Category: Infrastructure and energy

Awaited since November of 2017, the Sanitation Presidential Decree was finally promulgated on July 9. Despite the differences with respect to the versions submitted for public consultation, the rule maintained its foundations, which, if confirmed via its conversion into law, will increase the participation of private enterprise in the sector, thus favoring the structuring of new projects.

Initially, the Presidential Decree reconfigures the National Water Agency (ANA), giving it new functions. It is worth mentioning the jurisdiction to issue national reference standards for the regulation of basic public sanitation services. These rules will have the potential to reduce the regulatory patchwork that afflicts the sanitation sector, in which each municipality has the autonomy to prepare its own contractual modeling solutions. Perhaps the only existing standard is established by the most consolidated state companies in the restricted regions where they operate. Regulatory uniformity and legal certainty were old demands of investors and financiers, interested in mitigating transaction costs that often jeopardize ventures.

To ensure the effectiveness of national reference standards, it is essential to condition access to federal resources and financing granted by entities controlled by the Federal Government on compliance with established standards: states and municipalities, or companies that contract with them, when they resist compliance with ANA, may be deprived of onlending and credit lines, without which few sanitation projects are financially viable.

ANA also becomes a mediating and arbitration body for the public administration: in the event of conflict between municipalities, states, and/or their respective regulatory agencies and public sanitation service providers, the national agency may operate through voluntary and consensual submission of all those involved to a true and specialized permanent arbitral tribunal, aimed at resolving regulatory and/or jurisdictional conflicts, especially among states.

Another innovation of the Presidential Decree refers to metropolitan regions, urban agglomerations, and microregions: in them, the exercise of ownership of public sanitation services was assigned to the interfederal collective body created and constituted in light of the Statute of the Metropolis. The measure puts an end to a conflict of jurisdiction that has led to the filing of at least three direct actions of unconstitutionality against state laws on sanitation services in metropolitan areas.

In its judgments, the Federal Supreme Court then pointed to the need for states and municipalities to agree on and share decisions when there is a common interest in sanitation projects. There will also be discussion on how to structure and set up such interfederal collective bodies, especially their rules of governance regarding the right of veto by participants, deadlock situations, and financial contributions: precedents from public consortia will be useful to guide, by analogy, the modeling of agreements between participants, where it is possible, in public functions of common interest, to recognize a more decisive role for the state.

State sanitation companies can now be privatized without their program contracts automatically losing their validity, and it is up to the municipalities served by them to decide whether or not to accept the new conditions for continuity of the service. The situation is close to that of authorization by the granting authority for the transfer of control of concessionaires, under penalty of expiration of the concession contract, under the framework of Law No. 8,987/95. If there is agreement, under the model of the Presidential Decree, adherence to the new conditions operates as a true conversion of the program contract, and the instrument calling for bids serves, in whole or in part, as the basis for an addendum that significantly changes the original agreement: a contractual arrangement between the acceding municipality and the privatized state company is now qualified as a concession, and the framework of Law No. 9,074/95 can be applied, notably the provision of article 28. In the absence of consent, the municipalities reassume the services delegated, but with the obligation to indemnify the investments made and not yet amortized or depreciated. The solution given by the Presidential Decree is imperfect since the lack of voluntary compliance can lead to the issuance of a mere request to the municipalities, with its known drawbacks.

Competitive processes for the conclusion of program contracts are no longer automatically waived. Before opting for the services of a certain state sanitation company, municipalities should issue a call for bids for other companies to express interest and present a more efficient and advantageous proposal: in the event that there is at least one interested party, along with the state company, the holding of a bidding process shall be legally obligatory. This is the only rule of the Presidential Decree that is subject to a three-year vacatio legis: while all other regulations have immediate and general effect, municipalities and state-owned enterprises will have a long period to adjust their needs or business models, as the case may be, to the new competition rule.

Still far from the objectives of universalization and ecological efficiency of sanitation services, Brazil cannot do without private capital to accelerate investments in an industry that generates so many positive externalities, such as basic sanitation. Whether it is the privatization of state-owned companies, concession modeling, public-private partnerships, sub-concessions, or subdelegations, the Sanitation Presidential Decree has enormous potential to energize new projects, structured with more regulatory framework and regulatory space for smart innovations.

Category: Infrastructure and energy

On May 29, the federal government published the initial drafts of the call for bids and concession contract for the new round of federal concessions, which will include 13 airports, distributed in three blocks:

Northeast Block: Recife (PE), Maceió (AL), Aracaju (SE), João Pessoa (PB), Campina Grande (PB), and Juazeiro do Norte (CE).

Southeast Block: Vitória (ES) and Macaé (RJ).

Central-West Block: Cuiabá (MT), Sinop (MT), Barra do Garças (MT), Rondonópolis (MT), and Alta Floresta (MT).

The contracts will have a term of duration of 30 years and may be extended once for up to five years, in cases where there is a need to re-establish the economic and financial balance resulting from an extraordinary revision. The modeling adopted does not provide for a restriction on the participation of the current concessionaires: the winners of previous bidding procedures can also enter the dispute for the blocks. As in the last round, consortia can be formed only by private companies, without obligatory participation of Infraero.

One of the main innovations of the fifth round is the split risk between the Federal Government and potential concessionaires. According to the proposed payment schedule, the initial contribution (amount to be paid by the concessionaire due to the offer made in the auction) must be paid before the concession contract is signed. Due to the high value of the investments necessary, a grace period of five years will be granted to start the payment of the variable contribution, an amount to be paid annually by the concessionaire and calculated based on the gross revenue received by it in the year prior to the payment. The way in which the variable contribution is calculated makes it possible to allocate the risk arising from a possible decrease in gross revenue.

After the ninth year of the concession, the calculation of the variable contribution will be done based on a fixed rate over the gross revenue, with 16.50% for the Northeastern Block, 2.06% for the Central-West Block, and 12.42 % for the Southeast Block.

As in the case of the fourth round of concessions, it will be mandatory for the airport operator to hold at least a 15% stake in the winning consortium. With regard to the technical qualification of the airport operator, the call notice has different requirements for each of the blocks. For the Northeast, the operator is required to prove it has experience in serving at least seven million passengers in at least one of the last five years. For the Central-West and Southeast blocks, minimum service to three million passengers must be demonstrated in at least one of the last five years.

The draft call for bids and contract are subject to change after public hearings and review by the Federal Accounting Court. English versions of the documents have already been released.

The expectation of the federal government is that the bidding will take place in 2018. However, election campaigns may influence the schedule, thus lengthening the process of privatization of airport assets.

Category: Real estate

On October 6, a plenary session of the Chamber of Deputies approved the text of Law 10,728/2018, replacing the text proposed by means of Law No. 1,220/2015, which regulates the termination of contracts for the acquisition of real estate.

The purpose of the text is to amend Law No. 4,591 of December 16, 1964, and Law No. 6,766, of December 19, 1979, which regulate, respectively, real estate development and urban land subdivisioning. The highlight of the proposed text is the provision of express rules on the consequences of the discontinuation of contracts concluded for the acquisition of real estate in the scope of real estate developments, whether arising from default by the purchaser or developer.

If it is converted into law, the current wording of the draft bill will maintain the right recognized by case law for the purchaser to rescind or terminate the contract, and the developer must pay back the amount paid up to that time, less (i) the brokerage commission and (ii) a maximum of 50% of the other amounts paid by the purchaser, if the development is subject to the affectation regime, or a maximum of 25% of other amounts if the development is not affected. If the original purchaser is able to transfer its contractual position to another person, the penalty will not be due.

In cases where the contract is dissolved when possession of the property has already been taken, the purchaser must also pay an amount corresponding to the enjoyment of the property (as agreed upon in the contract or, if not agreed upon, as established by law), in addition to the condominium quotas and fees due in relation to the property.

In addition to providing legal certainty in settling the percentage of the penalty applicable, the approved wording runs contrary to the former understanding of our courts (which provides for immediate return), thus granting the developer a term to repay the former purchaser as follows: 30 days as of the issuance of the local authority’s certificate of acceptance of occupancy in cases in which equity is affected; up to 180 days from the termination of the contract in cases where there is no separation of property; or, in case of resale of the unit, within up to 30 days after the transaction.

The new law, if approved with the current text, will also settle the admissibility of a 180-day tolerance for the completion of construction, provided that such term has been clearly and expressly stated by the developer when the unit is sold. That is, a delay shorter than the grace period will not be accepted as a scenario for termination of the contract. After this deadline expires without due delivery, the purchaser may opt for (i) termination of contract, being entitled to the full receipt of the amounts paid, in addition to a fine; or (ii) maintenance of the contract until the conclusion and delivery of the unit, in which case indemnification corresponding to 1% of the amount effectively paid to the developer for each month of delay will be due.

The approval of the bill will be an important milestone for the real estate market, which slowed considerably after the large growth between the "golden years" of 2010 and 2014 (boosted by an increase in the credit supply and investments in Brazil), as a reflection of the rise in unemployment, interest rates, the economic recession, and a large supply of real estate projects launched and to be launched. During this deceleration, seen mainly between 2015 and 2017, there was a staggering increase in the number of terminations: according to data from the Brazilian Association of Real Estate Developers (Abrainc), this total reached 34.8 thousand (equivalent to 32.3% of sales of new real estate) between November 2016 and November 2017, one of the main causes of applications for judicial reorganization that involved Brazilian developers since 2015.

The boom of terminations, coupled with the lack of regulations, resulted in a considerable increase in lawsuits in which the amount to be refunded to purchasers of autonomous units, who for the most varied reasons, sought termination of their contracts. Without uniformity in the understanding of Brazilian courts, most decisions did not take into account the whole chain that involves a real estate development. The viability of these ventures depends on the funds raised and is directly impaired in cases in which the developer is obliged to immediately return unreasonable amounts because of contractual terminations that are often unjustified. In such cases, the losses fall on both the completion of the development and the other purchasers, effectively jeopardizing the equity sought in our legal system to protect purchasers.

The text of the bill approved by the Chamber's plenary session is in line with the new jurisprudential trend observed since 2017 in some courts of the States of Rio de Janeiro and São Paulo, which began to investigate the type of purchaser involved in the lawsuit (whether consumers or investors); to not authorize termination of the contractual relationship without cause; and to grant time limits for repayment of the portion of the amounts paid to the investor purchaser (see TJSP: Appeal 1116739-74.2016.8.26.0100 10 and TJRJ: Appeals 0291672-78.2015.8.19.0001, 0031585-12.2016.8.19.0000, 0072679-03.2017.8.19.0000, and 017226-23.2017.8.19.0000).

If the proposed wording is approved in the Senate, and if there is no presidential veto, the entry into force of the bill will bring light to the countless lawsuits on the subject and will strengthen the resumption of the real estate market in Brazil.

Category: Tax

Today, the São Paulo State Revenue Service published two important normative acts related to the ICMS-ST: (i) CAT Notice No. 06/2018, which "clarifies ICMS reimbursement due to tax substitution, in view of the decisions rendered by the Federal Supreme Court in Extraordinary Appeal No. 593,849/MG and Direct Suit of Unconstitutionality ADI No. 2.777/SP” and (ii) CAT Ordinance No. 42/2018, which establishes the procedure to supplement and reimburse the withholding tax for substitution for the scenarios set forth in articles 265, 269, 277, and 426-A of the State’s ICMS Rules.

Specifically regarding CAT Communiqué No. 06/2018 and, for the purposes of contextualization, it is important to highlight that:

1. Extraordinary Appeal RE No. 593.849 originated from a writ of mandamus filed by Parati Petróleo, which sought to give a more expansive interpretation to article 150, paragraph 7, of the Federal Constitution, to the effect that the failure to carry out a presumed tax triggering event would cover both the scenario in which the presumed triggering event is not carried out and the scenario in which the triggering event is only partially carried out, that is, the situations in which the presumed calculation basis is higher than the real calculation basis; and
2. Direct Suit of Unconstitutionality ADI No. 2,777/SP was filed by the governor of the State of São Paulo, who sought a declaration of unconstitutionality of article 66-B, II of State Law No. 6,374/89, since this rule guaranteed the right to refund of the tax paid in advance "if it was proved that in the final transaction with merchandise or a service it is established that the tax obligation is less than the presumed value." In 2008, State Law No. 13,291 was enacted, which added paragraph 3 to the article in question, whereby it restricted the possibility of reimbursement of ICMS-ST to situations in which the final price to the consumer, single or maximum, is authorized by a competent authority.

On October 19, 2016, Direct Suit of Unconstitutionality ADI 2.777 and Extraordinary Appeal RE 593.849 were decided jointly, and the Federal Supreme Court, via a majority opinion, (i) granted relief to the extraordinary appeal based on the theory that "refund is due of the difference of the Tax on Circulation of Goods and Services (ICMS) paid in excess in the future tax substitution regime if the actual calculation basis of the transaction is less than the presumed basis"; and (ii) dismissed Direct Suit of Unconstitutionality ADI 2.777, thereby affirming the constitutionality of the contested state provision, which was in conformity with the decision reached under the framework of the general repercussion system for appeals.

In view of the theory established by the Federal Supreme Court, as well as the declaration of constitutionality of article 66-B of Law No. 6,374/89, various taxpayers submitted formal consultations to the State of São Paulo Revenue Service to clarify the restriction imposed by paragraph3 of article 66-B of the aforementioned law on the grounds that there was way to allow that paragraph to completely render ineffective the content of the head paragraph of that article.

In order to respond to the inquiries submitted, the Fiscal Tax Consultancy, in view of the jurisdiction of the Attorney General of the State of São Paulo to define interpretation of and compliance with judicial decisions, sent a letter requesting clarifications on the comprehensiveness of the understanding established by Direct Suit of Unconstitutionality ADI 2.777, in relation to paragraph 3 of article 66-B of Law 6,374/89. By means of PAT Opinion No. 03/2018, the State Attorney General's Office issued an understanding on the restriction of requests for compensation only to cases involving a final or single maximum price fixed by a competent authority (ruling out the interpretation that was being adopted by taxpayers).

Based on the position of the São Paulo State Attorney General’s Office, the Revenue Service published the aforementioned CAT communiqué, giving publicity to the understanding set forth in PAT Opinion No. 03/2018 and clarifying the understanding of the State of São Paulo to the effect that "there will only be a right to reimbursement of the tax paid in advance under the tax substitution regime when the final transaction with the merchandise or service is at a value lower than the presumed calculation basis, in situations in which the final single or maximum consumer price has been authorized or set by a competent authority (paragraph 3 of article 66-B of State Law No. 6,374/1989). In cases where the ICMS tax basis due via tax substitution is not fixed pursuant to article 28 of State Law No. 6,374/1989 (final consumer price, single or maximum, authorized or fixed by a competent authority), the amount of any tax withheld, which corresponds to the difference between the value that served as the basis for the withholding and the value of the transaction carried out with the final consumer, will not be subject to reimbursement."

Despite the reasons for the opinion and the CAT communiqué, we believe that the subject calls for debate, especially in view of the theory that has already been settled by the Federal Supreme Court in general repercussion.

Still in relation to the changes implemented by the State of São Paulo, the State Revenue Service, in addition to CAT Communiqué No. 06/2018, issued CAT Ordinance No. 42/2018, providing for ancillary obligations to be observed by São Paulo taxpayers in order to submit a request for reimbursement or supplementation of the ICMS-ST, in the scenarios set forth in articles 265, 269, 207, 277, and 426-A of the State's ICMS Rules.

Specifically as regards the procedure for reimbursement, according to the Revenue Service's own understanding, it does not apply to cases in which the ICMS calculation basis due via tax substitution is not fixed pursuant to article 28 of State Law No. 6,374/1989 (final consumer price, single or maximum, authorized or fixed by a competent authority). In this sense, only in cases of (i) presumed and unrealized tax triggering event; and (ii) sale of the product at a value below the final consumer price, single or maximum, authorized or fixed by a competent authority, would it be recoverable. For other cases, the São Paulo taxpayers would still go without the possibility of reimbursement.

As stated on the agency's own website, the São Paulo State Revenue Service’s intent was to improve the ICMS-ST's reimbursement calculation system, including the guidelines of the "Non-Conforming" Program, in order to simplify compliance with obligations imposed by the State through modernization of information systems. In this sense, the implementation of the new model standardized by CAT Ordinance No. 42/2018 aims to guarantee greater legal certainty to taxpayers in the process of reimbursement and greater efficiency of the Tax Authorities in assessing the information provided.

Although this is not expressly stated in the ordinance, the São Paulo State Revenue Service has already declared that the agility of the new system allows the taxpayer to receive, within 24 hours, via the Taxpayer’s Electronic Domicile (in Portuguese Domicílio Eletrônico do Contribuinte, abbreviated as DEC), an electronic code confirming reception of the file, in order to immediately use the amount of the credit.

With respect to this content, pursuant to article 20 of CAT Ordinance No. 42/2018, the use of the amount reimbursed may occur in the following ways: (i) book-entry offset by the establishment, as per item I of article 270 of the ICMS Rules; (ii) transfer to a tax substitute, registered in the State of São Paulo, provided that it is a supplier, or for another establishment of the same company, according to item II of the same article 270; (iii) request for reimbursement, with a view to depositing the funds in the São Paulo taxpayer’s bank account, to be performed by a tax substitute responsible for withholding the merchandise tax, as per item III of article 270; (iv) settlement of the tax debts of the establishment, or another of the same holder, or of third parties, subject to the rules of articles 586 to 592 of the ICMS Rules; or (v) as previously established in a special regime held by the taxpayer.

Another novelty already governed by article 13 of the ordinance is the Electronic System for Reimbursement Management (e-Reimbursement), which will come into force in March of 2019 and will allow consultation of the current account for control of reimbursements. It will also be possible to receive in it electronic messages integrated with DEC; check the status of files being processed; request registration of tax to be refunded; use the tax to be offset to offset, transfer, or settle tax debt; replace files and record the tax transfer.

Pursuant to article 1 of the Transitional Provisions, the substituted taxpayer is entitled to apply the methods of calculating the reimbursement provided for in CAT Administrative Ordinance No. 158/2015, replacing the calculation method established by the new ordinance, subject to the following conditions: (i) only in relation to events that occurred between May 1, 2018, and December 31, 2018; (ii) by entering it into the ICMS Registry Book in the period from May to December 2018; and (iii) the taxpayer, for the period in which it exercised the option provided for in the head paragraph, does not transmit to Sefaz the digital file defined in paragraph 2 of article 1 of the new ordinance.

In spite of the claim by the São Paulo State Revenue Service that it is expediting and providing greater security to ICMS-ST reimbursement transactions, we believe that the topic will also involve a lot of debate, especially due to (i) revocation of the decrees CAT No. 17/1999 and 158/2015 (which contained the general rules for ICMS-ST reimbursement); and (ii) linking the application of CAT Ordinance No. 42/2018 only to the scenarios set forth in articles 265, 269, 277, and 426-A of the State’s ICMS Rules.

Category: Labor and employment

In August of this year, the Federal Supreme Court (STF) ruled that outsourcing is lawful in all stages of the production process, be it ancillary or main activities, in deciding Argument of Breach of a Basic Precept (ADPF) No. 324.

As a practical application of this understanding, the STF en banc also concluded that the lawfulness of outsourcing applies to the call center service of telephone companies upon deciding Extraordinary Appeal with Interlocutory Appeal No. 791932, with recognized general repercussion.

Since the STF had already considered the outsourcing of a company’s primary activity lawful and recognized the unconstitutionality of the TST's Precedent No. 331, Justice Alexandre de Moraes, writing for the court, ruled that this situation would not constitute an employment relationship between the parties. In the words of the justice ‘there is no way to confuse outsourcing of one of the stages of the flow of production with the scenario of unlawful intermediation of labor, as did the judgment under appeal.’

Accordingly, the STF granted relief to the extraordinary appeal, declaring the nullity of the decision by the TST, which had concluded that call center services are among the main activities of telephone companies. As a consequence, the trial decision rendered by the 19th Labor Court of Belo Horizonte (MG) was reinstated, which ruled out the existence of an employment relationship between the telephone company and the call center operator.

To date, the STF has not dampened the effects of the decision that recognized as lawful the outsourcing of a main business activity and declared unconstitutional items I, III, IV, and VI of Precedent No. 331 of the TST. However, the recent judgment on the outsourcing of call center services may serve as a guideline for what will be decided by the Supreme Court.

Historically, there are two theories about the effects of a declaration of unconstitutionality: nullity of the unconstitutional norm or its annulability. According to the theory of nullity, the understanding is that the unconstitutional norm is absolutely null, which affects its validity and effectiveness as of the beginning of its existence. Therefore, a declaration of unconstitutionality produces retroactive effects as of the beginning of the enactment of the norm. As a consequence, all the past effects produced under the aegis of that norm must be disregarded since its invalidity is recognized as of the enactment.

The theory of annulability, however, maintains the understanding that the unconstitutional norm is anullable, that is, it affects its effectiveness as of the creation of this status of invalidity. In this case, as a rule, there is no retroactive effect, but rather prospective effect, since all the legal effects produced by the norm before recognition of its invalidity are untouched.

Brazilian case law and legal scholarship are mostly based on the theory of nullity of unconstitutional laws, which is the understanding of the STF. To date, the Supreme Court has issued only one decision that adhered to the annulability theory, and it was proclaimed in Extraordinary Appeal No. 79.343/BA, with Justice Leitão de Abreu writing for the court.

The decision regarding the legality of the outsourcing of call center services of telephone companies, by reinstating the trial decision in which no employment relationship between the telephone operator and the attendant had been recognized, may indicate that, once again, the STF will adopt the theory of nullity and will decide that the effects produced under the aegis of Precedent No. 331 of the TST must be disregarded, thus leaving only doubts about the time frame to be set for such disregard.

The concern, however, is the reception of this new understanding in the Labor Courts, which until today reject the institute of outsourcing and probably will find other means to bar its application.

In this sense, the National Association of Labor Magistrates (Anamatra) has already reported that the Labor Courts will be responsible for evaluating the conditions under which the outsourcing was carried out. Anamatra's understanding in this sense is that it will be incumbent on the judges to review any prejudicial conditions.

According to Guilherme Feliciano, president of Anamatra, "what will be discussed is whether such outsourcing concretely led to prejudicial conditions, whether fraud occurred, and whether equal pay rules were violated. (...) With the decision, no judge will declare at first glance that the outsourcing of a main business activity constitutes fraud at the outset, but will review evidence to see whether in the specific case there were prejudicial conditions because of it."

In view of this scenario, it is recommended that telephone companies look into the existence of cases in which an employment relationship with outsourced call center workers was recognized based on the argument that they carried out a main business activity. Accordingly, it will be possible to try to reverse these decisions on appeal using the recent decision by the STF.

Category: Capital markets

Por Gustavo Rugani do Couto e Silva, Wagner Eustáquio Duarte Júnior, Paulo Estevão Henriques Carneiro Miranda e Arthur de Oliveira Cunha Miranda

The Brazilian Corporations Law, in its article 115,^[1] provides that shareholders must abstain from voting at meetings on matters in which their interests and those of the companies are in conflict. The purpose of the law is to protect the company's (corporate) interest to the detriment of the individual interests of the shareholders. Therefore, the legal provision imposes on shareholders with a conflict the duty of abstention, under penalty of the vote being considered abusive and even cause for annulment of the resolution.

Among the situations in which a conflict of interest is present, we highlight the approval of the management accounts and, consequently, the annual financial statements of the companies by the controlling shareholder who is also an officer or director. The law is exhaustive in this case and imposes a prohibition on a vote by the controlling shareholder who is an officer or director. Nonetheless, every year, when general shareholders' meetings are in session, controlling shareholders who act as officers or directors, especially of public companies, adopt different approaches to the issue (with a gradual increase in abstention rates in recent years).

The actions of the Brazilian Securities and Exchange Commission (CVM) in these cases have attracted attention. In 2015, for example, the CVM board issued a judgment against the indirect controlling shareholder of a publicly-held company who also held the position of member of the board of directors, with the penalty of temporary disqualification for five years of exercising the position of member of the board of directors, board of executive officers or audit committee of a publicly-held company, of an entity of the distribution system, or of other entities that depend on authorization or registration with the CVM to operate. He had voted, through two companies that directly controlled the company, in a resolution of the general meeting that approved the management accounts. On that occasion, the CVM was of the position that the conduct of the indirect controlling shareholder was incompatible with that expected of a publicly-held company.^[2] There are also other ongoing cases on the same subject.

However, the premise of abstention of the controlling shareholder who also acts as an officer or director should be assessed based on the specific circumstances of each case. In fact, there is at least one factual context which merits further evaluation. There are a number of cases in which controlling shareholders enter into shareholders' agreements to define, among other obligations, the ways in which control over their respective companies can be exercised, which are almost always translated into a requirement for block voting in corporate resolutions. Thus, the controlling shareholder acting as an officer or director who is a party to a shareholders' agreement that contains a block voting obligation may have his shares used by the other controlling shareholders to agree on the vote in the controlling block. Such a situation may result in apparent non-compliance with the law with respect to the provision that the controlling shareholder acting as an officer or director cannot vote on the approval of his accounts.

Legal scholarship on the subject considers regulating the use of the controlling shareholder’s shares by the control block and, as Modesto Carvalhosa argues, "the regime of common exercise of control entails binding the parties to the agreement to the will expressed by a majority of the its signatories, obtained in a prior meeting."^[3] The author also asserts that:

"(...) the majority resolutions of the prior meeting constitute the declaration of the will of the community of controlling shareholders and, in this sense, fall into the category of a plurilateral legal deal, formed by the coincidence of individual wills of the present signatories, which merge to express, by absolute or qualified majority, the will of the parties."^[4]

How then can the controlling shareholder acting as an officer or director protect himself in these cases?

The answer is usually given by the mechanism provided in the shareholders' agreement of each company in order to determine the voting guidance of the controlling block. In general, this mechanism involves the holding of a prior meeting in which the signatories of the agreement define the voting guidance of the block for the matters submitted for a resolution at the shareholders' meeting.

In our opinion, it will be incumbent on the controlling shareholder to avail himself of this meeting to declare his abstention when discussing management accounts (with this abstention being recorded in the minutes) and thus comply with the provisions of the corporations law, even though, at the meeting, his shares are used by the block to approve the accounts.

Paragraph 2 of article 118 of the Brazilian Corporations Law, however, provides that shareholders' agreements may not be relied upon to exempt shareholders from responsibility in the exercise of voting rights,^[5] thus leading some to conclude further that, in view of an abstention expressed at the prior meeting, the duty of abstention should also prevail in the resolution of the general assembly.

In our view, however, votes issued in a prior meeting demonstrate that the shareholder's will was different from the vote cast by the controlling block. Along the same lines, and in a reasoning extending to Nelson Eizirik's understanding that "although his shares are used to be part of the block of the agreement, he cannot be held responsible for any abuses committed against his will",^[6] it must be considered that, since the shareholder abstained from voting on resolutions at the prior meeting, it cannot be said that these legal provisions were breached.

Therefore, if the controlling shareholder acting as an officer or director abstains at the prior meeting in which the vote on the management accounts will be defined, it must be considered that the shares of the controlling shareholder acting as an officer or director were used by the controlling block under the agreement between the parties, thus complying with the contractual obligation assumed by the shareholder, in a valid manner and without any affront to the Brazilian Corporations Law.

Despite the above, there are still cases in which the controlling shareholders acting as officers of directors are afraid to comply with the legal duty of abstention because they are of the position that, in not voting with their shares in order to approve the management accounts, the other shareholders may reject them. However, rejection of the management accounts must always be reasoned and cannot be used by the shareholders as a mere instrument for manipulation or coercion of the company's officers and directors. Rejection of accounts may even be considered abusive conduct on the part of the shareholder, as Ricardo Tepedino believes:

"The approval of financial statements is mandatory, such that to reject them purely and simply, without dictating the course of their re-development, constitutes abusive exercise of the right to vote (...). Consequently, contrary to the general rule that dispenses with grounds for the shareholder’s vote, which is contrary to the exoneration from liability of the directors, and the one who rejects financial statements must necessarily do so with cause, lest it constitute abusive exercise of the right to vote."^[7]In light of the foregoing, in the event that the shareholder is a signatory of a shareholders' agreement that contains a block vote, the use of the shares of the controlling shareholder by the block to vote favorably in resolutions in which there may be a conflict of interest, in our opinion, will not be a breach of current law, provided that the controlling shareholder acting as an officer or director has complied with the duty to abstain in the voting on the respective matter at a prior meeting of shareholders (or, in the absence of a prior meeting, another form of formal voting by other shareholders who are signatories of the agreement). Such abstention may even be used as evidence in the event of the initiation of administrative proceedings by the CVM (which, so far, has not expressly ruled on the matter).

Caution is therefore required on the part of the shareholders in voting on matters in which there may be a conflict of interests between them and the company, especially in approving the management accounts, in order to avoid affront to the Brazilian Corporations Law and possible sanctions proceedings by the CVM, when it relates to a publicly-held company. However, such caution must be exercised within the limits and circumstances of each specific case, and there are appropriate instances to exempt shareholders from liability even when their shares are used by the controlling block in a situation of apparent conflict, as shown above.

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^[1] “Article 115: Shareholders must exercise the right to vote in the interests of the company; votes exercised for the purpose of causing harm to the company or other shareholders or to obtain, for themselves or for others, an advantage to which they are not entitled and which results or may result in harm to the company or other shareholders are considered abusive.

Paragraph 1: Shareholders may not vote in resolutions of general meetings regarding the appraisal report of assets with which they compete for the formation of the capital stock and approval of their accounts as officer or director, nor in any other deliberations that may benefit them in a particular way, or in which they have interests conflicting with that of the company."

^[2] CVM Administrative Sanctions Proceeding No. RJ2014/10060.

^[3] CARVALHOSA, Modesto. Acordo de acionistas: homenagem a Celso Barbi Filho [“Shareholders’ agreements: homage to Celso Barbi Filho”]. São Paulo: Saraiva, 2011, p. 118.

^[4] CARVALHOSA, Modesto. Op. cit., p. 224.

^[5] “Article 118: Shareholders' agreements on the purchase and sale of their shares, preference to acquire them, exercise of voting rights, or power of control shall be observed by the company when filed at its headquarters.

(…)

Paragraph 2: Such agreements may not be relied upon to exempt shareholders from responsibility in the exercise of voting rights (article 115) or from the power of control (articles 116 and 117)."

^[6] EIZIRIK, Nelson. Comments on the Brazilian Corporations Law [“A Lei das S/A Comentada”]. Volume I – Articles 1 to 120. São Paulo: Quartier Latin, 2011, p. 709.

^[7] TEPEDINO, Ricardo; et. al. The law of companies [“Direito das companhias.”] Alfredo Lamy Filho and José Luiz Bulhões Pedreira (coord). Rio de Janeiro: Forense, 2009, v. I, p. 1017-1018.

Category: Real estate

Brazil already has rules to regulate the legal regime of multi-ownership and registration of real properties. It is Law No. 13,777/2018, which amended and introduced new provisions in the Civil Code and in the Public Registers Law. Published in the Official Gazette on Friday, the 21st, it originated in Bill No. 10.287/2018, passed the previous day, and enters into force on February 4, 2019 (45 days after its publication).

Multi-ownership is a kind of time-sharing, and although it does not constitute a new doctrine in Brazil, the market expectation is that, with the respective regulations, investors and consumers will have more legal certainty and interest in conducting this type of business. It represents a modern way of sharing real estate, optimizing resources and making the dream of a second home for moments of rest and leisure more feasible for the general population. The trend is increasingly evident in an era marked by the use of technology to share services and spaces, such as Airbnb, WeWork, and Uber, and the increasing concern with the best use of the resources available.

The system of timeshares allows the same property, a beach or country house, flat, village or hotel room, among others, to be held in a shared manner by several multi-owners, with a fractional division of time for use and enjoyment of the property between them. Each multi-owner uses his quota of time to enjoy the property in a certain period (for example, a week), which can be fixed, floating, or a mix of the two each year. The existence of the so-called "three-dimensional property" (a thing in time and space) has been recognized, in which each multi-owner has the exclusive right to fully enjoy a particular property during a fixed period, during which time he may use the asset, lease it, give it via a free lease, or simply not occupy it. All expenses with the asset (IPTU, condominium fees, etc.) are apportioned among the multi-owners based on their respective co-participation.

With the promulgation of the new law and the recognition of multi-ownership as a real right, which provides for the individualization of time units of each multi-owner in the Real Estate Registry, part of the debates on the subject will be resolved. However, some controversial issues still need to be regulated and clarified by the market and by the judiciary. The question of foreclosure against the multi-owner's share of debts (for example, condominium fees and IPTU taxes), the regulation of what happens in the case of a waiver of ownership by one of the multi-owners and other sensitive issues will depend on specific rules to be established in the bylaws of each condominium.

The success of this type of venture and the good coexistence between the multi-owners is directly associated with a good legal structure for the contracts that will govern this relationship, especially the condominium by-laws. The law itself required that ventures in which the time-share regime has been instituted, in whole or in part, be managed necessarily by a professional manager.

Category: Infrastructure and energy

On December 13, President Michel Temer signed Presidential Decree (MP) No. 863, which extinguished the 20% limit on the participation of foreign capital in Brazilian airlines.

With immediate effect, the MP will allow foreigners to hold up to 100% of the share capital of companies in the airline sector. Other points of the Brazilian Aeronautical Code (Law No. 7,565/86) were also repealed, such as the prohibition on foreign officers in charge of Brazilian airlines; the limitation on the issuance of preferred shares, and the need for governmental approval for the transfer of shares, among others.

Therefore, foreign airlines will be able to acquire or increase their ownership interest in Brazilian companies, including by acquiring their corporate control, or even creating Brazilian subsidiaries to provide domestic air services in Brazil. Today, the main Brazilian airlines that already have part of their share capital held by foreign companies are Gol (Delta and KLM), Azul (United), and LATAM (Lan Chile).

This is not the first time that the issue of foreign capital in airlines has been debated. Since 2015, a proposal has been pending in the Brazilian Congress for the enactment of a new Brazilian Aeronautical Code (Bill No. 258/2016), which provides for an end on the limitation on foreign capital. In 2016, the Dilma Rousseff government issued Presidential Decree No. 714, which raised the limit on foreign participation from 20% to 49%, but the Brazilian Congress did not convert the text into law, thus bringing the percentage back to 20% in the same year.

Although the MP still has to be converted into law by the Brazilian Congress within 120 days in order to prevent the limit from returning to the previous level, Brazil now follows, albeit belatedly, the policy of the other South American countries, namely Argentina, Bolivia, Chile, Colombia, Paraguay, and Uruguay, which do not impose limits on foreign investment in air carriers established in their countries.

As a justification for MP No. 863, the government recognizes that Brazil is among the countries with the greatest aversion to foreign investment in air transport, being only ahead of Ethiopia, Haiti, Saudi Arabia, and Venezuela, among others.

The new measure seeks to overcome obstacles and allow greater investment in airlines, thereby contributing to increased competition in the air carrier market and, consequently, to developing the Brazilian air network. Among the positive effects expected by the government is the reduction of air fares, increased use of Brazilian airport infrastructure, stimulation of regional aviation by the emergence of new companies and new routes, introduction of new models of airline management, and improvement in the conditions for obtaining investment by Brazilian companies.

The new MP was issued a few days after the request for judicial reorganization of Avianca Brasil, the fourth largest Brazilian airline, due to financial hardship, mainly with the lessors of its aircraft. Avianca would now have legal support to receive a capital injection from some foreign airline, which could in theory alleviate the reorganization of the Brazilian company in order to get its finances in order.

The initiative to open Brazil's airlines to foreign capital undoubtedly represents an important advance for Brazilian commercial aviation, which, if confirmed by Congress, will give new momentum to the sector in the coming years with the entry of new players in the market, increase in investments, and improvements in the services offered to passengers. 

Category: Tax

Ordinance CAT No. 24/2018, enacted on March 23, governed, among other issues, transactions with digital goods and merchandise traded through electronic data transfer.

The objective was to regulate the changes implemented by Convention 106, of September 29, 2017, internalized in the State of São Paulo through the changes introduced in the ICMS Regulation by Decree No. 63.099/2017.

Considering the importance of the matter, we list below the most relevant points of Ordinance CAT No. 24/2018:

(i)    Concept of digital goods and merchandise  - in accordance with article 1 of the ordinance, digital goods and merchandise are "all those not personified, inserted in a mass marketing chain, as were the cases of those put on sale in a physical means: (a) Software, programs, electronic games, electronic files, and similar applications that are standardized (off the shelf), whether or not they have been or can be adapted, whether used by the purchaser through download or in the cloud; and (b) audio, video, images, and text content, with definitive assignment (download), subject to the immunities of books, newspapers, and periodicals."

(ii)    Issuance of NFs: pursuant to article 2 of the ordinance, "establishments that market or make available digital goods or merchandise are required to issue NFes". Although the obligation set forth in the head paragraph of article 2, paragraph 1, of that article is capable of allowing establishments "to issue by the 5th business day of each month NFes consolidating all exits of digital goods and merchandise destined for people domiciled or established in the same municipality carried out in the previous month.” Regarding the obligation to issue NFes, article 4 of the Ordinance states that “the issuance of a tax document is not required in transactions carried out by means of electronic data transfer with goods and merchandise prior to transfer to the final consumer."

(iii)    State registration obligation: pursuant to article 5, the ordinance provided that "the websites and electronic platforms referred to in item IV of article 16 of RICMS/2000 must have a registration in the ICMS Taxpayer Registry of the State of São Paulo specific to carrying out transaction with digital goods and merchandise destined to a person domiciled or established in this State.” Also on this topic, this article provides further that "considering that it is a virtual establishment, the address should be filled with the following information: Praça da Sé, no number, CEP 01001-000, São Paulo, SP, and the address for correspondence must be filled in with the taxpayer's information.” One should note that, under the terms of paragraph 5 of article 5 of the Ordinance, this obligation "also applies to websites and electronic platforms that sell directly to final consumers goods and merchandise that are exempt or not taxed."

Notwithstanding the date of its enactment, CAT Ordinance No. 24/2018 will enter into effect on April 1, 2018. We note that the above analysis contains a summary of the main points of CAT Ordinance No. 24/2018. It is important to carry out a careful analysis of each individual case and all its particularities.

Category: Tax

State Law No. 7,988/18 - RJ, published on June 15, revoked Article 75-A of Law No. 2,657/96 (the ICMS Law) in order to establish new rules regarding the procedures that the tax auditor of the Rio de Janeiro state revenue office must observe in order to disregard legal acts or transactions carried out for the purpose of concealing the occurrence of a taxable event or the nature of the elements giving rise to a tax obligation.

The attempt was to implement new elements to allow the application of article 116, sole paragraph of the National Tax Code, a controversial provision known as the “anti-avoidance clause". It would give power to the tax authorities to draw up tax assessments, levies, and penalties for the taxpayer, even in situations where the occurrence of a taxable event is not clearly found, on the grounds that, through subterfuge, its occurrence had been disguised.

Legal scholarship severely criticizes the validity of these provisions in the Brazilian tax law precisely because there is a conflict between this article and the principles and guarantees of the taxpayer, such as the principle of legality, the prohibition on taxation by analogy, and legal certainty.

There is also a certain consensus that this is a rule of limited effectiveness, because it depends on regulations by law. As no federal law has been issued regulating the application of the anti-avoidance clause, the federal tax authority avoids using it as a legal basis in assessments, even though it may sometimes rely on it as grounds for lack of a business purpose, abuse of form, or lack of substance.

With the enactment of State Law No. 7,988/18, the State of Rio de Janeiro seeks to remedy this lack of regulations in order to enable the application of the sole paragraph of article 116 of the National Tax Code.

The law establishes that the act of disregard will be done by drawing up an infraction notice, which must be based on the elements or facts that demonstrated the concealment, as well as the acts or deal to be taxed, therein indicating the respective standards applicable. Therefore, prior to the issuance of the infraction notice, the tax auditor should:

1. Subpoena the taxpayer to provide clarifications and information within 30 days about the facts, causes, reasons, and circumstances that led to the undertaking of the legal act or deal with “indicia" of concealment (failure to comply with the subpoena or the presentation of incomplete information or clarification will result in disregard);

1. If the clarifications are not enough, or do not convince the tax authority, an infraction notice will be drawn up and administrative litigation regarding the infraction notice will follow, with right to an adversarial proceeding and full defense. 

It should be noted that there is no definition in the rule of what is meant by "act or deal undertaken for the purpose of concealing the occurrence of the triggering event." This opens a wide margin of discretion so for the state tax authority to assign to certain situations a finding of concealment, even those in which a taxable event does not occur.

An attempt has already been made to create a federal law to regulate the application of an anti-avoidance clause by Presidential Decree No. 66/02. In this case, the Presidential Decree brought in even more elements regarding the concepts to be used in disregarding the legal act or deal, therein expressly mentioning the lack of a business purpose and abuse of form, and assigning their respective meanings in the legal text itself. The rule also required that the tax assessment be accompanied by evidence gathered by the auditor. Even so, these provisions were broadly rejected and ended up not being part of the text of the law that resulted from the conversion of the Presidential Decree.

Another attempt was made at the federal level with the enactment of Presidential Decree No. 685/15. It provided that the taxpayer would be required to make a prior annual declaration to the Federal Revenue Service of legal acts or deals (i) that had no relevant non-tax reason; and (ii) whose adopted form was not usual, was an indirect legal deal, or had a contractual provision that was not typical for contracts. These statements would be submitted as consultations to the Federal Revenue Service, which would express its opinion on the validity of the acts and possible disregard of them. Again, these provisions have not been converted into law.

Therefore, taxpayers in the State of Rio de Janeiro should be attentive, since the enacctment of Law No. 7,988/18 is inserted into a context of various legal controversies, which brings in uncertainty regarding its application by the tax authorities and uncertainty as to the position that will be adopted in any discussion in administrative and judicial courts.

The enactment of the law conveys the message that the state revenue service intends to use this type of anti-avoidance argument more frequently in order to prepare new tax assessments, which will certainly require even greater attention from taxpayers who intend to show that the tax assessment is unfounded.

Category: Banking, insurance and finance

Resolution No. 4,662 of the National Monetary Council (CMN), issued on May 25 of this year, provides for the requirement of a bilateral margin of guarantee on transactions with derivative financial instruments carried out in Brazil or abroad by financial institutions and other institutions authorized to operate by the Central Bank of Brazil (Bacen).

The new rules converges with the improvements applied to the derivatives market since the global financial crisis of 2008 and with the recommendations by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO) for transactions with derivatives conducted in over-the-counter markets.

Resolution No. 4,662/18 does not apply: (i) to derivative transactions settled through an entity that intervenes as a central counterparty, if that entity: a) is a clearing house and a clearing and settlement service authorized by Bacen, in accordance with Law No. 10,214/01 and the regulations in force; b) is recognized as qualified by Bacen, pursuant to Circular No. 3,772/15; or (c) complies with the rules that are in accordance with the principles established by the Committee on Market Payments and Infrastructure (CPMI) and by IOSCO; (ii) to derivative contracts with delivery of a physical commodity, except for gold; and (iii) transactions carried out within the scope of the Brazilian foreign exchange market dealt with in Resolution No. 3,568/08.

According to the new resolution, financial instruments that possess all of the following characteristics are derivatives: (i) variable market value as a result of changes in a certain interest rate, price of a financial instrument, commodity price, exchange rate, price index or rate, credit rating or index, or other similar variable, provided that, in the case of a non-financial variable, it is not specific to one of the parties to the contract ; (ii) no or a small initial net investment in relation to the value of the contract; and (iii) settlement {liquidation} carried out on a future date.

On the other hand, the following shall not be considered "hedged transactions": (i) derivative financial instruments included in the portfolio of assets of a Real Estate Guarantee, as referred to in Resolution No. 4,598/17; (ii) derivative financial instruments between institutions that are members of the same prudential conglomerate; (iii) forward contracts for currencies with physical settlement (FX forward); and (iv) physical currency swap contracts (FX swap).

The requirements of the initial margin and the variation margin established in the context of derivative transactions must be observed both by the "covered institutions" and by the "covered counterparties".

Covered institutions are defined as institutions authorized to operate by the Central Bank that, individually or jointly with the other entities that are part of their operating group, average aggregate notional value of derivative transactions higher than R$ 25 billion. Covered counterparties are defined by the rule as: a) the covered institution and any entity that is part of its operating group, as defined in the rule; and b) any other entity that has, individually or jointly with the other entities that are part of the operating group to which it belongs, a notional average aggregate value of derivative transactions in excess of R$ 25 billion.

By seeking to ensure a high level of security for derivative transactions, the rule also provides general prohibitions on the guarantees established in the scope of these transactions. One of these prohibitions applies to the sale or re-use of financial instruments received as collateral for any other purpose, including the creation of a guarantee of new transactions by the receiving counterparty. In addition, it is mandatory to segregate the financial instruments used as the initial margin guarantee for the assets of the guarantor and the guarantee, thus ensuring their timely availability in the event of insolvency, bankruptcy, or dissolution by the competent authorities.

In order for all players involved in transactions of this nature to be able to adapt to the new rules, they will only be applied to covered transactions as of September 1, 2019.

Category: Infrastructure and energy

In view of Brazil's current economic scenario, many companies have filed applications for judicial reorganization as a way of renegotiating their debts in order to maintain their activities and carry out their corporate purpose. Often, they must resort to this procedure without prior approval by the general meeting, which is pending further confirmation per the terms of article 122, sole paragraph, of the Brazilian Corporations Law.

In some cases, however, this approval does not happen or there are discussions between, on the one hand, shareholders, interested in protecting their rights under corporate laws, and, on the other hand, the company in reorganization, sometimes accompanied by its creditors.

In recent judicial decisions, our courts have addressed these discussions and tended to protect the decisions reached by the company in reorganization and/or the community of creditors, based on the prevailing interest in the judicial reorganization process.

An example of such a situation is the judicial judicial reorganization of the Renuka Group,^[1] especially the interlocutory appeal filed in the case, which debated the decision by the bankruptcy court that dismissed the affirmative vote of the minority shareholder for purposes of a capital increase in the company provided for in the reorganization plan.

In this specific case, the São Paulo State Court of Appeals (TJSP) upheld the decision by the trial court on the grounds of abuse of minority position and conflict between its actions and the company’s interests. According to the TJSP, it would be legitimate to suppress the need for approval by the minority shareholder for a capital increase (rule set forth in the company’s bylaws), as well as to have an arbitration clause on the subject (according to which any corporate dispute should be resolved via arbitration), since the capital increase, through the contribution of the majority shareholder, was allegedly compatible with the economic situation of the company and would not, therefore, mean unjustified dilution.

The TJSP opted to give prevalence to the rules of the reorganization plan and to its fulfillment with respect to the corporate issues relating to the matter since the decision to increase share capital was found to be "the pathway found by the company to overcome the crisis",^[2] with economic and corporate justifications explained well explained by the Renuka Group, and that the minority shareholder supposedly only sought to have its interests prevail.

Another relevant case on the subject is the judicial reorganization of the Daslu Group, in which minority shareholders sought to debate via an interlocutory appeal a decision granting an application for judicial reorganization.^[3] The Superior Court of Justice (STJ) upheld a decision by the TJSP according to which shareholders cannot seek to fight against a decision that approved the judicial reorganization plan derived from the respective approval of the plan in a general meeting of creditors. The TJSP understood that their interests "do not prevail over the principle of preservation of the company and its corporate function,"^[4] nor over that of the community of creditors.

The minority shareholders, in this case, sustained that the effectiveness of the reorganization plan was conditioned on the approval of the shareholders, according to a memorandum of understanding entered into by them. And, moreover, they argued that there was a shareholders' agreement that granted minority shareholders the right to participate in new businesses entered into by the company. Along these lines, according to the minority shareholders' theory, they have an interest in vetoing the reorganization plan since: (i) their approval is said to be a condition of effectiveness; and (ii) the plan was said to provide for the creation of a new company that would receive assets from the Daslu Group, including that its brand, without specifying how minority rights would be satisfied.

The trial court, the TJSP, and the STJ were of the position that such issues would not block approval of the plan. The TJSP further stated that, since these are corporate matters, they should be settled in a separate and autonomous proceeding, and not in the context of a judicial reorganization.

Finally, one of the cases with the greatest repercussion on the subject was the positive finding of conflict of jurisdiction ^[5]resulting from the judicial reorganization of the OI Group, involving the 7th Business Court of the Capital District of the State of Rio de Janeiro/RJ^[6] and the Arbitral Tribunal of the Market Arbitration Chamber of São Paulo/SP.^[7]

In summary, minority shareholders sought to challenge the reorganization plan approved in court on the grounds that it provided for a capital increase, through the conversion of OI Group debts into shares, the approval of which should be submitted to OI S.A.'s board of executive officers. The minority shareholders also called an extraordinary general meeting (AGE), whereby they decided to remove from office part of the board of directors of the OI S/A Group and approved the filing of an action of liability against two OI S.A. officers, one of them being the CEO. In view of these facts, OI S.A. submitted a plea at the reorganization hearing seeking to suspend the effects of the resolution passed at the AGE, which was promptly granted. Nonetheless, the minority shareholder Bratel BV, based on the bylaws of OI S.A., instituted arbitration proceedings to challenge the adoption of the measures provided for in the approved reorganization plan, which was granted in limine by the arbitral tribunal. In view of this, OI S.A. raised a positive conflict of jurisdiction before the STJ, seeking to suspend the decision by the arbitral tribunal and to obtain a declaratory relief affirming the jurisdiction of the 7th Court of Rio de Janeiro.

The reporting judge, via an in limine order, granted a stay of the decision handed down by the arbitral tribunal in the case, therein provisionally finding the 7th District Court of Rio de Janeiro as having jurisdiction to review issues related to judicial reorganization and related urgent measures as a means of preserving the interests and assets of the company undergoing reorganization.

In reviewing the cases decided, one notes, therefore, that in judicial reorganizations, either at the time of filing the request or at the time of a resolution on the means of reorganization, conflicts may arise between the corporate law and the Bankruptcy and Reorganization Law, with the prevailing theory to date being that it will be incumbent on the reorganization court to decide on the issue, and, to that end, resolve, among other points: (i) the conflict in the specific case; (ii) the motive of the shareholder with its actions and the claim sought by it; and (iii) the profile of the controlling power of the company under judicial reorganization.^[8]

Despite this, it is true that a great deal of debate will still arise regarding the subject, on the one hand, the defenders of the prevalence of corporate rights and arbitration, and, on the other hand, those who consider the rights of the company in reorganization.

---

^[1] Case No. 1099671-48.2015.8.26.0100, 1st Bankruptcy and Judicial Reorganization Court of the Central Judicial Section of the District of São Paulo - Interlocutory Appeal No. 2257715-26.2016.8.26.0000, 2nd Chamber Reserved for Business Law - TJSP

^[2] P. 9 of the appellate decision handed down in Interlocutory Appeal No. 2257715-26.2016.8.26.0000

^[3] Interlocutory Appeal No. 0154311-66.2011.8.26.0000, Chamber Reserved for Bankruptcy and Reorganization, TJSP - Resp 1.539.445 - SP, Third Panel, STJ.

^[4] Headnotes of Interlocutory Appeal No. 0154311-66.2011.8.26.0000.

^[5] Conflict of Jurisdiction No. 157.099/RJ, STJ

^[6] Court where the judicial reorganization of Oi is pending (case No. 0203711-65.2016.8.19.0001).

^[7] Court where Arbitration Proceeding No. 104/18 is pending, initiated by the minority shareholder Bratel BV.

^[8] COELHO, Fabio Ulhoa, idem, pp. 256.

Category: Intellectual property

Presidential Decree (MP) No. 869/2018, published on December 28, amended provisions of Law No. 13,709/2018, the so-called General Data Protection Law (LGPD), and created the Brazilian Data Protection Authority (ANPD), a part of the Executive Branch.

Among the changes promoted by the MP, it is worth highlighting the extension by six months of the date of entry into force of the new law. As a result, the obligations set out therein will become effective as of August of 2020.

The creation of the ANPD, in turn, takes effect as of the date of publication, with emphasis on the following points: 

• The ANPD will be composed of a Management Board, the National Council for Personal Data and Privacy Protection, the overseer’s office, the ombudsman's office, the advisory board, and administrative/specialized units for the application of the LGPD.
• The Management Board shall be composed of five members, appointed by the President of Brazil, for four-year terms.
• The National Council for Personal Data and Privacy Protection shall have 23 representatives, all of them appointed by the President of Brazil, 11 of them being from the State (6 from the Executive Branch, 1 from the Senate, 1 from the Chamber of Deputies, 1 from the National Council of Justice, 1 from the National Council of the Public Prosecutor’s Office, and 1 from the Internet Governance Committee in Brazil), 4 from civic society entities, 4 from scientific institutions, and 4 from the business sector.
• The ANPD shall be responsible for, among other things: promulgating rules and procedures for regulating the LGPD, interpreting the LGPD, and monitoring and applying the sanctions set forth in the LGPD.
• The ANPD shall coordinate its work with the National Consumer Defense System of the Ministry of Justice and other bodies and entities with sanctioning and normative competencies related to the subject of personal data protection, and it shall be the central body for the interpretation of the LGPD and the establishment of standards and guidelines for its implementation.

Other changes that deserve mention:

-      There is no longer any requirement that the Data Protection Officer (DPO) be an individual. Therefore, controllers will have more flexibility in relation to the implementation model of the function.

-      The text expresses the possibility of sharing personal health data for the provision of complementary health services.

-      The right to review decisions made on the basis of automated personal data processing procedures remains, but there is no longer any need for such review to be performed by an individual.

-      The possibility of sharing by the Government of personal data has been expanded, including the possibility of transferring personal data based on contracts, agreements, or similar instruments.

The presidential decree will be subject to the process of conversion into law, whose deadline is up to 120 days, and may be fully approved, rejected, or even approved with amendments. We will continue to monitor the issue and provide those interested with all the clarifications and support necessary.

The full text of the presidential decree may be found at this link: https://bit.ly/2ET3IYb.

Category: Litigation

In order to avoid having Brazilian courts produce different decisions on a single issue and seeking to accelerate the resolution of multiple demands dependent on a review of the same legal matter, the Code of Civil Procedure of 2015 inaugurated the Ancillary Proceeding for Resolution of Repetitive Claims (IRDR), a procedure provided for in articles 976 through 987 of said law.

In summary, if there is a common question of law repeated in various cases, individual or collective, the incident can be initiated in order that, based on one or more cases, a theory is defined that must necessarily be adopted by the covered bodies in the other individual cases. Thus, when a controversy that deals with a repetitive right with the potential to generate contradictory decisions on the same subject is identified, an IRDR is allowed in order to avoid risk to equal protection and legal certainty.

At the time of the judgment of the case chosen as a paradigm, the court must broadly hear all interested parties before issuing a full decision that will serve as the adjudicatory standard for repetitive cases. Another important aspect related to IRDRs is the suspension of cases that deal with the same issue as that which will be adjudicated in the model case.

Pursuant to article 982, item I, of the Code of Civil Procedure, once an incident has been admitted, the reporting judge will stay pending individual or collective cases that are pending in state or circuit courts, as the case may be. Paragraph 3 of the same article provides that such a stay may be extended to all Brazilian territory if a request filed with the Federal Supreme Court (STF) or the Superior Court of Appeals (STJ) is granted. This request is submitted by the party itself that is the subject of the IRDR, by the Public Prosecutor's Office, or by the Public Defender's Office.

However, although the stay is provided for in legislation as a result of the introduction of IRDRs, after the proceedings related to the subject were put into practice, it was found that the courts began to loosen the rule of stay of the proceedings of all cases related to the topic which will be adjudicated in the model case. This is because, in certain cases, a stay could have serious consequences for the individual or collective proceedings already in progress, which would go against important principles of the New Code of Civil Procedure, such as a speedy trial, procedural economy, and standardization of decisions.

As an example, we shall analyze the appellate decision rendered in the record of the proposal to change Special Appeal No. 1.729.593-SP. Upon repeatedly adjudicating claims that deal with aspects related to the purchase and sale of real estate on the planned real estate units and controversies involving the effects on the delivery of the property, the São Paulo Court of Appeals chose a model case for the establishment of an IRDR and forwarded the proposal to change to the STJ. As a rule established by the Internal Rules of the STJ themselves, based on articles 256-I and 257, there is a stage of admissibility in the proceeding in which the panel must express its views on the case. This step is subsequent to recognition of the admission of the appeal as representative of the controversy.

In the present case, the STJ found that the legal issues raised are of great relevance because they involve effects of delay in the delivery of autonomous units under construction, which would show the broad nature of the controversies dealt with in the case. Therefore, the decision rendered in that judgment would apply to cases that deal with the same topic.

Although it recognizes that a stay of all cases that deal with the same subject may be one of the effects of the decision to classify the appeal as being a repetitive one, the Court considered it unfitting to adopt this measure in the case in question and, in a weighted manner, detailed the arguments that grounded such a decision to the effect that: (i) the paralysis of all cases in Brazil that deal with the subject could have an effect different from the speedy trial and legal certainty that the judgment of repetitive appeals seeks; (ii) a stay would prevent parties involved in the housing lawsuits from seeking a settlement, which would be a "wholesome initiative to end litigation"; and (iii) the potential risk of closure of activities on the part of the respondents should be considered due to the slowdown in the real estate sector, which would only be aggravated by the massive stay of a large number of claims on this issue.

In the wake of the arguments developed in the appellate decision, it is possible to observe the efficient performance of the Judiciary in facing issues that may adversely affect the useful result that is intended with IRDRs. It is therefore necessary for the procedure to comply with the principles of a speedy trial and a reasonable duration of the proceedings. In this sense, even the legal scholarship takes the position that a complete stay of the proceedings may lead to undue delay in resolving issues that do not relate to the legal matter debated in the ancillary proceeding and which could result in denial of the right to a reasonable duration of the proceeding.

In addition, a stay of related cases would be essential when reviewing a subject whose decisions have hitherto been in conflict with each other, which did not occur in the discussion dealt with in the appellate decision handed down in the record of the proposal to affect special appeal No. 1.729.593-SP. This is due to the fact that varoius points that would be subject to reviewing by the STJ already present understandings that have been applied by Brail’s courts of appeal, which reinforces the lack of necessity of a stay in mass since the risk that conflicting decisions would be issued while the judgment on the model case is awaited would be low.

A different situation, however, may be observed in the record of the proposal to affect Special Appeal No. 1.763.462-MG, in which case the STJ decided to stay all proceedings concerning whether or not a fine is to be imposed when the party is subpoenaed to submit a document relating to an alienable right because of the controversies generated regarding the application of Topic No. 705 of the STJ’s compiled list of topics for review and the provisions of article 400 of the Code of Civil Procedure.

This is because, according to the rule established in Topic 705 of the STJ, no punitive fine should be imposed in the event or production of a document relating to an alienable right. However, as provided for in the sole paragraph of article 400 of the Code of Civil Procedure, in the event of unjustified refusal to produce a document, the judge may adopt inductive, coercive, mandatory, or subrogatory measures for the document to be produced.

Under the justification of restoring legal certainty in relation to the issue in view of the uncertainties lingering over Brazil's courts, a stay in related cases was ordered so as to allow for a decision on the potential overruling of the STJ’s Topic No. 705, established in light of the provisions of the Code of Civil Procedure of 1973, in order for the controversy to be addressed according to article 400 of the Code of Civil Procedure of 2015.

Therefore, the STJ's stance in reviewing on a case-by-case basis, in the light of the scope of the institute of IRDRs itself, may be seen as beneficial. This is because the ancillary proceeding was thought of as a tool to expedite the judgment of similar cases in order to guarantee to litigants a more efficient resolution of their conflicts and also an effective means of eliminating controversial decisions handed down by the Brazilian courts of appeals in order that the judicial process provide the legal certainty necessary.

Category: Capital markets

The civil liability insurance for directors and officers, or D&O Insurance, was adopted in Brazil in the 1990s, still in a very incipient form, and has gained relevance over time, with the transformations of the Brazilian economy, specifically the policies of privatization at the federal level and the commercialization of securities of Brazilian companies abroad. However, D&O insurance has never been so much talked about as it is today. The figures published on Susep's website show that the claim levels of this type of insurance went from approximately R$ 38 million in 2013 to R$ 228 million in 2017, and by August this year amounted to R$ 148 million.

In parallel, according to the report by the CVM regarding sanctioning activity (April-June 2018), R$ 73 million were paid in fines imposed by the CVM in the first half of 2018. Of the trials conducted by the agency during the same period, 130 defendants were fined, 6 were warned, and 5 were disqualified, compared with 107 fined, 9 disqualified, and 7 warned throughout all of the year 2017.

This scenario is undoubtedly due to the various corruption scandals that have arisen in Brazil during the period, such as Operation Car Wash (initiated in 2014) and all its developments, Operation Zelotes (initiated in 2015) and Operation Weak Meat (initiated in 2017), which have resulted in civil and criminal consequences for companies and their officers and directors.

It is also important to highlight that, in 2017, Susep issued a new rule regulating D&O insurance, Susep Circular No. 553/2017, which included the possibility of coverage for fines and civil and administrative penalties imposed on insured persons. In the same year, Law No. 13,506/2017 was enacted, which raised the ceiling of fines applicable by the Central Bank and the Brazilian Securities and Exchange Commission (CVM) (in the latter case, to R$ 50 million).

In this context, D&O insurance and indemnity contracts have once again received enormous attention and have been an important instrument for protection of executives since, with the increase of oversight and supervision by government agencies and, consequently, civil and criminal sanctions, it was necessary to establish mechanisms to mitigate possible impacts on their assets.

Indemnity contracts are private instruments entered into between the companies and their officers and directors with the objective of holding them harmless from liability for having reached their decisions in good faith and in the company's interest. Thus, in order to be exempt from liability, the officers or directors must be informed, question, refuse to act in a situation that constitutes or may constitute a conflict of interest, and always act within the limits of the powers conferred on them by law or the bylaws.

In turn, D&O insurance, as a rule, is purchased by companies from insurance companies in favor of their executives (elected or hired).

Thus, it is noted that D&O insurance and indemnity contracts are complementary instruments, with the common objective of indemnifying third parties who may be adversely affected by regular acts of management by the officers and directors and, consequently, preserving the individual assets of such officers and directors.

To illustrate the complementary nature of these instruments, it should be noted that D&O insurance has deadlines to cover the acts of officers and directors and a maximum guarantee limit established in the policy, which may, in some situations, not ensure the coverage necessary for the officer or director or not be sufficient to indemnify all a company’s officers and directors. In these situations, the indemnity contract may cover the limitation on the payment of compensation to such officers and directors.

Because they may be freely agreed upon between the company and officers and directors, indemnity contracts may provide for compensation in situations not covered by D&O insurance, or even establish more rapid compensation procedures for the company to subsequently seek to have the advance made to the officer or director reimbursed by the insurer.

In addition, it is worth mentioning that the purchasing of D&O insurance may also be seen as a form of indirect protection of the company's equity, which is committed only to the payment of the premium in consideration for the coverage offered by the insurer. By entering into an indemnity contract, the company may assume up to the full financial risk of the officer or director.

Because the company assumes such risks, it is important that the indemnity contracts contain limitations on the duty to indemnify officers and directors, even though they are freely agreed upon between the parties. They must, for example, restrict themselves to indemnifying or holding their officers and directors harmless for unlawful wrongful acts performed in the regular exercise of their duties and not in cases of commission of any harmful unlawful act.

These contracts should take into account the company's structure, which is to say, its size, the effectiveness of its internal controls, its compliance rules, its risk management mechanisms, the composition of its board of directors, among other issues.

With regard specifically to publicly-held companies, the CVM had already manifested its position regarding indemnity contracts on a few occasions, wherein it admits their existence, but without establishing any requirements or necessary elements for their validity and effectiveness. However, on September 25, the agency published CVM Guidance Opinion No. 38 on the fiduciary duties of officers and directors covered by indemnity contracts entered into between publicly-held companies and their officers and directors.

In this opinion, CVM expressly provides "that it recognizes the value of indemnity contracts as an instrument for attracting and retaining qualified professionals" and "that public companies have an important role to play in relation to such instruments, in order to ensure that they are prepared and executed in accordance with fiduciary duties."

The indemnity contract should be a document balanced between "the company's interest in protecting its officers and directors against financial risks arising from the exercise of their functions" and "the interest of the company in protecting its assets and in ensuring that its officers and directors act in accordance with standards of conduct expected and required by law."

Therefore, expenses arising from acts by the officers and directors should not be subject to indemnification when they are: a) outside the exercise of their duties; b) in bad faith, fraud, gross negligence or willful misconduct; or c) in their own interest or those of third parties, to the detriment of the company's corporate interest.

In addition, companies must implement procedures to ensure that decisions regarding the payment of such indemnities be based on severance agreements that are created independently and always in the best interests of the company.

To do so, the company's management must include rules in the indemnity contracts specifying: a) the company's body that will be responsible for assessing whether the act by the officer or director falls within any exclusion from the scenarios allowing for indemnity; and b) the procedure to be adopted to recuse the officers and directors whose expenses may be indemnified in the process of evaluation of item (a) of the decision on whether or not to make payment of the indemnity.

Although applicable only to publicly-held companies, CVM Opinion No. 38 will certainly become a general guide to good practices regarding indemnity contracts to be entered into between all Brazilian companies and their officers and directors.

D&O insurance and indemnity contracts are important mechanisms for protecting executives, which provide greater peace of mind and security for the regular and good faith performance of their duties. 

Category: Litigation

In a recent judgment, the Third Panel of the Superior Court of Justice (STJ) ruled out the requirement to post bond by a foreign legal entity duly represented in Brazil and who seeks to file a lawsuit in Brazil.^[1]

In the specific case, the suit was dismissed without resolution on the merits by the trial court on the grounds that the plaintiff, a foreign company, had not posted bond, as provided for in article 835 of the Code of Civil Procedure (CPC) of 1973^[2] (current article 83, of the CPC of 2015). Article 835 provides that plaintiffs, Brazilian or foreign, who reside outside Brazil or who are absent in the course of proceeding, must provide sufficient security to cover the costs and legal fees of the party against whom the suit is brought, if they do not have real estate in Brazil that may serve as a guarantee.

At the appellate level, the Court of Appeals of the State of São Paulo (TJSP) upheld the dismissal of the case, stating that the bond was enforceable, since the foreign company was not duly represented in Brazil.

Against the decision, the foreign company appealed to the STJ claiming to have appointed a legal entity domiciled in Brazil, through the conclusion of an agency agreement, as its general agent, with powers including to bring lawsuits in defense of its interests.

The discussion of the precedent stems from the fact that the Brazilian procedural system, out of caution, requires the provision of security by foreign legal entities that appear as plaintiffs in a lawsuit if they do not have sufficient real property to support the procedural costs and potential charges, if they do not succeed in the suit, in order to bear the attorneys’ fees of the opposing party (fees for loss in suit).

This type of guarantee has a dual function: (i) to protect the defendant against any financial incapacity of the plaintiff to bear the costs of the proceedings and fees for loss in suit; and (ii) to prevent parties that are not domiciled, or have no real property in Brazil, from litigating before the Brazilian Judiciary without offering any guarantee against potential default, which places them in an excessively favorable position and, consequently, even stimulates abuse of the right to file suit.

In a judgment session held on August 21, 2018, the Third Panel of the STJ held that modification of the TJSP's understanding, following the opinion of Justice Moura Ribeiro, who wrote for the Court, and who commented that there was "no reason that would justify fear with respect to potential liability of the claimant for fees for loss in suit, thus not justifying application of the provisions of article 835 of the CPC/73.” The Justice concluded by stating that the plaintiff is duly represented by an agency domiciled in Brazil which “may be liable directly, if it is unsuccessful in the claim, for any charges resulting from loss in the suit."

Finally, the Justice who drafted the opinion pointed out that, according to the wording of article 88, I, sole paragraph, of the CPC of 1973 (article 21, I, sole paragraph, of the CPC of 2015), a foreign legal entity with an agency, subsidiary, or branch established in Brazil is duly domiciled in the Brazilian territory.

Still on the subject, the CPC of 2015 expressly provides for three cases for waiver of the security: (i) when there is an international treaty or agreement that dispenses with it, a novelty brought about by the legislator in the new code; (ii) execution based on extrajudicial enforceable instruments; (iii) in compliance with a judgment and in a counterclaim (article 83, paragraph 1, I to III).

The prevailing understanding, however, is that the list of article 83 is not exhaustive and admits, for example, that provision of security may be dispensed with in a suit to domesticate a foreign judgment (STJ, Special Court, SEC 507/EX, opinion drafted by Justice Gilson Dipp, decided on October 18, 2006); in a search and seizure action (STJ, 4th Panel, Special Appeal V No. 660.437/SP, opinion drafted by Justice Cesar Asfor Rocha, decided on November 4, 2004) and in cases in which the foreign person appears as "creditor of the defendant in a related action" to the proposal (STJ, 3rd Panel, Special Appeal REsp No. 6.171/SP, opinion drafted by Justice Waldemar Zveiter, decided on December 18, 1990).

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^[1] STJ, 3rd Panel, Special Appeal REsp No. 1.584.441/SP, opinion drafted by Justice Moura Ribeiro, decided on August 21, 2018.

^[2] The special appeal was lodged under the aegis of the CPC of 1973.