Brazil: Corporate Governance: Cautious Improvement

Last Updated: 13 May 2003

Lira Renardini Padovan*

During a period in which issues of corporate governance have been given increasing importance in Brazil, and considering a scenario of recent changes in the Brazilian corporations law as well as publicity concerning rules of the so-called New Market ("Novo Mercado") and Levels 1 and 2 of corporate governance as launched by BOVESPA (São Paulo Stock Exchange), there has been an increasing amount of lawsuits and claims against executives of Brazilian companies. Together, theses two topics present a great opportunity for debates on the implementation of mechanisms of advancement of expenses, indemnification and insurance to directors and officers (all of them brand new in Brazil) as a means for companies to attract and maintain competent and committed professionals who wish to receive institutional corporate support. Such mechanisms, on the other hand, should prevent wrongdoing and abuse as well as exclude some kinds of legal responsibility from the list of hypos warranting the application of advance for expenses, indemnification, or insurance, as we shall see herein below.

In general, the advancement of expenses is the payment to executives, against whom there are judicial or arbitration proceedings, of amounts that cover the expenses related to their defense in such a proceeding (prospective nature).

The indemnification to directors and officers is basically the payment, by the company, of amounts in fact owed by the executives as a result of final decisions in judicial or arbitration proceedings to which they are made a party (retrospective nature).

Considering the above-mentioned mechanisms that may be implemented to the benefit of professional managers, there are some crucial issues that should be resolved on a case-by-case basis: what should be the range of situations covered by the advancement of expenses and indemnification, taking into account the economical impact that such systems can cause in the companies; how the hypotheses of advancement should be distinguished from those of indemnification in contractual or regulation provisions and until what point should both systems follow the same criteria; who is to benefit from such payment systems (executives and other employees of the company or simply the executives?); factual and time limitations for the beneficiaries to be entitled to such payments by the company; the labor law implications that become more evident in the implementation of such systems of payment to Brazilian companies in general and what the corresponding legislation and case law can teach us in respect of the most appropriate instrument to regulate such payment systems; what the most adequate form of adopting the advancement of expenses and indemnification is (agreement with each director or officer of the company or specific provision in the by-laws of the company / internal regulation?); the most important public policy rules applicable to the legal structure of these two benefits. Such pragmatic issues, among many others, arise whenever one elaborates effective systems for advancement of expenses and indemnification in Brazilian companies.

All such points require extreme caution in the preparation of the legal structure of advance for expenses and indemnification in order to avoid a too-broad-and-sometimes-dangerous system to the company. For instance, one have to be mindful that the indemnity benefit constitutes a shift of the economic cost of the liabilities or sanctions imposed as a result of certain actions or facts arising from the executives’ official position therein. Therefore, whenever such shift may frustrate the public policy of a country or encourage wrongful conduct, the structure of the mechanisms of advance for expenses and indemnification should be modified and reviewed accordingly.

The advancement of expenses and indemnification mechanisms are generally accompanied by the contracting of insurance to directors and officers. Such insurance, named as insurance of executives liability (seguro de responsabilidade executiva) in Brazil, is overly regulated and admitted in the United States, where it is called D&O Insurance, i.e., Directors and Officers Insurance.

In light of the advancement and indemnification systems, an interesting policy question is what should be the coverage of the D&O insurance in Brazil: the same as the referred-to payment benefits’ or broader? Many American states have regulated that the contracting of insurance in cases where the indemnification to the executives is not permitted shall be likewise prohibited; the objective is to prevent that such insurance interferes with the corresponding liability policy by turning the applicable sanctions into non-effect provisions. In Brazil, we believe that the overall topic will draw increasing attention from business people and lawyers inasmuch as there has been a boost in the hiring of such D&O insurance, what is mainly a response to the rise of lawsuits and claims filed against executives.

In sum, the advance for expenses and indemnification systems, if well implemented, may attract and provide the maintenance of more qualified executives. Should the benefits granted to them be limited and tailor-made without ever frustrating basic tenets of public policy, the advancement and indemnity regulations or agreements, as well as the D&O insurance associated thereto, may function as security to the executives engaged in the performance of good and responsible work and, furthermore, may foster an important corporate governance practice in Brazil.

* Partner of Araújo e Policastro Advogados (São Paulo, Brazil).

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.

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