- 1.Which laws, regulations and administrative rulings govern the offering and trading of securities and how are they proposed, adopted and amended?
The offering and trading of securities in Brazil is mainly governed by the following rules:
- Law 6,404 (1976) - Law of the Corporations (articles 4, 4A, 27, 172, among others);
- Law 6,385 (1976) - creates the Brazilian Securities and Exchange Commission (CVM) and disciplines the capital market;
- CVM Instruction 400 (2003) - regulates the public offers for the distribution of securities in primary and secondary markets; and
- CVM Instruction 312 (1999) - provides for the admission to securities exchanges in the stock exchange markets.
- 2.What is the rationale behind this legislation?
Brazilian laws and regulations try to protect the investor, primarily the small investor. Regulations in Brazil had made the companies and equity issuers’ obligations often complex and expensive. Therefore, the legislation divided them into different categories, according to the equities they issue and the kind of investors they aim for.
For the registry as a listed company, each category is defined by the nature of the equity it issues. The simpler category is dismissed of several obligations including some data from the periodical forms.
In the registry of the public offering, if the equity is aimed in qualified investors, the procedure is simpler and easier.
- 3.Which regulatory authorities oversee capital markets and what is the scope of their jurisdiction?
The major regulatory authority in the Brazilian market is the CVM, which oversees the capital market as a whole. However, the following authorities are also relevant:
- Banco Central do Brasil (BACEN), which regulates the financial institutions;
- Superintendência de Seguros Privados (SUSEP), which regulates the insurance companies; and
- Superintendência Nacional de previdência Complementar (PREVIC), which regulates the pension funds and the major capital markets investors in Brazil.
- 4.How is financial fraud and price manipulation in capital markets regulated?
Price manipulation in capital markets is a crime according to the Brazilian law (Law 6385/76, article 27-c), punishable by a prison sentence of one to eight years.
According to CVM Instruction 8, price manipulation on the securities market is the use of any process or stratagem intended directly or indirectly to raise, maintain, or lower the quotation of any security, inducing third parties to purchase and sell it.
- 5.What sanctions and remedies can the regulatory authorities impose?
According to article 27-C of Law 6.385 (1976), to engage in fraudulent transactions or other deceitful actions aimed at artificially changing the regular operation of the securities markets for the purpose of obtaining undue advantages or profits for oneself or others, or to cause damage to third parties, may lead to a penalty of one to eight years’ imprisonment and a fine of up to three times the amount of the undue advantage obtained as a result of the crime.
An analysis by the CVM, in advance, is not mandatory; but CVM may, at the request of shareholders or at its own initiative, suspend the shareholders’ general meeting.
- 6.What are the private remedies an investor may pursue?
In the relevant listing segments of BM&FBovespa (where companies voluntarily undertake corporate governance practices in addition to those already requested), namely the Brazilian Law, the Novo Mercado and Levels 1 and 2, there are mandatory provision for using arbitration as the dispute resolution procedure in claims among the shareholders, the company and its administrators. For that purpose, the BMF&Bovespa established the Market Arbitration Panel (CAM) which is the most appropriate forum to settle both corporate and stock market disputes. Anyone willing to settle conflicts whose core is related to corporate issues or the stock market may pursue this panel, which provides an independent, confidential, agile and cost-effective environment for dispute settlements, in line with the directives of the Arbitration Law.
This arbitration provision, in spite of having received the almost unanimous approval from the experts, still causes controversy regarding its validation and enforceability.
Furthermore, the BM&FBovespa also established a special entity for market supervision; this entity has the power to fine banks and other market operators in the event that they cause illegal losses for the investors.
- 7.Give details of the frequency and nature of enforcement actions or private actions.
The CVM is entitled to postpone and to suspend general meetings under certain circumstances – for example, when shareholders require extra time to explore a highly complex issue before voting on it. The CVM is also entitled to join in ongoing judicial cases as a third party. The CVM usually supplies data to the public authorities concerning criminal cases, in the instances where it had applied a fine.
- 8.What is the legal definition of a ‘security’ and which types of securities are commonly traded?
Law 8386/76 gives a list of these securities, such as stocks, debentures, subscription right titles and quotes of investment funds. It also excludes public and exchange rate titles.
In Brazil, a ‘security’ is the collective investment scheme or agreement that creates the right of participation on profits or remuneration, including those that result from the rendering of services and whose profits derive from the efforts of either the entrepreneur or third parties.
In Brazil, the most commonly traded securities are the shares themselves, their derivatives and – in periods before major capital increases their priority rights – the subscription warrant (bonus de subscrição). The debentures and other traded titles, such as the notes, are usually quite illiquid because each series has particular clauses, and in the majority of cases the original investor keeps them until their maturity.
- 9.How are securities offered and sold to the public?
Securities are offered and sold to the public either through a private offering or a public offering. Public offerings are characterised by public distribution acts, usually named ‘placement efforts’ (‘esforço de colocação’). These include the sale, sale commitment, offer for sale or subscription, the acceptance of a sale order, or the subscription of securities, consisting of elements such as:
- the use of lists, sales or subscription bulletins, leaflets, booklets or advertisements meant for the public;
- negotiations conducted in establishments open to the public and intended for subscribers or undetermined purchasers; and
- the use of oral or written letters or notices, directed to the general public with the objective of promoting the subscription or disposal of securities
Private offerings are those directed to a target public without the placement efforts.
- 10.What are the disclosure requirements for securities issuers for both public and private offerings?
When a company offers securities to the public mandated disclosures should be made, allowing investors to make an informed decision about the offering. Companies that are subject to a disclosure system should provide information covering some of the following areas: the business and management of the enterprise, financial statements, management discussion of financial position, projections, offering information and results of operations and cash flow.
Every year Brazilian companies are also required to disclose a substantial amount of information by filling out a Reference Form (Formulário de Referência) (FR). Every time a company issues equities for public offering, they are required to update their FR.
- 11.Are there exemptions from securities registration?
Depending on the characteristics of the public offer of the security distribution, the CVM can waive the registration. This is carried out only at the sole discretion of the CVM and in the best interests of the public while ensuring adequate information and protection for the investor. The CVM will consider some special conditions of the intended operation in order to waive the registration, such as but not limited to, the unit value of the securities offered or the total value of the offer, the securities distribution plan and the target public of the offer. Private offerings are always exempted from registration.
- 12.Do your accounting standards differ in significant ways from other jurisdictions’ generally accepted accounting principles?
As mentioned below, Brazil’s generally accepted accounting principles (GAAP) are currently undergoing a swift process to adopt the international financial reporting standards (IFRS) but there remain some differences. These mainly originate from Brazil’s historical periods of inflation. According to the GAAP it is possible, for example, for an asset not to be booked as an asset of the lessee, which is contrary to international standards. However, these discrepancies are gradually disappearing as Brazilian accounting rules adopt the IFRS.
- 13.If the International Accounting Standards Committee’s International Financial Reporting Standards have not been fully implemented, is full convergence planned?
Certain sectors such as banks and insurance companies are already required by their sectorial regulators to adopt an international standard.
Law 10.303 made this mandatory for the corporations. In order to regulate the transition from the old GAAP to the standard one – which is based on the IFRS – the Comitê de Pronunciamentos Contábeis (CPC) was created, under the auspices of the Federal Accounting Comission (CFC) to set accounting standards. In January 2010 a Memorandum of Understanding was signed between the CPC and the International Accounting Standards Board which will mean that the CPC will look for to eliminate any remaining differences between the CPCs and the IFRS.
The final goal of the current Brazilian GAAP transition is to adopt IFRS entirely in a full convergence.
- 14.Does your jurisdiction offer policy and tax incentives to invest in the capital markets?
- 15.Please describe the applicable tax withholding regime, the customary exceptions and the commonly used standard tax-planning devices.
As stated above, dividends are not subject to income tax in Brazil and therefore no tax planning is common.
- 16.Where and how are securities traded?
A company registered before CVM may trade its securities on the Brazilian exchange markets, the BM&FBovespa or in the Brazilian over-the-counter market. The shares of a listed company may also be traded privately, subject to some limitations. The Brazilian over-the-counter market, whether it is organised or not, consists of trades between investors through a financial institution registered with CVM and is authorised to trade in the Brazilian capital market. No special application, except the registration before CVM, is necessary for securities of a public company to be traded in the non-organised over-the-counter market.
Several very relevant players in the Brazilian capital markets, especially the pension funds, are forbidden to acquire equities out of the public markets and the public offers.
- 17.Where and how do securities clear?
Securities clearance is made by the Brazilian Clearing and Depository Corporation (Companhia Brasileira de Liquidação e Custódia) (CBLC) - now merged with BM&FBovespa - and the Centre for Custody and Financial Settlement of Certificates and Bonds SA (Cetip), both of which are for private securities. The Special Clearance and Escrow System (SELIC), a system governed by the Brazilian Central Bank jointly with the Brazilian Financial and Capital Markets Association (ANBIMA), is for government-issued securities.
- 18.Please provide a general description of securities settlement systems in your jurisdiction.
The securities settlement in Brazil is done by the stock exchange proper: the BM&FBovespa. There are also two very active settlement systems: Cetip (which deals with public bonds) and SELIC, which deals with private bonds.
- 19.What are the distinguishing characteristics of your debt and equity capital markets?
The Brazilian capital market is by far the largest in Latin America. In January, a total amount of 129,49 billion reais of shares was traded, down from 132,48 reais in December 2010. The most traded shares of Vale, Petrobrás, OGX Petróleo, Itaù Unibanco and BM&FBovespa.
- 20.Where and how are derivatives traded?
The derivatives are accepted to be traded in BM&FBovespa; the total amount traded there in January was 35,82 reais for the titles linked to future interests.
- 21.Can you explain development of structured finance instruments in your country?
Brazilian legislation has institutionalised several asset-based financial structured instruments. One of the main ones is Fundo de Investimento em Direitos Creditórios (FIDC), a fund which acquires several types of rights of credit. The funds, however, sell their own quotas on organised markets.
The scope of the FIDC was later widened to include a broader kind of rights of credits called Non-Standard Credits (FICD Não Padronizado).
There are also Rent Receivable Certificates (Certificado de Recebíveis Imobiliários) (CRI), which fill quotas for receivables originating from rents, in a transaction where Brazilian firms use their real estate assets to raise funds - similar to a sale-and-leaseback transaction.
The total amount of CRI traded in BM&FBovespa in January was 8,14 million reais.
- 22.How are institutional investors defined and regulated?
The main type of institutional investors in Brazil are pension funds. These funds have traditionally been formed on an individual-company basis - mainly governmental ones. They usually invest in the capital markets on a long-term basis in order to match their assets with their long-term obligations. They also usually keep large investments in major Brazilian companies and participate on their controlling groups. These funds are maintained under the supervision of a specific agency, the National Superintendency of Complementary Social Security (PREVIC) .
More recently, open pension funds increased their participation, organised by banks and insurance companies, under the supervision of the Superintendence of Private Insurance (SUSEP). The Central Bank also overviews the pension funds and enacted certain provisions on them, usually jointly with PREVIC and SUSEP.
The Brazilian private equity and hedge fund industry, which has become very active in the last few years, is under the supervision of the Central Bank.
- 23.What is the definition of ‘insider trading’? Outline the major developments in insider trading law giving details of any recent cases.
According to Law 6404/76, article 157, 40, the company’s administration should promptly inform the public about relevant facts or occurrences and highlight those which could materially affect the investor’s decision to purchase, sale or retain the company equities. The CVM regulations provide a series of examples of relevant facts or occurrences.
Insider trading is a transaction made by someone who has knowledge about the relevant fact or occurrence before it becomes public.
Several recent major corporate transactions in Brazil have been subject to investigation by the Brazilian authorities including freightage company Randon. Six partners and directors bought the holding, and shares in another company, Fras-le, before a US company, ArvinMeritor, entered into the group. The purchase was made two months before ArvinMeritor joined, a move that was only made public on August 2002. The executives bought approximately 754,000 shares and, in the 12 months following the union, the Randon shares appreciated 120 per cent.
Another case of “inside trading” occurred with Sadia shares, before the disclosure of its merger with Perdigão. With the creation of Brazil Foods, about 10 people were fined for having sold their shares before the disclosure of the risk incurred with the operation of foreign exchange derivatives, which eventually resulted in losses of about U$1.5 billion for Sadia. The CVM has fined the defendants nearly U$3 million; according to the institution, they operated in the stock market with privileged information obtained in April 2006, to avoid losses that, together, would exceed U$1.2 million.
In addition, another “insider” process occurred with Credit Suisse. The CVM imposed fines on two funds of the company for the use of insider information leading to the purchase of shares in Terna days before the company announced a sale to Cemig, which took place in April 2009. Credit Suisse was hired by Terna Itália to prepare a fairness opinion on the sale of its subsidiary in Brazil. Two days after the meeting to discuss the matter, the two funds started buying the “units” that the company traded on the Bovespa. However, the operation was only officially announced a week later.
Regarding sanctions imposed by the CVM, criminal penalties are not commonly used. In general, the processes eventually results in fines whose values vary according to the potential of trading shares.
Law 6385/76 defines a criminal act, for which the perpetrator may be subject to a penalty of one to five years in prison, plus a fine, for the use of non-public information by an individual for the purpose of unfair profit, regardless of whether the transaction is made in his own name or by conspiring third parties.
In the past, there has been the general feeling that these crimes remain unpunished in Brazil; recently, however, the CVM has punished several individuals and demanded a criminal investigation to be carried out by the proper authorities.
There have also been several settlements where the defendant agrees to pay fines without the admission of any wrongdoing.
Several recent major corporate transactions in Brazil have been subject to investigation by the Brazilian authorities, but there is a certain trend for ending cases via a settlement, as mentioned above. In this instance, the defendant does not recognise any wrongdoing but will nonetheless pay the fine. Last year 57 of these settlements were made and the CVM received over 173 million reais. This is a very large amount in Brazilian terms, equivalent to the CVM’s entire annual budget.
- 24.What are the roles of the authorities when a foreign issuer makes a public offering? Who has jurisdiction over the public offering?
All the public offerings in the domestic market are subject to CVM authority, even if the issuer is foreign or non-resident.
Recently, the CVM authorised companies listed abroad to issue Brazilian Depositary Receipts (BDR), which are to be traded in the domestic exchange.
- 25.Is there a formal understanding with other jurisdictions to share information and provide reciprocal assistance in enforcement matters? If so, which jurisdictions?
Yes. The CVM currently has valid bilateral agreements with several countries: South Africa, Germany, Argentina, Australia, Bolivia, Canada (Quebec), Chile, China, Ecuador, Spain, the US, France, Greece, Hong Kong, Cayman Islands, Israel, Italy, Luxembourg, Malaysia, Mexico, Paraguay, Peru, Portugal, Romania, Russia, Singapore, Thailand and Taiwan, plus the Multilateral Agreements of Windsor and Boca Raton and several Memorandums of Understanding.
- 26.Please describe the framework for corporate governance
Brazilian corporate law establishes strict corporate governance provisions and the Novo Mercado rules add several very relevant additional ones, such as having an independent member in the Board of Directors, avoiding the chairman and CEO roles being held by one person and turning mandatory formal codes about stock negotiation and publicity. The mandatory CVM regulations make public the executive compensation trough average.
- 27.Which governing bodies must public companies have and what are their main duties?
The mandatory governing bodies for the public companies and their main duties are the following:
Conselho De Administração
This is a body for collective decisions similar to the US Board of Directors. It is not mandatory for non-public companies. For companies listed in Novo Mercado and elsewhere, there is the additional requirement that at least 20 per cent of the board be composed by independent persons. There was a recent proposal to increase this mininum percentage to 30 per cent, but it was refused by the participants. The Conselho de Administração’s duties are: to define the strategic line of the business; to elect and remove its officers and independent auditors; to define each officer’s competence, according to the by-laws; to oversee their performance, being entitled to review the company’s accounts, executed contracts and the officers’ actions; to call the shareholders’ general meetings; to review the administrator’s reports and officers’ accounts. In accordance with the relevant by-law provisions, the Conselho de Administração may also offer an opinion on the contracts to be executed, the issuance of new shares or equities and the purchase or sale of encumbrance creation on permanent assets.
Conselho Fiscal
With a minimum number of members of three and a maximum of five, the by-laws may establish the Conselho Fiscal as permanent or each year or otherwise each yearit may or may not be elected in the annual shareholders general meeting. Its mandate is always annual. Its duties are focused on the fiscal and legal duties compliance, and compliance with the by-laws, by the company business and its administrators and employees. The Conselho Fiscal has to give an opinion on the administrators’ annual report, and is entitled to have its comments published with this report. It also gives an opinion on the administrator proposals to be submitted to the shareholders concerning social capital modifications, equities issuance, investment budget, dividends payment and corporate modifications. It is also entitled to denounce irregular acts and to call a shareholders’ general meeting in case of delay of the legal mandatory deadlines, and to be present at the Conselho de Administração meeting on certain subjects such as the financial statements, which it also checks and gives an opinion on.
Under Brazilian law, the audit committee is not mandatory and there is a reasonable similarity on the duties of this body with the Conselho Fiscal. Recently, there was a proposal to make the audit committee mandatory for the companies listed in the Novo Mercado, but it was refused by the participants. There is a reasonable number of Brazilian companies which made the Audit Committee mandatory through by-law provisions.
Diretoria
This is a body similar to the Board of Officers. It is composed of at least two members, elected and removed by the Conselho de Administração. The by-laws must establish its number and powers and mandates.
The Diretoria’s duties are to represent the company before third parties and the ordinary management of the company.
Under Brazilian law, there is no restriction other than a maximum of one-third of the company’s management or officers to also be a member of the Conselho de Administração. There was a recent proposal to limit this overlap for the companies listed in the Novo Mercado but refused.
- 28.Are there any laws governing capital markets that are unique to your jurisdiction?
From long periods of high inflation in the distant past, and the-then very complex successive systems to recognise the inflation effects by official indexes in the balance sheets, Brazilian companies still suffer from the effects in terms of valuation of its old assets. This is a non-recurring and fast-decreasing problem, but which still affects some of the major Brazilian companies. The number of real corporations, where the capital is spread among a large number of shareholders with small participation - in Brazil, known as companhia sob controle difuso - has been widening in the last few years. However, the majority of companies in Brazil are still under the control of a family or a group of investors under a shareholder agreement. Therefore, the conflict between the shareholders and the administrator, as often happens in the US and the UK, is not so common in Brazil. What is more frequent is the conflict between the majority shareholder and the minority ones, mainly when this control is sold and the acquiring controller shareholder try to resist somehow to offer the tag along.
The existence in Brazil of different classes of shares - one with votes and the other without, or under restriction - is not so unique but can still have huge effects. The majority of the major-listed companies cannot unify these classes (and be listed in Novo Mercado and enjoy the positive effects in shares valuation) without very relevant effects in terms of their controlling structure. Furthermore, the different classes suffer for the differences in valuation and mainly in liquidity and in certain periods the non-voting achieve larger liquidity or the other way around.
However, Brazil is now among the most developed countries in the world in certain regulation fields, such as in the transparency of the high administration remuneration - informed through the Formulário de Referência - and also in the financial assets market.
- 29.How do authorities and issuers resolve matters that are not expressly provided for in the securities laws and regulations?
Brazil is a country operating a civil law system, and the trend is for everything be governed either by laws or regulations.
Under Brazilian law there are mechanisms to overcome the lack of specific laws and provisions, mainly through the application of similar or general rules.
The authorities, mainly the CVM, usually edit provisions to overcome the lack of laws but under certain circumstances these provisions may be invalid, especially if they establish penalties which demand legal basis.
- 30.Which types of companies may make public offerings in your jurisdiction?
In order to make a public offer in Brazil the company is required to be listed and to register the offer before the CVM. Recently the ANBIMA was included in the registry procedures process in order to overcome the bottlenecks faced by the CVM in the peak of the markets.
Following a CVM instruction, the requirements for listing a company and for the issuance of equity was made separate, making the process simpler for the smaller organisations and for those aiming at sophisticated and qualified investors.
- 31.Which economic activities or segments are the most active in the capital markets in your jurisdiction?
Over the past few years, the majority of significant Brazilian economic segments raised money in the capital markets.
Three of the five top-traded companies are linked to commodities: Petrobrás and OGC Petróleo, both oil companies, and Vale, a mining company.
- 32.Describe the main stock exchanges and OTC networks.
We have one very active stock exchange, the BM&FBovespa, with 373 listed companies and a total market value of 2,47 trillion reais (as of January 2011). The BM&FBovespa has different segments: the standard segment; Level 1; Level 2; and the Novo Mercado. The last three of these require the companies to adopt certain additional good governance practices, as well as mandatory practices.
The BM&FBovespa has also established the Bovespa MAIS, as a market for smaller companies and as a kind of access market. However it is still in its early stages, with only one admitted company.
- 33.Describe recent initiatives undertaken by the government to improve the regulation and efficiency of its capital markets.
The most relevant initiative in the last few years is understood to be the huge success of the different segments in the BM&Bovespa, especially the Novo Mercado. These rules are fully voluntary, but out of 373 listed companies in Brazil 168 adopted one of these segments, which already represented over 77 per cent of the total value of transactions in the capital market. These rules were recently amended and updated.
- 34.Describe the main obstacles that a company may confront in your jurisdiction when it is trying to become public.
Brazilian businessmen do not generally make public their account information, such as revenues, profits and so on. This provision of Law 10.303 was in fact challenged in the courts, in order to keep this information confidential.
Another requirement with adverse effects, as cited by these businessmen, is the requirement to publish financial statements. Law 10.303, concerning this matter, has been challenged in the Brazilian courts, where some companies have tried to avoid this.
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