Co-written by Manoel Ignácio Torres Monteiro
On November 5th, 2001 Law No. 10.303 was published bringing important changes in the Brazilian Corporation Law (Law No. 6.404 of December 15th, 1976) and Law No. 6.385 of December 15th, 1996 (the Brazilian Securities Law). Said changes concern not only the privately- and publicly-held Brazilian corporations but also the Brazilian Securities Market.
The changes will undoubtedly benefit minority shareholders.
Firstly, it is important to point out the several rules as to when the new provisions will come into force vis-à-vis privately- and publicly-held companies.
- Corporations ("Sociedades Anônimas") will have until March 5th, 2003 (one year after the effective date of the Law – 120 days after publication) to adjust their bylaws to the provisions thereunder.
- The Tag Along right granted to minority shareholders of publicly-held companies corresponding to 80% of the purchase price offered to the controlling shareholder will not apply to state-owned companies undergoing privatization that have their Invitations to Bid Notes published until October 31st., 2001.
- Any change in the type and number of shares resulting from the new provisions under the Law shall not entitle shareholders to exercise their right to withdraw, unless it is carried out until December 31st, 2002.
- The voting: non-voting right ratio (which was reduced from 66% non-voting - 33% voting to 50-50%) of shares that companies can issue shall be applicable to companies incorporated after publication of the Law and to privately-held companies that apply for license to trade bonds and shares in the market.
- The election of members of the Board of Directors by minority shareholders (shareholders with voting rights representing 15% minimum of the total voting stock and shareholders representing 10% minimum of the total issued stock) is limited to a list of three names, prepared by the controlling shareholder until the first General Shareholders’ Meeting of 2005.
It is worth mentioning that a Brazilian corporation can be classified as a public trade company even though it has not issued shares into the market. Corporations that issue debentures, for instance, have to apply for a license as a publicly-traded company. In that respect, all the new rules applicable to publicly-traded companies will also be applicable to corporations that have been authorized to issue debentures or other bonds.
The most important changes brought by the new Law are summarized below.
- Public offer for acquisition of shares
- Voting and Non-voting Stock
- Put Option
- Shareholders’ Agreement
- Shareholders’ Meeting
- Board of Directors
As mentioned above, public offers for acquisition of control entails a tag along right to the minority shareholders corresponding to 80% of the value offered to the controlling shareholder.
Furthermore, in case of public offers for acquisition of shares from minority shareholders and closing of the company’s capital, a new procedure was established pursuant to which shareholders representing at least 10% of the shares not held by the controlling shareholder may challenge the value offered by the controlling shareholder and request a new appraisal of the company. The majority shareholder is also required to support the value offered based on one or more criteria for appraisal of the company mentioned in the new Law.
After the above mentioned public offer, if less then 5% of the total shares issued by the company remains in the market, the shareholders’ meeting may authorize the mandatory purchase of said shares by the company.
The non-voting shares can not exceed 50% of the total number of shares issued.
The non-voting shares of publicly-traded companies should receive preferential dividends in relation to voting shares. In case of privately-held companies the preferential dividend of 10% over voting shares was eliminated.
The right granted by law to the minority shareholders to withdraw from the company by selling their shares to the company, was increased including the spin-off the company, except if the spun-off assets are transferred to a company which the main business activity is equivalent to the business activity of the original company. Furthermore, the Put Option may be exercised by the minority shareholder in case of a reduction in the mandatory dividend.
The enforceability of the provisions in the shareholders’ agreement is confirmed by the new Law, according to which the Chairman of the Shareholders’ meeting or Board meeting should not take into consideration votes that violate voting arrangements provided in the shareholders’ agreement. The exercise of the controlling power was also included among the subjects that can be regulated in the shareholders’ agreement.
The time for calling shareholders’ meetings of publicly-traded companies was extended from 8 to 15 days. Depending on the agenda of the meeting and upon request of the minority shareholders, said time may be extended by CVM’s decision for up to 30 days and its course can also be interrupted by an additional 15 days.
Shareholders’ representing 15% minimum of the voting shares are entitled to elect one Board member. Shareholders with non-voting shares, representing 10% minimum of the issued stock are also entitled to appoint one Board member. Regardless of the number of members in the Board, the controlling shareholder will be entitled to elect the majority of Board members.
The appointment of Board members who are not resident in the country is now allowed.
The Board members can not hold officer offices in companies regarded as competition of the company.
The new Law makes specific reference to the possibility of solution of conflicts among shareholders or between the company and any shareholder by means of arbitration.
The changes will undoubtedly benefit minority shareholders and the securities market to the extent that investors confidence increases and CVM has more powers to oversee the market. The changes should also benefit foreign investments into the Brazilian securities markets, since it grants additional rights to minority shareholders. On the other hand, the new set of shareholders’ protection rights might have adverse effects on foreign investors taking a majority stake in joint ventures with Brazilian shareholders.
Even though the main reason for the enactment of the new Law is to boost the Brazilian Securities market, there are economic and tax aspects that should also be addressed by the Brazilian government in order to increase the investments (national and foreign) in the securities market.
Economic and tax (incentives) changes usually have a much more effective result in boosting investments then changes in the law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.