The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários - CVM) decided to amend again the provisions of CVM Instruction No. 391 of July 16, 2003 (CVM Instr. 391/2003), which regulates the incorporation, management and operation of the Brazilian Equity Investment Funds (Fundos de Investimento em Participações - FIPs), by means of CVM Instruction No. 540 of November 26, 2013 (CVM Instr. 540/2013).
The FIP, incorporated as a close-ended condominium, is a communion of resources for the acquisition of shares, debentures, warrants, or other securities convertible into or exchangeable for shares issued by privately and/or closely-held corporations, participating in the decision-making processes of the invested company, with effective influence in the definition of its strategic policies and management, particularly by appointing members of the invested company's Board of Directors. The FIP´s participation in the decision-making process of the invested company may occur: (i) by holding shares of the controlling block; (ii) through the execution of a shareholders' agreement; or (iii) through the execution of other arrangements or procedures which guarantees the FIPI's effective influence in the determination of strategic policies and management1.
The investment in the FIP may be made by means of an investment commitment whereby the investor is bound to pay up the amount of the committed capital as the FIP's manager calls for payments, pursuant to periods, decision processes and other procedures established in the respective investment commitment.
The existence of an active initial public offerings market is an important source of long-term financing for new projects and for accelerating the growth of small and medium-sized companies, being vital to the existence and continuance of a strong capital market. Companies exposed to the capital market are more transparent and adhere to stricter corporate governance rules. These factors tend to reduce the cost of capital of these companies, increase their competitiveness and improve their performance.
The changes introduced by CVM Instr. 510/2013 reflect two proposals submitted to CVM by the Technical Committee of Smaller Deals (Comitê Técnico de Ofertas Menores)2, with the objective to improve the regulatory environment so that small and medium-size companies are able to access the capital markets and get funding through public issues of shares, without putting at risk or misrepresent the characteristics of FIPs. The Committee proposed and CVM has accepted that the requirement of interference in the management could be dispensed with in the following situations: (i) for investments that are within the limit of up to 35% of the net worth value of the FIP (35% threshold); and (ii) in the case of disinvestment of each invested company (disinvestment).
Designed specifically for the private equity sector, FIPs are required to participate in the decision-making process of the invested companies. Both proposals relate to the relaxation of the requirement that FIPs have effective influence on the definition of the strategic policy and management of the invested companies and assume that the investment be made in listed companies in the segment of market access with more stringent corporate governance standards than those required by law.
The 35% threshold allows the FIP: (i) to hold any stake in the company in an initial public offering that will dilute its equity participation and involves the loss of positions in the company´s administration; and (ii) to invest in a larger number of companies. Such exception only applies to segments intended for the access to the capital market of smaller companies, which precisely because they are still in the process of maturation, tend to have higher growth potential. This is a typical characteristic of investments of FIPs.
This limit will be raised to 100% during the period of application of funds, which has been established in up to six months counted of each of the events of payment of units issued by the FIP provided for in the investment commitment. The FIP´s bylaws shall contain the rules and criteria to determine the deadlines for making the investments, counting from each capital payment, as well as for the refund of the paid up capital or the extension of such deadlines, in case the investment is not made within the provided term. The maximum term specified for capital calls shall not exceed the last business day of the second subsequent month following the initial date defined for the payment of the units.
During this period, if the threshold of 35% had not been relaxed, FIPs that just initiated their operations, when performing their investments in initial public offerings of companies listed in the primary segment focused on access to the market with differentiated corporate governance standards, would not qualify for the purpose of CVM Instr. 391/2003 to the extent that in these cases they would not have influence in the management of the invested companies. Such a possibility could cause FIPs to postpone investments in this segment.
The effective influence on the definition of the strategic policy and management of the invested company is more relevant in the maturation period of the investment. It is understandable, therefore, that this behavior is no longer required when the FIP effectively starts its phase of disinvestment. This procedure would enable the FIP to acquire an equity participation in a closely-held company (invested company), contribute with its strategic policy and management during the maturation phase, promote the initial offering of the invested company and gradually reduce its influence in the company´s decision-making process according to the decrease of its equity participation.
If the FIP fails to comply and exceeds the 35% threshold at the closing of the month for reasons unrelated to the wishes of the manager of the portfolio (desenquadramento passivo) and such situation continues at the closing of the next month, the administrator must: (i) notify CVM immediately on the occurrence of the non-compliance, with the due justifications, as well as a forecast for the compliance; and (ii) inform CVM of the compliance at the time that it happens.
1 The FIP's bylaws shall provide the criteria to be observed in determining which publicly-held corporations may be invested companies. The closely-held corporations must comply with the following corporate governance practices: (i) prohibition to issue Profits Participation Certificates (Partes Beneficiarias) and the inexistence of such securities in the market; (ii) establishment of an unified term of office of one year to all the members of the Board of Directors; (iii) to make available agreements with related parties, shareholders' agreements and option plans for the acquisition of shares or other securities issued by the invested company; (iv) resolve corporate disputes through arbitration; (v) in case the invested company goes public, it shall be bound, before the FIP, to join a special listing segment of a stock exchange or organized over-the-counter market which guarantees at least the differentiated levels of corporate governance practices provided in the items above; and (vi) annual audit of its financial statements by independent auditors registered with CVM. Whenever the FIP decides to invest resources in companies that are or may be involved in recovery and restructuring processes, it shall be allowed to pay up the FIP's, shares in goods or rights, including credits, provided that such goods and rights are related to the recovery process of the invested company and that their value is based on an appraisal report prepared by an expert company.
2 The Committee was formed by public and private entities: the Brazilian Agency for Industrial Development (Agência Brasileira de Desenvolvimento Industrial – ABDI), the Brazilian Association of Entities of the Financial and Capital Markets (Associação Brasileira das Entidades dos Mercados Financeiro e de Capitais – ANBIMA), CVM, Banco do Brasil, BM&FBOVESPA S.A. – Securities, Commodities and Futures Exchange (BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros - BVMF), BNDES Participações S.A. - BNDESpar, the Brazilian Innovation Agency (FINEP – Agência Brasileira da Inovação), the Brazilian Institute of Corporate Governance ( IBGC – Instituto Brasileiro de Governança Corporativa), the Brazilian Institute of Capital Markets (Ibmec – Instituto Brasileiro de Mercado de Capitais), the Employees´ Social Security Porftfolio of Banco do Brasil (PREVI - Caixa de Previdência dos Funcionários do Banco do Brasil), the Secretariat of Economic Policy of the Ministry of Finance (Secretaria de Política Econômica do Ministério da Fazenda), Bradesco Investimentos, Brasil Plural, BTG Pactual, FAMA Investimentos General Atlantic, Grupo DGF, Grupo Stratus, ItauBBA, Leblon Equities, Nutriplant, Senior Solutions, Taler, Votorantim and XP Investimentos.
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