What are the primary sources of laws and regulations relating to shareholder activism and engagement? Who makes and enforces them?
Brazilian Corporations Law (Law No. 6,404 of 1976), Brazilian Capital Markets Law (Law No. 6,385 of 1976) and regulations issued by Brazilian Securities and Exchange Commission (CVM) are the primary sources of laws and regulations on shareholder activism and engagement. Self-regulatory rules issued by the Brazilian stock exchange (B3) applicable to companies registered on its special listing segments related to disclosure of information to shareholders, dispersion and restriction on issuance of non-voting shares, and mandatory arbitration procedures are also relevant to shareholder engagement.
Enforcement of Brazilian laws on shareholder activism is incumbent upon the judiciary branch and the CVM. However, the latter has a leading role in building the case law on disputes on shareholder activism as an administrative body responsible for the enforcement of Brazilian Corporations Law, Brazilian Capital Markets Law and the CVM rules for public companies. Administrative penalties imposed by the CVM may vary from formal warnings to substantial fines and prohibition of holding offices in public companies in Brazil. It may be applicable to officers, directors, members of the board of supervisors and shareholders. B3 as a self-regulatory body is responsible to impose penalties for breach of its rules. Public corporations registered before certain special listing segments provided by B3, namely Novo Mercado, Nível 2, Bovespa Mais, and Bovespa Mais Nível 2, must have a mandatory arbitration referring to a specific arbitration chamber supported by B3, the Câmara de Arbitragem do Mercado (CAM). For all others, it is optional to adopt arbitration provisions before CAM and a limited number of public companies made such option. Under Brazilian corporate law, arbitration provisions included in the corporations’ charter are regarded as enforceable and binding to all past, present and future shareholders of the company.Shareholder activism
How frequent are activist campaigns in your jurisdiction and what are the chances of success?
Shareholder activism is still under development in Brazil. Until very recently, shareholder activism was not common in the Brazilian market. The reasons for that are related to certain features of Brazilian corporate law with regards to derivative lawsuits, which put a substantial burden on minority shareholders that eventually start the lawsuit, and with regards to class actions, which has an unfavourable case law. Therefore, shareholders rely heavily on representations before the CVM as an initial step before a damages civil lawsuit. The overall environment is unfavourable toward activist campaigns, but there has been pressure for change due to the different treatment provided to investors on deposit receipts of Brazilian companies negotiated in other jurisdictions. There have been very public cases in which foreign investors holding deposit receipts obtained indemnification awards in foreign jurisdictions while investors in the Brazilian market were not successful, despite filing lawsuits based on substantially the same facts.
How is shareholder activism generally viewed in your jurisdiction by the legislature, regulators, institutional and retail shareholders and the general public? Are some industries more or less prone to shareholder activism? Why?
Shareholder activism is increasingly viewed in Brazil as a relevant mechanism for the enforcement of best corporate governance practices in public companies. We expect Brazilian courts to change its current case law towards more favourable interpretations of current statutes to minority shareholders, aligning the legal environment in Brazil with other leading jurisdictions.
Brazil does not present a pattern of shareholder activism targeted at specific industries. A high or low incidence of shareholder activism depends on the concentration of ownership of each company. Most recently, due to the changes in the anti-corruption, anti-money laundering and anti-organised crime legislation, a series of corruption scandals erupted. Investigations also resulted in shareholder activism against companies involved in these scandals due to false information provided to investors. However, such investigations reached companies in many sectors, such as construction, oil and gas, food products and financial institutions.
What are the typical characteristics of shareholder activists in your jurisdiction?
Compared with jurisdictions where most of share ownership is dispersed, shareholder activism in Brazil is not a widespread practice. Most Brazilian public companies have a high degree of ownership concentration and, as a result, threats to management through takeovers is quite limited. In Brazil, the leading shareholder activists are pension funds of state-owned companies, investment fund managers, experienced individuals and other institutional investors as minority shareholders. Investor associations are becoming stronger and more engaged on efforts to improve corporate governance and on developing capability to support class actions. The main tool that has been used by activists is the filing of representations and complaints before the CVM to investigate misconduct of managers and controlling shareholders.
What are the main operational governance and sociopolitical areas that shareholder activism focuses on? Do any factors tend to attract shareholder activist attention?
From an internal point of view, shareholder activism focuses on overseeing companies’ internal controls. Activists also focus on the compliance with the law of relevant transactions and material changes in the company (eg, corporate reorganisations). On the other hand, recent corruption scandals and environmental disasters have recently drawn the attention of minority shareholders claiming indemnification for losses related to depreciation of the high-profile companies’ stock price.
Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
Activist shareholders normally make joint efforts to appoint members to the board of directors and board of supervisors of companies. Shareholders representing at least 15 per cent of voting capital or preferred shareholders representing at least 10 per cent of the total capital are entitled to appoint one member of the board of directors. Minority shareholders representing at least 10 per cent of the voting capital may appoint a member of the board of supervisors and require cumulative voting in director elections. Appointing members of the board of directors and of the board of supervisors allows them to have easier access to information on the issues to be discussed at the shareholders’ meeting and a better oversight of management, since members of the board of directors may request that certain decisions are subject to approval of the General Shareholders’ Meeting, members of the board of supervisors have broad powers to obtain information from the company’s officers, participate in the General Shareholders’ Meeting answering questions of the shareholders and can also provide individual reports to the General Shareholders’ Meeting. In addition, activist shareholders often file administrative representations and complaints against management or controlling shareholders’ decisions or relevant transactions approved by shareholders meetings with the CVM.Processes and guidelines
What are the general processes and guidelines for shareholders’ proposals?
Shareholders’ meetings are divided in two types: the ordinary meeting and the extraordinary one, depending on the matters to be discussed. The ordinary shareholders’ meeting is mandatory and should be held up until April of every year, takes place annually and can be held exclusively to discuss the matters proposed restrictively by the law, that is, approval of management accounts and financial statements, election of board members or officers, as applicable, and board of supervisors’ members and destination of the net profit and dividends. Extraordinary shareholders’ meeting can be held at any time of the year and shareholders can discuss any matters.
After the shareholders’ meeting is organised, any shareholder may make a voting proposition regarding any topics of the agenda different from what is proposed by the controlling shareholder or management. Shareholders may not make proposals to include new topics in the agenda of the meeting unless all shareholders attend the meeting, what is virtually impossible in a public company.
The CVM regulated remote voting in shareholders’ meetings to increase attendance, particularly of minority shareholders. Such rules are applicable only to public-listed companies. The public company shall mandatorily issue the distance voting ballot on ordinary shareholders’ meeting, when the meeting is called to appoint managers, and when an extraordinary shareholders’ meeting is called simultaneously with an ordinary shareholders’ meeting. Shareholders of public companies can request that proposals are included in the ballot if their shareholding surpasses certain thresholds of the total capital provided by the CVM rule, ranging from 5 per cent to 10 per cent depending on the size of the total capital of the public company.
May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?
Yes, any shareholder may nominate candidates for the election of members of management at a shareholders’ meeting. On companies with a board of directors, including all public companies, minority shareholders holding at least 15 per cent of voting capital or preferred shareholders representing at least 10 per cent of the total capital may request a segregated election to appoint one member of the board of directors as a representative of minority shareholders. Regarding the use of the company’s proxy by public companies, according to CVM’s rules, if the public company makes a proxy public request, shareholders holding at least 0.5 per cent of the share capital may appoint candidates if they notify the company of such intention up to five business days after the company makes public its intention to request a public proxy. If the public company requests a public proxy, it shall bear all costs of the proxy. Also, according to CVM rules, it is mandatory for the company to provide means for shareholders to vote remotely at shareholders’ meetings called to discuss almost all cases that involve the election of members of the board of directors, and absolutely all elections of members of the supervisory board.
With regard to general proposals, shareholders of public companies can also request that candidates are included in the ballot if their shareholding surpasses certain thresholds of the total capital provided by the CVM rule, which for the inclusion of candidates only is based on a reduced shareholding threshold of 2.5 per cent to 0.5 per cent depending on the size of the total capital of the company, which is about half of the amounts requested for the inclusion of general proposals in the ballot. To initiate a proxy fight, any shareholder holding at least 0.5 per cent of the share capital may request a list of the addresses of all shareholders. The company cannot charge the shareholder any fees for providing such information. However, if the shareholder wants to start a proxy fight based on such a list and the company does not present a proxy public request, the shareholder must bear the costs of the proxy public request.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
The board of directors must call the shareholders’ meeting. Otherwise it is incumbent upon the board of officers. Nevertheless, any shareholder may call a shareholders’ meeting if the managers delay the call for more than 60 days of the term provided by the law or by the company’s by-laws.
Shareholders owning at least 5 per cent of the voting capital of the company may call a shareholders’ meeting when managers delay the call for more than eight days after they received a notice with justified request for a shareholders’ meeting from such shareholders. Such notice shall include the list of proposals to be included in the agenda. If the managers delay the call of a shareholders’ meeting to setup a board of supervisors for more than eight days, shareholders owning at least 5 per cent of the voting capital of the company may call a shareholders’ meeting.
Shareholders may not act by written consent, except where:
- all shareholders participate through the remote voting system in the public companies that adopt the remote voting system as regulated by CVM; or
- it is possible to gather the consent from shareholders representing 100 per cent of the voting capital of the company, with or without unanimous resolutions, what is more common in private companies.
What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?
Brazilian law provides judicial remedies such as:
- action to hold the company responsible for losses caused to stakeholders, including shareholders, by irregularities in the company’s registers and books; and
- action to compel the company to show its registries, books and records.
Derivative actions against managers by the company depend on prior approval by the shareholders’ meeting. If the company does not file the lawsuit against the managers within three months as of the approval by the shareholders’ meeting, any shareholder can file such lawsuit in the name of the company. If the shareholders’ meeting does not approve the filing of a lawsuit against the managers, shareholders representing at least 5 per cent of the share capital may file a derivative suit. In addition, controlling shareholders may be liable for abuse of power or conflict of interest.
A widespread way of litigation is filing requests for the CVM to decide at the administrative level on breach of legal and regulatory provisions and regulations by managers and controlling shareholders of public companies. In Brazil, class actions may be filed by the CVM and the public prosecutor office to protect investors in the securities markets, including minority shareholders.
Class actions brought by minority shareholders are uncommon in Brazil. Prosecutor offices can file class actions on behalf of shareholders to obtain indemnification for damages resulting from capital markets investments. However, there has been no record of any successful class action and none of the several prosecutor offices have been engaged on such litigation.
Shareholders' dutiesFiduciary duties
Do shareholder activists owe fiduciary duties to the company?
Brazilian law does not provide specific fiduciary duties for shareholder activists. They are applicable only to controlling shareholders, directors and officers. However, shareholder activists may be held accountable for losses resulting from their action owing to the abuse of right doctrine. Also, all shareholders, including minority shareholders, are subject to broad conflicts of interest restrictions with regard to their votes at shareholders’ meetings and minority shareholders might be subject to litigation claiming damages.Compensation
May directors accept compensation from shareholders who appoint them?
The most common situation is the compensation to be paid directly from the company to the director, as a member of the board of directors. However, it is possible for directors to receive direct compensation from a shareholder who appointed them. In many of such cases, the director waives the payment directly from the company.
Payments by the controlling shareholder to the directors as well as any compensation paid for other types of services provided by the relevant director shall be disclosed to the market according to CVM disclosure rules.Mandatory bids
Are shareholders acting in concert subject to any mandatory bid requirements in your jurisdiction? When are shareholders deemed to be acting in concert?
Brazilian Law requires that the acquirer of the control of a company makes a tender offer for all the remaining voting shares of the company for the price per share of at least 80 per cent of the price per share offered to the seller of the controlling shareholding. Rules of Novo Mercado, the listing segment at B3 with the higher standards of corporate governance, the Nivel 2, Bovespa Mais and Bovespa Mais Nível 2, require that such a tender offer for the shares of all the remaining voting shareholders to be 100 per cent of the price per share offered to the seller of the controlling stake.
Another event of mandatory bid requirement is if the controlling shareholder acquires, by any means other than through a tender offer, more than a third of the outstanding shares of the public company in the securities market (free float). In this case, the controlling shareholder is subject to a tender offer for the remaining outstanding shares the valuation of which will be conducted by an independent appraiser.
As a rule, minority shareholders either acting alone or in concert with other shareholders are not subject to mandatory bid requirements. However, ‘poison pill’ statutory clauses may result in the event of mandatory bid if a percentage provided in the by-laws is triggered by a group of shareholders acting as a group, depending on the specific ‘poison pill’ provision.Disclosure rules
Must shareholders disclose significant shareholdings? If so, when? Must such disclosure include the shareholder’s intentions?
Yes. This obligation is applicable to direct or indirect controlling shareholders, shareholders who elect members of the board of directors or board of supervisors, any individual, entity or group of persons acting together or representing the same interest, which conduct material transactions (acquisitions and dispositions that changes the shareholding in multiples of 5 per cent) shall send to the company’s investor relations officer, immediately after the completion of such transactions, information on, among other things, name and particulars, indication of any agreement with rules on voting rights and trading of securities issued by the company, number of shares and of other securities and derivatives indexed in such shares, with the amount, class and species of the related shares.
Shareholders must disclose the purpose of the shareholding, interest aimed and, as the case may be, a statement by which the shareholder declares that the transaction does not aim to change the control or the management structure of the company. Otherwise, it must be disclosed to the market by the acquirer through the same ways used by the company.
Do the disclosure requirements apply to derivative instruments, acting in concert or short positions?
The disclosure requirements are applicable to derivative instruments, even if there is no physical settlement, according to the following rules:
- shares directly held and those referenced by derivatives cleared on a physical settlement shall be considered together to verify the percentages of shareholding disclosure;
- shares referenced by derivatives with an expectation of an exclusively financial settlement shall be calculated independently of the shares referred to in previous item to verify the percentages of shareholding disclosures; and
- the number of shares referenced in derivatives instruments that provide economic exposure to the shares cannot be offset by the number of shares referenced in derivatives that produce inverse economic effects.
Do insider trading rules apply to activist activity?
Regardless of the activity, insider trading rules apply according to the subject when using relevant information not yet disclosed to the market to obtain undue advantages. Therefore, insider trading rules may apply to activist activity if it involves relevant information not yet disclosed to the market. If such information involves litigation activity, particularly considering that certain public companies adopted arbitration provisions regarding corporate litigation, which also include non-disclosure provisions, any negotiations of stock by a minority shareholder while holding non-public information with regard to litigation against the company, its controlling shareholders or management may be regarded as insider trading.
Company response strategiesPreparation
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
Fiduciary duties according to Brazilian law include duty of care, duty of loyalty, duty of secrecy, and duty to inform, as applicable. There is no different standard for directors to fulfil their fiduciary duties when considering an activist proposal. According to Brazilian law, directors and officers always must act exclusively on behalf of the company’s interest. However, the law provides that the disclosure of the acts or facts by the director at request of the shareholders may only be used in the legitimate interest of the company or the shareholder. In case of abuse of right by the activist shareholder, he or she may be liable for the request of information.
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
The safest way to minimise the risks is to adopt a complete and effective corporate governance and compliance programme. The law regarding penalties on administrative proceedings before the CVM has been recently changed to increase general penalties from up to 500,000 to 50 million reais. Therefore, public companies shall increase substantially their investments in compliance in order to prevent serving as examples to the market when the CVM starts using its new heightened supervision authority.
Having an effective compliance programme involves the adoption of best practices of disclosure, which includes providing information to the market in a concise, complete and accurate way, and consistent performance as well. Material facts, policies applicable to related party transactions, internal controls are important strategies for a good relationship with minority shareholders, including activists. If a company is guided by clear and well-known polices and complies with its disclosure duties, the shareholder’s mistrust of the company’s management and controlling group tends to reduce.
There is no official quantitative data available to enable us to establish in a broad sense whether shareholder activism is a matter of heightened concern in the boardrooms of Brazilian public companies. However, minority shareholders such as investment fund managers, pension funds of state-owned companies, experienced individual investors and state-owned investment funds may have a significant influence on the removal of managers or adoption of specific policies.
Considering that most recent shareholder litigation has focused on corruption, it is highly advisable that public companies should have strong anti-corruption and anti-money laundering compliance programmes.Defences
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
Brazilian capital markets have a structural defence against shareholder activism, which is a substantial concentration of corporate control. Most companies have a well-defined control group, by families or government. As a result, any shareholder activism focused on changing management would not be able to succeed without the participation of the controlling group.
Although Brazilian law prevents the issuance of multiple-voting shares, there are other structural mechanisms to enhance the power of the controlling group as a defence against shareholder activism. Brazilian law allows corporations to issue preferred shares without voting rights provided that the total amount of such shares does not surpass 50 per cent of the total number of shares of the company. However, listing segments with a higher level of corporate governance at the B3 forbid public companies from issuing non-voting shares (eg, Novo Mercado) or provide additional rights to non-voting shareholders (Nível 2), such as voting rights on major matters such as transformation, merger, spin-off or consolidation, approval on agreements between the corporation and the controlling shareholder and choice of specialised company for the valuation of the corporation.
Another tool that has been used is the inclusion of ‘poison pill’ provisions in the by-laws of a company to discourage a potential hostile takeover. The most common type of ‘poison pill’ is related to the mandatory tender offer of all the shares of the company held by the other shareholders if a shareholder acquires or becomes the holder of a certain percentage of the stock capital of the company as provided in such a ‘poison pill’. In this case, the tender offer is subject to a price or a criterion already set forth in the ‘poison pill’ provision. Such prices usually include a very high premium that may jeopardise the efforts of activists to acquire relevant stockholdings.
Arbitration provisions in the charters may be regarded as a defence against minority shareholder litigation. Such provisions are required for public companies listed in the Novo Mercado, Nível 2, Bovespa Mais and Bovespa Mais Nível 2, and optional for other public companies. However, many companies choose arbitration instead of subjecting themselves to the courts since arbitration provides further confidentiality to the dispute. CAM’s case law is not public and presents much higher costs for minority shareholders to initiate disputes.Reports on proxy votes
Do companies receive daily or periodic reports of proxy votes during the voting period?
Brazilian law does not provide for a periodic or daily report requirement of proxy votes for the company. However, CVM rules on remote voting provides that the register agent of the shares must forward to the company two documents. These are:
- an analytic document with voting statement of shareholders duly identified with the extract of corporate shareholdings; and
- a summarised document with voting statement of shareholders, specifying how many approvals, refusals or abstentions on each subject and how many votes each candidate or list of candidates had received.
Such information must be delivered to the public company 48 hours in advance of the holding of the relevant shareholders’ meeting.Private settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
There is no public information in this regard. As mentioned before, certain special listing segments at B3 require a provision of arbitration clause in the companies’ charter. Considering the high costs of initiating an arbitration procedure in Brazil, the existence of an arbitration clause eventually pushes activists, directors and controlling shareholders into negotiations before the filing of an arbitration request.
Shareholder communication and engagementRules on communication
Is it common to have organised shareholder engagement efforts as a matter of course? What do outreach efforts typically entail?
There is an increasing number of associations of investors in the securities markets in recent years and international proxy companies such as ISS and Glass Lewis, which organise engagement of minority shareholders, especially against managers and controlling shareholders, are becoming more active and making proxy requests and remote voting more common, following on new rules regarding those matters issued by the CVM. However, due to the concentrated ownership of Brazilian public companies and the prominent role of institutional and state-owned enterprises, joint engagement of minority shareholders is not a widespread practice.
Are directors commonly involved in shareholder engagement efforts?
Members of the board of directors appointed by the activist minority shareholder or group of minority shareholders have led or supported engagement efforts. However, the directors owe fiduciary duties to the company and not to the shareholders who appointed them. Therefore, they must always act in the best interests of the company. If such goal is aligned with shareholder engagement, directors have no restrictions on joining such efforts.
Must companies disclose shareholder engagement efforts or how shareholders may communicate directly with the board? Must companies avoid selective or unequal disclosure? When companies disclose shareholder engagement efforts, what form does the disclosure take?
There are no specific rules on shareholders’ communication with the board. Brazilian law provides that directors may be invited to provide explanations at shareholders’ meetings. Brazilian laws and regulations provide the mandatory disclosure to the market of any material act or fact that may influence:
- the price of the securities issued by public companies or related to them; or
- the decision to buy, sell or hold such securities, or even to exercise any rights inherent to them.
‘Material events’ (including acts or facts) is, therefore, a broad concept, and certainly one that may include shareholder engagement efforts if they have influence in the pricing of securities. Selective or unequal disclosure are prohibited, since public companies have the duty to disclose such information through official channels of communication and to ensure its wide and immediate dissemination, simultaneously to all markets in which their securities are traded.
What are the primary rules relating to communications to obtain support from other shareholders? How do companies solicit votes from shareholders? Are there systems enabling the company to identify or facilitating direct communication with its shareholders?
Brazilian regulations for public companies set forth requirements for public requesting of proxies through media, such as newspapers, internet, radio and television. Such requirements are also applicable always if:
- the management or the controlling shareholders make such a request to more than five shareholders; and
- any other person makes such request to more than 10 shareholders.
If a company has an electronic system for proxies, shareholders representing at least 0.5 per cent of the stock capital may use such a system to conduct proxy public requesting. Proxy public request must include the draft power of attorney, the information provided in the CVM regulations, detailed information on the subject matters to be voted and any necessary documents as well. All materials sent in such public requests must be uploaded onto the CVM website to become available to all shareholders.
CVM regulations also provide rules for procedures and deadlines for remote voting and remote participation in the shareholders’ meeting, which includes the authorisation for custodian and register agents to carry out the receipt and processing of the forms sent by shareholders in the case of distance voting. Companies may adopt electronic systems to allow remote participation in the shareholders’ meetings subject to CVM specific rules.
Must companies, generally or at a shareholder’s request, provide a list of registered shareholders or a list of beneficial ownership, or submit to their shareholders information prepared by a requesting shareholder? How may this request be resisted?
Any person may have access to the list of registered shareholders, provided that this access has the purposes of defending rights and clarify situations of personal interest or shareholders or the securities market, subject to pay any costs incurred by the company. In case of denial, the shareholder may appeal to the CVM.
In any case, the request shall identify:
- the right to be defended or the situation of personal interest to be clarified; and
- to what extend the disclosure of the list of shareholders is necessary for the defence of the right and clarification of the situation of personal interest.
In addition, the supply of the list of shareholders is applicable to situations where the right to be defended is inherent to the quality of shareholder. It means that, depending on the reasons for the request, the access may be granted by the company or the CVM only on a partial basis.
Update and trendsRecent developments
What are the current hot topics in shareholder activism and engagement?
One major change that might influence shareholder activism in Brazil regards the increase in penalties potentially levied by CVM, the Brazilian capital markets authority. Since a majority of shareholder litigation in Brazil is performed through representations to CVM, higher penalties might provide further incentives for such representations and increase the bargaining power of minority shareholders. The law regarding penalties on administrative proceedings before the CVM has been altered to increase general penalties from up to 500,000 to 50 million reais, meaning a hundredfold increase in the capacity of CVM to penalise even simple compliance failures. For this reason, any public companies shall increase substantially their investments in compliance to prevent serving as examples to the market when the CVM starts using its new heightened supervision authority.
The most recent shareholder litigation has focused on corruption, and new cases are being presented every year. As a result, the pressure shall continue for public companies to implement strong anti-corruption and anti-money laundering compliance programmes. The anti-corruption statute (Federal Law 12.846/2013) and its regulations (provided by Presidential Decree 8.420/2015) provide a detailed framework of such compliance programmes and standards to evaluate their effectiveness as a means to reduce any future exposure of the public company.