The Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários – CVM) decided to review the proposed criteria to determine the information that must be reported by the Brazilian publicly-held corporations (issuers) whenever there is any transaction between related parties. The matter is now regulated by Annex 30-XXXIII introduced by CVM Instruction No. 552, of October 9, 2014 (CVM Instr. 552/2014). Among other provisions, CVM Instr. 552/2014 amended CVM Instruction No. 480, of December 7, 2009 (CVM Instr. 480/2009), which deals with the registration of issuers of securities admitted to trading on regulated markets of securities.
The purpose of Annex 30-XXXIII is to allow shareholders of the issuer to monitor the most relevant transactions more closely and immediately. The term "issuer" also comprises companies directly or indirectly controlled by the issuer.
The definition of "related party transaction" is the same contained in the applicable accounting rules that govern this subject, which are outlined below.
Therefore, a "related party transaction" is a transfer of resources, services or obligations between related parties, regardless of whether a price is charged. A "related party" is a individual ("person") or legal entity ("entity") that is related to the entity that is reporting the information (the "reporting entity").
A person or a close member of that person´s family is related to a reporting entity if that person: (a) has control or joint control over the reporting entity; (b) has significant influence over the reporting entity; or (c) is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.
An entity is related to a reporting entity if any of the following conditions applies:
- the entity and the reporting entity are members of the same group. This means that each parent, subsidiary and affiliate (fellow subsidiary) is related to the others;
- one entity is an associate or joint venture of the other entity or an associate or joint venture of a member of a group of which the other entity is a member;
- both entities are joint ventures of the same third party;
- one entity is a joint venture of a third party and the other entity is an associate of the third party;
- the entity is a post-employment defined benefit plan for the benefit of employees of either the reporting entity or any entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity;
- the entity is controlled or joint controlled by a person (as identified in the previous paragraph);
- a person (as identified in item (a) of the previous paragraph) has significant influence over the entity or is a member of the key management personnel of the entity or of a parent of the entity;
- the entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or the to the parent of the reporting entity.
Key management personnel are those persons having authority and responsibility for planning, directing, and controlling the activities of the entity, directly or indirectly, including any directors (whether executive or otherwise) of the entity.
Annex 30-XXXIII clarifies that the following are not to be deemed "transactions between related parties" and do not need to be disclosed:
- transactions between the issuer and its direct or indirect controlled companies, except in cases where there is participation in the share capital of the entity controlled directly or indirectly by the issuer, its administrators or related persons;
- transactions between entities controlled directly or indirectly by the issuer, except in cases where there is participation in the share capital of the entity controlled directly or indirectly by the issuer, its administrators or related persons; and
- remuneration of the administrators.
The term "related transactions" is defined as the set of similar transactions that have logical relationship to each other by virtue of its object or its parties, such as: (a) subsequent transactions arising out of an initial transaction already effected, provided that this initial transaction has established its main conditions, including the amounts involved; and (b) continuous duration transactions covering periodic installments provided that the amounts involved are already known.
The need of disclosure applies to:
- the transaction or set of related transactions, whose total value exceeds the lesser of the following amounts: (a) R$ 50 million; or (b) 1% of the total assets of the issuer; and
- at the discretion of the company´s administration, to the transaction or set of related transactions whose total value is less than the parameters referred to in item (i) above, taking into account: (a) the characteristics of the operation; (b) the nature of the relationship of the party related to the issuer; and (c) the nature and extent of the interest of the related party in the operation.
The value of total assets referred to in item (i) above shall be calculated on the basis of the latest financial statements or, whenever available, in the last consolidated financial statements published by the issuer.
The issuer must disclose to the market the following information relating to transactions with related parties that fit the criteria defined in the previous paragraph:
- description of the transaction, including: (a) the parties and their relationship with the issuer; and (b) the object and the key terms and conditions;
- if, when, how and to what extent the counterpart in the transaction, its partners or administrators participated in the process of: (a) decision of the issuer about the transaction, describing such participation; and (b) negotiation of the transaction with the issuer representatives, describing such participation; and
- detailed justification of the reasons why the administration of the issuer considers that the transaction noted commutation conditions or provides adequate compensatory payment, stating for example: (a) if the issuer has requested proposals, performed some procedure of making prices, or tried in any other way to carry out the transaction with a third party, explaining, if not, the reasons why it did not do so or, if so, the procedures performed and their results; (b) the reasons that led the issuer to perform the transaction with the related party and not with third parties; and (c) the detailed description of the measures taken and procedures adopted to ensure the commutability of the operation.
If the transaction in question is a loan granted by the issuer to the related party, the above information must necessarily include: (i) the explanation of the reasons why the issuer has chosen to grant the loan, indicating the guarantees eventually required; (ii) a brief analysis of the credit risk of the borrower, including the independent classification of risk, if any; (iii) a description of how the interest rate was fixed, considering the market risk-free rate and the credit risk of the borrower; (iv) a comparison of the rate of interest on the loan with other similar applications on the market, explaining the reasons for any discrepancies; (v) a comparison of the interest rate of the loan with rates for other loans received by the borrower, explaining the reasons for any discrepancies; and (vi) a description of the impact of the transaction on the condition of financial liquidity and the level of indebtedness of the issuer.
This communication to the market must be made by the issuer within seven working days of the occurrence of the transaction between related parties, pursuant to item XXXIII of article 30 of CVM Instr. 480/2009, as amended by article 2 of CVM Instr. 552/2014.
The new rules mentioned herein will be in full force and effect as of January 1st, 2015.
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.