provided for in the LFR.

Provisional amendments to the LFR

Among the most relevant amendments (and which will certainly incite more controversy), the proposed text suspends the effectiveness of certain requirements and prerogatives of creditors in judicial and extrajudicial reorganizations and bankruptcies, in particular the rights against third party guarantors and co-obligors during the period of validity of the provisional amendments.

For new petitions for judicial reorganization and approval of out-of-court reorganization plans during the period of public calamity due to covid-19, the bill proposes relaxation of certain requirements, such as allowing new petitions by companies that have already benefited from these arrangements without restriction in time and reducing the quorum for approval of out-of-court reorganization to a simple majority of the creditors involved (today 3/5).

During the transitional arrangement, an application for approval of an out-of-court reorganization plan may be submitted with proof that creditors representing at least one third of all the claims of each type covered by the plan have agreed to it, with a commitment to reach the quorum laid down in the LFR within an non-extendable period of 90 days from the date of the application. At this point, it seems to us that the reference made in the current version of the bill to article 163, subsection II, of the LFR is mistaken, since the quorum required for approval of an out-of-court reorganization plan is provided for in the head paragraph of article 163 of the LFR. It is also necessary to clarify whether the legislator's intent in this type of advance filing was to maintain the quorum of 3/5 or whether the real intention is also to make it more flexible for a simple majority of the creditors involved.

The bill also provides for the granting of a stay period to the debtor in extrajudicial reorganization in view of the type(s) of creditor(s) included in each reorganization. The LRF does not provide for a suspension period for this type of proceeding, but case law already allowed for it. The question remains as to what the duration of this suspension would be, especially since article 6 referred to in paragraph 2 of article 10 of PL 1,397/20 does not provide for any time limit. This leads to the belief that this paragraph would actually be referring to article 6 of the LRF, and therefore within the time limit of 180 days.

In the case of bankruptcies, the minimum limit for a decree of bankruptcy for non-payment of a debt was raised from 40 minimum wages (i.e., R$ 41.8 thousand)[1] to R$ 100 thousand.

The transitional rules proposed in the bill also affect ongoing out-of-court reorganization, judicial reorganization, and bankruptcy proceedings: obligations assumed in ratified reorganization plans are not payable for 120 days, and during this period the possibility of conversion of the reorganization into bankruptcy due to noncompliance with the obligation established in the plan is suspended. In addition, debtors will be able to submit a new reorganization plan including claims which are subsequent to the assignment of the reorganization claim (normally excluded from these cases). The bill also stipulates that debtors will be entitled to a new stay period under the LFR.

With regard to the addition to the plan, the amount of the claims originally held by the creditors, less any amounts paid, shall be taken into account both for the calculation of the amount to be paid and for the counting of votes for approval of the amended plan.

With regard to receivables, generally the most liquid of the guarantees, the transitional arrangement that is contemplated by the bill allows for the release of 50% of the amount in favor of the debtor, against creditors that may hold security interests on them or even fiduciary ownership. The bill also provides that its original flow (lock) may be gradually re-established from the 6th month onwards and within 36 months.

For micro and small businesses, the bill establishes more beneficial rules for the debtor in the event of judicial reorganization, with a special plan providing for payment of the first installment within one year.

Perspectives

To be discussed by the Congress, the bill will certainly have a large impact and, in some points, despite the good intentions, may end up causing legal uncertainty. Although it is not scheduled to be voted on, it should be one of the priorities of parliamentarians.

[1] Based on the national minimum wage in force on the date of publication of this article, in the amount of R$ 1,045.00, as provided for in Executive Order No. 919, of January 30, 2020.

Category: Labor and employment

The federal government published, in an extra edition of the Official Gazette on April 1, Executive Order No. 936/20 (MP 936), which institutes the Emergency Program for the Maintenance of Employment and Income. The objective is to protect workers and ensure their employability during the period of public calamity mandated by Law No. 13,979/20. Among the measures proposed by the government is suspension of employment contracts for a maximum period of 60 days.

On March 22, the government had already issued Executive Order No. 927 (MP 927), with the intention of suspending employment contracts for up to four months while the calamity lasts. However, this measure, proposed in article 18 of the text, was repealed the following day by Executive Order No. 928 (MP 928). The main reason for revocation was the lack of regulations to reduce the financial impacts of suspension of contracts for workers. MP 936 has brought in provision to fill this need, at least partially.

According to article 8 of MP 936, during the state of public emergency, employers may agree to temporary suspension of the employment contracts of their employees for a maximum period of 60 days, divisible into up to two periods of 30 days.

In the head paragraph of the article it is possible to find two important changes in relation to article 18 of MP 927. The first is the maximum period of suspension of contract, which used to be four months and is now limited to 60 days, with the possibility of two successive periods of 30 days each. The second change is the need expressed according to the employee. The wording of MP 927 generated discussion about this need, since subsection II of article 18 provided that this suspension "could be agreed upon individually with employees," which denotes absence of a mandatory term.

The change in the formality required to agree on suspension of contract is provided for in paragraph 1 of article 8 of MP 936. It provides that suspension of contract must be agreed upon in writing between the employee and employer and forwarded to the employee two days in advance.

The formalization of the agreement must be sent to the labor union and to the Ministry of Economy within ten days after its execution. This time limit is necessary to enable inclusion of the worker in the Emergency Program for Maintenance of Employment and Income.

With the formalization of the suspension of contracts under the terms above, the federal government will pay 100% of the unemployment insurance that would be due to employees, considering their nominal salary. This amount may reach a maximum of R$ 1,813.03, if the employee receives an average salary above R$ 2,666.29.

For salaries below this ceiling, the calculation is based on various assumptions:

• for those with a monthly income of less than R$ 1,599.61, it is equivalent to 80% of the nominal salary; and
• for those who receive a monthly salary between R$1,599.62 and R$2,666.29, R$1,279.61 is added to 50% of the salary that exceeds R$1,599.62.

The exception to this rule are companies that have annual gross revenue above R$ 4.8 million. In this case, the government pays 70% of the above amounts and the employer is obliged to maintain the payment of 30% of the employee's salary.

During the suspension of contracts, employers must maintain all benefits granted to employees, our mere liberality or by determination of a collective bargaining agreement.

During this period, employers will not need to maintain FGTS payments due to employees or the payment of INSS contributions. MP 936, however, allows employees to make the payment of social contributions as optional insureds, for the period to be accounted for retirement purposes, and other social benefits governed by the INSS.

MP 936 requires the agreement to be in writing, since employers may negotiate the maintenance of a daily allowance for employees during the period. The negotiated daily allowance and the mandatory allowance for employees of companies with annual gross revenue above R$ 4.8 million will be compensatory and will not form part of the basis for calculating withholding income tax and the annual income tax adjustment declaration of employees.

The allowance will also not be reflected in social security contributions or in other taxes and fees levied on payroll, nor will it be the calculation basis for the payment of the employee's FGTS.

The payment may also be deducted from the company's net income for the purposes of determining corporate income tax and Social Contribution on Net Income of legal entities taxed under the actual profit arrangement.

The suspension will cease in three cases: with a formal request to return to work made by the employer, at the end of the agreed-upon period, or when the end of the period of calamity is decreed. Employees will return to work within two consecutive days, counted from the occurrence of any of these scenarios.

MP 936 also provides for penalties if the employee performs any type of work activity for the employer during the period, even if partially, remotely, or via teleworking. In cases of proven activity, employers will be compelled to pay wages and social contributions in full during the period, in addition to the legal sanctions provided for in collective bargaining agreements.

As with the other measures brought in by the MP, the agreement to suspend contracts per an individual agreement is limited to employees who receive an average salary of less than R$ 3,135.00 and to those who have completed higher education and receive an average salary of more than R$ 12,202.12. For the others, this agreement must occur through collective bargaining.

The suspension of contracts pursuant to article 8 of MP 936 shall apply to internship contracts and part-time contracts. It is not equated to the provisions of article 476-A. To include employees in this program, employers do not need to provide employees with a vocational training course.

In any case of suspension of contract using the benefits of the Emergency Program for Maintenance of Employment and Income, the employees affected will have their jobs guaranteed during the suspension and for an equivalent period subsequent thereto.

Category: Infrastructure and energy

The National Economic and Social Development Bank (BNDES) approved different economic measures in March of this year in order to mitigate the social and economic impacts of the new coronavirus (covid-19) pandemic that Brazil is weathering. Among them is the possibility of granting a six-month suspension on repayments of loans (principal and interest) taken out with the institution, in both direct and indirect types, by companies affected by the crisis, a measure known in the market as a standstill agreement.

BNDES’s direct transactions are those in which the financing is requested by the borrower directly to the bank, without brokerage from other financial institutions. In such cases, BNDES offers the possibility of suspending interest and principal for a six-month period. For this purpose, it is necessary to submit the request to BNDES by June 30, 2020. It will be reviewed by the team responsible for the borrower’s contract who will seek the suspension and forward it to BNDES’s Credit and Transactions Committee, in charge of ascertaining whether there is any impediment to the suspension. If the standstill period request is approved, the financing contract will be amended.

The main implications for borrowers that have their financing agreements amended are: (i) prohibition on the distribution of dividends and interest on equity for the year in which the suspension of payments takes place, except the minimum provided for by corporate laws and regulations; and (ii) that the BNDES does not declare any financial default of the relevant borrower during the suspension period. Other specific obligations are described in the terms of the draft of the contractual amendment available on BNDES’s website. Considering that the new form of payment of the suspended installments is not standardized, the borrower must pay special attention to the repayment provisions of financing contracts entered into before the standstill agreement is applied for.

The standstill is also provided for indirect transactions, those where there is an intermediary financial institution between BNDES and the borrower, in general due to the lack of BNDES branches in the borrower's location. Only accredited financial institutions may participate in indirect financing transactions. They are responsible for analyzing the financing, the risks of financial default, and all the business issues for granting the financing.

In this type of financing, BNDES grants to borrowers the same possibility for suspension of payments as is offered in direct transactions, as indicated above. To this end, it is necessary to forward the request to the financial agent with whom the transaction was contracted. BNDES has already reported that the negotiation of standstill agreements and detailed criteria thereof are of the responsibility of the accredited intermediary financial institutions, noting that  the rules set out in SUP/ADIG Circular No. 12/2020-BNDES must be complied with.

The possibility of a standstill agreement applies to all BNDES financing instruments, including those done with funds from the Merchant Navy Fund (FMM). The exceptions are the financing programs subject to matching by the Brazilian Treasury (subsidized transactions where the interest rate of the transaction is lower than the cost of the funds granted by BNDES).

Category: Real estate

On April 3, the Senate voted and approved Bill No. 1,179/20 (PL 1,179/20), with the purpose of establishing rules, of an emergency and transitory nature, applicable to private law relations during the period of public calamity caused by the covid-19 pandemic. The text is still subject to approval by the Chamber of Deputies and then presidential veto.

The period of application of PL 1,179/20 was set as being March 20 to October 30, 2020. In the event that Legislative Decree No. 6/20 (which declared the state of public calamity in Brazil) is revoked before October 30, this revocation date will be understood as the new final term for the application of the emergency and transitory rules instituted by the bill.

Among the emergency and transitional rules approved, some have a direct impact on the real estate market and deserve special analysis:

Revision of real estate contracts

PL 1,179/2020 rules out future allegation: (i) of increased inflation, (ii) of variation in foreign exchange rates, (iii) of devaluation, or (iv) of substitution of monetary standard as cases of unforeseeable circumstances to support requests for termination of contract or revision due to excessive burdensomeness. The PL also establishes that the consequences of the covid-19 pandemic on contractual relations under private law will not have retroactive legal effects to March 20, 2020.

Leases of urban properties

The final approved version of the PL prohibits the granting of preliminary injunctions to vacate leased urban properties for commercial or residential purposes within 15 days in eviction actions, regulated by article 59, paragraph 1 of the Lease Law, and filed after March 20, 2020.

The original version of the PL provided for temporary suspension of payment of rent from residential leases. This suspension was justified by the change in the economic and financial situation of tenants, which could occur due to loss of employment, reduction in work hours and salary, or a reduction in their compensation as a consequence of the crisis caused by covid-19. The measure, however, was not approved by the Senate, as it was found that it could also result in losses for landlords, who often depend on rental income for their livelihood. It is worth noting, however, that the proposal to suspend payment of rent was strongly defended by some senators and may be rediscussed in other bills that cover the same issue.

Agrarian contracts

The provisions of the original proposal and its amendments on agrarian contracts were not approved.

In the original draft, PL 1,179/2020 provided for: (i) automatic extension of lease terms, (ii) an additional term for exercise of preemptive rights by lessees and for retaking of the property by lessors, and (iii) authorization for Brazilian companies equated to foreign companies (as a result of being controlled or having the majority of their capital stock directly or indirectly held by foreigners) to enter into lease agreements until October 30, 2020, without compliance with the restrictions set forth in Law No. 5,709/71.

Despite the non-approval of these rules, questions still have to be asked about the stability of leases during the quarantine period. The topic may be the subject of new proposals in the Brazilian Congress. The Senate felt that the existing legislation and reasonableness would already be sufficient to govern any discussions on the subject. Therefore, there would be no need for new rules of an exceptional and transitional nature.

Adverse possession

The rule approved provides for suspension of the time limits for acquisition of real estate or personal property by means of adverse possession until October 30, 2020, thus protecting the owners or interested parties who would have difficulty in defending properties that are in the possession of third parties during the period of the pandemic.

Still on the subject of property rights, the Senate rejected a proposal to prohibit the granting of injunctions to vacate a property that is subject to a fiduciary sale in guarantee, seeking to protect, in an equitable manner, the interests of the debtor and of the purchaser of the property. The decision also ensures that any prohibition on the bidder’s investiture in possession of the property would create legal uncertainty.

Rules applicable to building condominiums

In order to legitimize the measures adopted in some building condominiums in recent weeks and ensure the effectiveness of the recommendation of social isolation, PL 1,179/2020 has given landlords powers to temporarily restrict: (i) the use of common areas of the condominium, (ii) the holding of meetings and festivities, and (iii) the use of parking garages by third parties, including in areas exclusively owned by the condominium members. However, the right of the condominium members to use the common areas necessary to access their private areas was expressly reserved, as was the right to medical care and to carry out works of a structural nature or necessary improvements.

In addition, the bill authorized that both condominium meetings and their respective voting may occur virtually on an emergency basis. If it is impossible to hold meetings in this manner, it was decided to extend the terms of office of condominium representatives from March 20, 2020, to October 30, 2020.

Next steps

After the vote in the Senate, the text will be submitted to the Chamber of Deputies for evaluation, which may approve it without amendments or propose amendments. If amendments are proposed, the text will return for further consideration by the Senate. Approved in both legislative houses, the legal text shall be subject to approval or total or partial veto by the President of Brazil.

In the vote on PL 1,179/2020, the Senate expressed the expectation that the law will be passed within the next week, given the emergency nature of its provisions.

Category: Labor and employment

The new form of the coronavirus, called SARSCoV-2 and causing covid-19, was first discovered in Wuhan, China, in November of 2019. The coronavirus, previously associated with other known viral forms, such as SARS-CoV and MERS-CoV, suffered a genetic mutation in 2019, causing the new disease.

The transmission of the virus is identical to that of its predecessors: from person to person, when there is direct physical contact or less than 1.5 meters away, through droplets of saliva released by sneezing or coughing, or by contact with contaminated secretions such as phlegm. It also occurs through contact with contaminated objects and surfaces. Preliminary data suggest that an infected person may transmit SARS-CoV-2 not only during the symptomatic period of the disease, but also before it. As of March 19, 2020, more than 200,000 cases had been reported worldwide, with 8,017 deaths associated with the virus. Protective measures are social isolation (voluntary quarantine), constant hand hygiene with soap and hand sanitizer, covering the mouth when sneezing or coughing, avoiding crowds, keeping environments ventilated, and not sharing personal objects. Governments around the world, as well as private companies, have already put voluntary or mandatory social isolation into practice, and its impacts on private initiative are visible and worrying. The federal government, in anticipation of the impacts of preventive measures on labor relations, identified the difficulties that would be faced and, on March 22, 2020, published Executive Order No. 927 (“MP 927/20”), amending legislation to make procedures more flexible and to regulate the alternatives that could be adopted by employers to preserve jobs and income while the state of public emergency remains in effect. Although MP 927/20 has provided for some specific measures for dealing with the crisis, as shall be better explained later on, it also provided that other alternatives may be explored between the employer and the employee, through the execution of an individual written agreement, which will take precedence over the other regulatory, legal, and business arrangements, subject to the limits of the Federal Constitution (“FC”). Among the main measures provided for in MP 927/20, we highlight the suspension of employment contracts, for up to four (4) months, for the participation of employees in distance training courses or programs offered by employers. In view of the controversy around the issue, particularly in light of the exemption from the obligation to pay wages during the period, the federal government opted to reassess the advisability of maintaining this alternative, which was revoked the following day with the publication of Executive Order No. 928/2020. This primer aims to present the impacts on labor relations of the covid-19 prevention measures and what companies can do to limit financial losses, maintaining in the first place the welfare of their employees, particularly in view of the alternatives created or made more flexible by MP 927/20.

*Up-to-date information in April 7th. 

Category: Corporate

Upon the declaration of the covid-19 pandemic by the World Health Organization (WHO), we are currently experiencing a situation of global anxiety that requires attention in the face of a crisis that a few months ago seemed unthinkable. Like other countries, Brazil has also adopted various measures to combat the spread of the virus.

Federal Law No. 13979, of February 6, 2020, was one of the first legal standards published in Brazil in response to the covid-19 outbreak. It described the main measures to be implemented in order to contain the spread of the virus and support society, including those aimed at ensuring access by health market players to protective equipment, medicines, and other tools needed to combat the imminent pandemic.

In less than a month, the drastic change in the scenario led to the publication of Executive Order No. 926/20 and other state and municipal regulations throughout Brazil. They have restricted several economic activities, especially those related to retail and entertainment, to avoid crowding. Although such measures were well received by a large part of the population, there were still doubts about the need to maintain other ancillary activities related to essential ones.

Only on March 20, with the publication of Federal Decree No. 10282/20, which regulates article 3, paragraph 8, of Law No. 13979/20, was it defined, in its article 3, paragraph 1, what should be considered to be "essential and indispensable services and activities to meet the unavoidable needs of the community", among which: (i) health care, medical and hospital services; (ii) social assistance and care to populations in a vulnerable condition; (iii) public and private security activities; (iv) national defense and civil defense activities; (v) telecommunications and internet; (vi) water collection, treatment, and distribution; (vii) sewage and garbage collection and treatment; (viii) electric power generation, transmission, and distribution; and (ix) services related to information technology and data processing (data center) to support other activities.

Perhaps even more important, article 3, paragraph 2, of Federal Decree No. 10282/20 correctly included also as essential activities, the ancillary activities of support and supply necessary for the production chain associated with the performance and operation of public services and essential activities. Quite accurately, it identified that stopping these ancillary activities would lead to a hindrance or even suspension of activities and services deemed essential, thereby affecting the entire population in social isolation for an indeterminate period of time.

Although article 2 of the decree establishes that its provisions shall apply to all bodies of the federation (public and private), and given the strong legal arguments to defend the position that the rules therein should prevail over any other state and/or municipal measures, one may not want to overlook that some of the measures provided in Federal Decree No. 10282/20 may be disputed by states and municipalities. After all, they have constitutional duties to fulfill and many are being pressured by the population to respond to the total paralysis of local economies.

It is different for companies that provide services or inputs necessary for the maintenance of other essential activities, such as manufacturers of components and raw materials for the production of ventilators, masks, gloves, and other medical equipment and accessories. These organizations not only have the right, but also the duty to continue operating so that, in fact, there will be no shortage of what is essential to overcome covid-19 in Brazil.

Thus, if a certain company believes that it performs an activity considered ancillary to an essential activity performed by another supplier, it must gather evidence that continuity of its services is essential for maintenance of the production chain of an essential activity. This evidence may be brought to the attention of the competent authorities or even support judicial measures to protect the continuity of the activity.

It is worth remembering that companies that play an ancillary role in some essential activity are not exempt from adopting, in their business unit and in the entire production chain (including those responsible for distribution centers), strict measures of hygiene and care to prevent infection of their employees, business partners, and other staff members. They should also provide products and means for proper sanitization and for taking the temperature of their employees, in addition to keeping the environment ventilated and disseminate frequent and clear information with guidance on covid-19 prevention measures.

It is not possible to anticipate how long the current pandemic will last or how the restrictive measures necessary to combat covid-19 will evolve. Given the dynamics of the disease, it is likely that new laws, decrees, and regulations will be published in the coming days or weeks. For this reason, before implementing any measure, we recommend that companies should consult their legal advisors, and assess possible risks and preventive conduct necessary to perform in this scenario of great legislative instability.

Category: Corporate

Executive Order No. 931, published on March 30 (MP 931), amended deadlines and procedures for compliance with legal obligations of corporations and limited liability companies, among other entities. The amendments are justified by the difficulty in complying with certain legal provisions in the face of the restrictions imposed by the measures to combat the covid-19 pandemic.

MP 931 included provisions in the Brazilian Corporations Law and in the Civil Code with new rules applicable to general meetings and partners’ meetings, including to expressly provide for the possibility of holding virtual general meetings. Below are the main changes implemented by MP 931:

General provisions

• Extension of the terms of office of officers and directors, members of the audit committee, and other committees until the ordinary general meeting or partners' meeting, as the case may be (as an exception in this fiscal year); and
• Possibility of submitting corporate acts signed as of February 16 to the competent board of trade as soon as work is resumed, giving the respective act retroactive effects (exceptionally due to the state of public emergency).

For limited liability companies

• Holding of partners’ meetings within seven months of the end of the previous fiscal year, i.e., July 31, 2020 (exceptionally in this fiscal year);
• Withdrawal of the effectiveness of contractual provisions requiring the holding of partners’ meetings before seven months from the end of the fiscal year (that is, July 31, 2020), as provided for in MP 931 (exceptionally in this fiscal year); and
• Holding a partners' meeting with a vote and participation of partners remotely, under the terms of regulations to be issued by the DREI (National Department of Business Registration and Integration).

For corporations

• Holding of ordinary general meetings within seven months of the end of the previous fiscal year, i.e., July 31, 2020 (exceptionally in this fiscal year);
• Possibility for the board of directors to resolve, ad referendum, on urgent matters of exclusive competence of the general meeting (exceptionally in this fiscal year);
• Competence on the board of directors or the board of executive officers to declare interim dividends, regardless of amendment of bylaws (exceptionally in this fiscal year);
• Holding of general meetings by privately-held companies in which the shareholder can participate and vote remotely, under the terms of regulations to be issued by the DREI;
• Option for CVM to authorize, in the case of publicly-traded companies: (i) the holding of a general meeting outside the company's headquarters; and (ii) the holding of a digital meeting.

The provisions listed above applicable to corporations are also valid for government-owned companies, government-controlled companies, and their subsidiaries.

Other topics

• Temporary waiver of mandatory prior filing of acts for the issuance of securities and other legal transactions, as of March 1, 2020. The filing must be done at the corresponding board of trade within 30 days from the date on which the board restores services.

In addition to the amendments mentioned above, article 3, head paragraph and sole paragraph of MP 931 delegated to CVM the power to extend the deadlines established in the Brazilian Corporations Law for publicly-held companies, as well as to define the date of presentation of the financial statements by such issuers.

In order to give effectiveness to MP 931, CVM promulgated Resolution No. 849, of March 31, 2020. Among other issues, the standard establishes new deadlines for the submission of certain documents and information due in the 2020 fiscal year.

The deadlines amended by Resolution 849 are described below, with the new dates for submitting documents or information:

• By May 31, 2020: (a) presentation of the complete annual financial statements and other related documents by the Brazilian issuers[1] (article 25, paragraph 2, of ICVM 480/09) and (b) submission of the standardized financial information form - DFP to CVM by Brazilian issuers (article 28, II, “a” of ICVM 480/09).

• By June 29, 2020: presentation of financial statements for the 1st quarter of 2020 - ITR (article 29, II, of ICVM 480/09).

• By June 30, 2020: presentation of the annual report by the debentureholders' fiduciary agent (provided for in article 68, paragraph 1, "b" of the Brazilian Corporations Law and article 15 of ICVM 583/16).

• By July 31, 2020: (a) annual update of the Registration Form (article 23, sole paragraph, of ICVM 480/09); (b) annual update of the Reference Form (article 24, paragraph 1 of ICVM 480/09); and (c) sending of the report by securities distributors and consultants (article 7, paragraph 2, of ICVM 539/13).

• By September 30, 2020: update of corporate governance report article 29-A, paragraph 1, of ICVM 480/09).

Among the changes introduced by MP 931 and, consequently, by Resolution 849, the following also stand out: (i) suspension of the effectiveness of the provisions of article 13 of ICVM 476/09, for a period of four months (term for trading securities offered in accordance with the instruction); and (iii) the possibility of holding general meetings of unitholders of investment funds on a virtual basis, as well as consider the financial statements approved if there is no quorum to call the meeting to order and the auditor's report does not contain a modified opinion.

Both regulations (MP 931 and Deliberation 849) entered into force on the date of their publication. However, the definitive effectiveness of MP 931 requires its conversion into law within 60 days from the date of publication and extendable for the same period. After this deadline, the text will lose its effectiveness if it is not approved by Congress.

[1] In relation to foreign issuers, our understanding is that the provisions of subsection I of Resolution No. 849 apply: financial statements must be submitted by May 31, 2020.

Category: Labor and employment

On April 1, 2020, the Federal Government published Executive Order No. 936 ("MP 936") intended to implement new labor and employment measures for employers to confront the coronavirus (covid-19) and, with that, preserve economic activity and employment level, without significant impact on employees’ income.

It is expected that MP 936, also known as the “Emergency Employment and Income Maintenance Program”, will preserve around 8.5 million jobs and benefit a contingent of 24.5 million employees across the Brazilian territory during the state of public calamity.

In order to achieve these goals, MP 936 establishes two main labor and employment measures for employers to confront the crisis: (i) proportional reduction in work hours and salaries; and (ii) temporary suspension of employment contracts (layoffs).

Before detailing each alternative, it is worth mentioning that:

• the implementation of these measures does not require collective bargaining with the labor union, except for when implementing the proportional reduction in work hours and salaries greater than 25% and temporary suspension of employment contracts, which, only for employees receiving salaries between R$3,135.01 and R$ 12,202.11, must be implemented through collective bargaining with the labor union
• in consideration for the suspension or proportional salary reduction in salaries, employees will be entitled to a guarantee of employment while the measure remains in effect and for an equal period after the end of the suspension or recommencement of the contract[1]
• to preserve employees' income, the Federal Government will grant an Emergency Benefit to affected employees, corresponding to a percentage of the Unemployment Insurance

That said, please see below the details of each measure established by MP 936:

Proportional reduction in work hours and salaries

This consists of an individual agreement or collective bargaining for a proportional reduction in employees' salaries and work hours, for which the Federal Government will pay the “Emergency Employment and Income Preservation Benefit.”

The reduction may be implemented in the percentages set out below, all of which may be fixed through collective bargaining or, under certain conditions, individual agreements:

Thus, for employees receiving salaries between R$3,135.01 and R$ 12,202.11, reductions higher than 25% may only be implemented through collective bargaining.

In addition, employers must consider that employees’ hourly wages must be preserved and that the reduction cannot exceed the maximum period of 90 days.

MP 936 also established that employers may agree to reduction percentages different from those indicated above through collective bargaining, subject to the proportion of the Emergency Benefit payment provided for in MP 936.

Temporary suspension of employment contracts

This consists of an individual agreement or collective bargaining for the temporary suspension of employment contracts by employers, with the payment of up to 30% of the employee’s salary by the employer, and payment of the “Emergency Employment and Income Preservation Benefit” by the Federal Government.

With respect to this measure, it is worth mentioning that, last March 22, the Federal Government published Executive Order No. 927, establishing the possibility of implementing a temporary suspension of employment contracts without any salary or governmental aid, which was revoked, on the following day, by Executive Order No. 928.

With MP 396, the Federal Government apparently sought to correct the procedure previously established, which was target of harsh criticism by the press, Governors, and Congressmen due to a potential lack of protection for employees during the crisis.

However, unlike the provisions established by Executive Order No. 927, the suspension of employment contracts established by MP 936 must comply with some specific conditions according to the employer’s gross revenue in the 2019 calendar year:

Thus, for employees receiving salaries between R$3,135.01 and R$ 12,202.11, temporary suspension of the employment contract may only be implemented through collective bargaining.

In addition, employers must observe some conditions when implementing suspension of employment contracts:

• the maximum suspension period is 60 days and may be divided into up to two periods of 30 days
• during the suspension period, the employer must maintain the payment of benefits to employees
• during the suspension period, employees cannot continue working, even partially or remotely, under penalty of having the suspension disregarded

Finally, MP 936 also establishes, for both measures described above, that:

• they may be applied for apprenticeship and part-time contracts;
• for individual agreements, the reduction or suspension proposal must be delivered to employees with, at least, a two-day notice
• once the agreement is executed, employers must, within 10 days, inform the labor union and the Ministry of Economy about its execution (the form of communication to the Ministry of Economy is still pending definition)
• the Emergency Benefit to be paid by the Federal Government to the employee may be accumulated with any Allowance paid by the employer
• collective bargaining agreements executed prior to MP 936 may be renegotiated in order to adjust their terms to the conditions set forth by MP 936 within 10 calendar days (as MP 936 was silent with respect to individual agreements executed prior to its issuance, we believe that each situation should be analyzed on a case by case basis)
• a provisional guarantee of employment must be granted during the period of suspension or reduction of wor hours and salaries and for an equal period after the termination of this condition. In the event of termination of employment during the employment guarantee period, the remaining period will be due in percentages ranging from 50% to 100% of the salary to which the employee would be entitled
• regular work hours or the employment contract shall be reestablished, within 2 days, upon the (i) end of the state of public calamity, (ii) end of the period stated in the agreement, or (iii) acceleration, by the employer, of the end of the period agreed upon

Emergency Employment and Income Preservation Benefit

The Emergency Employment and Income Preservation Benefit will be calculated based on a percentage of the Unemployment Insurance, which is currently calculated as follows:

For example, for an employee who, in the last three months, had an average salary of BRL 2,000.00, the amount of each payment of his/her Unemployment Insurance would be BRL 1,479.87. If that employee agrees to a 50% reduction in work hours and salary with his/her employer, the employer would pay 50% of the employee's salary (BLR 1,000.00) and the Federal Government would pay 50% of the Unemployment Insurance Installment, which, in this case, corresponds to BRL 739.94. Therefore, during the period of work hours and salary reduction, this specific employee would receive a monthly amount of BRL 1,739.94, which is, approximately, 87% of his/her original salary.

Other Provisions of MP 936

MP 936 also establishes that:

• during the state of public calamity, the professional training course provided for in article 476-A of the Brazilian Consolidated Labor Laws (CLT) (that regulates the regular layoff procedure through collective bargaining) may be offered exclusively remotely, lasting no less than one month and not more than three months;
• during the state of public calamity, electronic means may be used to meet the requirements for collective bargaining, including for the purposes of calling, deliberating on, deciding, formalizing, and publishing the collective bargaining agreement;
• during the state of public calamity, collective bargaining negotiation deadlines are reduced by half;
• intermittent employees will be entitled to an Emergency Benefit of BRL 600.00 for a period of 3 months, regardless of the number of employers they have contracts with.

[1] For example, a company implementing a salary reduction for 3 months will not be able to terminate the employee during this period and for the following 3 months, totaling 6 months of guarantee of employment.

[2] Employees who receives more than R$12,202.12 and holds a higher education degree.

[3] Employees who receives more than R$12,202.12 and holds a higher education degree.

[4] Employees who receives more than R$12,202.12 and holds a higher education degree.

[5] According to MP 936, the allowance paid by the employer will not have a salary nature and, thus, will not be considered for purposes of income tax, social security contributions, other taxes on payroll and the Severance Guarantee Fund (FGTS). It may also be excluded from the company’s net income for purposes of Corporate Income Tax (IRPJ) and Social Contribution on Net Profits (CSLL).

[6] Employees who receives more than R$12,202.12 and holds a higher education degree.

Category: Corporate

With the covid-19 pandemic, a significant portion of companies will have their operations seriously affected due to the need to comply with orders that impose, among other issues, closure of establishments and reduction of operating hours. This adversely affects billing and generation of cash. In this scenario, Executive Order No. 931/20 (MP 931) and CVM Resolution No. 849/20 were approved. Among other matters, they deal with the extension of deadlines applicable to corporations and limited liability companies, such as deadlines for holding ordinary general meetings by corporations, until the 7th month of the 2020 fiscal year.

In addition, management bodies (board of directors and board of executive officers) have been authorized to declare interim dividends based on a half-yearly balance sheet, regardless of provision in the bylaws, in order to meet, when appropriate, the need to pay dividends to shareholders while awaiting the ordinary general meeting.

However, whether in advance or within the time limit extended by MP 931, companies cannot fail to approve their financial statements and, no less important, resolve on the allocation of the net income calculated in the past fiscal year, if any. This creates the obligation to remunerate its shareholders through the distribution of dividends, which compromises part of its cash in a crisis scenario that may extend throughout the fiscal year 2020.

Regarding the distribution of dividends, Law No. 6,404/76 (the Brazilian Corporations Law), which governs corporations, establishes as its main purpose the calculation of profits and, as a consequence, the obligation of companies to allocate part of their net income to the payment of mandatory dividends to shareholders, pursuant to article 202 of the Brazilian Corporations Law. Paragraph 6 of article 202 provides that “profits not earmarked per the terms of articles 193 to 197 [i.e. earmarked for profit reserves or retained through capital budget] shall be distributed as dividends."

Despite the obligation to distribute dividends, the Brazilian Corporations Law provides for the existence of profit reserves and allows companies to retain part of their profits for purposes other than the distribution of dividends.

Thus, considering the current economic scenario caused by the coronavirus pandemic, it is questionable whether companies, even if they have recorded profits in their balance sheets, could legitimately withhold part or all of the dividends to be allocated to shareholders.

On this issue, the Brazilian Corporations Law provides for some mechanisms that companies could use to allocate their results without the need to resolve on the distribution of dividends, saving and preserving their cash for the adverse scenario that they will most likely face in the coming months. They are: reserves for contingencies (article 195 of the Brazilian Corporations Law), retention of profit reserve through capital budget (article 196 of the Brazilian Corporations Law), and special reserve (article 202, paragraph 5, of the Brazilian Corporations Law). Let us see which would be the most appropriate for the current situation.

The reserve for contingencies is formed by allocating "part of net profit [...] to offset, in the future, decrease in profit resulting from a loss deemed probable, the value of which can be estimated." As legal scholarship teaches, the creation of a reserve for contingencies cannot be based on a provisioned contingency, because it has already materialized, but rather on a contingency that has not materialized, that is future and uncertain, but predictable, the quantification of which is possible.

It is possible to infer, therefore, that the formation of the reserve for contingencies is justified in view of demands with reasonable predictability and whose value involved in the event of loss is at least determinable beforehand, since only that part of the profit that equates to the estimated value for loss will be earmarked to this reserve. The residual value of the net income that cannot be earmarked for the reserve for contingencies, since the estimated loss is not equivalent to all the net income calculated by the company, should be distributed as a dividend to shareholders. Thus, pending the new deadline for deciding on the earmarking of companies' results, the uncertainties in each sector may not yet allow for an estimation of expected losses for the purpose of forming contingency reserves and, therefore, the use of such reserves may not be the most appropriate for what is currently proposed.

The profit retention reserve, on the other hand, allows the company to retain a portion of net profits, provided that a capital budget justifying the retention is approved at a general meeting. Normally, the objective of this retention is to cope with some project or investment that should be described and provided for in the capital budget. This reserve, however, cannot be approved to the detriment of distribution of the mandatory dividend referred to in article 202 of the Brazilian Corporations Law. In this sense, article 198 of the law provides that “the earmarking of profits to create the reserves referred to in article 194 and the retention of the terms of article 196 may not be approved, in each fiscal year, to the detriment of distribution of the mandatory dividend." It is worth mentioning that the profit retention reserve can only be used after the distribution of dividends, which would make it impossible to use such reserve to retain a dividend that would be distributed to shareholders.

On the other hand, the alternative of the special reserve provided for in paragraphs 4 and 5 of article 202 of the Brazilian Corporations Law may be a viable alternative for companies wishing to retain the amount of profits that would be earmarked for distribution of dividends. This reserve establishes retention of a portion of the adjusted net income of the company reserved for the distribution of the mandatory dividend to its shareholders, provided that the financial condition of the company is incompatible with distribution thereof.

In this sense, article 202, in its paragraphs 4 and 5, allows the company to refrain from distributing the mandatory dividend if it considers it to be incompatible with its financial situation, in the following terms: "the dividend provided for in this article shall not be mandatory in the fiscal year in which the management bodies inform the ordinary general meeting that it is incompatible with the financial situation of the company.”

Next, the article provides that the audit committee, if in operation, shall give an opinion on such information and, in publicly-held companies, the management shall submit to the Brazilian Securities and Exchange Commission (CVM) an explanatory memorandum within five days of the general meeting. The standard also states that profits that are not distributed will be recorded as a special reserve and must be paid as dividends when the financial condition of the company permits and if they are not absorbed by losses in subsequent years.

The withholding of dividends mentioned does not apply to holders of preferred shares with fixed or minimum dividends, in accordance with article 203 of the Brazilian Corporations Law.

As one sees, the creation of a special reserve is an exceptional situation and should be used with caution by the company's executives, since it may raise questions from minority shareholders unhappy with the retention. On the other hand, considering the exceptionality of the situation the companies are experiencing due to the coronavirus pandemic, we believe that companies can suspend the payment of minimum compulsory dividends on the basis of creation of special reserves, but in the meantime they must justify in detail to the general meeting the causes and justifications that led them to adopt the measure, which, it must be repeated, must be considered exceptional.

Accordingly, companies should make sure that there are sound arguments to justify that the pandemic situation will cause a material deterioration in cash position or other equally relevant facts that will prevent them from declaring the dividends to which shareholders are entitled.

As an alternative for companies that do not wish to resort to retention based on the special reserve when the ordinary general meeting is held, due to the fact that they are not yet aware of the extent and the effects of the current crisis on their results, CVM's board (PA CVM No. RJ 2003/12233) has already opined to the effect of considering regular resolution by the meeting that approved the suspension of payment of dividends previously declared. In that precedent, the dividends were declared at an ordinary general meeting and were to be paid by the end of the fiscal year in which they were declared, in accordance with article However, considering that the financial situation of the company in question deteriorated between the date of declaration of such dividends and the date of their actual payment, the company opted to hold a new general meeting to resolve on the suspension of payment of dividends previously declared, based on article 205, paragraph 3, of the Brazilian Corporations Law. 202, paragraphs 4 and 5, which was considered valid by CVM's board.

This could be an alternative for companies that prefer to wait until the end of the year to ascertain the effects of the crisis on their financial results. In this situation, it should be repeated, companies should provide a suitable justification for the reasons that led them to suspend payments already declared.

In any case, the validity of the retention of the minimum mandatory dividend to form a special reserve requires that certain precautions be taken by companies, among which we highlight:

• disclosure of a schedule for distribution of the minimum mandatory dividend retained if the special reserve is not consumed by future losses;

• avoiding future losses being absorbed by the special reserve, unless there is no alternative; and

• duly informing the market of the existence of the commitments which the special reserve seeks to guarantee and of any other guarantees which already secure them.

The decision to withhold the minimum mandatory dividend or suspend payment thereof shall be reported to CVM, pursuant to article 202, paragraph 4, of the Brazilian Corporations Law, and disclosed as a material fact for the purposes of CVM Instruction No. 358/02, as already stated by CVM in PAS No. 03/02: "the non-payment of a mandatory dividend on the scheduled date constitutes a material fact, under the terms of the laws and regulations in force and the failure to disclose it, without any justification, gives rise to liability."

Recently, some companies have preferred to make accounting provisions to cope with the effects of any economic crisis generated by the covid-19 pandemic. On this point, it is important to clarify that accounting provisions, unlike the formation of reserves or retention of profits dealt with in this article, impact the company's own results, which may prove detrimental to the issuer.