Category: Banking, insurance and finance

Nei Schilling Zelmanovits, Eduardo Castro, Gustavo Rugani, Thales Tormin Saito, Thais de Gobbi, Vicente Piccoli M. Braga, Pedro Duarte Pinho, Rodrigo Chiaverini Albano, and Pedro Augusto Cunha

The Central Bank of Brazil (BCB) and the Brazilian Securities and Exchange Commission (CVM) presented, in early 2020, their regulatory agendas for the coming years. Inspired by the resumption of Brazil's economic growth, and with the encouragement of the federal government, the agendas include studies, innovative systems, and the promulgation of various rules to address the topics selected in the schedules of each regulator.

In the latter group, structural reforms that will generate significant impacts on the operations of various regulated agents stand out, such as the advent of the Open Financial System (Open Banking), the entry into force of the rules on the Prevention of Money Laundering and Financing of Terrorism (PLD/FT), the reform of foreign currency exchange legislation, the new system of banking resolution frameworks, the creation of the Regulatory Sandbox, the implementation of the system of instantaneous payments, the regulations of the Economic Freedom Law, and the regulation of the scenarios of internalization of orders in brokerage firms.

The long list of novelties shows that the coming years should bring important legislative changes, with major impacts throughout the National Financial System. Many learning and business opportunities will certainly arise, but market players may face challenges to stay well informed about advances.

To help you keep track of the changes, in the coming weeks we will publish a series of introduction and contextualization texts on all the major topics under discussion, with descriptions of the positions of the regulators, the current scenario for each topic, and the main changes intended, among other details. The first text in the series will be available next Monday and will address the CVM's new rules on cyber security.

The other texts will be published over the next few weeks and may be accessed at the portal’s start page.

Category: Banking, insurance and finance

The Central Bank of Brazil (BCB) opened for public consultation, on November 28, drafts of a joint regulatory act of the National Monetary Council (CMN) and the BCB and a BCB Circular dealing with the introduction of a “Controlled Testing Environment for Financial and Payment Systems Innovations” (Regulatory Sandbox) under the National Financial System and the Brazilian Payments System.^[1]

The draft CMN-BCB joint regulatory act sets out the general guidelines for the Regulatory Sandbox, while the draft BCB circular regulates in more detail the proposal for the first cycle of the Regulatory Sandbox under the BCB. The measures are in accordance with the regulatory strategy announced in Brazil in June of 2019, by means of a joint release^[2] signed by the BCB, the Securities and Exchange Commission (CVM), the Private Insurance Superintendency (Susep), and the Special Finance Bureau of the Ministry of Economy.

In general terms, the strategy envisages the creation of an experimental regulatory environment that seeks to encourage innovation in the financial, capital, and insurance markets by granting temporary authorizations to institutions that have innovative business models. The companies selected may fulfill fewer regulatory requirements for a given period, but will be subject to the limits and conditions set by regulators, which should act in a coordinated manner if activities undertaken by a venture fall within the regulatory purview of more than one entity.

The objective of the measures is to give greater effectiveness to the provision of article 3, VI, of the recently promulgated Law No. 13,874/2019 (the Economic Freedom Act), which gives everyone the right to “develop, execute, operate, or market new types of products and services when regulatory standards become outdated by virtue of internationally established technological development, under the terms set forth in a regulation governing the requirements for the measurement of the specific situation, the procedures, the timing, and the conditions of the effects.”

Far from being a peculiarity of the Brazilian legal system, today the sandbox strategy is an international trend. According to a survey conducted between February and April of 2019 with the support of the World Bank,^[3] many countries already have provisions on the sandbox model, including Australia, Canada, Singapore, the United States, the United Kingdom, Russia, and Switzerland. Various others are already considering adoption of this model, such as South Africa, Brazil, Spain, Japan, and Mexico.

Among the sandbox initiatives adopted in other countries, those of the United Kingdom and Singapore stand out, which have established themselves at the forefront of regulatory innovations and point to interesting ways for putting the Brazilian sandbox model into operation.

In the United Kingdom, the financial system regulator, the Financial Conduct Authority (FCA), operates the sandbox strategy by opening pre-established registration periods for interested parties. In the call notice for each of these periods, the FCA highlights proposals and technologies whose applications will be prioritized, but does not rigorously restrict potential participants. Initiatives entering into each period follow a specific six-month testing cycle.

In Singapore, for its part, the Monetary Authority of Singapore adopts a sandbox model that segregates interested entities into two groups. The first, called Sandbox, is for more complex business models that require customization to balance the project’s risks and benefits. The second, called Sandbox Express, has fast approvals and predefined rules, and is aimed at businesses that pose low risk and are already known in the market.

Meanwhile, in Brazil, the Regulatory Sandbox is rehearsing its first steps with the advantage of being able to observe results from international experience. In addition to the aforementioned public consultation initiated by the BCB, the CVM submitted a draft regulatory instruction for public hearing in the second half of 2019, while Susep submitted drafts of a circular and a resolution from the National Private Insurance Board (CNSP). The main points of the three proposals are compared in the table below:

^[1] Public Consultation Notice No. 72/2019. https://www3.bcb.gov.br/audpub/DetalharAudienciaPage?1&pk=321

^[2] Statement {Release}: implementation of model regulatory sandbox in Brazil. http://www.economia.gov.br/area-de-imprensa/notas-a-imprensa/2019/06/comunicado-conjunto-de-13-de-junho-de-2019

^[3] CGAP-World Bank: Regulatory Sandbox Global Survey, 2019. Available at: https://www.findevgateway.org/sites/default/files/publication_files/surevy_results_ppt_cgap_wbg_final_20190722_final.pdf

Category: Labor and employment

The Labor Reform (Law No. 13,467/17) amended article 899, paragraph 11, of the Consolidated Labor Laws (CLT) to, among other things, enable the use of a judicial surety bond or bank surety to substitute for an appeal deposit, an alternative that had already been accepted by the Labor Courts to guarantee enforcement of judgment.

However, over the past two years, starting with the enactment of the Labor Reform, the Labor Courts have resisted the use of these new instruments, especially the judicial surety bonds substituting for appeal deposits. Decisions handed down by the circuit courts across Brazil and the Superior Labor Court (TST) followed different paths, removing the supposed legal certainty brought about by the new paragraph 11 of article 899.The decisions in question basically fell into three distinct groups: one that found it impossible to use the insurance policy, another that recognized the possibility of use, but conditioned it on some requirements not provided for by law, and a third that affirmed the full possibility of using such a guarantee regardless of any requirement.

Faced with this legal uncertainty, the TST and the Superior Review Board for the Labor Judiciary issued Joint Act No. 1, which now regulates the use of surety bonds within the framework of the Labor Judiciary, both in the appeal phase and in the execution phase.

The joint act provides objective requirements for the use of the judicial surety bonds already contemplated by procedural law, such as the need for the initial insured amount to be equal to the amount of the judgment, plus 30%, subject to the limits established annually by the TST for each type of appeal.

In addition to this requirement, the regulation provides for the specificities that need to be carefully observed by the parties and insurers, such as the provision for updating the judgment per the legal indices applicable to labor debts (a sensitive issue in the labor sphere and routinely modified), the reference to the lawsuit for which the amount will be guaranteed, and the minimum term of the bond of 3 years.

Another important piece of news for those who intend to use surety bonds are the guarantees given by the insurer itself, since, after the promulgation of Law No. 13,467/17, a market of insurers was created for this purpose, some of whom have not been accredited and registered. Thus, in addition to presentation of the surety bond itself, the TST also began to require proof of registration of the policy with Susep and the insurance company's certificate of good standing with that body.

The act also allows parties, if they need to file successive appeals, to also supplement the appeal deposit by means of a surety bond, which should specifically include the remaining amount of the judgment, plus 30%.

With the creation of objective requirements for the use of judicial surety bonds, the labor community expects the courts to accept and guarantee the effectiveness of this instrument, removing once and for all the legal uncertainty of the last two years and ensuring that companies may exercise their rights of defense with the lowest possible burden.

Category: Tax

The decision regarding the exclusion of ICMS tax from the PIS and Cofins tax calculation bases, currently one of the most anticipated tax issues in Brazil, was postponed by the Federal Supreme Court (STF) on November 28 and there is no forecast for when it will be handed down. As issue is the judgment of the motion for clarification filed by the National Treasury in the case Imcopa (RE 574706), in which the theory was set that there was general repercussion in whether the ICMS tax is not a part of the calculation basis for the assessment of the PIS and Cofins taxes. Among allegations of omissions and contradictions, the National Treasury requested softening of the effects of the judgment, so that it produce effects only after the judgment of the motions for clarification. Due to the enormous relevance of the case, once again the softening effects has gained prominence in the Brazilian tax scenario.

In order to ensure legal certainty and protect social interest, softening of effects may be adopted so as to determine that a ruling of the STF has prospective effectiveness or as of a date set by the court, when an understanding of the STF modifies a prior position of the court or declares a certain law to be unconstitutional. Thus, the Supreme Court may decide, on a case by case basis, when its decision will take effect, considering issues pertaining to the judgment.

The Supreme Court stated that the motion for clarification is the appropriate instrument to claim softening of the judgment,^[1] since, as a rule, decisions declaring the unconstitutionality of a law have retroactive effects, respecting the idea that an unconstitutional law is born unconstitutional. Thus, based on the establishment of provision in positive law for softening in Law No. 9,868/99,^[2] the STF applied this method in some of its decisions, considering its response according to the statement of facts and explanatory memorandum of the movant party.

The institute of softening gained strength with the advent of the New Code of Civil Procedure, which made it possible to establish a time frame for the purposes of decisions that alter the court’s prevailing case law.^[3] Thus, although recent, the provisoin of the NCPC has been applied by the Supreme Court, including by Justice Marco Aurélio, who, notably, has always been opposed to softening.^[4]

In RE 643247,^[5] the Justice assured the application of the provisions of the Code of Civil Procedure of 2015 and softened the effects of the decision stating that "(...) paragraph 3 of article 927 admits, in the case of change in the prevailing case law of the Supreme Court, softening of the effects of the ruling, provided that it is founded on social interest and legal certainty. Considering the warning to use parsimony in the observance of the institute, when the requirements of the provision are met, softening of the effects of the decision should be allowed, in order to consecrate good faith and trust in the judiciary.^[6]

Justice Gilmar Mendes also has a firm position on softening, which manifests itself as a rule by considering the impact that this mechanism can have on the public coffers.^[7]In a recent judgment (RE 870947), for which the appellate opinion has not yet been published,^[8] the Justice voted in favor of softening due to the financial and budgetary impact that the absence thereof would entail. However, the dissent inaugurated by Justice Alexandre de Moraes prevailed, in which it was stated that softening would empty out the practical effects of the judgment.

On the other hand, in the case of the ICMS Cesta Básica (RE 635688), the theory argued by the taxpayer and unsuccessful in the merits of the judgment, Justice Gilmar Mendes, writing for the court, stated that softening of effects would express a reversal of the effective outcome of the judgment.^[9]

In the case of Imcopa, the Federal Government's arguments in favor of softening the effects are mainly economic, stating that there would be a financial and budgetary impact in the amount of billions. However, the STF has been rejecting purely economic grounds, asserting that, by themselves, such grounds do not constitute the social interest necessary for the softening of effects to occur.^[10] This technique, therefore, could render the decision of no effect.

The STF has also stated that a change in the case law is essential in order to set a new time frame for the effectiveness of the decision.^[11]

There are specific situations in which the STF has given a transition period to laws declared unconstitutional, as in ADIs 429 and 4171. In the first one, there were questions regarding provisions of the Constitution of the State of Ceará that granted tax exemptions for some products and certain types of individuals and legal entities. Although it ruled that the provisions were unconstitutional, the STF granted prospective effectiveness to a provision that had not been suspended by the granting of an injunction in a prior ruling.^[12]

ADI 4171, in turn, challenged provisions of ICMS Agreement 110/2007 that provided for reversal of the credit in the form of withholding of the amount corresponding to the ICMS tax deferred and not via write-off. As these provisions were deemed unconstitutional, the STF, en banc, found it advisable to grant a period of six months for states to adopt a new model, given that recognition of unconstitutionality would be detrimental to some of them.

In general terms, it may be said that the STF only applies modulation of effects taking into consideration the circumstances surrounding each case, when there are issues relating to legal certainty,^[13] and relevant social interest,^[14] which requires an adequate demonstration by the requesting party. The STF has ensured exceptions in cases in which effects were softened via the granting of an injunction, ensuring their effectiveness for ongoing actions.^[15] Thus, even though there is no standardization of the technique, there are well-defined criteria so as not to surprise the parties or other groups that will be impacted by the decision.

As for the Imcopa case, it will be incumbent on the STF to weigh the arguments presented by the National Treasury and the factual reality of the judgment, which was nothing more than a reaffirmation of case law arising from the Auto Americano case (RE 240785).^[16] Considering the scenario outlined in this article, it seems that, based on the precedents, the softening requested will not occur, since this is not a question of change in the case law and it is essential to ensure legal certainty. And, as Justice Gilmar Mendes said in the case of the ICMS Cesta Básica, softening would mean a reversal of the outcome of the judgment.

^[1] ADI 2797 ED, opinion on motion drafted by: Justice Menezes Direito, appellate decision drafted by: Justice Ayres Britto, en banc, decided on May 16, 2012, DJe-039. Released: February 27, 2013. Public: February 28, 2013. Headnotes VOL-02678-01 PP-00001.

^[2] Article 27. In declaring the unconstitutionality of a law or regulatory act, and for reasons of legal certainty or exceptional social interest, the Federal Supreme Court may, by a two-thirds majority of its members, restrict the effects of that declaration or decide that it takes effect only as of the final judgment or any other time as it may determine.

^[3] Article 927. Judges and courts must observe the following:
Paragraph 3. In the event of changing in the prevailing case law of the Federal Supreme Court and of the superior courts or of that arising from judgment of repetitive cases, there may be softening of the effects of the change in the social interest and in the interest of legal certainty.

^[4] Justice Marco Aurélio voted several times against softening, as in REs 560626, 55943, 680089 (Topics 2, 3, and 615) and ADIs 4481 and 4628.

^[5] Topic 16 RG - fixed theory: “Public safety, with fire fighting and fire prevention, is carried out, in the field of primary activity, by the state of the Federation, and, as an essential service, it is viable via collection of taxes, and Municipalities are not permitted to create a tax for this purpose” (appellate decision published on December 19, 2017, DJe 292, released on December 18, 2017.

^[6] RE 643247 ED, opinion drafted by: Justice Marco Aurélio, en banc, decided on June 12, 2019, electronic appellate decision DJe-140. Released: June 27, 2019. Public: June 28, 2019.

^[7] See REs 560626 and 680089 (Topics 2 and 615 RG).

^[8] The judgment on the motions for clarification in RE 870947 ended on October 3, 2019.

^[9] RE 635688 ED-second, opinion drafted by: Justice Gilmar Mendes, en banc, decided on May 9, 2019, electronic proceeding DJe-114. Released on May 29, 2019, and published on May 30, 2019.

^[10] See RE 559937 (Topic 1 RG) and ARE 957650 (Topic 891 RG).

^[11] RE 651703 ED, opinion drafted by: Justice Luiz Fux, en banc, decided on February 28, 2019, electronic proceeding DJe-093. Released on May 6, 2019, and published on May 7, 2019.

^[12] A 12-month a transition period was granted for the tax benefit provided for in article 192, paragraph 2, of the Constitution of the State of Ceará.

^[13] In this sense, REs 560626, 559943, 593849 (Topics 2, 3, and 201 RG, respectively) and ADIs 4481 and 4171.

^[14] In this sense, ADIs 3796 and 4171.

^[15] In this sense, ADI 4628 and RE 639856 (Topic 616).

^[16] RE decided on October 8, 2014. Appellate decision published on December 16, 2014, DJe 246, released on December 15, 2014.

Category: Infrastructure and energy

Approximately 20 years after the first federal and state programs for highway concessions for the private sector, the concession agreements then entered into between the public administration and the operators of these sections will soon expire and there is much expectation regarding what measures will be taken in relation to them.

The context at the time when these highways were granted was one of economic, political, and institutional instability and a reduction in the role of the state in the management of public infrastructure, which led both the federal and state governments to prioritize the delegation of its most profitable assets, the true “crown jewels”, with high internal rates of return (IRRs), compatible with the macroeconomic situation of the 1990s.

This work involved initiatives in three dimensions: in politics, the promulgation of Federal Law No. 8,987/95 and State Law No. 7,835/92; in economic terms, the implementation of the Brazilian currency plan the Real Plan and the reduction of inflation and risco Brasil [risk of doing business in Brazil]; and in the technique, structuring, and monitoring of complex contracts with which the Brazilian Public Administration was unfamiliar.

Currently, a possible alternative for the management of this infrastructure would be early extension of concession agreements in accordance with the rules provided for in Federal Law No. 13,448/17 and State Law No. 16,933/19. In this case, and as an assumption of public policy for early extension, new investments would be included in the contracts, which should also be in line with current best regulatory practices. Without going into the merits of the public policy decision, based on what has been observed thus far, however, both governments have opted to again conduct public tenders for these assets, with the inclusion of new stretches of road, rather than extending the concession contracts in advance. The decision creates new business opportunities and extends the quality of road infrastructure to other regions.

Among the stretches of highway that were part of the first stage of the federal highway concession program (Procrofe), we highlight the 346 km of BR-116/RJ/SP - Presidente Dutra Highway, which connects Rio de Janeiro to São Paulo and whose concession agreement will expire in March of 2021. The Investment Partnership Program (PPI) is considering bidding for this highway again, but with the inclusion of the 23 km stretch of BR-465/RJ and another 266 km of BR-101/RJ/SP. That is, considering all the investments already made in the stretch of BR-166 currently granted under a concession and its high traffic volume, the government intends to connected highway stretches for which a single concession would not be viable.

In addition to Dutra, the 121 km stretch of the BR 290/RS highway, which represents an important link in the state of Rio Grande do Sul, was initially granted to Concepa, controlled by the Triunfo Group. However, at the beginning of last year, this highway was again bid (to ViaSul, controlled by the CCR Group), with the inclusion of stretches of the BR-101, BR-448, and BR-386 highways, which expanded the stretches to 472 km.

The state of São Paulo has followed the same tendency. An example is the 74 km stretch of the SP-310 highway, which connects São Carlos to Cordeirópolis, and the 144 km stretch of the SP-225 highway, which connects Bauru to Itirapina, currently granted to Centrovias, controlled by the Arteris Group. Soon there will be new public tender for the concession of these highways. It will include sections of the highways SP-294, SP-425, SP-284, SP-331, SP-293, SP-261, SP-304, SP-197, SP-191 and SP-308, which will increase the total granted under concession to 1,201 km.

The decision to conduct rebidding for the highways with the inclusion of new sections needs to be reviewed carefully to justify the advantage thereof over extension of an existing concession. The federal government and the São Paulo state government have presented a justification for the decision to conduct a public tender, first, because there is already a consolidated history of technical data regarding these assets (traffic level and geological conditions that may affect the pavement, among others), which significantly reduces the risks for potential winning bidders. Secondly, the inclusion of new stretches may contribute to the development of other regions, which to some extent also benefits the future concession with a possible increase in traffic.

Contrary to the public policy decision adopted in other logistics modalities, such as railways and ports, where the tendency is to conduct an extension (whether or not in advance) of existing contracts, the highway sector seems to have a propensity to rebid current contracts. This, however, does not prevent the decision by the public authorities to be otherwise in certain cases, thus allowing for extension of existing contracts on the basis of justifications demonstrating an advantage over rebidding.

Category: Real estate

Resolution No. 4,661/18 of the National Monetary Council (CMN) will reach one and a half years since its publication and will enter into effect on November 29. Even after the time that has elapsed, some rules established for investment in what was previously called the “Real Estate Segment” are still under discussion. Appropriate regulation on the subject in order to guarantee legal certainty for real estate transactions carried out by closed-end private pension entities (EFPC) is lacking.

Resolution 4,661/18 established restrictions on real estate investment by EFPCs, prohibiting direct acquisition of real estate and forcing these entities to dispose of their direct property within 12 years (by May 28, 2030). Much has been discussed, however, regarding what the correct interpretation would be of the prohibition on "direct acquisition of real estate."

Acquisition of real estate means acquisition of ownership of immovable property which, in Brazilian law, occurs in three ways: by adverse possession, registration of title, or accession. For the analysis conducted in this article, only direct acquisition of property by registration of the title is of interest, that is, through registration of a transfer of title over the property (deed of sale and purchase, donation, exchange, accord and satisfaction, deed of sale), among others) at with competent Real Estate Registry Office in favor of an EFPC.

By prohibiting direct acquisition of real estate by EFPCs under any circumstances, a discussion arises as to whether the provision of real estate collateral in favor of EFPCs would also be prohibited, such as collateral security (AFG). In an AFG, fiduciary ownership and indirect possession of the property are transferred to the fiduciary creditor as collateral for a debt and, in order to start the foreclosure process in the event of non-payment of the secured debt, prior consolidation of ownership of the property in the name of the creditor is required, including via payment of ITBI (Real Estate Transfer Tax) and registration with the Real Estate Registry Office.

This discussion is further divided into two lines: for new transactions entered into after the beginning of the entrance into force of Resolution No. 4,661/18, in which it may be understood that it will not be possible to create an AFG; and for the execution of real estate guarantees (AFG and mortgages) for transactions entered into before May 29, 2018, but foreclosed on after the expiration of Resolution No. 4,661/18. In the latter case, would it be possible to award or grant via accord and satisfaction properties offered as collateral to the EFPCs?

In the case of property mortgages, the possibility of creation of real estate collateral is not addressed because, unlike with AFG, the creation of a mortgage does not transfer ownership (even fiduciary ownership) to the lender, nor is the beginning of foreclosure of the guarantee addressed, since there is no consolidation of ownership of the property in the name of the creditor for subsequent sale at auction. However, there is still discussion regarding the possibility of awarding the property when there is no third party interested in the auction and regarding the possibility of emptying the equity value of the real estate as a result of this restriction, which harms the interests of EFPCs and their participants.

This discussion on the correct interpretation and scope of the prohibition on direct acquisition of real estate by EFPCs gives rise to many questions:

• How does one put into operation, in practice, the execution of an AFG set up in favor of an EFPC that requires prior consolidation of ownership of the property in the name of the creditor before subsequent sale in extrajudicial auction that may even result in the awarding of the property to the creditor itself?
• Will an EFPC be able to consolidate ownership of the property in its name, pursuant to Resolution No. 4,661/18, even though the AFG was created before May 29, 2018, for the purposes of execution?
• Will the EFPC be able to have the property given as collateral awarded and become its owner, even if temporarily, considering the obligation to dispose of all properties or pay them up in FII within 12 years?
• If it is found that it is possible to consolidate and award the property because the secured interest in the real estate was created before May 29, 2018, this property, when acquired by an EFPC, may the concept of “stock” be included so as to eliminate the concentration limit per issuer of up to 25% of shareholders' equity in the event of subsequent payment of the property by the EFPC in an FII?

Although Resolution No. 4,661/18 has been in force for a year and a half, all of these questions remain unanswered, which makes EFPCs’ activities and new investments in the real estate segment more difficult.

From a literal interpretation of the resolution (which does not provide for any exceptions), it seems obvious that EFPCs may no longer directly purchase any property after May 29, 2018, even as a result of foreclosure (mortgage or AFG) or accord and satisfaction with real estate arising from debts agreed upon or created prior to the entrance into force of Resolution No. 4,661/18. However, this does not appear to have been the intention of the CMN when it formulated the resolution, and EFPCs have been seeking alternative solutions to enable real estate collateral to be foreclosed on in order to balance both their actuarial objectives and their profitability and obligations imposed on them by the rule in question.

A literal interpretation of the letter of the law does not, in fact, seem to be the best way out, considering that, the objectives of EFPCs include precisely the guarantee of return on their investments and solvency of their assets in order to assure to their participants an adequate return and therefore, a satisfactory benefit. Seeking to preserve a minimum of legal certainty, foreclosure on real estate guarantees, including through the direct awarding of properties given as collateral, and accord and satisfaction itself for these properties in transactions entered into before May 28, 2018 (even if foreclosed on after the entry force of Resolution No. 4,661/18) should continue to be legally supported in the name of preserving the interests of the EFPCs themselves and their participants and beneficiaries.

At the present time, however, the lack of clarity on how the issue will actually be dealt with by Previc (National Supplementary Pensions Bureau), the body responsible for the interpretation and supervision of Resolution 4,661/18, and by the Judiciary creates a scenario of great legal uncertainty. Considering the vagueness surrounding Previc itself, which may possibly merge with Susep (the Private Insurance Bureau), there is no clear outlook as to when we will have a definitive solution for the issue. On a case-by-case basis, the recommendation that has been given to EFPCs is to formalize prior consultations with Previc in order to validate transactions arising from foreclosure on real estate guarantees.

Category: Public and regulatory law

Reduction of bureaucracy in public procurement is one of the main policy goals of the Brazilian federal government. Among the actions taken throughout 2019 in this regard is the promulgation of Normative Instruction No. 1/2019 by the Digital Government Bureau of the Ministry of Economy. One of the most relevant milestones in improving public-private dialogue, the rule governs the process of contracting for IT solutions by the bodies and entities of the Federal Public Administration that are part of the Information Technology Resources Management System (Sisp).

IN 19/2019 was promulgated in consideration of the recommendations provided in Appellate Decision No. 2,569/2019 by the Federal Court of Accounts (TCU), which identified a series of flaws and inefficiencies in practices and processes adopted by the Federal Public Administration for procuring IT solutions and indicated the need to adopt new parameters to better serve the public interest.

The changes introduced by IN 19/2019 shook up the market for service providers and suppliers of IT products and solutions, who were forced to change certain established practices in contracts with the government. The rule also served to clarify issues that previously lacked detail. One of them is proof of concept or POC, which means tests conducted to demonstrate whether a particular product or service works in practice and what its level of efficiency might be.

In procurement, the Public Administration uses POCs to assess, for example, the technical specifications, functionalities, performance, and suitability for the technological environment of the agency or entity in which the solution will be used, among other factors that are relevant to the procurement.

POCs generate documented evidence that supports the procuring public administrator's decisions to (i) plan a procurement (ascertaining the technical requirements of IT solutions that may meet needs, for example) or to (ii) assess the suitability of an IT solution submitted by a bidder to the technical specifications required in the call for bids (i.e., the Reference Term Sheet).

When a POC is performed during the contract planning stage, some procedures must be followed to remove the risk of targeting (albeit involuntarily) the notice and reference term sheet for the benefit of a particular IT solution or a specific bidder.

Although it does not expressly use the term POC for the purposes of planning a contract, IN 1/19 discusses the topic in its article 11, items I and II, when dealing with “comparative analysis of solutions” to support a Preliminary Technical Study for Procurement, a document that describes the review conducted by the Public Administration of the procurement conditions in terms of needs, requirements, alternatives, choices, intended results, and other characteristics. The objective is to demonstrate the technical and economic feasibility of the procurement.

The Preliminary Technical Study for Procurement must include this comparative analysis of IT solutions from the economic and qualitative point of view, observing market alternatives, different service delivery models, and different types of solutions in terms of specification, composition, or characteristics of the included goods and services, among other factors.

Once completed, the Preliminary Technical Study for Procurement will serve as a basis for preparing the Reference Term Sheets (or basic plan), which define the purpose of the procurement, describes the IT solution, and specifies the requirements of the procurement. Thus, it is essential that a POC be performed according to the procedures listed in the study in order to rule out the risks associated with targeted procurement.

In Appellate Decision No. 2,569/2018, the TCU condemned the practice of recording an opportunity involving the granting of differentiated discounts by IT solution manufacturers to resellers who provide their own human and material resources to perform a POC in a public procurement, an illegal practice that violates competitive bidding which should be avoided by market players in this segment.

Although the procedures set forth in IN 1/19 are binding only on bodies of the federal public administration, it is the case that they reflect best POC practices from the point of view of the government and the case law of the TCU. For this reason, the performance of a POC by those interested in cooperating with the Public Administration in the planning of future procurement should be in harmony with the rules of IN 1/19, assisting in having them be properly complied with by the procuring public entity.

With the constant need for improvement and modernization of the systems and processes used by public bodies and entities, the tendency is towards strong growth in IT solutions in procurement by the Brazilian Public Administration, which will require from interested companies strict compliance with the rules established by IN 1/19.

Category: Litigation

The principle of legal certainty is one of the underpinnings of the rule of law. It could not be otherwise, as it is because of it that society can trust that the rules of the game will not be changed during the course of its activities and the legal transactions entered into.

Legal certainty is materialized in sparse legal provisions, among which article 5, XXXVI, of the Federal Constitution stands out, which deals with accrued rights, perfected legal acts, and res judicata. The latter guarantees that, once a right has been decided on by the Judiciary, the decision becomes law between the parties and must be respected.

In this context, based on a logical and systematic interpretation of the doctrine of res judicata, the Superior Court of Justice (STJ), in a recent judgment on a motion to resolve diverging positions on the law (Motion on Divergence No. 600.811/SP), established an important hermeneutic rule. The Justices of the special body of the Superior Court established, in a close judgment of 8 votes against 7, that the force of res judicata is so strong that it prevails even over a previous res judicata that deals with exactly the same matter.

Understanding the case

In the case in question, three motions to stay were filed against the purchase of the same property at an auction: the first was dismissed without prejudice and became final and unappealable in 1998; the second was granted relief (canceling the auction) and became final and unappealable in 2001; and the third was dismissed (upholding the purchase at the auction) and became final and unappealable in 2010.

The parties then began to debate which of the decisions should prevail: the one that first considered the merits and became final in 2001 or the one that became final in 2010. At the trial level, without much basis, the judge established that the decision that reviewed the merits and first became final should prevail, such that the purchase was undone. In deciding the appeal filed by the purchaser of the property, the 21st Chamber of Private Law of the São Paulo State Court of Appeals upheld the lower court’s decision.

The controversy was then submitted to the scrutiny of the Third Panel of the STJ, with Justice Paulo de Tarso Sanseverino writing for the court, who reaffirmed the original trial decision such that the decision that assessed the merits and first became final would be respected. Dissatisfied, the purchaser of the property filed a motion for divergence, arguing for the validity and effectiveness of the decision that last became final.

The theories defended

The defenders of application of the decision that first became final maintain that, in the case of lis pendens or res judicata, the second claim fails to meet a procedural requirement, such that it constitutes defective pleading. In this sense, Nelson Nery Jr. and Rosa Maria de Andrade Nery argue:^[1] “The first prevails, because the second did not even form or, at least, offended the first res judicata, and is thus unconstitutional (Federal Constitution article 1, head paragraph, and 5, XXXVI) and illegal (Code of Civil Procedure article 267 V, 301 VI, 471, 485 VI). The second res judicata was never formed because there was no suit, proceeding, or judgment (see commentary, Code of Civil Procedure article 267, V and VI). Strictly speaking, it is not even necessary to appeal against this judgment handed down in violation of res judicata, nor to file an action for relief from judgment.”

Also due to the prevalence of the first judgment, but based on the invalidity by operation of law of the second judgment, Sérgio Gilberto Porto states:^[2] “The argument that the repeated judicial fact, that is, the new decision, in itself, offended a res judicata that already existed and that, as such, was assured by the Federal Constitution (article 5, XXXVI) seems irrefutable, and thus invalid pleno jure, behold, given that a constitutional command prevails over an ordinary rule (article 495, Code of Civil Procedure) which establishes a deadline for filing an action for relief from judgment. Thus, the only plausible solution to prevent violation of the Constitution is to not apply the period for preclusion in article 495, in the case of sectoin IV of article 485 of the Code of Civil Procedure, when there is a conflict in sovereignly adjudicated decisions.”

Teresa Wambier,^[3] in turn, cites Liebman in stating that "there will have been no authentic judicial activity, but the appearance of judicial activity, or the external form of judicial activity." Continuing on, the renowned professor also cites José Carlos Barbosa Moreira,^[4] stating that “there is no way to sustain that those who plead, before the Judiciary, review of a decision already decided, by means of a decision on which the authority of res judicata weighs, have an interest in the suit.”

On the other hand, those who argue for the prevalence of the decision that became final later do so based on the argument that all judicial decisions are valid and effective, such that the subsequent decision overrides the previous one and replaces it.

In this sense, Arruda Alvim^[5] argues that “in the event that the second proceeding reaches res judicata, the judgment rendered therein shall be unchangeable and preponderant. In other words, the formation of res judicata affects, in this case, the proceeding that began first, destroying the legal effects of the mere judgment.”

The lesson of Eduardo Talamini is to the same effect:^[6] “Nor may it be said that although the second judgment exists, the solution of the conflict between the two incompatible commands occurs with the prevalence of the first. Two considerations rule out this conclusion. The first is that the law expressly provided for actions for relief from judgment against the second ruling (Code of Civil Procedure, article 485, IV). This means that once the time limit has elapsed without this specific means of objection having been exercised, the defect of the second judgment becomes irrelevant. And then, 'the first judgement is devoid of value, since the second judgement implies negation of any prior judgment to the contrary.' It is not denied that positive law could have resolved such a conflict differently, but to that an express ruling in that regarding would be necessary, such as there is, for example, in Portuguese law (see Portuguese Code of Civil Procedure, articles 75 and 813, f). Hence the second consideration: in the absence of an express rule otherwise, the general principle applicable to all fields of public law intended to resolve conflicts between legal commands applies: the later act takes precedence over the prior act (criterion of 'temporality'). This may not be the ideal solution to the impasse. Incidentally, the ideal situation would be for the impasse to not even exist. In any case, if it does occur, that is the 'least bad’ solution.”

For this second line of understanding, restoring force to the decision that first became final requires the filing of an action for relief from judgment against the decision that was handed down and became final last. The filing of the action for relief from judgment is necessary because, although absurd, the judicial decision issued last must prevail due to the force that every judicial decision is endowed with.

How is the issue to be resolved?

Although a close result, the STJ joined the understanding that every judicial decision is endowed with effectiveness and validity until it is overruled. Accordingly, the decision that becomes final last must take effect and override the first one until, via an action for relief from judgment, the effects of the first decision are reinstated. In the absence of any action for relief from judgment, the decision which became final last will have completely superseded the first decision.

^[1] Commented Code of Civil Procedure and extraordinary legislation, 11th ed. São Paulo: RT, p. 714.

^[2] Coisa Julgada Civil [“Civil Res Judicata”]. 4th ed. São Paulo: Revista dos Tribunais, 2011, p. 166.

^[3] Nulidades do processo e da sentença [“Nullity in proceedings and judgments”]. 7th ed. São Paulo: Revista dos Tribunais, 2014, p. 356.

^[4] Nulidades do processo e da sentença [“Nullity in proceedings and judgments”]. 7th ed. São Paulo: Revista dos Tribunais, 2014, p. 384.

^[5] Direito Processual Civil [“Civil Procedure Law”], 1/380, 8th printing, Ed. RT, 1972 in RJTJESP 88/125.

^[6] Coisa Julgada e sua Revisão [“Res Judicata and its Review”], 1st ed., São Paulo: Revista dos Tribunais, 2005, pp. 155/156.

Category: Corporate

Executive Order No. 892/19 (MP 892), which substantially changed the framework for legal publications by corporations, expired on December 3rd. Essentially, MP 892 had extinguished the obligation to publish corporate acts in official gazettes and widely circulated print newspapers, pursuant to Law No. 6,404/76 (the Brazilian Corporations Law). These publications would be done only by electronic means, which would reduce costs and bureaucracy related to companies’ administrative and corporate routine.

Published on August 5th of this year, MP 892 expired and lost its effectiveness, since it was not reviewed by the floor of the House or Senate. In a vote of the mixed committee that reviewed the executive order, Senator Rose de Freitas (Podemos-ES) put forward arguments for rejecting the text, claiming that, if approved, the MP would make room for fraud in electronic documents of companies “whether due to technical failures in the digital certification systems, whether because the MP authorizes the Brazilian Securities and Exchange Commission (CVM) to waive the authorization of digital certification by means of a rulemaking act of the commission.”

In her opinion, Senator Rose de Freitas also considered the executive order to no longer be relevant, since the topic had already been discussed and governed by the Brazilian Congress in 2019, through Law No. 13,818/2019 (which provides that, starting in 2022, balance sheets shall be published in summary form in the print edition of the newspapers and, in full, on the website of the same newspaper).

The Senator also emphasized that the executive order was promulgated in a direction contrary to the law approved by the Brazilian Congress and did not provide for a transitional rule for it to enter into effect, that is, it would be valid once the rulemaking acts of CVM were promulgated (for publicly traded companies) and the Minister of Economy (for publicly traded companies), which she said would cause "unavoidable and immediate damage to the print media industry, without such losses being equalized over time in a more proportionate manner."

Although MP 892 was very well received by companies operating in Brazil, the mechanism of publishing in newspapers originally provided for by the Brazilian Corporations Law in the 1970s will remain unchanged until 2022, when Law No. 13,818/19 will enter into force, or before then, if a new legislative initiative to reduce or change the current requirements arises.

Category: Labor and employment

Executive Order No. 905/19 (MP 905), which instituted the Green and Yellow Employment Contract, implemented various changes to unemployment insurance and accident assistance.

Current unemployment insurance rules

The benefit is assured for (i) employees who have their employment contracts terminated without cause at the employer's initiative; (ii) employees with a suspended contract by virtue of a qualification program offered by the employer; (iii) fishermen during closed season; and (iv) workers rescued from conditions analogous to that of slavery.

The beneficiaries of the unemployment insurance were not considered obligatory Social Security covered persons and, therefore, did not contribute to the amount received as a benefit. However, according to social security laws and regulations, the workers maintained the status of insured for up to 12 months, extendable up to 24 months, even exempt from contribution, starting on the date on which they ceased to exercise paid activity, due to termination without cause or unpaid suspension/leave.

What changes with MP 905

The executive order changed part of the legal definitions by:

• expressly defining that the unemployment insurance beneficiary is a compulsory insured of Social Security system during the months of receipt of the benefit;
• including, in the list of contribution wage payments, the monthly portion of the unemployment insurance, it being the responsibility of the Special Bureau of Social Security and Labor to carry out withholding of the contributions; and
• expressly stipulating that the status of the insured will be maintained for up to 12 months after the cessation of the contributions, starting from the date on which they ceased to exercise paid employment due to termination without cause or unpaid suspension/leave, or ceased receiving unemployment insurance.

According to the changes brought about by MP 905, workers will contribute to Social Security during the period in which they receive unemployment insurance. In contrast, the trigger for counting the term for loss of status as an insured will no longer be the date of termination, but the end date of receipt of the benefit.

Changes in the accident assistance

The accident assistance was guaranteed to Social Security insureds who exhibit permanent sequelae that reduced their working capacity as a result of an accident of any kind.

The benefit was maintained until the eve of retirement, in any form, or until the date of death of the insured.

MP 905 amended the text of the law such that the accident assistance is granted only in the cases of specific sequelae to be defined by the Special Bureau of Social Security and Labor. With the change, not all accidents will be compensated, unlike what was previously provided for.

In addition, although MP 905 maintained the percentage of the benefit to be paid by Social Security, the continuity of payment of the accident assistance is linked to maintenance of the conditions that led to recognition of the benefit.

This article is part of a series about the major changes brought about by MP 905. Click here to read our other analyses on the topic.

Category: Social security

Executive Order No. 905/19, published on November 12, established the Green and Yellow Employment Contract and included in the Consolidated Labor Laws (CLT) rules on the supply of food to employees and the consequences thereof for the labor, social security, and even tax sphere. With the change promoted, food provided and paid through tickets or vouchers are exempt from labor, social security, and tax charges.

The Superior Chamber of Tax Appeals of the Administrative Tax Appeals Board (Carf) adopted the understanding that the food assistance allowance, paid in cash or in food vouchers and tickets, would be part of salary for the purposes of payment of social security contributions. Thus, the social security contribution on the benefit amounts was due.

In January of 2019, the Federal Revenue Service of Brazil (RFB), through the publication of Cosit Response to Public Inquiry No. 35/19, changed Carf's understanding, establishing a new understanding that the social security contribution should not be levied on food when it is given in natura^[1] or when it is paid via ticket or voucher.

However, the response to public inquiry did not exclude food paid in cash from the social security contribution, on the grounds that such remuneration is of the nature of a wage and, therefore, this amount should be part of the taxable base of the social security contribution.

It was in this context that MP 905 added to the CLT (article 475, paragraph 5), in an express manner, that the provision of food to employees, whether in nature or by means of vouchers, coupons, checks, electronic cards intended for the purchase of meals, or foodstuffs: (i) is not of the nature of wages; (ii) is not subject to the application of social security contributions; and (iii) is not included in the taxable base for other payroll charges, especially FGTS and IRRF.

The objective is to close any debates regarding the application of social security contributions and other payroll taxes on employees' food, making the administrative and judicial bodies apply the same understanding.

However, the executive order was silent regarding the payment of food in cash, which leads to the conclusion that the RFB and the Judiciary will continue to apply the understanding of Cosit Response to Public Inquiry No. 35/19 for the payment of food in cash, assigning it the nature of wages and ordering the application of social security contributions.

MP 905 ordered that changes relating to this matter shall only take effect when an act of the Minister of Economy attests to compatibility with the tax results targets provided for in the annex itself of the Budgetary Guidelines Law and compliance with the provisions of Supplementary Law No. 101/2000, which deals with public finances directed to responsibility in tax management, and the provisions of the Budgetary Guidelines Law related to the matter.

We will cover the main changes of MP 905 in the next articles in this series. Click here to read our other analyses on the topic.

^[1] Furnishing of meals to employees or provision of food baskets, in accordance with article 58 of RFB Normative Instruction No. 971/2009.

Category: Corporate

To regulate the application of Executive Order No. 892/19 (MP 892), which amended Law No. 6,404/76 (the Brazilian Corporations Law) with respect to the publication of acts and information of corporations, in September, the Brazilian Securities and Exchange Commission (CVM) and the Ministry of Economy issued new rules, respectively, on publicly and privately-held companies effective beginning in October.

Not yet converted into law, MP 892 determined that publications previously made in the Official Gazette and widely circulated newspapers should be made on the websites of CVM and the market managing entity where the company's securities are admitted for trading, in addition to the company's own website, in this case referring only to publicly traded companies.

In charge of regulating the application of the new rules for these companies, the CVM issued CVM Resolution 829, of September 27, 2019, providing that all publications and relevant information required by the Brazilian Corporations Law and CVM instructions regarding public companies should be made using the Empresas.NET System and on their own website, thus doing away with the need for digital certification of the documents.

The Ministry of Economy was responsible for disciplining the matter in relation to closely-held companies. To that end, Ordinance No. 529, of September 26, 2019, provides that the publication of acts of privately-held companies and the disclosure of their information (...) must be done in the Balance Sheet Center (CB) of the Public Digital Bookkeeping System (SPED), in addition to the companies’ own websites. Digital certification of the authenticity of documents kept on the website is required by a certifying authority accredited by the Brazilian Public Keys Infrastructure (Infraestrutura de Chaves Públicas Brasileira in Portuguese, or ICPBrasil).

Both Ordinance No. 529 and CVM Resolution No. 829 enter into effect on October 14, 2019. Thus, since then, publicly-traded and privately-held companies have been authorized to publish their acts only on the CVM's Empresas.NET System, or the SPED's CB, respectively, as well as on their own websites.

An issue that still hovers over the topic concerns the scope of the effects of MP 892 and Ordinance No. 529 in relation to limited liability companies (including those considered large). Although both rules generally refer to privately-held companies as well, the fact is that there was only an express amendment to article 289 of the Brazilian Corporations Law, without any mention of the provisions of the Civil Code dealing with publications. It seems that the spirit of the rule is to foster economic activity as a whole, reducing costs and red tape, regardless of the corporate form adopted. However, to date, the Brazilian Department of Business Registration and Integration (DREI) of the Ministry of Economy has only issued guidance to boards of trade regarding publications by corporations.

The topic is controversial and will probably still be subject to debate. The Federal Supreme Court (STF) is currently processing Direct Suit of Unconstitutionality No. 6,215 (ADI), for which Justice Marco Aurélio Mello will provide the written opinion. Filed by the Rede Sustentabilidade [“Sustainable Network”] Party, the ADI disputes the validity of MP 892. The Supreme Court has not yet ruled on the matter.

On September 20 of this year, MP 892 was slated to be processed on an urgent basis in the Legislature and, if not reviewed or converted into law by December 3, 2019, will lose its effectiveness. It will then be up to the Brazilian Congress to discipline, via legislative decree, the legal relations arising from it.

Registration of branches in states other than that of the headquarters

On August 6 of this year, DREI issued Normative Instruction No. 66, which deals with the approval, by boards of trade of the headquarters of a company, of acts related to the opening, alteration, transfer, and extinguishment of a branch in another state of the federation.

Instead of going through various states, the company may adopt a very simplified process that allows for a sole filing with the board of trade of the locality of the company's headquarters. The systems required to perform this procedure are still being adjusted in some regions.

Until the consultations regarding feasibility from the boards of trade and city governments are also integrated, it will be necessary to conduct the study initially in the locality of the branch. Once the feasibility study is approved, the corporate act may be filed with the registry of the headquarters. Thus, it will be up incumbent on the board of trade where the headquarters is registered, after granting the act, to electronically forward the information relating to the branch office to the body of the other state, which, in turn, must receive and store it.

The change of corporate name filed at the headquarters will be automatically extended to the branches, provided that the feasibility studies are presented completed together.

In practice, so far, there are states where recording already produces effects in relation to state registrations, and others where this is not the case. As for city registries, the systems are not yet interconnected, and registrations and updates must be done independently.

Category: Labor and employment

The publication of Executive Order No. 905/2019 brought about various important impacts for employers from a practical point of view. One of the main changes is permanent authorization for work on Sundays and holidays for all categories of workers, ending the obligation for collective bargaining or administrative requests to the competent authorities for this purpose.

In addition, all employers are allowed to work on Sundays and public holidays, subject to local laws and regulations for the commerce sector, with no interference by the federal government regarding the categories of employees authorized, contrary to what previously the case. However, the rules established in collective bargaining agreements on the subject must be observed.

Before the publication of the MP, Ordinance No. 604/19 of the Special Bureau of Social Security and Labor was in force, which regulated work on Sundays and holidays only for 78 categories of employees, leaving out various sectors that lacked labor regulations for these days.

Although the obligation to provide weekly days off is maintained, it is no longer required to do so, as a rule, on Sundays. While article 68 of the CLT now expressly authorizes work on Sundays and holidays, article 67 assured only the right to paid weekly rest for 24 consecutive hours, preferably granted on Sundays.

This is a major paradigm shift, as prior to the promulgation of the MP, the CLT stated that “except for reasons of public convenience or overriding need for service”, paid weekly rest should be given predominantly on Sundays, except for sectors that were already authorized by Ordinance No. 604/19 to work on Sundays.

The MP also added a paragraph to the new article 68 of the CLT, stipulating that the weekly paid break schedule on Sundays must be (i) one Sunday every for four weeks of work for the retail and services sector and; (ii) one Sunday every seven work weeks for industry. Specifically for commerce, the MP provided that local laws and regulations must be observed, which in fact already occurred.

The provision for alternation in enjoyment of weekly paid rest on Sundays is new in the CLT. Previously, the provision for alternation existed only in Law No. 10,101/2000, which provided, for commercial activities in general, mandatory time off on Sundays for every three weeks of work, and in Ordinance No. 417/66 of the then Ministry of Labor, which provided for mandatory time off on Sunday every seven weeks of work.

Per the new rules, when work occurs on Sundays or public holidays, employees must enjoy to compensatory weekly rest on any other day within the same week, and there is no need to remunerate this work as overtime. However, if the compensatory time off is not granted in the same week, that day must be paid double.

The regulation brings about security in labor relations and creates more opportunities for production and consumption. There is a clear need for various sectors to operate on Sundays, which makes it absolutely fundamental to disentangle this issue for business establishments, with the removal of different rules regarding work on these days.

Category: Tax

The penalty of forfeiture of property is one of the most severe and extreme penalties contained in Brazilian law. Despite its confiscatory nature, the Federal Supreme Court (STF) has already abstractly recognized its validity and compliance with the current Federal Constitution (RE 251.008-AgR/DF, Opinion drafted by Justice Cezar Peluso, First Panel, published in the Official Gazette of the Judiciary on June 16, 2006).

However, as this is an extreme penalty, application thereof must be preceded by a rigorous examination of the factual circumstances and their classification within the restricted scenarios that legitimize it, lest it run contrary to the principle of legality.

In the exhaustive list of scenarios that allow for the penalty of forfeiture, article 689 of the Customs Regulation contemplates unjustified deviation from route during the customs transit of the imported good:

Article 689. The penalty of forfeiture of the merchandise is applied in the following scenarios, as they constitute damage to the public purse (Decree-Law No. 37, of 1966, article 105; and Decree-Law No. 1,455, of 1976, article 23, head paragraph and paragraph 1, as amended by Law No. 10,637, of 2002, article 59):

(...)

XVII - foreign, in transit in the customs territory, when the land vehicle driving it is diverted from its legal route, without justified grounds;

It was on the basis of that provision that the customs authorities imposed the penalty of forfeiture on a given taxpayer on the grounds that it intended to mislead the good imported after finding the deviation during customs transit.

According to article 334 of the Penal Code, however, misleading only occurs in the case of an act to “evade, in whole or in part, the payment of a duty or tax due for the entry, exit, or consumption of merchandise."

That is, in order to find misleading, the Penal Code textually requires that the intention be to evade the payment of tax. Therefore, application of the penalty of forfeiture based on an allegation of misleading will necessarily require the customs authority to demonstrate the act of evading the payment of tax.

In a recent case we handled, the Federal Court of Appeals for the 2nd Circuit (TRF-2) brought for judgment a case litigating precisely a tax assessment issued by the customs authorities on the grounds that a particular taxpayer intended to mislead an imported good by virtue of deviation from route found during the customs transit of the good.

Leaving aside a discussion of the reasons that led to the deviation from route, the fact is that the TRF-2 decided to dismiss the forfeiture because the customs authority could not prove the taxpayer's intent to evade payment of the tax due.

To ratify the understanding of the TRF-2, the prevailing opinion emphasized that the presumption used by the customs authorities could not stand up to the set of evidence presented by the taxpayer, which was even sufficient to explain proper justification for the deviation from the route.

In the case examined, the good subject to forfeiture had been duly imported under a special customs regime, with the signing of a consent and presentation of a guarantee of the taxes suspended.

In support of its decision, the TRF-2 further noted that while the route stipulated had not been observed, there is a more specific penalty for punishing deviation from routes during customs transit. Thus, the court reaffirmed the understanding that damage to the public purse cannot be presumed indistinctly for the purpose of applying or maintaining such an extreme penalty.

Category: M&A and private equity

Latin America is going through a turbulent and uncertain time, reflecting the current scenario of economic and political crises in various countries in the region, such as Chile, Bolivia, Mexico, Argentina, and, in recent days, Colombia. Although all these countries are experiencing internal difficulties from a macroeconomic point of view, there are various causes and circumstances that have contributed to the current environment, affecting liberal or leftist governments.

In Chile, protests over constitutional reforms stemming from the population's discontent with the country's politics and economy have led President Sebastián Piñera's center-right government to face a serious social and political crisis, creating insecurity for new investments and for the financial markets.

Bolivia, for its part, is immersed in political and social chaos. Numerous demonstrations and protests in Brazil over allegations of electoral fraud have led center-left president Evo Morales, who has been in power since 2006, to step down. This uncertainty aggravates the situation of the Bolivian economy, which has been slowing down in recent years.

Contrary to the circumstantial problems of Chile and Bolivia, Argentina faces a situation that may be said to be chronic in nature, due to the systematic crises suffered over the last decades. The markets are experiencing a moment of great apprehension regarding the country, due to the return of Kirchnerism, with the victory of President Alberto Fernández and Vice President Cristina Kirchner in the October elections. The economic crisis and the fear of a return of a more protectionist government have produced mistrust in the private sector and led to investors leaving the Argentine market in recent months.

In Mexico, in turn, in spite of GDP growth in recent years, the left-wing government of President Andrés Manuel López Obrador gives worrying signals to investors, especially in the area of infrastructure. The highlight is the legal uncertainty caused by the cancellation of construction of a new international airport in Mexico City.

In Colombia, whose economy has undoubtedly been improving over the last few years, the crisis provoked by demonstrations is still very recent and its consequences are entirely uncertain.

A source of major investments in Latin America, Spain, for its part, is ending an almost bipartisanism between PSOE socialists and PP liberals, which recently provoked frequent internal political blockades and led to the holding of new general elections in November for the fourth time since 2015. The result of the election seems to be leading the country to a coalition government between the socialist Pedro Sánchez, the current president, and Pablo Iglesias, leader of the far-left-wing party “Unidas Podemos”. This movement will, however, require the support of minority groups of the left-wing independentist regionalism to maintain some stability. From an economic perspective, unpromising prospects for growth in the domestic market are projected, which may have a direct impact on the behavior of the country's investors.

The whole context of crisis in Latin America negatively affects trade flows between the countries in the region, especially Argentina. In turn, the flow of foreign investments follows a different logic, with a connotation to some extent countercyclical. We will explain. The Brazilian economy presents a favorable scenario for foreign investors. Historically low interest rates and controlled inflation encourage new investments and boost credit and consumption in the powerful domestic market. The new government, which liberal tendencies, is working to launch an ambitious program of privatization of major state-owned enterprises and to expand the existing partnership program with the private sector in order to develop new projects.

Due to Brazil's immense infrastructure deficit, compounded by the absence of major projects in recent years, there are good companies and good projects offered in virtually every sector, from energy and oil and gas to airports, railways, highways, and ports.

In addition, the low growth on the part of Brazilian companies in recent years and their increased indebtedness have created attractive opportunities for private acquisitions (M&A) in various sectors, such as health, education, and renewable energy generation.

In this scenario, Brazil emerges as a natural destination for diversifying the flow of investments of the main Latin American business groups, as well as an increase in the already historically high flow of Spanish investments.

This movement has been clearly felt by us, in the context of Machado Meyer's Latin American & Iberian Desk, a multidisciplinary group of partners and associates fluent in the Spanish language and experienced in the business environment of these countries, as we have represented important Latin American and Latin American and Spanish investors interested in doing business in Brazil.

Category: Corporate

Today is the last day of the deadline for submitting suggestions at the public hearing of the Brazilian Securities and Exchange Commission (CVM) regarding changes in the minimum percentages of equity participation for a shareholder of a corporation to file a lawsuit against the officers and directors^[1] and the parent company^[2] without the provision of collateral.

Launched in October of this year, SDM Public Hearing Notice No. 07/19 opened this discussion seeking to improve the mechanisms for protection of investors and minority shareholders and eliminate obstacles aimed at development of the Brazilian capital markets.^[3]

Currently, suits for civil liability against the officers and directors of a given company may be brought by the company itself, after resolution at a general meeting, or by shareholders representing at least 5% of the capital stock. The purpose of these lawsuits is to redress losses caused directly to the Company's equity that, in certain cases, result in damages to shareholders.

In turn, suits for liability against the parent company may be filed, without provision of collateral, by shareholders representing 5% or more of the capital stock or, with the provision of collateral, by any shareholder, in cases where it is believed that the parent company is required to compensate damage it has caused to the company for acts in violation of the duties and responsibilities of the controlling shareholder,^[4] which include, for example, the duty to use controlling power to guide the company in the fulfillment of its corporate purpose and in compliance with its social function and responsibility for the non-abusive exercise of the power of control.

The authorization for the CVM to change the minimum percentages required for the exercise of these rights is in the Brazilian Corporations Law itself, provided that two requirements are met: only reduction, not increase, of the percentages provided for by law, and this reduction occurs through the setting of a percentage scale based on the value of the capital stock.^[5]

According to the CVM's draft rulemaking instruction, the companies will be divided into ranges of capital stock, which will correspond to certain minimum percentages. Accordingly, the percentage of 5% of the capital stock for the filing of a suit against the officers and directors and the parent company will be applied only to companies with capital stock from 0 to R$ 100,000,000.

In addition to suggestions regarding the scale proposed by the CVM in the two cases cited, the federal authority will also receive comments on changes in the minimum percentages of equity interest in the case of requesting to see the company's books, convening a general meeting of shareholders, requesting information from officers and directors, setting up an audit committee, and requesting information from the audit committee. The authority has not proposed specific changes to these items in the draft presented and expects suggestions from the public at the public hearing.

According to a survey by the CVM Economic Analysis and Risk Management Advisory Committee in the report “Critérios para a participação de acionistas em assembleias de companhias de capital aberto” [“Criteria for Shareholder Participation in Meetings of Publicly-Held Companies,”^[6]  of December of 2018, the proposed scale will affect 77.78% of Brazilian publicly-held companies.

With the approval of the rulemaking instruction, a shareholder holding a smaller shareholding than the one provided for in the CVM’s scale for the range of the company in which it invests will continue to have to provide collateral when filing suit against the parent company.

Suggestions and comments should be sent to the Superintendence of Market Development, preferably at the e-mail address This email address is being protected from spambots. You need JavaScript enabled to view it. or to Rua Sete de Setembro, 111, 23rd floor - Centro - Rio de Janeiro - CEP 20050-901.

^[1] Action provided for in paragraph 4 of article 159 of Law No. 6,404/76.

^[2] Action provided for in paragraph 1, “a”, of article 246 of Law No. 6,404/76.

^[3] CEREZETTI, S. C. N., Regulação do Mercado de Capitais e Desenvolvimento [“Capital Market and Development Regulations”], in C. Salomão Filho (coord.), Regulação e Desenvolvimento: Novos Temas [“Regulation and Development: New Topics”], São Paulo, Malheiros, 2012, pp. 190-228.

^[4] The duties and responsibilities of the controlling shareholder are set forth in articles 116 and 117 of Law No. 6,404/76.

^[5] As provided for in article 291 of Law No. 6,404/76.

^[6] Available at: http://www.cvm.gov.br/export/sites/cvm/menu/acesso_informacao/serieshistoricas/estudos/anexos/Criterios_para_a_participacao_de_acionistas_em_assembleias_de_companhias_de_capital_aberto.pdf