Shareholders’ Rights & Shareholder Activism 2022

Last Updated August 02, 2022

Brazil

Law and Practice

Authors



Machado, Meyer, Sendacz e Opice Advogados has a team of lawyers specifically dedicated to corporate law, corporate governance, corporate restructurings, corporate litigation involving administrative proceedings before the Brazilian Securities and Exchange Commission (CVM) and in advising publicly held companies to comply with the regulation issued by the CVM and the Brazilian Stock Exchange (B3). The firm also has extensive expertise in administrative litigation, which includes companies in regulated sectors, at both the pre-sanction phase and in administrative proceedings, and carefully monitors the activity of regulatory bodies, such as CVM, B3, Central Bank and SUSEP. Its lawyers regularly follow CVM investigations and administrative proceedings regarding the compliance with Brazilian capital market standards. Besides the adoption of measures to prevent litigation, its work involves providing legal advice in daily corporate acts and in complex corporate transactions as well as defending clients in administrative, judicial and arbitral proceedings related to corporate matters.

Disclaimer

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: 

  • to participate in the distribution of net income;
  • to participate, in proportion of the holder’s share of the company’s capital stock, in the distribution of any remaining assets in the event of liquidation of the company;
  • to participate in any shareholders’ general meetings and discuss the matters of the agenda;
  • pre-emptive rights in the event of a subscription of shares, convertible debentures or subscription warrants, except in certain specific circumstances under Brazilian Corporate Law, including the possibility of exclusion or reduction of pre-emptive rights by the board of directors up to the limit of the company’s authorised capital stock if the distribution of those shares is effected through a stock exchange, through a public offering or through an exchange of shares in a public offering, the purpose of which is to acquire control of another company;
  • to withdraw from the company under circumstances such as: 
    1. reduction of the mandatory dividend; 
    2. creation of preferred shares or any changes to them; 
    3. merger and acquisition of the company; and 
    4. any amendment to the company’s corporate purpose;
    5. to call a shareholders’ general meeting, if the directors of the company fail to call a meeting within 60 days from the date they were required to do so under the provisions of the Brazilian Corporate Law;
    6. to monitor the management of the company in accordance with the Brazilian Corporate Law; and
    7. to propose a liability proceeding against the officers and directors of the company, in case that lawsuit is not proposed within three months of the respective approval by the shareholders’ general meeting.

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:

General Meetings

  • 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;
  • shareholders representing 5% or more of the voting capital or 5% of the non-voting capital 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 request to call a meeting to establish the fiscal council; and
  • shareholders representing 0.5% or more of the capital stock of the company may require a list of the addresses of the shareholders for whom the company required a proxy to a shareholders’ general meeting in order to send them the same request.

Board of Directors

  • Minority shareholders representing at least 10% of the voting capital may require the adoption of a multiple voting system, by means of which each share is entitled to as many votes as there are board members, and shareholders are entitled to the right to vote cumulatively for only one candidate or to distribute their votes among several candidates; and
  • in a separate election, shareholders representing at least 15% of the voting capital of the company and non-voting shareholders representing at least 10% of the capital stock of the company may each elect one member of the board of directors and its alternate; in case the holders of voting and no voting shares do not reach the required percentage, shareholders (either voting or non-voting) representing at least 10% of the capital stock of the company may elect one member of the board of directors and its alternate.

Fiscal Council

  • A fiscal council must be established at a shareholders’ general meeting upon request of shareholders representing 10% of the voting capital, or 5% of the non-voting capital;
  • in a separate election, the holders of non-voting shares will have the right to elect one member and its alternative, and the holders of voting shares representing 10% of the voting capital will also have the same right; and
  • the members of the fiscal council must furnish information about matters of their responsibility whenever required by shareholders representing at least 5% of the capital stock of the company.

Other Variations

  • Shareholders representing at least 5% of the capital stock of the company may require in a shareholders’ general meeting that the officers and directors disclose information about shares acquired and sold in the last fiscal year, including from stock option plans, benefits received from affiliated companies, conditions of the employment agreement and material facts related to the company;
  • if the shareholders’ general meeting decides not to propose a liability proceeding against any officers or directors of the company, shareholders representing at least 5% of the capital stock of the company may do so; and
  • shareholders representing at least 5% of the capital stock of the company 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.

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:

  • take the administrators' accounts, examine, discuss and vote on the financial statements;
  • resolve on the allocation of net income for the year and the distribution of dividends; and
  • elect the administrators and members of the fiscal council, when applicable, as they may also be elected at an extraordinary shareholders’ meeting, and approve their compensation.

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: 

  • any shareholder, if the board of directors fails to call a shareholders’ meeting within 60 days from the date set forth by applicable laws or by-laws; 
  • shareholders holding at least 5% of the company’s total capital stock, if the board of directors fails to call a shareholders’ meeting within eight days from the receipt of a request for such a meeting, indicating the issues to be discussed and appropriate reasons; 
  • shareholders holding at least 5% of the company’s voting shares or 5% of the company’s non-voting shares, if the board of directors fails to call a shareholders’ meeting within eight days of the receipt of a request to call a meeting for the formation of the fiscal council; and 
  • the fiscal council, if the board of directors delays calling the annual shareholders’ meeting.

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):

  • a change in the company’s corporate purpose;
  • a reduction in the percentage of minimum mandatory dividends to be distributed to the shareholders;
  • any merger into or consolidation with another company;
  • any spin-off;
  • the participation of the company in a group of companies (grupo de sociedades, as defined in the Brazilian Corporate Law);
  • application for cancellation of any voluntary liquidation;
  • dissolution of the company; and
  • merging all common shares into another Brazilian company, so that the company becomes a wholly owned subsidiary of that company (incorporação de ações).

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: 

  • the name and qualification of the person providing the information; 
  • the purpose of the interest and expected amount; 
  • the number of shares and other securities and derivative financial instruments relating to those shares, whether a physical or financial settlement, specifying the quantity, class and type of the referenced shares; 
  • the terms of any agreement regulating the exercise of voting rights or the purchase and sale of their marketable securities; and 
  • if the shareholder resides or is domiciled outside Brazil, the name and taxpayer identification number of their agent or legal representative in Brazil.

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. 

Legal Requirements

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. 

Legal Liabilities

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.  

Shareholder Resolutions

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.  

Shareholder Rights

In Brazil, the following rights that shareholders tend to use more for activism can be highlighted: 

  • the right to call a shareholders’ meeting whenever the managers of the company delay the call for more than 60 days, in the cases set forth in the Brazilian Corporate Law or the by-laws of the company (applicable to any shareholder); 
  • the right to call a shareholders’ meeting whenever the managers of the company fail to do so within the term of eight days, upon their justifiable request that a meeting be called, which shall also indicate the matters to be discussed (applicable to shareholders holding at least 5% of the capital stock of the company);  
  • the right to request to the CVM the interruption of the term between the first notice of call and the shareholders' meeting date for up to 15 days, in order for the CVM to analyse the agenda of the meeting (applicable to any shareholder of publicly held companies, in accordance with CVM Resolution 81/22); 
  • the right to file a lawsuit to obtain indemnification from directors or officers, as the case may be, for damages caused to the company, whenever the General Shareholders' Meeting decides that such a lawsuit shall be filed and the company fails to do so in the period of three months counted from the meeting (applicable to any shareholder); 
  • the right to file a lawsuit to obtain indemnification from directors or officers, as the case may be, for damages caused to the company, whenever the General Shareholders' Meeting decides that such a lawsuit shall not be filed (applicable to shareholders holding at least 5% of the capital stock of the company); 
  • the right to request the adoption of the multiple vote system for the election of the members of the board of directors (applicable to shareholders holding at least 10% of the voting capital of the company); 
  • the right to request the setting-up of the fiscal council (applicable to shareholders holding at least 10% of the shares with voting rights or 5% of shares with no voting rights);  
  • the right to elect separately one member of the fiscal council and its respective alternative (applicable to shareholders holding at least 10% of the shares with voting rights or to any shareholder with no voting rights); and 
  • the right to elect separately one member of the board of directors of the company (applicable to shareholders holding at least 15% of the shares with voting rights or 10% of the shares with no voting rights). 

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: 

  • Growth of the Brazilian capital markets, reflected by a higher number of companies becoming public and making their successful initial public offerings (IPOs) and by a growing number of investors (including individuals trying to diversify their investment portfolios and institutional investors). According to information disclosed by B3 in March 2022 about the profile of the investors, the number of Brazilian federal individuals’ taxpayer’s registry (CPF) entered in the B3 system has been increasing each year. It went from 1,4 million in December 2019 to 4,3 million in the first quarter of 2021.  
  • A significant increase in the practices of ESG (Environmental, Social and Governance) by Brazilian companies and a higher number of companies listed in the special listing segments of B3, which require higher and stricter rules of corporate governance and minority protection.  
  • A real effort from companies to create mechanisms to allow for a higher capital dispersion, adopting therefore the concept of “true” corporations. 
  • A high number of Brazilian companies which were affected by compliance/corruption investigations, which has resulted in a considerable reduction in their share value – resulting in minority shareholders’ losses – causing its shareholders to be more aware in relation to their rights and, consequently, allowing them to engage in a more active participation. 
  • A more proactive role of proxy advisory firms, such as ISS and Glass Lewis, releasing guidelines in relation to the agenda of several companies. 
  • A more proactive role of independent (or “activist”) asset management firms investing in companies with assets undervalued by the market with the intention to implement changes in the management or in the policies of the company. 
  • Recent initiatives and rules issued by the CVM allowing for more transparency, disclosure and participation of minority shareholders in general meetings, such as: 
    1. the enhancement of the content of the Reference Form (Formulário de Referência), which obliges companies to disclose in a very detailed manner most of the aspects of their corporate governance rules, including the highest, the lowest and the average remuneration received by the members of the management; 
    2. the creation of the Corporate Governance Form, which provides for ideal corporate governance principles and requires companies to explain if each of them is adopted and, if not adopted, to explain why not; 
    3. the creation of the Distance Voting Ballot (Boletim de Voto a Distância), which allows shareholders to send their written votes in advance of the meeting if they were present; 
    4. the possibility of entirely virtual shareholders' meetings, which allows a higher number of participants of the publicly held companies; and 
    5. the possibility to decrease, depending on the amount of the capital stock of the company, the minimum percentage established by the Brazilian Corporate Law for the exercise of certain rights, such as the right to file a lawsuit to obtain indemnification from directors or officers to the benefit of the company. 

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.  

Noteworthy examples

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:  

  • participating in general meetings, requiring explanation and voting against certain matters, such as the remuneration of members of the management, which is a theme in which shareholders tend to pay more attention to and vocalise more;  
  • requiring the setting up of the fiscal council; and  
  • using the mechanisms provided for in the Brazilian Corporate Law to elect members to the fiscal council and board of directors. 

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. 

Machado Meyer Sendacz e Opice Advogados

Ed. Seculum II - Rua José Gonçalves de Oliveira
nº 116, 5º andar - Itaim Bibi
São Paulo, SP
Brasil 01453-050

+55 11 3150 7000

comunicacao@machadomeyer.com.br www.machadomeyer.com.br
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Trends and Developments


Authors



Carneiro de Oliveira Advogados is a boutique law firm located in São Paulo, Brazil that provides legal assistance in business, corporate matters and mergers and acquisitions. Its team, composed of ten members, has deep experience of work in top law firms and is a reference in the market, having been mentioned in international publications. The firm is known for its strategic, business-focused approach, excellence and professionalism, as well as for the development of sophisticated solutions and customised services. It has recently advised: (i) Fogás Group in its acquisition of part of Copagaz and Liquigás assets in the Brazilian states of Mato Grosso and Goiás and in the São José dos Campos area; (ii) Smiles Fidelidade in its merger with Gol Linhas Aéreas Inteligentes, both publicly held corporations; and (iii) Bom Futuro Group (one of the largest agribusiness groups in the world) in the acquisition of Hydria Participações, a company in the hydropower sector.

The last few years have seen important moves to broaden discussion of the Brazilian legal and regulatory framework regarding shareholders’ rights, which are mainly provided for in the Brazilian Corporate Law (No 6,404/1976) and in regulations issued by the Brazilian Securities and Exchange Commission (CVM) and the Brazilian stock exchange, B3 S.A. – Brasil, Bolsa, Balcão (B3). 

Several organisations have been discussing proposals to improve protection mechanisms for shareholders, especially minority ones, aligned with best practices in corporate governance. Moreover, there has been an emphasis on attracting investment through strengthening shareholders’ rights and creating further possibilities for exercising such rights. 

Some of these proposals and discussions have developed into regulatory and legislative reforms, which will be the focal point of this article.

ESG

The ESG pillar has been one of the most talked about movements within corporate law and a new concern for investors. Following this trend, the Brazilian Securities and Exchange Commission issued a regulatory reform to substantially modify the content of the mandatory report Brazilian listed companies must release annually, the so-called Reference Form (Formulário de Referência), to not only lower compliance costs for these companies, but also to address ESG concerns.

The Reference Form was created with the purpose of uniting in a single document all the relevant information related to listed companies. However, in the last few years, the main critiques of this document have been that (i) the key information was getting lost in the vast quantities of far less relevant information required to be addressed in it and (ii) most of the information in it was already required to be disclosed by other means. In this sense and considering the need to meet the demand of investors for environmental, social and governance (ESG) information, CVM issued Regulation No 59, which will enter into force on 2 January 2023. Some of the most important improvements of this Regulation are set out below.

ESG reporting

Following a “comply or explain” approach recently adopted for other disclosure obligations by listed companies, CVM included specific questions regarding the existence and disclosure of an annual ESG report, with questions regarding methodology, auditing or revision procedures, appointment of key performance indicators, sustainability (with specific indication of adoption of the Sustainable Development Goals established by the United Nations) and climate matters, among other matters. As the name suggests, companies who do not work on an annual ESG report or only partly adopt the recommendations on content, must explain the reasons for this.

Social, environmental and climate risks

The current version of the Reference Form (prior to the entry into force of the revised version mentioned above) has a specific item to detail the risks to which companies are subject. It is, however, up to companies to determine what type of risks will be described. The new version includes specific items regarding social, environmental and climate risks, among others which may be freely determined by the companies.

Diversity and equality

Specific items regarding diversity and gender equality have been included to emphasise its importance among C-level executives, members of the Board of Directors and Audit Board (Conselho Fiscal), as well as among employees, where companies will be required to provide information on management and employee diversity with regard to gender, race, colour and other attributes. 

Moreover, in order to highlight the importance of this issue, companies will also be required to answer if there are specific policies or standards – regarding diversity of gender, race, colour and other attributes among the members of the Board of Directors, Officers and Audit Board – it aims to meet.

Compensation

Compensation is always a sensitive issue, specially within listed companies, and the current version of the Reference Form already focuses on transparency regarding this matter. Nevertheless, recent years have brought up discussions on whether C-level executives’ compensation has been too high or if it has not been presented with proper supporting explanation (this matter will also be addressed later in the article). 

Therefore, in line with the diversity and equality pillars, CVM included a question to address and determine pay gaps within listed companies through reporting the ratio between the highest individual compensation (including variable compensation) and the average individual compensation among all employees. The main idea of the new version of the Reference Form, considering all the aforementioned questions, is that the obligation to disclose information, even if only to register non-compliance, will encourage companies to effectively implement changes.

Disclosure of Corporate Litigation

Following recommendations issued by the Organisation for Economic Co-Operation and Development (OECD) in its report on “Private Enforcement of Shareholder Rights: A Comparison of Selected Jurisdictions and Policy Alternatives for Brazil”, in 2020, CVM created a new obligation applicable to listed companies regarding the disclosure of corporate litigation, which entered into force on 2 May 2022, through the issuance of Regulation No 80.

The obligation is applicable to listed companies which have authorisation to issue any kind of securities and shall consider litigations where the company, its shareholders or managers are plaintiffs or defendants, involving:

  • rights or diffuse, collective, or homogeneous individual interests; or
  • a potential decision whose effects may affect the company or other holders of securities issued thereby who are not parties to the litigation in question, such as an action for annulment of a corporate resolution, an action regarding liability of managers or an action regarding liability of the controlling shareholder. 

CVM defines corporate litigation as any type of judicial or arbitral lawsuit which is based on corporate or capital markets law or on regulations issued by CVM. 

The main idea is to disclose information on this type of litigation, which may impact the pricing of the company, mainly information regarding the identity of the plaintiff and defendant; the amounts, assets or rights involved; the main facts; and what is being claimed. Previously, this type of information was only disclosed on the Reference Form and was based on a relevance criterion defined by the companies themselves, which CVM considered to be no longer sufficient for transparency purposes.

There is, however, a controversial aspect in the new obligation regarding confidentiality clauses in arbitration agreements and rules of arbitration chambers, which may not be claimed by listed companies as an excuse for non-disclosure. The only exception for disclosure are cases of confidentiality provided by law, which is not applied to arbitration in Brazil. 

Management Compensation

According to the Brazilian Corporate Law, the global or individual amount of the annual compensation of managers is approved at the ordinary shareholders’ meeting, which shall be held in the first four months of each year. Usually, companies’ by-laws state whether the approval at the shareholders’ meeting will contemplate the global or individual amount and, if global, the Board of Directors will approve the individual amounts. As introduced above, management compensation is a sensitive topic because it requires the upmost transparency to give shareholders the confidence to approve the management’s proposal.

Pursuant to CVM’s Regulation, listed companies are required to present supporting information prior to the shareholders’ meeting, which includes the description of the fixed and variable compensation practice adopted by the company, post-employment benefits and those affected by the termination of the position; as well as stock option plans.

Further to this subject, it is worth pointing out a decision of CVM’s Board within the scope of an administrative proceeding regarding the approval of supposedly abusive compensation to managers (proceeding No 19957.003922/2020-50). The Reporting Officer of the case stated that companies must fix the amount of managers’ compensation considering their responsibilities, the time dedicated to their position, competence and professional reputation and the value of the services in the market, pursuant to Article 152 of the Brazilian Corporate Law. These criteria will even serve as justification for the proposed amount; therefore, the approval of the compensation amount by controlling shareholders in disagreement with such guidelines may constitute an abuse of the power of control in light of Article 116 of the Brazilian Corporate Law.

Therefore, as a general recommendation, supported by this recent decision rendered by CVM, a company must provide a full explanation for the amount proposed as compensation to its managers, using legal criteria such as market research, because of the importance this issue places on maintaining a balance between retaining talented executives and the company’s best interest.

Brazilian Corporate Law Reform

The last three years have also been a busy period for reforms of the Brazilian Corporate Law, which range from necessary amendments due to the COVID-19 pandemic to the need to attract investment, as mentioned above. The following reforms are highlights, especially due to their effects on improving shareholders’ rights.

Digital shareholders’ meeting

The movement to encourage more shareholders to attend meetings and be more active in social deliberations had already been ongoing for a while when the COVID-19 pandemic struck, which sped some changes up, one of them being the possibility to hold shareholders’ meeting 100% digitally or in hybrid form, both for listed and non-listed companies. 

This was essential during the worst times of the pandemic and has also proven to be an essential tool to increase shareholder attendance, together with the possibility of voting remotely.

Multiple votes

One of the main principles of the Brazilian Corporate Law was that each share had the right to one vote (except for preferred shares which may have no voting rights, apart from specific matters provided by law or the bylaws); however, this changed by the end of 2021 and now each share may have up to ten votes. This possibility applies only to non-listed companies, even though listed companies are allowed to have shares with multiple votes, if this right is established prior to an IPO, according to rules to be issued by the stock exchanges on the subject. 

This new right allows the holder to maintain greater influence on the decision-making process. This is especially important in companies considering an IPO because it allows a greater balance between the maintenance of power by the controlling shareholder and the possibility of raising funds to help companies develop their activities.

The multiple vote right of shares may not be used in decisions concerning the compensation of managers and relevant related-party transactions, in which case the prior rule is maintained (ie, one share, one vote).

Related-party transactions

Exclusively regarding listed companies, shareholders’ meetings are now responsible for the approval of related-party transactions or sale of assets, when the transaction corresponds to more than 50% of the value of the company’s total assets included in the last approved balance sheet. 

This reform started from a proposal to enhance the business environment in Brazil, as well as to impact Brazil’s position in the Ease of Doing Business report issued by the World Bank, through granting further rights to shareholders on sensitive topics, such as related-party transactions. 

Conclusion

As stated herein, the last years have been very beneficial in implementing changes in the legal and regulatory framework in Brazil and in bringing discussions from around the world closer, with the aim of improving and strengthening companies to boost shareholder trust and attract investment.

There is always room for further improvement and new discussions in the coming years will have an important effect to verify whether the purposes of the reforms were achieved, especially in the fields of ESG, which is an important discussion not only from a corporate point of view, but also as a social responsibility.

Carneiro de Oliveira Advogados

Rua Dr Renato Paes de Barros
778, 10º andar
Itaim Bibi – São Paulo/SP – CEP 04530-001
Brazil

+55 11 5171 8900

+55 11 5171 8905

contato@cdoadv.com.br www.cdoadv.com.br
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Law and Practice

Authors



Machado, Meyer, Sendacz e Opice Advogados has a team of lawyers specifically dedicated to corporate law, corporate governance, corporate restructurings, corporate litigation involving administrative proceedings before the Brazilian Securities and Exchange Commission (CVM) and in advising publicly held companies to comply with the regulation issued by the CVM and the Brazilian Stock Exchange (B3). The firm also has extensive expertise in administrative litigation, which includes companies in regulated sectors, at both the pre-sanction phase and in administrative proceedings, and carefully monitors the activity of regulatory bodies, such as CVM, B3, Central Bank and SUSEP. Its lawyers regularly follow CVM investigations and administrative proceedings regarding the compliance with Brazilian capital market standards. Besides the adoption of measures to prevent litigation, its work involves providing legal advice in daily corporate acts and in complex corporate transactions as well as defending clients in administrative, judicial and arbitral proceedings related to corporate matters.

Trends and Development

Authors



Carneiro de Oliveira Advogados is a boutique law firm located in São Paulo, Brazil that provides legal assistance in business, corporate matters and mergers and acquisitions. Its team, composed of ten members, has deep experience of work in top law firms and is a reference in the market, having been mentioned in international publications. The firm is known for its strategic, business-focused approach, excellence and professionalism, as well as for the development of sophisticated solutions and customised services. It has recently advised: (i) Fogás Group in its acquisition of part of Copagaz and Liquigás assets in the Brazilian states of Mato Grosso and Goiás and in the São José dos Campos area; (ii) Smiles Fidelidade in its merger with Gol Linhas Aéreas Inteligentes, both publicly held corporations; and (iii) Bom Futuro Group (one of the largest agribusiness groups in the world) in the acquisition of Hydria Participações, a company in the hydropower sector.

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