Early last month, June 2023, Brazil’s Ministry of Finance presented a reform bill (PL 2925/2023) which proposes relevant changes to the Brazil’s Law of Corporations (Law 6.404/76) and to Law 6.385/76, which deals with the Brazilian securities market.
The goal is to improve the protection mechanisms for minority shareholders and other company investors in Brazil and to align national rules with the practices adopted by OECD countries.
Although the changes have been discussed for many years, the proposal echoes debates from recent disputes involving investors and publicly traded companies, such as the cases of Americanas, IRB, and CVC.
Moreover, despite being focused on public companies, the bill also brings relevant impacts for private companies – as so, private equity and venture capital funds and other stakeholders should be aware.
In this article, we have listed a few of the main points and uncertainties related to such proposal, which is awaiting to be voted in the House of Representatives.
Class Action Liability
The bill introduces the possibility of collective actions, inspired by U.S. class actions, in which shareholders and investors have standing to bring a civil liability action in the event of damages suffered as a result of violations of securities market legislation or regulation.
According to the proposal, shareholders holding at least 2.5% of the securities of the same kind or class, or securities worth R$ 50 million (updated by the Brazilian index IPCA) are legitimized to file suit. The bill, however, does not make it clear whether shareholders must be examined individually or can join to meet such criteria, but allows The Brazilian Exchange and Securities Commission (CVM) to modify the criteria for standing, including reducing them.
In case of conviction, the defendants will have to pay the amount of the indemnity plus a 20% premium, from which the defeat fees will be deducted.
If approved, the new rule has the potential to increase considerably the number of corporate litigations, which will require even more attention from controllers and managers in order to avoid relevant losses.
Dismissal of Directors
The bill brings a debatable change regarding the approval of corporations’ accounts and financial statements, in what seems to be a reaction to the cases of Americanas, IRB, CVC and others.
Currently in Brazil, approval without reservations exonerates directors and fiscal council members from liability, except in cases of error, malice, fraud, or simulation. In the proposal, the approval of the accounts would no longer automatically exonerate management but would require an express approval to that effect.
According to the Ministry of Finance, this change aims to limit the “unconscious” exoneration of liability, excluding the requirement that the minority shareholder must first file an action to annul the meeting that approved the accounts and only then seek to hold management liable for damages caused to the company.
In our understanding, the practical applicability of the change will be low and should bring questions about the application of the law, generating legal uncertainty to the resolutions and to the managers.
Since the ordinary general meetings are called by the management itself, it is quite unlikely that the liability exemption will not be on the agenda for future meetings.
The concern is that any legal uncertainty brought by the proposed rule could generate real losses for companies, such as less attraction of talent for top management, higher costs for contracting D&O insurance, etc.
Publicity of Arbitration Proceedings
One of the most positive changes in the reform bill is the mandatory requirement that arbitration proceedings concerning publicly held companies be public, which would bring more publicity to the understandings built.
It is known that most of the disputes involving corporate law (and, especially, M&A transactions) are resolved by arbitration. As a result, the understandings regarding legislation and interpretation of key clauses are accessible only to the parties in each dispute.
By requiring that arbitration proceedings involving publicly held companies to be published, the proposal seeks to create mechanisms to broaden legal discussions, bringing a more uniform understanding of the interpretation of the applicable instruments and thus greater legal security to the business environment in Brazil.
This point requires attention, as the option for arbitration by the involved parties usually occurs precisely because of its confidentiality, which avoids possible turbulences that the press coverage and eventual analysis could bring. If this change is approved, the almost automatic adoption of arbitration clauses will need to be analyzed more carefully.