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Brazilian Corporation Law (Law # 6404 of December 15, 1976) was enacted during the military dictatorship at a time of economic growth, almost simultaneously with Law # 6385 of December 7, 1976  which created Comissão de Valores Mobiliários – CVM (Security Exchange Commission of Brazil), agency which holds the primary responsibility for regulating the securities industry, the nation's stock and options market, among other activities and organizations, including the electronic securities markets.

Focused on creating a stable market to gain the investors’ attention and confidence, the Brazilian Corporation Law offered protection to the minority shareholders, such as the tag along right, and regulated the liability of the Board of Directors, Officers and controlling shareholders.

During the last 40 years, Brazilian Corporation Law suffered several modifications, some of them necessary to update its contents and some for political casuistic reasons. Below we list the significant changes.

  • Law # 9457 of May 5, 1997

Brazilian Corporation Law when enacted set forth the tag along right, granting the minority shareholders the right to be offered the same conditions granted in transactions to controllers and majority shareholders.

However, in a political and economic context of public and joint capital companies’ privatization during the 90’s, tag along right of the minority shareholders was excluded from the Brazilian Corporation Law. The exclusion of the tag along right allowed the Government Authorities to offer better conditions to the bidders in the transactions during the privatization auctions, since the minority shareholders could not demand the same conditions granted to the Government, as controlling shareholder.

  • Law # 10.303 of October 31, 2001

Once concluded the privatization cycle in Brazil, minority shareholders’ tag along right was reintroduced, however, with a limitation. The tag along right that previously assured the minority shareholders the same conditions in transactions, was now limited to at least eighty per cent (80%) of the purchase price offered to the controlling shareholders.

Other minority rights were considered, such as the cumulative vote (voto múltiplo), recognizing the importance of protecting the minority’s rights in order to gain the market’s confidence.

Insider trading (“Insider”) concept, initially contemplating only shareholders, officers and directors, was broadened to include any and all individuals that, in view of their relationship with the company, have access and may take advantage of undisclosed privileged information to operate the stock market. Thus, in addition to the individuals mentioned above, lawyers, auditors, experts, market operators, among others, can also be considered Insiders when negotiating securities based on privileged information.

  • Law # 11638 of December 28, 2007

This third relevant amendment to the Brazilian Corporation Law aligned Brazilian accounting rules with the International Accounting Standards Board – IASB directives. Subsequently, CVM’s accounting rules were also adapted to the international accounting standards, attracting foreign investors’ confidence.

  • Law # 12431 of June 24, 2011

Some important amendments were introduced to the Brazilian Corporation Law, in line with international standards, by updating the rules applicable to shareholder’s meetings, excluding the requirement imposed to members of Board of Directors of being shareholders and reducing the bureaucracy for bond issues (debêntures).

The approval of a simpler and more flexible process of bond issues was favorable to long term investors and to their access to the capital market and, also, a favorable tax treatment to infrastructure bond (debêntures de infraestrutura) was created by granting fiscal benefits regarding the Income Tax to investors, both foreign and resident. Moreover, the bond issuance was simpler by exclusion of limitations related to the corporate capital and guarantees, and by granting the Board of Directors more autonomy to its approval.

An important change was the possibility to update the public companies’ books electronically, upon CVM’s orientations, decreasing the bureaucracy in the keeping of corporate records.

Another innovation was the electronic vote. Since the enactment of the law, shareholders are allowed to cast their vote electronically, provided that the Bylaws of the company allows this situation. Such possibility stimulated the participation of minority shareholders and enriched discussions and deliberations taken by the shareholders.

Market players defend the insertion of a clearer definition of controlling shareholder and conflict of interest, substitution of publications in newspapers by website releases (to reduce costs and modernize the disclosure of information) and reduction of statute of limitation terms in order to assure the legal certainty. Despite it, Brazilian Corporation Law is recognized as a solid and efficient statute, focused on market needs and in line with international standards.

Flavia Cantinho Pinheiro

Corporate lawyer – Barcellos Tucunduva Advogados