Contributed By Machado, Meyer, Sendacz e Opice Advogados
The answers in this Q&A refer to one specific corporate type of company, which is the Brazilian limited liability company called sociedade anônima. There are also other corporate types which are very common in Brazil, such as sociedades por quotas, also limited liability companies, but more often used by small to medium-sized companies, normally run by family members or by individuals with personal bonds. These companies are not allowed to offer securities publicly and have a simpler level of corporate governance. Thus, they will not be the subject of the analysis herein.
Companies (sociedade por ações) in Brazil may be either privately held (companhia fechada) or publicly held (companhia aberta). A company is publicly held when it is registered with the Brazilian Securities Commission (Comissão de Valores Mobiliários or CVM). Also, publicly held companies are divided into two categories: category A, which allows the public issuance of any securities; and category B, which only allows the public issuance of securities which are not shares or securities convertible into shares.
The type of company foreign investors use depends on the objective of the investor (see 1.1 Types of Company).
Companies may have common or preferred shares. A common share, as a general rule, entitles its owner to one vote at any shareholders’ meeting.
Law 14,195, enacted on 26 August 2021, approved an amendment to Law no 6.404 of 15 December 1976, as amended, or the Brazilian Corporate Law, in order to include the cumulative voting share, which allows common shares to have more than one vote per share under the conditions provided therein.
Preferred shares in general do not have voting rights and must have certain privileges granted and established in the by-laws, in addition to the privileges provided for in the law. One of these privileges, in closely held corporations, may be the priority in the distribution of dividends, fixed or minimum, and/or the priority in the reimbursement of the capital in the case of liquidation, with or without a premium.
Rights of the Shareholder
According to Brazilian Corporate Law, neither the by-laws of a company nor actions taken at a shareholders’ meeting may deprive a shareholder, regardless of its equity stake in the company, of the following rights:
Shareholders’ rights may vary depending on the type and class of shares, as detailed in 1.3 Types or Classes of Shares and General Shareholders’ Rights.
Also, certain rights may only be exercised by shareholders representing a determined percentage of the company’s capital stock:
Board of Directors
It is worth mentioning that the minimum percentage for the exercise of some of the aforementioned rights can decrease, depending on the amount of the capital stock of the company, as provided for in the CVM Resolution 70/22 (applicable to publicly held companies only).
There are no minimum share capital requirements, except as required by law, as is the case for financial institutions. At least 10% of the issuance price of the shares subscribed in cash must be paid in the constitution of the company.
The companies must have at least two shareholders, which can be either individuals or legal entities.
As a rule, all shareholders of Brazilian companies, whether individual or legal entities, may be resident or domiciled abroad. Certain sectors have a restriction on the participation of a foreign investor or require specific government authorisation, such as financial institutions, mining and exploration of mineral and energy resources, the oil sector and broadcasting and the news media sector.
It is very common for shareholders to enter into shareholders’ agreements and joint venture agreements.
The typical provisions of shareholders' agreements are related to the exercise of voting rights, including preparatory meetings, election of members of the Board of Directors, mechanisms for the transfer and sale of the shares, such as right of first refusal, tag along, drag along, and deadlock provisions.
The typical provisions that are normally inserted in joint venture agreements are related to the parties’ contributions, the sharing of profits and loss, risks and liabilities, control issue and decision making, restriction on sale of shares, exit strategies, confidentiality and non-competition clauses, dissolution, and dispute resolution mechanisms.
Shareholders’ agreements and joint venture agreements are enforceable in Brazil.
As a rule, such agreements are not public, unless it is a shareholders' agreement involving a publicly held company, in which case it must be disclosed to the market.
Annually, in the first four months following the end of the financial year, the company must hold one annual general meeting (assembleia geral ordinária) to:
In relation to the notice of the annual meeting, see 2.2 Notice of Shareholders’ Meetings.
Pursuant to the Brazilian Corporate Law, all notices for shareholders' meetings, either annual or extraordinary, must be published at least three times in a high-circulation newspaper.
Publicly held companies: the first notice must be published at least 21 days prior to the shareholders’ meeting, and no later than eight days before the date of the meeting on the second call. The CVM may also, upon the request of any shareholder: (i) determine the postponement of the shareholders’ meeting for up to 30 days, in the case of insufficient information provided for the meeting; and (ii) suspend for up to 15 days the process of calling for a particular extraordinary shareholders’ meeting in order to understand and analyse the proposals to be submitted at the meeting.
Closely held companies: the first notice is published at least eight days prior to the shareholders’ meeting, and no later than five days before the date of the meeting on the second call.
However, the notice can be shortened by bringing together all the shareholders; this way the lack of publication of the announcements or the failure to observe the deadlines can be considered resolved.
Shareholders’ meetings are usually called by the board of directors. However, shareholders’ meetings may also be called by:
It is worth mentioning that the minimum percentage for the exercise of some of the rights above mentioned can decrease depending on the amount of the capital stock of the company, as provided for in CVM Resolution 70/22 (applicable to publicly held companies only).
Pursuant to the Brazilian Corporate Law, all notices for shareholders' meetings must be published at least three times in a high-circulation newspaper. In case of publicly held companies, there is also the obligation to disclose the call notice in the websites of the company, CVM and B3.
All documents related to the matters relating to the meeting must be available to the shareholders at the time the meeting is called. For publicly held companies with free float, CVM Resolution 81/22 requires minimum information to be provided depending on the matter to be resolved at the meeting.
Specifically in relation to the annual meeting, management must make available to the shareholders the following documents one month before the date of the meeting: (i) the report issued by the officers on the corporate business and the main administrative facts of the ended fiscal year; (ii) the copy of the financial statements; (iii) the independent auditors' report, if any; (iv) the opinion of the fiscal council, including dissenting votes, if any; and (v) other documents related to the items included in the agenda.
Shareholders representing at least 5% of the capital stock of the company (or less, depending on the capital stock in the case of publicly held companies) have the right judicially to require the exhibition of the books of the company whenever the shareholder is suspicious that acts in violation of the law or the by-laws have occurred, or that irregularities have been committed by any of the management bodies of the company.
Shareholders' meetings can now be attended remotely. Due to the COVID-19 pandemic, Brazilian laws and regulations granted shareholders of either closely or privately held companies the flexibility to allow meetings to be held virtually.
As a general rule, the Brazilian Corporate Law provides that a quorum for purposes of initiating a shareholders’ meeting shall consist of shareholders representing at least 25% of the total number of votes attached to the voting shares on the first call or, if that quorum is not reached, any percentage of the company’s voting capital stock on the second call. When the purpose of a shareholders’ meeting is to amend the company’s by-laws, a quorum consists of shareholders representing at least two thirds of the total number of votes attached to the voting shares on the first call, and any percentage on the second call.
In respect to the quorum for the approval of the items of the agenda, see 2.8 Shareholder Approval.
All the resolutions of shareholders must be approved at a duly convened meeting (see 2.8 Shareholder Approval in relation to the matters which must necessarily be approved by the shareholders and their respective quorum of approval). In addition to those matters, the by-laws may reserve other matters to be decided by the shareholders.
The Brazilian Corporate Law has adopted the principle of majority, which means that 50% of the voting shares plus one additional share present at the meeting has authority to decide on the matters to be resolved by the shareholders.
However, the affirmative vote of shareholders representing at least 50% of the total number of votes attached to the voting shares is required to approve the following matters (qualified quorum):
For publicly held companies with a significant free float, as evidenced by cases where the companies’ three previous shareholders’ meetings were attended by common shareholders representing less than 50% of its total voting capital stock, the CVM may authorise a reduction of that quorum.
The by-laws of closely held companies may determine a higher quorum than the ones provided for in the Brazilian Corporate Law.
Meetings may be held live, in the company’s headquarters, or virtually.
A common share, as a general rule, entitles its owner to one vote at any shareholders’ meeting. Law 14,195, enacted on 27 August 2021, approved an amendment to Law No 6,404, of 15 December 1976, as amended, or the Brazilian Corporate Law, in order to include the cumulative voting share, which allows common shares to have more than one vote per share, under the conditions provided therein.
Cumulative voting is also permitted in the election of the Board of Directors, in case it is requested (see 3.1 Rights to Appoint and Remove Directors).
According to the Brazilian Corporation Law, the shareholder may be represented in the meeting as follows: (i) if a natural person, by an attorney-in-fact constituted for less than one year (that must be a shareholder, a manager, a lawyer or a financial institution); (ii) if a legal entity, by its legal representatives or by an attorney-in-fact appointed pursuant to its by-laws; (iii) if an investment fund, by its fund manager or by an attorney-in-fact appointed pursuant to its by-laws.
Since 2017, shareholders of publicly held companies may also exercise their voting rights in annual shareholders’ meetings and extraordinary shareholders’ meetings, either called to elect members of the fiscal council or the majority of the members of the board of the directors or whenever the company decides, through the Distance Voting Ballot (Boletim de Voto a Distância), which allows shareholders to cast their votes through a form which can be delivered to the shareholders’ custodian, the share registrar agent of the company or directly to the company (CVM Resolution 81/22).
Also, the Brazilian law and regulation allows the public request of proxy, although it is not often used.
Shareholders representing 5% or more of the capital stock of the company may call a shareholders’ general meeting, if the directors or officers of the company fail to call a meeting within eight days after receipt of a duly justified shareholder request to call the meeting indicating the proposed agenda.
For publicly held companies, the CVM allows shareholders representing percentages of the capital stock varying from 0.5% to 5% depending on the amount of the capital stock, to include in the Distance Voting Ballot (Boletim de Voto a Distância), indication of candidates for the fiscal council and/or the board of directors and/or proposals of matters to be deliberated in the shareholders’ meeting (CVM Resolution 81/22).
Shareholders may challenge a resolution passed at a general meeting in case it does not comply with the law, the by-laws of the company or a shareholders’ agreement. There is no minimum percentage of the capital stock to challenge a resolution. The Brazilian Corporation Law establishes the statute of limitation to cancel a resolution passed at a general meeting at two years.
For more information in relation to possible measures to be taken by the shareholders against the company or its management see 7.1 Legal Remedies against the Company, and 7.2 Legal Remedies against the Company’s Directors.
Under Brazilian law a meeting is always required for matters to be decided by the shareholders. The call notice may be dismissed in case all the shareholders are present at the meeting.
As a general rule, the members of the board of directors are elected and removed by the vote of the majority of the shareholders in a duly convened shareholders' meeting (see 2.8 Shareholder Approval and 2.1 Types of Meetings, Notice and Calling a Meeting).
However, Brazilian corporate law permits shareholders who, individually or collectively, hold at least 15% of the common shares or 10% of the preferred shares, on a separate ballot, the right to select each one director and his or her alternative. If the holders of common or preferred shares do not achieve the required percentage as an individual class, they can together – with a 10% percentage – elect one member.
Election by Voting System
Also, shareholders may require a cumulative voting system to elect board members. Thus, any shareholder or group of shareholders holding at least 10% of the company’s capital may request that, at a shareholders’ meeting to elect the board of directors, the number of votes of each voting share is granted as many votes as the number of board members to be elected. Each shareholder may then vote for one board member with all his or her votes or distribute the votes among different members of the board of directors.
CVM Resolution 70/22 allows the minimum voting capital percentage required for the adoption of the multiple voting system in publicly held companies to be reduced from 10% to as low as 5%, depending on the value of the company’s capital stock.
The number of board members may exceed the maximum set forth in the by-laws of the company if separate voting procedures are requested by the shareholders and, concomitantly, the election of the board of directors is conducted through the multiple voting system. Should this occur, shareholders or a group of shareholders bound by voting agreements representing more than 50% of the total number of votes attached to the voting shares would be entitled to select the same number of directors elected by the other shareholders plus one, regardless of the number of directors specified in the company’s by-laws.
Shareholders may challenge a decision/action taken by the company’s board of directors (see 7.1 Legal Remedies against the Company and 7.2 Legal Remedies against the Company’s Directors).
The appointment and removal of the auditors of the company is a matter reserved to the board of directors. The members of the board elected by the minority shareholder in a separate ballot (see 3.1 Rights to Appoint and Remove Directors), if any, have a veto right on this matter.
In the case of publicly held companies, and pursuant to CVM Resolution 44/21, whenever the direct or indirect ownership interest of any shareholder or group of shareholders increases or decreases by 5%, 10%, 15% and successively in 5% increments, of each type or class of the company’s shares, that shareholder or group of shareholders must report to the company the following information:
Also, the participation of the controlling shareholder must be disclosed in the company’s annual form (Formulário de Referência) and all tradings made by the controlling shareholder with securities issued by the company or referenced in them, must be disclosed monthly by companies listed in one of the special listing segments of B3.
Shareholders are entitled to grant security interests over their shares. Shares may be sold by their owners, either privately or in the securities market, in the case of publicly held companies with shares admitted to trading.
The by-laws of a privately held corporation may set forth restrictions on the transfer of shares but cannot eliminate that right. Shareholders in a publicly held or privately held corporation may enter into agreements granting rights of first refusal, co-sale and other rights, which are enforceable if registered in the proper corporate books.
The by-laws of a closely held company may establish limitations on the transfer of shares if such limitations are regulated in detail and do not prohibit transfers nor subject the shareholder to the discretion of the management or of a majority of the shareholders.
Shares of a publicly held company may only be traded after payment of 30% of their issue price.
Depending on the segment of corporate governance of B3 (the Brazilian Stock Exchange) chosen by the company, there is a lock-up period of 12 months (limited to 40% of their shares in the second six-month period) on the shares held by the controlling shareholders and management right after the company’s initial public offering.
Annually, in the first four months following the end of the fiscal year, the company must hold one annual general meeting (assembleia geral ordinária) to, among other matters, resolve on the allocation of net income for the year and the distribution of dividends. The mandatory dividend is equivalent to a minimum percentage of the relevant year’s earnings, adjusted according to the provisions set forth in the Brazilian Corporate Law.
If such distribution is not advisable in light of the financial condition of the company at that time, the Brazilian Corporate Law allows management to suspend such distribution.
Any suspension of the mandatory distribution must be reviewed by the fiscal council, if any. In addition, management of companies with publicly traded securities must submit a report setting forth the reasons for the suspension to the Brazilian Securities Commission (Comissão de Valores Mobiliários or CVM) within five days after the shareholders’ meeting. Profit not distributed as a result of such suspension is allocated to a separate reserve account and, if not absorbed by subsequent losses, is required to be distributed as soon as the financial condition of the company permits the payments.
In addition, the by-laws may authorise the board of directors or officers to approve distribution of interim dividends in other periods of time other than the annual shareholders' meeting, based on the profit of the ongoing fiscal year or reserves established in previous fiscal years.
The shareholders’ meeting is exclusively responsible to authorise the management of the company to request judicial recovery or bankruptcy and to approve the dissolution and liquidation of the company. The approval of the dissolution of the company and the cancellation of any voluntary liquidation are subject to a qualified quorum (see 2.6 Quorum, Voting Requirements and Proposal of Resolutions).
However, shareholders are not entitled, individually or as a group, to initiate an insolvency proceeding against the company as a financial or operational creditor would be able to do.
Although there were temporary measures approved in connection with insolvency proceedings a result of the COVID-19 pandemic and the resulting economic crisis, there were no changes in relation to shareholders’ rights, as previously described.
Pursuant to the Brazilian Corporate law, officers and directors are not personally liable for obligations assumed by the company by virtue of a regular management act, in which case only the company is liable. A regular management act is that one which is performed within the limits of the duties of the officers and directors and without violation of the law or the articles of incorporation/by-laws.
However, the company is not liable for illegal acts performed by its managers. For the liability for those acts, see 7.2 Remedies Against the Directors.
Also, in Brazil the legal framework did not welcome the “class actions” existent in the US and the UK legislation to require indemnification from the company. There is a similar institute, which is the Public Civil Action (Ação Civil Pública), which can normally be brought by the Public Prosecutor’s Office or associations authorised by law but are not used to request this kind of indemnification.
If shareholders feel they are being harmed, they can always file a claim individually to the judiciary to guard their rights, based on the principles of civil liability. For those purposes, they will have to demonstrate that the conduct of the company has caused a damage to that shareholder. However, this kind of legal claim is highly unusual.
As discussed in 7.1 Remedies against the Company, officers and directors are not personally liable for obligations assumed by the company by virtue of a regular management act. Officers and directors are personally liable when (i) they have acted under wilful misconduct or fault (even if within their duties), or (ii) violate the law or the by-laws (strict liability/lack of need to demonstrate wilful misconduct or fault). Thus, even if an act by officers or directors causes harm to the company, they shall only be personally liable if it is shown that their decisions were made in bad faith or through an unlawful act.
In those cases, the company has the obligation, after the shareholder’s vote took on a formal general shareholders' meeting, to file a civil liability lawsuit against the officers and directors, as the case may be, to recover the damages caused to the company or its assets. It is important to mention that, if the matter is not part of the shareholders' meeting original agenda but is connected to any matter or topic that will be discussed or voted, it can be included in the extraordinary general meeting’s agenda at any time (previously or even during the meeting). The director(s) or officer(s) against whom the lawsuit could be filed will be impeded and must be replaced at the same opportunity.
In addition, Brazilian Corporate Law also provides for an individual lawsuit to be filed by shareholders or third parties against members of the management, to recover direct losses for acts caused by those managers. In this case, there is no need for a previous formal approval from the general shareholders’ meeting or a minimum percentage that must be held by a shareholder.
For the purposes of liability, members of the fiscal council or committees created by the company’s by-laws are also considered members of the management and can be held liable in the aforementioned hypothesis.
As discussed in 7.2 Remedies Against the Directors, officers or directors are personally liable towards the company if they cause damages to it and if it is shown that their decisions were made in bad faith or through an unlawful act.
As a rule, the General Shareholders’ Meeting shall decide if a lawsuit should be brought against the management. If the meeting so decides, it is up to the company to file the lawsuit as soon as possible.
However, in certain special situations, the Brazilian corporate law grants to shareholders legitimacy to propose legal measures on behalf of the company, with the objective of preserving the company’s assets against losses caused by illegal acts of the management.
Thus, if the resolution is approved by the shareholder meetings and, within three months, the aforementioned civil liability lawsuit is not filed by the competent bodies of the company, any shareholder of the company may do so, proposing the action for the benefit of the company.
Also, in cases in which the shareholders’ meeting rejects the proposal to file a civil liability lawsuit against the managers, this action may also be proposed by shareholders representing at least 5% of the share capital. It is worth mentioning that this minimum percentage of 5% for the exercise of the aforementioned rights can decrease, depending on the amount of the capital stock of the company, as provided for in CVM Resolution 70/22 (applicable to publicly held companies only).
There are no specific rules in Brazil regulating shareholder activism. The Brazilian Corporate Law, applicable both to public and private companies, sets forth special rights with the purpose of protecting minority shareholders, and these rights can be used for shareholder activism. Also, the rules issued by the CVM and by B3, applicable to publicly held companies only, provide for additional shareholder’s rights. For a list of the main rights established by the Brazilian Corporate Law, the CVM and B3, see 1.3 Types or Classes of SharesandGeneral Shareholders' Rights and 1.4 Variation of Shareholders’ Rights.
In Brazil, the following rights that shareholders tend to use more for activism can be highlighted:
Amendments to the rule
It is worth mentioning that the minimum percentage for the exercise of the aforementioned rights can decrease, depending on the amount of the capital stock of the company, as provided for in CVM Resolution 70/22 (applicable to publicly held companies only).
Specifically in relation to the COVID-19 pandemic, a very welcome rule was an amendment in the Brazilian Corporate Law (and the issuance of regulation from the CVM for publicly held companies) allowing companies to hold general shareholders' meetings virtually. This was a topic much discussed by the market but never implemented (until the pandemic) and the belief is that this possibility is here to stay, as many public and private companies decided to hold their meetings virtually over the last two years, even when the social distancing rules were lighter.
Shareholder activism is not a common practice in the Brazilian market, since, historically, most Brazilian corporations have a controlling shareholder – usually a founder, which is also a member of the board of directors or director – and a low level of capital dispersion. However, this scenario has been gradually changing over the last few years, due to a number of reasons, such as the following:
Shifts in the Capital Market
Those changes in the Brazilian capital markets have led to an increase of shareholder activism and participation, although the number of precedents is still not very significant.
A recent example is the General Shareholders' Meeting of Vale SA - the company with the highest market value of all the Brazilian capital markets - held on 30 April 2021 (the first one after the company implemented a structure of “true” corporation, with a free float of approximately 60% of its capital stock), in which there was a dispute among shareholders over the ability to elect the independent members of the management of the company (as a company listed in the Novo Mercado special listing segment of B3, it is required to have at least 20% or two, whichever is higher, of independent members in the board of directors). In a nutshell, the management presented a list proposing 12 members to the board, and a movement led by a lawyer and former director of Vale presented an alternative list. Also, one of the main financial investors of Vale required the adoption of the multiple voting system (see 1.4 Variation of Shareholders’ Rights and 3.1 Rights to Appoint and Remove Directors for an explanation about this system). After two days of discussions regarding the procedure to be used for the multiple voting, four members who were not indicated by the management in its original list were elected by the shareholders.
Another prominent recent example of shareholder activism took place in the general meeting called to approve the merger between Linx SA and a subsidiary of StoneCo Ltd, a publicly held company listed in the Novo Mercado special listing segment of B3, in which an asset management firm gathered several other investors and requested to the CVM the interruption of the term between the first call notice and the date of the shareholders' meeting of Linx, so that CVM could analyse an allegation of a potential conflict of interests of the controlling shareholders of the company. Although in the end the request was denied by the CVM, it was certainly one of the most important movements of activism led by investors in recent years.
For Activist Strategies, see 8.1 Legal and Regulatory Provisions.
Thus, the most common attitudes that shareholders take are:
There are no current surveys or data in Brazil that indicate that any particular sector or industry is the target of activist behaviour by shareholders.
Shareholder activism in the Brazilian capital markets has traditionally been led by institutional investors (hedge funds, pension funds, investment funds and family offices), which tend to be more engaged and active in monitoring and participating in the decision-making process and in the company’s overall activities. However, recently independent (or “activist”) asset-management firms – which invest in companies with assets undervalued by the market with the intention to implement changes in the management or in the policies of the company – have been playing a leading role in shareholder activism in Brazil. They are often criticised for trying to implement changes which envision “short-term” results only, as opposed to institutional investors, which traditionally tend to look for long-term results.
There is no information available regarding the number of activist demands in the last year in Brazil.
In the recent past, acts or strategies implemented by activist shareholders was mostly seen in a negative way by the company and its controlling shareholders. This scenario was detrimental to both the company and its minority shareholders, as common ways to try to eliminate the activism “problem” included trying to limit minority shareholders' rights or not attending or procrastinating their demands and requests (normally until the investor files a claim before the CVM, for instance).
This scenario, although existent in many publicly held companies, has been changing as activist shareholders have gained space and visibility, demonstrating the importance of the active participation of minority groups in the daily life of the company as a way of improving corporate governance practices. Thus, the management of many companies does not necessarily see activism today as something that must be eliminated or confronted. Indeed, there are many situations in which the investor relations department fosters situations whereby investors and management can engage in conversations in order to try to reach an agreement about the “conflicting” issue.
Currently, it is possible to affirm that conflicts still exist (and always will), but companies, as a general rule, tend to try to maintain a friendly initial contact with activist shareholders and their demands (if those demands are not abusive), to avoid conflicts and negative consequences for the company itself and the members of its management.