Business organisations may take various forms in Brazil, including sole proprietorships (microempreendedor individual - MEI; empresario individual – EI; or Empresa Individual de Responsabilidade Limitada - EIRELI), cooperatives, limited liability companies (sociedades limitadas), and corporations (sociedades por ações). As the subject of this book is corporate governance, we will focus on limited liability companies and corporations, which are the most common forms of business organisations that may have more than one partner.
The central characteristics of both limited liability companies and corporations are as follows:
A limited liability company is a legal entity regulated by the Brazilian Civil Code and is formed by the filing of its articles of association (contrato social) with the appropriate commercial or civil registry. Its capital structure consists of equity participations called "quotas", and equity holders are called "quotaholders". A limited liability company may have one or more quotaholders, which may be either individuals or entities, resident, or non-resident (non-resident quotaholders must be represented by an individual resident in Brazil). The corporate governance of limited liability companies generally involves only two bodies: the quotaholders and the officers, provided that most limited liability companies do not have a board of directors. Due to super majority rules set forth by statutory law, control of a limited liability company requires 75% of the voting power. Small, medium, and large companies may use the limited liability company corporate form with a few variations in its corporate governance.
A corporation is a legal entity regulated by Law 6,404 of 15 December 1976, as amended (the "Brazilian Corporations Law"). The capital structure of a corporation is divided into shares, which may be of different classes or types (common or preferred shares). A corporation is generally incorporated by two or more shareholders subscribing its capital stock and approving its bylaws, but may also be incorporated by a single shareholder, as a wholly owned subsidiary, as long as the shareholder is a legal entity.
A corporation may be a closely held or a publicly traded company, depending on whether its securities have the authorisation of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários or CVM) to be traded on the stock exchange or in the over-the-counter market.
There are two important differences between limited liability companies and corporations.
The principal sources of corporate governance requirements in Brazil are:
Public companies are required to comply with several mandatory reporting and other requirements, which may vary pursuant to the B3 listing segment its securities are listed under. Apart from the specific requirements under each listing segment, public companies shall do the following.
As mentioned above, B3 provides for differentiated listing segments with rules setting out corporate governance practices and transparency requirements in addition to those already established under Brazilian corporate law. The main difference between such segments are the required governance practices.
The Novo Mercado ("New Market") has the highest level of corporate governance requirements. The following are some of the main requirements:
Most Brazilian companies have concentrated ownership and, therefore, they reflect an inverted-pyramid model of corporate governance. At the top, there are the quotaholders/shareholders, who own the company, elect the board of directors (or elect the officers in case there is no board of directors) and approve major matters involving the company. In the middle, there may be a board of directors (only required in public companies), which should establish the general orientation of the company’s business, elect, and remove officers of the company, etc. And, at the bottom, there are the officers, who act as agents of the quotaholders/shareholders or of the board of directors and execute the applicable policies and decisions. Few companies in Brazil have highly dispersed ownership and are controlled by management.
Public companies should prepare, update, and submit to the CVM the reference form, annually within five months of the end of the fiscal year (and keep its most relevant information updated). The reference form discloses to the market detailed information on issuer’s activities, risk factors, capital structure, financial data, and management (among others).
All category “A” issuers (issuers authorised to trade all types of securities regulated under the securities market, as opposed to category “B” issuers who are not authorised to trade shares, share depositary receipts or securities which entitle the holder to acquire shares or depositary receipts) are required to disclose in their reference forms:
The governance of Brazilian limited liability companies and corporations may be comprised by three major bodies: the quotaholders/shareholders, the board of directors, and the officers.
Provided that most Brazilian companies have concentrated ownership and do not have a board of directors, the quotaholders/shareholders have extensive legal power to appoint and elect the management and to approve key matters involving the company, such as: (i) amendment of the bylaws; (ii) election of the corporation managers; and (iii) approval of mergers, acquisitions, spin-offs, liquidation, extinction, etc. It also takes the managers' actions into account every year and analyses the financial statements. In general, it has the powers to decide upon any material matter of the corporation and it is highly recommended, for governance purposes, that it convenes its shareholders to give their respective inputs on any material decision that the company must take.
The Brazilian Corporations Law considers a controlling shareholder the entity/person that can: (i) make, permanently, most of the decisions in the general meeting; (ii) elect most of the corporation managers; and (iii) exercise its powers to conduct the corporation activities. The controlling shareholder can be one or more shareholders and must abide to certain duties provided by law. The controlling shareholders have the duty to use their controlling power to make the company accomplish its corporate purpose and perform its social role, and have duties and responsibilities towards the other shareholders of the company, being responsible for any loss caused by abuse of power.
If the company has a board of directors, the powers of the quotaholders/shareholders are generally significantly reduced, being the board of directors responsible to elect the officers and to define the corporate policies.
Brazilian law states that (i) every limited liability company should have at least one officer, and (ii) every corporation must have a board of officers with at least two members, whose main duty is to carry out the day-to-day management.
The bylaws of every corporation's should provide for a fiscal council (conselho fiscal), whose main function is to analyse all acts taken by the managers of the company (it works as a fiscal for the minority shareholders). The fiscal council may be permanent or function only if there is demand by the corporation shareholders (at least 10% of owners of common stock or 5% of owners of preferred stock).
In addition to the foregoing, a Brazilian corporation may (or, in the case of certain regulated companies, must) create additional committees or corporate bodies, the objectives and powers of which should be set forth in the bylaws. A specific committee to assist the board of directors in respect of certain activities of the corporation would be an example. However, the power and authority ascribed by law to the general shareholders' meeting, the board of directors, the board of officers and the fiscal council may not be delegated to any other committee or body that the corporation mandatorily has or may, at its discretion, choose to constitute.
A limited liability company customarily has no body similar or equivalent to the board of directors of a corporation, and the managers generally carry out their functions with less formality than the directors of a corporation (but a board of directors can be stated). A limited liability company may have a fiscal council should the articles of organisation choose to provide one, in which case such a body may be permanently active or only activated with reference to a given fiscal year when so requested by shareholders. Like a corporation, a limited liability company may choose to create additional bodies or committees, specifying the powers and authority of those bodies or committees in the articles of organisation. That said, the limited liability company may not delegate any of the powers or authority granted by law regarding the management and the fiscal council of the company to a different body or committee.
In those corporations where a board of directors exists, the board of directors is responsible, among other things, for establishing the general policies of the corporation and the overall orientation of the company's businesses. Other than the authority specifically set forth in the bylaws (eg, the authorisation for the execution of certain agreements by the company), the law provides for competence of the board of directors on specific matters (if the corporation, in fact, has a board of directors), including:
The managers (in a limited liability company) and the officers (in a corporation) are responsible for the day-to-day management, carrying out the objectives laid down by the board of directors. The managers or officers (as the case may be) have the power to bind and represent the company, including the authority to grant powers of attorney. Furthermore, the bylaws of a corporation may provide that certain decisions be made by the board of officers as a collegiate committee.
The fiscal council, in and of itself, has no authority to make decisions. Rather, the fiscal council overseas the other management bodies of the company and their acts, thus assisting the shareholders' meeting. The law provides for competence of the fiscal council on specific matters, including:
In a limited liability company, the fiscal council is responsible for the following, without prejudice to other responsibilities set forth in the law and in the articles of organisation:
The board of directors and the fiscal council are collegiate bodies, making decisions as a group. Normally, both collegiate bodies have internal statutes that regulate the decision-making process. The managers (in a limited liability company) act individually and so, as a rule, do the officers (in a corporation). In the case of officers of a corporation, however, the bylaws may provide that certain decisions be made by the board of officers acting as a collegial body. Unless a higher quorum is required, decisions are made by most votes among those members present and voting at a given meeting.
The bylaws of the company must state the number (or an interval number) of members of the board of directors, all of whom are elected by the general shareholders' meeting. The number of members of the board of directors should be at least three and there is no maximum number of members. If the bylaws set forth a range of members of the board of directors, the shareholders' meeting shall decide on the exact number of members within the applicable range. The bylaws of a corporation must determine whether the chairperson of the board of directors is to be appointed by the general shareholders' meeting or by the board of directors itself. The bylaws may also provide that the board of directors have a deputy chairperson.
The bylaws should provide for the frequency of the ordinary meetings of the board of directors, without prejudice to extraordinary meetings according to the actual needs of the relevant corporation or its business. It is important that corporations have an internal statute of the board of directors to regulate its functioning.
As mentioned above, B3 also has special requirements for the board of directors of publicly held companies. The requirements vary depending on the listing segment that they trade within.
As a collegial body, all members of the board of directors have the same role, ie, to take part in the meeting of the board of directors and to vote on the matters under consideration. The chairperson of the board of directors has additional administrative functions within the board, such as being responsible for calling the meetings of the board, presiding over these meetings, and generally representing the board before the other bodies of the corporation (but not before third parties). Additionally, depending on what the bylaws provide, the chairperson may or may not have the casting vote to decide on matters under deadlock. If provided by the bylaws, the deputy chairperson may replace the chairperson in the general event of absence. Other than that, the deputy chairperson acts as an ordinary board member.
The Brazilian Corporations Law states that the board should have a minimum of three members, but no maximum number is set by law. That said, the regulations in special listing segments of the B3 have different requirements of composition.
The Brazilian Corporations Law provides for legal requirements for a person to be appointed, elected, and installed as a director. In summary, convictions for certain crimes (such as bankruptcy offences, bribery, or corruption) and/or declaration of incapacity by the CVM would disqualify a person from holding a position in the board of directors. In addition, holding a management position in a competing entity and other conflicts of interest are also grounds for prohibiting a person from being elected a director, except in those cases in which a specific waiver is granted by the general shareholders' meeting.
Only natural persons may be members of a board of directors or officers. This rule emphasises the personal nature of the role of directors and officers, as well as their corresponding individual duties and responsibilities. Foreigners may be members of the board of directors of Brazilian companies, provided they have a representative in Brazil with broad powers to be sued in the name of the respective board member.
A maximum of a third of the members of the board of directors may be officers of the respective corporation. The bylaws of a corporation may provide for representatives of employees, chosen by the employees, to participate in meetings of the board of directors.
Regulations of the B3 in respect of certain listing segments require publicly traded corporations to have independent members in a number equivalent to at least 20% (but in no event fewer than two individuals) of the total number of members of the board. Provisional Measure No 1,040, issued on 29 March 2021 (the “Doing Business PM”), extended to all publicly held companies the obligation to have independent members in the board of directors, however the number of independent directors is yet to be regulated by the CVM.
Whenever the election of directors is carried out by the cumulative voting procedure and the holders of common shares or preferred shares exercise the right to appoint a member of the board, the shareholder, or shareholders bound by voting trust, holding more than 50% of voting shares have the right to appoint the same number of members appointed by all remaining shareholders, plus one member, regardless of the number of board members specified in the bylaws.
The election of directors, if the corporation has a board of directors, and officers, if the corporation does not have a board of directors, is typically a matter for the annual general shareholders' meeting. However, as a rule, the election of a member of management may take place in any general shareholders' meeting. The CVM regulations require a series of preparatory acts in the case of publicly traded corporations for a person to be elected as a director in any given general shareholders' meeting.
The removal of members of the management (that is, of a director, if the corporation has a board of directors, or an officer, if the corporation does not) may be carried out at any general shareholders' meeting. As a result, Brazilian companies cannot have a staggered board. If the directors have been elected by a cumulative voting procedure, the removal of any director results in the removal of all the other directors, after which a new election must be held.
There are two basic voting procedures for electing directors: straight ballot voting and cumulative voting. In the straight ballot voting procedure, each share carries one vote, and each shareholder votes for one (and only one) whole ballot. Each ballot is a complete slate of members proposed to the board of directors. By voting for a ballot, each shareholder, in effect, votes to fill all seats of the board at once. The persons proposed for the board of directors on the ballot obtaining the majority of votes become the members of the board. The cumulative voting procedure provides that each shareholder has as many votes as the number of shares held multiplied by the number of positions of the board to be filled. Shareholders may accumulate all their votes and give them to one candidate for a board position; or, alternatively, shareholders may distribute their votes among various candidates. In either case, the candidates accumulating the greatest number of votes are elected. The straight-ballot vote is the standard voting procedure and generally applies unless there is a request for cumulative voting.
As a rule, shareholders holding shares representing at least 10% of the voting stock are entitled to request the adoption of the cumulative voting system in any given election. However, with respect to publicly held corporations, the minimum shareholding required for the exercise of the right to request the cumulative voting procedure decreases according to the capitalisation of the company, in some cases reaching as low as 5%.
In addition, shareholders holding shares representing at least 5% of the voting stock and shareholders holding preferred non-voting shares or with voting restrictions representing at least ten percent of the total capital stock have, in each case, the right to elect one member of the board of directors in a separate election, with no participation of the controlling shareholder. If the foregoing thresholds have not been met, shareholders holding voting stock, non-voting stock and stock with restricted voting may join forces to elect separately one director and the respective alternate director. The same share may not be used in the separate election and in the cumulative voting procedure. For publicly held corporations with a single class of common shares, the minimum shareholding required for the exercise of the right of a separate election is 10% of the capital stock of the company.
When so provided for in the bylaws, the employees of a corporation may choose a representative to sit on the board of directors. This representative is elected by means of a separate election.
As a rule, for closely held corporations there are no specific rules requiring the appointment of independent managers. As a result, the directors and officers do not have full independence from the general shareholders' meeting (and the controlling shareholder, as applicable) or its resolutions, considering the hierarchical position of the general shareholders' meeting in the political structure of a corporation and its legitimate political power to direct the functioning of the administrative bodies of the corporation. Nevertheless, from an operational and legal standpoint, the directors preserve their discretion to act according to their convictions and always in compliance with law and in the corporations' interests.
The stock exchange regulations applicable to corporations listed in the New Market segment require that at least 20% (but in no event fewer than two individuals) of the listed corporations' board members must be independent directors. A director is deemed "independent" for the purpose of the regulations if she or he is formally independent, meaning that the director is not a party related to the indicating shareholder. These regulations provide that a director will be considered "independent" if she or he:
The obligation to have independent directors was recently extended to all publicly held companies by the Doing Business PM, which is yet to be regulated by the CVM.
With respect to conflicts of interest, directors and officers are subject to certain specific fiduciary duties including a duty of loyalty under which managers may not, among other things:
Moreover, directors and officers are prohibited from taking part in any decisions related to corporate transactions in which that manager has a conflicting interest with the company. Managers are required to inform the board of directors or the officers of the corporation of the existence of the conflicting interest and to register the nature and extent of the interest in the minutes of the meeting of the board of directors or officers.
Pursuant to the Brazilian Corporations Law, the duties of directors and officers are generally:
A manager must fulfil his or her duties to the company and must carry out his or her functions in the interest of the company, always in compliance with his or her duties, regardless of any particular interest of the shareholders, or group or class of shareholders, that appointed the manager.
The general shareholders' meeting (and the controlling shareholder, as applicable), as the supreme body of the corporation, can re-examine all acts of the other bodies of the corporation, including the managers. This power of re-examination of the general shareholders' meeting works as a corporate enforcement, including by remediating the breach of the managers' duties and possibly mitigating its effects. Further, there is always the possibility of a judicial remedy, with a lawsuit filed either by the company or a third party that has suffered a direct damage.
As a rule, a lawsuit against the managers for breach of duties must be filed by the company itself. There are, however, exceptions, the first one being the possibility of the corporate claim being filed by shareholder(s) if the company remains inert in filing such a suit. The second conceptual exception occurs if a third party (which can be a shareholder) suffers a direct damage, such claim being an individual claim (as opposed to corporate claim). In this case, the relevant third party may seek any remedies available, including indemnification. The CVM may also file an administrative procedure against directors and officers of publicly held companies due to the breach of their statutory fiduciary duties or the commission of acts that are not compliant with the company's bylaws. Companies listed in level 2 and the New Market segment of B3 are required to provide that arbitration will be the mechanism for dispute resolution, which provision is binding on the shareholders.
Directors may be held liable for damages caused as a result of a breach of their fiduciary duties, as well as damages resulting from acts performed with negligence, wilful misconduct, or abuse of power. Violations of applicable laws and regulations (including regulations covering mandatory disclosure, tender offers, conflicts of interest, etc) and of the company's bylaws may bring about claims against the directors and result in their liability. Members of management may not be held personally liable for obligations undertaken on behalf of the company in the ordinary course of business so long as they have acted as required for the careful management of the company (business judgement rule).
Each officer performs her or his duties on an individual basis and according to her or his respective assignments, positions, powers, and authority. No director or officer will be personally liable for acts or omissions of other officers unless she or he was involved in those acts, negligent in discovering the acts or failed to prevent the acts once she or he became aware of them. Neither will any director or officer be personally liable for an act of the relevant board so long as that director or officer, as the case may be, expressly makes manifest his or her dissent in writing. Indemnity agreements, hold harmless arrangements and bylaws indemnity provisions may be put in place, as may insurance policies (D&O and E&O). Mandatory disclosure requirements apply as discussed below.
Shareholders determine the aggregate or individual total compensation payable to the management (including stock-based compensation and additional benefits offered), taking into consideration in each case the manager's position, professional standing, responsibility undertaken, skills, time devoted to the company and compensation available in the market for a person holding a similar position. If shareholders approve compensation on an aggregate basis, the board of directors may receive the authority to approve its allocation between the directors and officers. A share of the company's profit may be payable to the management if certain statutory requirements are met.
Information regarding compensation must also be disclosed in the reference form, which will include information on policies or practices adopted by the company regarding:
Mandatory disclosure also applies to indemnity agreements benefiting management, as well as to any other transaction entered by members of the management of the company that is a related-party transaction required to be entered into at arm's length.
The relationship between the company and its shareholders is basically governed by statutory laws and internal regulations (articles of association for a limited liability company, bylaws for a corporation, and shareholders agreements, if any). The shareholders, together and as a whole, take part in the general shareholders' meeting, and as such the shareholders participate as a body of the company.
Individually, the shareholders have rights and obligations before the company. Several rights of the shareholders are exemplarily referred to in the law on a non-exhaustive basis, such as the right to:
Shareholders basically have two obligations: to pay in the subscribed shares and to exercise their voting rights in the interest of the company, should the shareholder have voting rights and when effectively exercising such rights.
A limited liability company is governed by its articles of association which, in turn, provide for management of the company through certain managers indicated therein or otherwise designated by an act of the quotaholders of the company. It is common, though not mandatory, that the managers of a limited liability company are quotaholders. The management of a limited liability company can even be delegated to all quotaholders in the articles of association. In a limited liability company, certain company decisions require the approval of quotaholders as a matter of law, and the articles of association may also provide for additional matters that require approval of the quotaholders, including matters concerning the day-to-day operations of the business.
In a corporation, as a rule, shareholders (as such) have no power to, individually, get involved in the management. Nevertheless, the general shareholders' meeting has authority to decide on any and all matters relating to the corporation and is considered the supreme body of a corporation. As such, the general shareholders' meeting may take any measures on behalf of the corporation as it may deem appropriate for the purpose of protecting and developing the corporation, including reviewing the decisions of any other body of the corporation.
Although the controlling shareholder is not itself a body of the corporation, Brazilian law acknowledges the power of the controlling shareholder (an individual or a group of shareholders acting exercising control together) in the corporate governance, regulating its duties and responsibilities.
In a limited liability company, quotaholders’ decisions may be adopted at quotaholders’ meetings. Or, as in most cases, any such decisions may also be adopted by means of a quotaholders’ resolution, duly signed by all quotaholders, regardless of whether the resolution was adopted at a meeting at which the quotaholders were present or was adopted by circulating the resolution for signature. A copy of any the minutes or decisions, as applicable, duly authenticated by the managers, must be presented to the Commercial Registry for filing.
A quotaholders’ meeting must be held at least once a year within the first four months after the closing of the prior fiscal year to:
The Civil Code provides for two different types of quotaholders’ meetings for limited liability companies: the general quotaholders’ meeting (assembleia geral) and the quotaholders’ meeting (reunião de sócios). Certain procedures for calling a general quotaholders’ meeting may be waived if all shareholders attend the general quotaholders’ meeting or otherwise declare, in writing, that they are aware of the place, date, time and agenda of the relevant general quotaholders’ meeting. A quotaholders’ meeting must be called by means of public announcements published at least three times and no later than eight days prior to the date of the general quotaholders’ meeting. The general quotaholders’ meeting will take place on its original scheduled date if shareholders representing at least three quarters of the capital stock are present at the meeting. If no such quorum is achieved, the general quotaholders’ meeting must be adjourned to a later date, to be determined by the company through publication of a second announcement, at least five days prior to the rescheduled date. The general quotaholders’ meeting may take place on the rescheduled date with any number of shareholders present.
Limited liability companies owned by ten or fewer shareholders may opt to resolve the matters subject to the decision of the shareholders by means of a quotaholders’ meeting instead of a general quotaholders’ meeting, should the articles of organisation of the company so provide. The articles of association may contain specific provisions regarding how the calling, voting of proposals and other procedures in connection with the quotaholders' meeting are to be carried out, and should require less formality and procedures than those of a general quotaholders’ meeting. If the articles of association are silent, the legal provisions in the Civil Code regarding the general quotaholders’ meeting will apply to the quotaholders’ meeting.
In a corporation, the shareholders' decisions are reached at the general shareholders' meetings. There are two kinds of general shareholders' meetings: the annual (ordinary) general meeting, and the extraordinary general meeting. Each year, the shareholders must meet in an annual (ordinary) general shareholders' meeting within the first four months after the close of the prior fiscal year to vote to approve (or not) the financial statements prepared by management, decide on the allocation of the corporation's profits and elect the members of the board of directors (if the corporation has a board of directors) or officers (if the corporation does not have a board of directors), if necessary. An extraordinary shareholders' meeting may be called at any time for the purpose of deciding upon matters relating to the corporate purposes of the corporation or those considered to be convenient to the protection or development of the corporation, including any corporate action that may result in an amendment to the bylaws.
The Brazilian Corporations Law does not authorise resolutions to be passed by simple written consent with no meeting held. A copy of any minutes of the general shareholders' meeting must be presented to the Commercial Registry for filing.
Call notices for shareholders' meetings in a publicly traded corporation must be published at least three times, and the first call must be published, as a rule, at least 15 days in advance (in a closely held corporation the first call must be published at least eight days in advance). Certain procedures for calling a general shareholders’ meeting may be waived if all shareholders attend the general shareholders’ meeting or otherwise declare, in writing, that they are aware of the place, date, time and agenda of the relevant general shareholders’ meeting.
Shareholders may be represented at a general shareholders' meeting by a proxy appointed as such less than one year before the date of the meeting, who must also be either a lawyer, another shareholder, an officer, a director of the corporation or a financial institution (in case of a publicly traded company); no maximum term is required in case of powers granted under a shareholders' agreement.
In a corporation, the general shareholders’ meeting will take place on its original scheduled date if shareholders representing at least one quarter of the voting capital stock are present at the meeting. However, if the general shareholders’ meeting has been called to decide on the amendment of the bylaws, the presence of at least two thirds of the voting capital stock is required. In a second call, the meeting may be called to order with any number of shareholders present at the meeting.
The basic rights of a shareholder that could serve as basis for a claim against a company are either political rights or economic rights, to:
In the majority of cases in which shareholders are seeking recovery for damages, the common practice of corporate litigation reveals that shareholders customarily seek protection from acts of abuse or violations committed either by another shareholder (frequently the controlling shareholder) or by management, in the event of a violation of legal and statutory duties. A company may appear as a defendant. However, since it is not currently common in Brazil for shareholders to seek remedies against a company, it is often the case that a company may participate in the litigation as an intervening party.
As managers of a corporation, directors and officers are all subject to the same legal duties:
Shareholders are entitled to hold directors and officers liable for breach of such legal duties. The most common actions filed by shareholders usually allege:
Publicly traded companies must disclose to the market any material acts or facts relevant to their business, as further detailed by the CVM, which regulates the mandatory disclosure obligations pursuant to the spirit of full disclosure set forth in the Brazilian Corporations Law.
Any individual or entity (acting alone, in concert with a third party or representing the same interest) who carries out a material trade involving shares of a company must notify the company immediately after making the trade (with information regarding the person's intention, if any, to interfere in the controlling block or the management of the company, as well as any intention of entering into any shareholders' or voting agreement). A trade is deemed material whenever (and each and every time) it results (individually or in aggregate with other trades) in one crossing a 5% threshold stake in the total outstanding shares of a type or class of shares (either by increasing or decreasing its holding).
Shareholders are also required to comply with disclosure rules in the context of tender offers launched for shares of a publicly traded company. Controlling shareholders are also required to notify the company of any decisions that may impact the price of the company's securities (or impact any decision to buy, sell or hold such securities) and the exercise of other shareholders' rights, such as a transfer of control to a third party.
Publicly traded companies must disclose their annual financial statements, together with the management report, the independent auditor's report (and the opinion of the fiscal council, if active), at least one month prior to the date the annual ordinary shareholders' meeting will take place (required by the Brazilian Corporations Law to take place within four months from the end of the fiscal year).
Listed companies must also disclose their:
Information included in the annual financial statements must also be included in the reference form which publicly traded companies are required to file and keep duly updated with the CVM.
Companies listed in special segments of trading of B3 are required to disclose their financial information both in Portuguese and in English. If listed on the New Market segment, they are also required to hold a public presentation (either in person, by teleconference or videoconference) of the information disclosed in their quarterly earnings results or financial statements (within five business days of their respective release). If listed on the level 2 or level 1 listing segments, they are required to hold at least one annual public meeting with analysts and other third parties to discuss their financial and economic situations, projections, and expectations.
Depending on a company's business activities, whether its fiscal committee is active and whether there are any pro forma financial statements, etc, other specific financial reporting requirements may apply.
Closely held companies are also required to disclose their financial statements by publishing them in printed newspapers as specified by law.
As a rule, the fact that a shareholders' agreement in respect of a publicly traded company has been executed must be disclosed upon release of a material fact and filed with the CVM (depending on the type of securities listed by the company). A description of such arrangements must also be included in the reference form. No disclosure requirement applies to closely held companies.
As a condition for enforceability against third parties, companies are required to file their financial statements (and file evidence of their publication), minutes of shareholders' meetings, minutes of meetings of the board of directors or officers, meetings of the fiscal council, and any other corporate act. Publicly held companies must also disclose such documents on their respective websites and file them with the CVM. The material so filed is publicly available.
Publicly held companies must appoint external auditors registered with the CVM and these external auditors must be independent. Accordingly, the external auditors are prohibited from rendering certain services to the company they audit – such as issuing valuation and appraisal reports, reviewing, and issuing reports on provisions and technical reserves, etc – and trading, directly or indirectly, in securities issued by the company.
As a rule, publicly held companies are also required to change their independent external auditors at least every five years. If, however, the company has a permanently activated audit council, the company may continue to use the same external auditors for a period of up to ten years before it is required to make the change. Once a change in auditors has taken place, the company cannot reappoint the previous auditors for a period of at least three years. Finally, a publicly held company must disclose information regarding its relationship with the external auditors, such as the amount of fees charged and paid, and policies adopted to prevent conflicts of interest.
Unless the company falls within the definition of a "large enterprise" (based on its gross revenue threshold or on the total amount of its assets) or has a private equity investment fund (FIP) as a shareholder, a closely held company is not required to appoint independent external auditors.
Requirements for the appointment of directors and a listing of their statutory duties are set down in the Brazilian Corporations Law. In general terms, the activation of a fiscal council is not mandatory.
A publicly traded company may adopt a management risk and internal controls policy, in which case the policy must be publicly disclosed by means of a detailed description included in the reference form. This description will specify the responsibility of each committee, management body or similar structure (and each of their members). If no such policy is adopted, the company must disclose that fact and justify its decision in this regard. Managers must comply with such a policy and make certain that the external auditors are reviewing and reporting their assessment and recommendation concerning the company's internal controls. Managers are required to comment on any recommendation in this regard presented by the external auditors and any action taken to implement any such recommendation or, if the recommendation is not implemented, specify the reason for non-implementation.
In the last decade, Brazil has made material improvements to the corporate governance framework. Among such improvements, this chapter will highlight the implementation of a Corporate Governance Code, the regulation of remote voting, the regulation of virtual and hybrid shareholders’ meetings, the reassurance of the binding nature of agreements, the reduction of the minimum number of members of limited liability companies, and specific measures aimed at improving the ease of doing business in Brazil.
Brazilian Corporate Governance Code
The Brazilian Corporate Governance Code was implemented in 2016, setting forth standards for board practice, shareholders’ rights, disclosures, voting mechanisms and environmental and social risks (the “Code”). The Code operates on a comply or explain basis.
The Brazilian Securities and Exchange Commission ( Comissão de Valores Mobiliários or CVM) enacted Rule No 586 in 2017, providing that publicly held corporations with listed shares that traded on the Brazilian stock exchange should file an annual report disclosing which recommendations set forth in the Code were adopted and explaining the reasons why any recommendations were not implemented.
Remote Voting, Virtual and Hybrid Shareholders’ Meetings
CVM Rule No 561 already provided rules on how publicly held corporations should conduct “hybrid” shareholders' meetings as opposed to having only in-person meetings at a physical location. Although provided for by Brazilian law, the adoption of “hybrid” shareholders' meetings was uncommon.
Due to the COVID-19 pandemic and related public health concerns, many state governors issued executive orders declaring public health emergencies, which restrict most in-person meetings. On 30 March 2020, the federal government enacted Provisional Measure No 931 allowing the CVM and the National Business Registration Department (Departamento Nacional de Registro Empresarial e Integração – DREI), the federal authority responsible for the regulation of commercial registries in Brazil, to regulate shareholders' meetings taking place exclusively online – virtual shareholders’ meetings.
On April 15, 2020, DREI issued Instruction No 79 (“DREI Instruction No 79”) regulating virtual and remote voting for closely held corporations, limited liability companies (sociedades limitadas) and co-operatives. Pursuant to DREI Instruction No 79, the call notice to a hybrid or virtual meeting must prominently state how the meeting will be held, provide details on remote participation and voting, and list the documents required for shareholders, quotaholders, members of the co-operative and their representatives in order for them to be admitted to the meeting and exercise their rights.
On 17 April 2020, the CVM issued Resolution No 622 to refine the regulation on hybrid shareholders' meetings and to provide for rules for virtual shareholders' meetings. It is important to mention that the adoption of meetings taking place exclusively online is optional.
Although the Brazilian government issued the aforementioned regulations due to social distancing concerns during the COVID-19 pandemic, such modifications will outlast the pandemic. In addition, we strongly believe that such modifications will improve corporate governance through the reduction of costs to attend shareholders’ meetings, which is especially important to encourage the attendance of shareholders with a small financial stake.
Economic Freedom Act
On 30 April 2019, the Brazilian government issued Provisional Measure No 881 (the “Economic Freedom Act”). Announced as an effort to cut red tape in the Brazilian economy, the Economic Freedom Act has put in place a set of principles aimed at reassuring the liberal status of the country's economy. As the Economic Freedom Act is a framework piece of legislation, it is still to be further regulated and implemented – but it currently corroborates the interest of government authorities in promoting business in Brazil. The Economic Freedom Act, which was further regulated by Law No 13,874 of 20 September 20 2019, has also changed specific legal provisions to bring a forthright response and solution to chronic problems those doing business in Brazil have to deal with on a daily basis. Some of which are summarised below.
The Doing Business Provisional Measure
In addition to the improvements to the business environment made by the Economic Freedom Act and the other measures mentioned above, on 29 March 2021, the Brazilian government issued Provisional Measure No 1040 (the "Doing Business PM"), which aims to improve Brazil’s position in the World Bank’s ease of doing business index.
A nation's ranking in the index is based on ten indicators:
The Doing Business PM tackled a few corporate governance issues in order to improve Brazil’s position in World Bank’s ease of doing business index, especially the reduction of procedures, time and cost to open a new business, and also provided increased protection to minority shareholders of publicly held companies, namely the following.
These modifications to Brazilian statutory laws and regulations show a clear trend towards the improvement of corporate governance. In addition to such modifications, we believe there is still room for improvement. The CVM’s regulatory agenda for 2021 states that it will:
In addition, we believe the substantial increase in the number of individuals holding stocks in the last few years (especially due to the reduction in returns of fixed income investments) will create incentives to Brazilian companies to improve their corporate governance practices and also to the Brazilian government to issue new laws and regulations in such regard.