Brazil: Tender Offers Of Brazilian Publicly-Held Corporations Must Be Approved By The Board Of Directors

Last Updated: 14 March 2013
Article by Walter Stuber

The Brazilian Exchange - BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF) - noted that in many cases the Board of Directors (Conselho de Administração) of a company listed in the differentiated corporate governance segments of BVMF, such as Novo Mercado1and Level 2 (Nível 2)2, has been rather vague to manifest on the desirability of making tender offers (Oferta Pública de Aquisição de ações - OPA), which is an obligation expressly required under the applicable legislation. The matter is governed by Law No. 6404, of December 15, 1976, as amended (the Brazilian Corporation Law - BCL), and the regulations issued by the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM).

The Board of Directors of the company shall have the powers and authority established under the BCL3, in addition to other powers outlined in the company's bylaws which are consistent with the nature of the Board's role. The bylaws of any company listed in Mercado Novo or Level 2 must contain a clause requiring the Board of Directors` favorable or unfavorable/contrary opinion about any OPA. This is a demand from BVMF to admit companies in these two segments.

The above-mentioned situation identified by BVMF (vague manifestation of the Board of Directors about OPAs) was repeated on several occasions. The lack to fulfill the Board`s obligation led to the publication by BVMF of Circular Letter (Ofício Circular) No. 020/2013-DP, dated March 5, 2013, which contains an attachment with clarifications on the subject that are discussed herein.

The attachment to this Circular Letter reinforces the need to obtain a reasoned opinion of the company's Board of Directors approving or rejecting any OPA, whether voluntary or mandatory under the laws and regulations in force and regardless of who is the offeror (whether it is a shareholder or a third party).

According to the regulations of BVMF the OPA is mandatory in the following cases: (i) transfer of corporate control; (ii) cancellation of the company's registration as a publicly-held corporation (deregistration); (iii) voluntary departure of the listing segment (delisting); and (iv) cancellation by BVMF of the company's authorization to negotiate its securities in the listing segment.

The members of the Board of Directors must act diligently in the interests of the company and its shareholders and cannot omit their opinion or remain neutral in relation to the OPA, and they must position themselves clearly and grounded. The manifestation of the Board of Directors allows the shareholders to have access to the technical opinion of those who have the management power and the knowledge of the company's economic and financial context and of the respective segment in which the company operates, enabling the shareholders to take their decisions duly informed.

In order to allow the shareholders to have adequate time for decision-making, the regulations dictate that the opinion of the Board of Directors shall be submitted within 15 days of publication of the notice of the OPA. Thus the opinion must be issued after disclosure of the appraisal report used by the offeror for the definition of the purchase price of the shares issued by the company. Such disclosure shall be performed through the Periodic and Eventual Information System (Sistema de Informações Periódicas e Eventuais - IPE), falling into the category "Meeting of the Administration" (Reunião da Administração).

If any substantial change in the conditions of the offer is made through the publication of an addendum to the notice of OPA or the dissemination of new relevant information by the offeror, further analysis will have to be performed by the Board of Directors ratifying, amending or complementing the opinion previously disclosed, in the event such change invalidates the prior opinion. The presentation of this new opinion will occur within 15 days as of the publication of the addendum to the notice of OPA or the disclosure of new information via IPE.

The responsibility for the development and dissemination of the opinion relating to the OPA is of the Board of Directors as a collegial body and not of its members individually. As a manifestation of the duties of diligence and loyalty of the administrator, the Board's opinion shall be delivered always with solid grounds in the interest of the company and of the collectivity of its shareholders.

Accordingly, if any administrator disagrees with the position adopted by the collegial body, he/she can consign such divergence in the opinion, expressing his/her own personal opinion on the subject. In this regard, paragraph 1 of article 158 of the BCL stipulates that: "An officer (administrador) shall not be liable for unlawful acts of the other officers, except when acting in connivance with them, when neglecting to investigate such acts or when, despite knowledge of them, he fails to take action to prevent such acts. A dissenting officer shall be exempt from liability when he makes his dissent to be recorded in the minutes of a meeting of the administrative body, or, if this is not possible, when he immediately informs the administrative body, the statutory audit committee (conselho fiscal), if in operation, or a general meeting about his dissent in writing."

The opinion of the Board of Directors cannot be restricted to facts and the mere description of the procedures and of the decisions taken by the offeror, that have already been disclosed in the relevant facts, the announcements to the market or the public notice of the OPA. The Board of Directors must analyze the following specific items: (i) the convenience and opportunity of the offer as to the interest of all shareholders, and in relation to the liquidity of the securities owned by such shareholders; (ii) the impact of the offer on the interests of the company; (iii) the strategic plans disclosed by the offeror in relation to the company; and (iv) other points deemed relevant. Although the first two items in this list mention explicitly the offer, whenever applicable, the Board's opinion must also consider the convenience, opportunity and effects of the transaction that resulted in the OPA. In order to enable the administrators to exercise their duties adequately, such items must be examined in line with the social interest, which is the key element to delimit the transactions and manifestations related to the OPA.

If necessary, the Board of Directors may hire third parties to perform studies, reports or fairness opinion to draw up their opinion, and shall disclose these documents to the market. However, the Board of Directors cannot override their demonstration by such studies, reports or fairness opinion4, and shall only use them as a subsidy or source of information for the exercise of the Board's duty stipulated in the regulations of BVMF.

Assuming that the convenience and opportunity of the OPA are intrinsically related to the offered price, the Board of Directors must express its opinion on the price, including the methodology and assumptions adopted by the evaluator, as well as if the assumptions used are consistent with the macroeconomic conditions, market and sector of activity of the company. Additionally, the Board's opinion must include relevant changes on the financial situation of the company that have occurred since the date of the last financial statements, quarterly information disclosed to the market or of the notice of the OPA, due to the possible impacts on the perception of the price of the OPA.

The Board of Directors must analyze if the transaction that caused the OPA will create value for the company or otherwise raise capital costs or reduce the return on investment. The Board's opinion must include considerations about the existence of alternatives to create shareholder value, possible scenarios after the transaction that resulted in the completion of the OPA, as for example the synergies that can be scanned as a result of the transaction or the potential losses that the company's activity could suffer from the change of corporate control, the delisting or the deregistration as a publicly-held corporation.

As already pointed out, the consistency and viability of strategic plans disclosed by the offeror in connection with the business of the company shall also be covered by the manifestation of the Board of Directors.

The Board of Directors must evaluate the impact of the OPA on the liquidity of the shares issued by the company at the time of its realization (liquidity event for shareholders) and after the transaction is completed. The shareholder must be informed about possible impacts of supply on the liquidity of the securities issued by the company and, should the offer come to fruition, on the potential reduction of liquidity, including the risk that the shares are no longer traded on the stock exchange. For example, it is paramount to mention scenarios in which due to the OPA: (i) the percentage reduction takes place of the company's shares outstanding to a level lower than the 25% required by the regulations of BVMF5, situation in which replenishment strategies must be drawn by the offeror and must also be examined by the Board of Directors; or (ii) output of the segment occurs (delisting) and subsequent negotiation of the securities in the organized over-the-counter market (OTC) or even in any unorganized OTC.

The Board of Directors must also address in their opinion other points considered pertinent and relevant to the shareholders such as: (i) compliance by the offeror of the regulatory requirements applicable to the OPA, including those established in the regulations of BVMF; (ii) the economic consequences of the offer to the company's management, as extraordinary payouts or prepayment of share purchase options; and (iii) the risks involved in the transaction, such as regulatory, legal or execution risks that may lead to its reversal.

In the event of an OPA formulated by the company itself for the deregistration as publicly-held corporation, there is no need to have the manifestation of the Board of Directors by means of a reasoned opinion about the acceptance of the offer. Considering that the Board of Directors is competent to establish the general orientation of the company's business and consequently to decide on the cancellation of registration or to propose a resolution of this matter in the general shareholders' meeting, if the bylaws require that a meeting be held for such purpose, the manifestation of the Board of Directors in this case will be meaningless. In this particular case, to justify the cancellation of the registration or to formulate a proposal for deliberation at the general shareholders' meeting, the Board of Directors must analyze the items indicated in the regulations of BVMF, as already explained above, complementary to that required by the applicable regulations issued by CVM. CVM Instruction No. 361, of March 5, 2002, determines that the notice of deregistration must contain a transcription of the deliberation of the company's body that has approved its release, including among others the justification of the transaction.

This is the understanding of BVMF about the obligation of the Board of Directors to give a favorable or unfavorable opinion about any OPA of shares issued by companies listed in the Mercado Novo or in the Level 2 segment. Such obligation is required since May of 2011 and it is expressly contained in the bylaws of all companies listed in these two segments. Other situations which have not been contemplated in the document commented herein will have to be solved by the President of BVMF on a case-by-case basis.


1. Subsection 4.8 of the Novo Mercado Listing Regulation establishes that:

"4.8 Opinion of the Board of Directors. The board of directors of the Company shall prepare and disclose a reasoned previous opinion on any type of tender offer aiming the Company shares, opining on (i) the convenience and opportunity of the tender offer vis-à-vis the interests of the shareholders and the liquidity of their securities; (ii) the impact of the offer on the interests of the Company; (iii) the announced strategic plans of the offeror for the Company; and (iv) any other point of consideration the board may deem relevant. The board of directors shall express its grounded opinion in favor or against the acceptance of the tender offer, whereas advising the shareholders that ultimately a decision on whether to tender their shares is in their discretion.

4.8.1 The reasoned opinion of the board required in the subsection 4.8 above must be disclosed within fifteen (15) days after the publication of the tender offer notice."

2. Subsection 5.8 of the Corporate Governance Level 2Listing Regulation contains an identical provision, with exactly the same wording as the one transcribed in the previous footnote.

3. The head of article 142 of the BCL, as amended by Law No. 10303, of October 31, 2001, lists the responsibilities of the Board of Directors as follows:

"Article 142. The board of directors shall be responsible for:

I - establish the general strategy for the corporation's business:

II - elect and discharge corporation directors and prescribe their duties in accordance with the relevant provisions in the bylaws;

III - supervise the performance of the directors, examine the books and records of the corporation at any time, request information on contracts signed or about to be signed, and take all other necessary action;

IV - call a general meeting whenever deemed advisable or as provided in article 132;

V - give its opinion on the reports of the management and on the accounts of the officers ( directors);

VI - give its opinion in advance on actions or contracts whenever required by the bylaws;

VII - when so authorized by the bylaws, decide whether to issue shares or subscription bonuses;

VIII - unless otherwise stated in the bylaws, authorize the transfer of fixed assets, the creation of charges in rem and guarantees for liabilities of third parties;

IX - select and discharge independent auditors, if any."

4. In the context used by BVMF, "fairness opinion" is the independent, impartial and technical external opinion issued with the specific purpose to convey the necessary information to the members of the Board of Directors regarding the OPA and the transaction in order to enable them to prepare the reasoned opinion to be given by the Board.

5. There is an obligation to maintain a minimum free float, equivalent to 25% of the company´s capital stock.

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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Walter Stuber
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